Archives May 2020

Most people start buying insurance policy as a means to buy life cover, as small savings and to avail tax benefits. Some others buy children policy, joint-life policy and health insurance. Those who have a home loan would get a home loan cover for the outstanding loan amount. These days getting a health cover is more prevalant. Pension plans and annuities too have gained popularity in recent times. Infact a good majority of the 400 million Indian urbanites have bought some form of insurance or the other (apart from the mandatory motor insurance).

So, why do we buy insurance?
There is widespread belief among us that the sum assured in a policy means premiums paid are returned with assurance. In a way it is ingrained in our minds that insurance is some form of a “capital-protected” investment compared to other financial products such as mutual funds or equities. And given how religiously the Indian middle class pays their premiums over the last 30 years, insurers have been encouraged to offer a variety of savings plans, investment plans, market linked investment plans, retirement/pension plans and the quick selling tax saving plans (especially in March of every year) as insurance policies. To the extent until the pre-ULIP era, buying an insurance policy was considered a very responsible and prudent financial decision of every household.

What is the outcome?
With the opening up of the insurance sector to private players there are over 300 million policies in force – in 2011-12, 44 million new life policies were issued with a combined premium of Rs.2.87Lac crores (Rs.2.87Trillion). To put in a different perspective, in terms of premiums underwritten annually (life + nonlife), the life insurance segment contributes to 4.1% of India’s GDP. This outcome evidently puts insurance as a preferred financial product of Indian households right behind #1:fixed deposits and #2:gold. In terms of corpus accumulated, LIC policies alone have Rs.15Lac crores while all mutual funds (debt+equity) put together is half that amount @Rs.7.6Lac crores (including corporate accounts).

Some guiding questions..
Now that your insurance policy is no longer a pure risk cover and that it has an element of investment/savings attached to it, inquire along the below lines:

Consult with your advisor to help you find the right answers and guide you to make prudent insurance and investment choices!

Insurance is a risk cover, it offers monetary protection against unforeseen circumstances primarily loss of life. It offers an immediate estate to the bereaved family to help them meet their life’s needs for a petty sum to be paid periodically called the premium. There are a plethora of policies to suit a variety of people with diverse needs and premium paying capacity. Let us look at them in detail.

What are the types of Insurance?

Broadly there are 3 types of insurance that a policy holder need to be aware of – Life, General & Medical. Life insurance takes care of providing the family with a lump sum upon demise of the policy holder. General insurance is primarily your vehicle, property and travel insurance. Lastly medical insurance provides cover for your hospitalization expenses. Among life policies, there are again different types of policies to cater to the needs of diverse risk groups.

Do you know your insurance portfolio?
Take a quick self-test to check if you know all the policies in your insurance portfolio (by name and by type) and whether you fully understand the features, returns and restrictions they offer/impose on you.

How do you know which policy is suitable to you? Consulting a financial planner could bring clarity, structure and method to buying the right insurance policies that specifically covers your needs & risks. A planner could help you arrive at a life cover based on your needs and premium paying capacity and recommend suitable products. As for your savings, investment and tax planning needs, the planner could work with you and help you choose products that yield higher returns over the same/reduced tenure with equivalent (low) risk characteristics. In many cases clients find that doing an insurance portfolio review with a financial planner has produced outstanding outcomes that are beneficial both in terms of reduced premiums (up to 70%) as well as substantially higher returns (418%) over a 20-25 year time horizon. In this way you could ensure that you get the most out of your insurance portfolio!!

Were you one of the recipients of a letter from the income tax department regarding non-filing of your income tax returns owing to some transactions you have done since 2010? If yes, you are not alone. The department has sent out letters to several lakhs of PAN holders who have done certain transactions, which the department classifies as “high value transactions”.

With effect from FY2016-17, for items (2) to (6), the limits have been revised to Rs.10 Lacs p.a. And post demonetization, the government has banned all cash transactions over Rs.2 Lacs, with a penalty for violation equivalent to the amount of cash transaction.

What should you do?

While many tax evaders have been caught through this exercise, some PAN holders (mainly senior citizens) whose income was below the tax slab were also sent this notice as they may have sold inherited shares for over Rs.1 Lac or have invested over Rs.2 Lacs in Debt Mutual Funds to generate tax efficient retirement income. Nevertheless, such assessees only need to submit a response via the compliance section of the IT portal and file their returns as a safe means to declare their income for the respective year(s).

Who should file a tax return?

If you have done any high value transactions in a year, file your returns, otherwise the department will make you file it. Also, if you forgot to submit form 15G/H, TDS will be withheld on your interest payments – department will send you communication to file your returns – so file a return and claim the refund of the TDS withheld. Other cases where filing of returns is mandatory:

• Gross total income before deductions exceed Rs.2.5 Lacs (Rs.3Lacs for senior citizens)
• Long term capital gains from sale of shares, although exempt from tax, must be declared
• Individuals with incomes of more than Rs.5 Lacs must do electronic filing
• And ITR-3, 4, 4S, 5, 6, 7 have to be mandatorily e-filed

In the first round, IT department has sent out such letters for transactions done from FY2014-15, however it is learnt that letters are also being sent to assessees for high value transactions from FY2010-11. While you may have filed your returns, do take stock of transactions done by non-working members and senior citizens in your family!

When an Indian leaves his/her homeland and stays abroad for more than 240 days in a year (240 days is wef FY20-21, prior to that it is 182 days), s/he becomes a Non-Resident Indian (NRI). NRIs have been given special economic status and they enjoy certain benefits but are also restricted from availing others. Given that NRIs live in different countries, depending on India’s bilateral pacts with the respective countries, investments, repatriation and taxation differs vastly in each case. This becomes complicated for NRIs to make investments and deal with taxation on investment gains. In order to reduce the tax burden of NRIs from being doubly taxed in India as well as in their country of residentship, DTAA (Double Taxation Avoidance Act) was signed by India with over 70 countries.

How are NRIs taxed?
NRIs will have to pay tax on their Indian income, if it arises under any of the heads as described in the Indian IT Act. This may include rental income from house property, business/profession income, capital gains from sale of immovable assets & market securities (short-term & long term rates differ) and interest income. Several tax-reliefs have been made available to NRIs at par with resident Indians. These include 80C, 80CCC (contribution to pension funds), 80CCD (New Pension Scheme), 80D (medical insurance premium for self, family & parents) and 80E (interest on education loan). Tax liability needs to computed by taking into account DTAA provisions applicable in each case.

How does Tax planning help NRIs?
Proper tax planning is critical not only during income accumulation stage of an NRI, but also gains significance in the case of returning back to India post retirement. NRIs typically have assets spread internationally. For returning NRIs, the tax implications of global income in India and in the country where their assets are held would become paramount since their residency changes. They may also have US$ liabilities to pay off for higher education of their children, management of property investments abroad and some insurance obligations.

Apart from income tax, wealth tax aspects of Indian and global assets need to be taken into account. And Indian Income Tax laws change almost every year rendering it impossible for one to follow up with in light of all other responsibilities shouldered. This is where a Financial planner possessing sound knowledge in NRI taxation could add value to NRIs in advising the right investment vehicles to choose during income earning stages as well as during retirement. A Financial planner could proactively plan to ensure their NRI client’s tax liabilities are minimized not just in the year of capital gain or in the year of returning back to India for resettlement, but through out the asset building phase of their lives.

For most people a second property is usually an investment property. Once the EMI for the first property is fully paid up or when additional income becomes available, people would start shopping for their second property. Just be aware that as with any investment, past performance is not an indicator for future performance in real estate as well.

Common mistakes when choosing your investment property..
The criteria used for the first home-buy greatly influences the second buy (both positive and negative influences). For example, if you had bought a first home in the city, you might want a second property tucked away from the hustle of the city. You now look for a suburban property which is in a quiet neighbourhood – and choose a property that meets your (self-occupation) criteria. The often forgotten objective at the time of choosing this property is that this is an investment property and not meant for self-occupation. So, when choosing your investment  property you need to keep in mind your potential buyer’s criteria (and not yours). This ensures that your investment is attractive to a potential buyer 5 years or 10 years down the line when you actually sell it. In this way, your property could be sold within a short timespan to the right target segment. Otherwise you would end up with a prolonged sales cycle and this could translate into lost opportunity cost.

Financial checklist for your investment property

The Financial planner advantage While property forms a main component of your investment portfolio remember it is not your only investment. Property is part of your overall investment planning. For people in the younger age group (<40 years age), property could make up to 70-80% of their portfolio, leaving very little to meet their other life-goals. Consulting a financial planner could help address the below issues:

It is also important not to undermine the risks of investing in real estate – it is not a liquifiable asset (not easily sell-able) during economic downturns and there may be periods in which it may not provide rental returns. There have been downturn periods even in the recent 10-20 years where real estate prices have receded and not offered investors with the expected return. Careful planning of your investments and striking a balance between real estate and other assets is critical in ensuring all your financial goals are well attended during your income earning phase. Depriving some of the goals and going overweight on one asset class would be akin to putting all eggs under one nest.

Buying your first home is very special as it makes you the proud owner of an asset that is considered SECURE by one and all. These days plenty of options are available to a home buyer to choose his dream home. Some prefer to choose their home in the heart of the city and look for new apartments or resale flats that are in close proximity to best schools and hospitals. A younger generation of buyers might choose to live in the suburbs as it offers modern comforts such as swimming pool, gym and a shorter commute to their work in a suburban IT/business park. There are also other buyers who are interested in custom building their home (villa-style). These buyers would buy a plot and build their home to suit their specific lifestyles.

Plan your finances right!

Regardless of your choice of home, it is very important to plan your finances ahead of the purchase. Some of the basic steps involved in planning are determining the monthly cashflow available to pay as EMI (Equated Monthly Installments) and arriving at a reasonable loan amount and tenure. Typical loan amount availed is 80% of the purchase price, although this could be varied to suit the risk appetite and risk attitude of the home buyer. A complete breakdown of the cost involved and payment plan needs to be obtained in case of a builder marketed property. Aside performing legal verification of documents, it is also imperative to check on all the extra/hidden charges involved such as car park cost, registration & stamp duty, recurring maintenance fees and so on.

How could a Financial Planner add value?

Although an individual would be able to work out the basic math using inputs from family and friends, consulting a Financial planner would bring significant benefits in terms of overall cost savings to the home buyer. Some of the issues facing a home buyer today are:

A financial planner would be able to address the above issues and provide guidance in structuring your home loan in a cost-efficient and tax-optimized manner for the entire tenure of the home loan. In the event of rising incomes in subsequent years, the planner would also be able to best advise whether to foreclose the current loan and/or to commence investment in other assets.

Gold gave pretty flat annualized returns of 1.3% from 2013 to 2018. From May 2019 to May 2020, the precious metal rose 33% and everyone is looking up to invest in gold. However, the question is would it provide good returns if one invests now? This blog examines the reasons behind the rise of gold in recent times and whether it merits investment by a retail investor.

What has driven up gold price?
The largest holders of gold are central banks. Sovereign wealth funds, pension/hedge funds (>$30Tn in physical gold) & ETFs are other institutional investors in the yellow metal. These funds increase/decrease gold holdings depending on their “perceived” asset risk and/or to diversify in relation to other assets they hold. In 2019, Central banks around the world have purchased 374 Tons of gold, driving up its price from $1300 to $1500 per ounce till Aug. Subsequently instituitional investors took it up to its current price @$1700.

Why do Central Banks buy gold?
Central banks around the world hold reserves in a variety of assets ranging from USD, Euro, foreign debt & Gold. They buy gold to diversify their holdings and to derisk from USD in uncertain times like war, recession, trade war etc.

Who are the largest holders of gold in the world?

Total world gold production in 2018 was 3.3k Tons. Interestingly, China is the leading gold producer (404 Tons) followed by Australia (319 Ton), Russia (297 Ton), US (222 Ton) & Canada (190 Ton).

Cirque de USD??
USD is world’s reserve currency today. Gold is seen as a way to diversify from USD. But gold is denominated in USD – while US itself holds the largest gold reserve in the world & is the 4th largest producer of the shining metal. Oil is also denominated in USD, while US is the largest producer & consumer of oil.

So what’s the relationship between Gold & USD?
For the most part, Gold & USD has had an inverse correlation relationship. Historically, when USD weakens, gold rises – with the only exception being 2009-13 during Fed’s QE (Quantitative Easing), when they exhibited direct correlation, ie both increased. With Fed’s tightening of QE since 2014, USD was getting stronger – this explains the meagre 1.3% return from Gold between 2013 to 2018. However with the recent escalations in trade war conflict, covid-19 and greater economic and life loss, demand for the yellow metal has risen.

Is it then a right time to invest in gold?
In the wake of covid impact, the Fed and central banks around the world are again on the anvil of printing money. So, in the near term, gold is expected to appreciate until the uncertainties subside. But, retail investors being small fry compared to central bankers around the world, which way gold moves and what kind of returns it may deliver are largely dependent on politics, trade & macroeconomics.

Gold as an asset class does not generate income (except if you buy Sovereign Gold Bonds), so it is recommended that retail investors hold no more than 10-15% of their total networth in the yellow metal. While it has delivered 4-8% annualized returns over 10,20 & 30 year periods, it has also fallen by 35% in some years. In order to cushion the downside, it helps to limit one’s investment in the aurum to a pre-determined threshold.

The rapid spread of the novel coronavirus (aka Covid-19) across 104 countries in the world has caused panic and fear in the lives of people like never before. Stock markets across the world have fallen by 30% within a very short span of 3 weeks (Mar-Apr’20). Combined with the fight for market share of oil, launched by Saudi against OPEC+, it is not too clear how much more the markets will fall from this point onwards.
On the one hand, while people are deeply distressed about the health & safety of their families, they are equally concerned about their job, investments and what the future beholds for them. Several questions arise in the minds of people – although we cannot address the health aspects, we shall try to address some of the key financial health issues here.

Questions from an investor – What should I do?

Qn1: Should I sell my stocks? Markets have fallen by 30-35% already, primarily due to the exit of large institutional investors. If your investments are in good performing & well managed companies with low debt, they will recover over time. Selling now will only guarantee you a 35%+ loss. So, NO, please do not sell good stocks, but if you hold poor quality companies (like YES bank), they could all be be washed away in this covid tsunami.
Qn2: Can I buy some stocks? For those of you trying to bottom fish the market, one word of caution. Governments & people world over are still trying to get a grip of this community virus on their life & death. Only when an assessment of Covid’s impact to economies, businesses, trade & jobs become apparent (which might take another 1-2months), it would be rightly reflected in asset prices such as stocks and gold.
So, while some quality stocks have corrected 30%, no one can guarantee that they wont fall further by another 10 or 20%. If you believe that it is a right price for a quality stock, YES you may enter now, but please do not infuse a big lump-sum, try to cost average and buy at different low levels from now on.
Qn3: Should I stop my SIPs? Your Equity Mutual Fund portfolio would be in RED, reflecting the fall in stock market. But, this is the best time for the mechanics of SIPs to work and boost your returns in the long term. If you stop your SIPs now, you are only depriving your portfolio of the much needed chance to buy cheap at these lower levels.
So, NO, please do not stop or sell your Equity mutual funds. You started these investments for a reason, more specifically for a GOAL, to educate your child or to save for your own retirement. Today a part of your EPF, NPS and that of your market-linked insurance schemes are all being invested in the market. And your EPF trustee, NPS manager and Insurance House are all not pulling out of the market – when you wont STOP contributing to these instruments, why stop your SIPs, think again!

What should YOU do? – From an Advisor

With a looming recession and jobs at stake, many businesses (airline, hotels, export-oriented business etc) will come under duress and there is every chance that some ill-managed ones will go bankrupt. Please take the below measures on your investments.

1. Go back and look at your asset allocation – most people have 60-70% of their assets in fixed income instruments like bank FD, Company FD, Bonds & Debt Mutual Funds.
2. Review the health of all those papers that you hold.
3. Redeem / foreclose any Company FD or Debt fund that is vulnerable to a cut in credit rating.
4. Take help from your advisor & ensure all your fixed income holdings are in high quality papers (majority AAA rated).
5. Get out of low quality FDs, bonds, NCDs and Debt funds.
6. Do not get hyper-excited about stocks – they may only be 10-30% of your asset allocation and hence do not merit your 100% attention.
7. Stocks can cause panic and what is worse is it could distract your attention away from the larger fixed income asset allocation that you hold – so pay attention ONLY in proportion to your asset allocation, nothing more.
8. In case you have a higher allocation to equities and find yourself in a sense of uneasiness with the current fall in stocks, it is time to REVIEW your risk profile with your financial advisor!

On the personal side, at this juncture, most people are prudent to cut down all unwanted expenses. However, for those who did not cultivate the habit of having an emergency fund, here is a crisis and in case of a job loss, your 6 month emergency fund is your only savior. Similarly, for those who do not have a health insurance, here is the day that makes you realize the importance of having a health cover for you and your dear ones.
Above all, for those with debt, the system will offer you with more loans – the most important thing is to resist taking on more debt. Do not be tempted to take on any personal loan or use that credit card if you do not have a genuine NEED and have the propensity to repay it. It is trying times for all, but with precautionary measures, as a human race, we shall come out of this crisis together and recover both our health and wealth!