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National Pension Scheme (NPS) which is a defined contributory savings scheme was introduced by the government with an intention to provide retirement solutions for Indian citizens.

Under the NPS there are two types of accounts – Tier I (pension account) and Tier II (investment account).

  • Tier I is the a mandatory account which allows limited withdrawal options until the person reaches the age of 60.
  • Tier II which is a voluntary savings/investment account is more flexible and allows the subscribers to withdraw as and when they wish without any restrictions.

In Jan 2018, the PFRDA (NPS regulator) relaxed the withdrawal norms and allowed the subscribers to withdraw up to 25% of the balance after the completion of 3 years. The purpose of withdrawal included treatment of specified illness of a family member, education of children, wedding expenses of children and purchase or construction of house.

Partial withdrawals – some more options now

The PFRDA has recently added two more events under which partial withdrawal from the NPS can be made before retirement. They are as follows:

  • Partial withdrawal towards meeting the expenses pertaining to employee’s self- development/ skill development/ re- skillingwill be allowed. This includes gaining higher education or professional qualification for which the employee might require in and out of India. However, if such activities on request of the employee are sponsored by the employer then these will not be considered as a class for withdrawal as in such cases the employer bears all the expenses.
  • Partial withdrawal towards meeting the expenses for the establishment of own venture or a start upshall be permitted. However, if an employer-employee relationship exists, then in that case the partial withdrawal will not be applicable.

There are certain limitations to the partial withdrawal clause which remain unchanged:

  • The subscriber should have been a member of NPS for a period of at least 3 years from the date of joining.
  • The subscriber shall be permitted to withdraw accumulations not exceeding 25% of the contributions made by him or her, standing in his/her credit in his or her individual pension account as on the date of application from the withdrawal without considering any returns thereon.

For instance, if you have Rs. 2 lakhs in your account out of which Rs 1 lakh was contributed by you and Rs 1 Lakh was contributed by your employer, then you will be able to withdraw only Rs. 25000 or 25% of your contributions.

  • The frequency of total partial withdrawals shall remain unchanged i.e. the subscriber shall be allowed to withdraw a maximum of 3 times throughout the entire tenure of the subscription of the NPS. For the withdrawal, the subscriber must make a request to the central record keeping agency or the Nodal office.


Adding equities to your retirement corpus

In addition to adding more withdrawal options, there have also been increases in the allowed equity percentage to the retirement corpus. The percentage of equity assets that a subscriber can choose under active choice have been increased. The percentage of equity assets allowed has been increased to 75% from 50% (applicable for non government employees).

All in all the PFRDA is trying to make the NPS more attractive as a retirement solution. Depending on your age, time horizon, risk profile and current retirement corpus investments, the NPS could still prove as one of the avenues that you could consider using for building a retirement corpus.

 

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Oil has always had a major influence on India. Whether it be politics, stock markets or the general state of the economy, oil continues to have it’s say in these matters. And this is so because India is a net crude oil importer to meet it’s ever growing demands, and it is not just about energy requirements.

brent crude price chart

Oil in the last year has gone up 48.5% (Brent Crude Price in USD), whilst in the last three months alone it is up by 16.9%! This huge surge can and probably has started to show it’s effect across the various aspects of the economy. But as an investor into that economy, we hope to underline the impacts of this event on your portfolio holdings.

EQUITIES

  1. Inverse Relation:Data indicates that Nifty and Crude Oil prices have an inverse relationship. Between 2014-2017 whilst oil prices saw a significant drop the equity markets showed significant upwards trends. However the latest data seems to suggest that this inverse relation is currently not being witnessed, at least temporarily, with both the markets undergoing volatility and oil prices sky rocketing. Oil price rises however do impact both debt and stocks and hence need a careful watch.

nifty vs crude

  1. Oil Sector:Oil Marketing Companies (OMCs) are directly impacted by oil price movement. While retail prices have been continuously raised for the last few days, the worry remains that the government may ask these companies to absorb further hikes rather than passing them to end consumers for controlling inflation. Such a move could dampen their stock prices in the immediate future. Therefore if your stocks portfolio has high exposure to such stocks its time to review the same.
  1. Other Sectors:Besides oil companies, other sectors that do get affected are the Aviation and Consumer Durable sectors. For airlines, jet fuel is the single largest cost. Hence rises in oil prices prove serious strain on their margins. This can also be seen through their Q4 results. Also, a lot of companies such as rubber, paints, lubricants, chemicals and even footwear are heavily dependent on oil derivatives as raw materials for their products. Therefore a higher oil price has an indirect impact on their profit margins.
  1. Any positives?:Higher oil prices invariably lead to a slide in the Indian Rupee (which we will discuss below). But a weaker rupee can be a positive for IT and Pharma companies as a lot of their business in exports of services and goods.

FIXED INCOME

  1. Widening Current Account Deficit (CAD) and Fiscal Deficit:As India imports most of it’s oil needs, rise in oil prices means more money spent for the same amount of oil. This increases the Fiscal Deficit i.e. our expenditure is more than the revenue. As such the government then has to borrow more to meet this gap. This also puts serious pressure on the gap between total imports and exports and invariably leads to a ballooning CAD, resulting in loss of foreign exchange reserves.
  1. Weakening Rupee:As mentioned above, oil affects the CAD of our country which in turn has a direct impact on the currency due to higher Fiscal Deficits, Increased Borrowings and Current Account Deficits.

Year Rupee Dollar Exchange Rate % Change Avg. Brent Crude Oil Price per barrel ($) % Change
15-06-2008 42.48 91
15-06-2009 47.75 12.41% 58 -36.26%
15-06-2010 46.45 -2.72% 77 32.76%
15-06-2011 44.7 -3.77% 100 29.87%
15-06-2012 55.51 24.18% 110 10.00%
15-06-2013 59.53 7.24% 110 0.00%
15-06-2014 60.06 0.89% 110 0.00%
15-06-2015 63.6 5.89% 58 -47.27%
15-06-2016 67.5 6.13% 35 -39.66%
15-06-2017 64.62 -4.27% 55 57.14%
15-06-2018 67.45 4.38% 76 38.18%
  1. Inflation:Rising oil prices means rising input, freight and transportation costs for companies, which finally means bills and expenses increasing for the end consumers. In other words, strong reasons for rising inflation in the country.
  1. Where is the actual Impact?:For fixed income investors currently holding debt mutual funds, the above event has a negative impact on the underlying benchmark I.e. 10 year G Sec Bonds. As such, the yields of current 10 year G Sec bonds goes up, which results in a loss in value of bonds held (both sovereign and corporate). In fact, for any investor who may have recently put money into debt mutual funds may be experiencing a notional principal loss!

While elevated oil prices have certainly bought about uncertainties in both fixed income and equities, as an investor it is crucial to know the fundamental reasons of investing into your current investments, along with a certain understanding of when you would require the monies i.e. your time horizon. Like oil, there are always other factors that have short term impacts on portfolios, but by ensuring your appropriate asset allocation through consistent professional advice, your portfolio will likely navigate such times.

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bonus 4

Anxious times lie ahead for employees across India as the season for the annual bonus starts in full swing. People often consider bonuses as “money found” rather than “money gained” and therefore almost always consider using these pots of income for discretionary expenses such as gadgets and treats and vacations. While there’s nothing wrong in indulging oneself, it is also equally important to have the big financial picture in mind.

And whilst the list of to-do items can be endless, we at Plan Ahead Wealth Advisors have distilled that list into a few essential options.

  1. Payoff those Debts: As crucial as it can get, reducing those crushing debts can go a long way to ensuring long term financial happiness. With that thought in mind, one should ideally those pay the ballooning credit card and personal loans which have very high interest cost. This could be followed by any car or educational loans, though do remember that an educational Loan has certain tax benefits. If nothing else, prepaying your home loan should also be considered though the pros and cons of prepaying the loan might be best arrived at after consulting with a registered investment advisor.
  1. Replenish Emergency Funds: Keeping funds aside for unforeseen events is a handy tool. And ensuring that tool is always at optimal levels is critical. Therefore, if you had dipped in those funds previously, the bonus is a good opportunity to return them to their originally intended levels. Ideally, anywhere between 3-6 months of expenses, including any EMI or insurance premiums, should be available in such funds.
  1. Revisit your Insurance Needs: Speaking of insurance premiums, it is common knowledge that with age, insurance requirements change. Chances are high that as you age, your health insurance premium might be bumped up or that you realize that your life cover is inadequate and needs an increase. Using your bonus for such needs is a prudent way to utilize the same.
  1. Pay attention to your unfunded Financial Goals: There may be certain milestones that may not have been attended to by you earlier. Some may be upcoming in the next year, while others could be years away. Earning a bonus is always a great time to re look at those goals and use the bonus to bridge any gaps that may be there to fund such items. This could also be, but not limited to, ensuring adequate investments into tax saving instruments as appropriate.
  1. Invest in yourself: They say the biggest asset anyone can have is himself/herself. Therefore, using the bonus to upgrade your skills/knowledge can be a rewarding decision for the future either by increasing your prospects for that next big professional leap or even increasing your earning capabilities.

While the above are some of the “to-do” items with bonuses, there are also certain “do nots” that one should look out for, such as:

  1. Although quite common, never over spend beforehand, especially with credit cards, with the assumption that you will receive adequate bonuses in time to cover for the same.
  1. Money in savings accounts usually vanishes quicker than one expects. So, don’t wait too long on deciding what to do with that bonus. You may find out that by the time you decide what to do with it, it has already been spent somewhere unknowingly.

Bonuses are the result of your hard work throughout the year, so ensuring that your bonus works as hard as you have, can go a long way to a financially secure future. By considering the items listed above, you are more likely to arrive at the right choice of what to do with your bonus. And if you are still confused, it is always advisable to bring on board professional advice to ensure that you are on the correct path.

 

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Like it or not, your Mutual Fund holdings, at least some if not all, are already undergoing significant changes. While the changes in some were predictable, there are instances where the proposed changes were never imagined. Now, everyone from advisors and distributors to AMCs and mostly importantly the investors are starting to scramble to make sense out of the commotion!

Since the mutual fund AMCs have started to list out the changes in their schemes, there have been plenty of eyebrows raised with some of their decisions.

For example, one particular AMC had a Liquid Fund and a Money Market Fund prior to re- categorization. As per the new re-categorization rules, there is a Liquid Fund and a separate Money Market Fund Category. The AMC has gone ahead and moved their existing Liquid Fund into the Money Market Fund category and vice versa!

Another major example is that of another AMC, where they have changed the mandate of an existing MultiCap Fund to that of an Aggressive Hybrid Fund (where only up to 80% can be invested into equities ) as per the new rules. In addition, they have decided to merge one of their existing Balanced Fund with this newly formed scheme. The N.A.V. of this newly merged entity would be that of the earlier existing MultiCap Fund.

The same AMC has dealt another googly by changing an existing pure Equity scheme to a Balanced Advantage Category Fund (a fund that manages debt and equity allocation on a dynamic basis). Note that there is no cap on either asset class as per new rules. Furthermore, they have merged another existing Balanced Fund into this new scheme, while keeping the N.A.V. of the prior equity fund. The fund could now theoretically go 100% into debt or the other way as per the discretion of the fund manager.

Another example is that of an AMC that had an Ultra Short Term Fund and separately also ran a debt fund that primarily invested into bonds of Banks and PSUs. Post the introduction of the re- categorization rules, the AMC has merged the above Banking and PSU fund into the Ultra Short Term Debt Fund. It has further gone on to change the mandate of an existing Short Term Debt Fund into a Banking PSU Fund as per new rules. Now imagine the plight of an investor who was anyways confused with the huge universe of schemes. If he/she is not careful, he/she might end up investing into the current Banking and PSU fund expecting to remain in that category when it actually will get merged into an Ultra Short Term Fund. Or he/she may invest into the current Short Term Debt Fund not realizing it will become a Banking and PSU fund shortly. These unintentional errors could have big implications later on the mutual fund portfolio.

There are thousands of mutual funds schemes out there. And if not selected right, which can often be the case, investors end up with a plethora of funds in their portfolio over time. Now imagine looking at your fund list and realizing that a lot of them are going changes and may come out as something new and unintended. In such a context, it is easy to make unintended errors or make ill informed decisions in deciding what to do next with your mutual fund portfolio.

It is with this concern in mind that Plan Ahead Wealth Advisors is conducting a seminar tomorrow at The Regus, Andheri West to enlighten both our clients and their friends and families, on the impact this massive reorganization of mutual fund schemes will have on their portfolios and how they can navigate these changes in an efficient way.

While it may seem a little inconvenient to come out on a Saturday 19th May 2018 to attend this event, the take away from this event could lead to much better decision making on your current mutual fund holdings in the immediate future!

 

 

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The universe of mutual funds within the Indian space is quite big; as per latest data on AMFI, to be precise. So it’s not particularly easy for an investor, especially a first time investor, to navigate through it to identify the right kind of mutual fund for his/her requirements.

In response to fund houses launching multiple schemes in one category, which confused investors, market regulator SEBI has come up with a new system for fund classification. The new system aims to bring uniformity to the schemes launched by different fund houses, thus facilitating scheme comparison across fund houses.

Based on the categories, mutual funds will be forced to either merge, wind down or change the fundamental characteristics of a particular scheme. This move could also have short term impacts on the portfolio on any investor depending on the schemes they have currently invested into.

As per the new classification, all open-ended mutual fund schemes will be placed under the following categories:

  • Equity
  • Debt
  • Hybrid
  • Solution-oriented
  • Others (index funds/ETFs/fund of funds)

Only one scheme per category would be permitted except index funds/ETFs, fund of funds and sectoral/thematic funds.

However, each of these categories will have sub categories:

  • Equity will have 10 sub classifications
  • Debt will have 16
  • Hybrid will have 6
  • Solution Oriented will have 2
  • Other will have 2 sub classifications.

That is a grand total of 36 classifications an investor can choose from.

As such, these new classifications will have varying impact on existing funds and consecutively on an investor’s portfolio. Such impacts could include:

  • Schemes will be forced to stick to their mandate:Funds often change their investing style based on market conditions. For example, a large cap fund may have sizeable mid cap exposure because its chasing higher alpha. But now, any drastic change will force the scheme to change its characteristics resulting in the same being communicated to the investors. So now the investor will not have to worry about the fund becoming something it originally was not set out to do.
  • Like for Like Comparison:As AMCs will have one scheme per category, it will be easier for the investor to compare the options available. All schemes of different AMCs of a category will have similar styles and characteristics, which will result in a “apples to apples” comparison.
  • Better choice by fewer options:With AMCs forced to ensure one scheme per category and fund labeling to be made in line with investment strategy, options will become lesser which should result in investors being more aware of their choice.
  • Need for review in the short term:With the latest mandates, one can expect a short period of fund houses realigning their products. As such, many schemes may end up being quite different they what they originally were. Therefore, investors may need to keep a thorough eye on their funds to watch out for any changes that may occur and act accordingly.
  • Possibility of reduction in performance:Like mentioned above, funds often change their investing styles to generate significant alpha. But after these regulations, alpha creation may be more difficult as the universe of stocks will be same for all schemes in a category. Furthermore, as per the latest mandate, if a fund wants to be categorized say as a large cap, it will have to invest only stocks defined as large cap as per regulations. So in the short term it may have to sell or buy some stocks which could have an impact on cost that would be borne by the investor. Also, as regulations would demand funds to rebalance their stocks as per the semi – annual publications of AMFI which enlist large, mid and small cap stocks, it may result in forced selling to accommodate any change in status of a stock, resulting in a possible negative impact on the performance of the fund.

Overall, while there may be short term practical hurdles for both investors and fund houses alike while adjusting to the new mandates, the general consensus has been that this move is a positive step taken by the regulators in the right direction as it will bring reliability and simplicity to investors. For any investor, it would be prudent now to get professional advice on how such changes may impact their own portfolios.

 

 

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According to Investopedia, “Geographical Diversification” is the practice of diversifying an investment portfolio across different geographic regions so as to reduce the overall risk and improve returns on the portfolio.

As with diversification in general, geographical diversification is based on the premise that financial markets in different parts of the world may not be highly correlated with one another. For example, if the US and European stock markets are declining because their economies are in a recession, an investor may choose to allocate part of his portfolio to emerging economies with higher growth rates such as China, Brazil and India.

There are two major advantages in diversifying one’s investment portfolio based on geography:

  • Taking Advantage of Opportunities in other Strong Economies:

A significant benefit to a geographic diversification of assets has to do with the way it allows you to mitigate risk by taking advantage of stable economies elsewhere in the world. It’s no secret that some economies are struggling to recover from the trying economic times of the last few years. Other countries, however, have seen higher growth rates due to a variety of factors. International portfolios have been shown, in general, to outperform domestic ones, this is because when there are so many markets to choose from, it is unlikely that the same country will ever repeatedly achieve the highest level of growth. With improved access to international markets and investment instruments such as mutual funds bringing down the costs, an additional option to further diversify has been to buy in international markets.

Picture1

(Source: Bloomberg, Kotak MF. As of 31st Jan, 2018)

The above returns data chart clearly shows that while the Indian Equity Markets have performed significantly in the last year, there were opportunities elsewhere which proved even better. Diversification into such economies can therefore result in better yielding portfolios.

  • Balancing out the risks:

While chasing better returns might definitely be one aspect of any investment portfolio, it is also crucial to understand how any strategy helps in mitigating the associated risks that are part of every investment decision. Geographic diversification provides a much needed balance that all investors strive for. If one of your assets is located in a part of the world that is or could be vulnerable, the investments in other geographies could compensate or buffer any unexpected losses. This is because despite the impact of globalisation, geographies and economies can still have limited correlation between them, and over time international markets could perform very differently to domestic markets. Following is a chart that shows how various sectors form part of some regions around the world, in % of total market capitalization:

Picture2

(Source: credit suisse global investment returns yearbook 2015)

As you may notice, different regions give different weightages to every sector. Thus by accessing these regions, you can in essence, reduce investment risks in individual sectors and therefore your entire portfolio as a whole.

Since the cycles that drive business and investment are experienced at different times in different countries, foreign markets seldom move in perfect tandem with each other. Losses in one market may be offset by gains in another. Geographical diversification significantly reduces the overall level of volatility and exposure to external factors. For an investor, theoretically this would mean that the more diversified your assets, the safer is your money. However it is true that a significant black swan event, such as the financial crisis of 2008, will likely deplete any such benefits, especially in the short term immediately after such an event. What is rather important to keep in perspective is (a) your investment horizon and (b) your risk taking capability to diversify into foreign markets.

 

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Long Term tax gain tax

One of the biggest items that came out from the recent Budget has been the reintroduction of Long Term Capital Gain (LTCG) tax. This tax is applicable on gains arising from sale of  :

  • Equity Shares in a listed company on a recognized stock exchange
  • Units of Equity Oriented Mutual Funds; and
  • Units of a Business Trust

The proposed tax is applicable to above assets if:

  • They are held for a minimum of 12 months from date of acquisition
  • The Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition

(As per Notice by Ministry of Finance, dated 4th February, 2018)

There are two major points in regards to the proposed regime:

  1. The LTCG tax will be at a flat 10% for any long term gains in excess of Rs 1 lakhs, starting from Financial Year 2018-19 i.e. 1stApril, 2018. In other words, all long term capital gains realized up until 31st March, 2018 will be exempt from the proposed tax.
  2. There is a “Grand Fathering” clause, which in essence ensures that all notional/realized long term capital gains up to 31stJan 2018 will remain exempted from the proposed tax. This means that effectively the closing price of 31st Jan 2018 would be the cost price for LTCG calculations.

How would the Long Term Capital Gains Tax be calculated?

If you sell after 31.3.2018 the LTCG will be taxed as follows:

The cost of acquisition of the share or unit bought before Feb 1, 2018, will be the higher of :
a) the actual cost of acquisition of the asset
b) The lower of : (i) The fair market value of this asset(highest price of share on stock exchange on 31.1.2018 or when share was last traded. NAV of unit in case of a mutual fund unit) and (ii) The sale value received

Scenarios for computation of Long Term Capital Gain

  • Scenario 1:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31st Jan 2018 was Rs 200 and it was sold on 1st April 2018 at Rs. 250.

As actual cost of acquisition is less than FMV, the FMV will be considered as cost of acquisition and therefore the LTCG will be Rs. 50 (Rs. 250 – Rs. 200)

scenario 1

  • Scenario 2:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31st Jan 2018 was Rs 200 and it was sold on 1st April 2018 at Rs. 150.

Actual cost of acquisition is less than FMV. However the sale value is also less than FMV. Therefore the sale value will be considered as cost of acquisition and therefore the LTCG will be NIL (Rs. 150 – Rs. 150)

scenario 2

  • Scenario 3:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31st Jan 2018 was Rs 50 and it was sold on 1st April 2018 at Rs. 150.

As actual cost of acquisition is more than FMV, the actual cost of acquisition will be considered as cost of acquisition and therefore the LTCG will be Rs. 50 (Rs. 150 – Rs. 100)

scenario 3

  • Scenario 4:An equity share has been purchased on 1st Jan, 2017 at Rs. 100. Its Fair Market Value (FMV) as on 31st Jan 2018 was Rs 200 and it was sold on 1st April 2018 at Rs.50.

Actual cost of acquisition is less than FMV. As sale value is less than both the FMV and actual cost of acquisition, the actual cost of acquisition will be considered as cost of acquisition and therefore there will be Long Term Capital Loss of Rs. 50 (Rs.50 – Rs. 100). Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the IT Act.

scenario 4

Note, there is no clause of indexation on cost of acquisition. Setting off cost of transfer or improvement of the share/unit will also not be allowed.

 

LTCG on these instruments realized after 31.3.2018 by an individual will remain tax exempt up to Rs 1 lakh per annum i.e. the new LTCG tax of 10% would be levied only on LTCG of an individual exceeding Rs 1 lakh in one fiscal. For example, if your LTCG is Rs 1,30,000 in FY2018-19, then only Rs 30,000 will face the new LTCG tax.

What should you do now with your Equity Portfolio?

Even with the reinstatement of this tax, we believe that equities are still an efficient post tax investment avenue. We would therefore continue to recommend to remain invested in equities provided the investment horizon is long. Alternatively, if you require monies in the short term, this may be a sound window to book profits and shift to less aggressive avenues.

 

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