Category Index

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!

For most people, finance is the second most worrying factor, next to health. Throughout one’s active career, we face uncertainties about our future income, job, rising costs and desired returns from assets. On the other hand, various liabilities and expenses arise all through our lives. At times, when incomes match expenses, we get by. At other times, when there is a mismatch, it gives rise to stress about our finances. Such situations could be addressed if only we plan our financial journey.

How does a financial plan help?
A plan of your finances is very much like any other plan you make in your life. It has a goal, a purpose and more importantly a method to help you achieve each of your goals with reasonable ease. In its simplest form, a financial plan gives you the focus to secure your financial future.

When your money matters are in order, it frees up your mind and you tend to better focus on various other aspects of your life. This allows you to be successful and happy in whatever you choose to do. Hence, financial Wellness is all about “being-at-peace” with your finances.

How could YOU attain financial wellness?
The evolution of financial market in India presents new investing opportunities to YOU as an investor. From the traditional and time-tested bank fixed deposits, today’s markets have rapidly grown to present a plethora of financial products to investors like you.

Although you may have an overall understanding of popular products, investing in them requires deeper knowledge of the finance triology risk-return-tenure. However, with good quality guidance, today it is practically possible to make your money work smarter for you and create lasting wealth. Once you see that your plan works, you become a confidant investor and attain peace with your finances.

The single most investing challenge faced by investors today is “free-advise”. Here is a look at the issues, consequences and impact caused to you by such free advise.

1. Wealth erosion occurs when you are are looking for an investment product but sold an insurance policy.
2. A product-mismatch occurs when say you are looking to open a bank locker but your bank pushes you to sign up for a 20 year premium paying pension product.
3. A risk-mismatch occurs when you look to enhance your returns in safe products, but you are sold an equity savings fund – you are pushed to buy a high risk product on the pretext of returns.
4. An asset allocation mismatch occurs when someone prods you to buy your third property or gold without understanding your allocation is low to liquid assets.

So, at the end of 10-15 years, you hold many investments, some with positive returns, some negative and others with no idea on returns. As an investor, you find it nearly impossible to comprehend exactly how much return all of these investments collectively gave you – why?

Because the above approach is based on free advise whereby a product is pushed to you without trying to understand your actual needs, goals, risk ability & return expectations. Items (1) to (6) belongs to product-based-investing & (7)&(8) are returns-based-investing. These approaches often leave investors’ with a basket load of products that are not aligned to the timeline in which they actually need the “cash” to spend for their liabilities (like child’s education or retirement).

A goal-based investing approach gives you undeterred focus on your big picture and help you wisely invest towards fulfilling those goals at timeline(s) they become due.

As we progress in life, we make investments and derive income from multiple sources – wages, interest, rent, capital gains and so forth. And we are liable to pay tax on all such incomes, albeit at different rates. While all these incomes are “money”, the tax law distinguishes them into 2 categories – Cash Assets & Capital Assets.

Certain assets such as fixed deposits and recurring deposits form cash assets. These assets are generally regarded as safe, offer moderate returns and are taxed based on your income slab. On an average, about 60-70% of one’s financial assets is held in fixed deposits, which are highly taxed (30%).

Physical assets such as property, land, gold and capital market instruments such as stocks, bonds & mutual funds form capital assets. From a tax perspective, capital assets are more tax friendly than cash assets.

First, we understand the tax liabilities arising from various sources of your current year’s income and recommend investing in suitable tax saving instruments in a structured manner. This enables you to obtain the dual benefit of saving tax as well as gaining better ROI from these investments.

Next, we delve into your existing asset structure and identify areas of major tax leaks. Our tax planning could show how a simple re-structuring of your assets could help you not only save tax, but also double / treble your returns!!

The focus here is to save tax outgo from your hard earned income accumulated over several years of your career and make your money work smarter for you. This is where we could add significant value to you in saving excess taxes year-over-year for many years to come.

While resident taxation is sufficiently complex, needless to describe the state of NRIs as they are far more stretched on time to attend to tax matters in more than one country. This is an area we could be of assistance to NRIs – from determining if they are liable to file their tax returns in India to covering tax aspects of investments, capital gains and repatriation (with DTAA as applicable). Planner’s value-add comes in specifically to returning NRIs who needs advice on tax implications of their overseas income/assets in India and in preserving their dollar-investments against rupee depreciation.

Typically individuals are led to buying high risk products with a hope of high return, especially after markets have peaked out. This approach leads to low returns or losses to investors. As a result, they stay out of capital markets due to the mis-trust created by their sour experiences. A win-win solution to this problem is to move from product-based investing to goal-based investing.

Based on client’s investment preferences, Planner builds a customized portfolio with a mix of instruments such as Mutual Funds, Bonds, Equities, ETFs, Gold, Silver, Small savings / Post office instruments, bank term deposits and overseas assets.

While traditional instruments like bank FDs and post office savings need no expert monitoring, certain other products such as mutual funds need to be continually monitored by an expert due to changing market dynamics. Even within mutual funds, debt funds exhibit a completely different behavior when compared to equity mutual funds.

Given that most investors have about 50-70% of their portfolio in debt instruments, managing them periodically in light of the above debt market dynamics becomes a defacto mandate. The recent overnight closing down of 6 debt funds by Franklin (in Apr’2020) are the exact scenarios where your investment advisor could help you tide over poor fund choices. This is why investment management is an on-going process and requires investors’ portfolio to be managed by an expert continually.

The rise of the new middle class has opened up the Indian financial market with a new range of products that the previous generation had not heard of. As experienced by us, some of the new instruments offer outstanding returns beating inflation in the long-run while others have depleted our personal wealth. This has led to a mis-conception that new financial instruments are loss-making and that it is better to stay away from them. However, with expert guidance and adequate knowledge on the new financial products, investors could reap good returns in the long term.

Some of the questions individuals raise go deep in unearthing their real financial need, for example:

Today, Financial experts help address these fundamental questions for clients. We have the necessary knowledge, expertise and tools to evaluate the various investment products available in the market and to recommend suitable products based on your risk appetite.

What areas of personal finances are covered?

Wealth building is a critical exercise in ensuring your long term financial security.  Primarily it equips you with sound knowledge to make informed investment decisions that are right for you!

With interest rates falling further and holding period for capital gains reduced from 3 to 2 years in the budget, new buyers and upgraders are looking to get the best realty deals. However, not all is done upon locating the property to buy. Choosing a right home loan product is vital to ensure that your hard earned money does not pay for exorbitant interest costs.

Home Loan – Product

A home loan comes with a variety of options and bargains but borrowers are not usually presented with all the available choices to make an informed choice. They are usually sold a product which may not suit them best. Let us take a case of a new buyer (or) an upgrader who seeks a loan of Rs.30 Lacs. This buyer is typically coerced into a 30-year “Fixed interest rate home loan” based on the lowest EMI option of Rs.23k per month. As this amount is close to the rental outgo of the buyer, s/he readily tends to accept the product.

A “Fixed” interest rate is in favor of the borrower if only the macro-economic condition is in a low interest rate era (2017). Longer tenure means lower EMI, but it also means higher interest payments to the bank. Shorter tenure means higher EMI, but an overall reduced interest outgo for the borrower.

Low interest rate era

When we are borrowing in a low interest rate era as in 2017, then the interest outgo of fixed rate (A) & floating rate (B) is almost similar for a 30 year tenure. In either cases you’d be paying a whopping Rs.54 Lacs in interest on a Rs.30 Lacs loan. So, it is advisable to reduce the tenure to 15 years. If you do so, your EMI goes up from Rs.23k to Rs.30k p.m, while your total interest outgo is reduced from Rs.54 Lacs to Rs.25 Lacs, in cases (C) & (D) . Though in a low interest rate era, the difference in interest between (C) & (D) is not much, any further fall in interest rates could work to your advantage. So, pick a floating rate option with shorter tenure (D).

High interest rate era

If you were to borrow during a high interest rate era such as in 2013, then floating rate (Q) is way better than fixed rate (P) for a 30 year loan tenure. You may note that in fixed rate (P), you’d be paying Rs.50 Lacs interest (vs) the floating rate (Q) case, where you’d not only be paying a lower interest of Rs.37 Lacs, but you’d also be able to close your loan in 20 years. However, a prudent choice would be to go in for floating rate with lower tenure (S) to ensure you pay the least interest of Rs.25 Lacs on a Rs.30 Lacs loan and close your loan in 13 years. So, when you are in a high interest era too, it counts to choose a floating rate loan with a shorter tenure (S). 

Could total interest outgo be reduced further?

When you get some handy cash or bonus, you may want to quickly make a pre-payment to your home loan. Pre-payments done within the first 1/3rd period of the loan tenure (Eg. in the 5th year for a 15yr loan tenure) significantly reduces your interest outgo. The above table shows that prepaying even Rs.6L (20% of loan) at the end of 5 years, helps to significantly lower both the interest outgo as well as loan tenure across all scenarios.

While pre-payments are allowed at ZERO charges in a floating rate product, fixed rate borrowers may be charged a 2-4% penalty on pre-payments, if it is not from their “own source” of funds. The reason is in the floating rate case, borrowers already bear the interest rate risks, while in the fixed rate case, the banks bear that risk and hence require to be compensated. However do note that the banks have made the pre-payment process quite painful for fixed rate borrowers. Another reason to pick a floating rate home loan.

Before signing up..

The interest rates on your bank FDs will tell you in which era of interest rates you are placed. Ensure to get a couple of amortization (home loan) quotations & check on pre-payment options before signing up with your bank/housing finance company. Then, pick the best quote with a lower tenure even if it means a slightly higher EMI initially (your salaries will only go up with time & you’ll learn to spend wisely). Just ensure to keep 6 months of EMI in a FD for any contingencies and buy a single premium home loan insurance to cover your loan amount. Alternatively, you could also consult your financial planner before choosing a home loan product. You’re then all set to sit back & enjoy your new home!

Risks

Mutual Funds invest in securities such as stocks and bonds which are actively traded in the stock exchanges. Hence the risks involved in investing in the underlying stocks and bonds are applicable to the Mutual funds holding these securities.

• Equity funds would carry the highest risk since they are subject to volatility in the stock markets due to micro or macro-economic factors.
• Debt funds invest in government and corporate bonds, so they carry moderate to low risks. These funds are subject to macro-economic performance of the country (fiscal and trade deficit), interest rate situation, inflation, forex currency fluctuation and so on.
• Liquid funds carry the least risk since their tenure is low and most of them invest in sovereign gilt (government papers) which carries very low risk of default (for India at the moment).

Costs

The fund house charges you a fee as a fund manager actively manages your funds. There are annual expenses, management fees, distributor fees (upfront commission, trail commission etc), which are all lumped together and published as “Expense Ratio” of the fund. The expense ratio could range from 0.5% to 2.75% depending on the fund category. Generally ETF funds, gilt and passive funds charge a low fee while equity funds charge high fees. You do not need to pay the various fees explicitly but it all gets deducted from your units’ NAV value at the end of each day. Be aware that a very high expense ratio + average performance could erode your wealth, so when choosing a fund, you need to consider a fund’s expense ratio in addition to its performance.

Returns

Returns are commensurate with risks and investment horizon of the funds. For example, it is not prudent to invest Rs.5Lacs in equity funds if you need the money within 2-3 years. Similarly if you’re looking at wealth creation, it does not make sense to invest in gilt funds – for this goal, equity funds with 7-10years horizon is more suited as it could provide a CAGR (Compounded Annual Growth Rate) of 15-20%, which could not only beat inflation but also multiply your investment by 4x-6x.

Buy thru a distributor or online platform or direct from the fund house?

If you are investing through your bank or any of the popular brokers, they act in the capacity of a distributor. This means they get to earn commission by selling funds to you. There could be a window of opportunity for conflict of interest or mis-selling, so you need to be careful when buying funds via distributors. These days several online portals & mobile apps provide free accounts where by you are not charged anything for buying and holding funds via their portal (but you still pay higher expense ratio compared to direct plans). If your choice of say 8 funds is limited to a max of 5 different fund houses or AMCs (Asset Management Companies), check with your financial planner to see how much you could save (in thousands) if you switch to direct plans!