Do You Actually Lose Everytime That You Invest In Property for the Long-term?

Indians’ love affair with real estate is only too well known to all of us. It provides a heady cocktail of being a tangible asset having appreciation potential and some income potential as well. There is also this strong perception that you can't lose money in real estate, if you have the "holding power". There are so many stories in the media of home prices reaching stratospheric levels and how some wise investors made a killing by selling their houses at 10, 20, 50 and even 100 times their cost. There is enough evidence of wealth creation in property markets for any investor to continue to hanker for even more exposure to property. Almost everybody and his dog will have stories to tell you about how he or his friend (or his uncle or naani...) bought this property 10 - 15 years ago at just Rs 10 lakhs and how it is now worth easily more than 15 times the cost price. And, if I were then to try and counter the argument by saying that equity has a similar or perhaps even greater potential to build wealth over the long term, the most common objection I encounter is "Look, equity funds that I bought in 2007 are still to make me money. I am better off in real estate".

There was a headline grabbing real estate deal in Mumbai in July 2011 - an investor sold his 3600 sq ft apartment in Samudra Mahal, Worli for Rs 33 crores - an eye popping Rs 100,000 per sq ft. This is the costliest real estate deal recorded in India till date. The seller paid only Rs 25 lakhs for this flat back in 1972 and has now cashed in a whopping Rs 33 crores from this investment in 39 years. Can equity funds give that kind of returns?

If we actually calculate, this flat that was being talked about - the costliest real estate deal in India - had actually yielded only around 13.7% per annum returns to the investor. On the other hand, there are a large number of equity funds that have comfortably beaten that return over 15 years! For example, Franklin India Bluechip Fund has given average returns of approx 24.9% per year over 18 years of its existence. When compared to Worli real estate deal, Rs 25 Lakhs notionally invested in it in 1972 would have returned (hold your breath...) approx Rs 1458 Crores!! Alternatively, you could have invested Rs 25 Lakhs in it as late as in 1990 to turn into Rs 33 Crores!! Don’t believe it? There is yet more of this: There is NOT EVEN ONE equity fund in Indian Mutual Fund industry which is more than 10 years old and has delivered returns less than 13.7% yearly. The very worst fund of this lot, Taurus Discovery Fund, has given 14.7% (that is, turning Rs 25 lakhs of 1972 into 52.6 Crores today) and the best, Reliance Growth, has given 27% (turning Rs 25 Lakhs into 2,794 Crores).

Why is it then that the perception continues about real estate being a better wealth creator for us? The crux I think lies in the way we talk about returns. In the real estate market, it is always absolute numbers that are talked about - never annual percentage returns, even though that is all that matters. That’s precisely why the Insurance Industry is able to sell its dud policies even when they give 6-7% returns – by projecting that your premium of a few thousands of rupees will get you many lakhs 15-20 years later.

In big metros, we have seen prices move up from their 1996 levels of Rs 1000 per sq ft to over Rs 10,000 per sq ft today. A flat that cost Rs 10 lakhs in 1996 is today worth Rs 1 crore. That works out to a CAGR (Compounded Annual Growth Rate) of 16.6% over a 15 year period. But, what we hear is 10 lakhs becoming 1 crore - that sounds a lot more than 16.6% CAGR. To put this in context, if the same investor had invested in a fund like HDFC Top 200 Fund in 1996 when it was launched, that Rs 10 lakhs would today be worth over Rs 2.67 crores! Suddenly, this wonderful 10 fold appreciation in property prices pales in comparison to a 26 fold gain in this equity fund over the same period. When one says that the fund delivered a 24.5% CAGR over 15 years, it sounds great to financial advisors but investors are not readily able to grasp the magnitude of the performance. Translate the same performance in layman’s language - say that Rs 10 lakhs invested in 1996 grew to Rs 2.6 crores by 2011 - and we now begin to grasp the magnitude of wealth actually created.

Actually, equity funds have many virtues which property cannot ever hope to match:

• Liquidity : Bull or bear markets, you can always liquidate your equity funds, at an efficiently determined price. Try selling a house in an economic slowdown – the property market just freezes in a downturn.

• Transaction costs : Stamp duty and registration costs across the country are prohibitively high in property transactions. Equity funds, with a zero entry load (and zero exit load, if kept for only 1 year), win hands down versus property on this score.

• Taxation : You pay zero long-term capital gains tax on equity funds – property has 20% indexable tax rate.

Unfortunately, it is precisely these very virtues that are becoming villains for mutual funds. With an effective zero tax on capital gains after a 1 year holding and negligible transaction costs, investors become far more trigger happy with their equity investments than they would ever dream of becoming with their property investments.

Time to ask yourself some serious questions

The biggest disadvantage for equity funds in their competition versus property is the time frame that investors are willing to give each asset class to perform. Investors happily look at property as inter-generational assets - but equity funds rarely get anywhere close to those kinds of time frames. Investors pride themselves on the "holding power" of their property investments during downturns - but somehow that same "holding power" vanishes when they look at their equity fund portfolios. Ask yourself these questions:

• Did you sell your property investments in 2008, at a time when you redeemed your equity funds, when both the markets were in downturn? If not, why not?

• When property prices fell in 2008-09, were you tempted to look for bargains and snap up "good deals"? If yes, did you also feel like snapping up a good deal in the equity markets, which were at the 8000-12000 levels? If not, why not?

• Do you keep comparing property prices in each locality of your city every month and switch in and out of houses based on which locality did the best in the last 6 months? If not, why do you feel like doing that with your equity funds?

• When you buy a house, do you mentally allocate it to your son / daughter? What prevents you from doing that when you buy equity funds with your same hard earned money?

In conclusion

There is no doubt that the Indian investor's love affair with property is indeed a strong one. There is no doubt about the long term wealth creation potential of property investments. There is no doubt that history is firmly on the side of property investments - in terms of showcasing the enormous wealth that this asset class has created in the past decades. All that I humbly submit is that, while all of this is true, equity funds are just as good, if not better, in terms of their wealth creation potential - over similarly long periods of time.

Is Gold Still A Good Investment Despite the Current Run-up?

Gold has, since time immemorial, allured mankind. While initially, the lure might have been due to its timeless lustre, in modern (and more material!) times, it has been due to Gold proving itself to be a storehouse of value, which refuses to get cowed down by the economic, political and financial gyrations of the nations the world over. In fact, the more such uncertainties, the more has Gold appreciated in value!!

Gold as a Metal

• The rarity of Gold is such that industry pours more steel in an hour than the total of all the Gold poured since the beginning of recorded time.

• China is the fastest-growing market for Gold jewellery in the world, accounting for 377 tonnes of demand in 2010. Chinese consumers look for the very highest level of purity; more than 80% of Gold jewellery in China is made from pure 24 carat Gold. In today's China, Gold takes centre stage in a wedding ceremony; this year, around 6.6 million brides will receive Gold at the wedding rituals.
• Unsurprisingly, two thirds of American women say that they think of their Gold jewellery as an investment, and the one to be treasured and handed down to future generations. 72% of US women feel that Gold is an everlasting gift.
• As per market sources, total Gold imports in India amounted to around 750 tons during 2010 compared to around 557 tons of Gold imports in 2009. And this, when Gold prices have risen steeply in recent times, indicating a huge demand surge which continues...
• Whilst over 50% of Gold jewellery is bought for weddings, the wedding anniversary has now become the most aspirational occasion for receiving Gold today, extending a couple’s relationship with Gold beyond the marriage ceremony.

Gold as an Investment

• Financial experts recommend as a rule of thumb that anywhere from 10% to 15% of your financial portfolio should be invested in Gold for diversification purposes. Part of the reason for the diversification recommendation is the fact that as a separate asset class, Gold has a low correlation with other financial investments such as stocks and bonds. This simply means that Gold prices are not technically dependent one way or another on the financial markets.
• Gold as an investment asset has given positive returns for each year during the last decade, outpacing most of asset classes, including Stocks in this respect! Gold has provided compounded annual returns of 17.68% during the decade. Gold ended the decade with a bang and moved up by 27.92% during the year 2010 making a new high for tenth year in a row. Systematically investing (SIP) in Gold has given returns of 27.92%, 23.28%, 22.51% and 20.16% on an annual basis in the past 1 year, 3 years, 5 years and 10 years respectively!!!!
• The risk of sovereign default because of higher debt burden, rising fear of inflation as a result of loose monetary and fiscal policies, uncertainties associated with global growth outlook and the thrust for portfolio diversification were few of prime drivers that help Gold prices move higher. Situation remains unchanged to a great extent and the concerns that kept Gold prices at elevated levels are not yet addressed. The risk of sovereign debt default continues, concerns over rising inflation and weaker outlook for US dollar still remain. Central banks, having huge Foreign Exchange reserves, like India and China, have started diversification away from US dollar and they will require huge quantum of Gold in further, which is likely to keep driving its price higher.

“From being an alternative investment option, Gold has gained

the status of ‘must have’ in any portfolio”

Investment Philosophy for Retail Investors like us
One can invest in Gold in any of the three ways: Jewellery, coins/bars, Gold ETFs / Mutual Funds.
• Out of these three ways, jewellery is inherently an expensive, risky and inefficient preposition. Risk of impurity, high ‘making’ charges, coloured stones sold as part of Gold but not accepted back as its part, safe-keeping, etc make it untenable as an investment (as different from ornaments for personal use).
• Gold coins/ bars bought from banks and jewellers could be 17-20% or even more expensive than the market price while remaining to be risky and bulky method to store. Also, the banks, as on today, are not allowed to buy back gold while they are allowed to sell them!
• A modern way of accumulating Gold is to go the mutual fund way where your investment could go in bulk of any amount or periodic investment for as low as Rs 100 per month can be made to enable you to buy equivalent of 24 Carat Gold without any risk of handling or losing of value (as for jewellery). Such a Systematic Investment Plan (SIP) will enable you to buy a large quantity of Gold over a period of time with small periodic investments at a good average price.

Benefits of Investing in a Gold Savings Fund

• Efficient way of Investing: No fears of impurity, over-charging, time lag in buying or selling, storage or safe-handling problems, etc.
• Opens doors for non-demat a/c holders: Investors can invest in this fund either online or through the physical mode across the country thereby making it easily available and convenient for ‘non demat a/c holders’
• Systematic Investment Plan (SIP): SIP investment technique enables you the following benefits:
 Small, regular investments: A simple way to enter Gold by investing small amounts. Small but regular investments go a long way in creating wealth over time
 Rupee cost averaging: Fewer units during rising markets and more units during falling markets, thereby reducing the average cost per unit
 No need for ‘timing the markets’: No need to select the right time and quantity to buy and sell as timing the market is time consuming and risky. It eliminates the need to actively track the markets.
• Availability of add-on facilities: Ease of availing add on facilities like Systematic Transfer Plan/ Systematic Withdrawal Plan / Systematic Investment Plan/ auto switch /trigger facility etc.

• Cost effective: Investing in Gold through the Gold Savings Funds in physical application mode enables you to invest in a low cost manner as the investor does not have to incur charges like annual maintenance charges for demat account , delivery brokerages charges, and the transaction charges incurred for investing through the demat mode.

Stock Markets have Crashed ..... EXCELLENT NEWS!!

Dear Friends,

As the global markets went into a tailspin two weeks back and continue till writing this mail, comparisons to the financial crisis of 2008 are inevitable. I am getting a large number of calls every day from investors whether it is time to get out of equity markets now – things could get much worse. They say, it is just like the bad old days of September 2008.

Or maybe not! There are two ways one can react to having lived through some great market disasters. Either, you can stay permanently scared, going into a panic every time the conditions resemble the original disaster. Or, as a bona fide survivor of the original, you can be wiser and more confident of facing up to whatever the future can throw at you. It should be self-evident that the worst thing to do now would be to panic. We've had a few weeks of bad news, both domestically as well as globally. It's easy to get influenced by all this talk, especially because of the noise emanating from the investment media. However, you must remember that most of this noise is targeted at short-term traders. If the FIIs are shorting the indices over the next few days or if they are going to pull out cash for a month or so, then it matters to these people.

For long-term investors in equity funds who are investing regularly (either through SIPs or directly), none of this should matter. We need to remind ourselves that things in India are bad only on a relative scale - relative to the rest of the world, relative to what they could have been, even relative to what they should have been. However, in a crisis like this, you need to focus on the absolutes, not the relatives. This is still an economy that's growing faster than much of the world and will continue to do so for a long time. There are plenty of businesses of all sorts that will generate wealth. Our job, as long-term investors, is to make sure that we can reap the rewards by investing steadily for the long term.

You see, the lessons of 2008-09 are absolutely clear. Back in 2008-09, the only investors who lost out were the ones who cashed out or stopped investing when the markets plunged and then stayed away. In the long run, all that happened was that when the buying opportunity was at its best, they were running scared. Eventually, the only winners were the ones who let their SIPs continue, taking advantage of the low NAVs.

In fact, there's one new twist in this tale that makes it all the more important that you don't start running scared. What was witnessed in 2008-09 was a crisis. I suspect that what is setting-in now is not a crisis but a prolonged disease. After all, how many of us expect that the debts of USA will go away soon, or the half-a-dozen sick European economies will get magically cured or that Indian Govt will start focusing on quality infrastructure in a hurry? Thus, as per my reading, it is just a matter of sometime before the markets will realise that this condition is here to stay, take it in its own stride and get on with the business like in pre-last-Thursday days. It should soon be business as usual and all the valuations and the mathematical mumbo-jumbo should adjust to this reality.

If some positive indicators are needed to get you convinced of India's resilience, look no further than what happened in 2008. When US, Europe and Japan went into recession and their GDP actually shrunk, the worst quarter we recorded at that time was a growth of 5.5%. We came down from 9% to 5.5%, but we still grew! And ultimately, we all know that money chases growth. Also thanks to the global growth slowdown fears, commodity prices are crashing - crude is trading around $83 which can only spell good news for the Indian economy, its inflation and therefore the Indian markets. You can also be reasonably sure that we have seen the last of the rate hikes from RBI for some time to come. A peak in interest rates and a hope of gradual reduction will come as welcome relief to corporate and markets. Lastly, there is now a growing chance that the US Fed will announce QE3 (third cache of Quantitative Easing – a euphemism for printing more of green-backs), in a bid to stem the fall in asset prices. That may not be a great move from a long term point of view, but can help put a floor on falling asset prices and give speculators renewed confidence to start bidding up asset prices all over again. This could again postpone the problem - but the West seems to love postponing the problem rather than dealing with it!

As far as I am concerned, I am looking around for some loose cash to buy as many quality Mutual Funds as I can get my hands on over a period of time starting from now. And, of course, not to forget Gold for some more time...

RETIRE RICH, LIVE COMFORTABLY IN YOUR GOLDEN YEARS

Retire rich, retire early and retire to relax – every working person has this dream

Guaranteed pension, assured returns from government schemes, relatively low inflation and the security of a joint family - all the four pillars on which has previous generation’s retirement planning rested, have either gone or will disappear soon. Tomorrow’s retirees will balance high income with uncertain returns, better means of capital appreciation with longer lifespan, and all new earning and career options with an urge to hang up their boots early. And all this, without wanting to compromise on their lifestyle.

The other big challenge for retires comes from an enemy that is both stealthy and relentless - inflation. Just as compounding works to grow your corpus, inflation eats away at its value. The sum of Rs 1 crore may seem like a lot of money today but over 30 years, an inflation of 8% can reduce its equivalent purchasing value to less than Rs 10 lakhs of today!! And to think that consumer-level inflation today actually is in double digits. A low-to-moderate inflation rate of 7-8% does not attract attention of the working class. That’s because incomes prices of products and services do not seem to be shooting up ‘fast’ but it nevertheless erodes your money-value ever so quietly!

Dangers of Living Long Only on Govt Pension

Let’s take the example of a Colonel who retires at the age of 54 in June 2011. He will get a pension of approx Rs 26,000 pm after tax (assuming 50% commutation of pension) which grows by approx 5% per annum due to the DA component. We assume that his household expenses are Rs 25,000 pm which increases with inflation at approx 8%. The calculation further assumes he has no other liability and lives in his own house. A very preliminary calculation shows that, if he is dependent only on his pension for his living, then, due to this difference of 3% in the growth rates of his pension and inflation, his pension will fall short of his expenses by Rs 1394 per month after 3 years. This figure will shoot up to Rs 9641 per month 9 years after retirement, Rs 25252 pm 15 years after retirement and Rs 83166 pm 25 years after retirement. Remember, since we live well and maintain ourselves well, our life expectancy is comfortably at 85 years of age – ie, we will live more than 30 years after our retirement!!

And in case somebody feels that he has approx Rs 50 lakh corpus of retirement benefits which will help him live well, calculations again show that if he invests this sum at 8% per annum in very safe investment avenues and gets the returns, he will start eating into this corpus from the age of 66 years (ie just 12 years after retirement) and by the age of 80 years (ie 27 years after retirement), there will be no corpus left! Also remember that we are only talking about normal day-to-day living, no big purchases – not even change of a car ever or gifts for children / grand-children or holidays or repayment of a home loan. And if inflation goes into double digits as it is today, heavens will surely fall!

So it is clear that inflation eats away your entire guaranteed pension. There is a significant gap between the income and expenses and this gap can create a serious problem in future. It is advisable to invest adequate a disciplined amount regularly in some high growth investment avenues while you are serving, which generates high return that will not only support your expenses after you stop earning but will help you pursue your dreams post-retirement.

Follow this four-step retirement strategy to build up a healthy nest-egg:-

1) Know how much you need

The income that you would need to live off on after retirement is approximately 65-70% of the income that you live off on while working, considering no big purchases or expenditures. However, this rule of thumb may not be accurate for everybody since people are living longer than ever and retiring in good enough health to incur additional expenses (travel, entertainment, and so on). This estimate applies if your situation fits the following criteria:

o Your house will be paid off (no rent/loan).

o No work-related expenses (commuting, changing of clothes frequently, shifting, etc).

o Your children will be financially independent.

o Fewer taxes because of lower income and No debt of any sort.

2) Decide your asset allocation

Don’t pull all your nest eggs in one basket. That’s too risky a strategy for something as important as retirement. The nest egg should be a mix of different asset classes and investment instruments. Equities offer a distinct advantage because they can deliver significantly higher returns than other investment over the long term. Investors whose retirement is 20-25 years away should ideally park their investment in equity mutual funds. For older investors in their 40s and 50s, a larger allocation to debt is advisable. However, this is a generalized statement and finally, everything depends on your risk attitude and aptitude (calculate your Risk Aptitude from the calculator on our website www.humfauji.com).

3) Choose appropriate products

Once you have decided your asset allocation, choose the investment vehicles that will take you to your destination. Instead of investing in a single scheme, do so in a bunch of instruments, which not only assure regular income but also allow your corpus to grow in tandem with your withdrawals and rising inflation. This strategy should alter with the age or stage of the life after retirement. So, for the first 6-8 years after you retire, allow your funds to grow at faster rate than the withdrawal. Even as you use the interest earned through debt options to meet your expenses, invest in equity through mutual funds or monthly income plans. However, the crux of all investment remains a very aggressive monitoring after you have parked your funds in them.

4) Formulate a withdrawal plan

The final step in your retirement planning is to formulate a withdrawal strategy. Your retirement portfolio must have two essential components: liquidity and growth. It should provide you regular income and also grow fast enough to take care of future expenses. Systematic Withdrawal Plans (SWP) options of the Mutual Funds and rentals from a good residential / commercial property are ideal in this regard.

Financial Planning for Your Children

Introduction

Financial planning for your children is probably something that takes up a lot of your 'worrying' time. You know that you need to start setting aside money for your child's needs. But what you do not know is the ideal way to go about doing the same. Whether your objective is to provide for your child's marriage, property or seed capital for a business venture for your child, the approach given here holds good.

Why is this exercise more strenuous for Armed Forces Officers

Due to the nature of the profession, wherein there is constant movement from one end of the country to the other and even abroad; when one does stop for a short while, it is in some unpronounceable place in the middle of nowhere; in the name of a financial advisor or facility, there is a semi-literate, maybe ill-intentioned, insurance agent available, if at all; the stresses and strains of the job keep own well-being far away from the mind; etc. All these issues combine to make a potion which keeps any thoughts of financial planning for own self far away from own conscious. The result is a sudden jolt-like awakening when the requirement is not merely knocking, but loudly banging at the door. Thus, in spite of all diversions, constraints, lack of adequate knowledge and facilities etc, one has to keep at it, come what may.

Concept of Financial Planning

Before venturing any further, it is pertinent to note that financial planning is not a one-time activity. Making of the plan is only the start of what is going to be an ongoing activity for many years to come.

We take the case of three families who need to plan for their young child’s college 15 years away. Taking today’s College costs to be approx Rs 2.5 Lakhs per year (implying 10 Lakhs for 4 years’ Engineering), with a 6% yearly inflation, it comes to Rs 23.96 Lakhs 15 years later. If the three families put in, say, Rs 1 Lakh today and then decide to pursue different methods of accumulating the balance money for their child, the results could be drastically different. A parent (Parent A), who is willing to take higher risk, would ideally be compensated by a higher return over long term - the portfolio will have a higher concentration of assets like equity mutual funds. Such a portfolio can earn a return of about 15% CAGR (Compounded Annual Growth Rate). At the other extreme could be a risk-averse parent (Parent C), who is investing only in schemes like the DSOPF/Public Provident Fund (PPF) and the National Savings Certificate (NSC). He can hope for a return of approx 8% per year. The third parent (Parent B) could take a middle path and have a cautious dabbling of ‘fully safe’ and some equity-oriented flavour. He/she could hope for about 10% per annum return. When we look at what they require to accumulate over a period of time, the results could be as follows:-

                                            Parent A      Parent B       Parent C

Value of initial Rs 1 Lakh       8,13,706     4,17,724        3,17,216

after 15 years    

Therefore, net balance to     15,82,294   19,78,276      20,78,783

 be accumulated

This balance money requires:

Yearly savings of                     95,904      1,23,768        1,31,748

OR monthly savings of                7992        10,314            10,979

OR one-time amount of        1,69,114     4,44,165          6,28,615

* Includes combined fee and monies for living, for Engineering from a rated institute in India.

Coming to the solution, the first number that hits you in the table above is the 'inflated' cost of education and living expenses 15 years from now. Indeed, if seen in isolation, you might almost give up in terms of ever having enough money to provide for your child's education need. However, what appears impossible is not really so. For a parent with some risk appetite, the money that needs to be set aside every month is just Rs 7,992!

Do’s of Planning

The ‘mantras’ given below may have to be applied as per your specific requirements and risk aptitude, though in most of the cases, their applicability is universal.

• Have a distinct plan in place for each objective: Define each objective that you wish to accomplish i.e. provide for your child's education, marriage or seed capital for a business activity. The next step should be, to have a definite plan in place for each objective, to allocate resources accordingly and most importantly, follow it through and through with discipline.

• Engage the services of a financial planner, if not confident yourself: The importance of engaging the services of an expert and qualified financial planner cannot be overstated. He would make out a balanced portfolio for you to meet your goal and, if he offers those services, may even monitor its progress over its life-time. However, it pays to be actively involved in the entire financial planning activity.

Don'ts of Planning

• Don't delay the investment activity: Starting early will enable parents to gain from the "power of compounding". In the example given above, if Parent A, who is taking more risk, starts say 5 years later. He would only accumulate Rs 4,47,819 from his initial Rs 1 Lakh investment and would require Rs 1,82,806 per annum OR Rs 12377 per month or a lump-sum accumulation of Rs 3,91,118 to get the required money for his child. The substantial difference seen above can be attributed to the fact that earlier, he had longer investment tenure and hence could enjoy the benefits of compounding. The message is simple: it pays to start early!

• Don't dip into your child's portfolio: Resist the temptation to utilise the monies that have been set aside for the child's future needs, for your present consumption.

Way Forward

Just common-sense, perseverance and correct identification of objectives is actually all that you require to fulfil your obligations of a parent. It is very important to be proactive, avoid drift and identify the investment avenues that you are comfortable with. But do what you may, please start early – maybe even before the child is born!!