Govt plans change in retail stock scheme - Home - livemint.com

Govt plans change in retail stock scheme - Home - livemint.com

Why You Need to Revisit Your Financial Plan (ET 26th Apr 2012)

You have to rework your financial plan because your assumptions while preparing a plan could change, says Nikhil Walavalkar

    Goal-based financial plans are in vogue. However, getting a goalbased financial plan prepared by a planner or an advisor alone won’t guarantee achieving all your financial goals. “A financial plan is like an itinerary given by a travel agent to you. You have to take care of some operational issues to ensure a great holiday for you,” says Lovaii Navlakhi, managing director & chief financial planner, International Money Matters. For example, you have to get a visa on time or the air-ticket at the right price if you want to make the most of your holiday. A financial plan also needs such fine-tuning from your side. Most financial planners list people’s failure to get their goals right and implementation and review of the plan as the main reasons why most plans fail to deliver the goals. 
CONFUSION ABOUT GOALS “There are many instances of incorrect assessment of financial goals. Underestimating the money value of a financial goal is a big risk,” says Mukund Seshadri, founder partner, MS Ventures Financial Planners. This happens especially when there are multiple family members involved in a financial goal and there is no communication among them. For example, an individual may think that . 15 lakh is enough for his daughter’s wedding. But his wife may be keen on gifting her daughter a foreign honeymoon package, which may not fit into this budget. “If you really want to quantify your financial goals right, better involve your spouse in the process, as he or she will have a say in each of your spending and saving decisions,” adds Seshadri. 
You have to fix a date by which you would want to achieve the goal along with the money value of your financial goal. In case the time available on hand changes, your financial plan may fall short of success. For example, an individual has decided to accumulate . 15 lakh for his daughter’s higher education, and he assumed that he will pay . 5 lakh per year for three years. But what if she enrolls for 18 months course overseas, where her father has to pay . 15 lakh at the start of the course. Such a development is beyond one’s control and one can do very little about it at the last moment. One probably has to use funds meant for some other objective to pay for the course. Even if you get your goals right, there are issues with implementation of financial plan. 
IMPLEMENTATION BLUES “Some individuals think they can do implementation themselves at cheaper cost,” says Lovaii Navlakhi. But it may not be that simple. “Financial planners may recommend cheaper products. But distributors may not sell it at all given the low or no commission,” says a wealth manager. A financial planner may recommend liquid funds to maintain emergency corpus. But not all distributors are keen to offer a liquid fund as they are not remunerative. Some individuals lack discipline to meticulously implement the plan given to them. Procedural issues related to KYC, account opening and starting SIPs also adds to woes. “We come across situations where for months there is no progress on implementation of the financial plan, making a well drafted financial plan useless,” says Mukund Seshadri. 
Even if the individual is keen to implement the plan, some decisions at the implementation level may change the performance of the plan. Let us understand with an example. An individual estimated that he would require . 15 lakh for his daughter’s wedding. This included 100 gram of gold. When preparing the financial plan in CY2006, gold prices were at around . 8,000 per 10 gram and he had 15 years in hand to save the money. But now, five years down the line, gold prices have shot up at a much higher rate than average inflation to around . 28,000 per 10 gram. It resulted into wedding expense estimate going much above the . 15 lakh mark. In 2006, there was no gold ETF around. Had he started buying units of gold ETF at regular intervals after it was launched in CY2007, the gap between the estimate and the actual would have been less. One can segregate wedding expenses under two heads – cost of gold and actual wedding cost. Gold ETFs can be used to accumulate gold; and financial instruments can be used to accumulate funds required for other wedding expenses. Not all individuals are aware of such techniques and may face difficulty in implementing the financial plan. Even if you implement the plan you have to keep visiting it at regular intervals. 
FAILURE TO REVIEW “Buy-and-forget is the biggest risk. You have to review your plan at regular intervals to ensure that you are on track,” says Lovaii Navlakhi. A review will bring forth any deviation from the expected progress. 
“Reviews help you account for changes in priorities, changes in tax structure and performance of the existing products in portfolio. It also helps you validate your assumptions pertaining to inflation and expected returns from portfolio,” says Ajay Kinjawadekar, CEO, Moneysafe Financial Services. Some of the problem situations discussed above, could have been dealt better through thorough reviews at regular intervals. One review a year is a must, Kinjawadekar adds. 
nikhil.walavalkar@timesgroup.com 

What are the top 5 investment avenues post repo cut? (DNA 26th Apr 2012)

What are the top 5 investment avenues post repo cut?

Nupur Anand & Neelasri Barman | Mumbai

The Reserve Bank of India has set the interest rate cycle in reverse motion with a surprise 50 basis point cut in the repo rate last week. A number of banks have since slashed their deposit and lending rates and others are expected to follow suit. For investors, therefore, it is time to scramble and realign their portfolios in line with the rate reductions effected and expected ahead. We bring you the top five investment avenues currently available. Fixed deposits (FDs) This may be your last chance to lock into an FD at a higher rate. Though a number of banks have already announced reductions, some are yet to do so - and therein lies your chance. "FD rates may fall further, so this is probably the last change for risk-averse investors to lock in funds," says Suresh Sadagopan, who runs Ladder 7 Financial Advisors. For taxpayers, the returns on FDs work out to 6.5-8.6% depending on the tax bracket, he points out. Remember, you will have to go through the Know Your Customer, or KYC, procedure for booking an FD in a bank where you don't have an account. Public Provident Fund (PPF) In case you fail to lock into an FD at the desired rate, there's always the trusted PPF. "For a conservative investor with a long-term time horizon (of 15 years or more), PPFs continue to be the best option as the post-tax returns are 8.8%," says Jayant Pai, head - marketing, PPFAS AMC. "Before you zero in on the products that you plan to invest, you need to decide the investment horizon and the post-tax returns. Instead of going in for the headline rates, you should calculate your post tax returns and invest only after that," he adds. Fixed maturity plans (FMPs) Those with a time horizon of less than five years could look at FMPs. Look at the indicative returns provided by the companies, which are generally in line with the actual returns one c an get. Currently, indicative returns on FMPs maturing between one and two years are around 9.5-10%. The added advantage here is the double indexation benefit, which kicks in when you hold the product for more than one year. Indexation takes inflation into account while calculating the cost of acquisition of an asset. Double indexation provides inflation benefits for two years even though you have held the investment for a little over one year, say for 15 months. This feature, in fact, makes FMPs more attractive than FDs. Monthly income plans (MIPs) Those willing to take baby steps into the equity world can try out the MIPs. "These are hybrid funds that invest in both debt and equity and can allow you to have an equity exposure while keeping the most part in debt. However, if you are a conservative investor, then you should go in for an MIP that invests only up to 15-20% in equity," says Pankaaj Maalde, head-financial planning, Apna paisa.com. National Savings Certificate (NSC) The high interest rates being offered on fixed deposits may have led investors to give NSCs the miss, but with rates headed down, they could get back the shine before long. And so could other small savings schemes.

Gilt Funds (Dated 1st Dec 2011)

Greetings,

In context to our advice on investments in Gilt Funds on 1st Dec 2011, we are recommending to exit 50% of the position and  moving to Birla Sunlife Dynamic Bond Fund (Div / Growth depending upon the income tax  bracket).

This is keeping in mind the developments post budget and the stance taken by RBI there after.

For further details please write to vivek@wealthcare.net.in

Should You Invest in FDs or Liquid Funds?

Nikhil Walavalkar recommends FDs if you expect a fall in short-term rates. Otherwise, MFs should offer better post-tax returns.

Savings bank account and liquid and ultra short term bond funds were the only options available to investors looking to park their surplus cash in hand. Even after the deregulation of interest rates, mutual fund options were preferred by individuals in the highest tax bracket due to higher post-tax returns. But the scenario has changed a bit lately. The State Bank of India has recently increased the interest rate on fixed deposits of seven to 180 days up to . 15 lakh by 100 basis points to 8%. The interest rate is 9% for deposits between . 15 lakh and . 1 core. More importantly, there is no penalty on premature withdrawal of these deposits. Put simply, you can walk out of the bank with your money anytime after seven days and can still enjoy high interest rates. Obviously, high net worth individuals should take a hard look at these deposits. “Ultra short term bond funds are offering annualised returns of around 9%. The post-tax returns offered by the shortterm fixed deposits or saving bank accounts are lower, which make the ultra short term bond funds still a better parking space for money,” says Abhishek Gupta, chief executive officer and founder of Moat Wealth Advisors. Towards the end of March this year, the liquid and ultra short term bond funds category offered weekly average returns of 0.21% and 0.26%, respectively. These translate into double-digit annualised returns. But one must understand that this is an outcome of the extremely tight liquidity condition towards the end of the financial year. Things may change soon. “Shortterm interest rates are expected to move down gradually as liquidity tightness in the system improves over a period of time,” says Joydeep Sen, senior vice president (advisory desk) fixed income at BNP Paribas Wealth Management. One-year bank certificate of deposit (CD) yield, which was at 10.15% on March 30 this year, eased to 10% by April 12. Over the same period, three-month CD yield came down from 10.70% to 9.75%. 
This is in line with the expectations of market pundits. Though many market participants agree on interest rates going down this financial year, few expect a big fall in interest rates in the near term. “RBI is expected not to touch CRR and maintain liquidity at the current levels. This should support the short-term rates in the near term,” says Ganti Murthy, head – fixed income, Peerless Mutual Fund. The central bank may take time before cutting key interest rates. Given the heavy government borrowing programme in the first half of the financial year, liquidity may not improve drastically, which will ensure that money market rates won’t move down much. 
If you look at the post-tax returns, the dividend options of ultra short term bond funds look attractive. Dividend distribution tax (DDT) on liquid funds stands at 27.03%, whereas DDT on ultra short term bond funds stands at 13.52% for individual investors. Fixed deposit interest is added to your taxable income and taxed at the marginal rate, which means for the highest tax slab it is 30.9%. The Union Budget 2012 proposes that savings bank interest income up to . 10,000 will not be taxed. A reverse calculation shows that if you have . 2.5 lakh in your saving bank account for one year, you will exhaust that limit at 4% rate of interest. Interest earned from your saving bank account beyond this limit will be taxable at the marginal rate. Though it appears to be a situation of ‘advantage mutual funds’, when it comes to money parking solution, there is another side of the coin. Before parking your money in a scheme classified as an ultra short-term bond fund, do check if there is any exit load. Some such schemes do have exit loads. If you cannot keep your money for the stipulated period after which there is no exit load, avoid such schemes. 
There is one more point you need to look at. “A bank has to pay the agreed interest rate at the time of accepting a fixed deposit, even if the market interest rate falls in the currency of the fixed deposit. But a mutual fund performance is linked to market interest rates. The returns will fall if the interest rates were to go down in funds that do not have a significant mark-to-market component,” points out Joydeep Sen. Let’s understand this with a simple example. You enter into a 180-day fixed deposit with 8% interest rate, and after one month, the bank revises the interest rate down to 6% in sync with market rate for all future customers. But the bank will pay you interest at 8%. However, things will be different for a mutual fund. Returns in the third month may not be the same as in the first. As the fund manager has to deploy maturity proceeds of high-paying investments at lower interest rates prevailing in the market, the returns should go down. If you are expecting a massive fall in short-term interest rates, you can consider fixed deposit with no premature withdrawal penaltyand lock in your returns. Otherwise, mutual funds should offer better post-tax returns.nikhil.walavalkar@timesgroup.com