Category: Investment Advice for Defence Personnel

17 Sep 2015
Gift to a loved one How about a Mutual Fund SIP

Gift to a loved one? How about a Mutual Fund SIP?

Divesh Kumar has recently retired as a contended man. He hasfulfilled his duties as a devoted father, caring son and loving husband all his life. He now wants to gift something long lasting for his two lovely grandchildren which he and his wife fondly dote on. They both decided to contribute for higher studies for them by contributing some money every month. Their first impulse was to save in a bank Recurring Deposit (RD) but wanted their decision to be validated by us.

We heard them out and asked them, “Have you thought of mutual funds for this purpose?” They never had thought so. We explained to them that they had a long time frame for their gift. The gift should actually work for the recipients to create value as they have planned and not be lost to inflation and taxes. In case of any emergent requirement some time later, they should also be able to take out the money fully or partly without any penalties or severe tax implications, though such withdrawals should be avoided since they were saving for the specific purpose of their grandchildren’s higher education.

We then went on to explain the superior tax-efficient returns that mutual funds offer with a lot of flexibility of how they wish to save or withdraw the money. They could contribute on a monthly basis through SIPs (Systematic Investment Plans) for as long as they wished. In case they could not contribute any longer, they could just let the accumulated money lie there and grow as long as they wanted. They could also put in bulk additional amounts of as low as Rs1000 on special occasions whenever they wished to. We made an illustrative table for them for contributing Rs 5000 per month, comparing RDs and various categories of mutual funds on the basis of current interest rates of RDs and past returns of best mutual funds of various categories.

5 years 10 years
Returns Amount Returns Amount
Bank Recurring Deposits 7.75% ₹ 3,65,000 7.75% ₹ 9,02,083
Pure Debt Funds 10.50% ₹ 3,92,345 9.40% ₹ 9,89,759
Balanced – Debt Funds 13.90% ₹ 4,29,808 13.10% ₹ 12,27,461
Balanced – Equity Funds 16.30% ₹ 4,58,951 17.40% ₹ 15,95,380
Diversified Equity Funds (Large Cap) 14.10% ₹ 4,32,147 17.00% ₹ 15,56,130


It was explained to them that while above returns of RDs will be fully taxable on yearly basis as per tax slab irrespective of time frame of investment, pure debt and balanced debt funds will have indexation benefits beyond 3 years, thus reducing tax liability substantially. In equity products, there will be no tax after one year. They also were made to understand the risks of various products – equity was subject to market risks while debt products including RDs were comparatively safer. However, statistically, risk of equity products declines to negligible levels over long periods of time. Hence, when saving for long periods, it is better to take some equity exposure, depending on one’s comfort level, to make the money grow in real terms.


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11 Jun 2014
The benefits of having a financial

The benefits of having a financial planner

In a country where event managers are paid for organising weddings and nutritionists are paid for making diet plans, financial advisors struggle to make a case for earning a fee. Only a small segment has managed to break through the resistance. Investors continue to save, invest, and borrow without any framework or process in place and assume they can manage their money. Why does one need a financial advisor at all?

There was a time when getting a job meant meeting “commitments.” There were siblings who needed college education; there were marriage expenses; and, there were elderly parents to take care of. Today, a young earner begins financial life on a firm footing – a regular surplus income. He acquires a bank account and a debit card with the job. By the end of his first year of earning, he has bought some tax saving products and applied for loans. He has not engaged a financial advisor, yet.

If the earning class wants to focus on enhancing its income, it needs someone to take care of its surplus and keep its financial life in order. Engaging a financial advisor is not a felt need when the power to be able to spend keeps one confident and fearless about the future. But, soon enough, our young earner begins to default on that education loan, does not file tax returns in time, does not know where his tax-saving policies are, and finds himself locked into a house at a location where he is no longer working. It is rare to find earners with well-ordered financial lives. This is why anyone who earns, needs a financial advisor. Someone who will walk with you and work for you, and ensure that your finances are in order. Let me list a few simple things an advisor can enable every earner to do.

First, they should be encouraged to save a portion of their earnings. Just as a personal trainer will motivate you to hit the gym every day, a financial advisor will ensure that you have set aside a portion of your income for yourself. Many earners believe that they can do it themselves, and see this as too simple a task for an advisor. Many advisors think that unless they get a complete account of all income and all expenses, including the electricity bills and payments at restaurants, they cannot determine the earner’s saving potential. A simple engagement that asks a percentage of the income to be saved is a good starting point.

Second, earners should have a default choice to convert their savings into investments. Many of us save regularly in our Provident Fund (PF) and are not even aware that a fixed amount from our salary goes into a basket of fixed income investments. Earners need to realise that such default choices help them in the long run. If 12 per cent of the salary is already saved in the PF, setting up another 12 per cent in a diversified equity mutual fund would do no harm. A monthly SIP (systematic investment plan) into few such funds, chosen at the start of the year and, reviewed every year, is adequate for most purposes. The earner needs an advisor so that this allocation happens after careful consideration of choices, and so that a good fund is selected.

Third, they need tools to deal with the unexpected. There are times when unexpected expenses hit the family budget; there are times when unexpected income comes in, in the form of bonus and gifts. Borrowings hurt the saving ability; poorly allocated funds may end up in losses. An advisor should be the first port of call, when taking such important financial decisions. But, investors think they need not involve the advisor since it amounts to discussing private details, and advisors keep away assuming that investors will be reluctant to let them in. Unless the advisory relationship extends beyond investment advice, its ability to deliver value will get compromised. Over a period of time, the advisor should be able to evaluate loans, manage repayment crises, arrange liquidity as needed by the client, and smooth out contingencies for him.

Fourth, earners fail to see the impact of life cycle changes on their finances. Many believe that as long as they accumulate assets, they are doing fine. Over a period of time, their incomes, expenses, and their needs change. Without providing for these changes, a household would have to compromise on goals such as higher education and retirement. The biggest contribution of the financial advisor to a client is advice on asset allocation. It is the advisor who is able to orient the savings and investments of the earner towards specified financial goals and aspirations.

While DIY (Do-it-Yourself) is tempting, earners are likely to find themselves locked into property and gold, when what they need might be assets that are more divisible and liquid. An advisor is an asset allocation specialist who should help you align your assets to your goals.

Fifth, earners are prone to errors that they are loath to admit. Investing in the next big thing; selling out of an investment out of fear; buying a share based on a tip; being taken in by a sales pitch; leaving money idle in the savings account; failing to sell off what is not working; and, choosing the easy over the optimal are all routine mistakes investors make. A combination of inertia, lack of time, lack of information, need for control and overestimation of abilities, leads to a situation where investors manage their money inefficiently. Bringing an advisor is worth it, just to ensure that someone is in charge and is accountable.

If earners begin by describing what they want and, are willing to hold their advisors accountable, we will see the beginning of a process of engagement. Investors see advisors as sellers; advisors see investors as transaction-oriented. With one side being secretive and the other being scheming, we have dissatisfaction as the outcome. In the interest of their own long-term wealth, earners-investors should demand a process for their financial well-being and, advisors who lay it down and implement it, would have earned their fee.


[Source: Uma Shashikant; She is Managing Director, Centre for Investment Education and Learning]

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03 Jun 2014
5 Common Investing Mistakes - Hum Fauji Initiatives

5 Common Investing Mistakes

We take a look at common investing errors and suggest solutions to ensure you make better investment decisions.

As emotional human beings, we tend to be our own worst enemy when it comes to making investment decisions. Below are 5 common ways in which investors slip up, and suggestions on how best to avoid these mistakes.

1. Letting anxiety rule your head

Back in 2007 you might have been feeling nervous about the stock market, with equities at all-time highs, and pondering whether it might be time to offload some holdings. In 2008, you may have found yourself thinking that markets couldn’t go much lower and it was time to plunge your money back into equities. The chances, however, that you actually managed to accurately pick—and act on—these two turning points are very slim. Furthermore, miscalculating these points could have had a seriously detrimental impact on the value of your portfolio.

It’s difficult to ignore your emotions completely but the statistics prove that stock performances over time tend to improve and come back. If you’d been fully invested in debt between 2000 and 2003, you might have been rubbing your hands with glee as you watched equities tumble amid the bursting of the tech bubble. But that same portfolio today would have substantially underperformed a mixed stocks and bond portfolio, even taking into account the stock market crash of 2008. The key message here is threefold:

  • Taking a long-term view is important because it reduces the impact of volatility
  • Trying to time the market leads to slip-ups
  • Diversification is very helpful for spreading risk.

2. Trying to time the market

As alluded to above, timing the market is a lot easier with hindsight. Accurately timing the market is pretty difficult, and many would argue it’s impossible. Instead, focus on setting your investment goals, picking your investment strategy and spreading your investment risk, which will ultimately lead to steady returns—returns that would have been substantially reduced if you’d tried to time the markets and missed, say, the best-performing month of each year. Trying to guess market movements is a risky and fraught investment style.

One particularly effective method of investing is a systematic investment plan (SIP), which is when you invest equal amounts of money on a regular basis into your portfolio. This allows you to bypass the risk of making poor investment decisions during tumultuous times. Rupee-cost averaging can help investors limit losses, while also instilling a sense of investment discipline and ensuring that they’re buying equity at ever-lower prices in down markets.

3. Misunderstanding diversification

A common mistake to make is to think that because your portfolio contains 15 different funds, you’re well diversified. But diversification isn’t about the quantity of holdings. Good funds combined in the wrong way can make a bad portfolio: diversification means spreading your investments across assets, regions, sectors, and investment styles. One year’s ‘hot topic’ can become the next year’s dud. Anyone invested fully in one area takes the risk of watching their portfolio swing violently between notable gains and substantial losses. But a savvy investor who had spread his money across a range of assets, sectors and regions would have achieved much smoother returns over the same time frame.

4. ‘Old age’ means time to pull out of stocks

By all means, as your investment time frame shortens you may want to move from a more aggressive investment style to a more conservative one, perhaps shifting assets into bonds and cash and out of more volatile equities. But just because you’re broaching retirement age doesn’t necessarily mean it’s time to focus your portfolio fully on fixed income.

There are three key points to take into consideration here:

  • Firstly, retirement income horizons are increasing—if you can afford to retire early, then congratulations.
  • Secondly, we’re living longer these days—in fact a couple aged 65 at present have more than a 25% chance that one of them will live into their late 80s; so that’s more than three decades of living costs they need to have saved and invested for.
  • Thirdly, inflation erodes purchasing power. The value of a portfolio invested solely in fixed income will decrease over time, even at the current low rates of inflation, and increasingly so as inflation rises, as many expect it will do given the vast quantity of money injected into the system by way of the government’s economic stimulus programmes. Keeping a portion of your portfolio in other assets such as equities can help protect again inflation-erosion.

5. Procrastination or inertia

“I can’t afford to invest right now, I’ll do it later once the company reinstates bonuses, 7th Pay Commission comes in, etc.” Sound familiar? The problem with delaying is that it reduces the amount of time your money has to work for you and also reduces the long-term advantage of pound cost averaging. If you had invested Rs 2,000 per year over a decade, the value of your investments at the end of the time period would be far greater than had you started investing Rs 4,000 per year halfway through that period.

An additional benefit of long-term investing is compound interest, exemplified by the oft-quoted trick question of whether you would rather have Rs 1000 per day for 30 days or One Paisa that doubled in value every day for 30 days. The savvy investor would pick the doubling paisa and be looking at Rs 50 Lakhs at the end of 30 days versus Rs 30,000 if they opted for the Rs 1,000 per day.

Hopefully you’ve noticed that these investor mistakes all lead to the same few suggested solutions:

  • Take a long-term view
  • Understand that market corrections do happen
  • Stay the course rather than attempting to time the market
  • Take advantage of rupee-cost averaging and compound interest
  • Diversify your portfolio
  • Act rather than delay

(This article initially appeared on Morningstar’s UK website and has been edited for an Indian audience.)

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