I am 36 years old, my wife is 33 and our son is 7. My wife and I each have an annual agricultural income of Rs 12 lakh. Our present household expenses are Rs 3 lakh per annum (Rs 25,000/month) and our son’s schooling expense is Rs 3 lakh per annum.
— Nimbalkar Khardekar
The Khardekars have started investing fairly early, are currently earning well and have clear cut goals. If one looks at the basic inflow and outflow, as of now they have an inflow of Rs 24 lakh per annum and an outflow of Rs 11,39,142. The latter includes their monthly household expenses as well as premium payments towards various insurance policies and monthly investments. That leaves them with an investible surplus of Rs 12.60 lakh. While some of this money can be placed in a bank fixed deposit as an emergency fund, the chunk of it can be invested towards their goals. And by invested, we mean equity investments. While they have a bag full of insurance policies and a Public Provident Fund (PPF), they must ensure that equity forms a major component of their portfolio if they are to achieve wealth creation. The returns from equity far outweigh the returns that one would get from a fixed-return instrument. For that reason, equity is a must for virtually every portfolio, though the actual amount allocated to that asset would differ.
Here are some suggestions.
* A health policy must be taken out in the son’s name. An accident, sickness or illness can deplete one’s bank balance rapidly. Health insurance is a must for every individual.
* Despite having so many insurance policies, we would still recommend a term plan for each of the spouses since both are earning. The total value can be around Rs1.5 crore. The tenure can be for as long as possible since it will protect the remaining members against life risks.
* If they discontinue with their insurance current plans, it would be a losing proposition. We recommend that they continue with all their insurance policies.
* They should also continue to invest the maximum annual limit in PPF. This will continue even under the new tax regime of the Direct Tax Code (DTC).
* Since time is on their side and they do not have major liabilities or debts, exposure to equity must increase. Specially if they are saving for their retirement and their son’s retirement too. They can start by just increasing the amounts of their Systematic Investment Plans (SIPs). As their income rises, they can proportionately increase the amount that is channelized towards their investments.
* We recommend that investing in equity funds is always done systematically. This enables the investor to buy more units when the market is down and less when it is high. It is a good strategy to participate in the equity market.
* An annual review of the portfolio is recommended. No one must buy and sit tight. Every quarter, they must look at the performance of their funds via each fund’s benchmark and its peers. They can also keep a tab on the star rating of the fund that is assigned by Value Research. If a fund keeps falling in performance, then it can be replaced by another good performer in its respective category.
* As they approach their goal, they can begin to lower the equity exposure and put the money in a bank fixed deposit or debt fund. They must not wait to sell all their equity investments at one go because that would put them at the mercy of the state of the market then, which is too much of a risk.
* They must create a contingency fund which will help out during emergencies. The amount could be around four months of monthly expenses. This can be kept in a liquid fund or even a savings account or bank fixed deposit which is linked to a savings account and can be accessed instantly.
The Kharkekars have not only planned for their retirement but even their son’s, which is going one big step ahead. But if they stick to the plan, it is certainly achievable and definitely very commendable.
(source:http://www.valueresearchonline.com)
Mutual Fund News update from Nishit Doshi (9824021680) a leading MF Advisor based in Ahmedabad. Gujarat.
Tuesday, August 9, 2011
Exit Stocks, Enter Funds
I have received stocks worth Rs 1 crore from my father. He had been actively trading and investing in stocks for the past 35 years. I am not that good at stock investing and I don't know exactly what to do with them. But I do have a long-term investment horizon. Over 70 per cent of these stocks were bought over a year ago. What should I do?
- D Kumar
You are lucky that your father has handed over a portfolio valued at a little over a crore currently, which is doing well. However, such a large and valuable portfolio also comes with attendant responsibilities. That you have listed your financial goals and have a mutual-fund portfolio that rides on systematic investment plans (SIPs) reflects your sound temperament towards investing. That you also have a house of your own and do not service any loan indicates your prudent handling of finances.
Insurance: By opting for a term plan you have made the right selection. The Rs 27 lakh cover is a good start and is about 10 times your current annual household expenses. If you take on any additional liability, consider increasing this cover.
You have Rs 4 lakh worth of medical insurance that covers you and your family members. However, an employer-provided insurance cover lasts only as long as you are employed. Urgently consider supplementing this cover with one purchased by you.
PPF: You have PF deducted from your salary. If the debt component of your portfolio is high, reduce your contribution to PPF.
Pension Plan: You don't need a pension plan. Check its fund value and exit costs and terminate the plan if this does not cause losses.
Financial Goals
That you have been able to quantify your goals and are also aware of the time frame within which you have to achieve them are positives. Now work towards achieving them.
With the Rs13,000 investible surplus that you have, it will not be easy to achieve your financial goals within the time frame you have stated, unless you start dipping into the stock portfolio that your father has given you. Temper some of your goals: postpone your retirement and your plan of buying a bigger house. Instead focus on goals such as saving for your child's education.
At 32, however, you have time on your hand, and your income will increase. Continue investing aggressively in equities as it is one asset class that has the potential to help you achieve your financial goals over the long term.
Financial goals
Monthly investments
Cost (Rs) Years to go @12% @15%
First child's education 20 lakh 9 10,300 8,750
Second child's education 20 lakh 11 7,300 6,000
Retirement and other future expenses 5 crore 19 57,200 38,700
Current portfolio
Schemes Category Rating 3-yrs ret(%) 5-yrs ret(%)
DSPBR Equity Multi Cap **** 15.47 16.16
HDFC Equity Multi Cap ***** 20.89 16.94
HDFC Top 200 Large & Mid Cap ***** 18.95 16.97
ICICI Prudential Fusion Mid & Small Cap Not rated 6.26 6.55
IDFC Premier Equity Mid & Small Cap ***** 18.78 19.94
Reliance Regular Savings Equity Multi Cap **** 13.47 20.5
Returns as on April 6, 2011 Ratings as on March 31, 2011
Suggested portfolio
Schemes Category Rating 3-yrs ret(%) 5-yrs ret(%)
Fidelity Equity Large & Mid Cap ***** 16.34 14.7
HDFC Equity Multi Cap ***** 20.89 16.94
DSPBR Micro Cap Mid & Small Cap **** 14.66 —
AIG World Gold International Not Rated — —
BSL Dynamic Bond Ret Income **** 8.92 8.79
IDFC Premier Equity Mid & Small Cap ***** 18.78 19.94
Returns as on April 6, 2011 Ratings as on March 31, 2011
Investments
You have a diversified stock portfolio of 71 scrips spanning market capitalisations and sectors. Managing such a large portfolio will require you to review and watch their performance closely. On the other hand, mutual funds require less frequent review, once a few good funds have been selected and a portfolio built around them. Your temperament suggests you would be better off having the larger portion of your equity investments in equity mutual funds rather than in stocks.
Do not exit all the stocks you own; hold on to some of them, especially the ones that are part of a large representative index such as BSE 100. These are mostly companies with good financials and fundamentals. They are actively traded and both institutional and retail investors invest in them. By staying invested in these stocks, you can expect the value of your holdings to grow further, as well as earn dividends and bonuses from them, as has been the case in the past. You may exit the remaining stocks in a phased manner by booking profits and without attracting capital gains tax.
Mutual Funds
Your current selection of six mutual funds is not bad, but no thought seems to have gone into making a portfolio out of them. Having three multi-cap funds and two mid- and small-cap funds is diversification in terms of numbers but not in terms of style or market capitalisation. What you need is a diversified portfolio that is easy to manage and has the potential to help you achieve your long-term financial goals. Diversification reduces the volatility within a portfolio.
We have suggested an aggressive portfolio that has 90 per cent equity exposure and have retained two of your existing SIP investments in it. The higher equity allocation and regular investments in this portfolio should help you achieve your financial goals.
You can also adopt a core and satellite portfolio strategy. The core portfolio will comprise funds that need low maintenance, while the satellite portfolio will have to be actively tracked. With this dual strategy you can take advantage of market opportunities without putting your complete portfolio at risk. The core comprises large-cap and large- and mid-cap funds. The satellite allocation comprises multi-cap funds, mid- and small-cap funds, sector funds and even thematic funds.
As the core portfolio comprises funds that are not prone to violent swings, it will cushion your portfolio against market swings while providing steady returns. The satellite portfolio comprises high alpha-generating funds, which will give a fillip to returns. The main advantage of this approach is that it is flexible and can be modified according to the investor's risk appetite.
You have also parked some of your savings in fixed deposits. Transfer them into a liquid fund, which is likely to give superior returns while also being more tax efficient.
(source:http://www.valueresearchonline.com)
- D Kumar
You are lucky that your father has handed over a portfolio valued at a little over a crore currently, which is doing well. However, such a large and valuable portfolio also comes with attendant responsibilities. That you have listed your financial goals and have a mutual-fund portfolio that rides on systematic investment plans (SIPs) reflects your sound temperament towards investing. That you also have a house of your own and do not service any loan indicates your prudent handling of finances.
Insurance: By opting for a term plan you have made the right selection. The Rs 27 lakh cover is a good start and is about 10 times your current annual household expenses. If you take on any additional liability, consider increasing this cover.
You have Rs 4 lakh worth of medical insurance that covers you and your family members. However, an employer-provided insurance cover lasts only as long as you are employed. Urgently consider supplementing this cover with one purchased by you.
PPF: You have PF deducted from your salary. If the debt component of your portfolio is high, reduce your contribution to PPF.
Pension Plan: You don't need a pension plan. Check its fund value and exit costs and terminate the plan if this does not cause losses.
Financial Goals
That you have been able to quantify your goals and are also aware of the time frame within which you have to achieve them are positives. Now work towards achieving them.
With the Rs13,000 investible surplus that you have, it will not be easy to achieve your financial goals within the time frame you have stated, unless you start dipping into the stock portfolio that your father has given you. Temper some of your goals: postpone your retirement and your plan of buying a bigger house. Instead focus on goals such as saving for your child's education.
At 32, however, you have time on your hand, and your income will increase. Continue investing aggressively in equities as it is one asset class that has the potential to help you achieve your financial goals over the long term.
Financial goals
Monthly investments
Cost (Rs) Years to go @12% @15%
First child's education 20 lakh 9 10,300 8,750
Second child's education 20 lakh 11 7,300 6,000
Retirement and other future expenses 5 crore 19 57,200 38,700
Current portfolio
Schemes Category Rating 3-yrs ret(%) 5-yrs ret(%)
DSPBR Equity Multi Cap **** 15.47 16.16
HDFC Equity Multi Cap ***** 20.89 16.94
HDFC Top 200 Large & Mid Cap ***** 18.95 16.97
ICICI Prudential Fusion Mid & Small Cap Not rated 6.26 6.55
IDFC Premier Equity Mid & Small Cap ***** 18.78 19.94
Reliance Regular Savings Equity Multi Cap **** 13.47 20.5
Returns as on April 6, 2011 Ratings as on March 31, 2011
Suggested portfolio
Schemes Category Rating 3-yrs ret(%) 5-yrs ret(%)
Fidelity Equity Large & Mid Cap ***** 16.34 14.7
HDFC Equity Multi Cap ***** 20.89 16.94
DSPBR Micro Cap Mid & Small Cap **** 14.66 —
AIG World Gold International Not Rated — —
BSL Dynamic Bond Ret Income **** 8.92 8.79
IDFC Premier Equity Mid & Small Cap ***** 18.78 19.94
Returns as on April 6, 2011 Ratings as on March 31, 2011
Investments
You have a diversified stock portfolio of 71 scrips spanning market capitalisations and sectors. Managing such a large portfolio will require you to review and watch their performance closely. On the other hand, mutual funds require less frequent review, once a few good funds have been selected and a portfolio built around them. Your temperament suggests you would be better off having the larger portion of your equity investments in equity mutual funds rather than in stocks.
Do not exit all the stocks you own; hold on to some of them, especially the ones that are part of a large representative index such as BSE 100. These are mostly companies with good financials and fundamentals. They are actively traded and both institutional and retail investors invest in them. By staying invested in these stocks, you can expect the value of your holdings to grow further, as well as earn dividends and bonuses from them, as has been the case in the past. You may exit the remaining stocks in a phased manner by booking profits and without attracting capital gains tax.
Mutual Funds
Your current selection of six mutual funds is not bad, but no thought seems to have gone into making a portfolio out of them. Having three multi-cap funds and two mid- and small-cap funds is diversification in terms of numbers but not in terms of style or market capitalisation. What you need is a diversified portfolio that is easy to manage and has the potential to help you achieve your long-term financial goals. Diversification reduces the volatility within a portfolio.
We have suggested an aggressive portfolio that has 90 per cent equity exposure and have retained two of your existing SIP investments in it. The higher equity allocation and regular investments in this portfolio should help you achieve your financial goals.
You can also adopt a core and satellite portfolio strategy. The core portfolio will comprise funds that need low maintenance, while the satellite portfolio will have to be actively tracked. With this dual strategy you can take advantage of market opportunities without putting your complete portfolio at risk. The core comprises large-cap and large- and mid-cap funds. The satellite allocation comprises multi-cap funds, mid- and small-cap funds, sector funds and even thematic funds.
As the core portfolio comprises funds that are not prone to violent swings, it will cushion your portfolio against market swings while providing steady returns. The satellite portfolio comprises high alpha-generating funds, which will give a fillip to returns. The main advantage of this approach is that it is flexible and can be modified according to the investor's risk appetite.
You have also parked some of your savings in fixed deposits. Transfer them into a liquid fund, which is likely to give superior returns while also being more tax efficient.
(source:http://www.valueresearchonline.com)
Increase Equity Allocation
My husband is 30, I am 28, and we have a one-year old son. With both of us having worked abroad for the past few years, we have been able to accumulate some savings. We expect to bring back Rs15 lakh divested from our employer’s 401K plan later this year. Now that we are back in India, we plan to live in our own home that is fully paid for. In his new job in India, my husband’s take-home salary will be Rs90,000 per month. I do not plan to work for the next few years. We estimate that every month we will be able to invest approximately Rs40,000. Of this, we plan to invest Rs25,000 through the SIP route and keep the balance in cash, fixed deposits, or liquid funds.We have endowment insurance policies started in our early twenties. Additionally, my husband’s employer will cover him under a term plan and also provide medical insurance cover for our family.
Our investment style has been rather haphazard so far. We would like to know what steps we need to take to rebalance our portfolio. Is our choice of mutual funds correct?
Your investment decisions appear haphazard both in the selection of funds and stocks. For the sake of simplicity we have compartmentalised your portfolio into funds and stocks. Since you have a greater amount invested in funds we shall make them the mainstay of your investment strategy.
Funds:You have invested in very good funds like HDFC Equity and Reliance Regular Savings Equity. But you have also taken on board below-average performers like Sundaram S.M.I.L.E. and untested funds like Principal Emerging Bluechip or Reliance Small Cap. Your selections are not all bad, neither are they all good. You can improve your portfolio by opting for time-tested funds and by allowing our ratings to be your guide.
We disapprove of the way you have accumulated so many funds in such a short time frame. More importantly, as you have yourself mentioned, most of these are one-time investments. You should have taken advantage of rupee-cost averaging by investing in your mutual fund portfolio via SIPs. The result of investing in lump sum is that so far you have earned almost no returns from this portfolio.
Stocks: Your stocks portfolio has given an absolute return of 15 per cent which is a decent gain. Considering that the market has tanked by 10 per cent since November 2010, this is not a bad start. As you might have realised yourself, Infosys is the mainstay of your stock portfolio. It comprises 29.08 per cent of your portfolio. Relying too much on a single stock increases downside risk. By the way, the funds you have chosen have also bet heavily on this stock.
Since the stock portfolio is meant to provide a kicker to your portfolio return, having a very small exposure to stocks does not make sense. In your portfolio you have got a few stocks that have very negligible impact on the overall portfolio. Try to consolidate your stocks portfolio: only hold onto stocks that you are highly convinced about and which have not underperformed the market for long.
Asset allocation: Your portfolio has a heavy tilt towards debt. The income and obligation profile that you have provided doesn’t require you to allocate such a large proportion of your investments in debt. Your cash holdings are adequate and will enable you to tide over small emergencies.
Pare your debt holdings like fixed deposits and debt funds and allocate more to equity funds. Currently the debt-equity ratio of your portfolio is 53:41. Re-orient your portfolio so that the allocation settles at around 73 per cent in equities and 20 per cent in debt. Try to maintain it at this level by rebalancing (either by selling equities and buying more debt or the other way round) periodically.
What advice would you give us for future investments — the monthly surplus of Rs40,000 as well as the lump sum Rs15 lakh we expect to bring back later this year and the fixed deposits maturing next year?
You have made balanced funds the mainstay of your fund portfolio. We think this is the right way to go. Currently they corner 27.31 per cent of the fund portfolio. The rest of the portfolio is dominated by Mid- & Small-cap funds (30 per cent) and Multi-cap funds (19.25 per cent). Our suggestion would be that you hike your balanced fund allocation to 60 per cent and keep the rest in Multi-cap funds.
As for the debt portion, invest in debt funds rather than in bank fixed deposits. They are much easier to manage than fixed deposits when it comes to rebalancing.
First, invest the amount that will come to you on maturity of fixed deposits and from 401K in a debt fund, then do a systematic transfer into equity funds.
You already have almost six months of your salary in cash. Increasing it further by allocating Rs15,000 every month would therefore be excessive. Rather divert this to your fund and stock portfolio.
Are we on track to achieve our goals?
Your current investment and the future SIPs that you plan to initiate are more than adequate for meeting the goals that you have set. Investment of Rs25,000 every month for the next 27 years at the rate of 10 per cent will give you a corpus of Rs5.6 crore (after paying for your son’s education), enough to see you through your years of retirement.
Portfolio Highlights
Skewed towards debt, equity:debt ratio = 41:53
Fund Portfolio
• Mid- & small-cap oriented exposure is 55.48 per cent
• Out of 15 funds, two are 2-star rated and four are unrated funds
• Mode of investment has been lump sum
• Fairly diversified MF portfolio, with the underlying stock portfolio diversified across 329 stocks
Stock Portfolio
• Dominance of one stock: Infosys
• Biased towards blue chip companies
• In as many as five stocks, exposure is less than 1 per cent
• Top five stocks corner 52 per cent of the portfolio
• Nine stocks in the portfolio have gained over 15 per cent, while 11 are in the red
Suggested Portfolio
BALANCED MULTI CAP MID & SMALL CAP
Birla Sun Life 95 DSPBR Equity Birla Sun Life Mid Cap
DSPBR Balanced HDFC Equity ICICI Prudential Discovery
HDFC Prudence Reliance Regular Savings Equity IDFC Premier Equity
UTI Dividend Yield
(source:http://www.valueresearchonline.com)
Our investment style has been rather haphazard so far. We would like to know what steps we need to take to rebalance our portfolio. Is our choice of mutual funds correct?
Your investment decisions appear haphazard both in the selection of funds and stocks. For the sake of simplicity we have compartmentalised your portfolio into funds and stocks. Since you have a greater amount invested in funds we shall make them the mainstay of your investment strategy.
Funds:You have invested in very good funds like HDFC Equity and Reliance Regular Savings Equity. But you have also taken on board below-average performers like Sundaram S.M.I.L.E. and untested funds like Principal Emerging Bluechip or Reliance Small Cap. Your selections are not all bad, neither are they all good. You can improve your portfolio by opting for time-tested funds and by allowing our ratings to be your guide.
We disapprove of the way you have accumulated so many funds in such a short time frame. More importantly, as you have yourself mentioned, most of these are one-time investments. You should have taken advantage of rupee-cost averaging by investing in your mutual fund portfolio via SIPs. The result of investing in lump sum is that so far you have earned almost no returns from this portfolio.
Stocks: Your stocks portfolio has given an absolute return of 15 per cent which is a decent gain. Considering that the market has tanked by 10 per cent since November 2010, this is not a bad start. As you might have realised yourself, Infosys is the mainstay of your stock portfolio. It comprises 29.08 per cent of your portfolio. Relying too much on a single stock increases downside risk. By the way, the funds you have chosen have also bet heavily on this stock.
Since the stock portfolio is meant to provide a kicker to your portfolio return, having a very small exposure to stocks does not make sense. In your portfolio you have got a few stocks that have very negligible impact on the overall portfolio. Try to consolidate your stocks portfolio: only hold onto stocks that you are highly convinced about and which have not underperformed the market for long.
Asset allocation: Your portfolio has a heavy tilt towards debt. The income and obligation profile that you have provided doesn’t require you to allocate such a large proportion of your investments in debt. Your cash holdings are adequate and will enable you to tide over small emergencies.
Pare your debt holdings like fixed deposits and debt funds and allocate more to equity funds. Currently the debt-equity ratio of your portfolio is 53:41. Re-orient your portfolio so that the allocation settles at around 73 per cent in equities and 20 per cent in debt. Try to maintain it at this level by rebalancing (either by selling equities and buying more debt or the other way round) periodically.
What advice would you give us for future investments — the monthly surplus of Rs40,000 as well as the lump sum Rs15 lakh we expect to bring back later this year and the fixed deposits maturing next year?
You have made balanced funds the mainstay of your fund portfolio. We think this is the right way to go. Currently they corner 27.31 per cent of the fund portfolio. The rest of the portfolio is dominated by Mid- & Small-cap funds (30 per cent) and Multi-cap funds (19.25 per cent). Our suggestion would be that you hike your balanced fund allocation to 60 per cent and keep the rest in Multi-cap funds.
As for the debt portion, invest in debt funds rather than in bank fixed deposits. They are much easier to manage than fixed deposits when it comes to rebalancing.
First, invest the amount that will come to you on maturity of fixed deposits and from 401K in a debt fund, then do a systematic transfer into equity funds.
You already have almost six months of your salary in cash. Increasing it further by allocating Rs15,000 every month would therefore be excessive. Rather divert this to your fund and stock portfolio.
Are we on track to achieve our goals?
Your current investment and the future SIPs that you plan to initiate are more than adequate for meeting the goals that you have set. Investment of Rs25,000 every month for the next 27 years at the rate of 10 per cent will give you a corpus of Rs5.6 crore (after paying for your son’s education), enough to see you through your years of retirement.
Portfolio Highlights
Skewed towards debt, equity:debt ratio = 41:53
Fund Portfolio
• Mid- & small-cap oriented exposure is 55.48 per cent
• Out of 15 funds, two are 2-star rated and four are unrated funds
• Mode of investment has been lump sum
• Fairly diversified MF portfolio, with the underlying stock portfolio diversified across 329 stocks
Stock Portfolio
• Dominance of one stock: Infosys
• Biased towards blue chip companies
• In as many as five stocks, exposure is less than 1 per cent
• Top five stocks corner 52 per cent of the portfolio
• Nine stocks in the portfolio have gained over 15 per cent, while 11 are in the red
Suggested Portfolio
BALANCED MULTI CAP MID & SMALL CAP
Birla Sun Life 95 DSPBR Equity Birla Sun Life Mid Cap
DSPBR Balanced HDFC Equity ICICI Prudential Discovery
HDFC Prudence Reliance Regular Savings Equity IDFC Premier Equity
UTI Dividend Yield
(source:http://www.valueresearchonline.com)
Building A Corpus
I am first time investor in mutual funds and want to invest regularly through SIPs to have Rs 20 lakh at the end of five years. Is it possible?— Madhu Maharana
Let’s work backwards - how much do you need to invest to have Rs 20 lakh at the end of five years? If your portfolio earns an annualised return of 12 per cent, you would need to invest Rs 24,300/month. If the returns are upped to 15 per cent, you would need Rs 22,400/month to reach your goal.
We suggest you invest Rs 10,000/month in two large cap funds (Equity: Large Cap), Rs 5,000/month in a multi-cap fund (Equity: Multi Cap) and the remaining amount in two balanced funds balanced funds (Hybrid: Equity).
If you go on our website, ValueResearchOnline.com, you will be able to see the best performers (5 star ratings) under each category. Make your selection and invest systematically. Keep checking the performance of the funds every six months.
(source:http://www.valueresearchonline.com)
Let’s work backwards - how much do you need to invest to have Rs 20 lakh at the end of five years? If your portfolio earns an annualised return of 12 per cent, you would need to invest Rs 24,300/month. If the returns are upped to 15 per cent, you would need Rs 22,400/month to reach your goal.
We suggest you invest Rs 10,000/month in two large cap funds (Equity: Large Cap), Rs 5,000/month in a multi-cap fund (Equity: Multi Cap) and the remaining amount in two balanced funds balanced funds (Hybrid: Equity).
If you go on our website, ValueResearchOnline.com, you will be able to see the best performers (5 star ratings) under each category. Make your selection and invest systematically. Keep checking the performance of the funds every six months.
(source:http://www.valueresearchonline.com)
Thursday, June 16, 2011
Target Long-Term Goals
I am 35 years old and earn Rs 35,000 a month. I need Rs 40 lakhs in ten years. How much should I invest in a mutual fund through SIPs to achieve this target?
- Vikas Kumar Gupta
If your mutual fund investments grow at an annualise 12 per cent; you will need to invest Rs 17,220 every month to achieve your target. However, if the portfolio earns an annualised 15 per cent, you need to invest Rs 14,360 every month. You can achieve this by investing in a portfolio of large-cap funds such as DSPBR Top 100 Equity or Franklin India Bluechip along with large- and mid-cap funds such as HDFC Top 200 or Fidelity India Growth fund. Make sure you invest regularly and track the performance of these funds and their progress towards your goal of accumulating Rs 40 lakh in ten years.
(Source:www.valueresearchonline.com)
- Vikas Kumar Gupta
If your mutual fund investments grow at an annualise 12 per cent; you will need to invest Rs 17,220 every month to achieve your target. However, if the portfolio earns an annualised 15 per cent, you need to invest Rs 14,360 every month. You can achieve this by investing in a portfolio of large-cap funds such as DSPBR Top 100 Equity or Franklin India Bluechip along with large- and mid-cap funds such as HDFC Top 200 or Fidelity India Growth fund. Make sure you invest regularly and track the performance of these funds and their progress towards your goal of accumulating Rs 40 lakh in ten years.
(Source:www.valueresearchonline.com)
Save Tax and Create Wealth
Making investments that enables one to save on income tax is one of the commonest and yet one of the least well-planned investments. Most of us are happy that the tax-saving investment we make has saved tax. Whether it suitable as an investment or not is generally not thought about.
Why does this happen? The basic reason is that there is a confusion of goals between saving tax and making investments. The typical investor makes this decision either in late March under the duress of having the deadline slip by. At the end of the day, we may make sub-optimal investment decisions and even if we realise it, we console ourselves by saying that that at least we got tax benefits.
This duality of concerns—tax as well as investments—prevents clear-headed thinking about just exactly what one is getting out of an investment. However, these investments should also be treated as actual investments. The investment part—the returns we get should be considered as important as the tax we save.
For example, if you otherwise do not need to invest in a traditional fixed return avenue, but would rather invest in equity, then you can do so in your tax-saving investments as well.
In fact, going in for traditional tax-saving instruments like PPF, fixed-return deposits carry the disadvantage of long lock-in periods ranging from five to fifteen years.
By contrast, Equity Linked Saving Schemes(ELSS) can offer all the wealth building opportunities of equity funds, coupled with the same tax-saving, with a lock-in period of just three years. Birla Sun Life Mutual Fund offers investment solutions that help you grow your wealth with equity while savings taxes, all with a shorter lock in than traditional tax-savers.
Key benefits of saving tax by investing in an ELSS scheme by a mutual fund
Save tax upto Rs. 33,900 on investment of upto Rs. 1 lakh per year.
Traditional tax savers offer fixed returns, ELSS offer the opportunity to
realise potentially higher returns through investments in equity.
ELSS offer a much lower lock-in period of just three years compared to
other tax saving avenues.
Opportunity to earn dividends
The Financial Solution (Save Tax and Create Wealth) stated above is ONLY for highlighting the many advantages perceived from investments in Mutual Funds but does not in any manner, indicate or imply, either the quality of any particular Scheme or guarantee any specific performance/returns.
(Source:www.valueresearchonline.com)
Why does this happen? The basic reason is that there is a confusion of goals between saving tax and making investments. The typical investor makes this decision either in late March under the duress of having the deadline slip by. At the end of the day, we may make sub-optimal investment decisions and even if we realise it, we console ourselves by saying that that at least we got tax benefits.
This duality of concerns—tax as well as investments—prevents clear-headed thinking about just exactly what one is getting out of an investment. However, these investments should also be treated as actual investments. The investment part—the returns we get should be considered as important as the tax we save.
For example, if you otherwise do not need to invest in a traditional fixed return avenue, but would rather invest in equity, then you can do so in your tax-saving investments as well.
In fact, going in for traditional tax-saving instruments like PPF, fixed-return deposits carry the disadvantage of long lock-in periods ranging from five to fifteen years.
By contrast, Equity Linked Saving Schemes(ELSS) can offer all the wealth building opportunities of equity funds, coupled with the same tax-saving, with a lock-in period of just three years. Birla Sun Life Mutual Fund offers investment solutions that help you grow your wealth with equity while savings taxes, all with a shorter lock in than traditional tax-savers.
Key benefits of saving tax by investing in an ELSS scheme by a mutual fund
Save tax upto Rs. 33,900 on investment of upto Rs. 1 lakh per year.
Traditional tax savers offer fixed returns, ELSS offer the opportunity to
realise potentially higher returns through investments in equity.
ELSS offer a much lower lock-in period of just three years compared to
other tax saving avenues.
Opportunity to earn dividends
The Financial Solution (Save Tax and Create Wealth) stated above is ONLY for highlighting the many advantages perceived from investments in Mutual Funds but does not in any manner, indicate or imply, either the quality of any particular Scheme or guarantee any specific performance/returns.
(Source:www.valueresearchonline.com)
Securing The Future
I am 34 and am investing for the past six months for my year and half old daughter’s future education expenses and marriage. I am investing Rs 4,000 in ICICI Prudential Discovery, IDFC Premier Equity and Reliance Regular Savings Equity. I am left with Rs 2,000 more to invest; please suggest funds to invest in? Also, I have not taken any insurance plan for my daughter and wife; could you please suggest any insurance plans for both of them?
- K Shankar
You have investments in good funds that have a proven track record and performance history. Collectively these form an aggressive portfolio of funds, and you should consider investing the additional Rs 2,000 that you have in a large-cap fund such as DSPBR Top 100 Equity or Franklin India Bluechip to balance the existing funds that you have to have a diversified portfolio to achieve your long-term investment goal of saving for your daughter’s education and marriage. As both the goals are a long way to go; you should invest regularly and track the performance of your funds through this period to evaluate its progress and make any changes to the funds you hold if needed.
As for life insurance for your wife and daughter; you don’t need to cover for your daughter, you should make sure that between you and your wife you are adequately insured so that your daughter’ future needs are taken care of if something happens to you. You should also make sure to take cover for any liabilities that you may have such as a home loan. As for your wife; if she is working, you should consider insurance that that is 8-10 times her annual income to start with. But, insurance should be taken only to cover for risks and not as investments.
(Source:www.valueresearchonline.com)
- K Shankar
You have investments in good funds that have a proven track record and performance history. Collectively these form an aggressive portfolio of funds, and you should consider investing the additional Rs 2,000 that you have in a large-cap fund such as DSPBR Top 100 Equity or Franklin India Bluechip to balance the existing funds that you have to have a diversified portfolio to achieve your long-term investment goal of saving for your daughter’s education and marriage. As both the goals are a long way to go; you should invest regularly and track the performance of your funds through this period to evaluate its progress and make any changes to the funds you hold if needed.
As for life insurance for your wife and daughter; you don’t need to cover for your daughter, you should make sure that between you and your wife you are adequately insured so that your daughter’ future needs are taken care of if something happens to you. You should also make sure to take cover for any liabilities that you may have such as a home loan. As for your wife; if she is working, you should consider insurance that that is 8-10 times her annual income to start with. But, insurance should be taken only to cover for risks and not as investments.
(Source:www.valueresearchonline.com)
Infrastructure Disappoints
I have a SIP investment in ICICI Prudential Infrastructure Fund. Of late its performance has been dismal. Should I continue with this fund or it's advisable to discontinue, as the entire Infra pack is not performing poorly?
- Narasimha G Prasad
ICICI Prudential Infrastructure Fund invests in companies belonging to infrastructure development category. A thematic fund, it is a risky investment compared to the broad diversified equity fund category. A three-star fund, the returns are not as expected, but it is a belief in such themes that finds investors flocking to them. We can empathize with your situation, but the way out is for you to exit this fund if you no more believe in it. You would be better of cutting your losses now and investing in a consistently better performing fund.
(Source:www.valueresearchonline.com)
- Narasimha G Prasad
ICICI Prudential Infrastructure Fund invests in companies belonging to infrastructure development category. A thematic fund, it is a risky investment compared to the broad diversified equity fund category. A three-star fund, the returns are not as expected, but it is a belief in such themes that finds investors flocking to them. We can empathize with your situation, but the way out is for you to exit this fund if you no more believe in it. You would be better of cutting your losses now and investing in a consistently better performing fund.
(Source:www.valueresearchonline.com)
Exit Strategy
At Value Research, we receive a large number of queries from investors asking for advice on their portfolios. On the insurance side, one of the most common problems we encounter is the existence of Ulips and traditional products (endowment and moneyback plans) that are meant to serve as two-in-one, investment-cum-insurance products. We, on the other hand, firmly believe that investors should keep insurance and investment apart, and that their interests would be best served through a combination of term plan and mutual funds.
Why go for term plan-MF combo
The term plan-mutual funds combination is financially the most efficient. Ulips levy a number of other charges besides the fund management charge (that a mutual fund also charges) and mortality charge (that a term plan charges). They levy a premium allocation charge (PAC), an administrative charge, and so on. The cost structure of Ulips is also complicated. For the lay buyer it can be hard to know what the charges are and what their implications on his final returns will be, especially at the time of purchase. (Later, of course, he will get statements from time to time, but by then it will be too late). Therefore, in the first place, the mutual fund-term plan combination scores by having a lower and more transparent cost structure.
Another problem with Ulips is that an insurance company offers only a limited number of fund options. If the funds offered by the insurance company underperform, the investor does not have the option to exit his current fund and invest in a high-return fund from another company (until the lock-in period is over). On the other hand, if he invests in mutual funds, he can easily exit his current underperforming fund (most mutual funds do not have an exit load after one year), and choose from any one of the hundreds of funds available in the market.
Traditional products such as endowment plans and moneyback plans too have drawbacks. The biggest is that they offer simple interest, whereas if you invest in a mutual fund or even in a PPF, your investments grow through compounding. As we well know, the effect of compounding is powerful, especially over the long term. The second disadvantage of traditional products is that they have a high allocation to debt products. This, too, affects their returns: over the long term, as we know, returns from equities trounce those from debt.
Another disadvantage of insurance-cum-investment products belonging to insurance companies is that despite paying a hefty sum of money as premium, the family could still be under-insured. Since term plans are inexpensive, one can buy adequate amount of cover through them.
What should you do
Exit and bear the losses upfront: If a person has invested in a Ulip or in traditional products, and especially if he has paid the premium only for two or three years, the ideal solution would be for him to exit these policies right away. In the older Ulips, there was a lock-in period of three years, which has now been extended to five in the new Ulips. If an investor exits from an old Ulip after paying two premiums, he will lose out on his premiums completely. If he exits an old Ulip after three years, all he is likely to get is the third-year premium; the myriad charges in Ulips would eat up the rest. According to Pune-based financial planner Veer Sardesai, “Over a 20-25 year span the investor is likely to be better off exiting these policies, even if it means entirely forfeiting his premium, and going with the term plan-mutual funds combination.” However, only investors who are financially savvy would perhaps agree to pursue this course of action.
Stay put: At the other end of the spectrum, you would have investors who are not at all financially savvy. They would have little knowledge of term plans (because agents do not push them) and mutual funds (especially in smaller towns, there tends to be greater awareness about insurance products than about mutual funds). Such investors would be wary of these options.
These investors would prefer being in a Ulip rather than in a term plan-mutual fund combination because a Ulip, being a product from an insurance company, would offer them a greater sense of security (especially if it is from the public-sector behemoth). Such investors could stay put in the Ulip. Even if the Ulip is not a financially-efficient product, it would still benefit these investors by offering them equity exposure, which would boost their returns over the long term.
The middle path: Next, you have investors who are financially savvy and who understand the logic behind promptly exiting a Ulip or a traditional product. Despite this, they might shy away from the option of writing off their premiums in the Ulip entirely. Very often the premiums they have paid are as high as Rs1 lakh or more per year, so bearing the loss upfront becomes difficult.
For such investors, Sardesai suggests the middle path of making the policy “paid up”. Enquire from the insurance company the minimum period for which premiums must be paid. Pay till then and then stop. Thereafter, the policy will continue to exist. The insurance company will deduct its annual charges from the corpus that has accumulated within the policy and keep it alive. The paid-up policy would offer a lower sum assured, but the investor would at least be saved from throwing good money after bad. The advantage of this course of action is that the investor feels he has not lost his money entirely, though if one were to do the mathematical calculations, the first rather than this third option would be optimal.
As you can see, once you have entered these high-cost insurance-cum-investment policies, there can be no painless exit. Taking your losses upfront, especially if you have not been in these policies for long, would be the best course of action if you are keen to get your financial portfolio back on track.
(Source:www.valueresearchonline.com)
Why go for term plan-MF combo
The term plan-mutual funds combination is financially the most efficient. Ulips levy a number of other charges besides the fund management charge (that a mutual fund also charges) and mortality charge (that a term plan charges). They levy a premium allocation charge (PAC), an administrative charge, and so on. The cost structure of Ulips is also complicated. For the lay buyer it can be hard to know what the charges are and what their implications on his final returns will be, especially at the time of purchase. (Later, of course, he will get statements from time to time, but by then it will be too late). Therefore, in the first place, the mutual fund-term plan combination scores by having a lower and more transparent cost structure.
Another problem with Ulips is that an insurance company offers only a limited number of fund options. If the funds offered by the insurance company underperform, the investor does not have the option to exit his current fund and invest in a high-return fund from another company (until the lock-in period is over). On the other hand, if he invests in mutual funds, he can easily exit his current underperforming fund (most mutual funds do not have an exit load after one year), and choose from any one of the hundreds of funds available in the market.
Traditional products such as endowment plans and moneyback plans too have drawbacks. The biggest is that they offer simple interest, whereas if you invest in a mutual fund or even in a PPF, your investments grow through compounding. As we well know, the effect of compounding is powerful, especially over the long term. The second disadvantage of traditional products is that they have a high allocation to debt products. This, too, affects their returns: over the long term, as we know, returns from equities trounce those from debt.
Another disadvantage of insurance-cum-investment products belonging to insurance companies is that despite paying a hefty sum of money as premium, the family could still be under-insured. Since term plans are inexpensive, one can buy adequate amount of cover through them.
What should you do
Exit and bear the losses upfront: If a person has invested in a Ulip or in traditional products, and especially if he has paid the premium only for two or three years, the ideal solution would be for him to exit these policies right away. In the older Ulips, there was a lock-in period of three years, which has now been extended to five in the new Ulips. If an investor exits from an old Ulip after paying two premiums, he will lose out on his premiums completely. If he exits an old Ulip after three years, all he is likely to get is the third-year premium; the myriad charges in Ulips would eat up the rest. According to Pune-based financial planner Veer Sardesai, “Over a 20-25 year span the investor is likely to be better off exiting these policies, even if it means entirely forfeiting his premium, and going with the term plan-mutual funds combination.” However, only investors who are financially savvy would perhaps agree to pursue this course of action.
Stay put: At the other end of the spectrum, you would have investors who are not at all financially savvy. They would have little knowledge of term plans (because agents do not push them) and mutual funds (especially in smaller towns, there tends to be greater awareness about insurance products than about mutual funds). Such investors would be wary of these options.
These investors would prefer being in a Ulip rather than in a term plan-mutual fund combination because a Ulip, being a product from an insurance company, would offer them a greater sense of security (especially if it is from the public-sector behemoth). Such investors could stay put in the Ulip. Even if the Ulip is not a financially-efficient product, it would still benefit these investors by offering them equity exposure, which would boost their returns over the long term.
The middle path: Next, you have investors who are financially savvy and who understand the logic behind promptly exiting a Ulip or a traditional product. Despite this, they might shy away from the option of writing off their premiums in the Ulip entirely. Very often the premiums they have paid are as high as Rs1 lakh or more per year, so bearing the loss upfront becomes difficult.
For such investors, Sardesai suggests the middle path of making the policy “paid up”. Enquire from the insurance company the minimum period for which premiums must be paid. Pay till then and then stop. Thereafter, the policy will continue to exist. The insurance company will deduct its annual charges from the corpus that has accumulated within the policy and keep it alive. The paid-up policy would offer a lower sum assured, but the investor would at least be saved from throwing good money after bad. The advantage of this course of action is that the investor feels he has not lost his money entirely, though if one were to do the mathematical calculations, the first rather than this third option would be optimal.
As you can see, once you have entered these high-cost insurance-cum-investment policies, there can be no painless exit. Taking your losses upfront, especially if you have not been in these policies for long, would be the best course of action if you are keen to get your financial portfolio back on track.
(Source:www.valueresearchonline.com)
Understanding Tax Planning Funds
I am confused with my investments in HDFC Top 200 and HDFC Taxsaver; which one of them will provide tax exemption? I have investments in ICICI Prudential Dynamic and DSPBR Equity, someone told me I won’t get any tax exemptions in my investment in these funds. Can you please tell me all the differences between normal mutual funds and tax saver funds?
- Rajeev Jagasia
Tax planning funds, better known as ELSS (Equity Linked Savings Scheme) is a type of mutual fund which is qualified for tax exemption under Section 80C. These are equity funds with a three-year lock-in wherein the investments qualify for tax rebates and the redemption after the lock-in is tax free. HDFC Taxsaver is a tax planning fund and hence, your friend is right in pointing out that your investments in it qualify for tax deductions and redemptions are tax free at the end of the lock-in.
You will not get any tax exemptions on your investments in HDFC Top 200, DSPBR Equity and ICICI Prudential Dynamic. However, if you have opted for the dividend option in these two funds and receive dividends; it will be tax free. Likewise if your holdings in these funds are more than a year, you won’t pay any long-term capital gains. However, if the holding period is less than a year, short term capital gains will kick-in at 15 per cent.
(Source:www.valueresearchonline.com)
- Rajeev Jagasia
Tax planning funds, better known as ELSS (Equity Linked Savings Scheme) is a type of mutual fund which is qualified for tax exemption under Section 80C. These are equity funds with a three-year lock-in wherein the investments qualify for tax rebates and the redemption after the lock-in is tax free. HDFC Taxsaver is a tax planning fund and hence, your friend is right in pointing out that your investments in it qualify for tax deductions and redemptions are tax free at the end of the lock-in.
You will not get any tax exemptions on your investments in HDFC Top 200, DSPBR Equity and ICICI Prudential Dynamic. However, if you have opted for the dividend option in these two funds and receive dividends; it will be tax free. Likewise if your holdings in these funds are more than a year, you won’t pay any long-term capital gains. However, if the holding period is less than a year, short term capital gains will kick-in at 15 per cent.
(Source:www.valueresearchonline.com)
Consistently Underperforming
I have been investing through SIPs in Magnum Taxgain for a period of 3 years and off late the performance has not been comparable with other tax saving funds such as HDFC or Sundaram. Should I continue this SIP or switch to another fund?
- Abbas Ali
The performance of this tax planning fund has been going down compared to some of the other funds in this category. If your three-year lock-in is over, you can consider exiting this fund. If your investments in this fund were to gain from tax savings, you can consider investing in Fidelity Tax Advantage or Canara Robeco Equity Tax Saver, which are the best performing funds in this category.
(Source: www.valueresearchonline.com)
- Abbas Ali
The performance of this tax planning fund has been going down compared to some of the other funds in this category. If your three-year lock-in is over, you can consider exiting this fund. If your investments in this fund were to gain from tax savings, you can consider investing in Fidelity Tax Advantage or Canara Robeco Equity Tax Saver, which are the best performing funds in this category.
(Source: www.valueresearchonline.com)
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