Friday, June 1, 2012


Prashant Jain is one of the most respected Mutual Fund managers in India. In a recent article, “Its Tomorrow That Matters”, he makes out a very persuasive case for investing in equity-linked products NOW. By giving behavioural, fundamental and philosophical aspects of equity investing, he asserts that this is the time to invest in equity linked products like diversified equity mutual funds. Some excerpts of the same article are given below in point form for easy assimilation. To download the full article, use the link

Good returns are seldom made on investments made in good times.
Rather, Good returns are typically made on investments made in adverse times.
1.    Look at the performance of investments made in stock markets at different times:-
Table A: Performance of Investments made in good times
Sensex Level
1 yr forward P/E
Main news / reason
Total returns after 3 yrs
Total returns after 5 yrs
Jan 00
High optimism in technology stocks
Dec 07
Booming global economy, optimistic markets
Table B: Performance of Investments made in adverse times
Sensex Level
1 yr forward P/E
Main news / reason
Total returns after 3 yrs
Total returns after 5 yrs
Oct 01
9/11 attack on WTC, global markets collapse
Jun 04
Unexpected defeat of BJP in elections
Nov 08
Sub-prime crisis – Lehman collapse

2.    Buy low and sell high is what everyone suggests and that is what everyone would like to do. The reality however for a typical investor in equity markets / equity mutual funds is somewhat like this - buy high, buy more higher, buy even more even higher, buy less when market falls, buy lesser if markets fall more and buy nothing when markets are really down.
3.    This pattern of an overwhelming majority of investors mis-timing the markets repeatedly and consistently is a key reason for the unsatisfactory experience of the majority from equities and for the poor equities ownership in India. While there can be many reasons for this collective expertise at mis-timing, the key reason probably is that a majority of investments in equities are not done with a long term view, despite the fact that the best that equities have to offer is only over long periods. This is unfortunate, as by investing with a short term view, investors are not benefiting from the compounding potential of equities.
4.    As the horizon is short term, the entire focus is on guessing the near term market movements. This inevitably leads to extrapolating the markets in either direction and therefore, in rising markets, expectation is that markets will keep on rising. Greed of quick returns leads to higher inflows in equities and as the trend sustains, the confidence and greed both keep on increasing, leading to even larger inflows. Similarly, in downward moving markets, the expectation is that the markets will keep on moving lower, leading to lower inflows; the lower the markets move, or the longer the markets do not move, higher is the confidence that markets will fall further or that markets are going nowhere, resulting in drying up of fresh investments or even redemption of existing investments.
5.    When markets are moving up, the news flow is generally good and vice versa. Therefore, generally, in rising markets the perceived risk is low whereas the actual risk is higher as valuations are high. On the other hand, in adverse times, when the markets are not doing well and the news flow is not good, the perceived risk is high whereas the actual risk is lower as valuations are attractive. The net result of all this is that, time and again, a majority of investors end up investing large amounts at high valuations and small amounts at low valuations.
6.    Such an approach to investments is not returns friendly and it therefore comes as no surprise that a majority of investors probably do not get rich by investing. Faced with unsatisfactory returns, most blame the markets when instead, it is their investment approach that is flawed and needs to be corrected.
7.    However, in case of Gold in India, nobody looks at real returns as the time-period of investment may border on even indefinite. Comparative returns are as below:-
5 year returns (Compounded Annual Growth Rate) of Equities and Gold in India
BSE Sensex
Gold returns %
Excess returns of Sensex over Gold
2006 - Apr 2012

8.    It is true that the economy is currently passing through a difficult phase. However, this is neither the first nor will it be the last time the economy is facing challenges. Besides, the problems facing the economy are such that should get resolved over time and through some specific steps. In the face of so many issues and adverse news flow almost on a daily basis, it is easy to forget the several strengths of the Indian economy.
9.    Bargains are available only in challenging environments / in markets characterized by weak sentiment and seldom when the going is good / sentiment is strong. That's why, from an investor's perspective, a more appropriate way to describe the current markets would be bargain markets and not difficult markets.
10.By the end of June or shortly thereafter, Greece will either be in Eurozone or it will not be. Over the same timeframe, steps if any that are undertaken by the government to resolve some of the issues facing the Indian economy will also be known. Irrespective of what happens, markets should discount these outcomes fairly quickly.
11.Times such as present, when the markets are not doing well should actually be looked upon as a window of opportunity for savers to invest more into equities, so that when the good times come, there are meaningful investments in equities to reap the benefits from. The lower the markets are, the bigger is the opportunity and the longer the markets remain depressed, better is the opportunity for savers. In a lifespan of investing of say 30-40 years, it is unlikely that the markets will provide many such windows. In the last 20 years there have been only 3-4 such windows. 

Monday, May 21, 2012

Hope You do not Fall Prey to these Investment Myths

As a Financial Planner and an Investment Advisory firm, we come across quite a few biases over-and-over again while dealing with people from all walks of life. Sometimes it is quite surprising that many of the people know more about the state of nation’s and USA’s finances than their own! Investment myths abound, leading to mis-purchasing and misdirected savings. Due to this many investors burn their fingers and then swear to stay away from perfectly healthy investment avenues, only because they actually did not understand what they were getting into, in the first place. Here we present to you four very common investment myths.

Myth 01: I have made my Tax Saving Investments, so My Job is Done.
Fact 01: People who want to invest but are not too serious about it belong to this category. This is a common mistake made by investors. Saving on taxes is a good way to save money but it is not the end of investing - just a small part of it. There are many more things to be looked at while investing apart from just saving taxes. We should leave the habit of waiting till February or March for seeking tax deductions; instead we should plan all your investments from the very beginning of financial year (April) keeping tax deductions as just one more factor in mind.
Myth 02: Investing Should Be Exciting! I should Diversify As Much As Possible!
Fact 02: It is good to have a well diversified portfolio (debt, equity and gold) but within certain limits. Many investors get so wrapped up with diversification that they include every new product that hits the market in their portfolio and then, 1-2 years later wonder why their returns are only in the range of 2-3%, or maybe even negative. You do need a level of diversification across equity, debt, gold and maybe, real estate. Equity will beat inflation over the long term. Debt will protect your capital and give you steadier returns. Gold and real-estate will hedge against inflation. However, keep in mind that over-diversification can actually hurt you. Stick with well chosen equity mutual funds for diversification across companies, sensible fixed income products like PPF, FDs and liquid funds for your cash needs, and gold by way of ETFs / Gold MFs.
Myth 03: Plan for my retirement? I’ve got plenty of time for that!
Fact 03: You don’t. Any salaried person who does not have a retirement plan is inviting disaster. Life and the world’s economy are two things which should never be trusted for steady longevity! Plan for your retirement now and forget delaying it. As little as Rs 2,000 per month at an average returns rate of around 15% will fetch you nearly Rs 36 Lakhs by the time you are 60 if you are currently in your early or mid-20s.
Let’s take an example: Suppose in your post-retirement years you want to be able to spend today’s equivalent of Rs 75,000 on household expenses and Rs 25,000 per month on discretionary expenses, medical care, and any other expense you would like to consider. That’s Rs 75,000 per month plus Rs. 3,00,000 per year by today’s rates. You are currently 35 years old and would like to retire at 60. Taking inflation at 8% per annum, a life expectancy of 85 years, and post retirement returns at 8% as well (to keep things simple), you’re going to need Rs 20.54 crores to retire in peace and maintain your standard of living!! Even if you are going to get a pension from your employer, there is still a sufficiently large amount you would need to build up if you do not want your post-retirement standard of living to be maintained.
Myth 04: I can do this on my own; I don’t need a Financial Planner. They’re too expensive.
Fact 04: You must have heard that ‘A half-truth is far more dangerous than an outright lie’. Getting free financial advice or no advice at all, will be much costlier than the fee you would pay your Planner. A financial planner is important because you need someone who’s going to give you unbiased advice for not just what you want but what you need the most.
While investors are smarter today, they also have more to deal with more information, more products, more options (and therefore a surfeit of choice), more demands on their time and money, and more demands from themselves. You need someone who can sit down with you and create an over-arching financial plan that will help you overcome the financial myths, clear the financial fog, simplify your financial life, and help you gain complete control over it.
[This article has been adapted from an email article sent by Quantum Information Services Pvt Ltd (]

Tuesday, April 24, 2012

Should You Invest in Gold Today on Akshay Tritiya?

Today is Akshay Tritiya (or Akha Teej / Akshay Teej) – a day which is considered auspicious to donate to the needy or to present something to dear ones or to start a new trade/venture. It is also considered a good day for weddings. The savvy marketers of modern times have made this day auspicious solely for buying Gold. So you see hoarding, advertisements, surrogate advertisements and advisories extolling you to buy Gold today. For the believers and non-believers alike, the main question is – Is Gold a good buy as an investment? If yes, in what form should it be bought?

Gold as an Investment
Gold has a unique position as an investment. It thrives on economic volatility and chaos in the world – a throwback to the days of Gold Standard instead of the current Dollar Standard. That’s why, various financial crises – sub-prime crisis, dollar meltdown, Eurozone problems etc – in the recent past have seen Gold going through one of the most spectacular rallies ever. Consider the chart below:-
Last Akshay Tritiya Date
Price that day (Rs, 10 gms)
Annualised Returns till today
Today (24 Apr)
06 May 11
17 May 10
27 April 09
08 May 08
As you can see, returns have been far better than what any other investment has given. But will it continue its dream run? May or may not. If the world’s economy stabilises, if no new crisis takes place, it may not. If world continues in a flux, it may continue to appreciate depending on how deep is the crisis. How do we see it today? We feel that the world is turbulent enough (and the crises are not going away anywhere too soon) for Gold to offer a good value for at least one more year. Nobody knows beyond that.

How to Buy Gold for Investment
Primarily Six ways in which you can invest in Gold:-
1.    Jewellery - Good for personal use but not good as an investment. Problems – difficult to be sure of purity (unless you pay huge charges for Hallmarking), coloured stones embedded in jewellery sold by Gold rate but rejected while selling back, storage and carriage problems, high making charges which are lost the moment you buy the jewellery piece, no standardisation of prices amongst jewellers and the Indian mindset of never selling Family Jewellery (thus it does not serve the purpose of an investment).
2.    Coins/Bars - Easy to buy but very expensive. Today’s 24-carat Gold rate (9.15 AM, 24 April 2012) in Mumbai Bullion market is Rs 28803 per 10 gms. Of the banks selling it, cheapest is SBI at Rs 30,519 (6% mark-up), PNB is giving at Rs 31,888 (10.7% mark-up) and ICICI Bank is giving at 33,447 (16% mark-up). An investment made at such high prices may take long time just to get even. Also, as per RBI rules, Banks are not allowed to buy back any Gold, not even their own coins. That way, ‘trusted jewellers’ are a better bet as they will most likely buy back what they have sold to you when you go back to them – but finding a ‘trusted jeweller’ is an exercise by itself.
3.    Gold ETF - Gold Exchange Traded Fund. Paper Gold - it is like your money in the bank. Most efficient way to buy and sell gold. Done on stock exchanges at the price of 24 carat Gold at that moment in the bullion market – no mark-up. No problems of purity, storage/carriage and no time lag in buying or selling. Can buy or sell from 1 gm equivalent onwards. Benefits of Long Term Capital Gains available after one year itself. Problems – you don’t get to hold it in your hand, cannot buy less than 1 gm and there is no procedure of ‘Systematic’ buying automatically on a regular basis.
4.    Gold Mutual Funds – Similar to Gold ETFs with all its advantages but taken through the Mutual Funds route. Additional advantages are – do not need a demat account, can buy on a regular basis (generally once a month), and investment could be from as low as Rs 100 per month or Rs 5000 in bulk with no upper limit. Disadvantage – generally 0.5% transaction charges additional to ETFs, but that does not amount to much anyway.
5.    E-Gold – Another form of paper Gold bought on NSEL (National Spot Exchange Limited). Need a separate demat account for it. Advantages same as Gold ETF. Additionally, transaction costs and liquidity is better provided you are buying it in large quantity. It can also be converted to physical Gold at additional cost. However, it makes sense only if you are going in for large quantity of Gold. For small quantities up to 50-100 gm, it may not be beneficial.
6.    Gold Futures – These are ‘Futures Contracts’ on Commodity Exchanges such as MCX and NCDEX. These are meant for sophisticated investors who understand the associated risks since these have the potential to make or lose big money. Meant for traders and speculators with a high risk appetite.

Our Recommendations
Gold is definitely investment-worthy even at current high rates but remember:-
1.    Gold ETFs / Gold Mutual Funds are the best way to buy Gold for investment.
2.    Since Gold prices are quite volatile, better to buy regularly in small lots. Gold Mutual Funds score over ETFs there.
3.    Never should Gold form more than 10% of your portfolio. If your total investments (excluding real estate) are, say Rs 10 Lakhs, Gold should be maximum Rs 1 Lakh. Similarly, if you contribute Rs 10,000 per month to savings, Gold should be Rs 1000 pm.
4.    Remember, despite its fabulous returns in the past few years, Gold, in the very long-term, tends to move just along with inflation rate. Hence, it is actually a hedge against inflation only. Do not go over-board by stocking up a major part of your savings into it. Do not forget the drastic fall it had in 1980!

Thursday, April 19, 2012

You Owe it to Your Children - Part 2

In Part-1 of this article, posted 4 days back, we had dealt with planning for the children for the long term wherein general strategy and points to be kept in mind had been discussed.
As already brought out, one needs to start saving as early as possible. This has four huge advantages – you only need to save a small amount regularly, you are able to ride out the periodic ups and downs easily as there is enough time-cushion available, mid-course corrections can be easily implemented and most importantly, power of compounding works for you in an astonishing manner.
Having understood this, the most important question that faces you is how and where to invest? When the parents think about the child’s future, the primary thoughts are about their education and marriage. Most parents are aware of how expensive higher education has become today and compounded by Inflation, it would be out of reach of many if not meticulously planned for. This is the primary reason that most of them want to start saving so as to create enough resources to give their children dream education. This may even include higher education abroad. In this article, we will deal with these aspects specific to your child, taking age-wise scenarios.
Characteristics of Various Investment Products
There are a bewildering variety of products available in the market, each one of them catering for a specific need which should be carefully understood. If we use a good product for something it is not meant for, it is bound to fail us – you cannot use a gun to kill a fly or a butter-knife to cut wood! The products that can be used for planning for your child along with their general characteristics are as below:-
1.    Life Insurance – As the name suggests, it is meant for insuring life and not for saving. Generally, traditional policies, like money-back and endowment plans, give you returns in the range of only 6-7% per annum which is much less than inflation itself. One should not expect it to create wealth for you in the long-term. Unit Linked Insurance Plans (ULIPs) can be equity market-linked but their high upfront loading combined with barriers in switching out if they do not perform, make them unsuitable compared to other products for meeting long-term goals. ULIPs would give you decent returns only after about 6-7 years of continuous investment.
2.    Debt Products – These fixed-return products like Bank FDs, Recurring Deposits of Banks and Companies, Provident Funds (PPF, DSOPF, EPF etc), Bonds and Debt Mutual Funds, generally give you returns equal to inflation. This implies that it is likely to fare better than Life Insurance, but will only preserve your capital. Eg, if PF rate is 8.6% pa today, the inflation is also on the same lines. Your Rs 100 in these instruments will become Rs 108.60 next year, but then price of everything will also increase to that amount next year. Thus, the purchasing power of your money in these instruments has practically remained the same! However, the safety and security of capital provided by these instruments is a big plus. Therefore, some amount of your savings for the child should go into such safe instruments too.
3.    Gold – While Gold has had an unusually good run in the near past, it has largely been due to the unstable economic conditions in large parts of the developed world, which may or may not be sustained in future. Traditionally, Gold has at the same rate as inflation in India and thus, is considered a long-term hedge against inflation rather than a wealth builder. Also, to look at it as something which will fund a child’s education or marriage may not turn out to be so since normally Gold in Indian households does not get sold to fund goals except marriage!
4.    Real Estate – Real estate has the potential to give good long-term returns provided a good property is identified well in advance. This can be tricky but plenty of success stories abound. However, own Home and a second property to provide good rentals to take care of your Retirement Planning take priority while using this route to plan for your goals. The bulk investments required in real-estate may also be a deterrent and not be very conducive to using your small monthly savings. There is sometimes a tendency to concentrate all resources in this asset class, which is not a good long-term strategy and can bounce back.
5.    Equity-Linked Products – It is a well-known fact that Equities (ie, stocks or shares) and equity-linked products like Equity Mutual Funds (MF) outperform all other asset classes over the long term. If you lack the expertise to invest in equities directly and/or find yourself unable to follow the turbulence of stock markets and take timely corrective actions like exit/ additional purchase/ rebalancing, take the MF route. MFs are one of the best regulated instruments in the market today, they don’t need your day-to-day involvement, offer excellent long-term returns, are very liquid and lend themselves to small regular contributions. Maximise your exposure to such instruments for achieving the education and marriage goals of your children and keep putting the excess away in them as your income increases. However, remember that you should be comfortable with the short-term volatility of such equity-linked products before you take this step.
Prescription for your Child as per the Age Bracket
The first and foremost requirement remains taking an adequate Term Insurance Cover for yourself so that your child’s future remains safe - with or without you around. The future insurance need has to be carefully calculated in terms of amount and time-period and insurance cover already taken to be subtracted from it. Remember that the tendency to look for ‘returns’ or ‘money-back’ from an insurance policy is self-defeating – you do not expect money-back from your car insurance, then why from your life-policy? Such ‘returns’ only make it unacceptably expensive.
Child 0 to 6 Years:  There is plenty of time available for saving for your child and is, in fact, the ideal time to start. Nothing will work as well as Equity-linked products here. While debt products will provide safe option, you will not be able to meet the goals as comfortably or surely by investing only in them. Depending on your risk-taking capability, you should take a mix of the two in a ratio of anything from 0:100 to 40:60 for debt:equity products to reach your goals.
Child 6+ to 12 Years: Whatever is true for above age bracket holds true here too, the only difference being that goals are closer now. The debt:equity ratio essentially remains the same. Rebalancing and constant monitoring of the equity-linked products continues to be very important here too to create the required wealth. Adequate Term Insurance, if not already taken, remains a necessity.
Child 12+ to 18 Years: Now the education goal could be very close, maybe less than 3 years away for Graduation. There is a need to consolidate and preserve the gains made in equity / equity-linked MFs now. Hence, the money earmarked for Graduation studies’ goal should be moved gradually to debt products while that for the Post-Graduation and marriage goals should continue to grow in the equity / equity-linked MFs.
Child 18+ to Pre-Earning Years: The Post-Graduation goal could also be coming closer and the money earmarked thereon should be moved to safer avenues. Marriage expenses may continue to be invested in equity-linked products if there is still adequate time available – at least more than 3 years.
Earning Child: The child should start taking the burden of his/her future expenses now, including higher studies. Since the age is young with plenty of earning years to go, the investments should primarily be in equity-related products except for some debt products like PPF, where safe tax-free returns build up gradually and counter the volatility of equity products to some extent. Systematic Investment Plans (SIPs) in equity-diversified MFs would work the best here. The child should be encouraged to start his own investments now.
The End-piece
A child brings a lot of joy and happiness to the family. But with this also comes the realization of responsibility of parents towards them. A lot of dreams emerge with the child being the centre of those dreams. From here originates the need to create a financial base that would ensure the future of the child in all respects. It is essential that investing decisions are taken with due deliberation – seeking professional help would benefit you far more than it would cost you in the long-term. Investing portfolio for the child should be diversified to accommodate the positive points of each asset-class as also to de-risk it. Equally important is its periodic review and rebalancing. Remember, there are no automatic ‘fire-and-forget’ solutions and nothing but the best should accrue to your child!!

Sunday, April 15, 2012

You Owe it to your Children – Part 1

Saving for your child’s future needs is one of your most important goals in Life
 as also your Bounden Duty as a parent
Remember Farhan Qureshi in the 3 Idiots? His father planned out his education and career the day he was born. The senior Qureshi's career choice may have been out of sync with his son's passion for wildlife photography but the underlying objective — to secure the financial future of his child—was bang on target. An increasing number of Indian parents are doing that today.
According to the survey, 63% of the 1,908 respondents said they started saving for their children's education when they were born. Another 9.2% had started even before the kid was born. That's good news, because the earlier you start, the more the time available for your investments to grow, and the bigger the corpus. But are Indians choosing the right options when investing for their children? Here's the bad news. An overwhelming majority is opting for low-yield instruments. Almost 45% of the respondents in survey said they invest in the Public Provident Fund (PPF) and fixed deposits for their children. Another 38% have invested in traditional insurance policies.
"Despite the numerous options available, Indian parents continue to rely on bank fixed deposits due to lack of awareness," – laments a Financial Planner. The encouraging part is that 43% also invest in equity mutual funds and stocks for their children, while 26% have opted for child insurance plans that provide for the education of the child if the parent is no more. The skew towards low-yield products also means that many Indian parents might fall short of the targets they have set for their children's investments.
Estimated that in raising a child in urban India from cradle till college costs roughly Rs 55 lakh. The calculation assumes that the child will take up a professional course costing Rs 10 lakh. This is the cost at today's prices and the amount has to be adjusted for inflation. Now comes the scariest part. Education costs, which constitute nearly 46% of the total expense on a child, are growing at a worrying pace of 20-25% per year.
Formulating a Strategy:
Fortunately for parents, there are enough investment products to help them fulfill the dreams for their children. Chosen appropriately, these options can help you save enough to send your daughter to the best medical college in the country, or book a ritzy 5-star hotel for your son's wedding. How does one choose the right product? The first thing to understand is that there is nothing to differentiate the investments made for children from the rest of your portfolio. They are exposed to the same risks, offer the same returns and are taxed at the same rate. No mutual fund will give units at a discount or offer guaranteed returns just because a parent is saving for his child. No bank will offer you a higher interest rate. No insurance company will charge a lower premium. The taxman too will not exempt any income. So, the same rules that govern your own investments should apply to those made for your children.
Your choice should depend on four basic factors: the tenure of the investment, the risk you are willing to take, the returns offered by the option and the taxability of the income. Here's how these four factors can affect your investments.
Tenure of investment: Are you saving for your daughter's education? Or for your son's marriage? Financial planners say it is best to define your goals and segregate the investment for each goal. "Since each goal has a different time frame, separating them will allow the parent to choose the most appropriate investment to reach that goal," The stock market has historically been the best place to park your money for the long term. There are enough studies to prove that equities give the highest returns in the long term.
Risk and returns: Every individual has a different risk appetite. Equities are certainly a great option for creating wealth over the long term, but what good is this money if it leaves you tossing and turning in bed, agonising over how your investments are faring. So choose an option that suits your risk tolerance. For this, first get your risk profile assessed by a financial planner. In many cases, one does not even know how much risk he can take. "Most parents adopt a very conservative approach when it comes to investing for their children. This attitude is rooted in the choices their parents had made and is difficult to shed.
Higher the risk you are willing to take, the higher your returns could be. Then again, your ability to take risks depends on the time available. As we mentioned earlier, stocks and equity funds work best for long-term goals. However, if you are saving for your son's marriage in 2013, steer clear of volatile stocks and put the money in a debt fund, or even a fixed deposit.
Taxability of income: Keep in mind the income tax rules that apply to your investments. Your child's income is actually your own. This is also the reason why PPF and insurance policies are so popular with investors. The income from these options is tax-free, but there are other tax-efficient options as well. For instance, the income from equity and equity-oriented mutual funds is tax-free after a year. Investments in other funds can help you defer tax for years, even decades.
When you take into account these factors, the investment portfolio for your child becomes a mix of short-, medium- and long-term products. Each option has something to offer, some financial goal to achieve. Fixed deposits offer safety and assured returns but won't be able to beat inflation. Mutual funds offer high growth but carry a risk and don't offer any insurance cover. Child insurance plans offer an insurance cover and help the wealth to grow but levy high charges. Gold helps fight inflation but doesn't offer diversification.
-Excerpts from an article in Economic Times, 18 April 2011

Just to substantiate the article above, a calculation primer for all:-
High Risk, High Returns – A monthly investment of Rs 10,000 will grow to:
Rate of Interest
@ 8%
@ 10%
@ 12%
@ 15%
In 5 Years
    Rs 7.32 Lakh
    Rs 7.76 Lakh
    Rs 8.02 Lakh
    Rs 8.62 Lakh
In 10 Years
Rs 18.02 Lakh
Rs 19.98 Lakh
Rs 22.02 Lakh
Rs 26.02 Lakh
In 15 Years
Rs 33.76 Lakh
Rs 39.84 Lakh
Rs 47.14 Lakh
Rs 60.92 Lakh
Equity Portion
(The next article to be posted on Wed, 18 April 2012 will give out the suggested financial instruments and planning you should do for your child(ren) depending on their present age)