Exotic investment options for HNIs (Business Standard 3rd Dec 2012)

NEHA PANDEY DEORAS & TANIA KISHORE JALEEL For three years, the going has been tough for stock market investors. While gold has provided some solace by giving over 20 per cent returns during the period, it is not wise to put all eggs in the same basket. It is little wonder that investors, especially high net worth ones, are seeking alternative investments. An alternative asset class is something beyond the traditional ones ( stocks and bonds) and includes structured products such as private equity ( PE), investing in unlisted firms and start- ups, and real estate funds. Alternative investments got a bad name in the 2008- 09 crisis, when a number of exotic products such as derivative combinations were hit badly. Even art funds were hit badly. Experts recall that until the late 1990s, the Indian art market was not that big. By 2008, the market had grown 500 per cent. Art started to figure prominently in portfolios and valuations skyrocketed. Then came the economic crisis and wiped everything out. “Investors in art had presumed it would appreciate by up to 25 per cent yearly. And, art works could shield against the decline in stock markets. But none of that happened,” says a fund manager. Growing affluence in India helped individuals easily afford ticket- sizes of between ₹ 20 lakh and 25 lakh. But things are changing. In May, stock market regulator Securities and Exchange Board of India ( Sebi) notified the Alternative Investment Funds (AIF) Regulations, 2012. According to this, the minimum ticket size for investment should be ₹ 1 crore. Therefore, the first thing to understand is that alternative asset classes are not meant for a retail investor. Rajesh Saluja, CEO and managing partner at ASK Wealth Advisors, says, “ At the moment, the most popular alternative assets are real estate and PE funds. They form around 80 per cent of the alternative asset class portfolios. Structured products are also common.” Real estate funds: A number of builders raise money through this route. Some big ones take the direct route by talking to HNIs themselves. Other approach investment banks, wealth managers and private equity players to raise the money. Typically, the fund manager approaches an HNI and asks you to invest in such schemes. Returns can be as high as over 20 per cent. Investments are made in tranches, if it is for a upcoming project. Realty funds’ portfolio takes two to three years to appreciate. Realty funds typically have investment tenures of five to eight years. Some funds are meant for last- stage funding. The tenure of such funds is shorter than that of the development- based funds. Rentalbased funds have a shorter tenure. The issue here is that these funds may not always disclose their valuations and returns they generate, making it difficult to take informed decisions. The returns from realty funds depend on the performance of the broader real estate market. After the AIF guidelines increased the ticket size, angel investing route (many investors putting money together) is being taken to invest. Private equity: For real estate and PE, fund managers will charge you around two per cent as management fees a year. And, then, a performance share, too. This means that once a certain hurdle is crossed ( it is mostly 9- 10 per cent returns), the investor will have to give the fund manager 20 per cent of the profits made. PE funds typically return 20- 25 per cent annually, says Saluja of ASK Wealth Advisors. PE investors put money in companies that are not publicly traded or invested as part of buyouts, hedge funds or new ventures. These companies add value to organisations with the objective of making these profitable. They deal in real estate, nano technology, renewable energy and biotech, among others. It comes with its own set of risks. Therefore, you should not look at over 10 per cent of your portfolio. PE requires an investment horizon of fiveseven years. You may not get your money back. Only if you have Rs 100 crore, can you afford to invest Rs 1 crore. PE experts consider those with less than ₹ 1 crore investible money as retail investors. However, these funds could be a good portfolio diversifier. Unlisted firms: This is yet another kind of PE investment, where you put money or buy stake in unlisted firms, largely start- ups. This is done in two ways – individually and in groups. Investors can pocket 15- 20 per cent on an average and investment horizon is advised to be a minimum of five years. Rohit Bhuta, CEO of Religare Macquarie Private Wealth, says, “ Many clients are looking at investing in startups. They are looking at picking up 510 per cent through PE players. A lot of investors invest through the angel investing route. The companies invested into are those that are looking to raise $ 5- 10 million.” Structured products: A structured product, also known as a market- linked product, is a pre- packaged investment based on derivatives such as a single security, an index, debt issuances, or even foreign currencies. Most structured products in India come with ‘principal protection’ function as the key, which means that the investor gets back his principal. For example, suppose you invest ₹ 100 for 40 months in a Nifty- linked capital protection structure. Of this, ₹ 80 is invested in debt securities, yielding areturn of six- seven per cent per annum. Thus, over a period of 40 months, you could get ₹ 20 as interest on these debt securities. This ensures that your capital of ₹ 100 is protected. The interest of ₹ 20 is invested in the Nifty. If the Nifty doubles in 40 months, ₹ 20 will become ₹ 40, thus the value of your ₹ 100 will be ₹ 140 at the end of the period, giving you an absolute return of 40 per cent. On the other hand, if the Nifty were to fall by, say, 50 per cent, then the ₹ 20 invested would become ₹ 10, thereby giving you back ₹ 110. This strategy ensures that at any given time, your capital is protected and you will get ₹ 100 back at the end of 40 months. There are many equity and equitydebt structured products on offer currently. Structured products are issued in the form of non convertible debentures (NCDs), whose returns are linked to an underlying stock index such as the Nifty or a basket of stocks. NCDs are better suited for retail investors. Sophisticated structured products, depending upon the market conditions, can be specially created for a set of clients and privately placed. The ticket size generally is ₹ 10 lakh upwards. Art film funds: “ About five years ago, people did look at art or films funds as an alternative investment option. But it turned out to be too exotic for most. Not many are looking at these as investment options now,” says Bhuta of Religare Macquarie Private Wealth. Experts say that since art prices do not depend on other components of a portfolio, art investment acts like a shock absorber when other asset classes are not doing well. An art work, it is said, does not depreciate in value and hence is called aless risky investment. But, not everyone can invest in it. Art prices largely depend on public tastes, making them a fairly speculative investment. Also, art cannot be resold quickly for a profit. Moreover, it needs high level of maintenance, storage, security, and it doesn’t give dividends, bonuses or income. Similarly, there are funds investing in films. Or you invest individually or by way of crowd funding, like in the critically acclaimed “ I Am”. But, this is still in its nascent stage. Wine: Fine wine is a popular means of investment. Wine for investment is typically obtained from a reputable wine broker as wine houses do not generally sell directly to the public. Wine is not affected by the stock market, company bankruptcies or fraudulent activities. Wine investment provides exemption from capital gains tax, value added tax, and import and export duties. The quality of fine wine improves with time, hence its value increases. However, the wine market is difficult to understand and analyse. Wine value is not always price- based, but on demand. Storing and preserving wines comes at a sizeable expense. As there are no Indian wines, wineries or wine funds one can invest in, one needs to look at international wine funds. More underlying assets might come into the Indian market such as co- investing in coal mines or dairy farms. Alternative investments are catching up, though they need high risk appetite

Are NRE FDs better than FMPs for NRIs? (www.onemint.com 7th Oct 2012)

In a prior post I compared FMPs (Fixed Maturity Plans) with bank fixed deposits, and said that if you are in the higher tax bracket, the tax advantage of FMPs tilt the balance in their favor somewhat (if you can live with the uncertainty).

That’s true for domestic investors but what about NRIs?

Allwyn left the following comment on the Suggest a Topic page a few days ago:

allwyn September 4, 2012 at 12:59 am [edit]

Hi,
Could you pls. explain the advantages/disadvantages of FDs(presently int. rates of over 9% tax free) over FMP/Debt funds for NRI’s

Thanks in advance

Allwyn

This is an interesting question, and in my mind since it’s only the tax advantage that makes you think of FMPs over fixed deposits for domestic investors, you need to look at the tax angle to answer this question for NRIs as well.

For close to a year now, NRE fixed deposits are tax free, and this was one step by RBI to arrest the Rupee slide. This means that NRE fixed deposits are currently better than NRO fixed deposits, and they are an obvious competitor to NRI investments in FMPs.

I didn’t know how FMPs are taxed for NRIs but this DSP BLACKROCK page on NRI taxation states that NRIs will be taxed at their applicable assessee rate in case of short term capital gains, and will be taxed at 10% without indexation or 20% with indexation for long term capital gains on non – equity mutual funds.

Since most FMPs are slightly over a year to make them count under long term capital gains, this means that most of the time your NRI FMPs will taxed at 10% whereas the returns from your NRE fixed deposits are tax free.

I think in general it is easier to open a NRE fixed deposit than it is to buy a FMP for NRIs, so that’s another thing in their favor along with the fact that you know before hand how much your fixed deposit will earn.

If the tax situation for NRIs change as far as FMPs are concerned then this might be worth a re-look but until then I can’t think of a good reason to favor FMPs instead of FDs for NRIs.

Investment ideas for the home maker (Yahoo.com : By BankBazaar.com | Strategic Moves – Wed 22 Aug, 2012 8:58 AM IST)

It is essential for women, be it working women or homemakers to keep themselves and their family financially secure. In the olden days, women generally had a habit of keeping savings in containers in their kitchen, but today that is not going to get our savings anywhere when confronted with ever-growing inflation. It is wise to choose to invest and wiser to choose the best investment in order to keep our family and ourselves financially secure. A good investment gives you better returns than merely saving in a bank deposit or in our piggy bank and helps us to cope up with inflationary pressures.

Homemaker and Investments?

Not a good combination, most people would say. Many people think homemakers make very bad investors, as they do not have knowledge about the share markets and the technical aspects of investing. That's completely false notion. Looking from a fundamental analysis point of view, they are the ones who could be good investors as they make all purchase decisions for the entire family and they are aware which company performs better for what reason.

They may not have to make a decision by looking at the balance sheet of the company; they are the main consumers of most of the products around. This is a strength, which can help them analyze stocks and invest in shares and equity. They are uniquely qualified to buy and sell shares.

How does a homemaker choose appropriate investment options?

The best way to plan your investment is to know your goals. Try to take a piece of paper and write down what you would like to achieve in your life time, you might want to have a house of your own, probably a luxurious car, a world tour etc. These are your long-term goals.

There may be a few other things that you need to achieve in the next two to three years or more, for example higher studies, marriage, purchase a two wheeler etc., these are your short term goals. Remember, your short term goals keep changing as you move on in your life. Your short-term goals today are not going to be the same when you become a mother. The article discusses in detail about the investment options for homemakers at different stages of life.

Where to invest in your 20s

In your 20s, you are likely to be in your college or at your first job, so your income is definitely going to be very less. You can choose to invest them in a recurring saving deposit or bank deposits where you can earn low but regular and fixed returns. You can also choose to invest your money in mutual funds because the risk involved is lesser and you can invest very small amounts of money. Once you have started earning good money in your late 20s you can start investing your money in equities where the risk and returns are higher.

Where to invest in your 30s

In your 30s as homemakers, you might not have plenty of money to invest in, but make sure you have a term insurance for yourselves and your family. A health insurance will help keep you more secure during times of emergency. Try to cut down unwanted expenses and invest in education funds for your childrens' higher education, take up a suitable retirement plan for yourselves and your spouse. Avoid endowment plans; they carry higher charges and may not give high returns.

Avoid buying gold ornaments, they are only going to eat away your money in the form of wastage and making charges. Instead, invest in gold-based funds and buy gold in the form of coins/bars.

Where to invest in your 40s

In your 40s, you need to boost your children's education and wedding investments and your investment for retirement. If you are planning to build a house for 1500 Square feet, take only 1000 Square feet for your accommodation, rent the 500sq feet space, and use the money for investments. You can also take in a paying guest and use the rental and food charges for your short-term investments avenues.

Where to invest in your 50s

In your 50s you should invest in risk free investments. If you need to withdraw your long-term investment for your son's higher education, withdraw it or switch it to a debt fund at least a year before he gets the admission. Do not wait until the last minute, as you will be at risk if there is a sudden fall in the market.

In the 60s and beyond

Transfer the amount of money you have into bank deposits or into a recurring deposit (RD) so that you will receive good returns and your money will be safe. Avoid risky investments in your 60s.

BREAK FREE FROM MONEY MYTHS (ET Wealth 13th Aug 2012)

Investment decisions based on flawed assumptions could result in suboptimal returns. Here are some widely held misconceptions you should break free from.

Anybody who invests in a basket of blue-chip stocks and holds it for 29 years is bound to be a billionaire, right? Not in Japan. With the Nikkei index at the same level as it was in 1983, the value of the investment would be the same as it was 29 years ago. The Japanese aren’t alone. Stock indices of the European markets are down to 14-15-year lows. Investors in the US and India are a tad better with benchmark indices at their 2007 levels. 

With zero returns after all these years, the cult of long-term investing is almost dead. Yet, financial experts and investment advisers don’t tire of preaching that holding stocks for the long term will make you rich. They profer carefully selected data to show how stocks have made mounds of money for investors over different periods of time. 
Many more such money myths have been perpetuated by investment professionals. Stocks have the potential to earn high returns, but investors should not wait endlessly to book those profits. Over the next few pages, we have examined seven such money myths, which can work against you in certain situations. For instance, it is not always better to buy a house. A young investor should not allocate too much to an illiquid asset like a house too early in life. Also, if the property market is overheated and interest rates are high, it is better to live on rent. 
The mutual fund space is a minefield of myths. Read the reality behind these misconceptions. SIP investments are considered safe and almost a guarantee for better returns. But as we will illustrate, the SIP is just a mode of investment and does not hold out any guarantee of better returns. Buying too many funds with a similar investment mandate only clutters your portfolio without diversifying the risk. Top rated funds are not always the best performing funds. 
Another major misconception relates to the Indian investors’ obsession with assured returns and tax-free income. This makes them invest in tax-inefficient bank deposits and low-yield life insurance policies. We explain how debt mutual funds will be a better option even though you might have to pay a 10% tax on the income. 
Then there is the problem with interest rates on loans. A lay person will obviously choose a loan that comes at the lowest rate of interest, but this can be misleading if you don’t check how the rate has been computed. A flat rate of interest may seem low, but actually works out to be costlier than a reducing rate loan. 
As the country celebrates its 65th Independence day, it’s time for you to break free from the shackles of these ill-conceived notions. ET Wealth will give you all the support you need in your bid for financial emancipation.

MYTH 1 STOCKS GIVE GOOD RETURNS IN THE LONG TERM Indian markets have not generated any returns in the past five years. 
Financial planners like to parrot the widely held notion that stocks give high returns in the long term. The catch is that ‘long term’ is not defined. The Indian markets have not generated any returns in the past five years, but some developed markets are worse. Japan’s Nikkei, for instance, is at the same level as it was 29 years ago. British, German, French, Spanish and Italian markets are where they were 13-15 years ago. There has been some recovery in the US, but the Dow Jones is still at its 2007 level. So, ‘long term’ can be extended as per the convenience of the financial adviser. If his clients don’t get the desired result in three years, he extends the horizon to five years, or even further to 7-10 years. 
Does this mean investors should desert equities and concentrate their investments in the assurance of debt, gold and immoveable property? Certainly not. The journey for the Indian and most other markets has not been flat. There have been bullish phases and bearish periods, each bringing with it an opportunity to book fantastic profits or enter at unbelievably low prices. 
Most planners frown upon the small investor’s attempts to get in when the prices are low and exit when they are high. “Never try to time the market,” they tell him. We agree that you cannot always hope to buy low and sell high. We are not espousing intra-day trading and short-term punting. But booking profits periodically is perhaps the only way to make serious money from a volatile stock market. 
Markets tend to go through mood swings. There are periods of extreme pessimism, when market participants behave as if the stock market is going to close down. We witnessed this in 2008-9. Then there are periods of extreme euphoria, when they think stock prices can only go up. We saw this in 2007 and again in 2010. Smart investors who move against the crowd during these extreme situations, buying during a downturn and selling in a rally, make good money 
How does one spot these entry and exit points? One simple way is to look at the valuation of the broader market as defined by its PE. We examined the PE and Sensex movement in the past 15 years (see graph). On the few occasions that it moved below 12 (1998, 2002 and 2008), it offered great buying opportunities. Similarly, when it moved above 24 (2000, 2007 and 2010), these were signals for exiting. 
This strategy of buying only below a PE of 12 and selling when it is above 24 requires tons of patience. You may have to sit on cash for a very long time. Also, there is a possibility that you might miss some rallies in the interim. “Since we are the second fastest growing major economy in the world, India doesn’t deserve to go below a forward PE of 12,” says Chokkalingam C, group CIO, Centrum Wealth. 
Another strategy is for investors to keep building their positions when the PE is ruling at low levels and start exiting when they have reached higher levels. It should not matter whether this happens in a span of five months or five years.

MYTH 2 TAX-FREE OPTIONS ARE GOOD INVESTMENTS A tax-efficient option will yield higher returns than a tax-free one. 
Bank deposits and insurance policies are the two most popular investments in India. Almost 45% of the total financial savings of households go into bank deposits, while life insurance accounts for nearly 22%. The concern for most investors is the safety of capital offered by bank deposits and tax-free income offered by insurance policies. They don’t realise, however, that bank deposits are not very taxefficient because interest is fully taxable. In the 30% tax bracket, the post-tax return of a 9% fixed deposit is pared down to 6.3%. 
Insurance policies are no better. They offer taxfree income, but the buyer ends up sacrificing too much. The returns from a traditional endowment or moneyback plan is barely 5.5-6%. Instead, it’s better to invest in the PPF, which also offers tax-free income. The current interest rate is 8.8%, but this is linked to the market and could change in the coming years. Also, there is an annual ceiling of 1 lakh on investments in the PPF. 
Debt funds offer investor tax efficiency as well as higher returns. After one year, the income is treated as long-term capital gain and taxed at 10%. Yet, small investors account for barely 1-2% of the total investment in debt funds.

MYTH 3 
DIVERSIFICATION GUARDS AGAINST VOLATILITY Buying too many similar mutual funds does not really diversify your investments. 

One of the biggest advantages of a mutual fund is that it spreads the risk across a basket of stocks. With 30-40 stocks in the portfolio, an investor can be sure that his fund won’t suddenly crash. Though a large number of stocks in a fund’s portfolio diversifies the risk, the same cannot be said for an investor who packs his portfolio with too many funds. If he invests in 10 funds that have a similar investment mandate, he is not really diversifying his portfolio. Rather, he is buying the same basket of stocks through 10 different funds. 
Most diversified equity funds follow roughly the same pattern of investment. The portfolios of the two largest diversified equity funds, HDFC Top 200 and HDFC Equity, are almost photocopies of each other (see table). The pattern gets repeated with minor alterations in other funds as well. ICICI Bank, SBI, ITC and Infosys figure in the top 10 holdings of nearly all large-cap funds. The sectoral allocation is also similar, with the banking sector being the favourite of most diversified equity funds. So there is hardly any diversification if you invest in 5-6 different funds. 
To be fair, you cannot fault the funds for following the herd. A fund has to invest in certain stocks if they are in its benchmark index. The large-cap funds that track the Nifty or the Sensex will necessarily invest in index stocks. It’s only that the percentage allocation to individual stocks will depend on the fund manager’s reading of the market. It is for an investor to look up the fund’s investment mandate before he puts in his money. He should avoid duplicating his investments by buying too many similar funds. 
For instance, a well-diversified portfolio can be a mix of large-cap, mid-cap and multi-cap schemes. Add a dash of sectoral funds if you want a focused exposure to a particular sector or theme. You will have to do a lot more research than a cursory look at the fund’s category and its index. HDFC Equity is categorised as a multi-cap fund and tracks the S&P CNX 500, while HDFC Top 200 is a largeand mid-cap fund with the BSE-200 as its benchmark. But don’t invest in more than 6-8 equity funds, because monitoring them will be a challenge. As investment guru Peter Lynch said, too many funds will only ‘diworsify’ your portfolio.

MYTH 4 SIP INVESTMENTS ENSURE BETTER RETURNS SIPs are not a guarantee against loss and don’t always yield higher returns. 
    You will not lose money by investing through an SIP.’ Mutual fund investors have been sold this story for years. The systematic investment plan is packaged as a panacea to all their investing problems. Don’t fall for it. While SIP investors stand a better chance of getting average returns, it is hardly a fool-proof strategy. Neeraj Chauhan, CEO, Financial Mall, says, “SIP is only a mode of investing, a mechanism that helps you average out your costs over a period of time. They do not not guarantee anything.” 
    The stock indices are almost at the same level as they were five years ago. If you had invested 1.2 lakh as a lump sum in the HDFC Equity fund in August 2007, your investment would now be worth 1.8 lakh. But if you had invested 2,000 a month through SIPs, your total investment of 1.2 lakh would have grown to 1.58 lakh. Unfortunately, this comparison can only be made in hindsight and there is no way to tell the direction of the markets. 
    When the markets are in a downtrend (see case A), a lump-sum investment at the beginning of the period will lose more than the SIP investment. However, if there is a sustained rally in stock prices, the SIP investor will not gain as much as the lump-sum investor (see case B). The real benefit of the SIP investment kicks in when it is continued over a long period of time and across market cycles (see case C). 
    However, SIPs involve investing on a predetermined day of the month. This means you lose out if the market slips during the month, offering a good investment opportunity. They are useful because they match the cash flow of the small investor, especially the salaried individual. He allocates a predetermined sum from his monthly income to the investment. A lumpsum investment is not an option he can consider because he doesn’t have a large investible surplus. Therefore, the SIP route suits him best. 
    Another problem associated with SIP investing is that the small investor often loses his nerve when the markets go into a tailspin. Under the SIP route, by investing at different points of time, you get the benefit of cost averaging, wherein you purchase units in the scheme at different NAVs at each interval. This can theoretically allow you to reduce your purchase cost over time. If you stop investing when the markets are going down, you forego the advantage of buying low and averaging out your purchase price. This can be disastrous for your returns.

MYTH 5 FUNDS WITH HIGHER RATING PERFORM BETTER Ratings are based on past performance and don’t guarantee future returns as well.
Investors in mutual funds often use the fund ratings to decide which schemes to choose from among the hundreds available. Though the rankings are based on robust statistical analyses and widely used methods of assessment, many investors read too much into these. This can lead to suboptimal investment decisions. 
It’s important to note that ratings are based on the past performance of schemes. They do not serve to make a judgement about their future performance. Also, they are based on the percentile score of the schemes. A scheme’s performance is not seen in isolation but is rated on the basis of how it performed relative to the other funds in the category. For instance, the top 10% funds are assigned a five-star rating, while the bottom 10% funds are branded one starrers. 
Market regulator Sebi has acknowledged how the ratings can be used to misguide investors. In February this year, it banned fund houses from mentioning ratings in their advertisements. Only certain funds, including capital protection funds, which require Sebimandated ratings, are allowed to mention these in ads. 
Secondly, ratings can change over time. A five-star fund’s performance may decline, turning it into a four-star or even a threestar fund. An investor who goes strictly by the rating may then have to rejig his portfolio and shift to a five-star fund. Investors should also note that fund ratings work on a ‘one size fits all’ rule. They don’t tell whether the scheme is suitable for different types of investors. So a multi-cap equity fund with an aggressive mid-cap orientation may have a very high rating, but it will not suit a conservative investor seeking low but stable returns. 
A fund’s rating, by itself, does not tell you whether it is a good investment or not. So investing in a fund based solely on its rating would be inappropriate. At best, fund ratings can serve as a starting point, says Dhruva Raj Chatterji, senior analyst at Morningstar India. “These fund ratings can be used for initial screening to identify a broader set of funds, but the investor should also look at other factors before choosing a particular fund.” 
We looked up the performance of diversified equity funds between September 2007 and August 2011. The results were surprising as well as instructive. Four-star rated funds, on an average, were the best performers during this period. The bigger surprise was that even the average two-star and three-star funds did better than the average five-star fund. However, this is based on the ratings assigned in 2007. They may have changed over the years. A five-star fund in 2007 may not have retained such a high rating or a two-star fund might have risen in rank.

MYTH 6 BUYING A HOUSE IS BETTER THAN RENTING Not when real estate prices are overheated and interest rates are high. 
Almost everybody dreams of owning a house. No more pushy landlords, poor maintenance and annual rental hikes. Plus, there is always a feeling of uncertainty when the lease is due for renewal. Owning a house frees you from a lot of worries. 
Or so you think. Being a home owner has its own sets of problems. It might seem counterintuitive, but experts say that one should not invest in real estate too early in life. It’s a bigticket investment that ties you down to a location and prevents you from investing in other, perhaps more lucrative, avenues. If your career is on the fast track, anchoring yourself to a particular city might mean forgoing emerging job opportunities in other locations. A big EMI can become an albatross around your neck just when you are finding your feet in the corporate world. 
Even older and deep-pocketed buyers need to rethink before they take the plunge. Real estate is an illiquid investment that doesn’t allow partial withdrawals. The entry load is very high and disposing of the property can take several weeks, even months. If your job involves a lot of mobility, it may not be a good idea to block your money in immoveable property. If you choose not to sell the property, you will end up servicing an EMI as well as paying rent for the house in the new location. “If one doesn’t plan to stay in one location for 4-5 years, I will not suggest he buy a house. Leasing is a better option for him,” says Pankaj Kapoor, managing director of real estate research firm Liases Foras. 
Buying a house makes sense if property prices are low but are expected to rise soon and capital is cheap. Right now, all three conditions have crosses against them. Property prices are high, especially in some overheated pockets in the metros, and there are indications that the real estate market is likely to stagnate in the coming months. “If you are undecided about the location or the price, renting a property would probably be a better option,” says Badal Yagnik, managing director, Chennai & Coimbatore, Jones Lang LaSalle India. 
Many home buyers are encouraged by the prospect of not having to pay rent, but keep in mind that bidding rent payments goodbye also means saying hello to home loan EMIs. Home loan interest rates are ruling above 12% right now. Remember that unlike landlords, banks can’t be cajoled in case your rent is late. If you miss the EMI, there’s a double penalty slapped on you—from the lender as well as your bank. The rental market, on the other hand, offers a better deal. You can rent a house for a fraction of what you will have to shell out as an EMI. In Noida, a suburb of Delhi, a 2-BHK house can be rented for 15,000-20,000 a month. The price tag of the same property can be as high as 80-90 lakh. If you take a loan of 50 lakh at 12% for 20 years to buy a house, you have to pay an EMI of 55,000. 
The case against buying becomes even more compelling if you are an investor, not an end user. The rental yield, which is the annual rent of a property as a percentage of its market price, has steadily dipped in urban areas. In overheated markets, it works out to merely 1-1.25%. In other words, a 1 crore property will fetch a monthly rent of only 8,000-10,000. Experts say that if the rental yield is below 4%, the investment is not worthwhile. This is especially true if the cost of capital is high. What you pay as interest on the loan will neutralise any gain from the property.

MYTH 7 TAKE A LOAN WITH THE LOWEST INTEREST RATE Flat rate of interest may appear low but works out to be costlier than a normal loan. 
Planning to buy a car? When you take a loan, make sure you understand how the interest rate on the loan is calculated. Lenders offer loans with different terms and conditions and the lowest interest rate may not always be the best deal. 
The flat rate of interest is a widely used trick that creates a financial illusion in the mind of the borrower. The flat rate is arrived at by dividing the total interest paid on the loan by the number of years. It will obviously appear lower than the interest rate calculated on a reducing balance basis. What the borrower does not realise is that he is being charged for the entire loan amount even though the outstanding amount reduces progressively with every EMI. As the graphic shows, a flat rate of 10% is a lot more expensive than a normal reducing rate of 12%. 
Another trick is to ask for one or two EMIs in advance. This seemingly innocuous clause pushes up the effective interest cost for the borrower. This is because the actual loan disbursed is reduced by the amount of these advance payments even though the borrower is charged for the full amount. As the graphic shows, a loan at 9% with one advance EMI will actually cost the borrower more than 18%. Similarly, two advance EMIs will push up the effective cost of a three-year loan to a prohibitively high 20%. In a new trend, some banks are insisting on the borrower parking some money in a fixed deposit with them. The rate of interest offered on these deposits is not very attractive but some borrowers have no choice. They are forced to agree to the terms and conditions laid down by the lender. This also pushes up the effective interest on the borrowing, though the difference is not as significant as in the case of loans with advance EMIs. It’s best to stick to the normal reducing balance calculation when comparing interest rates. To avoid confusion, ask the agent to quote the EMI per 1 lakh. This normalisation of quotes will help you compare the offers of other lenders. Home loan borrowers should also watch out for certain misleading tactics used by lenders. They are enticing new borrowers with lower rates, but don’t get carried away by these special offers. The catch is that instead of bringing down the base rate, to which all home loans are linked, they just bring down the spread between the base rate and the rate charged to the customer. Turn to page 21 for a detailed story on how this could affect your home loan.

What You can Learn from a Slowdown and Profit from it (ET 16th Aug 2012)

Even in this era of gloom, an individual can create wealth by being prudent and investing in the right financial products, says Vidyalaxmi

Slowdown. The word features in every conversation these days. Stock market gurus advise you to tread with caution because of the slowdown. Your boss tells you to be patient for a better hike; again, because of the slowdown. The slowdown menace has even forced you to cut short your holiday abroad this year... In short, the uneasy presence of slowdown is a permanent feature in the lives of most common folks these days. 

KEY SIGNS “A slowdown is a situation in which GDP (Gross Domestic Product) growth slows down but does not decline,” says Dipen Shah, head of fundamental research at Kotak Securities. For example, if the GDP growth of any country goes down from 5% to 3%, the economy can be said to be experiencing a slowdown. “It is a period of slow economic growth, especially the one that follows a period of high growth.” A slowdown can be interpreted in several ways. “From an economist’s perspective, a slowdown means lower IIP growth, lower power generation, slowdown in automobile, lower growth in cement dispatches, etc,” says Rajesh Kothari, MD, AlfAccurate Advisors. 
For individuals, it could be a single-digit increase in wages or no pay hikes or even pay cuts. They would also notice that there are few or no new property launches, hiring freezes, sales and discounts in non-sale months, and downsizing in corporate travels and other perks. “For an individual, it means prices are shooting up without the corresponding increase in income. Investments may also not do too well, especially if it is related to equities,” says Suresh Sadagopan, certified financial planner, Ladder 7 Financial Advisories. However, typically an individual would notice the impact of a slowdown only when it is in an advanced stage and it starts pinching his wallet badly. “As an example, when Infosys employees came to know they are not going to get an increment, they knew they are in the middle of a slowdown,” says Suresh Sadagopan. 

INCOME AND FUTURE EARNINGS A slowdown reduces employment opportunities. “Further potential raises or pay hikes may be put on hold or become more modest than in the past. In some cases, it may even lead to job losses since managements’ focus may shift from growth to improving productivity,” says Vishal Kapoor, head (wealth management), Standard Chartered Bank. Since the bargaining power of the employees diminishes, they may have to endure salary cuts, increased working hours, tougher appraisals, and so on. “However, if one is able to build on one’s skills (say, through executive education courses or vocational training) during this period, they will surely be better positioned to take advantage of the next upswing,” says Jayant Pai, certified financial planner, Parag Parikh Financial Advisory Services (PPFAS). 

IMPACT ON CONSUMPTION “When people read these news, they tend to spend less as they are uncertain about their future and save somewhat more. In our case, saving more also is a bit of a problem due to the persistent high inflation,” says Suresh Sadagopan. Sure, one can’t cut down on spending on basic necessities, but discretionary spending, like on automobile and holidays, could take a back seat. “Since discretionary consumption (such as holidays, purchase of automobiles, etc.) may be put on hold, all sectors dependent on such expenditures are adversely affected. This in turn affects the economy overall,” says Jayant Pai. “In a high interest rate regime, consumers may also shy away from loans. Government policy measures can try to stimulate demand by encouraging consumption to move the economy out of recession in a primarily a consumption driven economy,” says Vishal Kapoor. 

IMPACT ON INVESTMENTS “Volatility can offer good opportunity for those who understand and have experience of investing in risky assets. There is often attractive value in many investments, presenting opportunities to lower average price or buy into afresh,” says Vishal Kapoor. “There may be a few sectors which are either not impacted by domestic economy (IT or other export oriented sectors) or are relatively less impacted. Also, in all sectors, there will always be companies which have strong balance sheets and managements,” says Dipen Shah of Kotak Securities. These companies will be able to tide over the slowdown. Such stocks should be identified for investments. “Investing through SIPs in a couple of diversified equity funds could be more effective over the entire economic cycle,” says Jayant Pai. “Capital protection often becomes a key requirement, and a mix of debt and equity strategies that provide capital protection based strategies have been relative outperformers as well,” adds Kapoor.

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.

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 

Now earn up to 16.53% returns from public provident fund

http://economictimes.indiatimes.com/personal-finance/savings-centre/savings-news/now-earn-up-to-16-53-returns-from-public-provident-fund/articleshow/10733486.cms

Are you a "buy & forget" investor - ET Wealth (20th Dec 2010)

We believe that all good things come to an end. This article supports our view that it is definitely beneficial to take timely profits than simply hold your investments forever.

http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=pastissues2&BaseHref=ETM%2F2010%2F12%2F20&ViewMode=HTML&PageLabel=33&EntityId=Ar03200&DataChunk=Ar03300&AppName=2

Now, you can buy physical Gold on EMIs - Mint 13th Sep 2011

Throwing bad investments is good strategy

http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETM/2011/09/05&PageLabel=51&EntityId=Ar05000&ViewMode=HTML

Asset Allocation taken from ET Wealth (5th Sep 2011)

Use SIPs to fight volatility

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STILL SINGLE? SET SHORT-TERM GOALS FOR YOURSELF - Business Standard

MASOOM GUPTE

Chinmay Athle has been investing over 50 per cent of his salary in stock markets and the public provident fund (PPF). The 25year-old software engineer’s latest goal is to purchase a house.

Financial planner Malhar Majumdaris, however, not too convinced about Athle buying a house at this age. He feels that as Athle is still single, making a long-term commitment towards property may not be the wisest thing to do. Especially, when things (read his requirements) could change after marriage.

Setting goals is, perhaps, an important part of financial planning. Goals define the way you should invest and, more important, the instruments you should use to achieve these.

For example, if you want to purchase a house after five years, investing in equity would help. On the other hand, if you plan to travel abroad next year, a more conservative approach such as investing in debt instruments would be appropriate.

But, goal-setting is also a function of your age and means. Often, those who are single aim for the impossible–the latest carina year, a flat in a prime area in two years and the latest gadgets–all at the same time. Financial planners have a simple advice for such people: Keep goals reasonable.

Explains Ramalingam K, director, Holistic Investment Planners, a Chennai-based financial planning firm, “The state of your finances can change drastically after marriage. Therefore, single people must be careful with their financialgoalsandinvestmentdecisionstoensureaseamlesstransitionaftermarriage.” Athle,forinstance,hasbeen saving ` 15,000 for a year (his take home salary is `28,000).Of this, almost `10,000 is in equity, the rest being in PPF. He now wants to invest in property and discounting for home loans. While he intends borrowing the amount for down-payment from his father, he plans to stop his investments, atleast partly, for repaying his loan.

However, Majumder does not think it to be the correct goal for Athle. He feels as most home purchases are made on loans, the ability to finance a loan after marriage may not be known at this point. Also, the plans of single people tend to be uncertain, he says. For example, there may be sudden plans for higher education or shifting cities and such a liability may be difficult to shoulder.

Majumder says it is too early for Athle to take on such a huge commitment. Instead, it makes more sense to continue with the equity investments. The corpus created can be utilized for multiple goals in future, including the down payment of a house, he adds.

Besides a house, many going for an expensive car on loan too soon. As of now, Athle should concentrate on creating a corpus that will help make these purchases in the future with as little loan as possible.

If he invests `10,000 through a systematic investment plan(SIP) for the next four years, he would have accumulated as much as

`7.81 lakh (assuming annual return of 10 percent). The amount can be used for the initial down payment for a residence or car.

Typically, young people should be aggressive on equity, as their risk-taking ability and time horizon is much higher than senior citizens. But, having an emergency corpus — at least six months’ salary—in debt instruments will help in troubled times. Such investments can be parked in fixed deposits or liquid debt funds.

Creating a strong corpus through equity will reduce later need for debt to make big purchases

Goal setting is also a function of your age and means. Often, those who are single aim for the impossible–the latest car, a flat in a prime area and the latest gadgets–all at the same time. Financial planners have a simple a vice for such people: Keep goals reasonable.

Don't jump for insurance covers bundled with products

http://economictimes.indiatimes.com/personal-finance/insurance/analysis/dont-jump-for-insurance-covers-bundled-with-products/articleshow/9804309.cms