Investment Planning

Investment Planning (18)

SEBI Registered Investment Advisers (RIA) provide right financial advice and act in clients’ interest. RIAs are like Financial Doctors and are different from Distributors and Banks. RIAs focus more on advice where as Distributors including Banks focus more on products; just  like selling medicines.

Regular and Direct Mutual Fund Products 

The Mutual Fund AMCs design regular products factoring two components; i.e. the price of the product and the commission. When the investors buy Regular MFs; the  embedded Commission in it  is  passed on  to the Distributors  and Banks. It is like selling branded medicines.

But now SEBI has directed AMCs to design Direct MF schemes without the commission in it. It is like generic medicines. These are  transparent and the investors do not pay for the Commission component. These are not offered by the Distributors and Banks since they do not earn commission from it.

Benefit of Direct Schemes

SEBI has mandated that expenses ratios of MF schemes should not exceed 2.5% in case of equity schemes and 2.25% in case of Debt schemes. These include the commission paid to the Distributors and the Banks. We provide the comparative expenses ratio  of some Regular and Direct Mutual Fund schemes below .The differences are due to the commission embedded in Regular schemes. As may be observed, it is around 1% more in case of  Regular schemes than in Direct schemes .This excess of 1% in Regular schemes  are  paid to the Distributors and Banks.

During February 2016, the Government of India had announced  that it will review small savings interest rates every quarter  based on the yields of government bonds of the previous three months.Recently the government has reduced  interest rates on small savings schemes  to align them with market for the quarter beginning 1 April 2017.

The commercial Banks were reluctant to pass on the policy rate cuts by RBI citing the higher small savings rate. Now this linking of interest rates of small savings schemes to the yields of government securities and reduction in rates will prompt the banks to  pass on the policy rate cuts to the borrowers  through lower lending rates.

The  rates have been reduced  by 10 bps of all small savings schemes including PPF,senior citizens’ saving scheme, postal time deposits, KVP,NSC and Sukanya Samriddhi  excluding the Postal Savings account which has been retained at 4%.The Government has  also retained the spread of 25 basis points of long-term savings schemes such as the five-year term deposit and National Savings Certificates (NSC)  etc over government securities of comparable maturity  to encourage long-term savings.

In the past few weeks, we have seen banks either introducing new charges or hiking the existing ones sharply. While many customers complain of banks robbing them with higher charges, those from the banking industry say customers need to pay for the services they enjoy. Customers’ pain point, however, is not just the fee, but the non-transparent, arbitrary manner in which charges are being levied.

Asset Classes

There are four major asset classes; Real Estate & Gold under physical assets and Equity & Debt under financial assets. The trend of physical assets providing higher return is now reversing. 

Real Estate: Real estate investment is indivisible and illiquid. It carries liquidity risk. It may take longer time to find a buyer for selling the property and hence one must invest in real estate only if one wants to remain invested for longer period. Further real estate prices are correcting and may not provide the higher return it has generated in the past.

Gold: Investing in physical gold and ornaments depresses return due to making charges. It is advisable to invest in Gold ETF of the Mutual Funds. But over last two/three years, gold has not provided return to beat inflation. Sovereign gold Bonds are the flavor of the season. It provides interest of 2.75% besides benefit of capital gain tax. Gold should not be more than 5-10% of your portfolio.

 Equity (Shares and Mutual Funds): It carries volatility risk due to fluctuations of prices in share market. But the volatility gets normalized over a longer period. Hence it is advisable to invest in equity for longer period and not to invest for short term goals. 

After the EPF taxation Fiasco by the Finance Ministry, another big blow has been passed on to the middle income savers by reduction of interest rates on small savings schemes effective 1st April 2016 for the April-June 2016 quarter. 

  Interest Rate (%)
Schemes Now New
Public Provident Fund 8.7 8.1
Sukanya Samriddhi Account 9.2 8.6
Senior Citizens Savings Scheme (5 yrs) 9.3 8.6
Kisan Vikas Patra 8.7 7.8
National Savings Certificate (5 yrs) 8.5 8.1
Monthly Income Account (5 yrs) 8.4 7.8
Post Office Deposit (5 yrs) 8.5 7.9
Post Office Recurring Deposit (5 yrs) 8.4 7.4
Post Office Deposit (1 yr) 8.4 7.1
(New Rates For April 1 to June 30)

UAN (Universal Account Number) is a must

One must get an UAN for availing the online EPF services.UAN is a 12 digit single account number which will be linked to your provident fund account. You don’t need to worry for your different EPF accounts and how to transfer them, when you join a new job. Now each employer will give you a member id, and the member id will be linked with the UAN. Even the employee’s having EPF under private trusts will be assigned the UAN. This is the new system and will be applicable for your current and future employment.

UAN Status in online mode

You have to go to the Employee Provident Fund website (http://uanmembers.epfoservices.in), activate your UAN based registration and complete the details with your login credentials, nearest EPF Office area etc.

EPF Balance:

Once you activate your UAN, you can avail different services such as PF balance, PF passbook, monthly contribution etc through online and SMS.

 

Recently Govt. of India has announced the three gold schemes; two for consumers and one for manufacturers i.e  Jewellers. We will discuss here the features of the first two.

Sovereign Gold Bond Scheme (SGBs)

It is a government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India. The bonds are held in the books of the RBI  or in demat form eliminating risk of loss of scrip. The application form will be provided by the issuing banks/designated Post Offices. It can also be downloaded from the RBI’s website. Banks may also provide online application facility.

Creating and managing a portfolio by the investor requires investment decisions to be made on which asset classes to invest in, how to invest, timing of entry & exits and review & rebalancing the portfolio. These decisions have to be based on the analysis of available information so that they reflect the expected performance and risks associated with the investment. Very often the decisions are influenced by behavioral biases, which lead to less than optimal choices being made. Some of the well documented biases that are observed in decision making are;

 Greed and Fear

These are the most common biases impacting the retail investors. Investors enter the market when prices are already high and sell when the market bottoms out; thereby losing in both the scenarios and finally concluding “equity is the worst investment class”. Few who exercise patience overcomes these biases and emerges as winners.

The single party majority verdict in the recently held parliamentary election and forceful promises made by the Prime Minister to improve the economy has triggered bullish rally in the current share market. Once the economic policies of the new Government get implemented and investment cycles start kicking, the market may reach new heights.

Many retail investors have abandoned the equity market earlier. But it is right time to invest in equity now. The current situation provides an opportunity where the probability of market going up is high vis a vis the downside risk.

I met Pratap yesterday, my ex-colleague. He is keen to buy a two bed room flat. He is searching for the right one since the last two years but has deferred it on being advised that the prices may get corrected in future. He came to know that I have helped few of our common friends in buying flats in Navi Mumbai and all of them are happy about it. He wanted my help and I provided the following tips:

Price correction:

It is a fact that real estate prices are correcting. Residex data published by National Housing Bank (Wholly owned subsidiary of Reserve Bank of India) every quarter provides index of real estate prices in different cities and different localities. The Quarterly Index is as follows:

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