Nirav Panchmatia's BLOG

HEY! YOUR BLOG HAS MOVED & IMPROVED

2014-02-16T11:54:00.002+05:30

Dear Blog readers,

It was in 2010 that I started this blog & the kind of response that I have received from "YOU all" is phenomenal…

Your comments, suggestions, critical reviews have helped me become a better blogger & help me write better blog articles that are relevant to YOU, the reader… (At least that what I think…correct me if I am wrong)…

Amongst the many suggestions that I have received, one frequent input was that the blog design needs to be more reader friendly & that you wanted to know more about your author (that's me) & hence I should provide links to my other activities on the blog itself…

Based on YOUR suggestions, I have decided to move my blog to wordpress, a better environment, that allows better interaction between "YOU" the reader & your author (that's me)…

So here is “YOUR” newly designed, more responsive (it works on all screens; smartphone, tablet & laptop; try it out now) & more interactive blog at your disposal…

YOUR NEW BLOG: www.niravpanchmatia.in

I will urge you all to please visit your new blog; subscribe yourself there (top left corner) so that you do not miss any of my future posts & I would also urge you to try this blog on your smartphone, tablet &/or Laptop/desktop and mail me the issues /concerns/suggestions, if any for betterment of your blog…

In fact, now you can Suggest a Topic (or Ask a question) to me & I will try to write an article based on your suggestion..

I promise to take your suggestions seriously…

Once again, a BIG THANK YOU for all your support & looking forward to your support in future too…

PS: Don't forget to visit the following pages on my blog:

Blog Section	Why visit this section
Warren Buffett	My interaction with the God of Investing himself; now it has an article & a video clip too
On CNBC	Video clippings of my appearance on CNBC Awaaz on its most popular financial planning show on “YOUR Money”
Tax Planning	Get answer to most your tax investment related issues here
In-Media	Links to my articles Online & in Newspapers, Magazines & Dailies

Keep visiting this blog & other blogs too & continue reading…Remember:

“ONE WHO DOES NOT READ IS IN NO BETTER POSITION THAN ONE WHO CANNOT READ’..

Here’s wishing you “HAPPY & WISE INVESTING”…

Nirav Panchmatia

Blogger | Wealth Manager | Financial Coach

Investing Resolutions 2014

2013-12-31T00:28:00.000+05:30

It is always good to go to the root of a word and try and understand the underlying true meaning of the word. So I decided to check Wikipedia for the meaning of the term “New Year's resolution” and here is how Wikipedia defines the term.

A New Year Resolution is a secular tradition, most common in the West but found around the world, in which a person makes a promise to do an act of self-improvement starting on New Year's Day.

A NEW YEAR RESOLUTION IS A PROMISE MADE TO SELF TO DO AN ACT OF SELF-IMPROVEMENT

Now, if we you think that New Year Resolution is a modern phenomenon made popular by modern social media, then you are wrong.

The ancient Babylonians made promises to their gods at the start of each year that they would return borrowed objects and pay their debts.

The Romans began each year by making promises to the god Janus, for whom the month of January is named.

In the Medieval era, the knights took the "peacock vow" at the end of the Christmas season each year to re-affirm their commitment to chivalry.

Hindus, take New Year resolutions on the eve of Diwali to start afresh with renowned vigour the forthcoming year and so on. So do Muslims in the month of Ramadan.

So, just like our forefathers, for us the modern human race, January is the month of taking New Year resolutions. Resolutions for better health, better relations & more prosperity & so on & so forth.

Well my domain is the last one; “PROSPERITY”.

Being a financial coach & planner, let me dare to suggest a few Investing resolutions for the common man. If the Investor sticks to the below mentioned resolutions, he will soon create WEALTH for himself and his family.

And let me assure you that these are times-tested principles….

So, without much ado, let me mention some New Year investing resolutions for one and all.

10 Investing resolutions for 2014

1. I shall buy a decent Term Insurance Plan for myself and other earning members of my family

The first & the only necessary Insurance plan that every earning member should buy is a basic, TERM Insurance Plan that insures ones family against untimely death of the bread winner which can cause immense loss to the family. This is the CHEAPEST form of insurance money can buy but protects your family against the sudden and untimely death of the main bread earner of the family.

2. I shall buy a decent Mediclaim cover for each member of my family

Anybody can fall ill or meet with an accident in our family. Whereas Life Insurance is to be taken only for the earning member of the family, medical insurance is to be taken for all the members of the family. Medical costs are increasing by the day and if you are not covered by a proper medical plan, sudden sickness or accident in the family has the potential to eat your life’s savings.

3. I shall buy a decent Critical Illness cover for each member of my family

Just like Mediclaim, Critical Illness cover is equally important. Normal Mediclaim plans do not cover critical diseases that requires you to take a separate critical illness plan. It does not cost much but can save you a lot of cost in case of an unforeseen eventuality.

4. I shall start Systematic Investment Plan (SIP) in professionally chosen Equity Diversified Mutual Funds

One of best invention in the world of finance is SIP or Systematic Investment Plans. The only fool proof way of talking equity exposure via the Mutual Fund route.

After the abolition of entry loads on Mutual Funds from Aug 1, 2009, Mutual Funds have become the best, most economical form of Investment vehicle available to a retail investor. Consider this. Over the last decade, well chosen mutual fund schemes have given a compounded average return of 20 to 24% per annum. And that to tax free. How many businesses give this kind of return? Just one caveat, consult a Mutual Fund expert and let him create a dedicated mutual fund portfolio for you after understanding your needs.

5. I shall pay off my personal loan & credit card out standing’s (asap) at the earliest

Personal loan & credit cards are the costliest form of loans that banks and NBFC’s give to unsuspecting layman. One pays a whopping interest rate of 18% to 24% per annum on personal loans & 36% to 50% per annum on credit cards. Avoid these two at all cost.

6. I shall not trade in shares & I shall avoid speculation in equity, commodities or F&O

Most people approach the stock market as a place to make fast money in shortest possible time. They buy stocks on tips but make mistake on when to sell and eventually lose money unless you are lucky enough to exit at the right time. But one cannot be lucky all the time. So invest in stocks but only after thorough research. Avoid trading or speculation & always be an Investor.

7. I shall not invest in Insurance plans

No matter how much one emphasizes this point, one can never overemphasize it. Insurance is not investment. There are basically 2 types of Insurance plans viz; Traditional Plans like Money Back & Endowment & market-linked plans like ULIPs. The later (ULIPs) are already notorious for being largely miss-sold while the former (traditional plans) give returns that hardly beat inflation. Invest in equity diversified Mutual Funds instead.

8. I shall consult a Financial Planner to help me plan my financial affairs

We are living in a world of plenty. We now have a problem of CHOICE. 22 + life insurance companies, 44 odd Mutual Fund companies, 7,000+ listed shares and other traditional Savings & investment avenues. How can one expect a lay investor to choose which are the best investment avenues for him/her.

When one falls ill, one consults a doctor who then writes a prescription and then one goes to the medicine shop and buys the medicine prescribed by the doctor. Why not follow the same path while taking your financial decisions. Go to the financial planner who after understanding your specific needs, your financial goals & risk profile, helps you create a dedicated investment portfolio. It is worth paying fees to a financial planner & buy peace of mind then paying very high commissions to the commission agents and have sleepless nights.

9. I shall invest with a GOAL in mind

Now why is this important! Look, investing just to make money seems like a rational thing to do but it is anything but that. If you invest without a Goal, you will never know what action to take when faced with tough choices. So let’s say you have invested for your child’s higher education which is 10 years down the line. In the 4th year of investment, the market tanks. What will you do? Since your goal is 6 years away, you should be happy that the market has tanked and buy as if there is no tomorrow. If you didn’t have a goal in mind, you would probably have panicked and sold in distress thus losing a wonderful opportunity to buy.

10. I shall not forget the above resolutions

Most important. The above resolutions are not rules. They are principles. And principles are time tested rules that hold their ground through thick & thin.

So do not commit the mistake of forgetting them…

Here’s wishing all my blog readers a very prosperous & wealthy New Year.

Invest wisely, read a lot, read this Blog & keep commenting. I look forward to your constructive criticism.

You have supported me over the last few years of my blogging career here. For want of a better blogging environment, I have moved this blog to wordpress (http://niravpanchmatia.wordpress.com).

Looking forward to your continued patronage.

HAPPY Investing in 2014…

The TRUTH behind GOLD

2013-06-19T19:46:00.000+05:30

Dear Blog Readers,

It has been time that we have connected and the fault lies entirely with me that I have been too infrequent in writing on my BLOG. In fact the only complain that you all, the wonderful readers of my BLOG have with me is that I do not write every week. So here is a sincere apology and I promise to be more regular on my BLOG.

In return I would request you to keep showering your blessings, questions & promise to keep writing to me as you have been doing all along.

Having said that, I would like to inform my readers that I have started a small but effective WhatsApp group by the name of “INVESTMENTZ” wherein we discuss Investment & Personal Finance related matters.

The language, as you would expect is informal & attempt is to initiate a healthy dialogue /discussion within the group wherein group members ask queries and I attempt to answer those queries in a simple but effective manner.

Many of you readers and my friends in the Media have been writing to me with queries on GOLD. I therefore decided to share some of the conversation we had on my Whatsapp Group on GOLD with you.

So here is the transcript on GOLD from our WhatsApp conversation. Again, the setting is very informal as you wud expect on such grp.

WhatsApp (Investmentz) log on GOLD:

Nirav panchmatia: Good Morning. Many of you had called me to enquire on Gold. Well let's discuss Gold Fundamentals today.

On a very basic level, GOLD Prices in India are influenced by 2 very broad factors;

1. The International Price of Gold

2. FX rate ie INR USD rate

Yes. Gold prices in India are majorly influenced by INR USD FX rate. Because India does not mine (produce) any GOLD; 99% of our Gold requirement is IMPORTED.

Now tell me if you want to IMPORT something; say you want to import Apple iPhone from US; you first buy Dollars and with the dollars you will buy iphone; same logic applies to Gold too.

Now did you know that International price of Gold has practically not moved for a 28 year period from 1980 to 2008?

Yes. Gold Price was USD 850 an ounce in 1980 and it was the same in 2008.

But in India Gold price moved drastically over this 28 year period. WHY???

Why did Gold price in India move up drastically even though it did not move an inch internationally over a 28 year period from 1980 to 2008?

WhatsApp (Investmentz) member: Due to depreciating rupee

Nirav panchmatia: Explain further...

WhatsApp (Investmentz) member: The purchasing power of rupee decreased since 1980, which leads to increase in gold prices in India.

Nirav panchmatia: 1 US Dollar is approx 57 today; what was 1 USD in 1980??? Anybody wanna guess??

WhatsApp (Investmentz) member: 15?

WhatsApp (Investmentz) member: 7-8

Nirav panchmatia: Yes. 1 USD was approx 7 to 8 INR in 1980. And it was INR 55 a year back. Now that explains the rise in GOLD prices in India. The TRUTH is that we Indians, all along have been buying DOLLARS & have been fooling ourselves that we are buying Gold.

The graphic below explains the TRUTH behind GOLD in 1 slide:

Particulars	1980	Mid-2008	Early 2012
Gold Price (USD/ounce)	$ 850.00	$ 812.00	$ 1,772.40
% Change	-	-6%	118%
Gold Price (Rs. per tola)	Rs. 1,330.00	Rs. 12,500.00	Rs. 31,200.00
% Change	-	840%	150%
USD / INR Fx rate	Rs. 7.89	Rs. 43.50	Rs. 53.36
% Change	-	452%	23%

Nirav panchmatia: And YOU thought that you were buying GOLD all along??? How many Media reports highlight this TRUTH about GOLD???

WhatsApp (Investmentz) member: On the same line...investment expert says to invest certain amount of portion of portfolio in Gold...and given the link of gold price and fx...our portfolio wud hav exposure to currency risk even though a investor is unwilling to tak ths kind of risk...right?..

Nirav panchmatia: Gold is not an investment in the first place. It is a HEDGE against PESSIMISM. If things go bad, if economies go bad, if markets crash, GOLD shall come to your rescue.

WhatsApp (Investmentz) member: Very true

WhatsApp (Investmentz) member: Hmm....true...if economies go bad...currency wud depreciate which would increase price of gold further..and easy liquidity of gold act as a saviour..

Nirav panchmatia: When you are optimist about the future you buy EQUITY or STOCKS and Real Estate and when you are pessimist you buy GOLD. Now Time and situation is not constant hence we Financial Planners suggest that 10 to 15% of your portfolio should be in GOLD.

WhatsApp (Investmentz) member: GOLD ETF or physical gold? Which one is better if economy is not doing well?

Nirav panchmatia: That is the true reason for GOLD in ur portfolio and not as a stand- alone investment. Our ancestors preferred GOLD because it was easy to store, did not lose value, did not get oxidised , easily transferable and because they did not have better alternative like stocks and Mutual Funds.

Nirav panchmatia: I personally prefer Gold Mutual Funds or Gold ETFs because it cannot be stolen, the mutual fund co. guarantees 99.99 purity gold, and there are no making charges and it is only in GOLD Mutual Fund that you can invest monthly via SIP that too as little as Rs. 500 per month.

Does your local jeweller offer all these facilities???

WhatsApp (Investmentz) member: No global or local jewllers would offer such a facility...

Nirav panchmatia: By the way, Jewellery is not an Investment. Do you know why???

Investment, by defn is when you place your money today with the intention of getting back a bigger amt tom; so on the day of investment itself you have decided to sell it;

Can you DARE to ask your wife to give her jewellery back to you so that you can sell it???

Nirav panchmatia: Any takers?????????

WhatsApp (Investmentz) member: Sir. Is it advisable to invest in e gold in Nat Spot exchange rather than goldbees ?? considering the heavy amc charges (almost upto 1.5%)of goldbees as compared to e gold

Nirav panchmatia: Maam. Prefer investing in Gold Mutual Funds. It is better than Gold Bees or E Gold because Gold MF is the only avenue where you can invest periodically say monthly or even weekly and an amount of your choice with minimal expense ratio.

Also, since v do not know whether gold will go up or down from here, it is better to invest via SIP mode in it

WhatsApp (Investmentz) member: I have concerned about Indian currency.....continuously its depreciating against dollar...is this going to be regular scenario?...

Nirav panchmatia: Nobody knows for sure. Trust me, it is much much more difficult to predict currency movement than Sensex.

And every coin has 2 sides. A weak rs is bad for importer and good for exporter and vice versa...also, FIIs and NRIs will find it more attractive to invest in India if rupee depreciates.

WhatsApp (Investmentz) member: But i guess weak currency or depreciating currency is not good sign for econony

Benefits you are talking about are correct...Plus n minus points r thr

Nirav panchmatia: Economists are confused about that too. It is not a very easy conclusion to draw. Many leading economists believe that a weak currency is actually good for the economy. The author of Breakoutnation and Head of Morgan Stanley Mr. Ruchir Sharma believes so.

WhatsApp (Investmentz) member: Could you provide link to the article of head of MS...i want to read the points tht he puts forward to support his opinion

Nirav panchmatia: Read his book BREAKOUT NATIONS

WhatsApp (Investmentz) member: One more question on Gold. I guess Gold Mutual Funds are funds that are invested in equities of companies which are involved in mining etc of gold or other precious metal.. while funds like goldbees invest in gold....am I correct?...

Nirav panchmatia: No. Gold mutual funds buy physical gold. Those funds that invest in gold mining companies are of the nature of Fund of Funds and are actually similar to Equity Sectoral Funds as they invest predominantly in Equity of Gold Mining companies. So strictly speaking, they cannot be called gold MFs.

Nirav panchmatia: When you buy gold MF you get exact exposure to gold as if you are actually buying physical gold

WhatsApp (Investmentz) member: Okay...that answers my query Nirav. Thanks.

WhatsApp (Investmentz) member: Can you pl name one such gold mutual fund to cite an example

Nirav panchmatia: HDFC Gold Fund, SBI Gold Fund, Reliance Gold Fund; there are 7 to 10 such funds. They do not differ in performance much as they are all supposed to track the exact price of 99% purity Gold in India. What might differ is their Expense ratio. So choose a Gold Mutual Fund that has the lowest expense ratio & min. tracking error.

Also, Crude prices and gold price increase results in rupee depreciation to a large extent as these are India’s 2 biggest imports. This is 100% true. So govt is right in levying import duty on gold. Indians, pls stop buying more gold. V Indians r collectively getting poorer compared to other nations as v keep buying more gold and consuming more fuel.

Dear Readers, hope you liked & benefitted from the above conversation.

As always, shall eagerly await your comments/criticisms/opinions. As that is what keeps me going.

SOUND INVESTING…

QUOTE of the DAY:

EQUITY (Stocks) is the new gold…

Common Stocks, Uncommon Profits & Investing resolutions for New Year 2013

2013-01-07T17:13:00.002+05:30

If you regularly watch business channels then you would have noticed the change in tone of media and the market experts on TV channels with respect to the advice they give on markets. Since last couple of months, and in case of some experts since last year or so, are coaxing you, the retail Investor, to INVEST in Equities (i.e. Stocks) &/or Equity Mutual Funds.

However, this is my advice to you, the INVESTOR & my BLOG readers…

Please IGNORE what the pundits are saying & I strongly urge you to NOT invest in Equities

(I.e. Stocks & Equity Mutual Funds) in the year 2013…

Although this goes against what I usually speak on CNBC Awaaz financial planning show YOUR MONEY on which I appear regularly (click on the links below to watch my recent show on CNBC Awaaz:

http://www.facebook.com/photo.php?v=303985546386731&set=vb.196469380371101&type=2&theater

http://www.facebook.com/photo.php?v=303989549719664&set=vb.196469380371101&type=2&theater

http://www.facebook.com/photo.php?v=303994946385791&set=vb.196469380371101&type=2&theater )

I have a selfish motive involved here when I say that I do not want YOU to invest in Stock Market/Equities:

I do not mind if you stay away from EQUITIES because:

1. While you keep your money in low interest bearing Savings Account (earning a meager 4, 5 or at best 6% per annum) or while you earn taxable 9% per annum in Fixed Deposits, I shall continue to buy HDFC Bank, Indusind Bank or the likes of Yes Bank which are up 3.5x times, 11.0x times & 5.9x times respectively since DEC 2008.

2. I also urge you to pay all your EMIs diligently and on time so that retail loans given by banks do not get into trouble and my banking stocks appreciate further from here.

3. I would also urge you to continue buying GOLD even at these inflated levels (please ignore what the Indian Govt. is saying) so that I continue making supernormal returns in “Titan Industries “and other jewelry companies because while GOLD might be up 2.58x times in last four years, the stock of Titan Industries, which retails gold, is up 6.90x times during the same period.

4. I would also urge you to buy “Real Estate” and do not forget to take a Home Loan for the same especially from HDFC & LIC Housing Finance. That is how I made 2.8x times & 5.7x times respectively in these stocks over the past 5 years.

5. Also, while you buy or construct your house, please insist on buying the best quality construction material, may it be Cement, Sanitary Ware or anything else. Because it is because of you that I could make 192% on ACC and 4.5x times on Hindustan Sanitary ware since 2008. Also, please buy decorative paints from Asian Paints only, so that I can make 4.8x times on it over last 4 years.

6. If you are done with putting money in Bank FDs, Real estate & Gold, and there is still some money left to waste, I would urge you to buy Insurance products so that while you pay hefty double digit commissions to your agent and yourself make low single digit returns on your Money back & Endowment plans, I would have made 6.0x & 2.0x times returns respectively on Insurance company stocks like Bajaj Finserve & Max India.

7. Also, having invested intelligently in Bank FDs, Real Estate, Gold & Insurance, please feel free to pamper yourself by going to a mall, watch movie in a multiplex and munch some popcorn so that while you have been spending on movies & entertainment, I have made 2.7x times, 3.0x times, 3.0x times & 3.5x times returns respectively on stocks like Phoenix Mills, PVR, Zee telefilms & sun TV since 2008. Hey, do not forget to take your dinner at Dominoes so that I continue making 5.4x time’s return that I have made on Jubilant Foodworks since its IPO in 2010.

8. Also, your car must be pretty old now. Why don’t you upgrade to the latest model and let me do the boring job of owning stocks like Maruti & Bajaj Auto that are up 2.9x times & 10.8 times respectively since 2008. Or keep buying the macho motorcycle Enfield so that I keep making 12.0x times returns that I have made on Eicher Motors since 2008 and continue making some more money.

9. Also, please continue smoking & drinking so that I continue making 3.80x times return on ITC, 10.3x times on United Breweries & 2.2x times on United Spirits in four years.

10. Last but not the least, god forbid, if you over indulge yourself & have to visit a hospital, or buy medicines, I shall continue to make 3.8x times on Apollo Hospitals, 4.0x times on Dr. Reddys & 2.3x times on Cipla.

SO now I have given you 10 strong reasons to NOT INVEST in EQUITIES but continue being the CUSTOMER of the companies whose stocks I own…that way, you are happy enjoying their services or products & I am happy making triple digit returns by owning the stocks of the very same companies…

Top Stock Performers since Dec 2008
Stock	Returns over the past 4 Yrs. (%)	Value of Rs. 1 Lac invested in Dec 2008 (Rs.)	How many times (x.0)
Sensex	19.28%	1,19,280	1.19
Eicher Motors	1034.00%	11,34,000	11.34
Bajaj Auto	968.00%	10,68,000	10.68
Bajaj Finserv	543.00%	6,43,000	6.43
Titan Industries	539.00%	6,39,000	6.39
LIC Housing Finance	491.00%	5,91,000	5.91
HSIL	351.00%	4,51,000	4.51
Dr. Reddys	289.00%	3,89,000	3.89
Apollo Hospitals	260.00%	3,60,000	3.60
HDFC Bank	247.00%	3,47,000	3.47
PVR	198.00%	2,98,000	2.98
ACC	192.00%	2,92,000	2.92
Maruti Suzuki	183.00%	2,83,000	2.83
Cipla	118.00%	2,18,000	2.18
Max India	108.00%	2,08,000	2.08

If you have a hard look at the table above, you will notice that while Sensex has given a meager 19.50% returns over 4 years between Dec 2008 and Dec 2012, Stocks like Eicher Motors have gone up 10.0x times or Titan Industries have gone up by 6.40x times and so on over the same period.

Now I leave it up to you to decide whether you want to be a consumer only of the above mentioned companies are do you want to join in their wealth creation party by partly owning some of the above phenomenal stocks…

Now a few caveat here….

Please don’t think that I am recommending you to buy the above-mentioned Stocks….

Because since these stocks have gone up so much over the past 4 years, some of these are no more cheaply valued & hence are not a very attractive investment options today.

By writing this article I am trying to bring home the point that there is no better investment option available in India today than investing in Stocks or Equities especially because this is a rare asset class that is not overvalued today as returns over past four years of Sensex companies are nothing to write home about.

Gold, Real Estate is already overvalued. Not that they may not give returns going ahead but that party is already in midnight whereas the Equity party has just started. It is still not late to enter that party. and it absolutely makes no sense to me why somebody would park his money in Bank Fixed Deposits earning a meagre 9 to 9.50% and then paying 30% tax on the same. (Please read my article "The Rich Man's bank accounts" to get a perspective on the same (http://niravpanchmatia.blogspot.in/2011/03/rich-mans-bank-accounts.html)).

Also, this is the first time that I have borrowed an article. Till date whatever I have written on this BLOG was all Original content. This article appeared in Outlook Business recently and was penned by Samir Arora. I found it so enlightening & full of wisdom that I thought it fit to share it with you all.

EQUITY shall be the asset class of 2013, 2014 and so on…

Those who will be out of Equity (read Stocks and Equity Mutual Funds) in 2013 will miss the party…

The CHOICE is yours…

By the way, the title of this blog, Common Stocks & Uncommon Profits is also the name of a very famous book authored by Philip Fisher, one of the most successful stock market investor who was admired by my Guru Warren Buffett himself. If you can get hold of that book, it is worth a read…

HAPPY INVESTING in 2013...

2012-07-16T17:52:00.000+05:30

BAD TIMING

Of late many of you, my BLOG readers, have written to me requesting me to increase the frequency with which I write articles on my BLOG. I am happy to know that I have great folks out there waiting to read what I write on the subject of Investing & Personal Finance and admit that I should write more frequently.

I know I that I suffer with bad frequency or shall I say BAD TIMING in writing my BLOG and I fully admit my mistake. I shall endeavor to correct myself and write more frequently in future. Your opinions, suggestions and constructive criticism are more than welcome.

While I was thinking about bad timing, I thought of the googling for AWARDS that are given for worst performance in any field, just out of curiosity. And to my surprise, in many categories there are many WORST PERFORMANCE AWARDS given every year. Have a look at the table below:

AWARDS given for WORST Performance

AWARD	Presented for what?
Golden Raspberry Award	An award presented for the worst performance in the Hollywood film industry; worst film, worst director, Worst actor of the year etc.
Golden Kela Awards	Awards the worst performances in Hindi cinema; Worst film, worst Director, Worst actor etc.(This came as a surprise to me too; Google is great)
Top 10 Worst Awards Show Hosts	Recognises Anchors who have hosted a mega show and have done their job really badly
Bekaar Advertisement Award	Worst advertisement in India in print or TV awarded by The Economic Times’ “Brand Equity” supplement
Worst Dressed Oscars Award	Given to worst dressed actor or actress at the Oscars
Worst Company in America Award	As the name suggest, given to the worst company of the year in USA
Roger Award	Award for the Worst Multinational company (MNC) of the year awarded by Former Finance Minister of New Zealand Mr. Roger Douglas ( hence the name)
Nostradamus Award	Awards the Worst Economists of the year who made the worst economic forecast that particular year
Worst Company in the World Award	A Swiss group, The Berne Declaration, gives the title of “The Worst company in the World” which they call “Noble Prize of Shame” to those companies that are likely to cause the worst environmental & financial damage.

Ya I know that this is a Personal Finance BLOG. Then why am I talking about all these crazy awards???

Give me a minute and I shall come to the point.

Now, you must be wondering why I am taking of WORST rather than the best. This usually is not my nature.

Well the objective of this BLOG is to single out the BEST Investment avenues for my Blog readers. But is that all! My objective and duty towards YOU, my Blog reader, is to also SAVE and PREVENT YOU from Investing in undesirable financial products and save you from a possible financial loss. this BLOG article is written keeping this objective in mind.

I think it’s time the Financial Services Industry in India should also come out with a few awards in the Worst category, especially on these lines:

A “WORST FINANCIAL PRODUCT OF THE YEAR AWARD” to recognise the worst financial product introduced during the previous year.
A “BAD TIMING Award” to recognize a financial product that was introduced at the worst possible time of the year.

Let us concentrate on the 2^nd award in this BLOG article; the BAD TIMING AWARD and try to find out the Nominations for the same…

Now let me come to the point…

The Indian Financial Services Industry represented largely by the Insurance Industry, the Mutual Funds Industry and the broking community keeps introducing various products in the market from time to time. Some of these new product or product categories go on to become great products , some are talked about when they are launched and later forgotten and some become notorious or shall I say INFAMOUS for the great pain and loss that these cause to the Investing community.

I shall in this BLOG article talk about 3 product categories of the 3^rd type that have now become infamous and nobody wants to touch them with a barge pole.

BUT the situation was diagonally opposite when all these three product categories were launched.

I am really amazed at the TIMING with which some financial products were launched in our country over the last few years; in hindsight, if we analyse their timing, there couldn't have been a worst possible timing to launch those products or product categories.

In this BLOG, I shall be discussing 3 such Financial Product categories that are Nominees for the Worst Product Oscar AWARD or wait a minute, I think all the 3 have actually won the BAD TIMING OSCAR AWARDS.

All the 3 product categories were launched with great fanfare, with very aggressive marketing and record sales were booked in each of these categories.

Let me start with a product category that can win both the above awards in one go; the Worst Financial Product Award as well as the BAD TIMING Award.

I. Highest Guaranteed NAV Plans

"Little Guarantee of returns but full guarantee of high expenses & high commissions"

Invest in the fund and get highest NAV (net asset value) of last 7 years guaranteed. Now, this sounds lucrative and attractive, doesn’t it? Such funds are called the Highest NAV Guaranteed Plan’s. They came in hordes last year and created a buzz. Bet you would have seen at least one advertisement on hoardings or in newspapers or magazines on these products during the past two years. These products are in news again, but this time for wrong reason.

Insurance Regulatory and Development Authority or IRDA, the agency which regulates the Insurance Industry in India, has with effect from JULY 2012, banned selling of Highest NAV Guaranteed Plans by all Insurance companies in India. (http://www.business-standard.com/india/news/irda-bans-productshighest-nav-guaranteed/474272/)

But alas, as it happens in many hindi films, by the time the COP reaches the scene of crime, the DAMAGE IS ALREADY DONE.

It is great and appreciative of IRDA to finally wake up, realise the truth and ban these products in July 2012. JAB JAAGO TAB SAVERA…

But over a period of around 18 to 24 months, since the time these products were launched and before this ban came into effect, these plans were sold aggressively by many Insurance companies and at their peak Guaranteed NAV Plan’s which are a type of ULIPs (I am willing to bet that most of the Investors in this plan were not aware that a Highest Guaranteed NAV plan is an avatar of ULIP, the most notorious financial product ever to be launched in India which as everybody knows, has attracted loads of negative media coverage over past few years) accounted for more than 20% of all the premium income of Insurance companies.

JUST IMAGINE. The product which is sold so aggressively by insurance companies that it becomes the highest selling financial product for most companies, but the same top selling product, in hindsight, turns out to be so bad that the insurance regulator IRDA is forced to ban the entire product category. THINK about it for a second…

So how it all did began:

According to market experts, “The Highest NAV Guaranteed Plans were launched in early 2010 after the recent crash in the market, and companies were taking advantage of the fact that Investors were looking for some kind of a SAFE investment product plus the upside of equity markets. Hence, were launched these Highest NAV Return ULIP’s which confuse investors and make them (the investors ), believe that they are going to get the highest return from the Stock market in long run – generally the tenure is 7 yrs, for these plans .

You have to read in between the lines; Investors need to understand that these schemes guarantee the “Highest NAV”, READ AGAIN! , its Highest NAV and not “Highest Returns”. Normal Investors don’t give much thought before buying these products and normally assume that the returns will be linked to the Stock Markets.

The Highest NAV Guaranteed Plans Launched after the 2008-09 market crash to lure investors who had lost money in the 55%+ fall in the Sensex and who were now looking for safety rather than high returns. IRONY is, the Stock Market, represented by the Sensex, went up by more than 81% within a year after the launch of these plans which are yet to deliver returns good enough to even beat Bank Fixed Deposits.

The major controversy is around the term ‘highest NAV’. There is a difference between what the insurance holders understand by highest NAV and what the insurance companies mean and what the agents portray.

Insurance companies certainly mean the highest NAV of the fund while the insurance holders confuse it with highest market level. Hence, they may assume the Sensex or the Nifty as benchmark for the highest NAV.

The guarantee part can be adverse for investors. As the funds are supposed to provide the highest NAV, they do not take the risk and invest major part of the fund in debt instruments. This reduces the returns that otherwise may be possible from typical mutual funds over the long term. Moreover, management fees and administration charges eat up portions of the profit which can further deteriorate the returns from the highest NAV guaranteed funds.

Another aspect of discord is the management fee charged by the insurance providers. The fee could be as high as 40% of the policy premium in the first year which needless to say, eats into Investors returns. Over the last one or two years, all major life insurance companies launched highest NAV guarantee products and some of the companies also came up with more than one version.

Even India’s biggest life insurer, which enjoys great trust & confidence of the Indian public, launched two such products — Wealth Plus and Samridhi Plus — which ensured returns based on the highest NAV. However, both these plans have now been withdrawn. But not before damage was done. And mind you, this insurance major planned to garner, hold your breath, Hold…, Hold……………………, a whopping Rs. 25,000 Crore from the sale of Wealth Plus alone in the form of first year premium income.

Imagine the magnitude of the damage, Rs. 25,000 Crore of our money getting locked in a good for nothing, long term product, bearing very high expenses & expected to deliver very nominal returns, and that too in a product category that later on gets banned by the insurance regulator.

NOW, let me ask you one very basic question…

When will you INVEST in the Stock Market ? &

When will you Book Profits & EXIT from the Stock Markets?

Situation (A) The Stock Market has CRASHED and VALUATIONS are very low i.e.; Stocks are available at a DEEP DISCOUNT to their actual price

Situation (B) Stock Market Valuation is at its PEAK, with very high unreasonable & unsustainable valuations

I don’t know about you but I shall prefer Situation (A) to INVEST in the Stock Market & Situation (B) to EXIT from the Stock Market. And I am sure any reasonable Investor would do the same. Right!!!

Now, one more question. When shall you, if you will, invest or need a plan like a Highest Guaranteed NAV Plan. In Situation A or Situation B?

Well, the answer is obvious. If the Stock Market has already crashed and stocks are cheap, the probability of them falling further from that point is minimal and the chances of an Investor making money in situation A is high. Therefore, in case of situation A, I shall invest in Equity Diversified Mutual Funds rather than Invest in a Highest Guaranteed NAV Plan and incur very high expenses and at the same time put a cap of my returns when the chances of getting handsome returns are the highest. It is only in Situation B that I might , if at all, invest in a Highest Nav Guaranteed Return Plan. As per this LOGIC, these plans should have been launched in late 2007 & early 2008 when the Stock Market valuations in India were at its all time peak and not in early 2010 when the Stock Markets had already crashed by more than 55%.

BUT, when were these Highest Guaranteed NAV Plans actually launched???

In Feb 2010 when the Stock Market has already CRASHED by more than 50% and VALUATIONS were very low i.e.; Stocks were available at a DEEP DISCOUNT to their actual price and the probability of getting good returns from this point were at its highest.

Now, this is what I call BAD TIMING…

II. Jeevan Aastha

(Jeevan is left but I have little Aastha of getting good returns)

It was in Dec 2008, that India’s biggest insurance company with more than 50% market share launched its plan JEEVAN AASTHA, a single premium life insurance product with guaranteed benefits on maturity and death, with great fanfare.

Basically, Jeevan Aastha is a single premium assurance plan which offers guaranteed benefits on death or maturity. In simple terms, this policy is like a fixed deposit that offers a certain guaranteed return and a certain specific amount of insurance upon the death of the investor.

The scheme was offered with five and ten-year terms giving a guaranteed ten per cent and nine per cent per annum of maturity sum respectively. This is how it was stated in various advertisements in Newspapers & periodicals. Now who would not like to invest in a plan that offers 9% guaranteed return for 10 years. BUT, THAT”s where the GLITCH lies.

As in a fixed deposit, the premium (investment) has to be paid once, at the beginning. In insurance jargon, this is known as a single premium plan.

Now, It is in school that we are taught the basic difference between simple and compound interest. We are taught the fundamental principle that compound interest and not simple interest is the effective rate of return on any investment.

However, it increasingly seems to me that this is a lesson that is either not learnt well or is forgotten way too early. Jeevan Aastha essentially is a fixed deposit that, depending upon the age of the investor, offers at best 7.32% per annum (p.a.) and at worst a 4.32% p.a. return according to most market experts.

While it is true that Jeevan Aastha offers insurance along with investment, regular readers of my BLOG would know that I do not encourage combining insurance and investment. Always buy a term insurance plan, which is the most economical insurance that you can buy and then try and optimise your investment returns by investing in Equity Diversified Mutual Funds.

Though it is generally believed that insurance policy proceeds are free of tax, as per Sec. 10(10D), if the premium payable on any insurance plan exceeds 20% of the sum assured, the proceeds cease to be exempt and instead will be fully taxable. In the case of Jeevan Aastha, the single premium will always in all cases be more than 20% of the maturity proceeds. Would this not make the maturity amount from the plan fully taxable?

So from a Fixed deposit like, Insurance cum Investment plan, that promises 9 to 10% tax free returns but that is actually likely to deliver a simple rate of return in the range of 6.75% to 7.25% per annum in most cases and which is likely to be taxed, this insurance company powered by its mammoth team of agents managed to garner a whopping, hold your breath, Rs. 5,000 to 8,000 Crores in premium income in 2008 on its launch.

Now the Rs. 8,000 Crore question is?

Why did the insurance company launch this plan in Dec 2008?

Well, when markets have crashed by 50%+ in a single year what do Investors look for?

High Returns??? No. They look for SAFETY. SAFETY of the CAPITAL invested. It is this fear of the markets which was fresh in Investors memory that this insurance company wanted to bank on, according to news reports. Hence it came out with a Fixed Deposit like plan. But was it worth it???

Look at the table below:

Month & Year	Event	Average Sensex Levels for this month	Percentage returns from the last Event (%)
Jan, 2008	Sensex touches all time high	20,325	-
Dec, 2008	Jeevan Aastha launched	9,647	-53%
Dec, 2009	1 year after Jeevan Aastha's launch	17,464	81%

Particulars	Absolute Returns (%)	Value of Rs. 1 lac after 10 Years	Value of Rs. 1 lac after one Year
10 year returns from Jeevan Aastha @ 7.25% pa	72.5%*	1,72,500	-
1 Year Returns from Sensex a year after Jeevan Aastha was launched	81.0%**	-	1,81,000

*estimated based on what most market experts have to say

** Actual returns

Yes, what return Jeevan Aastha is expected to give in 10 years, Sensex gave 8% more returns then that within a single year of its launch….

another great example of BAD TIMING…

III. INFRASTRUCTURE FUNDS New Fund Offers (NFO’s)

(Over hyped Sector, Little Funds left for Investors)

Although very few, alas, even my pet Mutual Funds Industry has its own share of judgemental & timing errors, the chief amongst them is the slew of Infrastructure Mutual Fund New Fund Offers (NFOs) that were launched during the boom years of the stock market prior to the huge 55% odd fall of the Sensex in 2008.

Have a look at the graphic below:

Infrastructure Mutual funds New Fund Offers (NFOs)

Calendar Year (CY)	No. of Infra Fund NFO’s launched during the year	Percentage of Total Infra Funds launched till date	Average Sensex Level during the year	Average Sensex P/E Level during the year
CY 2004	3	11%	6,602	17.26x
CY 2005	2	7%	9,397	16.21x
CY 2006	4	15%	13,786	20.18x
CY 2007	6	22%	20,286	22.25x
CY 2008 (Jan to March)*	5	19%	16,957	22.65x
CY 2008 (April to Dec)**	NIL	0%	13,052	16.61x
CY 2009	3	11%	17,464	18.08x
CY 2010	3	11%	20,509	21.71x
CY 2011 (till July 2012)	1	4%	15,454	19.21x
Total Infra Funds NFOs	27	100%	-	-

*prior to the market crash

** after the market crash had begun

As is evident from the table above, between Jan 2006 and Mar 2008, just before the Indian Stock Market suffered its 2^nd biggest fall, more than half ie 56% (15%+22%+19%) of all Infrastructure Mutual Funds NFOs were launched. This coincided with the period when the Stock Market valuations in India were at its peak.

I mean the stock market in India was at its most expensive levels in the recent past during Jan 2006 to Mar 2008. Notice the P/E levels* during this period (highlighted in red).

*A Price to Earnings Ratio or P/E ratio is a very good indicator of how expensive a stock market is and is considered the standard parameter to measure how cheap or expensive a stock market is. So, higher the P/E Ratio, more expensive the market and lower the P/E ratio, cheaper the market.

The Sensex P/E levels were upwards of 20x times during the period when 15 out of 27 New Infrastructure Funds were launched.

The average P/E levels of Sensex over the past 30 years is 14.0x to 16.0x and any levels beyond these is considered to be expensive and hence not a very good time to enter the market.

A 20.0x or 22.0x P/E level is 46% more expensive than the average accepted level of 15X. Now, this was the time period when 15 out of 27 Infra funds that are in existence today or 56% of all Infrastructure Funds were launched.

THIS IS BAD TIMING…

What? You Want PROOF?

The table below gives the 1 year, 3 year and 5 years performance of Infrastructure funds and compares them with the returns given by the Sensex and the Equity Diversified Mutual Funds over the same time period.

Performance of Infrastructure Funds v/s Sensex v/s Equity Diversified Mutual Funds

Fund Category	1 Year Return (%)	3 Year Return (%)	5 Years Return (%)
Infrastructure Funds (average)	-12.74%	3.39%	-0.14%
Sensex	-7.43%	8.70%	2.42%
Equity Diversified Funds (average for Large & Mid cap funds)	-5.11%	11.38%	3.72%

Returns for 1 year are absolute returns
Returns above 1 year are average compounded (CAGR) returns
Data as on July 15, 2012

As is clear from the graphic above, over a 1, 3 and 5 year period, the Infrastructure Funds have underperformed both the Sensex & Equity Diversified Mutual Funds. The difference is wide in a 3 year period wherein the Infrastructure funds have given a mere 3.39%CAGR (compounded average) returns compared to a 8.70% CAGR returns for the Sensex and 11.38% CAGR returns by Equity Diversified Mutual Funds over the same period. Need more proof guys!!!

So, The NOMINEES for the BAD TIMING AWARDS are:

Highest NAV Guranteed Plans
Jeevan Aastha
Infrastructure Fund NFOs (launched before Mar 2008)

And the winner is...........

Well, owing to very very tough competition, the JURY has unanimously decided to grant the OSCAR to all the 3 contenders. Yes, History is in the making, for the first time, 3 contenders shall jointly shares the OSCAR.

3 cheers for the WINNERS...

To CONCLUDE:

Whenever YOU AND I Buy any Consumer Product, the basic underlying principle is that of "CAVEAT EMPTOR" or BUYERS BEWARE which means that it is the Buyers primary responsibility to keep himself aware of the market environment and check for himself before buying any product.

I think the same holds true for Investing in financial products as well...

CAVEAT EMPTOR or BUYERS BEWARE

(do write to me with your opinion on this blog article; would appreciate your opinion/comments/constructive criticism.)

CRISIL report confirms my view on Tax saving Mutual Funds (ELSS)

2012-03-28T18:41:00.000+05:30

Great!!! I now have the backing of India’s leading credit rating agency CRISIL confirming my view that Tax Saving Mutual Funds, also known as ELSS, are an Investors best bet as far as Tax Saving Investments are concerned. The investors favourite, PPF & NSC, have been beaten black & blue by good ELSS funds over a 10 year period, as per a recent report published by CRISIL.

So all those articles that I have written on Tax Saving Mutual Funds or ELSS have not gone in vain.

Here is the list of my previous articles on Tax Saving Mutual Funds; in fact, my latest article titled “Invest and therefore save tax and not vice versa” was published by me a few weeks back on this BLOG and sums up and provides links to my previous articles on Sec 80C and tax saving investment options…

Some of my articles on ELSS or Tax Saving Mutual Funds:

No.	Article Heading	Link to the article

1	Invest and therefore save tax and not vice versa	http://niravpanchmatia.blogspot.in/2012/03/invest-and-therefore-save-tax-and-not.html
2	Death and Taxes	http://niravpanchmatia.blogspot.in/2010/09/death-taxes.html
3	4 Strong Reasons to Invest in Tax Saving Mutual Funds	http://niravpanchmatia.blogspot.in/2011/03/3-strong-reasons-to-invest-in-tax.html
4	Tax Saving Mutual Funds: Grab them with both hands	http://niravpanchmatia.blogspot.in/2010/09/tax-saving-mutual-funds-or-elss.html

CRISIL, India's leading credit rating agency, carried a detailed analysis of various tax saving options available based on past 10 years performance & it confirms that ELSS or Tax Saving Mutual Funds are better that most other tax saving avenues like PPF or NSC

over a 3 year and more important a 10 year investment horizon....

Here are the links to CRISIL’s report in India’s leading business dailies:

Business Daily	Article Link	Article Heading
The Economic Times	http://economictimes.indiatimes.com/personal-finance/savings-centre/savings-news/elss-better-investment-option-than-ppf-nsc-crisil/articleshow/12430151.cms	ELSS better investment option than PPF, NSC: Crisil
Business Standard	http://business-standard.com/india/news/elss-better-investment-option-than-ppf-nsc-crisil/161624/on	ELSS better investment option than PPF, NSC: Crisil
The Financial Express	http://www.financialexpress.com/news/elss-better-than-ppf-nsc-crisil/929093/2	ELSS better than PPF, NSC: Crisil
Indian Express	http://www.indianexpress.com/news/elss-trumps-ppf-on-returns/916999/0	ELSS trumps PPF on returns
Moneycontrol.com	http://www.moneycontrol.com/news/mf-news/elss-better-investment-option-than-ppf-nsc-crisil_686054.html	ELSS better investment option than PPF, NSC: Crisil

Snippets from some of the above articles worth reading and pondering on:

Indian Express put it very nicely:

A penny saved is a penny earned. In the long run, those who follow this simple yet very powerful principle would probably be more financially sound than those who don’t. And those who go one step further by not just “saving” but “investing” in appropriate asset classes and products would likely benefit all the more.

Equity Linked Savings Schemes (commonly known as ELSS schemes or Tax Saving Mutual Funds) offered by mutual funds combine these two principles to create a product that not only help investors to save tax but also has the potential to help build wealth in the long run. However, ELSS funds differ from most of the other tax saving investment instruments in terms of their risk-return characteristics and for that reason, many investors tend to prefer traditional tax saving investments over ELSS funds.

Like most equity funds, ELSS funds also tend to be volatile in the short term but have the potential to help investor generate wealth in the long run. Their wealth generation potential along with the compulsory minimum investment period of at least three years makes it a great investment option for investors looking to benefit from tax deductions under Section 80C.

As per a study carried out by Fidelity Worldwide on Indian Tax Saving Mutual Funds, Rs. 1 lakh invested in ELSS funds on an average would have grown to Rs. 3,23,036 in a five-year time-frame whereas the same amount invested in PPF or NSC would have grown to just Rs 1,49,120 and Rs 1,50,317 respectively. It was also interesting to learn that more than three times out of five, ELSS funds outperformed PPF by over 10 per cent on an annualised basis.

Economic Times quoted CRISIL and said:

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

As per CRISIL analysis, Tax Saving Mutual Funds or ELSS gave 26 percent and 22 percent annualised returns over three and 10 years respectively vis-a-vis 8 to 9 percent offered by traditional tax saving investment products such as public provident fund (PPF) and national savings certificates (NSC).

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

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

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

Further, investors must choose funds that have performed well both in good and bad times.

Business Standard says:

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

The PPF accounts fetched 8.12% over the last 10 years and in the similar period, the NSC gave an interest of 9.10%. However, the average inflation over the past 10 years stood at 6.05%. So post-inflation returns of PPF & NSC are not at all attractive which is not the case with ELSS.

To sum up:

So, based on the CRISIL Report and what various leading business dailies in the country have quoted, if one has to put it in a tabular format:

ELSS Returns v/s PPF & NSC post inflation

Tax Saving Investment option u/s 80C	10 year Annualised returns as per CRISIL report	Average Inflation rate assumed	Post Inflation rate per annum
Top ranked Tax saving Mutual Funds or ELSS*	22% per annum	7.0% per annum	14% to 15% per annum
PPF	8.12% per annum	7.0% per annum	1.12% per annum
Employees Provident Fund (EPF)	8.25% per annum*	7.0% per annum	1.25% per annum
NSC	9.12% per annum	7.0% per annum	2.12% per annum

*going forward; Source: Crisil Report

A few words of caution here:

1. As of today, there are more than 35 ELSS or Tax Saving Mutual Funds in existence today. If you have to invest Rs. 1 lac under section 80C in ELSS funds, you should invest in 1 or 2 ELSS funds.

Which ELSS funds will you chose? My advise is that an Investor should either himself do a thorough research while choosing a good ELSS fund or take help of a Financial Planner or a Mutual Fund Expert / Advisor (not the typical commn agent; hope you know the difference by now).

2. Even though Tax Saving Mutual Funds require you to stay invested for 3 years, for the sake of safety, keep a 5 years investment horizon

3. Go for dividend payout option rather than a growth option for your ELSS funds…

4. Keep visiting this BLOG for further inputs…

HAPPY TAX INVESTING!

BUDGET 2012 Simplified for the retail Investor

2012-03-16T18:10:00.000+05:30

So the d-day has arrived. The suspense relating to BUDGET 2012 is now out in the open and the Pandora’s box is has now opened.

Now, if you google "BUDGET 2012" now, you will get 100s of hits, if not more.

So why should you visit my BLOG today to read about the Budget?

Because here, I have attempted to remove all unnecessary info, data etc and the article below is written in a simple, easy to understand manner keeping the retail Investor’s point of you in mind.

No jazzy talk, no extra details, just talking plainly about the couple of things that matter most to a retail Investor like you and me.

So, what matters to a retail Investor in India?

What does a retail Investor look for in the BUDGET document?

According to me, the following things matter to a retail Investor?

1. What are the New Income Tax Rates applicable to me the next financial year (FY 2012-13)? Basically, tax kitna lagega are kitna tax bachha?

2. What is the impact on my Investments? Should I change my tax investments especially under section 80C where I can invest up to Rs. 1 lac and save tax?

3. What has changed under section 80D that deals with Medical Insurance? A section where up till last year I could pay medical Insurance premium and get deduction up to Rs.15,000 (Rs. 20,000 in case I am paying premium for parents who are Senior Citizens)

4. Any other extra deduction that I can avail off and therefore save some Income Tax?

5. What about changes in Indirect Tax laws or rates?

6. Any major legislative (tax laws) changes that I need to worry about? For example people were talking about Income Tax Act 1961 being abolished and replaced with DTC (Direct Tax Code).

So let me attempt to answer all the above questions one by one?

1. What are the New Income Tax Rates applicable to me the next financial year (FY 2012-13)? Basically, tax kitna lagega are kitna tax bachha?

Ok. Here is the Old Income Tax slabs (FY 2011-12)

Income Tax Slabs for FY 2011-12 (current Financial Year)

Income tax slabs 2011-2012 for General tax payers
Tax slab (in Rs.)	Tax
0 to 1,80,000*	No tax
1,80,001 to 5,00,000	10%
5,00,001 to 8,00,000	20%
Above 8,00,000	30%
*For Individuals other than Woman assesses and who are not Senior Citizens
Basic exemption limit for other assesses	Rs.
Women assesses less than 60 years of age	1,90,000
Senior citizen (60 years to 80 years)	2,50,000
Very Senior citizens ( Age > 80 years)	5,00,000

And here are The Revised Income Tax Slabs as per Budget 2012 applicable to Individuals for next financial year (FY2012-13):

New Income Tax Slabs for FY 2012-13
(Next Financial Year 2012-13)
Income (Rs.)	Tax rate (%)	Savings (Rs.)
*Up to Rs. 2,00,000 of Income**	NIL	Rs. 2,060
Rs. 2,00,001 to Rs. 5,00,000	10%	Rs. 2,060
Rs. 5,00,001 to Rs. 10,00,000	20%	Rs. 2,060
Above Rs. 10,00,000	30%	Rs. 22,660
*For Individuals other than Woman assesses and who are not Senior Citizens
Basic exemption limit for other assesses	Income (Rs.)
Women assesses less than 60 years of age	2,00,000
Senior citizen (60 years to 80 years)	2,50,000
Very Senior citizens ( Age > 80 years)	5,00,000
Source: DNA India

Comment:

As you can notice from above, Budget 2012 has given an income tax savings of mere Rs. 2,060 is available to an Individual male assesses earning income up to Rs. 8 lacs. However, if your income is above Rs. 8 lacs, than your tax savings next year is Rs. 22,660 approximately.

2. What is the impact on my Investments? Should I change my tax investments especially under section 80C where I can invest up to Rs. 1 lac and save tax?

The most important Section under the Income Tax Act to claim tax deduction is Sec 80C wherein you and I can invest in various instruments and claim tax deduction up to Rs. 1 lac. Well, fortunately or unfortunately, not much has changed under Sec 80C. Neither the investments avenues have been reduced nor added, barring a small clause on Insurance plans on which clarifications are awaited. Thankfully, and that GOD for this, the most profitable investment avenue u/s 80C, Tax Saving Mutual Funds or ELSS are still going to be there next here. This is the best thing that has happened according to me…(to know more about Tax Saving Mutual Funds or ELSS, read my past article titled INVEST and therefore SAVE tax and not vice versa http://niravpanchmatia.blogspot.in/2012/03/invest-and-therefore-save-tax-and-not.html)

3. What has changed under section 80D that deals with Medical Insurance? A section where up till last year I could pay medical Insurance premium and get deduction up to Rs.15,000 (Rs. 20,000 in case I am paying premium for parents who are Senior Citizens)

After you have used section 80C to avail deduction of Rs. 1 lac, the other option is to use Sec 80D and avail deduction of another Rs. 15,000 to Rs. 20,000 by paying premium towards Medical Insurance for Self, spouse and 2 children (Rs. 15,000) or parents who are senior citizens (Rs. 20,000). Now senior citizen up till last year meant citizens above 65 years of age. That definition of senior citizen has been revised to include citizen above 60 years of age. A good amendment according to me…

While the above limits of Rs. 15,000 and 20,000 still hold true, the FM has given an additional deduction of Rs. 5,000 if you have incurred it “on any payment made on account of preventive health check-up for yourself or any member of your family”. Also, a deduction is available even if this check-up cost is paid for in CASH. A small but necessary change... (I believe this will help you and me to avail tax deduction on those innumerable medical check-ups that our doctors make us to do throughout the year).

4. Any other extra deduction that I can avail off and therefore save some Income Tax?

YES. 3 more avenues to save on Income Tax…

1. Till this financial year, even the nominal interest that you and I earned on our savings bank accounts (@ 4 %) was subject to tax. Going forward, Interest earned on deposits in Savings Account with Banks, Co-operative Societies and Post Offices shall not be taxed up till a maximum limit of Rs. 10,000 per annum. This deduction is available under a new section Sec 80TTA.

However, the above deduction until Rs. 10,000 is applicable to Individuals & HUFs only and not to Firms, associations and companies and the deduction is available for Interest earned on Savings accounts only and not applicable for Interest earned on Fixed Deposits. (that’s why Debt Mutual Funds give better income post-tax then Bank FD’s; read my article “The Rich Man’s Bank Accounts” http://niravpanchmatia.blogspot.in/2011/03/rich-mans-bank-accounts.html )

2. One more, more options for tax-free bonds would be available next financial year. Further clarification awaited.

One more to go. Yes, one extra Investment avenue has been added but not much clarity on it available yet. Even the Govt of India and the Finance Minister wants you to Invest in the Stock Markets. This in order to boost investment in the equity markets, FM has introduced Rajiv Gandhi Equity Savings scheme. The scheme allows for Income Tax (I-T) deduction of 50 percent to new retail investors, who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of three years. The details of the scheme will be announced in due course.

4. No Income tax return to be filed for Salary Income below Rs. 500,000; not a deduction but a relief to newly salaried guy...

5. What about changes in Indirect Tax laws or rates?

Yes, after good news comes some bad news. While the FM has given us some avenues to save Income Tax, he has given us a double whammy by increasing tax rates on Excise as well as Service tax rates that do not impact us directly but go on to increase prices of goods and services that we consume and therefore pinched our pocket.

a. Standard Rates of Excise duty (a tax on manufacture of goods that is passed on to you and me and applicable to most manufactured items) raised to 12% from 10% earlier.

b. Service tax rates also increased from 10% to 12%.

c. More important, and this is the double whammy; while currently Service tax is applicable on selected items and most items were excluded from Service tax; going forward Service Tax would be applicable on most items barring 17 major categories of items that would be specified under the negative list…

d. Import duty increased @4% on GOLD…so Gold prices likely to go up…

e. Excise duty increased on big cars; therefore they will become costlier

What? Have you still not had enough? You want more bad news then Google Budget Highlights and you can read the Summaries provided by other people.

6. Any major legislative (tax laws) changes that I need to worry about? For example people were talking about Income Tax Act 1961 being abolished and replaced with DTC (Direct Tax Code).

That is the biggest disappointment from BUDGET 2012. All the hype that FM will finally deliver and bring in the necessary reform by introducing the Direct Tax Code (DTC) by replacing the Income Tax Act 1961 and the Goods & Services Tax (GST) by consolidating various Indirect taxes was a mere hype. The FM , sadly, failed to deliver miserably on this front. Major Reforms? There are no reforms in this budget…

To conclude, our beloved Finance Minister today opened his Budget Speech with this remark,

“I must be cruel to be kind”

Well, what do I say! Our FM is a MAN of his word…He is a thorough gentleman..

Whatever benefits he has given to the common man under Income Tax, he has taken away under Indirect taxes by increasing Service Tax and excise duty rates and so on. But to be fair to our honourable FM, he is currently walking a tight rope after what happened in the Railway Budget. I just hope that all the major reforms that he has postponed like bringing in the DTC and GST, he brings sometimes during the next financial year. If not, join me in praying for this govt.

One Question: What do you do if the FM does not deliver a Budget to your expectations?

ANS.: You tighten your own family budget!!!

HAPPY BUDGETING…

INVEST and therefore SAVE TAX and not vice versa...

2012-03-12T20:03:00.000+05:30

Confused about the heading of this article…

What is the biggest mistake people commit in the month of March???

The first financial agent to knock on your door in March gets to sell any damn financial product to you.

Any damn financial product with any amount of commission and expenses?

And all his hefty commission and his company’s expenses go from whose pocket?

Obviously from your pocket…

So why do you commit this hara-kiri? (Hara-kiri is a Japanese term for Suicide done in a violent fashion)

Because of the following reasons:

1. It is March and just like all previous years, you just could not manage to get hold of a good Financial Advisor who can help plan your tax saving investments (What, do you really think you do not need professional help to decide where to Invest that 1 lac every year?)
2. Your CA had strictly instructed you last time to invest in some or the other financial product under sec 80C of The Income Tax Act if you want to save on taxes
3. Since you have not planned anything and its fag end of March, the financial or commission agent who has come knocking at the door has been god sent. Or that’s what you think…

So, just like all previous years, you end up buying an unwanted, undesirable, expensive financial product not because you wanted to buy the same but because it is March and the Income Tax Act requires you to invest up to Rs. 1 lac each year to save tax….

And if it happens to be an Insurance product (which would be the case more often than not), then you have promised commitments for not only this year but for the next 5, 10 or even 15 years…

So you buy an insurance product and if you are very unlucky, the commission agent’s favourite insurance product, a Unit Linked Insurance Plan (ULIP) to save tax this year but knowingly or unknowingly you have bought an insurance plan on which you will have to pay hefty Insurance premium for the next 5 to 10 or even 15 years. And you are not even sure whether you need this product in the first place….

So what is the solution…?

Can I manage to teach you about the various Investment avenues available to us under Sec 80C of the Income Tax Act 1961 and help you to pick the right product for yourself?

Well, if you promise me that you will read this article properly and the links provided, I can at least attempt to make you understand the pros and cons of various tax saving avenues…

Well let us start then…

To begin with, since I have already written a lot on Tax Saving Investment previously, and since till date not much has changed in the Income Tax laws pertaining to Sec 80C, I would insist that you go through my previous articles on this subject by clicking on the links below:

Read the following 3 articles on my BLOG and return here:

No.	Article Heading	Link to the article
1	Death and Taxes	http://niravpanchmatia.blogspot.in/2010/09/death-taxes.html
2	4 Strong Reasons to Invest in Tax Saving Mutual Funds	http://niravpanchmatia.blogspot.in/2011/03/3-strong-reasons-to-invest-in-tax.html
3	Tax Saving Mutual Funds: Grab them with both hands	http://niravpanchmatia.blogspot.in/2010/09/tax-saving-mutual-funds-or-elss.html

The first article, titled “Death & Taxes” helps you to break various Tax Planning Myths and introduces you to various Investing options available u/s 80C:

Tax planning myths

· I invest only to save tax

· I buy Insurance only because I need to save taxes

· PPF / NSC are still the best tax planning instruments available

· Unit Linked Insurance Plan's (ULIPs) are good for tax planning & give great returns too

· Rs. 100,000 is the maximum I can invest to save taxes

· Repayment of loans do not qualify for any tax deduction

· Tax planning needs to be done only at the end of the year around Jan-March

The right approach Tax planning investments have to be planned in a way that it helps you create WEALTH and in the process help you reduce your tax liability. Further, your risk taking capacity & asset allocation should decide what tax planning instrument you choose. Last minute rush to buy insurance or investing in PPF disregarding your actual needs is not the right approach towards tax planning. A good financial advisor can help you decide on the right tax planning instruments for you based on your financial goals.

The second article titled “4 Strong Reasons to Invest in Tax Saving Mutual Funds” introduces you to the merits of investing in Tax Saving Mutual Funds or Equity Linked Savings Scheme (ELSS) as they are commonly known, which according to me, is one of the best tax saving investment available to us u/s 80C of The Income Tax Act…

Why, because it has following advantages...

Merits of Tax Saving Mutual Funds or Equity Linked Savings Scheme (ELSS):

Tax Saving Mutual Funds, also known as ELSS, have minimum lock-in period of 3 years compared to any other tax saving avenue; PPF has 6 yrs, NSC has 5 years, ULIP has 5 years, Bank FD has 5 years etc…
It is one of the few marked-linked (investment in stock market) Investment avenue available under sec 80C and much better than the other market-linked product like ULIP
You only have to Invest once in this product and there is no binding on you to continue investing for a few years in the future which is the case with practically all other Sec 80C products; what a relief! It works like a Single Premium insurance plan…
It has amongst the best returns as returns are linked to market and over a longer time frame, Tax Saving Mutual Funds have usually given double digit returns, post tax, post expenses…
Also, after the abolition of entry load on Mutual Funds, weft Sep 1, 2009, the commission on this product is zero and the expenses ratio is also minimal in the range of 1 to 2% per annum…
Most important, the returns from Tax Saving Products are tax free….yes, the Long Term Capital Gains or ELSS is tax free as per the current law…

What more do you want from a Tax Saving Investment avenue?

No long term commitment, onetime payment only, zero commissions and minimal expenses, minimum lock-in period of 3 years and tax free double digit returns…

Well, you are a very greedy person, if you are demanding something more from a tax saving product then what an ELSS is already offering you…

Now, it is known that in the coming budget, The Income Tax Act 1961, in all probabilities will get replaced with the Direct Tax Code… if that happens, the tax planning game will change completely.

However, that will have effect next financial year (FY 2012-13) and will not have any impact whatsoever this financial year or your tax planning strategy for this year (FY 2011-12). Also, it is likely that this might be the last year for Tax Saving Mutual Funds or ELSS. In all likelihood, ELSS will cease to exist under the DTC regime. (Although I wish this should not happen). If that is the case, this is the last year when you can invest in this wonderful Investment & tax saving avenue…

So please grab Tax Saving Mutual Funds or ELSS with both hands and after Home Loan Principal amount and Term Insurance premier and PPF/EPF/GPF, every penny left u/s 80C out of Rs. 1 lac should go into ELSS or Tax Saving Mutual Funds…

Yes, one caveat here, there are more than 35 Tax Saving Mutual Funds or ELSS schemes out there in the market. And you should be investing in the top 1 or 2 schemes. Which are these?

Well, you have 2 options:

Consult your Financial Advisor or Financial Planner (not the commission agent, I hope you know the difference by now) OR
Read my BLOG regularly…

Plan your taxes wisely…

I am closing this article with Chanakya’s quote on Taxation…

According to Chanakya, “a King should collect Tax like a bee collects nectar from flower, without harming the flower and collecting only that much nectar from a flower as is necessary and without harming the flower so that it can come again to collect the nectar from the flower next season”…

Wise words from one of the wisest political minds India has seen…Hope our beloved pranab da is listening and has read Chanakya’s Arthashastra…

Subbu liquid fund ke bare main nahin jaanta hai

2012-01-05T20:53:00.000+05:30

You must have seen or read about this wonderful advertisement appearing since december on TV as well as print media...

“SUBBU SAB JAANTA HAIN”....

It is an advertisement by Kotak Mahindra Bank intending to attract money in it's savings bank account on which it recently increased the interest rates from 4% per annum to 6% per annum. And their pitch is that do not see it a mere 2% increase but look at it as 50% increase over & above what you were getting on your savings bank account earlier...(a 50% increase from earlier 4% per annum to now 6% per annum)

I want you to see this advertisement first before we proceed with this article...

http://www.moneycontrol.com/news-topic/kotak-50/video-kotak-mahindra-bank---subbu-sab-jaanta-hai---laughmp4_U2cSYfnZyDE.html

I don’t know about you but I kind of like this guy SUBBU….

What a wonderful way to explain the concept….

Only caveat is that SUBBU needs to take some financial literacy lessons from Financial Planners like me so that he becomes wiser… let me explain…

Now advertising on TV and other print media is not cheap....

A one minute clip on TV and half page advertisement in leading biz dailies like The Economic Times and Business Standard by Kotak Bank to advertise the simplest of all products, the Savings Bank Account seems a bit tricky…

Somewhere, the top management at that bank believes that 6%pa is an attractive rate of return good enough to lure the depositors to park their idle cash with them rather then your existing bank, which in all probabilities is still giving you a mere 4% per annum on your Savings Bank account ....

Now, if Kotak and some other banks believe that offering a 5 or a 6 % on it's savings bank a/c is good enough to attract depositors money, so much so that it worth spending lacs on TV & Print media…then there might be some truth behind it…and why not, if I am getting 2% extra, I will go there…after all, as SUBBU says, look at it as 50% more…

Now, let us visit the BASICS first…

What is a “Savings bank a/c” and why do we keep money there...

Well, you and I keep that portion of our money in the saving bank a/c that we have as a surplus, that we have not spent but which we think we might need in a foreseeable future...but we are not sure when we might need that money…

So we keep our idle money in a savings bank account pending further use... Why do we not invest this money...

Because we might need it any time...therefore it's better to keep it idle in a savings bank account then to invest it somewhere where it might become difficult to withdraw it when the need arises...

So , as far as our savings bank money is considered, we give preference to LIQUIDITY over RETURNS...

And by the grace of God, the returns on Savings bank account have also become attractive now... Alas, one good news that 2011 had to throw us...

The Reserve Bank of India (RBI) announced a deregulation of the savings bank deposit interest rate in its second quarter monetary policy review some time back. This means banks are now free to determine the interest rates on their savings accounts. Before the deregulation, banks were supposed to give a flat 4% per annum on savings accounts.

I expect savings accounts interest rates to go up in short term due to competition among banks to acquire these low-cost deposits. The interest rates are expected to be higher for deposits of more than Rs 1 lakh. But this will hold true as long as the interest rates in the economy are high…Once RBI starts reducing the interest rates, this golden period might also come to an end…

So since last few months of 2011, you would have come across advertisement by some banks highlighting the increased savings bank account interest that they would have begun offering to their customers compared to the 4% per annum that other banks are offering...

After the recent deregulation of savings bank account interest rates by RBI, at least three banks have hiked their interest rates till date.

Yes Bank was the first one to raise the interest rates on savings account with all balances to 6%, and this was followed by Indusind and Kotak bank announcing interest rates hikes on their savings accounts too. Others might follow too…

To start with, these are the three/four banks that have announced a hike in their interest rates.

S.No.	Name	Under Rs. 1 lakh	Over Rs. 1 lakh
1	Yes Bank*	6.0%	6.0%
2	Indusind Bank	5.5%	6.0%
3	Kotak Mahindra Bank	5.5%	6.0%
4	Karnataka Bank	5.0%	5.0%

Source: Internet; data as on Oct 31^st, 2011

Now why are these banks offering more to it's savings bank customers and also spending lacs of rupees advertising the same... Is it not a loose- lose situation for them...

First increasing their cost of fund by offering 50% more and then heavy spending on advertisement,

And the answer is No... Because money that we keep in our savings bank account is the cheapest source of funds for any bank... Even at 6% it is by far one of the cheapest ...

So they are not doing a favour to you and me by offering 2 % more but they are actually getting a very cheap source of money from us...But there is nothing wrong on their part either....this is how a bank is run..

And SUBBU s right when he says that do not look at it as 2% extra but look at it as 50% more...(6% is 50% more than 4% that was earlier being offered by all banks to its savings bank customers)

But there is one thing that SUBBU is either not aware of or that he is hiding from us...

(in fact, since I have developed a liking for Subbu, I would like to believe that SUBBU is plain ignorant but he is honest)

Ever thought where do banks park their surplus funds... banks, as per banking regulations are not allowed to lend all their money to us… So if banks are not allowed to lend all their money and as a rule if banks are supposed to have LIQUIDITY at all times, where do banks PARK (as against INVEST) their surplus or idle funds....

· Because like you and me, LIQUIDITY is of primary importance for a bank too...

· And a Bank does not have access to a savings bank type product like you and me...

· So a bank would like to PARK it's money in a product where it can withdraw money at will at very short notice and yet earn more than the 5 or 6 odd percentage that it is offering to it's savings bank customers...

Among the 2 to 3 options available to a bank to park it's short term money,Liquid funds offered by Mutual Funds is one…

Now, just think for 2 minutes....

A bank needs to fulfil 3 criteria before it can park it's short term money:

1. The investment avenue should b safe, very safe, as a bank cannot afford to take risks with its short term money

2. The liquidity should be good ie; a bank can withdraw money at a day or 2 days notice

3. The bank should earn returns good enough to compensate for the interest rate it is offering its customers on its savings bank or Equivalent products...how will it make money otherwise…

So, if banks are using Liquid funds to park their money, rest assured it fulfils all of the above mentioned criteria of SAFETY, LIQUIDITY and attractive RETURNs as far as short term funds are concerned...

Now, can YOU & I invest in LIQUID funds, banks favourite products for parking it's short term money....

The answer is YES....

Do we get the similar returns as to what a bank earns from liquid funds?

The answer is YES...

Then why are we, the lay people, not using LIQUID FUNDs as a safe, sound instrument to PARK (and not INVEST) our short term funds and leaving it idle in a savings bank account for months together earning a meagre 6% per annum, 5% per annum or in most cases 4% per annum? (and mind you this was 3.50% pa earlier)…

The only answer that comes to my mind is sheer IGNORANCE...

Either you have not heard about this wonderful savings product or you have heard about it but not considered the proposition seriously...

I do not blame you for the same… Since time immemorial we have been using a SAVINGS BANK A/C as the only and only place to keep our idle, temporary , short term money… so what if it was earning 3.5% per annum earlier and is now earning 4 to 6% per annum…

At least our money is safe and you might need the money any time…

After all, we are not supposed to invest all our surpluses…we need to have spare cash with us for emergencies or unforeseen events…

But if banks (where we so comfortably park our excess cash) think LIQUID Funds are safe and liquid and remunerative enough then it would be sheer ignorance on our part not to consider this wonderful instrument that offers avenues for parking our short-term, temporary funds…

Just imagine, an instrument where you can park your money for short term (for a time period as short as a couple of days), that offers liquidity so that we can withdraw money at will (at 2 working days notice ) and yet it earns an annualized return in the range of 7 to 8% per annum...practically risk-free…(remember, banks will not park their money where they are not safe)

Yes, well chosen liquid plus funds are currently offering anywhere between 7 .50% to 8.00% per annum, risk-free &

YES again, you can withdraw this money on 2 working days notice…&

YES again, your money is as safe as it was in a bank account provided you choose your fund carefully or take professional advice…&

YES again, you can withdraw your money, that you had parked in Liquid Funds,

either at one go or in multiple instalments, as you please…

What a wonderful proposition indeed…

Why keep even small amount of money idle in a savings bank account earning a 4%, 5% or in a few rare cases 6 % per annum return when today, we are getting upward of 8% per annum annualised returns on LIQUID FUNDS offered by Mutual Funds...virtually risk-free

Now SUBBU will agree and if he is honest enough, which I believe he is, he will admit that if a “Liquid fund” is offering 7.50% per annum to 8 % per annum currently, and at the same time not compromising either on the SAFETY of your funds or on LIQUIDITY, it is a very very attractive avenue for parking our idle funds that we might need anytime…

After all, a good LIQUID Fund is offering a COOL 25% more than the best savings bank rate being offered by any major bank in India (7.50% of liquid fund is 25% more than 6%, the highest interest rate being offered by any bank on savings a/c) and a cooler 100% more than what most banks are currently offering (8.00% of liquid fund is 100% more than 4%, the interest rate being offered by most banks on savings a/c)

Now have a look at the graphic below...

Last 1 year actual returns from some Liquid+ Funds

No.	1 year return (% pa)*	Expense Ratio (%)	Returns post expenses (% pa)
1	9.62%	0.37%	9.25%
2	9.40%	0.25%	9.15%
3	9.34%	0.35%	8.99%
4	9.14%	0.35%	8.79%
5	9.29%	0.63%	8.66%

Now, the above table shows post expenses actual returns realised from some of the Liquid Plus Funds over the past year….

As you can see, the actual returns earned by some liquid plus fund over the past year are well above 8.50% per annum…but the reason I am saying that one can expect 7.50% to 8.0% pa going forward is because RBI is expected to decrease the interest rates going forward…but even in that scenario, it is a very attractive proposition…

And mind you, it's the likes of kotak, Indusind & Yes bank that are offering 5 to 6% per annum on savings account and that too now when the interest rates are at their peak...these banks are bound to decrease the interest rates on savings bank a couple of months later when RBI starts decreasing them…

Also, Most of the banks have not yet increased the interest that they are offering on Savings bank account...they continue to offer4% per annum on Savings bank accounts…

So SUBBU, an 8% per annum on Liquid Funds, where your very bank is parking our money, is a COOL 100% more than 4% being offered by most banks & a cool 33.33% more than what your bank is offering us on our money…

Why don’t you consider shifting your money from your bank a/c to Liquid Funds…

I shall await your reply SUBBU…and shall also look forward to your next pitch…

What did you say, you do not have access to a Financial Planners services…

Oh dear, do not worry, I am always there for you SUBBU… call me any time in case of any query that you might have regarding Savings & Investments or for that matter any financial product…

No, do not worry; my Advisory Fees are very nominal, they will be very light on your pocket…

No SUBBU, I will not tell anyone that you take advice from me before giving it to others…

…after all, I am your fan too…

Have a nice day SUBBU….

Thought for the day

Don’t SAVE what is left after spending,

SPEND what is left after saving…

JAAGO NRI JAAGO

2011-12-17T19:52:00.000+05:30

“The BEST Investment opportunity is provided only in times of CRISIS”.

Indian importers are aghast, shocked and caught unawares at the sudden fall in rupee vis-a-vis the US dollar…an Indian traveller, the Indian Govt. and the Indian Importer are in pain as they have to pay full 15 to16% more rupees today to buy 1 US dollar compared to a year back…

Have a look at the table below…

Time Period	1 year ago	6 months ago	3 months ago	Current exchange rate
Date	17-JAN-11	16-JUNE-11	16-SEP-11	16-DEC-11
1 USD = INR	45.48	44.84	47.40	52.63
Rupee depreciation	16%	17%	11%	-

While it takes us Indians approx. Rs. 52.63 today (16-DEC-11) to buy one US dollar, we could buy 1 USD by paying a mere Rs. 45.48 a year back. The rupee has depreciated against the US Dollar by a good 16% compared to a year ago (or should I say that the USD has appreciated by a cool 16%). What’s more, the sharp fall in the rupee against the dollar has been sudden, with 11% fall coming in last 3 months itself…

This has caused a huge blow to the Indian Govt. because OIL is India’s biggest import & oil price, although has remain range-bound in terms of dollar, but because it takes our Govt. more rupees to buy 1 US dollar today compared to a year back, the cost of oil imports has suddenly shot up catching the Govt. unawares… in fact, this has been sighted as the main reason by our govt. to increase the price of petrol this week…

The Indian traveller who was planning to pack his bags and travel to US or the Europe will think twice now as his cost of travel has suddenly shot up by a good 15%...

Similar is the plight of an Indian parent whose child/ward is studying abroad. This December they are forced to pay 15% to 16% more fees compared to last year because of a similar fall in rupee v/s the USD.

However, the most pain is being borne by the poor Indian importer who would not have imagined in his worst nightmare that he will have to pay upwards of Rs. 50 to buy 1 USD. If you are a traveller, you can cancel/postpone your travel, if you are a parent remitting education fees to your child studying abroad, you can pay the higher rate for the dollar now hoping that by next semester, USD would be much cheaper, but the pain is continuous and unavoidable for the Indian Govt. and the Indian importer is in a more precarious situation as he cannot stop importing good otherwise his business will stop growing.

However, to repeat my quote above…a CRISIS for one is an OPPORTUNITY for another…

No awards for guessing who is the biggest beneficiary of the 15 % rupee depreciation? The Indian EXPORTER…especially those who are exporting goods and/or SERVICES to the United States…

The Indian EXPORTER has had his diwali this year, not in the month of October but from October till now with rupee depreciating by 8% to 10% since diwali and their top line & bottom-line increasing in direct correlation to the depreciation of the rupee vis-à-vis the US dollar…

Our Indian Exporter is having a field day and the diwali is continuing till the date of writing this article…

But, besides the exporters, there are two more group of people who stands to benefit directly & immediately from the 15% depreciation in rupee….

And what more, if they play their cards well, they can benefit immensely from this unwanted but unavoidable fall in Indian rupee…

Can you guess whom I am talking about…?

Think hard….what is missing from the graphic below???

Those who “LOOSE” from the rupee depreciation	Those who “BENEFIT” from the rupee depreciation
Indian Govt.	???
Importer	Exporter
Indian tourist & biz travellers travelling abroad	Foreign traveller planning to travel to India
Parents whose children are studying abroad	???

Can you fill in the blanks above…. besides the Exporters, which 2 communities stand to benefit the most from the falling rupee??

Well, let me break the suspense here….

The 1^st is the Foreign Investor including the FIIs (Foreign Institutional Investors) who have hordes of unutilised CASH lying idle in their coffers in the form of US dollars…that’s one of the reason I am not very concerned about the sudden fall in the Sensex…The FIIs, if they decide to invest in Indian equities today, stand to make a cool, risk-free 10 to 15% profit just by remitting money to India and converting USD to Indian Rupee…. So what my teachers taught me in school has some truth in it…

“EVERY CLOUD HAS A SILVER LINING”…

So, if we re-visit the above graphic… you’ve got one of the answers….

Those who “LOOSE” from the rupee depreciation	Those who “BENEFIT” from the rupee depreciation
Indian Govt.	Foreign Investors or the FII’s
Importer	Exporter
Indian tourist & biz travellers travelling abroad	Foreign traveller planning to travel to India
Parents whose children are studying abroad	???

Now I hope the FIIs read my BLOG, understand the logic of 15%+ risk-free return that I am writing about and start investing in Indian markets again….

But alas, that’s wishful thinking… My BLOG readers are not FII’s and FII’s are yet to become my BLOG subscribers, at least not in the near future…

So, for who am I writing this article… who is going to benefit by reading this blog article? Well YOU, my BLOG reader, if you know any NRI friend and/or relative and/or business partner. And to speak more directly, my friends who are residing/studying/working abroad… the NRI’s (Non-Resident Indian’s) and the PIOs (Person of Indian Origin’s).

So, now we complete the graphic above… finally…

Those who “LOOSE” from the rupee depreciation	Those who “BENEFIT” from the rupee depreciation
Indian Govt.	Foreign Investors or the FII’s
Importer	Exporter
Indian tourist & biz travellers travelling abroad	Foreign traveller planning to travel to India
Parents whose children are studying abroad	NRI’s and PIO’s

Yes, pick up the phone and give a call to your NRI / PIO friend/relative/biz partner sitting abroad, with dollars stashed away in his bank, probably worrying about his job, next salary, raise or about his business prospect, envying you and us Indians that we are living in the 2^nd fastest growing economy when he/she/they are living in economies struggling to stay out of recession and earning a meagre 2 to 3% on his bank deposits when we Indians are earning 9%+ on our deposits.

Call your NRI friend /relative / biz partner not to tell the above but to tell him that NOW, since last couple of months; YOU & I have started to ENVY our NRI friend working abroad…

WHY???? Here is the reason…

If I am an NRI residing in US or Europe or for that matter anywhere else, having spare dollars (or for that matter any other foreign currency) with me that I do not need at least for a few months if not more, I shall immediately REMIT my foreign currency savings to my NRE account and end up buying rupee @ Rs. 52.63 for every US dollar. Had I remitted money last year or even 3 months back, I would have received either Rs. 45.48 per US dollar (1 year back) or Rs. 47.40 (3 months back) per USD…

So, by remitting money NOW, I gain a cool 11.0% more compared to say 3 months back & 15.7% compared to a year back…

Now, an NRI has two choices after he has remitted money back to India.

Option 1: Start a NRE Deposit account and earn 2.5% to 3.5% return on his NRE deposits which actually is not bad as now his total earnings from this activity is a cool 18.5% (15% earned on conversion to rupee+3.5% on NRE deposits)…

Not bad compared to 3 to 4% max. that he/she might be earning on their local bank deposits…

(PN: interest rates earned on local deposits might vary from country to country)

However, if your NRI friend is of the more intelligent kind who takes pains to do some more research and /or takes professional advice from Wealth Mangers/Financial Planners, here in India, he will go for option 2…

Option 2:

So what is option 2?

Well, step 1 remains the same. Transfer money to India by remitting your foreign currency to your NRE bank account and convert your USD or any other foreign currency to Indian rupee and pocket a cool 15% odd risk-free…

Step 2, rather than depositing it into a NRE Deposit a/c, you INVEST the rupees so earned into Debt-based Mutual Funds here in India….

Ok, did you know that already???? So what’s stopping you my friend??? Are you not happy with practically risk-free 20.0% + returns in one year?

There are two unique events playing simultaneously in Indian economy that presents a unique, never before, opportunity to our NRI friends to obtain / EARN a practically RISK-FREE return of 20% odd….

Not only the rupee depreciation is at its peak, even the interest rates in India are at their peak. We all know that… you and I are earning upwards in the range of 9.0% to 10% per annum on our Fixed Deposits with banks (although I believe it is foolish for an Indian do open a FD today… surprised, read my article “ The Rich Man’s bank Accounts:….( http://niravpanchmatia.blogspot.com/2011/03/rich-mans-bank-accounts.html )

I say that because while FDs are giving us 9 to 10% pa they are taxed @ 30% however some of the medium-term debt-based Mutual Funds in India are offering returns in the range of 10.00% to 11.25% per annum…and are taxed @ 10% even if I may be in the 30% tax bracket..

So step 2 for an NRI would be to INVEST his money from the NRE account to some of these, well chosen, debt-based Mutual Funds in India.

He therefore stands to gain a cool 25% to 26.50% returns on his surplus dollars that otherwise were lying idle in his foreign bank account or earning a meagre 3 to 4% pa.

Now, a final graphic for you… the table below shows 1 year return in case of 3 strategies that an NRI can adopt with respect to his surplus funds…

	NRI money lying idle in his local bank a/c	NRI remits money NOW to his NRE A/c & transfers it to NRE deposits	NRI remits money to NRE A/c and Invests in debt mutual funds in India
Profit on conversion of USD to rupee	0%	15.0% approx.	15.0% approx.
1 year return	3.0% to 4.0% pa	3.0% to 4.0% pa	10.0% to 11.25 % pa
Total returns earned after 1 year	3.0% to 4.0% after 1 year	18.0% to 19.0% after 1 year	25.0% to 26.25% after 1 year

Now, the returns from debt-based mutual funds are expected returns but past 10 years record shows that good, well chosen debt mutual funds have given returns as indicated within a range of +/- 0.75%. Only one caveat here, please take professional help before finalising the debt mutual fund for Investment.

So, how is that for a neat 25% return over one year with very little risk …

Isn’t it cool…. If you think so and agree with me, then I would request you to forward this article to every NRI/PIO friend of yours… he will definitely thank you from the bottom of his heart and probably gift you that ipad or the latest iPhone4…

Now, about DON2,

if Shah-Rukh Khan can dare to bring out DON2, can I not write JAAGO NRI JAAGO part II…

Await the sequel, as in my following article I am talking about NRI’s making a cool, hold your breath, hold it, hold it, 50%+ returns….

Wait, before you point a finger at me and raise doubts, this one is not without risks….it is meant for NRI investors who fulfil the below mentioned conditions:

1. They have the stomach to take risks
2. They are willing to INVEST for a longer time period of 3 to 5 years
3. They take professional advice here in India before creating their Investment portfolio

Yes, a cool, 50% return in 3 to 4 years is not bad, is it????

Wait for DON 2, I mean JAAGO NRI JAAGO part II…

WATCH THIS SPACE…

QUOTE OF THE DAY:

If you buy things that you don,t need,

Soon you will have to SELL things that you need…

Hope you have doubled your SIP Investments this monsoon?

2011-09-19T12:48:00.000+05:30

Yes, you have read it right. And no there is no typo error here. I am asking you whether you have doubled your SIP Investments in Mutual Funds recently?

What did you say?

The markets are down and there is gloom all over. The World is in recession including India and hence we should stay away from equity (stock market) investing. So am I crazy to suggest that you increase your SIPs in Mutual Funds?

Now, I fully agree with the 1^st part of the sentence and partially agree with the 2^nd part of the sentence. Let me explain in detail.

Explanation to Part I: “The markets are down and there is gloom all over”.

Yes, the markets are down and there is gloom all over & it is precisely for this reason I am suggesting that one should buy equity or invest in our stock markets.

I don’t know which school you went to but my professor has taught me that the way to make money either in the stock market or for that matter any other market is to “BUY CHEAP & SELL DEAR”.

In other words, buy stocks when the markets are down and sell stocks when the markets are up. Were you taught something else by your professor? Well then check how his investment portfolio is doing.

Because I believe that one does not need a phd to figure this commonsensical fact that the only and the surest way to make money is to BUY when prices are LOWER and SELL when prices are HIGH.

Explanation to Part II: “The World is in recession including India and hence we should stay away from equity (stock market) investing”.

Now, coming to the 2^nd part of the question. There is gloom all over the world and constant talk of recession, slowdown and negative investor sentiment. Well, as I said , I only partially agree with this statement. Yes, we are living in troubled times. Most part of the western economy is in financial turmoil today. US has just been downgraded (first time in 4 decades) amid fears of a double dip recession, Europe is fighting possible bankruptcies of at least 3 nations including Greece and is barely managing to keep the euro zone intact. Japan has been in trouble and facing slowdown for more than 2 decades now. So you are partially true that a major part of the world economies, especially the western ones are either in recession already or on the verge of recession.

So, why do I not fully agree with the statement that there is gloom and fears of recession all over the world. Because there is one silver lining to this cloud and that silver lining is India & China. When the entire western world is in financial struggle, struggling to save itself from falling into recession, Indian and China are the only 2 large economies that are giving support to the hope that the world economy might be saved from recession.

NO there is no recession in India. I repeat, there is no recession in Indian and neither is there any fear of recession coming to India at least for the next decade. How do I know? Well, let me FLIP the question and ask you “Which FOOL told you that there is recession in India?”. If a friend or relative or broker or agent has told you so, then stop discussing finance and investments with that person, because he knows nothing about that subject. If you have read about recession or even fears of recession in India in any newspaper or magazine, dump that newspaper or magazine and let that be your last issue.

The text book definition of “RECESSION” that is generally and most widely accepted defn of recession by economists around the world is as follows: “ A country is in recession if its economy faces 2 successive quarters of negative GDP growth”.

If an economy shrinks (that is does not grow at all but has a –(ve) growth rate for 2 consecutive quarters in a row, then that is called as recession. India for the last many quarters for the past decades is growing on an average in the range of 7 to 8 % per annum. For us to qualify for recession, we should not be growing but shrinking @ -0.5 to -1% for two quarters in a row. Have we passed this test anytime over the past few decades?

NO, WE HAVE FAILED THE TEST OF RECESSION and that too miserably. India has not even known what recession is for decades now and will possibly not see one for next few decades. Thank GOD. So be happy, cheer up and buckle up for the best decade that India has ever seen in its post independence history.

Yes I agree that there is slowdown in India, meaning that while we were growing at approx. 8 to 9% per annum over the last few years, this year we might end up growing in the range of 7.50% to 8.0% per annum, a decline of 0.5%. But that this qualifies India for the rank of 2^nd fastest growing economy in the world after China. I agree that if the entire western economy is in financial turmoil, it will have some negative effect on our economy and especially our stock markets. But to what extent? “We should not confuse indigestion with stomach cancer”.

In fact the western economies are looking towards countries like India and china to lift the world economy from fears of recession. When was India so much important to the world economy?

So to repeat your concern once again,

The markets are down and there is gloom all over.

The stock markets in India are down and there is gloom in the west but there is HOPE in the East especially in India and China. In spite of the slowdown in our economy, the worst GDP growth rate forecast for India is @ 7.50% pa for 2011-12. This still will make us the 2^nd fastest growing economy in the world next year. That is equivalent to a silver medal in Olympics. Why don’t we Indians celebrate India’s GDP growth like we do when an athlete wins a medal in Olympics…

One sure way of doing same is to invest in the Indian stock markets…

So am I crazy to suggest that you increase your SIPs in Mutual Funds?

I don’t think so. On the contrary I feel that any Indian, whether resident or NRI, would be crazy NOT to invest in Indian Stock Markets NOW (over next 6 months), if he has surplus Cash to spare and if his investment horizon is beyond 3 years.

Do you know when is the best time to INVEST in a country’s STOCK MARKET? The BEST time to INVEST in any COUNTRY’s STOCK- market is when 2 conditions are met:

Condition 1: The economy of the country that you wish to invest in should be strong & its GDP growth forecast should be robust.

Does India meet this condition? Yes, by all means yes. Our average GDP growth rate over the past 30 years is 6.50% and we are expected to grow @ around 7.50% to 8.0% this year. So India has aced this test.

Condition 2: The stock market of that country should have seen a correction in the recent past and therefore offer attractive valuations

Our stock market index “BSE Sensex” had reached the peak of 21,000 in Jan 2008, almost 45 month back and is yet to reach those levels. The market has therefore significantly corrected from those levels and therefore offers bluechip stocks at very attractive valuations.

Having met both the above conditions with full marks, I strongly believe that Indian equity is a very strong buy at these levels.

However a few caveats here…

READ the HEADING of this article carefully.

Did I tell you to buy SHARES? No.
Did I tell you to Invest in the market at one go? NO.

I am asking you whether you have DOUBLED your SIP INVESTMENT in well chosen MUTUAL FUNDs during the last few months.

Why am I saying so? Because, investing in stocks directly is fraught with risks. The chances of you going wrong while choosing stocks (of the 7,000 odd stocks listed in the stock markets today) are higher than the chances that you will choose the right stocks. Even experts get baffled and make mistakes in choosing stocks. As for the traders and speculators, ask somebody who was speculating and/or trading in stocks over the past 3 years and you shall get the answer yourself.
Why SIP investing and not investing in lump sum at one go. Because one is not sure that the Indian Stock Market has seen its bottom yet. The downside risk still remains and any major economic uncertainty either in US or in Europe can take our stock market further down from these levels. However, just because one expects the market might go down further does not mean that one should wait for that to happen as nobody can catch the bottom. Hence stagger your Investments over the next few months rather than investing at one go.

An SIP Investor BENEFITS from A MARKET FALL and should be HAPPY if the stock market falls in the short run as in a falling market an SIP Investor accumulates more units of mutual funds, which, once the stock markets recovers, will help him make much more money.

Hope, now you are convinced that when Indian economy is doing well, (yes high inflation and rampant corruption are the pain areas but do not forget that we are growing at 750% per annum in spite of these 2 evils) and our stock markets are down, and there is negative sentiment the world over, that is the best time to dip into Indian equity using SIP mode of investing via well chosen Equity Diversified Mutual Funds selected with professional advice.

Still sceptical and have your doubts… GOD save me. It is really difficult to convince an Indian to forget GOLD & REAL ESTATE and invest in Equity… OK… let us talk with some facts & figures…

What was the Sensex in Jan 2008? 21,000 odd levels
What is the Sensex NOW (Sep 18, 2011) ? 16,900 odd levels (down 19.50% since Jan 2008)
What was the price of GOLD on Jan 15, 2008? 11,500 odd levels
What is the rove of Gold NOW (Sep 18, 2011) ? 27,500 odd levels (up 139% since Jan 2008)

NOW, if may dare to make a BOLD statement here:

“Had you done an SIP in well chosen Equity Mutual Funds since Jan 2008, when the Sensex was at its peak at 21,000 levels, and continued your SIP investments till date (SEP 2011), you would have beaten Gold today (in SIP terms)…even though Gold today has appreciated by around 139% since Jan 2008 and the BSE Sensex has fallen by approx. 19.5% since its peak levels of 21,000 in Jan 2008.

DO NOT TRUST ME…. Here are the facts…. Carefully study the table below… it will be a shocker and an eye opener for YOU…

Scheme Type	Absolute return over last 12 months - (Oct 2010 to Sep 2011) (%)	Value of Rs. 1.20 Lacs invested via 12 monthly SIPs of Rs. 10,000 each	CAGR Returns since last 36 months - (Oct 2008 to Sep 2011) (%)	Value of Rs. 3.60 Lacs invested via 36 monthly SIPs of Rs. 10,000 each	CAGR Returns since Jan 2008 (last 45 months) (%)	Value of Rs. 4.50 Lacs invested via 45 monthly SIPs of Rs. 10,000 each
Equity Sectoral Mutual Fund 1	17.65%	1,29,420	37.24%	5,92,900	32.2%	7,85,300
Equity Sectoral Mutual Fund 2	-3.21%	1,18,220	33.81%	5,68,175	31.2%	7,72,720
Gold Exchange Traded Fund	58.91%	1,49,700	32.65%	5,59,970	30.0%	7,57,800
Equity Sectoral Mutual Fund 3	31.86%	1,36,650	35.47%	5,80,055	27.9%	7,31,870
Equity Diversified Mutual Fund 4	-6.86%	1,16,180	24.75%	5,06,165	23.8%	6,83,490
Equity Diversified Mutual Fund 1	-0.11%	1,19,940	27.18%	5,22,320	21.9%	6,61,930
Equity Diversified Mutual Fund 3	-3.83%	1,17,880	26.88%	5,20,320	21.8%	6,60,815
Equity Diversified Mutual Fund 2	-10.82%	1,13,930	28.85%	5,33,640	21.5%	6,57,465
Balanced Mutual Fund 1	-4.54%	1,17,480	25.81%	5,13,175	21.5%	6,57,465
Equity Diversified Mutual Fund 5	-8.58%	1,15,200	22.05%	4,88,590	20.1%	6,42,000
Equity Diversified Mutual Fund 6	-11.98%	1,13,260	24.96%	5,07,050	20.0%	6,40,900
Equity Diversified Mutual Fund 7	-13.36%	1,12,460	24.12%	5,02,025	19.6%	6,36,500
Balanced Mutual Fund 2	-0.92%	1,19,490	21.80%	4,86,985	18.8%	6,27,900
Balanced Mutual Fund 3	-7.76%	1,15,670	21.27%	4,83,590	18.6%	6,25,765
BSE Sensex	-20.76%	1,08,000	7.29%	4,00,000	4.7%	4,90,130

The table above, gives SIP returns for last 12 months (Oct 2010 to Sep 2011), SIP Returns for past 3 years (Oct 2008 to Sep 2011) and SIP Returns for the past 45 months since Jan 2008, when the BSE Sensex reached its peak of 21,000 (Jan 2008 to Sep 2011). The adjacent columns gives the current value of Rs. 10,000 monthly investment made in Top 10 Mutual Fund schemes over the respective time period.

We have also compared the return from Top 10 Equity Mutual Fund with Sensex returns (at the bottom) and with Gold ETF SIP returns (at the top).

So, what do you observe?

Now, it is not a surprise that GOLD is at the top of the table and Sensex at the bottom. But what might surprise you is that at least 2 Equity Mutual Fund schemes have given compounded returns more than GOLD ETF (which exactly mirrors the Gold price) ince JAN 2008. A very BIG surprise. So the two top equity mutual funds have given compounded return of 32.2% and 31.2% respectively against 30.0% given by Gold SIP and a mere 4.7% by the Sensex. So while a Sensex has fared poorly against Gold over the past 45 months, top equity mutual funds have matched and in 2 cases, even exceeded Gold ETF returns since Jan 2008. SURPRISE SURPRISE….

In other words, had you invested Rs. 10,000 every month over last 45 months since Jan 2008, you would have invested Rs. 4.50 lacs till date. Now see the graphic below to see what is the current value of Rs. 4.40 lac investment:

Scheme Type	Compounded Returns since Jan 2008 (last 45 months) (%)	Value of Rs. 4.50 Lacs invested via 45 monthly SIPs of Rs. 10,000 each (Rs.)	Your Investment over past 45 Months (Rs.)	Your Gain from your SIP Investments (Rs.)
Equity Sectoral Mutual Fund 1	32.2%	7,85,300	4,50,000	3,35,300
Equity Sectoral Mutual Fund 2	31.2%	7,72,720	4,50,000	3,22,720
Gold Exchange Traded Fund	30.0%	7,57,800	4,50,000	3,07,800
Equity Sectoral Mutual Fund 3	27.9%	7,31,870	4,50,000	2,81,870
Equity Diversified Mutual Fund 4	23.8%	6,83,490	4,50,000	2,33,490
BSE Sensex	4.7%	4,90,130	4,50,000	40,130

Yes, had you invested in the top equity mutual fund via SIP since Jan 2008, your Rs. 4.50 lacs investment would have become Rs. 7.85 lacs netting you a cool gain of Rs. 3.35 lacs. Compare this with a value of Rs. 4.90 lac and a gain of Rs. 40,000 only from Sensex and a value of Rs. 7.57 lacs and a gain of Rs. 3.07 lacs from Gold…

Now, do not forget that the above exemplary SIP performance from equity mutual funds is in a period when in absolute terms GOLD has risen by 139% and the Sensex has fallen by 19.5%.

3 cheers the Fund Managers of these Mutual Fund schemes….

Now, here comes the BOMBSHELL… Why am I asking you to double your SIP in Equity Diversified Mutual Funds?

Because going forward, over the next few years, I expect the Sensex to go gradually up from here and probably the reverse for Gold. Now imagine, in a period when Sensex gave a mere 4.7% compounded return, good equity mutual funds gave a staggering return in the range of 25 to 30% per annum compounded.

Imagine, what kind of returns will good equity mutual fund schemes give if the tide is in their favour and the Sensex itself gives double digit returns. Just IMAGINE the possibility…

So, set up a meeting with a good, qualified Mutual Fund Expert and/or Financial Planner today, who will help you devise a good Investment Portfolio (ie help you choose the right Mutual Fund Schemes that suits your risk profile & investment horizon) and start your SIP investments asap….

Also, please choose an Advisor who charges FEES rather than going to a mere agent/distributor who might not charge you fees but dump your investments in non-performing mutual fund schemes. (Please refer to my previous article titled “No Entry Load on Mutual Funds….http://niravpanchmatia.blogspot.com/2010/09/no-entry-load-on-mutual-funds.html ). Remember, if your Mutual Fund portfolio is not designed with professional help, it might also back fire.

(Also read my previous article titled “The Unsung Hero of India’s Investment Universe” http://niravpanchmatia.blogspot.com/2011/06/unsung-hero-of-indian-investment_12.html )....

HAPPY SIP INVESTING….

What to do NOW?

2011-08-06T17:53:00.002+05:30

Stock Markets the world over have corrected in the range of 3% to 8 % over the past week and with a good portion of correction coming on Friday… India has also participated in the downfall and corrected by approx. 2% on Friday and 4 to 5% over the past week.…

As if this was not enough, today (Sat), the premier credit rating agency S&P downgraded the United States from a credit rating of AAA (which is the best rating in the world and that the US had been enjoying for the past 70 years) to AA+ (which is a notch lower than AAA). It is still not a junk status and should not send an alarm bell to the hoarders of US treasury but it definitely raises concern in the financial markets across the world. That is because, till now, the US Govt Bonds or treasuries were considered the safest place to park funds by international investors as they enjoyed AAA, the safest credit rating. With a downgrade, things might not change drastically but it does raise a shadow of doubt on the US economy and also it signals a shift in thinking.

The economic situation in Europe is not something that gives confidence either. As if the financial woes of Greece and Ireland economies were not enough, Italy and Spain are also giving signals of financial turbulence. And unlike Greece and Ireland that in terms of relative size are not that big, Italy and Spain are very large economies and if they are in trouble then the unity & strength of the European Union can be in trouble and hence the future of the Euro. Japan, over the past two decades has had its own set of problems with the recent earthquake followed by tsunami and the resultant economic damage adding to its woes…

The Middle Eastern economies have had their own share of financial and political turbulence… Thus with US, major part of Europe, and even the middle eastern economies fighting with their own financial woes, the only cloud with a silver lining in the world map today are the emerging market economies like India, China , Brazil & Russia.

The last year or two has been a very turbulent year for the Indian economy with record number of scams getting unearthed of unthinkable amounts and proportion.

While this causes some amount of frustration in our minds followed by lack of trust and anger in our democratic system, at the same time we can see a silver lining to this cloud too. Never before have so many top politicians, bureaucrats and business tycoons gone to jail in such short period of time. While I fully agree that there are still many culprits roaming freely out there who deserve to be behind bars, yet, at least some action has been taken by our otherwise sleepy Govt. We can only hope that all of this unearthing of various scams acts as an eye-opener for the current and all future Governments. And that they will be more diligent and uncompromising in the future. However, just visualize this scenario. In spite of all these scams (CWG, 2G, Mining, why do the biggest scams end with g) our economy has managed to grow at a healthy 7.50% to 8.50% per annum over the past many years, the time period during which these scams were actually taking place. This makes India the 2nd fastest growing large economy in the world over the past many years. And this has happened in spite of all the above scams. Imagine what would have been our GDP growth rate had these scams not happened. So, I am not justifying these scams but what I am saying is that they have not dampened our economic machinery yet. Yes, if the Congress still fails to wake up and remains lethargic, then God save them, God save India and god help the world because now, besides Indians, even the world is counting and dependent on India’s economic growth…

Having put things into perspective and hopefully having laid to rest some of your concerns, let me now approach to the main topic on what to do with your investments in these volatile times…

What to do now with my Investments ?

I firmly believe that for an Indian INVESTOR, every correction in our stock market gives a wonderful opportunity to accumulate equity for your medium to long term goals…

For your short term money ( 1 month to 1.5 years), prefer deb mutual funds that are giving returns in the range of 9.50 to 10.50% per annum.

For your medium to long term investments, nothing beats equity. But remember, buy for the long run and have staying power… You make money in the Stock Market by going against the crowd and not by being with the crowd…

However, you should place your bets very very carefully…that is, be very careful while choosing the Stocks that you bet on…there are fraud companies out there, there are good companies that have fallen into bad times because the sector to which they belong has fallen into bad times and there are great companies with great management but who have borrowed lot more than what they should have and are having difficulty in coping with the exorbitant interest rates on their loans. All the above category companies should be avoided for the time being… So how should you play the current downfall in the markets.

Stagger your equity investments, whether directly in stocks or indirectly via equity diversified Mutual Funds (which I believe should be a preferred route) over the next 6 months…. However, the best option is to invest in well chosen equity diversified mutual funds (preferably with professional help) via the Systematic Investment Plan or the SIP route… if you already have SIPs running in well chosen Equity Diversified Mutual Funds, then, subject to availability of surplus, you should INCREASE your SIP investment in Equity Diversified Mutual Funds (double your SIP investment, if possible).

If you have still not started SIP investment in Mutual Funds (and I really do not understand why that is the case), Monday morning fix up a meeting with a Financial Planner or Mutual Fund Expert.

The underlying assumption here is that you are an INVESTOR and not a TRADER or SPECULATOR, that you are investing with a medium-term (3 to 5 years) or long-term (5 to 7 years and beyond) goal in mind, ie you are Investing in equity for either your children or for your retirement or for some long term goal in mind. If that is true, then the present market levels and the correction is a wonderful opportunity and a blessing in disguise. If you have the staying power, buy with both hands…

The Pitfalls to avoid:

While I firmly believe that any long term investor should accumulate equity , however avoid the following pitfalls:

1. Avoid penny stocks or small cap stocks unless you have done thorough research on the company’s fundamentals and promoters and are very sure about the company’s future potential. Even then, these should not form more than 15 to 20% of your equity portfolio.

2. Avoid taking sectoral bets ie Invest in Equity Diversified Mutual Funds only rather than investing in sectoral or thematic mutual funds. Time has shown that even the experts have gone wrong more often than they have gone right on which sectors will perform in the future. Let your fund manager take the call as he is more well informed then most of us.

3. Prefer the Mutual Funds route to equity rather than investing directly in shares unless you have done your research and are thorough with the company’s fundamentals.

4. Avoid buying stocks solely on the basis of TIPS. Tips rarely work and even if they do, you should know when to exit, else you might end up burning your fingers. Also, TIPS might work in a bull run when thinks are fine but are very dangerous in volatile times like these.

5. If your investment horizon is less than 2.5 to 3 years, then avoid investing in the stock market in these volatile times. Enter stick market only if your investment horizon is 3 to 5 years and beyond.

6. Never borrow and invest, especially not in equity or stock market…because the stock market may take time to recover but your interest clock keeps ticking day and night right from day one.

7. Do not put all your money at one go, stagger your investments over the next few weeks if not months

8. Invest a little in GOLD but do not go overboard with it ie; not more than 10 to 15% of your investment portfolio should be in Gold. You can now start a SIP of as little as Rs. 500 a month in Gold Mutual Funds too and you do not need a demat account for doing that.

9. Avoid investing too much in commodities.

10. Last and the most important. I am not very comfortable with F&O Investing. (even though I am a CA & MBA with 10 years of industry experience) . Neither should you be comfortable with F&O.

My Investment Guru, Mr. Warren Buffett (have you read my article on my interaction with Mr. Buffett http://niravpanchmatia.blogspot.com/search/label/Warren%20Buffett ) rightly calls F&O and derivatives, weapons of mass destruction. Need I say more…

What to do NOW???

Where to invest depends on the following 3 main factors, besides a host of other factors:

1. Your age and number of your financial dependents

2. Your risk profile (which in turn depends on your current Net Worth and your liquidity situation)

3. Your financial GOALS

Based on the above, you should follow the following investment strategy:

1. If it is your short term-money (meaning if you need money within 1 to 2 years) then invest in 1 to 2 year Bank FDs if you are in the lower tax bracket or if you are in the higher tax bracket then invest in Debt-based Mutual Funds as they give a percentage return more than 1 year bank FDs and are taxed at a lower rate. But please take professional help in choosing which Debt Mutual Funds to invest your money in.

2. The money that you can let go for 1 to 3 years can be parked in MIPs or Monthly Income Plans of Mutual Funds where you can expect 10 to 11% return and which invest 15 to 20% only in equity or the stock market and the rest in debt markets.

3. Any money that you want to invest for the medium to long-term (3 to 5 years and beyond) should be used to accumulate equity (preferably in equity diversified mutual funds) over the next few months.

4. SIP mode of investing in Equity Diversified Mutual Funds is your best bet in these volatile times…

5. Please take professional help to design your Investment Portfolio…

Remember, it took India 60 years to become a 1 trillion dollar economy and it is expected that over the next decade, India would become a 4.5 to 5 trillion dollar economy…

Imagine this, it took India 60 years or 6 decades to grow to 1 trillion dollars and it is expected that we shall grow from 1 trillion dollars to 4.5 to 5.0 trillion dollars in a single decade. If this happens, immense amount of wealth is expected to be created in our country over the next decade and the best way to participate in this wealth creation is to participate in the equity markets by buying stocks of good companies with excellent track record and great management. Still better, since it is easier said than done to choose good companies, use the Mutual Funds route to equity by doing SIPs in Equity Diversified Mutual Funds. Anybody who intends to become wealthy cannot afford to ignore stocks and/or equity mutual funds…

HAPPY INVESTING!!!

Have you checked your ADVISOR’s credentials?

2011-06-25T18:30:00.004+05:30

Every now and then one comes across a media article that talks about innocent investors being taken for a ride by shrewd, scheming agents or advisors. It is so very unfortunate that because of a few bad apples in the financial services industry, the entire industry gets tainted. But I believe that at some level, even the Investor is to be blamed?

The principle of “BUYERS BEWARE” applies as much to the financial services industry as it applies to any other industry, if not more…

One cannot expect all advisors to be unbiased, free from any wrong intentions. One or two black sheep will always find its way amongst a flock of white sheep’s. It is for the investor to be alert & sharp enough to identify the black sheep amongst a flock of sheep’s.

As I said earlier, partial blame lies with the Investor himself. Why does he/she not do a background check before he/she trusts the agent/advisor with his/her hard earned money?

Yes. I am a financial advisor too. Yet I am asking you to do the following check on your Advisor before you allow him to render any financial advice to you?

Ask following questions with respect to your Financial Advisor...

1. Is he QUALIFIED enough to give you financial advice?

In the times in which we are living, even the most qualified person finds it difficult to sail through the turbulent world of Investing. In such a scenario, the minimum that one can expect from his/her advisor is that he should have the requisite educational qualification to understand the intricacies of the financial world. A post-graduate degree in finance is a must. Thus, your financial advisor should at least be a CA, MBA (Finance)from a reputed college, a CFP or should hold some other post graduate degree in finance or economics, to say the least. Does holding a post-graduate degree in finance guarantee that your financial advisor is qualified enough to render you financial advice? No. But, if he does not have the bare minimum qualification, then there is a very high chance that he is not fit enough to render financial advice.

By the way, are you aware what is the minimum qualification required to start selling either an Insurance product or a mutual fund product or for that matter any other financial product in India? It is 12^th standard pass and a small exam with unlimited attempts. Yes, believe it or not, one need not be a graduate to become an insurance agent or a mutual fund agent? I have always believed that one’s financial advisor should be equally, if not more qualified than oneself. Imagine a non-graduate, recommending you buy a financial product, which even experts take time to understand….

2. Is he EXPERIENCED enough to give you financial advice?

The 2^nd most important credential, besides education, is your Advisors’ work experience. This carries equal weight. What is his career background? How long has he been working in this field? Is it a mere family business that has been handed over to him? Has he had any corporate experience working in a well known financial institution?

I once came across a client who was previously being advised by an insurance agent cum Mutual Fund distributor who was previously a commission agent dealing in food grains. Yes, believe it or not, this guy used to trade in food grains before he started selling insurance and mutual funds, as he found them more remunerative (this was before Aug 1, 2009 when there used to be commissions in Mutual Funds and still fatter commissions in Insurance, although selling insurance products is still highly remunerative). And trust me; he has clientele who are highly qualified and rich businessman. This beats logic, but it’s true. Look around you and you will found more jaw dropping examples of agents with a background that hardly has any co-relation with the financial services industry but are still able to convince people into buying financial products from them, so that the agent can earn hefty commissions.

3. Is he NEUTRAL enough to offer you advice free from biases?

Let us assume that I am an agent of a particular company, say ABC Insurance Ltd. Now imagine that my company ABC Insurance Ltd comes out with a new insurance product, which though not a very attractive proposition for my clients, yet it offers a great incentive to me to sell it as my company intends to sell it aggressively. Now there is a XYZ Insurance company, my competitor, which has a much better product in existence. Now what is the chance that I will push my company's product? 100%. What is the chance that I will even mention XYZ Insurance Cos. product to my prospect? Almost Nil! Do you get the point here?

Financial Advisors are supposed to be like doctors writing you a prescription (designing your Investment Strategy) … You are then supposed to buy the medicines (Investment products) from a shop of your choice… now turn this around and imagine you asking the medicine shop owner to write you a prescription and suggest you which medicine to buy…which medicine will he recommend? The ones on which he gets a bigger cut, right…

Look, I have nothing against agents per se. They have worked hard to increase the reach of financial products and to bring them to our door-step . And one does not say that all of them have malafide intentions at all times. However, what one is questioning is their ability to write prescriptions for all patients...

4. Is he a financial advisor or a mere distributor of a financial product?

Now we are living in times when we suffer from the problem of plenty & not scarcity. 22+ Insurance companies with each offering 10 to 15 different insurance plans, 40+ Mutual Fund companies together offering 1000+ mutual fund schemes, 7000+ listed stocks and not to forget a whole host of traditional financial products offered by the banks & post offices. One needs unbiased, fair & specific advice to help one choose the best, value for money financial product that money can buy. A typical agent, representing a particular organization, and who is driven by his remuneration, will hardly be able to offer a free from bias, best in class advice that fits the investor’s profile.

Today, when there are enough financial products to suit all pockets, age & risk profile, one needs to be extremely choosy while buying a financial product and from whom we are buying that particular product. A wrong advice can land you in trouble. So beware from whom you are taking that financial advice?

5. Does he do his own research or does he rely on 3

Well, imagine you being advised by an agent who does not take pains to update himself/herself on the latest happenings in the financial market in particular and economy in general.

It’s a very dynamic investment environment out there, changing at break-neck speed. An investment advice that is proper today might require a re-look tomorrow as circumstances change. Your financial advisor must be a voracious reader and a thorough research oriented personality otherwise he does not stand a chance in today’s volatile investing environment.

6. Is your advisor transparent enough about his compensation?

It is your right to know what your agent &/or advisor is earning from you and there is absolutely nothing wrong in asking him about his earnings whether in the form of commissions or in any other way. And the agent &/or advisor should be frank enough about his earnings. If you suspect that your agent is hiding any part of his/her earnings from you, then consider changing your agent/advisor as he/she is not being transparent enough.

7. Is he here to stay?

How often do you come across an RM/agent who is more than 5 year old with his/her employer? Now imagine buying a financial product that calls for a 10 or even a 15 year commitment from your side and you buying it from an RM who in all likelihood is not expected to remain with his/her employer for even half that tenure. Now, I am not saying that stop buying financial products from them but be aware that in all probabilities, the guy who sold you that product might not be there to service it a few years down the line. the Institution will stay and you should be taking call on the institution and not the agent.

By the way, do visit this previous article titled “The Citibank fraud and the curse of the RM”, http://niravpanchmatia.blogspot.com/2011/02/citibank-fraud-and-curse-of-rm.html (in case you have not read it earlier)...

8. Check his integrity?

Well, all the above qualities are not enough if your financial agents/advisors’ integrity is in doubt. Don’t you think so too? There is nothing wrong with your financial advisor making some income from you. How will he earn his bread & butter otherwise? However, his income should not be at your expense. No way…

I have always believed that a financial advisor-client relationship should be a WIN-WIN situation for both parties. The nature of the relationship should be symbiotic and not parasitic.

One cannot earn at the expense of another. If that is the case then the relationship will in all probabilities end in a painful death in which both parties eventually tend to loose from the relationship.

I also believe that an Advisor's job starts and does not end with the money coming in. Unfortunately, for many so called agents, once they have received the investment chq from a prospect & earned their commissions on the same, they are least bothered with what happens to the client’s money. I believe a true financial advisors responsibility increases many-fold after the client has written a cheque and product recommendation is only a first step in the entire wealth management process.

To conclude, if we do as much research while buying a financial product and/or choosing a financial advisor as we do while buying soaps or a White good like a TV or a Laptop or even a mobile phone, we would be much better off. After all, a mobile phone can be replaced in 6 months but one usually gets penalised if one does a premature exit from a financial product that was wrongly bought ….

As always, HAPPY INVESTING…

The unsung hero of the Indian investment universe

2011-06-12T14:59:00.010+05:30

What if I tell you that there is a investment product in India, that is in existence for more than a decade now, that has given phenomenal double digit returns over the past decade, that offers you ample choice of Investment tenure (ranging from 1 week to 1 decade & beyond), that is either marginally taxed or not taxed at all (irrespective of the quantum of return that you make), that also offers one of the best tax saving avenue u/sec 80C and yet which has given you double digit, post-tax returns, year on year for the past 10 years and that in spite of all these qualities, not more than 5% of the Indian population has invested in this wonderful investment tool as a means to Wealth Creation…

Oh yes, did I mention that , now, you do not pay any commissions to your agent for buying or selling this product & that practically anyone with a PAN card, an address proof & a bank account can buy this humble investment option…

Also, not the least, that this investment tool, offers the widest variety of choices, ample liquidity & if it had been used wisely over the past decade, would have given practically most PMS & Equity gurus, a run for their money. No, it is not a LIC Product, it can never be an insurance product & it is not something exotic that only the select few have access to.

Some of you, who are aware of the Investment world, and have been reading my BLOG regularly, should have guessed by now. Yes, I am talking about the humble, ubiquitous, but often ignored Investment Avenue, MUTUAL FUNDS…

Mutual FUNDS, I believe, is the UNSUNG Hero of Indian Investment universe……..

Now, after making such tall claims, let me substantiate them with raw data...

Claim 1: Mutual Funds in India are in existence for more than a decade now, and well chosen ones have given phenomenal double digit returns over the past decade.

Let us take the 3 most popular Mutual Fund Schemes that I am sure we have all heard the name of:

1. Franklin India Bluechip Fund , HDFC Equity Fund & 3. HDFC Top 200 Fund

No.	Scheme Name	Date of Inception	10 year cagr return**	Annualised return since inception
1	Franklin India Bluechip Fund	Dec 1, 1993	26.50% per annum	25.51% per annum
2	HDFC Equity Fund	Jan 1, 1995	33.11% per annum	22.80% per annum
3	HDFC Top 200 Fund	Oct 11, 1996	31.57% per annum	25.17% per annum

*Returns as on Mar 31, 2011

**Cagr returns means compounded returns year on year & Data taken from respective fund house fact sheets.

Now let us compare the returns of these top performing schemes to the returns given by the bellwether of Indian stock market, the BSE Sensex.

No.	Scheme Name	10 year cagr return**	Sensex (Had you bought the Index)	Incremental return from Mutual Fund schemes over BSE Sensex
1	Franklin India Bluechip Fund	26.50% per annum	18.45% per annum	8.05% per annum
2	HDFC Equity Fund	33.11% per annum	18.45% per annum	14.66% per annum
3	HDFC Top 200 Fund	31.57% per annum	18.45% per annum	13.12% per annum

Have a hard look at the graphic above and you realise that while the BSE Sensex itself has done very well over the past decade giving 18.45% per annum compounded return; some of the well performing equity schemes have done much better than the Sensex, and by what margin?

Thus, a Franklin India bluechip fund has beaten the Sensex by 8.05% year on year for the past decade giving a phenomenal return of 26.50% pa... But the 2 HDFC Schemes have done even better and have beaten the Sensex by a good double digit return of 13 to 14% per annum, giving extraordinary compounded return of 31 to 33% per annum….what a show….and we say that equity is risky & that you only lose money in the stock market….

Claim 2: Mutual Funds offer the Indian Investor ample choice of Investment tenure (ranging from 1 week to 1 decade & beyond)

Most investors that I talk to, both during the course of my practice & on my CNBC appearances, tend to equate Mutual Funds with stock market…While, it is true that, Mutual Funds is the best way to take exposure to the Stock Market & that most investors should avoid buying stocks directly and should take the mutual funds route instead, yet, the mutual fund universe is not that narrow. In fact, there is a wide variety of Mutual Fund categories to suit all types of investment tenures…

Investment Tenure	Popular Choice of the uninformed retail investor	Expected return per annum	Taxation	Mutual Fund answer to that	Expected return per annum from Mutual Fund counterpart	Taxation
0 to 3 months	Savings bank a/c	4.0% pa	Tax-free	Liquid plus funds	6.50 % to 7.50% pa	Short Term Capital Gain (if sold within 1 year) - as per your Income Tax slab; Long Term Capital Gain (if sold after 1 year) - taxed @ 10%(20% with indexation); Dividend Income from all mutual fund schemes is tax free
3 to 6 months	Short Term bank FDs	8.50% to 9.5% pa	Taxed as per your Income tax slab	Debt Funds (short term)	8.50% to 10.25% pa annualised
6 months to 1 year	Medium Term bank FDs	9.50% to 10.25% pa	Taxed as per your Income tax slab	Debt Funds (medium term)	9.50% to 10.50 % pa annualised
1 year to 3 years	Longer Duration Bank FDs	9.0% to 10.25% pa	Taxed as per your Income tax slab	Monthly Income Plans or MIPs	9.75% to 11.50 % pa
3 years and beyond	PPF; NSC; KVP; 5 year bank FDs, Insurance Plans etc...	8, 9 or 10% pa	PPF income is tax free & so is maturity amount of some insurance plans; rest are taxed as per your Income Tax slab	Equity Diversified Mutual Funds	Market-linked (one can expect approx. 15.0% pa compounded returns based on past performance)	If equity funds sold within a year (STCG), then taxed @ 15.45%; however if sold after 1 year, ZERO rate of tax

*highest expected returns from these avenues

For a detailed overview of non-equity based Mutual Funds, please read my previous article titles “The Rich Man’s Bank Accounts by clicking on the following link;
( http://niravpanchmatia.blogspot.com/2011/03/rich-mans-bank-accounts.html )

Claim 3: Mutual Funds are either marginally taxed or not taxed at all (irrespective of the quantum of return that you make)

Most investors are not aware of the great tax advantage that investing in mutual funds offer…

Now, though a little complex, let me explain mutual fund taxation.

First and foremost, from the taxation point of view, there are 2 broad categories of Mutual Funds, namely;

I. Equity Mutual Funds (those that invest at least 65% in equity and includes Equity mutual funds & balanced schemes)

II. Almost all other Schemes Mutual Funds (most other mutual fund schemes that are not equity-based fall in this category)

The taxation of both these categories differs, except in case of Dividends.

The dividend receipts, in the hand of the investor, is exempt for all mutual Fund schemes…may it be equity-based or other schemes….(although, in case of the Other schemes, there is a Dividend Distribution Tax (or DDT) that is paid by the Mutual Fund company directly).

Now, comes the treatment of Capital Gains, both Short Term (holding period less than 1 year) & Long Term ((holding period more than 1 year).

The Short Term Capital Gains (in case you sell mutual fund within 1 year of purchase) in case of equity based mutual funds are taxed @ 15.45%...The long Term Capital Gains (if sold after 1 year) is tax-free…yes, you heard it right, even if you double your money in equity mutual funds, but take the precaution of selling them after 1 year, you pay zero taxation……

Now, the treatment of capital gains is slightly different in case of non-equity mutual funds…

The Short Term Capital Gains (in case you sell mutual fund within 1 year of purchase) in case of non-equity based mutual funds are taxed as per your Income Tax slab – (10, 20 or 30%)...The long Term Capital Gains (if sold after 1 year) are taxed either @ 10% (without indexation) or at 20% (with indexation) ……the choice is with the investor

(PN: the above taxation provisions are for Resident Individuals & HUFs, the taxation of Companies is a bit different)

Claim 4: Mutual Funds offer one of the best tax saving avenue u/sec 80C

Tax Saving Mutual Funds or ELSS, are a specific category of Mutual funds that allow deduction u/80 c up to a maximum of Rs. 1 lac per annum and have a minimum lock-in of 3 years amongst other tax saving investment avenues. To read detailed article on Tax Saving Mutual Funds, visit the link below;(http://niravpanchmatia.blogspot.com/search/label/TaxSavingMutualFunds%28ELSS%29 )

Claim 5: Mutual Funds offer one of the cheapest Investment avenues to invest in India today with zero agent commissions

With effect from Aug 1, 2009, after SEBI’s Abolition of entry loads on Mutual Funds, we do not pay any commissions to our agent for buying or selling Mutual Funds…. Nothing whatsoever….Now compare this with double digit commissions that we shell out from our pocket whenever we purchase any Insurance plan….

For detailed explanation on the impact of entry load abolition, do visit the following link;( http://niravpanchmatia.blogspot.com/2010/09/no-entry-load-on-mutual-funds.html).

Claim 6: If it had been used wisely over the past decade, a portfolio of well chosen Mutual Funds, would have given practically most PMS & Equity gurus, a run for their money……

How many PMS guys, or Wealth Mangers of so called MNC banks, or high profile Stock brokers, have such enviable track record of providing a CAGR return of 18 to 24% per annum, year on year, post expenses & post tax, for the past decade….There are at least 10 Mutual Fund schemes that have given such phenomenal returns over the last 10 years, year on year, post all expenses and post taxes ….

Indian Mutual Fund Industry has some of the best Fund Managers in the country, if not in the world…Their services are available to you and me, at a pittance, via the Mutual Funds route…It is up to us how we make the best use of their services to create WEALTH for us & our family….

INVEST WISELY…

YES, I met Warren Buffett: The GOD of Investing

2011-05-20T11:55:00.001+05:30

I finally met the God of Investing himself, Mr. Warren Buffett on his recent and first visit to India. I was luckier still to be able to ask him question (shall attach a youtube link soon) to which he was kind enough to give a detailed reply.

Here, therefore, are PEARLs of WISDOM from the GOD himself & my interpretation of the same….

WARREN BUFFETT’s pearls of WISDOM

Mr. Buffett on gold, silver & other commodities: it is very difficult to value something that does not generate cash flows; if you are betting only on the price of an asset rather than the productivity of the asset, then I am not for it;

All the Gold in the world today is selling for 7 trillion USD; Approx. market cap of all listed US stocks 20 trillion dollars; “All the farm land in the US (a billion acres)+7 Exxon Mobiles + 1 trillion dollars = value of all gold in the world”

I would rather own 1/3rd of all listed stocks in the world rather than all the Gold in the world;

I would bet my money on buying stakes in good business rather than gold, silver or any other commodities…

What it means: Mr. Buffett has for all his LIFE only invested in STOCKS of companies. He is a firm believer in equity and equates owning a stock in a company to being a partner in that business. He says that any given day, he would prefer to invest in a good business as they have CASH FLOWs with the help of which one can compute the VALUE of that business. Commodities, do not give any cash flows and hence it is difficult to put a VALUE to them…

On Inflation: Inflation is an invisible tax that only 1 in a million people understand; it is tax on people who have faith in their country’s currency;

The best protection against inflation is grow your own earning powers to maximize your talents and hence your earning power; the best passive investment against inflation is a good business;

What it means: Mr. Buffett warns all Investors to guard their WEALTH against INFLATION, the silent thief that steals our money everyday. According to him, keeping our wealth idle, either in a bank account or even in Fixed Deposits is not enough. Investing in Equity is the best hedge against inflation, which by the way, in India is nearing double digits and is bound to be high in developing economies like India for years to come. Our only saving grace is to put a good part of our investment in equity or equity related instruments…

On the fate of US Dollar (in response to my question on Gold Standard): I will not bet my money on the US dollar or dollar related investments for the long term; The Dollar note, on its face, says, “IN GOD WE TRUST” ; need we say more; we (US) have a govt. that relies too much in God;

The natural tendencies of all Govts in the world is to debase its currency to an extent that it becomes worthless over time; and this is true for all govts. Across the world; the value of a currency reflects the word of the govt issuing that currency; the integrity that people have on that govt;

What it means: Mr. Buffett, just like most international experts, does not have much faith in the future of US Dollar. For the past few decades, the USD has been the reserve currency of the world. But, this is bound to change in the future. It will take time as, as of now, there is hardly any currency that can challenge the USD. In fact, this is one of the more important reason why we have seen a sudden rise in the value of GOLD. International investors are buying GOLD as a hedge against the expected fall in the value of the USD.

On Financial Crises & asset bubbles: Human behaviour is such that they will keep committing mistakes & blunders & history keeps repeating itself;

What it means: Mr. Buffett says that as humans, we keep repeating mistakes and fail to learn from our past mistakes. Human memory is short. Very short. Every decade sees a different asset bubble building in front of our very eyes and investors (or should I use the word SPECULATORS) tend to enter the asset class at its peak, when the bubble is about to break, and as a result tend to loose their life’s savings. The recent SILVER bubble is a case in point. The 2008 US real estate bubble and 2000 dot com bubble were the 2 big asset price bubbles of the previous decade… The current decade, in fact, has already started with a commodities bubble…..

On succession planning

My goal is to leave for my children enough so that they can pursue whatever interest they have but not so much that they do nothing; I make my WILL every 6/7 years & when I make that will & before I finalise that will, I ensure that all my children have read it thoroughly, understood all the clauses, debated the ones where there are issues, sorted them out and prepare a revised draft. That way, I ensure that there is no bad blood between my siblings and me and amongst themselves.

What it means: Mr. Warren Buffett, as we all know, has donated 99% of his WEALTH to a charity (yes its right, he has donated 99% of his wealth; there is no typing error) run by his friend, Microsoft Chairman & Founder and fellow billionaire, Bill Gates. He was therefore asked that his donating 99% of his wealth; did it not create a problem in his family, to which his answer was as follows. He said that even 1% of his wealth is enough for his children and he was fortunate that when he announced his decision to donate his wealth, all 3 of his children were well above 40 and mature enough (Warren Buffett’s age is 80+).

I am sure, the above article must have amused you and you would be curious to know more about this great investor….

Here is a small bio of Mr. Warren BUFFETT

Warren Edward Buffett is an American investor, industrialist and philanthropist. He is widely regarded as one of the most successful investors in the world. Often called the "legendary investor, Warren Buffett", is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is consistently ranked among the world's wealthiest people. He was ranked as the world's wealthiest person in 2008 and is the third wealthiest person in the world as of 2011.

Warren Buffett is the only person in Fortune 100 who has made his wealth by investing in the Stock Market.

Buffett is called the "Oracle of Omaha (Omaha, Nebraska is a small town in US where he lives to this day) or the "Sage of Omaha" and is noted for his adherence to the value investing philosophy and for his personal frugality despite his immense wealth. (He still lives in the same House where he lived when he was a struggler and a teenager). Buffett is also a notable philanthropist, having pledged to give away 99 % of his fortune to philanthropic causes, primarily via the Gates Foundation.

Buffett was born in 1930 in Omaha, Nebraska, the second of three children and only son of businessman & politician, Howard Buffett. Even as a child, Buffett displayed an interest in making and saving money. He went door to door selling chewing gum, Coca-Cola (he now owns a big chunk of this company), or weekly magazines. For a while, he worked in his grandfather's grocery store. While still in high school, he carried out several successful money-making ideas: delivering newspapers (He delivered The Washington Post Newspaper as a child and today owns a good chunk in it)., selling golf balls and stamps, and detailing cars, among them. In 1945, in his early years of high school, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in the local barber shop. Within months, they owned several machines in different barber shops.

Buffett's interest in the stock market and investing also dated to his childhood, to the days he spent in the customers' lounge of a regional stock brokerage near the office of his father's own brokerage company. On a trip to New York City at the age of ten, he made a point to visit the New York Stock Exchange. At the age of 11, he bought three shares of Cities Service Preferred for himself, and three for his sister. While in high school he invested in a business owned by his father and bought a farm worked by a tenant farmer. By the time he finished college, Buffett had accumulated more than $90,000 in savings measured in 2009 dollars.

In 2008 he was ranked by Forbes as the richest person in the world with an estimated net worth of approximately US$62 billion.[95] In 2009, after donating billions of dollars to charity, Buffett was ranked as the second richest man in the United States with a net worth of US$37 billion[96][97] with only Bill Gates ranked higher than Buffett. His net worth is up to $47 billion in the past 12 months.

On my BLOG, you would keep reading about Mr. Buffett …..more about him sometime later….

WISE INVESTING…………

4 Strong Reasons to invest in Tax Saving Mutual Funds

2011-03-12T13:37:00.000+05:30

I am writing this article on March 12^th, 2011. 18 days remaining for the end of financial year i.e.; March 31^st. Most of us have already made our tax related investments. However, if there is any scope still left u/s 80C; i.e. if you are yet to fully utilise Rs. 1 lakh max limit available u/s 80C (that enables you to claim deduction from your income), then you still have some time left (18 days to be precise) & every rupee of balance left should be deployed in well chosen Tax Savings Mutual Funds.

To know more about the various options available u/s 80c, read my previous article on this subject (http://niravpanchmatia.blogspot.com/2010/09/tax-saving-mutual-funds-or-elss.html ).

Now, Tax Saving Mutual Funds are a special category of mutual funds (also known as ELSS) that are eligible for deduction u/s 80c. Just like any other savings /investment avenue u/s 80c, there is a lock-in involved here. The lock-in period for tax saving mutual funds is the minimum at 3 years for any product u/s 80C. In case of PPF, it is 7 years(for partial withdrawal), 6 years for NSC, 5 years for Bank FDs & 5 years for ULIPs(too costly) & so on. Also, the returns over a 3 to 5 years period are one of the highest in case of Tax saving mutual funds.

Also, once the Direct Tax Code (DTC) comes into existence from 01/April/2012, as promised by the FM in his recent budget speech, tax saving mutual funds will cease to exist. (i.e., fresh investment in tax saving mutual funds will not be allowed; those who have already invested in them till Mar 31, 2012 will be eligible for deductions). So this financial year (FY 2010-11) and the next Financial Year (FY 2011-12) are the last two years in which you can invest in one of the most remunerative & efficient tax saving instrument available in India today.

To sum up, 4 strong reasons to Invest in Tax Saving Mutual Funds (ELSS):-

It helps you save on your taxes and at the same time you can take exposure to the equity market
Minimum lock-in period of just 3 years amongst entire bouquet of tax savings instruments
One of the most remunerative tax saving investment avenue (12 to 15% pa CAGR returns over 5 years)
The current financial year (FY 2010-11) and the next Financial Year (FY 2011-12) are the last two years in which you & I can invest in Tax Saving Mutual Funds as under the DTC regime, this wonderfull tax investment avenue will cease to exist.

So, grab the opportunity & invest in TAX SAVING MUTUAL Funds before March 31^st…..

(Just one caveat here; currently more than 25 Tax Saving Mutual Funds is available in the market; do your research well & consult a Mutual Fund Expert before choosing the right fund for yourself)

Happy Investing…………..

The Rich man’s bank accounts

2011-03-05T17:35:00.000+05:30

In this article, let me introduce you to the rich man’s bank account. Yes, the financially well healed & High Networth Individuals (HNI’s) have a different avenue where they park their funds that they do not need temporarily.

Now where do you park the surplus money that you do not need immediately? You and I would, in all probabilities, park our surplus money in savings account of banks. The reason is that we want the money to remain safe and also we can’t invest that money because we might need the money anytime. Hence the best option that comes to one’s mind is the ubiquitous bank savings account that earns us a handsome return of 3.50% per annum.

Wait a minute, did I use the word handsome returns. In today’s inflationary times, when the purchasing power of our rupee is going down by 7 to 10% per annum, a 3.50% per annum return is in real terms reducing the purchasing power of your money, lying in your bank savings account, by 4 to 5% per annum. Yes, let me repeat this once again. The value of your money lying in the bank savings account is getting reduced by 4 to 5% every year in real terms. And you thought that you are actually earning interest on your savings bank account.

In reality, the money that is lying idle in our bank savings account is unknowingly a loan that you and I are giving to our banks at a paltry, minuscule low rate of 3.50% per annum. And what rate of interest does the bank charge us when we approach them for availing a bank loan. Currently, banks are charging interest rates ranging between 9% pa to 24% pa on various types of loans.

Now that was the case with short term surplus money at our disposal. Any surplus money that we might have beyond what we need in the immediate short term, one tends to park that money in Bank Fixed Deposits (FDs). Why? Same 2 reasons. Safety and because nowadays bank FDs are offering a handsome return of 8.5 to 9.50% per annum. (No no, you are mistaken. The 10% rate of return that you see being promised on huge hoardings or in the media is either meant for senior citizens or it is meant for FDs that have tenure of 500 to 1000 days. So your liquidity goes for a toss here. (Haven’t I mentioned before, on this blog to read the * and the fine print carefully?)).

Again, did I mention handsome returns of 8.50 to 9.50% pa? Sorry for the mistake. We forget to take into account the taxation and inflation factors here. So assuming a 20% rate of tax (on average; on FDs you are taxed at the income tax rate applicable to you) and a 7% pa rate of inflation (again I have taken this figure on the lower side; your real earnings from Fixed Deposit = 9.50% - (20% of 9.50%) - 7% = 0.60% per annum. Yes, believe it or not. In India, considering the present inflationary situation & the prevailing tax rates, a Bank FD on which a nominal rate of return of 9.50% is promised to you, you are actually earning 0.60% per annum real returns. In other words, your bank Fixed Deposit, giving 9.50% pa interest rates, is in real terms, post inflation and taxes, growing merely at 0.60% per annum. Yes, I should admit that your capital remains protected and does not go down in bank FDs (unless in case of some co-operative banks). Have a look at the graphic below:

What the bank charges you & what it pays you?

Type of Bank Loan	Interest charged per annum	Tax Impact
Home Loan	9.5% to 14% pa	Tax deduction available
Car Loan	11.5% to 15% pa	No tax deduction
Personal Loan	15% to 24% pa	No tax deduction
Credit Cards	36% to 54% pa	No tax deduction
Type of Bank Product	Interest earned per annum	Tax Impact
Savings Bank A/c	3.50% pa	-
Bank Fixed Deposits	8.5 to 9.50 % pa (1 yr FDs)	Chargeable to tax as per your tax bracket (10% to 30%)
Average Rate of Inflation going forward	8 to 10% pa	-

The rich guys bank accounts

So what is the remedy? Most Indians (65% as per a recent survey) use bank savings account & Fixed Deposits as a preferred choice for parking their short & medium term money. There is simply no other option out there. Right…

WRONG. Where do you think the richer guys or HNIs who advised by their financial advisors or wealth managers, park their riches.

One, when it comes to parking very short term money that they might need any time but do not know when, Liquid & Liquid plus funds offered by almost all Mutual Fund companies is the most preferred avenue by HNIs or richer folks to park their short term surpluses and not your ubiquitous savings account. So what are these liquid or liquid plus funds and how safe is my money in them. What about liquidity?

Liquid & liquid plus funds are the most liquid & least risky category of mutual fund products where one can invest or park temporary surpluses for even a day or two. Yes, liquid funds can be used to park money even for as little as 1 to 2 days. You can even park your money on Friday and withdraw your funds on Monday and earn interest for Saturdays & Sundays too. Sounds too good to be true…

Ok. Now what do you earn on liquid funds & how are they taxed? Well, currently, one can earn on an average 6.50 to 7.25% per annum on well chosen liquid funds & the returns earned on liquid plus funds are taxed @ 14.67% (compared to 30% on Bank FDs). How safe is your money in liquid funds? Well, the entire banking industry uses liquid funds to park its surplus funds. Does that say enough about their safety? Only, not all liquid funds are equally safe or give same rate of return. And there are more than 50 liquid funds out there in the market. So exercise discretion and take advice of your wealth manager to help you choose the right liquid fund for you.

Short term Debt Funds: OK, what about the Bank FDs. Does mutual fund industry have an answer to the high safety and so called handsome returns provided by Bank FDs. Off course it does. Short term debt funds offered by mutual fund industry are currently offering returns in the range of 8.50 % to 9.0% per annum and again, are taxed @ 14.67%. If debt funds are chosen properly after evaluating its portfolio & consulting your financial advisor, they are very safe instruments if entry & exit is timed correctly. Only one caveat here... The returns from debt funds are indicative and not guaranteed like Bank FDs. But on the positive side, short term debt funds are more tax efficient and more remunerative and also offer liquidity beyond 3 to 6 months.

Monthly Income Plans (MIPs): Now, if you have a slightly longer investment horizon (say 2 to3 years) and if you can take some risk with your money, Monthly Income Plans or MIPs offer average returns in the range of 10 to 12% per annum. MIPs invest 75 to 85% of your money in safe debt instruments and only 15 to 25% of your money is invested in equity. Here is where the extra return comes from. Well chosen MIP is another weapon in your armoury against inflation.

*Poor Man’s banking* *products*	Expected Return (% pa)	*Rich Man’s banking* *products*	Expected Return (% pa)	Incremental earnings
Savings Bank A/c	3.50% pa	Liquid Plus Funds	6.0 to 7.0% pa	3.50% pa
Fixed Deposits	9.50% pa pre tax; 6.65% pa post tax	Short Term Debt Products	9.50% pa pre tax; 8.11% pa post tax	1.5 to 2% pa
Monthly Income Schemes (MIS)	8.50 to 9.0% pa	MIPs	10 to 11% pa	2 to 3.5% pa

Conclusion

So know we know where the rich guy or HNI parks his money. Not in banks or FDs but in a combination of liquid funds, debt funds & MIPs. By doing this, he earns 2 to 3 % higher returns & pays 50% less tax. Now you know why the rich guy is rich?

Sound Investing…………………

Budget 2011: a first cut Analysis and Summary

2011-02-28T18:59:00.000+05:30

The D-day has come and it has gone. Sensex has gone up by more than 500 points & at the time of writing this article has come down to an increase of 122 odd points. So why did the market react this way.

Well the stock market was expecting some negative news from the FM in the form of higher excise duty, increase in service tax rates etc. that did not materialize. Not much was expected on the Income Tax front but FM was kind enough to extend the basic exemption limit. This caused an over positive reaction by the stock market in the earlier part of the day by over 500 points. But later, as analysts started analyzing the budget & reading the fine print, they realized that this is a very very balanced budget & nothing extra ordinary has been promised in the budget yet. The FM might take some drastic steps later to which he has just provided indications in his budget for now.

Some Highlights of the Budget relevant for the Indian Investor:

A. Direct Taxes

1. Basic exemption limit for retail Investor increased from current Rs. 1.60 lac to Rs. 1.80 lacs wef April 1, 2011; this shall result in savings of Rs. 2,000 per annum for all assesses.

2. Basic exemption limit for Senior Citizens increased from current Rs. 2.40 lacs to Rs. 2.50 lacs wef April 1, 2011; not only that, the definition of Senior Citizen has been changed to include assesses above Rs. 60 years of age (this was 65 years earlier); a very positive step..

3. A new category of assesses has been created, Very Senior Citizens > 80 years and a basic exemption limit of Rs. 500,000 has been granted to them. Again, a very positive step that finally recognises Senior citizens..

4. Surcharge on income tax for Corporate has been brought down from 7.5% to 5.0%. Good for corporates as it will reduce there tax burden, though nominally.
5. Minimum Alternate Tax (MAT) on Companies has been marginally increased from 18% currently to 18.5% wef April 1, 2011.

So, in all, the Income tax changes, though nominal, are on the positive side. The reason only nominal changes are made is because the FM has promised to stick to the April 1, 2012 deadline of bringing in the Direct Tax Code.

B. Indirect Taxes

1. Excise Duty rates have been kept unchanged for most products barring a few exceptions

2. Peak Customs duty rates are also kept unchanged

3. Even Service tax rates are kept unchanged @ 10%

(the above means that the taxes on most goods & services, barring few, have not changed; again good for the layman)

4. However, airline travel cost will increase as service tax will now be levied on air tickets…

Again, just like Direct Taxes, no major change on the Indirect taxes front. The reason only nominal changes are made is because the FM has promised to usher in the GST regime in the current session of the parliament. So it is wait & watch on both the direct taxes & indirect taxes front & big moves will only be made later...

Two Noteworthy changes in the budget:

1. One Major change that might have got unnoticed by many is that FM has allowed Foreign Citizens, who fulfill the KYC norms, to invest in Mutual Funds in India. The good part is that this will bring in more inflows in the ailing MF Industry & to our stock market which is good for the Indian investor… Indeed one bold step by the FM in the budget...

2. FM has allowed govt. infrastructure companies to bring out Infrastructure bonds worth Rs. 30,000 crore that retail investors can also invest in. This is a great way of using Investors money to invest in the country’s Infrastructure sector. A win-win situation for both…

Besides the above two remarkable changes, all other bold steps have been postponed to posterity. For now, to sum up, a very very balanced but uneventful budget by a mellow but highly experienced Finance Minister.

(keep visiting this space for much more detailed analysis of the budget tomorrow once I get the budget doc in my hand)

The Citibank fraud and the curse of the RM

2011-02-26T18:21:00.000+05:30

Most of us by know have heard of & are aware of “The Citibank fraud” case. For those who have either not heard of it yet or are not fully aware of what it is all about, let me summarise the case for them; as it is of primary importance that all investors, present as well as future, make themselves aware of this case and learn from it.

It is alleged that, Shivraj Puri, a Relationship Manager (RM) of Citibank’s’ Gurgaon branch, allegedly defrauded prospective Investors for a staggering sum of Rs. 400 crores, most of whom are High Net Worth Individuals (HNIs) by promising them returns to the tune of 24% to 36% per annum from a new investment product that Citibank had allegedly launched. In order to convince these investors, he also forged a document from market regulator SEBI saying that the scheme was approved by Sebi. The money was not collected in the name of any scheme but was pooled into a common bank account of shivraj purl’s accomplice and then they diverted this money to various brokers who invested the same in the stock market on their behalf.

Now what is surprising is the list of people who got fooled by this smart RM of Citibank. More than 40 HNI’s were duped by Citibank’s Relationship Manager (RM) and amongst the list of gullible investors are included the following:

1. More than 16 corporate including high profile executives from a Delhi based auto major

2. The MD of a well known venture capital firm

3. Certain members of the a major auto company’s promoter family

4. 40+ High Net Worth Individuals’

The estimated size of the scam is Rs. 400 crores.

The modus operandi of the fraud was as follows:

Allegedly, the RM had access to High Net Worth Individual (HNI) clients of the bank and was serving in a role which involved servicing their requirements for investment products. Citibank’s relationship manager Shivraj puri and his accomplice, are said to have committed the fraud with the help of an external party, most likely a brokerage house that distributes investment products.

To quote a leading personal finance magazine, The Citi and other similar frauds share some common features.

1. First, there is the use of forged documents to fool customers. Given that there is a growing market for fake PAN cards, driving licences, income tax returns, and so on, a healthy dose of scepticism is required if one is to base an investment decision on a piece of paper. 2. Investors also place undue reliance on relationship managers of banks especially MNC banks. 3. It is hard to believe that a set of businessmen did not question Mr Puri’s promise of a 24% to 36% annual return on what was portrayed as a SEBI-approved scheme.

Who is this RM ?

It is very important that one understands the concept of the RELATIONSHIP MANAGER (RM) in order to understand the Citibank fraud and how this guy was able to dupe HNI’s of Rs. 400 crores. Almost all big MNC banks in India (like Citibank) have the concept of a RELATIONSHIP MANAGER in their banks. The concept of Relationship Managers is more prevalent in these banks Wealth Management divisions. The RM is supposed to be a one stop shop for all queries of the clients that he is assigned. So if I am a client of a bank’s wealth management division and Mr. X is my RM, he will be my single point contact with the bank. From basic paper work to strategic advice, everything is taken care of by Mr. X.

Now, Mr. X typically is an MBA hired from top notch b-school at fat salary and on day one of joining he is given hefty ambitious targets of gathering business for the MNC bank. His variable salary, (which generally is many times his fixed salary) is a function of how much business he can bring for the firm. So Mr. X, a highly motivated RM of MNC bank, sets out to bring new business for his bank on which shall depend his variable pay. Mr. X will greet me and my family on our birthdays and anniversaries, will give jazzy presentations to me, will pay personal visits to me and my family, do practically anything to gain my confidence and eventually my money.

Mr. X is trained to talk smooth, speak high profile finance terminology, promise very high returns and display glamour of the MNC bank to convince me to loosen my purse string. He will also give names/references of other high profile clients to convince me, if nothing else works. Now this RM is typically a marketing guy with basic minimal knowledge of financial products. Mr. X is NOT a finance EXPERT and is not in position to devise an investment plan for you or your family. Second, he is only interested in his commissions and typically changes his job every 2 to 3 years in search of a better salary. So if MNC Bank B gives him better pay then MNC Bank A, he will leave immediately.

Now why is MNC Bank B willing to offer a hefty salary to Mr. X who is not a finance expert ? The answer is pretty simple. Bank B is eying Mr. X’s relationships i.e.: the reason Mr. X is being hired by Bank B is not for his expertise but his list of HNI clients. So Mr. X now joins Bank B and immediately doubles or triples his pay package. Now he approaches me and convinces me to switch my investments to Bank B from Bank A and in the process pockets hefty commissions once gain. In both cases, earlier when he made me invest in products of Bank A and later when he made me switch my investments to Bank B, I was made to pay hefty commissions which went straight to X’s pocket.

Profile of M. X

1. People associate RM of an MNC bank with an expert. This is completely mistaken concept

2. People associate a big MNC bank to have checks and balances at place. Another myth...

3. RMs are generally marketing agents without adequate knowledge of investment products and are generally interested in gathering business for their employers & in return earn hefty commissions

4. RM’s are generally marketing people and not finance experts.

5. They are prone to change jobs frequently and usually do not bother to intimate their clients who would have invested for long term based on his/her advice.

Now nowhere am I saying that all RM's of all banks are on the wrong side and that they should not be trusted. In fact some MNC banks have wonderfull fund managers and have vast experience and knowledge base but the question is do we have acces to their services. It always pays & make sense to do a double check and be a bit skeptical especially when the question is of assigning somebody to manage your life's saving, one has to be a bit more cautious and carefull.

Lessons learnt: PRECAUTIONS to be taken

1. NEVER EVER fall prey to the lure of hefty returns. Any return over and above 9% per annum in India cannot be 8guaranteed. It can only be indicated. More so if there is a stock or commodity market exposure involved.

2. SEBI will never promote the investment product of a particular entity or a particular scheme

3. Schemes promising extraordinary returns should be viewed with suspicion and are in the nature of ponzi schemes

4. Never give a blank cheque to the RM or even to your your wealth manager

5. Always write the chq in the name of the Investment product or scheme, never leave the chq blank

6. Never trust anybody blindly with your hard earned money; try to have access to the Investment professionals and fund managers of the bank. If that access is not granted, it should raise suspicion.

7. Do a background check of the Wealth Manager or agent.; ask for references

9. Start initially with a small amount and after having gained confidence, invest further amount.

10. Learn to differentiate between a Marketing guy and a finance expert.

11. Do not fall for the lure of big name. The biggest names are known to commit the biggest frauds and are usually not aware of what is happening at the ground level like in the case of the Citibank fraud.

12. Avoid commission agents . Prefer advisors /financial planners who charge fees for their advice.

Wealth Management is an extremely complex activity involving very high level of education, experience and skillets. Always make it a practice to ask the educational qualification of your Wealth Manager & enquire about his experience in the field.

WHEN IN DOUBT, ASK, SEEK REFERENCES, DO A BACKGROUND CHECK, RESEARCH & IF NOT CONVINVED, POSTPONE YOUR INVESTING DECISIONS.

Good Investment products and opportunities will keep coming your way......

SOUND INVESTING...............

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." - George Soros

2 promising NFOs on the horizon

2011-02-24T01:00:00.000+05:30

Normally, as a matter of practice, we at AUM Financial Advisors do not recommend Mutual Fund New Fund Offers or NFOs.

There are a couple of reasons for the same. First and foremost, when there are existing mutual fund schemes with proven track record, why should I take the risk and invest in a new mutual fund scheme without any track record. Second, the initial expenses in an NFO are generally higher as the investor base is small compared to an existing scheme where the expenses are divided amongst a wider investor base.

However, 2 new NFOs running currently have forced me to make an exception.

NFO I: The first NFO that I am recommending to my client is the IDFC Infrastructure Fund. (www.idfcinfrafund.co.in ). By the way please do not confuse IDFC Infrastructure Fund, which is essentially a Sectoral Mutual Fund that shall invest in the Infrastructure based companies with IDFC Infra Bonds (http://niravpanchmatia.blogspot.com/search/label/IDFC%20Infrastructure%20Bonds ) which is essentially a debt product offering fixed rate of return and not a mutual fund product.

Now, there are a couple of reasons why I am bullish on this fund. First, IDFC, the parent company of IDFC Mutual Fund, is the biggest & most experienced infrastructure finance company in India. Nobody understands the infrastructure space in India better than IDFC. Second, Mr. Kenneth Andrade, the CIO of IDFC Mutual Fund has already proven his mettle with great performance over last 3 years by his funds IDFC Premier Equity Fund & IDFC Small & Midcap Fund. Third, the infrastructure sector is the worst performing sector over the last few years. This coupled with the recent correction in the market has ensured that most infrastructure stocks have corrected by 40 to 50% and are fairly valued today available at great valuations. So the pedigree of the parent company IDFC, the timing of the NFO and beaten down valuations in the infra space, all put together makes IDFC Infrastructure Fund an attractive bet. However, a word of caution here. IDFC Infrastructure Fund is a sectoral fund. A sector based fund is more volatile than equity diversified mutual funds and sometimes takes longer duration to give results. Also, Infrastructure as a theme requires a long gestation period and needs 5 to 7 years to show results. INVEST with a 5 to 7 years investment horizon.

NFO II: The second NFO that I am recommending to my client is the Reliance Gold Savings Fund. Reliance Mutual Fund, the biggest AMC operating in India, has introduced a new asset class in Mutual Funds, GOLD. Every Indian wishes to buy gold every month but most do not have the wherewithal to do so. However, Reliance has made this possible by bringing Reliance Gold Savings Fund. Until now, either one was forced to buy physical gold (from the local jeweller and worry about its purity or from the bank and pay a premium to the market) or if one needed to buy gold in demat or electronic form, then eGold or Gold ETFs (Exchange Traded Funds) were the only option available wherein one could buy gold electronically using the commodities or trading account and pay brokerage. However, in either of these cases, one could not do a systematic Investment Plan or an SIP in Gold i.e.: buy fixed amount of gold every month. Considering the recent surge in prices of gold, SIP is the best way of buying Gold in these volatile times. Reliance Gold Savings Fund is just like any other mutual fund schemes with zero entry load and 1% exit load for the 1^st year. What more, one can do SIP of as little as Rs. 100 per month in Reliance Gold Savings fund. What this means is that you can now buy as little as Rs. 100 worth of Gold every month. One caveat here. The expense ratio is 1.50% pa. i.e.; this scheme can charge maximum expenses equal to 1.50% pa. However, I believe, this is a small price to pay for the convenience of buying gold every month and not bothering about the purity or the physical security of Gold.

However, expect more such offerings in near future from other mutual fund companies probably at lower expense ratios. Meanwhile, INVEST via SIP and buy at dips in Reliance Gold Savings Fund.

Both the above NFOs are closing on Feb 28^th, 2011.

7 Investing resolutions for 2011

2011-01-07T19:30:00.000+05:30

In the month of January, people normally take various resolutions may it be reducing weight, quitting smoking, watching less TV, reducing anger or just about anything one can think off.

Being a financial planner, let me dare to suggest a few Investing resolutions for the common man. If the retail investor sticks to the below mentioned resolution, he will soon create WEALTH for himself and his family.

So, without much ado, let me mention some New Year investing resolutions for one and all.

7 Investing resolutions for 2011

1. I shall buy a decent Term Insurance Plan for myself and other earning members of my family

2. I shall buy a decent Mediclaim cover for each member of my family

3. I shall start systematic Investment Plan (SIP) in well chosen Mutual Fund schemes

4. I shall pay off my personal loan & credit card out standings at the earliest

5. I shall not trade in shares without doing adequate research

6. I shall not buy ULIPs

7. I shall consult a Financial Planner to help me plan my financial affairs

Let us go in further detail:

Resolution 1: I shall buy a decent Term Insurance Plan for myself and other earning members of my family

Resolution 2: I shall buy a decent Mediclaim cover for each member of my family

Resolution 3: I shall start systematic Investment plan (SIP) in well chosen Mutual Fund schemes

After the abolition of entry loads on Mutual Funds from Aug 1, 2009, Mutual Funds have become the best, most economical form of Investment vehicle available to a retail investor. Consider this. Over the last decade, well chosen mutual fund schemes have given a compounded average return of 24 to 28% per annum. And that to tax free. How many businesses give this kind of return? Just one caveat, consult a Mutual Fund expert and let him create a dedicated mutual fund portfolio for you after understanding your needs.

Resolution 4: I shall pay off my personal loan & credit card out standings at the earliest

Personal loan & credit cards are the costliest form of loans that banks and NBFC’s give to the unsuspecting layman. One pays a whopping interest rate of 18% to 24% per annum on personal loans & 36% pa to 50% per annum on credit cards. Avoid these two at all cost.

Resolution 5: I shall not trade in shares without doing adequate research

Resolution 6: I shall not buy ULIPs

The most undesirable, costly, and illiquid financial product in India is Unit Linked Insurance Plan (ULIP). Whereas in mutual funds you pay no commissions today, one pays commissions and expenses, together, as high as 25 % to 40% in the first year itself* to your insurance agent. ULIPs are the most miss-sold product in the history of Indian financial services history. Avoid ULIPs at all cost. (* Post Sep 2010, after New ULIP guidelines have come, the commn & expenses are now staggered over a 5 year period)

Resolution 7: I shall consult a Financial Planner to help me plan my financial affairs

When one falls ill, one consults a doctor who then writes a prescription and then one goes to the medicine shop and buys the medicine prescribed by the doctor. Why not follow the same path while taking your financial decisions. Go to the financial planner who after understanding your specific needs, your financial goals & risk profile, helps you create a dedicated investment portfolio. It is worth paying fees of a financial planner or a mutual fund expert and buy peace of mind then paying very high commissions to the commission agents and have sleepless nights.

HAPPY Investing in 2011.

L&T Infra Bonds

2010-10-26T17:59:00.000+05:30

L&T Infra Bonds

October 18, 2010

After, IFCI & IDFC, it is now the turn of L&T Infrastructure Finance Company Limited (L&T Infra) to come out with tax saving infrastructure bonds for the retail investor that also allows deduction u/s 80CCF of the Income Tax Act 1961 to Individuals & HUFs who invest in these bonds.

The maximum amount of deduction available is Rs. 20,000 per income tax assesses and it is over & above Rs. 1 lac deduction allowed u/s 80C.

So it makes sense for any investor in the 30% tax bracket to invest in these bonds and get instant tax savings of Rs. 6,000+ by investing in these bonds.

The bonds will have a maturity of 10 years. As an exit option to the investors, the company will offer buyback facility at the end of 5th and 7th years from the date of allotment. The bonds are proposed to be listed on NSE and can be traded after the initial 5-year lock-in period. There would be four series of the bond. Each bond will have a face value of Rs 1,000 and would be issued at par. The issue opens on October 15 and closes on November 2.

YM Deosthalee, director, L&T Infra said: “There are similarities between our bond and the one which was recently issued by IDFC in terms of coupon rates for five-year paper. We are both offering a coupon rate of 7.5% for that period. However, unlike IDFC, we are offering coupon rates for seven years and beyond.”

Also, unlike IDFC, whose bond can be purchased only by opening a demat account, L&T Infra has got approval from the competent authority to make investors able to purchase its bond even without having demat account. It is basically for those retail investors that live in far-flung areas of the country and hence are unable to open demat account, he said.

Documents required:

PAN card is compulsory but demat is not compulsory.

Who can Invest?

Individuals & HUF can invest in these bonds.

Offer period

Oct 15, 2010 to Nov 2, 2010.

AUM View

SUBSCRIBE to these bonds if you are in the 30% tax bracket and if you missed the IDFC bonds.

Latest Updates: IDFC Infra Bonds

2010-10-14T19:18:00.000+05:30

The last date for applying for IDFC Infrastructure bonds has been extended to Oct 22, 2010 from Oct 18, 2010.

More importantly, on popular demand, the DEMAT a/c requirement for applying for IDFC Infra Bonds has been done away with and rightly so. What was the point in keeping demat compulsory for bonds that have a min. 5 yrs lock-in and that cannot be traded. Also, on one hand you are allowing HUFs to invest in these bonds and on other you make demat compulsory. Did not make sense. So great and thanks to IDFC that it listened to investors & logic prevailed.

Remember, we had raised this issue on our BLOG last week..(http://niravpanchmatia.blogspot.com/2010/10/idfc-infrastructure-bonds-open-for.html )

IDFC Infrastructure Bonds open for a limited period: INVEST

2010-10-01T16:45:00.000+05:30

IDFC Infrastructure Bonds open for a limited period: INVEST if you are in the upper tax bracket

Sep 30, 2010
In the last budget, FM Pranab Mukherjee had allowed Investors to invest additional Rs. 20,000 over & above Rs. 1 lac that one is usually allowed u/s 80C to claim deductions. Hence, this (FY 2010-11) is the only financial year in which one can invest Rs. 1.20 lacs per Income Tax file & avail additional deduction.
The extra deduction of up to 20,000 is allowed u/s 80CCF if one invests in govt. specified Infrastructure Bonds to be issued by Infrastructure NBFCs like IFCI, IDFC, etc. Further, these bonds shall remain open for a specified time period only. IFCI had last month come out with its Infra bonds & the issue is closed now.

IDFC Infrastructure Bonds issue opens tom on 30th September 2010 & shall remain open for subscription till Oct 18th 2010 only.

The bonds have a tenure of 10 years & expected yield of 7.5 % pa or 8.0% pa depending on the option chosen.

Who can Invest? Individuals & HUF only;

What you need to Invest? PAN no. & a Demat Account

(although we believe that making demat compulsory is an unnecessary requirement as one may want to Invest for all members in the family but they might not have a demat account; opening a demat for the sole purpose of investing in these bonds is not advised as it adds to the cost. Also, HUFs rarely have a demat account)

There are four option to choose from:

Bond Type	Interest Rate	Tenure	Buyback Option
Bond Series 1	8.0 % pa annual interest	10 years	No
Bond Series 2	8.0 % pa cumulative interest; compounded annually	10 years	No
Bond Series 3	7.5 % pa annual interest	10 years	Yes; after 5 years
Bond Series 4	7.5% pa cumulative interest; compounded annually	10 years	Yes; after 5 years

Analysis & Comments
Any investor who is in the 30% tax bracket, should subscribe to these bonds as it will result in total tax savings of approx. Rs. 36,000 this financial year (30% of Rs. 1.20 lac; surcharge & cess excluded).
The yield under various options are explained in the table below:

Tax Bracket		Tax Adjusted Yield to Investors
Your Tax bracket	Effective Tax Rates (%)	Series 1 (%)	Series 2 (%)	Series 3 (%)**	Series 4 (%)**
30%	30.9%	13.89 %	12.06%	17.19%	15.74%
20%	20.6%	11.57%	10.52%	13.41%	12.57%
10%	10.3%	9.64%	9.18%	10.23%	9.86%

**yield calculated assuming buyback at the end of 5 years

So if you are in the highest tax bracket and have already exhausted the limit of Rs. 100,000 u/s 80C, then it makes sense to invest the maximum amount of Rs. 20,000 in these bonds. We would suggest option 3 so as to net a yield of 17.19% in 5 years. Go for the buyback option that has a lock-in for 5 years only.

SUBSCRIBE.....

EPF becomes the most attractive risk-free investment avenue post incresae in interest rate

2010-09-20T12:27:00.001+05:30

Latest Developments

Interest rate of 9.50 % on Employees Provident Fund (EPF) makes them attractive vis-à-vis other traditional savings instrument
Sep 15, 2010
The News
In a surprise but encouraging move, the government increased the interest rate offered in the employees' provident fund (EPF) by 1 percentage point to 9.5 % per annum for the current fiscal year that ends in March 2011.
Over 4.4 crore workers and employees of the public and private sectors in the country will receive an interest rate of 9.5% pa instead of 8.5% pa for financial year 2010-11 for their savings in the Provident Fund account.
The move to increase the interest rate by one percentage point was taken at a meeting of the Central Board of Trustees (CBT) of the Employees Provident Fund Organisation (EPFO). The recommendation of the EPFO trustees will now be forwarded to the finance ministry. The finance ministry, which notifies the provident fund interest rate, usually accepts the recommendation of the board of trustees of EPFO.
The move is expected to benefit nearly 4.71 crore employees in public and private sectors. This is the first that the interest rate on provident fund deposits has been increased to 9.5% since 2004-05. With this hike in interest rate, EPFO deposits become more attractive than bank fixed deposits, which at present are offering interest in the range of 7-7.5 per cent. The rate hike is expected to put pressure on companies with independent PF trusts, as they are required to match the PF rate declared by the government.
Analysis & Comments
Three cheers for the govt. & the EPFO department for raising the interest rate to an attractive 9.5% pa. this will at least make it beat inflation which is very high in india and shall remain high in the near future. With this move, the EPF becomes one of the most remunerative fixed income instrument in our country. Have a look at the graphic below:
Comparison of Real Rate of Returns across various instruments

Traditional Savings Instrument	Interest Rate (% pa)	Inflation Rate (% pa)	Real rate of Return (% pa)
Employees Provident Fund Or EPF (FY 2010-11)	9.50 % pa	6.50 % pa	3.00 % pa
Senior Citizens Savings Scheme (SCSS)	9.00 % pa	6.50 % pa	2.50 % pa
Public Provident Fund (PPF)	8.00 % pa	6.50 % pa	1.50 % pa
Bank Fixed Deposits (FDs)	6.75% pa to 7.50 % pa	6.50 % pa	0.25% pa to 1.00 % pa
Debt Mutual Funds	7.00 % pa to 8.50 % pa	6.50 % pa	0.50 % pa to 2.00 % pa
Monthly Income Plans (Mutual Fund MIPs)	10.00 % pa to 12.00 % pa	6.50 % pa	3.50 % pa to 5.50 % pa
Equity Mutual Funds *	15.00 % pa to 18.00 % pa	6.50 % pa	8.50 % pa to 11.50 % pa

*market linked; past 5 years CAGR returns
It is very clear from the table above that with the 1% hike, the EPF @ 9.50% pa has become more remunerative for the Indian investors & even better than Senior Citizens Savings Scheme (@ 9% pa) & PPF (@ 8% pa). The all season & investors favorite Bank Fixed Deposits (FDs) is no match for any of the above three, at least at today’s prevailing rate.
Also, always compare the rate of return from a savings instrument to the inflation rate to see how remunerative a particulars investment is in terms real rate of return. As is clear from the table above, on a post inflation basis, Bank FDs are not very remunerative at the prevailing rates of interest. So give the FDs a miss for know. Monthly Income Plans (MIPs) are an attractive option if you have a tenure of 1.5 years & have tradinally given double digit returns with a minor exposure to equity.
(http://www.myiris.com/shares/company/ceo/showDetailInt.php?filer=20100828195201194&sec=ifa).
For Salaried employees
So, if you are salaried, invest the maximum possible allowed to you in EPF this year (as it shall guarantee a 9.50% pa return for you), the balance amount can be deployed in variety of Mutual funds (including Tax Saving Mutual Funds or ELSS) based on your investment tenure. Consider MIPs & equity diversified mutual funds for better returns. Give the PPF & Bank FDs a miss for this financial year.
For Self employed
If you are self employed professional or a businessman, EPF is not available to you. Your next best risk-free investment is PPF (@ 8% pa tax free). However, if the only purpose of investing in PPF is to save tax, then I would suggest that you skip PPF for the next 2 financial years & invest in Tax Saving Mutual Funds or ELSS (http://niravpanchmatia.blogspot.com/2010/09/tax-saving-mutual-funds-or-elss.html). Click on the link to find out why I am asking you to skip other avenues u/s 80C this financial year & stick to ELSS.
Sound Investing !!!!