MoneyVedam

When it comes to equity related investments, most people wonder about the effectiveness of SIP. There is a lot of apprehension (and misconception) prevalent on the street about SIP - that it would not give as good a return as a lump-sum invested during a down turn. Let us consider some scenarios from our real-life situation to understand the effectiveness of SIP. We take our tablets / health capsules daily, exercise daily, receive a pay packet monthly, pay our bills/taxes monthly and even diligently pay our insurance premium yearly. This is sufficient proof that a systematic and continuous plan works for most of our financial and non-financial matters of our lives. Scenario Analysis Now coming to SIPs, let us consider 3 investors, all investing the same amount of Rs.8.4 Lacs over an investment horizon of 7 years and compare their outcomes: A invests Rs.10000 in a monthly SIP and accumulates Rs.17.05 Lacs, with annualized returns of 19.88% B invests a lumpsum of Rs.1.2Lacs p.a using...

Although Mutual Funds is a single investment vehicle, it encompasses a wide variety of funds. It is often confusing for a new comer to comprehend the 1000+ mutual fund schemes offered by 30+ fund houses (aka Asset Management Companies). In this blog, let us look at the broad classification of these funds. Equity & Equity-oriented Funds - these funds invest 65-90% of their assets (money collected from investors) in equities - i.e stocks of companies listed in the stock exchanges BSE & NSE. Again there could be thematic funds depending on whether they invest in large-cap, mid-cap, small-cap or micro-cap stocks or across sectors such as banking, infrastructure etc. Debt Funds - these funds invest 75-90% of their assets in debt securities. They would choose to invest in a combination of government and corporate bonds, the details of whose allocation is specified in the scheme's SID (Scheme Information Document). Hybrid Funds - these are balanced funds with a 40:60 alloca...

What is Mutual Funds? Mutual funds are collective investment schemes that pools money from different investors to buy capital & money market instruments such as stocks, bonds, government securities etc. The money so collected under each scheme follows specific investment theme(s) so as to cater to the risk-return profile of the investors. A fund manager is typically entrusted to manage such pooled funds and is responsible for investing the money in the said securities. The Jargons.. NAV (Net Asset Value): Price of one unit of the fund, it is calculated at the end of each day by computing the total value of all securities held by the fund less expenses incurred and divided by the total units of the mutual fund Plan type - Grown, Dividend, Dividend re-investment: These are various options available to investors depending on their financial goals and needs. Those who save for long term needs go for growth option while those that need cash at regular intervals would go for div...

The setup of toxic product trap is more perverse now than ever. Take for example the US mortgage sub-prime crisis leading to the financial crisis in 2009 - greedy banks mis-sold poor quality mortgage loans packaged as MBS (mortgage backed securities) to investors all over the world right under the nose of the US banking & insurance regulators. It is the primary responsibility and function of banks to assess the risk profile of its borrowers and extend credit. If a bank issues sub-prime loans, it needs to suffer the consequence of not getting its loan paid back and no one else. This way only those banks that extended poor quality loans would have failed & busted. Instead, the banks decided to pass over their losses to a larger market by manipulating the product and  selling them under the disguise of AAA-ratings with rating agencies as their accomplice . By doing this, the banks have maliciously passed over the underlying (institutional) risk to retail investors - all und...

Investment products need to be broadly investor centric catering to the genuine needs of a wide range of small investors rather than favor a few big fish(es). Ironically, investment products rolled out are based on public policies which gets formulated based on corporate-bias (in developed world) or government-bias (in developing countries). A good example of investor centric product is PPF which is offered on an individual basis (no corporate accounts allowed) and enjoys EEE (exempt-exempt-exempt) status on all three counts - amount invested, interest earned and maturity proceeds. Several bad and notorious examples exist in the market which needs no mention. A constructive example of how public policy combined with good regulatory oversight has helped fortify the retirement nest of the working class is Chile's pension system. The insurers are tightly regulated on two fronts - costs and performance. Insurers are required to bid for managing the annuities of pensioners, thereby...

The budget has been released and as usual some benefits were given and some new taxes imposed. Some of the announcements are still in proposal stage (eg. taxation of non-equity mutual funds) and may be re-considered for clarity on implementation timelines, while others (such as raising of basic exemption to Rs.2.5Lacs) are final. It is argued that India is one of the lowest tax-to-GDP ratio countries and more needs to be done to widen the tax net. A look inside the tax revenue stats reveals some startling data points for us to ponder. Number of Tax Payers in India & their Slabs Slab            No. of assessees (in lakhs)     Percentage of taxpayers 0-5 lakh       288.44                                      89.00% 5-10 lakh     17.88    ...

When it comes to inflation, it is natural to apply it to prices of goods & services. Avid investors would be concerned as to whether their returns from investment(s) beat inflation. But the most forgotten yet important issue is whether tax exemptions and tax slabs have kept pace with inflation. In other words have the tax slabs been inflation indexed? Let us examine where inflation has taken taxes to! Nominal vs Real money value Prior to delving into the subject lets get 2 terms clear. A nominal value is the face value of money - a nominal value of Rs.100 in 2005 is Rs.100 and in 2014 is Rs.100 as well. However real value of money is one that is adjusted for inflation (based on cost inflation index). So, Rs.100 in 2005 is not Rs.100 in 2014, but its real value has dropped to Rs.48.53 in 2014 due to inflation. In other words, if you had paid Rs.100 for a good in 2005, you would have to pay nearly twice that amount, Rs.195 for the same good in 2014 (based on cost inflation index)...

In most aspects of life, black is considered a beauty and is welcome - karuvizhi (black eyes), kaarkundhal (black hair), kaarmegam (dark clouds that brings rain), karungal (black stone that keeps insides of temples cool) and the darkness of outer space! However, when it comes to financial matters, regardless of its short-burst attractiveness, black only gives a headache!! The real estate case of black money.. Most common people engage in black transaction only in real estate deals either because of a desire to evade tax or by simply following a (tax evasive) real estate system in the country where black money is demanded (during a buy) and/or pushed (during a sell). Lets take an example to see how involving black money as part of a transaction is harmful to one's financial well-being. An investor buys a plot of land in 2004 and sells it in 2014. The middle column - "buy(b), sell(b)" represents the case where by the investor buys in black and sells in black (all-blac...

KYC is an acronym for “Know your Customer”, a term used for customer identification process. It involves making reasonable efforts to determine true identity and beneficial ownership of accounts, source of funds and the nature of customer’s business. The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering. Compliance with KYC is mandatory for investing in financial instruments. KYC compliance has taken many avatars prior to current state of affairs whereby you need to do a KYC with your bank and another one for investing in capital market products (Mutual funds & Stocks). The KYC done with the bank is sufficient to buy Insurance products as well. However to invest in any capital market products, you need to do a separate KYC. This KYC is valid to invest in Mutual funds (direct or through intermediaries), stock brokers and to avail portfolio management services. To do your KYC, you need to ...

A century ago, most Indians worked in farms or family trades. We produced and consumed for domestic needs (within 5-50kms) and lived well with all products that were available natively - we never had broccoli or oats, but we had several varieties of millets and keerais.  Neither did we have fiat currency (printed paper that states the value of money held / currency that is not backed by gold or silver). All that we used were produced locally and perhaps bartered from nearby locations. Wealth was real and tanglible - in essence, we were free of finance & financial needs. Through the British rule, we imported several things ranging from the english language to western culture to modern industries, a 9-to-6 job, marks-based education, rank-based-selection, a nice designation, fat pay, retirement, insurance, credit, stock market, speculative trading, wealth accumulation and capitalism. The most recent addition to this list is "Financial Freedom". From being financially free ...

What is an annuity? An annuity is a fixed stream of income for a certain defined period of time. Similar to pension, annuities provide regular income stream during retirement years. Annuitization is the process where by you pay a lumpsum accumulated from years of savings in a plan (such as NPS, deferred pension plans etc) to buy an annuity product which would pay out regular cash flows primarily during your retirement years. One who receives such a payout is called the annuitant. There are several variants of annuity plans available depending on your preference for payout tenure, increments desired, continuing payouts for spouse in case of death of annuitant etc. Types of annuity Immediate annuity - pay with lumpsum & start receiving annuity immediately (eg. LIC Jeevan Nidhi) Deferred annuity - a savings plan where you save some amount every year for 5,10,20 years & then start receiving annuity from the deferred date (eg. UTI pension); Annuity certain - receive a fixed ...

Non-Convertible Debentures are debt instruments sought by investors in bonds. These bonds cannot be converted into equity at a later stage and hence the name "non-convertible". These instruments are gaining popularity in the recent 3 years due to higher returns they offer compared to long term bank FDs. Typically infra companies and NBFCs (Non-Banking Financial Companies) issues NCDs. If the cost of raising debt for such companies gets higher or if they have exhausted their existing credit lines, then such companies issue NCDs to raise funds from public. Most of the NCDs issued are secured, but there are also unsecured NCDs - you need to check for this info in each issue. Unsecured NCDs have higher risk than secured NCDs and carry a higher risk premium. Features Debt is "secured" against assets of the issuer (for Secured NCDs) Liquid instrument as it is traded in secondary markets Suited for medium tenure of 3 to 6 years Need demat account to purchase NCDs a...

This is the latest product launched by RBI in an effort to wean retail investors away from physical assets to financial assets. Since inflation has been a record high in the recent 5 years, Indian investors have been shifting to gold and real estate to protect their savings from inflation. This has dented our current account deficit quite significantly in the last two fiscals. Inflation Indexed National Savings Scheme - Cumulative (IINSS-C) is an alternative to physical assets (gold & property) to motivate retail investors to save in an asset that provides "real rate of returns", one that does not get eroded by inflation. How does it work? Typically a fixed interest is paid on a bond (called coupon). A Rs.1000 bond that pays 8% interest p.a looks good but if inflation (as measured by CPI) is 10%, your real rate of return is negative. In the case of IINSS-C, the interest is the sum of a fixed interest (1.5%) and CPI (consumer price index) of the preceding 3 months, com...

These are closed ended mutual funds that predominantly invest in debt instruments. They can be subscribed through the NFO (New Fund Offer) and redeemed only upon maturity. They are relatively stable and specify in the Scheme Offer Document (SOD) the category of debt instruments in which the fund manager would place your funds. They have gained popularity in the recent 2-3 years due to high yields in Indian bond market. Their tax efficient nature makes them a preferable choice when compared to liquid/debt funds. The only disadvantage is that the funds are illiquid for the entire tenure of the fund. Taxation of FMPs Fund houses issue FMPs with fixed tenure such as 370 days, 500days or 730days. As the tenure is more than 365days / 1year, these securities qualify as long term investments and hence could avail a lower capital gain tax. Long term capital gain tax for FMPs is the lower of 10% without indexation or 20% with indexation benefit. Due to the indexation benefit, the tax realize...

These are long term bonds that provides tax free returns to the investor. This financial instrument falls under fixed income asset class that is issued almost every year by select institutions with the approval of government of India. These bonds carry relatively stable ratings and are considered to be sovereign bonds due to the covering of default risks by government of India. Who issues these bonds? In the previous two fiscal years, the total issue of tax free bonds were about Rs.25,000 to Rs.30,000 crores. For the current fiscal (FY13-14), the approved total sum of such tax free bond issues is Rs.50,000 crores. As the government is fighting the twin deficit of CAD (Current Account Deficit) and Fiscal deficit this year (FY13-14), several institutions such as PFC, REC, IIFCL, NHPC, HUDCO, NHB, NTPC, IRFC, Ennore Ports, Airport Authority of India and Cochin Shipyard Ltd have been granted the approval to issue tax free bonds. What is the nature of the bond? Long term - 10, 15 and 20 ...