Investment Advice for army officers Archives

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.

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:-

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:

Your house will be paid off (no rent/loan).
No work-related expenses (commuting, changing of clothes frequently, shifting, etc).
Your children will be financially independent.
Fewer taxes because of lower income and No debt of any sort.

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).

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.

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.

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Tag: Investment Advice for army officers

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