MoneyVedam

Knowledge, Discipline & Time are the 3 vertices of an investment triangle. In this issue, we are going to examine the next 2 vertices of the investment triangle – Discipline & Time. Discipline is easy when imposed Discipline in investing is an essential ingredient to successful investing. When we stay invested in a right asset over a longer duration, it certainly pays off. Let us take Suresh, a teacher, who has a home loan EMI to pay for 15 years. Only if he pays his monthly EMIs regularly without fail, he could own the property at the end of the loan tenure. Paying a monthly EMI is a huge commitment and requires discipline on part of the investor. Similarly, take Sara, a lawyer, who pays the premium for her parent’s health insurance policy. Only if she pays the annual premium in a disciplined manner, her parents would be able to avail the hospitalization benefits. Most of us diligently pay our periodic payments in a disciplined way, like Suresh ...

Knowledge, Discipline & Time are the 3 vertices of an investment triangle. In this issue, we are going to examine the first area - Knowledge. Knowledge is foremost As investors, we need to be aware of the various financial products available in the market. Without first hand knowledge of various products, it is easy to fall prey to quick sales tricks and part our money to unsuitable products. Let us take the case of Anand, a manager in a private sector firm. In 2017, when he received his bonus, his relationship manager called him and recommended him to invest in Arbitrage funds (AF). The primary reason cited to him being good returns and no long term tax since arbitrage fund is treated at par with equity funds. It was further explained to him that a portion of the arbitrage funds would be invested in derivatives to cover any fall in stocks held by the fund. Anand was convinced and invested his entire bonus in one such arbitrage fund. However, Anand is very disappo...

In the last issue, we explored 4 major leakages, which if prevented, could go a long way in saving your hard earned money. In this article, we are going to see 4 smaller but recurring leakages, which if left unnoticed, could deprive you of a significant contribution to your long term wealth. Leak 5 – Tax outgo EPF/PPF, children’s education fees & any home loan principal you pay takes care of your income tax rebate in section 80c. However, for those in the middle years of their career, who have completed their EMI liabilities, you may wonder if there are avenues beyond section 80c to save tax. This requires a fundamental shift in viewing assets as cash (or) capital assets. Cash assets such as bank FDs are draining on tax, so you may consider switching a part of them to tax efficient capital assets such as debt funds to plug the tax leakage. Lets say Guru has Rs.25Lacs in bank Fds and he falls in the 30% income tax bracket. At 7% interest, he earns Rs.1.75Lacs on whi...

So far we have seen how to measure the combined returns of one’s asset mix, called the portfolio, understand the difference between nominal & real returns and took a further step to examine the 3 different types in which assets are classified. In this issue, we are going to look at increasing your savings, while keeping income constant, by plugging the leaks on the expenditure side. Income – Savings = Expenditure Most of you may be familiar with this arithmetic, “Income – Expenditure = Savings”. The problem with this math is expenses being variable, savings too becomes variable. This is not good for your financial health in the long run. So, it is important to first select a certain fixed percentage (10% or 30%) of your income as savings and then spend the balance. Leak 1 – Insurance policies Insurance is required only to compensate you for any loss, other than term & medical policy, rest are not required for an individual. Insurance is not an investment, ther...

In this third classification of assets, we are going to understand assets based on whether they could be quickly converted to cash, a parameter more commonly known as liquidity. It is a key characteristic that ties an investor’s preference to a particular asset class. Assets that can be easily converted to cash form Movables and the rest form immovable assets. Movable Assets Most of the cash assets such as bank FD, RD & Post office schemes and capital market instruments such as open-ended mutual funds & stocks are liquid and form part of movable assets. There are 2 stages in one’s life when most people desire to have a higher percentage of the movable assets in their portfolio. They are: - Buying a dream home - Children’s Education/Marriage Lets take Robin who is building his dream home. Due to an unexpected rise in the cost of certain raw materials, say his budget overshoots by 20%. He now needs extra cash to meet this shortfall. Even if he has other properties...

In the previous article, we saw the classification of assets into cash & capital assets. In this issue, we’re going to classify assets based on the returns they generate, into appreciating assets and depreciating assets. All of you would like your money to work harder for you to provide financial security for you and your family in the future years. Hence, it is important to understand the difference, so that your hard earned money does not disappear in depreciating assets. Appreciating assets Appreciating means growing in value over time. And from experience, we understand property and even certain cash assets like recurring deposit & PPF are appreciating assets. Just as how land & property appreciates over time, mutual fund units too appreciate in value. Not only have their returns beaten inflation, in certain categories such as equity funds, they have offered the best returns among all asset classes over the last 10-20 years. Lets take the case of John, who ...

Assets could be classified in three ways based on their nature, returns and liquidity as cash & capital assets, appreciating & depreciating assets and movable & immovable assets. It is important to understand assets from each of these classifications so as to build a right asset mix that is unique and suitable to each investor. Cash assets Cash assets primarily help to meet present needs in the short and medium term, up to 3 years. Cash is regarded as “King” because it helps us buy things for our essentials, comforts and luxury. It helps to immediately satisfy one’s needs in the present, be it our food, health, education or travel. Some of the popular cash assets are bank fixed deposits, post office savings schemes, money-back insurance policies etc. Cash assets are generally regarded as safe, offers moderate returns and are taxed based on your income slab. In your income earning years, you may not need to hold more than 2 years of expenses in cash assets. How...

In the previous article, we sought to explore if there is any magical number to measure good return. And yes, that magical number is based on your real return. To understand real returns, it would be good to begin understanding inflation. There are two types of inflation, wholesale and retail. The retail inflation (a.k.a CPI) measures the price rise of a common basket of 460 commodities primarily used by indian households. Wholsesale inflation is used for national GDP accounting, while retail inflation is adopted by RBI for determining interest rates in the country. It also forms the basis for wage rise. Inflation-adjusted Income to meet Cost of Living Senthil, a professional is 43 years of age. Let us say 20 years ago, in 1998, Senthil earned Rs.8000/- and at that time, his family’s expenses were about Rs.5000/- p.m. At an average wage rise of 12% p.a and an inflation rate of 6.5% p.a, today his income rises to Rs.77k p.m and basic expenses rises to Rs.17k. However, due to h...

We know that when we invest our money, we get returns, measured either in absolute amounts or as a percentage of our investment. But what exactly is a return? We part/lend our savings to someone, who borrows it and pays us a small sum until they return our entire money back. This small sum is called return, which could be periodic or single lumpsum repayment. How do we decide if a return is good? Before we attempt to answer this question, lets look at some returns that we're familiar with. Kala lends her savings to a bank as Fixed Deposit & the bank returns her 7% Ram invest in stocks & the company pays him a dividend of 1.5% Mangai buys gold & gets no return till she sells it Siva rents his Rs.60 Lacs apartment/house and gets Rs.15,000/- p.m, i.e, get rental yield of 3% Arul buys a plot of land & gets no return till he sells it If we compare the percentage returns of the above people, we would be inclined to conclude that Kala’s...

Last week the Turkish lira fell by 20%, inflation spiking to 15.9% and spooking stocks & currency markets worldwide. Subsequently, all emerging market currencies came under pressure, leading to a fall in stock indices as well. This blog explores what lies underneath the recent currency market rout. Background - Trade war leading to Currency war? The US has imposed sanctions on Iran (missile test) & Russia (annexing Crimea). First, the US started pressurizing major oil importers (Germany, China & India) to switch out oil from Iran & Russia. Next, it imposed tariffs on Chinese exports, with China too imposing retaliatory tariffs on the US. And now, it initiated a political row on Turkey by asking Turkey to release Andrew Brunson, a pastor, arrested by Turkey for a planned coup against Erdogan, the Turkish PM. All this has resulted in carnage in the emerging market currencies. As evident from the above table, the Lira, Rial & Ruble have all been directly h...

On 9 Aug 18, Nifty hit its new peak 11,470 from the recent low of 10,200 on 2 Apr 18, a 12% return in just 4 months. This blog examines the reasons behind this sharp rally. SEBI Re-categorization churning? Of the Rs.23.4 Lac crore mutual fund assets, about Rs.7 Lac crores (30%) are equity based assets. Between April & July, the fund managers churned their fund portfolios to comply with SEBI's new norms. As part of this churning, many managers had to cleanse their large-cap and diversified funds by selling the disproportionate mid & small cap stock holdings - this led to a possible correction in mid and small cap indices. Additionally they had to re-invest the proceeds in large-cap stocks in order to rightly qualify as a large-cap fund. The total sale by DIIs (Domestic Instituitional Investors) during apr-july 2018 was Rs.2Lacs crores, compared to Rs.1.7Lac crores sale in the same period in 2017, an 18% rise. Nifty rose by 5% during this period (10200 - 10700), in c...

In the recent two months, investors in Mutual Funds have been receiving communication from their respective fund houses on change of fund names, returns, benchmarks or even mergers with other funds. These changes are as a result of our capital market regulator, SEBI's constant endeavor to make the fund selection process investor-friendly. Background Today India has about 40+ fund houses and 3000+ schemes, often carrying names that do not reflect the underlying fund characteristic. This presents great challenge to a retail investor to navigate the ocean of schemes & identify the right funds for him/her. To simplify this process, SEBI in Oct 2017, mandated that all fund houses must categorize their schemes under 5 broad schemes Equity Debt Hybrid (Equity+Debt) Solution-oriented (Retirement, Children's fund) Others (Fund of Funds, Sector/Thematic & Index Funds) The most useful change by SEBI is allowing only ONE fund under each category by a fund house. This m...

This budget brings in key changes to equity investors & senior citizens. Salient points are presented below for quick reference. Only when the budget is blessed by both houses of the parliament, the effective date(s) of these changes will become firm. An across the board change in direct tax is revision of Education cess as "Education & Health Cess" from 3% to 4%. Investors Re-introduction of long term capital gains (LTCG) tax on equity shares and equity/equity-oriented mutual funds @ 10%. It covers Arbitrage funds, Balanced funds & Tax-saving ELSS funds as well. For shares, long term capital gains in excess of Rs.1 Lac from Jan 31, 2018 would be taxed at 10% Dividends on equity funds to be taxed at 10% as distribution tax - they are no longer free! 54EC capital gains tax savings scheme is now restricted only to capital gains from land & building. The lock-in period is also extended from 3 to 5 years. If you made a long term capital gain in debt mutual...

The most popular product that is sold on the premise of tax breaks in this country is insurance. Arbitrage funds probably comes next, especially in the wake of demonetization. As these funds are gaining momentum, let us examine what it offers! Definition Arbitrage Funds (AF) is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the asset. In simpler terms, this fund mimics a stock trader with his position covered. It buys stocks in the equity market and simultaneously sells it in the derivatives market. The price differential between equity market & derivatives market is used to generate returns for the fund. Performance Arbitrage Funds perform very well in bull markets, when volatility is high and money market yields are low - present times. And they do not perform in stagnant/bear markets and when money market yields are high (2010-2013). Although the performan...