28 Nov 2020
Diversification is as important in savings as in investments

Diversification is as Important in Savings as in your Investments

Earlier this month, depositors of an almost a century-old private sector bank – Lakshmi Vilas Bank – were greeted by a rude shock. The Reserve Bank of India had capped the withdrawals from the bank at Rs 25,000 per customer per month. However, the depositors in this case are particularly lucky – in just a matter of few days, these customers have again gained full access to their savings as all the branches of this bank operate as DBS Bank from 27th November 2020.

Unfortunately, very few stories have such a happy ending. There is another story of a stressed bank where the depositors are still struggling to get their money back from the bank. The customers of Punjab and Maharashtra Co-operative Bank (PMC Bank) are still under withdrawal restrictions from the RBI, even 14 months after their ordeal started.

There is a reason why we are talking about all of this today.

Far too many people we talk to rely on a single bank for all of their financial needs. If someone had all of their life savings, say, in the PMC Bank, imagine the ordeal of not being able to access your own money for a long time. No access is as good as not having that money!

These two episodes have some lessons for all of us from a financial planning perspective. Let us take a look at a couple of such important learnings.

Know your bank

To be honest, many people think that having a good rapport with the branch manager of their bank branch and getting quick service for routine affairs means that their bank is doing great. To be fair, this is a good thing to have, but not sufficient. As consumers we must learn to go beyond the daily niceties of the professionals around.

Your bank is the custodian of a significant chunk of your wealth. You must always strive to keep yourself up to date about the health and happenings of your bank. Over the past few years, non-performing assets have been in the news. Please remember that it is not very difficult to keep a track of the non-performing assets of your bank.

For instance, the NPA ratio of Lakshmi Vilas Bank was 24.5% as of end-September 2020. In other words, the bank was finding it very difficult to recover Rs 25 of every Rs 100 they gave out as loans. These numbers speak a lot. It can also be said that wise depositors had ample time to move their money out of this bank in time.

Diversify your investments, and savings

Many of you who interact with us on a regular basis know how peculiar and particular we are about diversifying investments. The conversation there is mostly about allocating money to equity, debt, gold, real estate, etc. In some cases, we also end up advising that the amount lying in savings bank accounts should be put to better use as it is being eaten away by inflation.

It is pertinent to go beyond that. If you have a good chunk of money in a savings account which you do not intend to invest, make sure it is spread across 2-3 banks. This is more so if you have money lying in the ‘smallish’ banks which have lately mushroomed, cooperative banks which are quite popular in small towns and villages, or banks which start coming in news for all wrong reasons. This number will vary depending on the comfort and convenience of every person. But this will ensure that just in case one of those banks goes under moratorium like Lakshmi Vilas Bank or PMC Bank, you will not be left empty handed and your needs will largely be taken care of.

In our busy lives, we do not think much about contingency plans at different levels. This is a good time to remember that contingency plans too can be of different forms in different situations.

09 Nov 2020
Tax Saving be done early in the year

Tax Saving be done early in the year

Making Tax-Saving Investments only in March is a bad idea!

Our hundreds of interactions over the past many years have reinforced our belief in one common human tendency. In college days, it was referred to as: ‘The rocket takes off only when the tail is on fire!’ While it can be a joke in some circumstances, it has loss-making consequences when applied to investments and money.

This year, talking about this in November seems strange. Typically, the income tax filing deadline is in July and is then extended to August. This time however, we are yet to reach the deadline for filing of income tax returns for the previous year, and yet the ongoing financial year is going to end in less than 5 months.

Hence, we thought it will be a good idea to list down Three key reasons to plan your tax-saving investments and expenses much in advance – maybe right now. In other words, these are the three points that can save you from financial mistakes and hence, monetary losses.

Let us go step by step.

1. Choosing wrong products

The most common mistake that many people fall prey to is choosing a wrong product when deciding in a hurry. While it is understandable that you could be excited and keen to save over Rs 45,000 in taxes if you are in the 30% tax slab, you might miss out the fact that you are putting Rs 1.5 lakh at stake for that tax saving.

So, if you choose a wrong investment product to save Rs 45,000, then you could be putting the well-being of the entire invested capital of Rs 1.5 Lakhs at stake. For example, many people end up buying expensive investment-cum-insurance policies that demand a high premium payment year after year. By the time investors become aware of this vicious cycle, they have already paid one or more premiums. And stepping out of the cycle at that stage could mean a significant haircut (for you!).

2. Choosing the right product, but without a need!

There are of course many smart people who don’t fall for the trap mentioned above. Unfortunately, some of them end up falling in another trap. Take this: Someone understands very well that investment-cum-insurance plans are a bad idea, hence chooses to use a term insurance plan to fill the Section 80C requirements. But to get all of the 80C benefits, you need to invest Rs 1.5 lakhs, and term insurance premiums are pretty low in comparison.

So while the financial plan of the individual might call for a term insurance of, say, Rs 1 crore, he might end up getting multiple similar policies. This is a mistake because the amount can be better utilised in other places and other financial goals.

This mistake is also common in the form of adding unrelated add-ons to health and life insurance policies. This is not to say that these add-ons or riders are never needed. Some of them are really important, but most of them taken in this manner may not be!

3. Not knowing their taxable income

This is for our young friends. Early on in their career, some of them are unaware about their own finances. It is understandable but needs to be rectified. Along with starting investments at this stage, our young friends also need to learn to read and understand basics about taxation and finance. Apologies, went into lecture mode!

So, what is happening is that we come across youngsters who have made investments up to Rs 1.5 lakhs for 80C benefits, that too in inappropriate products. The kicker is that they did not need to make that much investment at all, because their taxable income is either low, or may not even be taxable at all. It is crucial to understand that the new age salary structures have many components. Your CTC (cost to company) is not your taxable income.

All these mistakes are committed in the rush of the March-end tax-saving spree. Unfortunately, it turns out to be a loss-making proposition for many people. Hence, it is important that you start your tax planning right now when you are neither rushed nor stressed to save tax.

Do remember to save your money, not just your taxes!!

31 Oct 2020
Why is investment in equity mutual funds better than in direct equity_

Why is investment in equity mutual funds better than in direct equity?

This has been a strange year!

The conversations we have had with people with respect to their investments have moved in exact sync with the equity market. In January 2020, when the benchmark BSE Sensex was hovering around 44,000 points, we were dealing with questions like ‘Should I shift from Mutual Funds to direct equity’ on a daily basis.

In March, when the Sensex tumbled to 26,000 points, many people, including some referred to in the previous sentence, frantically called us to seek advice. This time, they were panicking and wanted to exit equity altogether, direct as well as mutual funds.

Such questions usually mean only one thing: The investor is very young in the market, and has not seen market cycles.

Now that the market is again hovering close to 40,000 points, many people would like to get a share of the pie and would like to invest in direct equity. After all, the story of Reliance Industries Ltd getting doubled in value in just a few months will make anyone red with envy! FOMO (Fear of Missing Out) further…

Despite that, we are going to argue today that investing through Mutual Funds is a better idea than direct equity.

Well, the caveat is that this is true for a vast majority of people around us. There will certainly be exception of a few people who can spend time and energy to research on direct equity investments.

Why do we say so? The answer is below.


What it takes to ace direct equity investment?

Short answer: Research.

Long answer: Ability to read between the lines when reading news about companies and industry, a knack for thinking ahead of the curve basis the previous two, deduced information that others might not have, and lastly, capacity to handle big big losses!

Accordingly, all our conversations on direct equity investments start with the last question first! That is surprisingly the weakest link.

Remember that a cash-rich giant like Maruti Suzuki saw its share price fall from around Rs 10,000 to Rs 4,000. Will you be able to sleep peacefully if you bought Maruti at near Rs 10,000 when everybody said Maruti is the new Tesla and now your portfolio has that huge dent? It is another story that strong companies also recover from those depths over time.

The other questions revolve around the understanding of a particular industry and company. People who understand a business really well, and can anticipate the changes – positive and negative – for the company basis their analysis are the ones who gain.

Unfortunately, very few retail investors have that kind of time, energy or zeal for more than a couple of sectors. You could be a defence professional and can make investments in related stocks, but do you also understand the global energy market dynamics? Are you confident of your predictions for the automobile industry or the decorative paints sector?

If not, then it is better to stick to mutual funds.


How you gain through equity mutual funds as retail investors?

Most people we speak to are very enthusiastic about equity investments, but unfortunately cannot extend their research or understanding to a sector beyond the one in which they themselves work. You certainly cannot put all of your money in a single sector! It is like keeping all of your eggs in a single basket. One accident and all or most eggs are gone, not even fit for a humble omelette!

On the other hand, if you spread those eggs in different baskets, you can be certain that even if there is an accident at one or a few places, at least some of the eggs will hatch to give you a few chickens!

Okay, let’s think beyond food again.

Mutual funds will enable a defence professional to have exposure to finance, manufacturing, energy, pharmaceuticals, information technology, emerging businesses and all other sectors that we don’t even think about.

A fund manager and her team, managing your mutual fund investments will however, not miss any of these sectors. This is their profession, they get paid for it and the MF industry has huge competition to emerge out as the best fund manager.

Not only will they not miss the sectors, they will also strive to find the best companies in that space for your investments. Of course, they are doing it for a fee, but that is what makes it a truly professional decision!

In the end we would say that, by all means, invest in equity if you have the expertise. But unfortunately, most people do not have that expertise, or worse still, think that they have it due to a few ‘beginner’s luck’ wins.

Hence, for most people, equity Mutual Funds should be their first choice to get an equity exposure for their investments.