Investment – Page 5

May 22, 2023

What’s your Investment Personality?

Few investors neatly conform to a single description. The Standard Chartered Investor Personality Study 2020 surveyed 1,200 affluent and high net worth investors and founds that geographic and cultural differences shape behaviours and personalities. For example, Hong Kong has the highest proportion of “Enthusiastic” investors. Singaporean tended to fall into the “Comfortable” category, while Taiwan cornered the “Conservative” archetype.

John Rekenthaler, director of research for Morningstar, believes that most investors have blended traits. Here he explains how personalities affect investment behavior. After describing three personality types, he concludes by telling us (in a very amusing way) where he fits it.

Loners

Investors who belong to this group make their own decisions. They consume investment research neither for its counsel, nor to learn what others are doing, but instead as grist for the mill. Such investors ignore the actions of the crowd. Should they see a line snaking around a block, they will not try to learn what they are missing. They will instead go on their way while pitying the line’s occupants.

Strength: Buying Low

Loners are not the only investors who try to buy low. Equity mutual funds sometimes receive inflows after market declines because the overall marketplace believes that the dip presents a buying opportunity. Overall, though, loners are the likeliest investor type to sift among discounted securities, seeking bargains.

Strength: Early-Bird Gains

Besides receiving “dead cat bounces” from securities that are deeply depressed, loners may also profit from the opposite form of investment: highly expensive emerging-growth stocks. Before Tesla was mainstream, it was owned mainly by iconoclasts who discovered its story. The same holds for all winning startups.

Weakness: Self-Delusion

Unfortunately, not all that glitters is gold. For each dollar they stashed in Tesla or bitcoin, loners squandered thousands on investment dreams that never materialized. Sometimes, wisdom does in fact lurk within the crowd. Loners constantly face the possibility their “insight” is instead self-delusion—the mistaken impression that they have spotted what others missed.

Weakness: Bear Traps

A related problem is bear traps. This error has happily become less frequent, because market-timing has become unpopular, but loners nevertheless tend to exit the stock market, believing they have identified an upcoming bear. (A little knowledge can be a dangerous thing.) Once out of equities, they have trouble getting back in, because doing so before stock prices collapse would be a tacit admission of failure. Loners do not always benefit from having large egos.

Followers

More common than loners are followers, who derive comfort from crowds. Rather than walk past lines, they join them. Followers are strongly influenced by recommendations—from researchers, the media, friends and family, and internet boards. They seek investment allies.

Strength: Staying Informed

Followers listen to others. Doing so helps to keep them knowledgeable about investments, thereby reducing the chance of an unpleasant surprise. As with inflation, which causes the most damage when it is unanticipated, unforeseen investment losses carry the sharpest sting. Followers who listen to both side of the investment debates—which, it must be confessed, does not always occur—are well prepared for bad news.

Strength: Trading Opportunities

By the time that followers learn of an investment possibility, the loners have already found it. Word takes time to spread. Astute followers, however, may still reap ample profits by arriving before the rest of the marketplace. Discovering Tesla in winter 2020 was too late. But buying the stock two years before, when it was well known but not yet the investment rage, would have been a splendid trade.

Weakness: Tail Chasing

A fine line separates being guided by the collective from being controlled by it. Those who appropriately use investment information, by applying common sense and at least a modicum of their own judgments, can prosper. Not so those who become bewildered by the investment gossip, turned this way and that, like dogs distracted by a fluffle of rabbits. Such is the constant danger for followers.

Weakness: Mob Mentality

Followers are the most prone to being harmed by their emotions. As anybody who has participated in internet forums can attest, chat groups can quickly become mobs. (Whenever I receive an openly insulting email, I know that my column has been posted on a Reddit board.) Investors may benefit from hearing additional views, but rarely will they succeed by sharing others’ emotions.

Zombies

Most investors are zombies. The less they know about their portfolios, the happier they are. Consequently, they tune out the noise. Back in the day, that meant owning a portfolio that had been assembled by a stockbroker, and then leaving future decisions in the broker’s hands. These days, zombies are typically 401(k) participants or index-fund proponents. Either way, they stand aside.

Strength: Investment Discipline

This one is obvious. To the extent that investment success comes from staying the course—a hoary cliché, but not without truth—zombies are perfectly situated. They possess neither the faith to make their own adjustments, nor the interest to copy other investors’. Their portfolios therefore tend to remain unchanged.

Strength: Emotional Control

In the 1990s, many investment experts speculated that when the long-awaited bear market finally arrived, 401(k) participants would be the first to sell, given their inexperience. They were instead the last. During the technology stock crash of 2000-02, 401(k) assets were more stable than either retail investors’ taxable accounts, or the portfolios run by professional managers. There is an advantage to lacking an investment brain.

Weakness: Missing Out

Although zombies will neither become ensnared by bear traps nor chase their performance tails, neither will they spot investment opportunities. To return to our previous example, some people bought Tesla before the company joined the S&P 500 in late 2020. They might have been loners, or they might have been among the earlier followers. But they assuredly were not zombies.

Weakness: Structural Changes

Over the long haul, the markets are very stable. Roughly speaking, bond yields increased for 30 years, from 1950 through 1980, before subsiding over the next three decades. That made for one inflection point during the Depression generation’s investment lifetime. The long-run performance of equities has been equally predictable. Thus, structural changes rarely leave zombies behind. When such shifts do occur, though, zombies are the last investment type to know.

My investment type can best be described as “artificial zombie.” That is, while I am a loner by nature, I have learned through experience the difficulty of outguessing the crowd. Thus, I behave like a zombie, by making few trades and distancing myself emotionally, although of course I am much too informed to be among that breed.

And you?

Source- Morningstar

May 19, 2023

Investment in units of Mutual Funds in the name of minor through guardian

SEBI Circular no. SEBI/HO/IMD/DF3/CIR/P/2019/166 dated December 24, 2019 has prescribed the uniform process to be followed across Asset Management Companies (AMCs) in respect of investments made in the name of a minor through a guardian. Based on recommendation of Mutual Fund Advisory Committee, it has been decided as under:

1. In partial modification to the above SEBI circular, it has been decided as under:

i. Para 1(a) shall read as under:

“Payment for investment by any mode shall be accepted from the bank account of the minor, parent or legal guardian of the minor, or from a joint account of the minor with parent or legal guardian. For existing folios, the AMCs shall insist upon a Change of Pay-out Bank mandate before redemption is processed”

ii. Irrespective of the source of payment for subscription, all redemption proceeds shall be credited only in the verified bank account of the minor, i.e. the account the minor may hold with the parent/ legal guardian after completing all KYC formalities.

iii. All other provisions mentioned in the aforesaid circular shall remain unchanged.

2. All AMCs are advised to make the necessary changes to facilitate the above changes in mutual fund transactions w.e.f. June 15, 2023.

3. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with Regulation 77 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Source- SEBI

May 15, 2023

National Pension System (NPS) exit rule changed: Now buy multiple annuities of minimum Rs 5 lakh each

National Pension System (NPS) Exit Rules 2023: The Pension Fund Regulatory Development Authority (PFRDA) has decided to allow NPS subscribers to purchase multiple annuities on exit if their corpus is over Rs 10 lakh and they utilize at least Rs 5 lakh to buy each annuity.

“The option of multiple Annuities shall be provided for those Subscribers who earmark the annuity corpus more than Rs 10 lakhs wherein Rs 5 lakhs utilized to buy each annuity scheme,” the regulator said in a circular dated May 10.

Under NPS, subscribers are allowed to buy immediate annuities from Annuity Service Providers (ASPs) under the enabling provisions of Exit Regulations of PFRDA. Till now, the subscribers were allowed to buy only one annuity scheme from the ASP at the time of exit.

The regulator said that it has taken the decision to allow the purchase of multiple annuities in the interest of subscribers.

“In the interest of subscribers’ retirement income optimization and to provide them with a wider range of annuity options, PFRDA is pleased to inform that the choice of multiple annuities from the same ASP will be made available,” the regulator said.

What’s new

As per the regulator, the option of multiple Annuities will be provided for those subscribers who earmark an annuity corpus of more than Rs 10 lakhs wherein Rs 5 lakhs is utilized to buy each annuity scheme.

The regulator has advised CRAs to build the necessary system-level functionality to facilitate the implementation of this change.

“Until this feature is developed, ASPs can handle the requests for multiple annuities received from subscribers and provide the necessary information to CRA through Reverse Information Flow (RIF),” the regulator said.

“PFRDA believes that this change will greatly benefit subscribers by providing them with a wider range of annuity options and optimizing their retirement income,” it added.

Source – Financialexpress

May 12, 2023

High pension recipients can get short-changed in bailouts

In 1983, the excitement was palpable as Kapil Dev hoisted the Prudential trophy after the limited-overs World Cup held in England. The 1987 event, initially set for England, was moved to India and Pakistan due to the financial woes experienced by the United Kingdom’s (UK) pension providers, including Prudential, the World Cup’s sponsor then.

The pension industry was struggling because pensioners were living longer, investment returns were lower than estimated, and pension payments were fixed and payable for the pensioner’s lifetime. Ultimately, the UK government took over the liability. Some individuals, who were eligible for a higher pension, experienced losses as the government capped the maximum pension amount.

A similar situation unfolded in the wake of the 2008 Great Financial Crisis, when General Motors (GM) faced bankruptcy due in part to high pension liabilities towards former employees. The US government nationalised GM, took over the pension liability, again capping the maximum pension amount. Pensioners eligible for a higher pension again suffered.

These events show that reckless pension schemes eventually fail. Another lesson is that when the government steps in, it focuses on protecting those who need the pension the most. Those receiving higher pension amounts often suffer.

This leads to the current debate among executives about whether they should opt for a higher future pension by diverting a portion of their existing Employees’ Provident Fund (EPF) corpus.

Let’s say an employee, whose salary is Rs 1 lakh per month, contributes 12 per cent (Rs 12,000) to his EPF account. The employer contributes an equivalent amount (12 per cent of salary or Rs 12,000) over and above the salary. Of this 8.33 per cent, subject to a maximum salary limit of Rs 15,000 (or Rs 1,250 per month) has to be contributed to the Employees’ Pension Scheme (EPS).

The balance Rs 10,750 (Rs 12,000 less Rs 1,250) is transferred to the EPF account. The employee’s EPF account receives a total of Rs 22,750 per month (Rs 12,000 from the employee and Rs 10,750 from the employer). The accumulated balance in the EPF account is tax-free, and can be withdrawn fully on retirement.

The EPS fund receives Rs 1,250 per month from the employee. Additionally, the central government tops up with a proportional contribution to enable EPS to meet its pension liability. This contribution is Rs 174 per month (1.16 per cent of salary, with a maximum salary cap of Rs 15,000).

The pension on retirement is based on the number of years of contribution and the salary at retirement. The maximum salary assumed on retirement remains Rs 15,000 per month and the maximum pension is Rs 7,500 per month (for those who have contributed for 35 years or more).

The retirement pension is available only if the employee completes 10 years in the scheme. Those who don’t can withdraw their EPS contributions. Many employees don’t withdraw this EPS amount even though they are eligible to do so. This unclaimed amount is exceptionally large and is likely to be never claimed back. The interest earned on this “surplus” powers many of the unsustainable pension promises, like a minimum pension of Rs 1,000 per month.

A Supreme Court decision has allowed some EPF subscribers to receive a higher retirement pension without the constraint of a cap on maximum salary of Rs 15,000 per month. To be eligible, however, they would need to transfer significant amounts from their EPF accounts to EPS, sparking a debate on the advisability of such an action.

A valuer assesses whether the resources can meet the liabilities. The latest valuation for the year ended March 31, 2017, revealed a deficit of Rs 15,000 crore. The deficit is expected to grow even larger with the removal of the cap on retirement pensions and growing life expectancies of Indians.

Truth be told, employees hoping for a larger pension in the future by contributing more from their EPF corpus are betting on the government stepping in to cover the deficit. However, history has shown that when a government intervenes, those receiving higher pensions often suffer losses. Employees with higher salaries would be better off investing their tax-free EPF corpus in suitable financial instruments upon retirement rather than trusting that money to an uncertain future pension.

All data taken from EPFO annual accounts of 2021-22

May 1, 2023

4 things investing is, and is not

Investing is NOT Hectic. Investing is calm and measured.

Today you can check the value of your investments on a minute-by-minute basis if you want. But just because you can doesn’t mean you should. Investors who trade more have lower returns, as Brad M. Barber and Terrance Odean demonstrated years ago. And checking your portfolio more frequently will inevitably lead you to trade more.

Doing nothing and sticking to selected funds for the long term can be a significant source of alpha in the long run. Of course, this requires something that many investors find very difficult to implement: patience and discipline.

Resisting that urge to adjust your portfolio becomes particularly difficult when you’re faced with losses. Loss aversion means you suffer losses more than you enjoy gains. And what’s still the best way to avoid losses? Don’t look at your portfolio.

Assume an equity portfolio with a 10% annual return and volatility of 15%. The probability of a positive return over any given year is 93%. As a result, an investor who evaluates the portfolio once a year will experience a loss once every 10 years or so. If the same portfolio is evaluated quarterly, a loss will occur about once every four quarters, or once a year. And if that portfolio is evaluated daily, roughly 120 days a year will register losses.

It takes superhuman discipline not to change a portfolio when you are confronted with losses 120 times a year. But the best returns in the long run are achieved by adhering to a well-diversified investment strategy that lets you reap the benefits of the different risk premia available to long-term investors.

To stay calm and measured, you need to turn off the noise and look at performance only sporadically, and avoid the temptation to tinker too often with your portfolio.

Investing is NOT precise. Investing is rough and dirty.

Investing isn’t watchmaking either. As an investor or portfolio manager, you cannot precisely manipulate the mechanics of the market the way a watchmaker can the mechanics of a wristwatch. If a stock or a bond has a portfolio weight of less than 2% or an active weight of less than 2% compared to the benchmark, it is almost guaranteed that the effect on the overall portfolio will not be meaningful in any practical sense.

And now think about the time spent analyzing the details of stocks that will end up with an allocation of 2% or less in the portfolio. Each of these details has a miniscule influence on the overall stock performance, and the overall stock performance has a miniscule influence on the overall portfolio.

Just because you can calculate risk exposures to the second decimal place and adjust portfolio positions to the basis point doesn’t mean you should. Fighting for every basis point is best left to money market fund or government bond fund managers who have to because of current central bank policies.

If you work in the equity space, across asset classes, or in any asset that has some volatility, always remember that even the best model can only explain less than 50% of the variation in returns when applied out of sample — and out-of-sample tests are the only ones that count.

What does this mean? Over 50% of your returns will be noise. And that noise will inevitably drown out any benefits accrued from fine-tuning a model or investment portfolio.

Investing is NOT rational. Investing is emotional.

The financial industry is incredibly innovative — mostly when it comes to reinventing the wheel. For most investors, the simple and transparent solution will do just fine most of the time. But every once in a while an innovation comes along that benefits investors as a class. Just think: Where would we be without the limited liability company, the stock exchange, diversification, the mutual fund, the index fund, options, or futures?

Thanks to all of these inventions, investing has become cheaper, risk management more effective, markets more liquid, and access to investments more open. Ultimately, financial markets are among the most democratic institutions in the world today.

But very often financial innovation is a recipe for disaster. Investing may be rational, but money is emotional, and when risks — or opportunities — materialize, emotions take over and investors make crucial mistakes.

I have made it a rule to recommend only those investments that I have experienced myself. If a new innovation comes along, I tend to add it to my own portfolio with a little bit of money just to know what it’s like to live with it. Experiencing a new innovation firsthand will elicit the same emotions in me as it will in my clients. And only then can I judge if the investment is appropriate for a specific investor.

Emotions cannot be imagined. As a portfolio manager or adviser, you have to experience them to improve your recommendations and decisions. Research shows that fund managers who invest much of their personal wealth in their mutual funds generally outperform. Similarly, advisers who eat what they cook tend to cook better.

Investing is NOT entertaining. Investment is boring.

Is there a television on nearby turned to CNBC, Bloomberg TV, or any other financial news channel? If so, please get up and switch it off.

Let me explain why you shouldn’t watch what I call “Bubble TV.”

The people working at Bubble TV and their counterparts at financial newspapers, investment newsletters, etc., are not in the business of providing good advice. They are in the business of selling airtime, newspapers, and newsletters. And the best way to attract attention is to appeal to the emotions and instincts of their viewers and readers.

“If it bleeds, it leads” is an old saying in the news business. Spectacular earnings surprises and cratering stock markets generate more viewers and readers than stories about meeting earnings expectations and stock markets grinding their way up.

“Experts” who want to be mainstays on Bubble TV have to entertain. And it is much easier to accomplish that by stoking people’s fears of a crash or their desire to get in early on the next superstar investment. As a result, Bubble TV is full of “news alerts,” “breaking news,” and pundits predicting imminent doom or eternal bliss — often both at the same time.

TV experts make bad investment advisers. So keep your TV switched off and focus on what really matters in investing: having a thorough understanding of each investment and how they interact in a diversified portfolio.

Source – Morningstar

April 26, 2023

Why I will still continue to invest in certain categories of debt funds

The Finance Bill, 2023, with 64 official amendments, was approved by the Lok Sabha without discussion on 24 March. The key amendment that will affect all fixed income investors is about debt mutual funds. These funds have been stripped of the long-term tax benefit if they invest less than 35% of their assets in equities. Such mutual funds will attract short-term capital gains tax.

I would still invest in target maturity funds even after 31 March because fixed deposits (FDs) don’t give me these flexibilities. Here are my three simple reasons.

If I were to decipher the key amendment in simple words, all the gains will now be taxed as income and you will have to pay income tax. This is a big jolt, especially for debt investors.

There is a chatter that a few categories of debt funds, especially the recently introduced and hugely successful target maturity funds, will not attract investors now as they will move to FDs. Few will but I will still look at investing in them for these reasons:

Higher returns if yields come down

The data on 10 years government security yield from 1998 points out that yield mostly moves in a tight band of 5.5%-7.5%. In fact, over 80% of the time, it’s between 7%- 8.5%. The bond price is inversely co-related to yields. This means if the yields go down, the bond prices go up and if the yields go up, then bond prices go down potentially leading to capital losses too.

Our view is the yields offered by government securities are near their high. So, if I capitalize on higher debt yields and the yields fall, I can make higher returns than just the expected regular yields.

The yields have fallen from high before too and happened in 2008, 2014, and 2019. The total returns from debt funds were close to double the returns of the yield.

Deferral of tax

Investing in target maturity funds that have maturities matching my retirement age or post-retirement age is a smart way of reducing the tax impact. As per the current law, one must pay income tax on accrued interest income out of the investments made in FDs.

Many of you will fall in the 30% tax bracket and this would mean low post-tax returns. My deferral of tax point was more to do with my income levels. If I am, let’s say 50, and plan to retire at 58, where I would have no income, I would invest in debt funds as the redemption will come to me as an income only after I retire thereby helping me reduce my tax liability. Here I pay taxes at much lower rates than what I would have paid during my prime working years leading to higher post-tax yields.

Longer duration

Many banks offer attractive FDs rates only for a maximum period of five years. I also have seen the pattern where the longer the duration of deposits, the lower the rates. For example, the difference in rates between a 1-year FD and a 5-year FD is over 25 basis points. One basis point is one-hundredth of a percentage point.

In the case of a few target maturity funds, the holding duration can go up to 15 years holding too. I think India’s interest rates currently are high enough and hence I would like to lock it in for longer years.

The final point which is applicable to all asset classes that have been forgotten in the last 4-5 days is the fact that the investors can smartly avail the benefits of setting off.

Set off is an option where investors can use the benefits of any losses that they carry to be adjusted against the gains made during the same or different financial year.

While it is mandatory that short-term gains can be set off against short-term losses, for long-term gains both short- and long-term losses can be set off. This can be a big reason for investors to invest in debt mutual funds if they carry some short-term losses or create during the years of investment to adjust later. The losses can be carried forward for seven years. So, the immediate worry of debt mutual funds seeing huge outflows is just a mere exaggeration. Now it’s a level playing field, and this augurs well for the industry and especially target maturity funds.

Source: Livemint

April 19, 2023

6 money lessons Indian Premier League can teach us

If cricket is a religion in India, the Indian Premier League (IPL) is surely its Kumbh mela or Maha Kumbh. Millions of people in India and beyond will watch the cricket carnival that begins March 31.

Lots of talent to watch and cheer for; many current players and many more emerging cricketers who hope to crack the tournament and make it to the national team.

But what is in IPL to do with personal finance? There’s much in common; in fact here’s what IPL can teach us all about how we should manage our money.

1. Past success is past

Mumbai Indians, the winners of IPL 2021, did not qualify for the playoffs of 2022. Three-time champions Chennai Super Kings, have not played the final for two consecutive seasons.

What does this suggest? The fact that past performances count for nothing in IPL. It’s the same in personal finance. Many investment options may have performed well in the past. But that doesn’t necessarily mean they will perform as well in the future.

2. The best cut out the noise

There is a lot of glamour involved in IPL. It’s all about fame, money, endorsements, media, fans, cheerleaders and so much more.

A new player may be overwhelmed by all the hype. But have you noticed how the best players keep their cool and go about their job quietly and efficiently? The best players, often, perform by cutting out the noise around them.

That’s what wise investors do with their money. Often, we are overwhelmed by all the advice, tips and suggestions from our parents, friends, colleagues and the social media. For instance, our parents may recommend the age-old life insurance policy they’ve been investing in for generations to save tax. Never mind if such policies yield returns of only up to 4-5 percent. Or tons of money-making advice about the next best stock to buy or tips doled by social media influencers.

Turning a deaf ear to such noise and understanding our needs is important to achieve our goals.

3. Wait until the last bowl is bowled

IPL is a classic example of matches that go down to the wire. If there is one truth that cricket lovers have learned, it is that the game goes on until the last ball is bowled. IPL has its fair share of last-ball climaxes or even super overs where one over decides the fate of the match.

Similarly, in personal finance, it’s never too late to start. Just because you didn’t start investing in the first 10 years of your working life doesn’t mean all is lost. Just because your salary is low doesn’t mean you cannot build wealth.

Never give up on your financial planning until your objectives are achieved. Sticking to your plan and consistently implmenting it until you reach your destination is the only way to success.

4. Hard work pays off

Two years ago, very few people knew players like Ruturaj Gaikwad, Arshdeep Singh, Umran Malik and Rahul Tripathi. Today two of them have made it to the national team.

Every year, IPL introduces us to a new cricketing sensation who made it because of hard work, perseverance and patience. Be it IPL or personal finance, hard work is rewarded at some point of time.

Here’s a tip: If your salary is low, start a systematic investment plan with as little as Rs 500. Patient, regular and disciplined investing with small amounts to begin with can build a sizeable corpus; you’d be surprised to see how much money you’ve accumulated after a few years. Try it out.

5. Review your finances regularly

From winning the toss to setting your field and choosing the line-up, IPL is a game of strategy. Each match has two strategic time-outs wherein the captain and coaches combine to design a strategy — one at the beginning and one near the end.

In personal finance, with factors such as age, risk appetite, income source and dependents, each individuals needs to ascertain his or her needs and save and invest in different instruments.

Over a period of time and depending on personal milestones such as marriage and birth of a child, you will need to alter your strategy.

6. A good start is work half done

IPL being based on a T20 format, a good start to the game makes the win nearly certain. If it is batting and the batting team scores 200 runs without loss of any wicket or if it is bowling and if half of the batting team is sent to the pavilion within the first 10 overs, the spirit of the team soars and their supporters are jubilant.

Similarly, in personal finance, early financial planning not only ensures early achievement of your objectives but also results in greater returns.

We don’t know who will win this year’s IPL, but if you start saving early, plan your finances well and be disciplined, you will end up the winner in achieving your financial objectives.

Source: Moneycontrol

April 12, 2023

5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning

Do you wonder whether you need to make a financial plan with a financial planner to achieve your life goals? Some individuals believe that saving regularly through bank recurring deposits or investing in mutual funds through SIPs qualifies as financial planning. However, such ad hoc allocation of savings and investments is insufficient to accomplish your financial goals and may result in inefficient utilisation of financial resources. If you want to become wealthy or achieve various life goals such as purchasing a dream home, going on a foreign vacation, or funding a child’s higher education, solely relying on salary or business income may not be enough. This is where financial planning becomes valuable. With a financial plan, you can create a roadmap to fulfil all your financial goals, including building a contingency fund for unexpected expenses. This article elucidates why financial planning is necessary and why you should work with a financial planner for effective financial planning.

What is Financial Planning & Why it is Necessary?

Financial planning is a process that assesses your current and future financial situation, enabling you to systematically achieve all of your goals. This process includes creating a roadmap to cover all of your expenses; both anticipated and unforeseen. To achieve this, financial planning involves budgeting your expenses, setting S.M.A.R.T. goals, selecting the appropriate asset allocation, creating a retirement plan, and more.

Even if you have savings, you need to have a financial plan because inflation can significantly erode the value of your money over time. Inflation refers to a general increase in the prices of goods and services over a period, which can reduce the purchasing power of your savings. For instance, a chocolate bar that costs Rs. 100 today could cost Rs. 110 tomorrow, and the cost will continue to rise over time. A financial plan can help you combat inflation by developing a sound investment strategy.

Financial planning also involves setting and achieving specific life goals, such as retirement, children’s education and/or wedding, purchasing a house, buying a car, and family vacations. Your planner will assess your cash flow and quantify your goals, creating a plan to allocate your funds towards achieving them in a systematic manner. Finally, the plan will recommend suitable investments, which may also include tax-saving investments.

Why Do You Need a Financial Planner to Manage Your Finances?

Now that we know why financial planning is necessary to achieve your life goals and create wealth in the long term, the question arises, how to start financial planning? Well, if you have been reading our articles, you might have come across several articles we published that are about how you can start financial planning by yourself. However, the majority of investors either lack the required knowledge to make a such crucial financial decision or do not have sufficient time to do the intensive research necessary to make informed financial decisions.

By sticking to the fundamentals, you can achieve your life goals. You might assume that if this is true, then there is no need to hire a financial planner and that financial planning is just another task you can handle on your own. However, that’s not entirely true.

A competent and honest financial planner can play a crucial role in helping you reach your financial objectives sooner than expected. With their guidance, the financial planning process can become much easier and more manageable.

However, having a trustworthy financial planner who always meets high fiduciary standards is very important. They should handle your money with care and responsibility, just as they would handle their own personal finances. Their recommendations should be based on research, and their approach should be unbiased. Nevertheless, there is a fee associated with this service that you would need to pay.

In India, financial planners operate under one of three revenue models:

1. Pure commission model – Financial planners are compensated based on the commission they receive from the financial products in which you invest.

2. Pure fee-based model – Financial planners are compensated solely by the fees you pay for their advice and services. They do not earn any commissions on the financial products in which you invest.

3. Fee + Commission model – Financial planners are compensated by both the fees you pay for their advice and services, as well as the commissions they earn on the financial products in which you invest.

Here Are 5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning:

1. Managing finances can get increasingly complex:

With time, managing finances can become more complex, even without major life changes. It can become overwhelming to keep track of your income, investments, insurance policies, debts, etc. This is where a financial planner comes into the picture. A competent financial planner will aim at optimising your investment returns while reducing your investment risk.

Managing money can be like having a second job that you may not have the time or desire to handle on your own. If you do not have time to research and monitor your investment portfolio, you can hire a financial planner to do it for you. He/she will take care of the tedious work, and you can get involved when it is time to make decisions.

Furthermore, you might not feel comfortable making financial decisions due to the confusing nature of investing. A good financial advisor can support sound decision-making and help educate you on best practices for money management.

2. The one-size-fits-all approach does not work in financial management:

Personal finance advice is often presented in an oversimplified manner, especially by conventional agents and commission-based planners who give the same investment advice to each of their clients. However, you need to realise that a particular financial strategy or recommendation may not be suitable for everyone. This is because we all have our unique objectives, aspirations, and challenges that require personalised financial solutions. Additionally, after the emergence of COVID-19, there has been a lot of instability in the markets. With the abundance of financial information available, it is easy to react impulsively to the news and the fluctuations in the value of our investments. Unfortunately, this can lead to unfavourable outcomes. Engaging the services of a financial planner can help you manage your finances from the right perspective.

3. You will receive unbiased financial advice:

If a financial planner is charging a fee for creating a financial plan without any obligation for you to invest in it, the advice they provide will likely be impartial and unbiased. However, if an agent or advisor is offering a free financial plan, you may need to be wary. There may be underlying motives for this free service, such as a desire to earn commissions from recommending certain financial products. As a result, the recommendations provided may not align with your investment objectives and financial goals.

It is essential to understand that nothing comes for free, and a free financial plan may pose a risk to your financial well-being. It is possible that the planner offering this service is pushing unsuitable financial products that are in their interest to sell, resulting in a disadvantage for you.

To ensure that commission income does not influence the advice provided, it is advisable to choose a fee-based financial planner. This will guarantee that the recommendations made are solely in your best interest.

4. A financial planner will maintain a professional relationship:

Our emotions often influence how we handle our finances, thus, leading to unconscious biases. A financial planner can make informed decisions based on rationale and prioritise our financial well-being.

In addition, financial planners are experts in their field. They have the necessary qualifications to handle financial problems and unexpected situations. Financial planning goes beyond simply investing in a few products. It’s like a test match in cricket, where patience is key and finances must be managed for the long term. You need to navigate short-term volatility, economic downturns, and favourable periods to build your wealth. Working with a professional who can manage your assets under different circumstances and variables is the best approach.

Financial planners guide and support you in the journey towards building wealth and improving your financial health. They uphold strong ethical standards and professionalism, which helps to establish trust in a time when it can be difficult to trust others. When you work with a fee-based financial planner, you can ask important questions and they will be happy to answer to the best of their ability, always keeping your best interests in mind. This can be challenging to do with friends or relatives, and there is also no emotional bias when working with a financial planner.

5. You will need guidance even after investing your money:

It is important to remember that investing is only the beginning – it is crucial to evaluate whether your financial planner offers reliable and sensible support after the initial investment.

Typically, a financial guardian who is readily available and guides you throughout the process of achieving your life objectives with the necessary care and understanding is the most favourable choice.

To conclude:

Finding a competent, experienced, and trustworthy financial planner may seem like a difficult and nearly impossible task. However, it is not. You just need to be patient and willing to take responsibility in the financial planning process. Before hiring a financial planner, ask for references and verify their credentials. Ask relevant questions about how they plan to help you achieve your goals, question their recommendations, and ask for alternatives and backup plans in case their plan fails to meet your expectations.

Furthermore, it’s important to stay actively involved in the investment process. While it’s important to have confidence in your financial planner’s abilities, it’s crucial not to blindly trust them. Always stay within the realm of confidence and avoid crossing over into blind faith.

Source: Personalfn

April 8, 2023

Hybrid mutual funds can be the next big wave. But do they suit everyone?

A big outcome from the Finance Bill amendment on March 24 is that post-April 1, mutual fund schemes will be subject to three different types of taxation. On schemes that invest 35-65 percent in equities, you will now pay Short-Term Capital Gains (STCG) tax in line with your income tax rates; long-term capital gains (LTCG) will attract 20 percent tax with indexation.

To be sure, the Finance Bill has removed the capital gains tax and indexation benefits for debt funds that invest less than 35 percent in equity. In the third category of taxation, nothing changes for funds that invest at least 65 percent in equities.

For the Rs 40 trillion mutual fund industry struggling to come to terms with the latest tax shocker, this new category of taxation has changed little. The fact that hybrid funds were left untouched by the Finance Bill amendment actually opens new opportunities.

The question is: should you really switch to hybrid funds, if you’re affected by higher taxation on you debt fund investments?

MF industry officials and experts say that the 35-65 percent equity category, which largely makes up hybrid mutual fund schemes, would be under the spotlight.

Hybrid funds comprise six categories: Conservative Hybrid, Balanced Hybrid/Aggressive Hybrid, Balanced Advantage, Multi Asset Allocation, Arbitrage, and Equity Savings.

Hybrid schemes with total Assets Under Management (AUM) of Rs 4.87 trillion are the second-lowest open-ended mutual fund category after Solution Oriented Schemes. Compared to this, Growth/Equity Oriented Schemes commanded AUM of Rs 15.01 trillion as of February-end.

Dynamic Asset Allocation/Balanced Advantage funds, which are expected to benefit from the tax changes, are the most popular categories among the hybrid schemes with AUM of Rs 1.91 trillion.

A better alternative?

Experts say that with a slight upgrade in their risk profile, hybrid funds can offer a better alternative when it comes to generating returns, over and above fixed deposit rates.

In this category, equity allocation can move anywhere between 20 percent and 80 percent or even 0-100 percent depending on market conditions. Currently, 30 such funds are available in the market, but most are keeping their equity exposure in the range of 65-100 percent and debt in range of 0-35 percent.

Equity Savings is a neglected category among hybrid schemes with the lowest AUM of Rs 16,445 crore. But that could change soon.

“For retail investors, hybrid funds would make more sense. BAFs and Equity Savings may come in handy for retail investors as they can take debt allocation in a tax-efficient way,” said Niranjan Awasthi, Head of Products Marketing and Digital Business at Edelweiss Asset Management Company.

Equity Savings and Arbitrage Funds

In Equity Savings, minimum investment in equity is 65 percent and minimum investment in debt is 10 percent while arbitrage is also allowed.

In mutual funds, arbitrage is the simultaneous purchase and sale of a stock to take advantage of the price differential in the spot and futures markets. This helps in increasing the equity exposure in the scheme while avoiding a rise in the risk profile.

Experts say that Equity Savings have largely remained neglected as retail investors generally look at equity allocation in hybrid funds. Case in point, Conservative Hybrid, where equity allocation can stay between 10 percent and 25 percent, has a total AUM of just Rs 22,716 crore.

Kirtan Shah, founder of Credence Wealth Advisors LLP, believes that a lot of money will start flowing into Equity Savings.

“Asset management companies will start pushing Equity Savings as a category for fixed income kind of investments. These funds, in four or five years of history, have kept equity in the 20-30 percent range. If you look at all the other hybrids, the equity range is much higher,” he said.

Apart from Equity Savings, the expert also sees money starting to flow into Arbitrage Funds.

“A pure debt replacement will move to Arbitrage and Equity Savings. However, the problem is that in both these categories, if a lot of money starts flowing in, then automatically the spreads will reduce on the arbitrage. That is one big problem that can arise in the future. If we are anticipating that Arbitrage and Equity Savings will see a lot of flows, then the return expectations have to be slightly tempered,” Shah added.

Can hybrid replace debt?

Over the past few days, fund houses have gone on an overdrive suggesting that investors put as much money into debt funds as they can until March 31 to take advantage of lower taxation.

Many experts say that while some people may feel the urgency to shift out of debt mutual funds to save some taxes, they will realise eventually that debt funds can still outperform traditional FDs. There may just not be other credible options available in their risk profile.

Dhirendra Kumar, CEO, Value Research, said, “In terms of taxation, nothing changes for Liquid funds, Ultra-Short Term and Money Market Funds. Debt funds can give investors great convenience, and also a little better return. Plus, for a fixed income investor, equity is risky. In March 2020, the equity went down by around 30 percent in a few days, and that time people were running for cover and they hate equity for that.”

Experts are also of the opinion that investors shifting from debt to equity will risk having a complete change in their risk profile.

Swarup Mohanty, director and chief executive officer (CEO), Mirae Asset Investment Managers (India), does not like selling a hybrid fund to a debt fund investor. “That’s the worst thing that can happen.”

Edelweiss’ Awasthi added: “Specifically, for longer-tenured bond funds and Target-Maturity Funds, there will be times, even like now (high interest rate regimes), where funds which are closely comparable to a fixed deposit, would still do well.” When interest rates fall, bond prices rise; this benefits your debt funds.

What should mutual funds do?

According to Mohanty, the mutual fund industry used to talk about fixed deposits versus income funds in the early 2000s.

“Maybe we have to start from there now, now that the taxation is similar,” he said.

Deepak Chhabria, CEO of Axiom Financial Services, says that if the debt industry has to survive, it has to bring in alpha compared to other fixed-income products.

“In early 2000s, the return on say a long bond fund used to be around 1 percent higher than the corresponding deposit rate. With indexation and tax benefit, it used to be a decent 1.5-2 percent alpha. That alpha over a period disappeared because of the competitive pressure. The pitch has to change, there has to be an additional return and safety will have to come in too,” said Chhabria.

Another aspect debt mutual funds may look to work on is simplification of language so that they can make themselves understood to lay investors.

“The language that we speak; long debt, duration, CAGR (Compounded Annual Growth Rate), compared to a simple FD 8 percent interest is very complicated. We have had the benefit of taxation until now, but debt sales will continue as usual,” said Mohanty.

Source: Moneycontrol

April 1, 2023

Follow These 5Ps to Take Control of Your Finances in the New Financial Year 2023-24

It is critical to plan your finances and investments at the start of the fiscal year in order to avoid a last-minute scramble and to invest based on your needs and financial goals. Every year brings new challenges that we must overcome, learn from, and move forward. As a result, it is prudent to revisit our financial decisions from last year in light of our present financial status and market conditions. Learning from our mistakes in the past can help us make better financial decisions in the future.

Financial planning has evolved in recent years, and more people are recognising the importance of having a long-term financial plan. Today’s digitally-savvy generation prefers to manage their finances using digital platforms or apps. A one-stop solution that allows them to plan, manage, grow, and address their financial needs.

Financial planning plays a pivotal role in allocating funds to the best-suited investment vehicle to add value to your overall financial portfolio. The beginning of the new financial year 2023-24 is the perfect time to reflect on your financial practices or mistakes from the previous year 2023-22 and get started with smart financial planning.

Recently, on the occasion of Gudi Padwa, I met all my cousins. Rohit and Madhu were discussing ITR filing, their investments and how they are struggling with the finances due to last-minute hassle. While our youngest brother Rishi said, “All these financial planning swing like a bouncer over my head. I wish there were a simple concept or theory to understand this.”

To which Rohit replied, “These Gen Z’s want everything readymade and easily available at their fingertips. Rishi, the new financial year is approaching, and you must emphasise on financial planning rather than splurging on irrelevant gadgets online; the early you start the better it is.”

Rishi replied, “Yes, bhaiya, I too, intend to put my finances in place and have better control. But I don’t know where to start. The basic I understand about personal finance management is earning enough to manage one’s daily or monthly expenses and saving enough for the future.”

To which I responded, “Rishi, there is more to financial planning than simply saving from monthly expenses; however, it is one of the elements. The practice of financial planning should be considered as a scientific approach to achieve life’s milestones rather than seeing it as an ad hoc process only to save maximum tax at the end of the financial year. The goal of developing a financial plan is to understand your financial situation, prioritise your goals, and maintain stability even during challenging times.”

Let me help you understand financial planning with a unique approach. You need to follow these 5Ps to take control of your finances.

1. Planning

If you create a plan for any event in life, it is easier to manage; for instance, if you are going on a vacation, proper planning is required. Similarly, your personal finances require structured planning to stay in control and manageable. You can begin with 2 simple steps:

Step #1 – Goal Planning – You need to create S.M.A.R.T (Specific, Measurable, Achievable, Realistic, and Time-bound) goals. A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you, whether to buy a house or help you retire early, it will assist you in saving efficiently towards your goals.

Step #2 – Budgeting – Budgeting is an important aspect of financial planning; developing a budget helps you manage your cash flows, and you can cut back on non-discretionary costs to save more and meet your goals. An accurate picture of your finances is the key to creating a strong financial plan and can reveal ways to direct more to savings, investing, or debt pay-down. There are various budget planning apps available online that can assist you in prudent budgeting exercises.

2. Protection

A common goal that every individual holds is providing a secure financial future for our loved ones and protecting them from any financial challenges. You need to protect your financial worth, to maintain financial stability. An adequate insurance cover helps you do that and is thus considered a vital aspect of financial planning.

You have all seen the necessity of having life and health insurance during the pandemic. One must remember that as we age, the probability of getting insurance coverage at an affordable premium decreases. Therefore, if you already hold insurance coverage for life and health, take a close look at it, and enhance the coverage wherever needed. The best way to cover your life risk and provide financial security to your family in your absence is by getting appropriate health, term or life insurance.

Insurance has several aspects like protection, wealth generation, and a select few that offer the policyholder a combination of both. This is an essential element of your financial planning and should be of utmost importance to avoid having a dent in your savings due to unforeseen contingencies.

3. Provide

Many individuals are charged with the responsibility of managing finances and providing for household expenses and others. With this step of financial planning, you can ensure a better plan tailored for emergencies as well. A major component of financial planning is liquidity management to sustain unforeseen events.

You need to create a financial cushion or safety net to maintain your financial stability in times of emergencies. The future is uncertain; a sudden job loss or an unexpected medical emergency can shake up your finances considerably. Ideally, you need to keep an amount equal to 6-12 months of expenses, including loan EMIs, as a contingency fund. You can start small, and the money can be invested into liquid funds so that you can access the money quickly in case of an emergency.

4. Power

One of the benefits of taking control of your finances through financial planning is the sense of empowerment it brings to you. There are two aspects of financial planning that can strengthen your overall finances.

Investment Planning
Your finances are powerful once you indulge in prudent investment planning. Your savings are best utilised when they are invested in rewarding investment avenues like mutual funds. Starting investments at the beginning of the year through ELSS or SIP in the best suitable mutual funds is a convenient way for novice investors to start off.Do note you need to pick mutual fund investments that meet the risk-return expectations and, eventually, your investment objective. It is essential that you begin investing early so that you can take full advantage of the power of compounding, which has the potential to help multiply your returns exponentially over time. Investments in worthy mutual fund schemes will give you the power to beat the cost of inflation as well.Ideally, investors need to identify their financial goals and align their investments accordingly. I would recommend PersonalFN’s SMART Fund Explorer ; it is a tool that can help you plan your mutual fund investments smartly based on your risk profile to achieve your financial goals. It provides a list of the best suitable mutual fund schemes recommended by our research team that will help you reach your financial goals.

Debt Reduction
You may have debt that you created to fulfil various financial requirements; however, repaying your debt on time is crucial. You need to focus on clearing/paying off your debt burden to be in the pink of your financial health. Eliminating the debt burden gives you the power to have more disposable income to save and invest in rewarding avenues.You need to tackle a high interest debt that pulls out the major portion of your income, leaving you with a small amount to manage the rest of your financial needs. There are numerous approaches to dealing with high interest debt, including the well-known snowball method, which focuses on paying off your smaller bills first. The avalanche method, on the other hand, prioritises paying off your highest interest loans first. You should aim to maintain a debt-to-income ratio of below 40%.

5. Promote

To promote a financially secure life for yourself and your loved ones, you need to be financially literate. All the factors and processes of financial planning will only work for you if you are financially aware of how to implement them.

Financial literacy is the enhances your capability to use knowledge and skills to manage financial resources effectively for your financial wellbeing. Major financial decisions like opening suitable bank accounts, planning for retirement, paying off personal debt from loans or credit cards, and developing a strong investment portfolio for wealth creation are difficult to make when one lacks financial literacy.

Thus, it is vital to bolstering your financial knowledge, and I suggest you consider to enrol for PersonalFN’s latest special initiative, the “Certified Family Guardian,” that offers you an exclusive opportunity to learn the finer nuances of financial planning. Organised into eight modules with 24 extensive videos, the “Certified Family Guardian” will help you with all the relevant tools and learning modules needed to get better at money management.

To conclude…

Personal finance management is crucial for every person mainly to ensure that they have a comfortable present as well as a secure financial future. The beginning of the new year is a perfect time to reflect on the areas of improvement and get a head start on building strong financial health.