Sharp Investor

Retirement Corpus: How much do you need?

2010-09-04T06:02:00.000-07:00

One of the main goals of personal finance is to build a retire corpus which you can outlive. Like earlier generations, going forward very few people will have the luxury of pension. So the onus of building a retirement corpus will be on individuals. But before delving into “how to build the corpus?” one needs to find out “how much is good enough?”.

Retirement corpus that you would need is a function of:

Current expense: Your current expense gives an indication of what you would need to meet your expenses during your retirement. Since in your retirement you wouldn’t have any active income, inflation adjusted value of your current expense is the amount that your retirement corpus would have to generate for you to meet your regular expenses.

Years till retirement: This is the period from now till you plan to retire. In this period you would have active income (from salary, business etc.) which has to be used to create the retirement corpus. It is the “accumulation phase” wherein you accumulate corpus for your retirement.

Years in retirement: This is the “consumption phase” wherein you would consume from the retirement corpus to finance your regular expenses post retirement. How do you find out the numbers of years that you would spend in retirement? Calculated guess with bias on the upper side. Better health-care and standard of living has improved life expectancy significantly. While this should be good news for all, people unprepared for retirement will find themselves in quite a fix. Today it is very come for people to have a retirement period of 25-30 years beyond the usual retirement age of 60. Another pointer – life expectancy of your close relatives (parents, grandparents) would also give you some idea.

Annual inflation during retirement: This is another figure that you will have to assume. If you are not aware of what mehngai (inflation) can do to your corpus, I suggest you listen to “Mehngai Dayain” song from Peepli [Live] released recently. The lyrics goes something like this ….

Sakhi Saiyan to khube kamat hai
mehngai dayan khaye jaat hai 2
har mahina uchhle petrol
deisal ka uchhla hai role
Sakkar bhai ke ka bol
Roosa baat maati dhaan hamari jaan hai
Mehngai dayan khayat jaat hai …

For now inflation can be assumed to be around 8-10%.

Rate of return on investment during retirement: This is the rate of return (RoR) that your retirement corpus can generate when invested. During retirement, it’s better to invest in low to medium risk channels like Senior Citizen Scheme, Fixed deposit, debt funds etc. RoR from these investments will be moderate in range of 8-12%.

Retirement Calculator from Bank Rate can help you to come up with the value taking all these factors into consideration. Statutory warning: If this the first time you are doing similar calculation, the amount may shock you.

Suppose a 35 year old has a monthly expense of 35 thousand. He wants to retire at 55 years of age and expects to like till 85 years. If we assume an inflation of 8% and RoR of 10% during his retirement period, the amount that he would need in his corpus to maintain the same living standard during his retirement is 4.55 crores. Yes you heard that right!

I suggest you play around with the calculator to find how much you would need.

“The journey of a thousand miles begins with one step”

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Papa Kehte Hain syndrome in personal finance

2010-07-10T08:58:00.000-07:00

Papa Kehte Hain is a famous song from Hindi movie “Qayamat Se Qayamat Tak” starring Aamir Khan and Johi Chawla released in 1988. Verbatim translation of “Papa kehte hain” in English is “father says”. Now this not an blog on hindi movies. Rather we will discuss what is meant by Papa Kehte Hain syndrome in personal finance.

In simple term it means you blindly follow what your father keeps telling regarding your financial decisions. And what are the symptoms of this syndrome?

All your financial decisions are taken by your Papa (father) or other elderly person in family like uncle.

You don’t keep track of investment details or documents and leave that for your father.

You blindly believe that all your father’s financial decisions are correct; don’t validate or question them.

Now let’s delve into why this is very dangerous for your financial health.

You don’t have any clue where your father is investing your hard earned money. You don’t even keep track of investment details or documents. Very dangerous. Your father will surely not always be there to handhold you regarding your finances. What happens when he passes away? How do you know which instrument he has put your money in – PPF, NSC, KVP, FD, RD? Which banks or post offices are these accounts with? Did he take the service of any agents for them? When is the next deposit/payment due? When are these investments getting matured? Where has he kept those passbooks, bank statement, and certificates? Did he take any insurance policy for you? So in addition to mourning the loss of someone close, you will have to grapple with all these questions.

You blindly believe that all your father’s decisions are correct. After all he has got years of experience with him. Wrong. Today’s investment avenues and choices are far more in number and complexity. Back in his days, only avenues for investment were FD, RD, NSC, KVP, endowment and money back policies. Mutual funds, ETF, SIP are relatively new concepts in Indian financial sector which he is not aware of.

For example, my father has done very well in managing his finances in spite of many responsibilities and limited investment avenues then. He has married off 5 sisters, built his own house, funded education and marriage of two children and still managed to build a retirement corpus which will outlive his retirement life. Does that mean I should following his ways and means of investment? While I look up to his discipline and patience in saving enough from his earning and investing the same, there are far too many investment avenues now which are more profitable in the long run. Most of his investments were in FD, RD, MIS and other government saving schemes.

There are far too many investment avenues today which are more profitable than those available in yesteryears. It is proven beyond doubt that most viable way of building a large corpus in the long term is through equities. Thus one has to be aware of all equity related basics like mutual fund, direct stock, SIP, ETF etc. Moreover, now investment is just a mouse click away; with internet banking and brokerage investment can be done anytime, anywhere without making rounds of banks, post-offices. Now it is way too much to expect your father to pick up all these concepts afresh and make himself tech savvy.

One more reason is our social upbringing; wherein questioning elders decision is considered disrespectful. However, concurrence doesn’t mean respect. If we explain things with valid data points there is no reason why they shouldn’t understand. While it's wise to consult elders and benefit from their experience, final decision making should be your own responsibility. For example it was tough to explain benefits of term insurance to my father vis-à-vis endowment policy, as in term insurance premium is not paid back to policy holders. But it was easy drive the point once I explained in details with data points.

Bottom-line : Take final decisions regarding your personal finance on your own; since consequences will be yours to face.

Personal finance mis-selling: Insiders story

2010-07-09T10:47:00.000-07:00

Mis-selling of financial products is rampant in India. Basic financial literacy among common people is highly inadequate irrespective of educational background, profession, age. This is exploited to the hilt by agents, bank relationship managers, personal bankers and others in mis-selling financial products to gullible people to meet their own target or earn hefty commission.

NFOs are sold to naive customers in place of existing mutual funds which are having great track record over long term. Reason given – NAV of NFO is Rs.10 and is thus cheaper than existing mutual funds having higher NAV.

Endowment and money-back insurance policies are pushed instead of term insurance policies, even though sum assured in term insurance is much more than other policies for same premium. In case policyholder outlives the term of term insurance policy, he doesn’t get back the premium. At first this fact is a bit hard to digest and is used unscrupulously by insurance agents to sell endowment and money-back insurance products.

Then there is Unit Linked Insurance Plans (ULIP), by far the most mis-sold financial products in India today. ULIPs embodies all ill traits that you can have in a financial products, they are complex, non-transparent, exorbitant charges (mortality charge, fund management charge, policy charge …. List goes on and on).

The list can go on and on. A lot has been written about this malice in personal finance. Recently I came across a write-up from an ex-personal-banker who was himself involved in mis-selling financial products to his customers. He is one of those rare soles who could not put up with the guilty feeling for long and quit.

Read Confessions of a mis-seller in MoneyToday. Though the article is a bit dated, the incidents mentioned in it are still rampant.

Psychology of stock market cycle

2010-07-02T07:04:00.000-07:00

Today we are inundated with tons of information and sound bites on stock market. All sorts of chart, graphs, data point are being used to put forth different point of views. The talking heads in business channels tell us how different micro and macro economic factors are going to affect certain stocks.

But if you step back and see, there is one very important factor that influences the market. That is mass psychology of all people who own equity of any type. The stock market is a reflection of this mass psychology wherein investors swing between extremes of euphoria and despair. And this mass psychology does not necessarily reflect actual economic condition at any specific moment.

I came across this amazing Wall Street Cheat Sheet which depicts the psychology of a market cycle.

Where are we now in this cycle? I think somewhere between Optimism and Belief.

“I can calculate the motions of heavenly bodies ….. But not the madness of people !” – Isaac Newton.

Is it better to rent or buy home? - Perpetual debate

2010-06-19T12:09:00.000-07:00

Yesterday while chit chatting with a few colleagues over a cup of tea, we started discussing – Is it better to buy or rent a home/flat? As expected each one had his own point of view on this. While tea got finished quickly, we could not conclude the discussion.

Buy-vs-Rent decision is a complicated one which depends on a number of complex criteria both quantitative (financial) and qualitative ones. Financial criteria include price, affordability, loan eligibility, tax benefits while qualitative ones are lifestyle, security, career ambition etc. And all these vary from person to person, thus there is no one-size-fit all answer.

The follow table gives high level advantage/disadvantage of both options:

While the table provides some high level pointers, one has to judge them in context of his own requirement and preferences. For example:

For a person who has just started his corporate career, easy exit without too much commitment is very relevant. At this stage in life people generally change jobs and often shifts from one city to another in search of better career prospect. For him renting and not buying makes sense. I know of a person working in IT sector who after spending initial years in Delhi shifted to Bangalore because of better career prospect. While in Delhi he had bought a flat for which EMI is being deducted. Now he is looking for a flat in Bangalore. So he is running after real –estate agents at both ends; one for selling Delhi flat and other for buying one in Bangalore.

On the other hand people who are steady in their job and don’t need mobility, security and comfort of own home is more relevant for easy exit. Regular home shift unsettles many things– kid’s schooling, office commute, neighborhood etc.

Unlike rented house, own house can be modeled according to one’s style, taste and budget. However, this brings along added responsibility of maintaining the property. Some people may not like to take this responsibility.

While it is trickier to factor in qualitative criteria, there are a number of calculators that helps with quantitative aspect of the decision – cost-benefit analysis for renting or buying a home. The New York Times provides one such buy-or-rent calculator, which I found very useful and comprehensive. The calculator includes a number of factors which can be used to do “what-if analysis”. While the unit (USD) and some factors used are in US context, the calculator is flexible enough to be used in Indian scenario.

At the end, one has to factor in all these and decide for himself which options best meet his requirement. The debate will not end anytime soon.

Stock tips are misleading: Take them with a pinch of salt

2010-06-12T02:04:00.000-07:00

Recently India Infoline (IIFL) came up with two different reports advising clients to "sell" and “buy” the same share, Punj Lloyd on the same day! Both the reports were published on 31st May, 2010. The first report advises institutional investors to sell shares of Punj Lloyd, while the second report targeted at its
private client recommends buy for the same share. The full story is covered in MoneyLife.

Money Life contacted IIFL’s VP of Corporate Communication for clarification ….

When contacted, Harshad Apte, India Infoline's vice president for corporate communications, said, "Both these reports are in fact, targeted and sent to two separate set of customers and also both these recommendations are for differing time horizons. One of the recommendations (IIFL Private Client Group) is for the retail clients and carries a shorter time horizon while the other one is meant for institutional clients and is for a longer time horizon."

Well “differing time horizons” is just a lame excuse. In all probability the two reports were prepared by two different people, either of them having any clue about what other is saying. This has to be incompetance or an intentional means of profiting a set of people at expense of other.

So what does a retail investor do when continuously bombarded with misleading recommendations ? I would say-

Stop following so-called financial experts/advisors (they come in many names) who dish out hot stock recommendations, tips through business channels, stock sites, magazines, reports etc. Open ended sound bites like “long term bet” (how long is long term?), “cautiously optimistic” (damn! can we be specific? it’s cautious or optimistic) can only add to confusion but not to your corpus.

Media and so-called experts are there to further their own interest and not yours. Business channels are there to increase their TRP which leads to more advertisements, magazines their revenue through increased sales and expert intent to enhance their personal branding. For retails investors there is no short cut for making money in stock market; everyone has to invest their own time and effort in doing research.

If you don’t have time or expertise for doing research, outsource that to experienced fund managers by investing in mutual funds instead of direct stock through systematic investment plan.

Moreover, if you cann’t choose right mutual funds that meets your financial requirements and risk appetite, invest surplus money passively through index funds instead. Over a period of time they will generate good returns.

Most of all make a financial plan tailor-made for your own financial goals and stick to that. Only discipline, patience and right financial choices can help build a large corpus.

Please send me your comments.

Index fund vs active fund - which one to invest in?

2010-05-01T21:19:00.000-07:00

Mutual funds provide a means to retail investors to participate in equity investment without knowing the nuances of the stock market in details. The objective is to take advantage of higher returns that equity provides over other investment channels in the long term. If this the backdrop should one invest in
index funds?

For uninitiated, index funds are passive funds that mirror an index like Nifty or Sensex. Thus your return on your investments is not dependent on the expertise of fund managers. Moreover, cost structure (expense ratio) of index funds are much less than active funds as administrative costs are less.

But as a retail investment shouldn’t you be taking advantage of expertise of fund managers in active funds? In a growing market like India, there are many pockets of opportunity outside index which are not well research but provide potential for huge upside. But is that happening in practice? Are active funds providing returns well above corresponding index funds to justify their cost structure?

Recently Standard & Poor's (S&P) has come out wi th a scorecard, S&P Indices versus Active Fund (SPIVA) scorecard for the Indian mutual fund industry. The scorecard reveals that benchmark indices have outperformed a majority of funds in most categories across a number of observed time frames. The study by S&P and CRISIL has compared the performances of the Indian mutual funds across time periods such as 1 year, 3 years and 5 years as on 31 December 2009. According to the scorecard, 70% of large cap funds in India underperformed the S&P CNX Nifty Index while 40% of the funds in the diversified equity category underperformed the S&P CNX 500 Index over a 5-year period ended Dec 2009. The scorecard has also revealed that almost 80% of the Equity Linked Savings Schemes (ELSS funds) underperformed during the 1 and 3 year periods. When it comes to 5 years period 65% of funds have failed to outperform the benchmark.

This implies while some active funds many outperform index funds till Indian market matures, it will become more and more difficult for fund managers to do the same over long run after adjusting higher expense. Thus for retails investors who wants to stay investor for long haul, index funds should be part of their core portfolio along with active funds. Moreover, due diligence should be done while choosing active funds, look for funds which are consistently giving more returns than index in its category over term (3,5 and 10 years).

For retail investor while it make sense to take advantage of higher returns of active funds with consistent history

Related articles:

Equity Investment: Direct or Mutual Fund ?

Expense Ratio: Fund ka funda

Mutual fund: SIP or Lump Sum ?

You can buy gold coin from post offices

2010-04-30T21:12:00.000-07:00

India Post, government’s postal department first introduced sale of gold coin through a number of post offices across the country on October 14, 2008. Given the popularity of gold in India, the new service became a great success. 24 carat Gold coins are sold in denominations of 0.5 g, 1 g, 5 g and 8 g. The gold coins are
packed in sealed cover with the certification from Valcambi, Switzerland and the service is provided in association with World Gold Council and Reliance Money Limited.

Given initial success, India Post has recently decided to augment the service. It has announced plans to expand the network of post offices where these gold coins would be sold from 466 currently, to 700 post offices during May 2010. Moreover coins will be sold with its own logo.

India Post charges a commission/service-charge of 4% of the sale value. And for buying coins worth more than Rs.50000, buyer has to furnish a copy of PAN card. If you want to buy physical gold, this service is quite similar to gold coins sold by many banks. Premium charged by banks varies and is usually more than the service-charge of India Post.

However, from investment perspective Gold Exchange Traded Fund (ETF) is still best bet for retail investors. Advantages of ETFs are that the fund house takes over the responsibility of storage and insurance of this gold, liquidity is high, making charge is not incurred. Gold ETFs are also more tax efficient than physical gold.

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Saral II: filing tax return will get easier

2010-04-28T08:42:00.000-07:00

In his budget speech, the finance minister had indicated that to make the tax filing process simpler, the erstwhile Saral form will be make a comeback. On 23rd April, Income Tax Department has come out with new income tax return form named 'Saral-II', that seeks to make tax filing easy for the assesses and gather information on TDS paid on salary and interest.

Saral II (ITR-1) can be used only by specific taxpayers — individuals having income from salary/ pension/ income from one house property (excluding loss brought forward from previous years)/ income from other sources (excluding winning from lottery and income from race horses). That means, only those who earn a living from salary, pension or interest income may use this form. Moreover owning more than one house makes one ineligible.

The form can be accessed here.

While this is a welcome move, changes are also needed at a fundamental level as our tax laws; it’s still complex for common people and subject to different interpretations.

Earn Save Invest : Personal Finance Cycle

2010-04-22T07:31:00.000-07:00

In this post lets discuss about Earn-Save-Invest cycle in personal finance. Each cog in this cycle is important for our financial freedom and complements each other very well. As we go along in our life, we should be aware of this phases to maximize financial gain.

Earn (Active): People trade their skill, effort or experience to earn money. Thus doctors, engineers and other professionals use their academic knowledge while businessmen use their business acumen to earn money. Most people are very conscious of their earning and leave no stone unturned to maximize that because of varied reasons like peer pressure, maintaining life style, aspiration. So you will find doctors putting extra hours in their clinic, businessmen put extra effort to augment revenue while IT professionals keep hopping jobs.

While active earning can be increased consistently in early life, for most people this doesn’t increase as much in later part of their career. Thus while salaried people get hefty increments in their 20s, it tappers to lower single digits in 40s and 50s.

Save: This means livings well within your means and keeping some of the earned money for future, as they say “save for a rainy days”. While saving a part of earned money is good, letting the same to idle in bank saving account is not. With current inflation of around 9.5%, saving account (current interest return is around 3.5%) gives negative yield. Another means used by many risk averse people is small saving schemes like National Saving Scheme (NSC), fixed deposits (FD), however post-inflation and post-tax return of these schemes are also very low. This erodes the purchasing power of your hard earned money.

Invest: Judicious investment is the only way of building a corpus while tackling the demon of inflation. Money saved should be put to work by investing in various investment channels available. While risk appetite varies from person to person, there are enough investment channels to cater to different risk profiles. Thus direct stock or equity mutual funds give more return with higher risk, debt fund are of less risk and moderate return. Investment goal should also vary with age; capital appreciation at early age and capital protection as one approaches retirement.

Earn (Passive): Passive earning is money earned indirectly without active involvement of the owner. This is result of judicious investment started early in life which keeps generating earning with compounding effect without active participation of the owner. At early years of career when people have steady stream of income, it is difficult to appreciate the importance of passive earning. But as one reach the twilight of life, passive earning becomes important. With increase in life expectation, retirement life span is also increasing. Thus investments made should generate enough passive earning to meet expenses during this phase of life.

While everyone wants to earn more, many know the virtues of saving, awareness about investment and potential of passive earning thereof is still lacking in India.

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Get Credit Report from CIBIL

2010-04-16T09:38:00.000-07:00

Credit Information Bureau of India Limited (CIBIL) now provides a report by which people can check their creditworthiness in case they are denied loan by banks because of their poor credit history. While obvious reason for poor credit history is past irregularity in repaying credit, it can also be other reasons like lack of updated information, human error, wrong identity, dispute etc. Now CIBIL provides a mechanism for people to check their own creditworthiness and take corrective measures if required.

What is Credit Information Report (CIR)?

These day people borrow from different financial entities like bank, credit card companies, housing finance companies etc. in different form like credit card, personal loan, housing loan etc. and repay the amount over period of time. All these past transaction details can tell how creditworthy a person is. A report which contains all the financial transaction details about an individual in a consolidated form across different financial institute is called Credit Information Report (CIR).

This helps a lender to track repayment record of loan seeker and quickly ascertain his loan eligibility. According to the nature of the record, a borrower is given a credit score. A poor credit score will make getting a loan difficult.

Credit Information Report from CIBIL

Credit Information Bureau of India Limited (CIBIL) was incorporated in 2000 to gather all existing consumer and commercial credit information and pool it in a one-point source, for reference. Currently banks, financial institutions, state financial corporations, non-banking financial companies, housing finance companies and credit card companies are members of CIBIL.

It helps protect lenders from giving credit to people with poor repayment record and establishments who are unlikely to repay what is lent. On the other hand, if a consumer has good credit score his loan eligibility will improve and loan processing will become faster. While the intent is good, at times things go wrong. Credit report can give incorrect score because of other varied reasons like lack of updated information, human error, wrong identity etc.

Now CIBIL provides a mechanism for people to check their own creditworthiness. One has to fill up an application form available at CIBIL'S website, attach a draft of Rs. 142 and mail it along with a few documents. The credit report is dispatched to his address through post. Detailed steps to be followed are provided in CIBIL site.

While the report is very helpful, current process of getting the report is very cumbersome. Online payment using credit/debit card instead of demand draft and online download of the report instead of physical dispatch will make it much more convenient for people. Hope CIBIL will provide that soon.

Claim Settlement Ratio of Indian life insurers

2010-04-13T11:32:00.000-07:00

Claim Settlement Ratio is one of the key considerations while selecting an insurance product. In India insurance regulatory body, Insurance Regulatory and Development Authority (IRDA) provides claim settlement ratio for different insurers in its annual report.

For example, as per IRDA annual report 2008-09, largest insurer Life Insurance Corporation (LIC) has the highest individual death claim ratio
of 95.48; while combined ratio of private insurers has is 82.26. Among the private players Max New York Life has the highest ratio of 90.02; other notables are Birla Sun Life (87.29), Reliance Life (86.57), ICICI Prudential (86.55), SBI Life (76.57).

Keep an eye on this important factor while choosing a life insurance product. You will get all recent IRDA annual reports here.

Term Insurance from LIC

2010-04-12T09:21:00.000-07:00

Life Insurance Corporation (LIC) is India’s largest insurer. Apart from plethora of endowment, money back policies LIC also have 2 term insurance policies in its kitty.

Only difference between these two term insurance policies is the range of
sum assured. In case of Anmol Jeevan the min/max sum assured is Rs. 5 lakhs and Rs. 25 lakhs respectively. While in case of Amulya Jeevan the min sum assured is Rs. 25 lakhs and no upper limit. So, if you want to take life cover less than Rs.25 Lakhs than go for LIC Anmol Jeevan Term Insurance Policy and beyond Rs. 25 lakhs go for LIC Amulya Jeevan Policy.

Both of these are pure term policies and have no rider option. Policy holder doesn’t get any money if he survives the policy term, but that should not dissuade you from taking term insurance. Remember term insurance is the best insurance.

Note that premium for these term policies from LIC is more than similar policies from other insurers. However LIC has high claim ratio, so you get peace of mind by paying a bit extra. Claim ratio is the proportion of claims incurred to the premium underwritten by an insurer.

Financial portfolio - Key Considerations

2010-04-09T10:09:00.000-07:00

Lets look into key considerations that needs to be addressed while building a portfolio:

Capital Appreciation: This is by far the single most important and obvious motive behind building a sound financial portfolio. Investments made should provide real growth post-tax and post-inflation over long period of time. Asset class selected has bearing on how much appreciation can be expected at long term over whole portfolio. While equity, real estate can provide
considerable growth over long term, other like FD, NSC etc. can barely negate negative impact of inflation.

Then there are factors like tax, inflation which erodes the value of portfolio. Inflation is a silent money killer. For example, with current inflation of around 8.5% your money should grow by at least at this rate for you to have the same purchasing power at the end of one year. Regarding tax, different tax structure exists for different investments; PPF is currently tax exempted while others like Fixed Deposits (FD), National Saving Scheme (NSC) are taxed. Besides there are costs associate with different investment channels which bring down the value. For example, brokerage, exit loads etc.

Key questions

Would the portfolio provide real positive growth post-tax and post-inflation?

Does it have suitable investment channels to maximize appreciation?

Are all tax and cost implications taken into consideration?

Goal Orientation: Every individual has separate financial goals and needs, thus his portfolio should specifically address those. There is no “one-size-fit-all” portfolio, otherwise we all could have followed the same portfolio template.

Based on different factors like age, family responsibilities, career choices financial goals vary – children education expense, building retirement corpus, buy house/car etc.

Key questions

What is the purpose or goal of investments made?

Does the portfolio provide ways and means to meet short, medium and long term financial goals?

Risk Management: Risk management is all about identification, assessment of effect of uncertainties or unforeseen events and taking actions to minimize, monitor the negative impacts thereof. When it comes to personal finance risk can come in different forms – accidents, medical problems, death, investment decisions gone wrong, financial market crash etc. Thus a proper financial plan should be resilient enough to manage and minimize the effect of such unforeseen events.

Key questions

Do I have adequate life and medical insurance?

Is it putting all eggs in one basket? Or is well diversified.

Liquidity: It’s another important consideration – how fast and easily an asset can be sold and converted into hard cash. These become important when cash is required in a short notice as in emergency. Liquidity depends on asset class and its form. For example in case of real estate liquidity is low.

Key question

Does the portfolio contain liquid assets? What percentage?

While building a portfolio these are the most important considerations that needs to be addressed.

BBMP property tax online payment

2010-04-08T07:38:00.000-07:00

People in Bangalore who come under the jurisdiction of BBMP (Bruhat Bangalore Mahanagara Palike) can pay their property tax online through BBMP site. Based on your property status you need to select form type. Form IV (white form) for those properties where there is no change either in the extent of built up area, usage (residential to non-residential or vice versa) or its occupancy (owner occupied to tenanted or vice-versa), or
category from the Return filed in the previous year. While Form V (Blue form) for properties where are changes.

For online payment the site asks for application number of last payment made, so first time payment has to be made offline via BBMP offices. From then onwards payments can be made online, and it’s very convenient. A word of caution - the site may not be always available. At times I tried and got error, so you need to have some patience.

There is also some discounts provided as an incentive who make payment early (before specified date).

Procrastination: Biggest Personal Finance Impediment

2010-04-03T10:59:00.000-07:00

Procrastination is by far the biggest impediment when it comes to personal finance. Whether it’s paying back debt, retirement planning, paying monthly bills, tax planning most of us think of it as chore and try to push it as late as possible. All these comes back to bite us – March end rush for tax saving, penalty for late payments of credit card and other utility bills,
debt trap, no retirement corpus. And as years pass by, suddenly at the twilight of productive life people realize that their finance is in mess and they don’t have large enough corpus to outlive retirement life.

As we start new financial year this would be the right time to have some resolution as we do during calendar new year – to do tax planning and start implementing it at the beginning of the year, put a monthly budget in place, create a personal financial plan, make regular investments. All that is required for that is bit of discipline, patience and some awareness.

Best time to work on improving your financial health was yesterday; if you have missed start that today, now, ASAP. As they say time is money!

Consolidated statement of Mutual Fund investments

2010-04-02T19:59:00.000-07:00

Do you find it tough to keep track of all your mutual fund investments? If you are investing in Mutual Funds for some time now, your investments will be spread across AMCs, fund types and registrars and different channels (online platforms like ICICIDirect, brokers or Direct). It takes lots of time and effort to consolidate these scattered investments and get a single portfolio view. Now there is help.

Karvy in collaboration with CAMS has come up with a tool where you can get all your transaction history in almost all Mutual Funds (except for funds whose registrars are other than CAMS & Karvy) just at the click of a button. The tool is available at https://www.karvymfs.com/platformservice/. You can get both summary and detailed (having all transaction details) statement across different period. I tried this out and got a statement in my mailbox within a few minutes of providing the details in the site.

Note-

The consolidation of statement is done based on the email id provided. So if any folio detail is missing in the statement that means you have not registered your email id against those folios.

The statement will contains all funds whose registrars are either CAMS or Karvy. Given that these two are registrars for most AMCs in India, this should covers bulk of your mutual fund investments.

Pretty useful tool.

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ICICI Direct brokerage options

2010-03-21T10:59:00.000-07:00

Since begin of this calendar year ICICI Direct has started giving multiple brokerage plans to users. A brokerage plan is a set of terms and conditions about the commissions you pay ICICI Direct for your trades. The two plans now available are

I-Saver
I-Secure

While I-Secure has a fixed brokerage of 0.55% irrespective of trading volume,
I-Saver has a tiered brokerage which reduces with increase in trading volume. In I-Saver, brokerage will be less than that in I-Secure only when trade volume is more than 50 lakhs in a quarter.

For people who predominantly trades less than 50 lakhs in cash in a quarter, I-Secure is going to be cheaper. Another point to be noted is that plan change will not get effected in between a quarter. Thus if you make a change in plan now it will be effective from 1st April only. The option of selecting/changing brokerage plan is under Customer Service section in ICICIDirect site, it’s a bit difficult to locate this among other details in the site.

Besides brokerage there are other charges also including Service Tax (ST), Transaction charge, Securities Transaction Tax.

Term insurance is best life insurance

2010-03-03T00:54:00.000-08:00

Term insurance policies are designed for financial protection of family members in absence of breadwinner because of untimely death. It is the pure and best form of life insurance because only purpose of term insurance is to ensure family’s financial protection, no-more-no-less. With the death of the breadwinner of the family, income also dies and proceeds from term insurance can be used to meet the financial requirement of the family.

Why this is called term insurance? Because they are offered for a specific term or period. In India most term insurance policies are offered for maximum term of 25-30 years.

In term insurance, premiums are far less than other insurance forms like endowment policies. Thus for minimal premium, term insurance can offer large sum assured. Inspite of that popularity of term insurance is india is dismal because of varied reasons.

In term insurance, in case the policyholder outlives the term of the policy, he gets nothing. At first this fact is a bit hard to digest and is used unscrupulously by insurance agents to sell other form of insurance products like endowment policies, ULIP etc. But it becomes easier to comprehend if you think other way – do you get premium back in case of car or 2 wheeler insurance? Then why expect the same in case of life insurance; though your life is more valuable than your car. At the end, insurance is a way of risk mitigation for which insurer charges premium from the policyholder. Thus whether premium is got back shouldn’t be a consideration while going for life insurance.

Second, low awareness of term insurance policies as Life Insurance Companies or insurance agents doesn’t market term insurance policies because of vested interest. As investments cum insurance plans are more profitable than pure risk products, all high sales pitches of life insurance companies are directed toward investments cum insurance plans. Insurance agents also avoid term insurances as they fetch less commission.

Key points to remember:

Life insurance is meant for “death benefits”, don’t buy it for “living benefits”.
Term insurance is good for policy holders, while investments cum insurance plans are good for insurance companies and agents.

Term insurance is the best life insurance. Period.

Please send me your comments.

Mutual Fund: Diversified or Sectoral?

2010-01-14T01:41:00.000-08:00

One of the key decision points for retail investors while investing in mutual funds is which category to go for - diversified or sectoral funds. Diversified equity funds invest in shares of companies across different industries or sectors, thus fund managers has the freedom to pick shares of any company from plethora of sectors. While sectoral funds focuses in one specific sector, fund managers gets to pick shares of companies from that specific sector only. There are a many sectoral funds – Power Funds, Infrastructure Funds, Technology Funds so on and so forth.

The decision becomes trickier because in any given time one or other sector will be doing better than the overall economy and corresponding sectoral funds outperforms the diversified funds. In this article we will explore which of these two categories is better for retail investors in the long run. First let us look into the primary reasons why people invest in equity through mutual funds; as discussed in an earlier article key reasons are

Inadequate expertise in equity
Inadequate bandwidth to track

Now let us revisit these same points with regards to sectoral funds. With inadequate expertise or knowhow how would one pick the right sector? Prospect of a sector is dependent on many factors like cyclic nature of some sectors (like metals), supply demand scenario, regulatory changes, rupee appreciation (like IT). With inadequate bandwidth and expertise how would one know when a sector will go in/out of fashion and enter/exit related sectoral funds? Thus sectoral funds contradict the very reasons people invest in mutual funds in the first place.

Moreover, in sectoral funds, fund managers are constrained to look for quality stock from a handful of choices in that sector. Even if a specific sector has better prospect it is not necessary that all and sundry in that sector will prosper. Besides a conducive environment, prospect of a company also depends on many other factors like management quality, product/service quality, strategic decisions etc. After all not all IT companies in India has gone on to become TCS, Infosys or Wipro even though overall IT sector had a dream run in the last decade. Thus it’s a tough task to identify more than 4/5 winning stocks in a sector.

But are sectoral funds “all bad and no good”? It depends how you leverage them. Sectoral funds are high risk bets which can give high return when used properly. Once core of a portfolio is built around diversified and balanced equity funds, based on risk appetite sectoral funds can be used to accelerate return in short bursts. It’s something like batting power play in cricket (Ok, that’s a rough analogy from a cricket buff!!)

Key takeaway

Diversified funds invest in shares of companies across different industries or sectors while sectoral fund invest in a specific sector.

Diversified funds are relatively safer than sectoral funds. Diversified funds are for long term, while sectoral funds are for short term.

Diversified funds should be part of our core portfolio, while based on your risk appetite use sectoral funds to accelerate return in short bursts.

Track sectoral funds more frequently and book profit whenever your target is reached.

Please send me your feedback on the article.

Related posts

Mutual Fund: Growth or Dividend ?
Mutual fund: SIP or Lump Sum ? Part I and Part II
Equity Investment: Direct or Mutual Fund ?

Gold: How to invest ?

2010-01-12T20:44:00.000-08:00

In an earlier article we have seen why gold should find a place in your investment portfolio as it is less volatile and a safe heaven in unsettled times. Herein we will look into different means through which a retail investor in India can invest in gold.

Jewellery :
Most obvious means is buying jewellery, which is both auspicious (for religious reasons) and a necessity (for marriage and other social functions)
in Indian context. Thus jewellery has sentimental value which takes precedence at times. However, purely from investment prescriptive this is not prudent because of many disadvantages - cost of craftsmanship in addition to the gold, impurity risk, low liquidity, security concerns.

Gold bar/coin :
Gold coins and bars are probably the best way of investing in physical gold. These can be purchased at banks and come with an 'assay certification' which guarantees that they meet the international standard of purity. This option also has some disadvantages like security concerns, storage hassles. Most banks including ICICI, HDFC sell gold in different denominations.

Gold ETF :
From investment prescriptive, gold exchange traded funds (ETF) are however the most convenient option for retail investors to invest in gold. The money invested in gold ETFs is used to purchase physical gold of equivalent value. The advantages of ETFs are that the fund house takes over the responsibility of storage and insurance of this gold, liquidity is high, making charge is not incurred. Gold ETFs are also tax efficient unlike physical gold. Currently 6 asset management companies ( Benchmark, kotak Quantum, Reliance, SBI, UTI) are providing such funds.

Following tables provides a comparative matrix of the 3 options:

Please send me your comments.

Why invest in Gold ?

Why invest in Gold?

2010-01-10T07:43:00.000-08:00

Gold is an investment vehicle which is getting lots of focus these days. Herein we explore a few reasons why gold should find a place in your portfolio.

Safe haven in unsettled times:
Gold is a safe haven in unsettled time including economic downturn and social turmoil. Take for example the recent meltdown in global economy. At a time when every other asset class was losing shine, gold prices was
increasing as more and more people was resorting back to the safety of gold.

Above charts for Nifty and Gold BeES shows the valuation of equity and gold during the tumultuous period between Nov 07 and Oct 09. While stock price was spiraling down throughout 08, Gold price was steadily increasing.

Diversification:
Gold provides another means of diversifying your investment portfolio along with equity, debt, real estate etc. It brings in stability and predictability in portfolio and provides insurance against extreme movement in valuation of other asset classes. While it does not provide as high return as equity, it is less risky, less volatile and has relatively high liquidity.

High demand but low supply:
Unlike other currencies, gold can not be printed but has to be mined and produced. Now as the reserve of gold is limited it is becoming more difficult to mine and produce gold. Moreover even if new gold reserve is spotted, gestation period before gold can be mined and produced is said to be long. Thus with less supply demand can only increase.

Hedge against inflation and foreign currency:
The value of gold, in terms of its purchasing power of real goods and services is relatively stable. Thus it acts as a hedge against inflation. Moreover, Gold has inverse relation with dollar. In future when dollar is expected to weaken, Gold prices will go up.

Please send me your comments.

Mutual Fund: Growth or Dividend?

2010-01-03T04:15:00.000-08:00

Most mutual funds provide multiple options to investor to choose from – Growth, Dividend and Dividend Re-investment. In this article we will look into difference between these options and when to choose one over another.

Growth:

In growth option, NAV (Net Asset Value) reflects the profit or loss made by the fund at any given point of time. When fund makes profit NAV goes up while at loss NAV goes down. Thus over a period of time if fund makes profit NAV keeps increasing. Only way of realizing profit in this option is to sell units of the fund.

Tax implication of equity oriented MF schemes is similar to shares - there is no long term capital gains tax (holding period is more than 1 year), and the short term capital gains tax is 15% (holding period is less than 1 year).

Dividend
In this option a part of profit made is paid back to the investor in the form of dividend from time to time. The amount and frequency of dividend paid depends on the profit made by the fund and is at the discretion of the fund manager. Thus dividend payment is not guaranteed. Moreover, dividends are paid out from the asset of the fund. Whenever dividend is paid, NAV of the fund goes down proportionately. That why NAV of dividend mutual funds are less than that of their counterpart with growth option. Example – For HDFC Top 200 fund latest (31 Dec 09) NAV for Growth and Dividend options are 180.46 and 46.67 respectively.

One key point to note is that dividend paid by mutual funds is “return of capital” and not “return on capital”. This is quite different from the dividend received in stocks. For example, an investor holds some stocks of Reliance and the company declares dividend. In this case dividend is paid from the profit made by Reliance, money gets transferred from Reliance to the investor. However, CMP (Current Market Price) of Reliance stock remains same. Thus the dividend received by the investor is over and above the money that he can realize by selling Reliance stock. But in case of mutual fund, dividend is paid from the fund asset i.e investor’s money is paid back to the investor. This confusion is often misused by many distributors to sell funds to investors.

Dividends are not taxable in the hands of the investors.

Dividend option is relevant if liquidity is required in form of dividend amount. Food for thought – if liquidity is required in short term should you be investing in equity at all? Beyond one year liquidity can be achieved in growth option by selling fund units without any tax.

Dividend Re-investment
This is a variant of Dividend option, wherein dividend is paid in form of units of the same fund. Thus dividend that was supposed to be paid to investor is used to buy units and is credited to his account.

For all practical purpose Dividend re-investment is same as growth option. So why have this separate option? For historical reason. Earlier, capital gains were taxed at 20% (for long term) and 30%( for short term). While dividends were taxed much less. Since growth option funds had only capital gains anytime units are sold for liquidity tax liability was more. To offset this dividend re-investment was introduced to ensure that dividends paid lesser tax and re-investment, being usually at a higher NAV as fund is growing, will attract less capital gains tax when sold.

With current tax structure dividend re-investment is not relevant. Thus for all practical purpose this option can be ignored unless there is any change in tax structure in future.

Illustration

Following table explains implications of investing same amount with different options:

Key takeaway

In growth option, fund NAV keeps increasing with profit. In dividend option a part of the profit is paid back to the investor in cash or kind (extra units in case of dividend re-investment).

Dividend in case of mutual fund is a misnomer. It’s “return of capital” and not “return on capital”. Dividend is paid from fund asset which reduces NAV. So be wary of distributors who try selling mutual funds based on dividend.

Tax implication of all three options is same if holding period is more than 1 year.

Growth is best option for long term investors.

Dividend options provide liquidity in form of dividend amount. But if liquidity in short term is a concern for an investor, equity might not be the right choice in the first place. More so, because mutual fund dividend is not guaranteed.

Dividend re-investment is not relevant with current tax structure and can be ignored.

Please send me your comments on this article.

Expense Ratio: Fund ka funda

2010-01-01T08:07:00.000-08:00

A number of parameters are to be considered before investing in a mutual fund. One of them is Expense Ratio – it is the percentage of a mutual fund’s total net asset/corpus that goes towards meeting recurring operating costs. Different operating cost incurred by mutual funds include management costs, legal and audit fees, marketing and selling expenses and other miscellaneous charges.

In Indian context, as per SEBI regulations equity and debt funds can charge a maximum expense ratio of 2.5% and 2.25% respectively. This is in addition to one-time costs like entry/exit load. On an average, most equity funds have expense ratio between 1.5% and 2%. In case of index funds, it could be lower, in the range of 1-1 .5%.The expense ratio is disclosed by fund houses once every six months.

Key points:

Expense Ratio is a key parameter to be considered while choosing a mutual fund. While a figure of 2.5 looks innocuous, a small difference in expense ratio makes a huge difference in the long term. We will see that in the example below.

Especially, in case of debt funds where rate of return is on the lower end (8-10 % per annum), the impact of expense ratio becomes more evident.

Index funds and exchange traded funds (ETF) have lower expense ratio as they are passively managed and saves on the steep operational cost of active funds.

While expense ratio is a key parameter, it is however not the only consideration while choosing a mutual fund for investment.

Example:

Let us consider two hypothetical funds A and B which has expense ratios of 2.25% and 1.75% respectively. Suppose a sum of 3 lakhs is invested in these two funds for a time framework of 10 years and each of these funds return an annual return of 15%.

As shown in the table above, a difference of 0.5% in expense ratio has a considerable impact on the maturity value of the two funds to the tune of 50K.

Assumption made

Expense ratios and annual rate of return (RoR) remain constant for both the two fund throughout the timeframe, though in practice it varies.

Please send me your comments on the post.

Mutual fund: SIP or lump sum? - Part II

2009-12-27T05:14:00.000-08:00

In Part I of this article we have explored myriad virtues of Systematic Investment Plan (SIP) over lump sum mutual fund investment - rupee cost averaging, limited volatility, investment discipline, limited initial amount required for investment etc. Herein we will see them in practice with an example using historical data.

Suppose investor A invests a lump sum amount of Rs. 48000 in Nifty Benchmark Exchange Traded Scheme (Nifty BeES) on start of July 2007. While investor B takes the SIP route and invests an amount of Rs 2000 in the same Nifty BeES on 1st trading day of every month starting July 2007. In this example we will explore how they will fare at the end of two years i.e 30th June 2009.

Nifty BeES is an exchange traded fund (ETF) that mimics the S&P CNX Nifty Index. Being an Index fund it is representative of general trends in Indian stock market. Moreover time frame of two years between July 2007 and June 2009 is used on purpose as this has been a very turbulent period in the market.

The following table shows the details of two investment modes:

Note: Historical NAVs is taken from www.mutualfundsindia.com. NAVs are for the 1st trading day on every month.

Observations

While both A and B has invested a total amount of Rs 48000 in the same fund, annualized return for SIP is 5.92% while lump sum investment has a negative annualized return of -0.27%. Annualized return is calculated using XIRR.

SIP provides rupee cost average. Thus when the stock price is at peak (NAV of 621.33 in Jan 08) minimum number of units (3.22 units here) is received, while the same investment of Rs.2000 has fetched maximum units (7.39) when NAV is least (270.5 in Dec 08).

Rupee cost averaging reduces the average cost of units and increases the total number of units purchased. Thus in this example for SIP average unit price is Rs 408.23 and total unit received is 117.58. But in case of lump sum investment the average unit price is higher at Rs. 435.96 and gets a onetime 110.1 unit.

One way of determining volatility in investment is to calculate drawdown. Drawdown is the peak-to-trough decline during a specific record period of an investment and is quoted as the percentage between the peak and the trough. Lets see what is the drawdown for our example. Note that in this example we have calculated investment value corresponding to NAV of 1st day on month only and not on daily basis, thus actual drawdown can vary. However, this is good enough to drive the point.

In case of SIP investment valuation peak and trough are Rs 27102.8 (in Sep 08) and Rs 21710.34 (in Dec 08) respectively. Thus the drawdown is -19.89%. But in case of lump sum investment, volatility is relatively much more. Valuation peak and trough are Rs 68409.55 (in Jan 08) and Rs 29782.54 (in Dec 08) respectively, which gives a downturn of -56.46%

Caveats

SIP is a mode of investing in mutual funds and not the only factor impacting success or failure of an investment. A lot depends on other factors like fund selected, type of fund (diversified, sectoral etc.)

At times lump sum investment can be better than SIP. For example in a rising market, lump sum investment at the beginning of uptrend will give better return than SIP.

SIP cannot always contain loss. For example, in a falling market, investment will incur loss inspite of SIP.

Please send me your comments on this article.