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blog 2With the recent launch of the ICICI Bharat 22 ETF, a lot of buzz around Exchange Traded Funds or ETF’s has been doing the rounds. Most investors may be wondering whether it is worth investing in ETF’s?

So what is an Exchange Traded Fund?

An ETF is a passive investment instrument whose value is based on a particular index and such a scheme mirrors the index and invests in securities in the same proportion as the underlying index. For example, a Nifty ETF will invest in the 50 stocks compromising the Nifty index. ETF’s are freely marketable securities which are traded on the stock exchange.

Since ETF’s trade on the exchange, their value fluctuates all the time during the market trading hours. This is different from the working of a mutual fund scheme which has a single Net Asset Value (NAV) per day that is determined after the trading hours are over.

Theoretically, ETF’s are structured to provide a variety of advantages to investors. The most prominent among them are as follows:

  • Diversification: ETF’s can provide a variety of diversification based on following themes:
  1. Asset classes such as equities, gold, fixed income
  2. Sectors such as financial services, consumption, infrastructure
  3. Based on market cap i.e. large, mid and small cap
  • Low Cost: One of the biggest attraction of ETF’s has been it’s very low cost structure, especially in comparison to Indian mutual funds. The low costs is primarily due to the fact that an ETF is a passive investment i.e. there is no active intervention in stock selection, re balancing based on a certain view. Therefore the costs associated with hiring professionals and the required infrastructure is avoided, resulting in a significantly cheaper product. Furthermore, most ETF’s have kept the expense ratios low to induce significant inflows from institutional investors. Following are examples of some commonly known ETF’s and their respective Expense Ratios
ETF Expense Ratio
CPSE ETF 0.07%
Motilat Oswal MOSt Shares M100 ETF 1.50%
Kotak Banking ETF 0.20%
ICICI Prudential Nifty iWIN ETF Fund 0.05%
SBI – ETF Nifty 50 0.07%
Average 0.38%

(Source: Value Research, mutual fund websites)

  • Suited to Efficient Markets: it is a global observation that passively managed funds have performed significantly better over actively managed funds where markets are more efficient. This is because in developed markets, all related information that should be priced into the equity market already happens, leaving very little space for the fund managers to beat their respective benchmarks.
  • Reduced Risks: Due to its passive structure, the risk arising due to stock selections by a fund manager are reduced. Furthermore, as an ETF comprises the same stocks in the same allocation as in the underlying index, tracking error is significantly reduced to the point of it being almost negligible. Tracking Error is the standard deviation between the returns of the fund and the underlying index. A lower tracking error indicates the fund is that the ETF will mirror the index more closely and therefore its performance will be more consistent with the same index.

Despite many advantages that ETF’s can bring to the table, in India they so far have been primarily avoided for the following reasons:

  • Liquidity: One of the major disadvantages plaguing ETF’s currently is liquidity. As ETF’s are traded on the exchange like any stock, its not always you will have to opportunity to either buy or sell at the desired quantity or price, depending on the type of ETF involved. However an alternative to this problem is the use of a market maker. A market maker is appointed by fund houses. They, on behalf of fund houses, provide quotes for buying or selling an ETF based on the current NAV of that ETF. This helps ensure liquidity for investors. Any investor can approach a market maker for transaction. The difference in their quote and the NAV of the ETF is called “spread”, is the cost for the services. –
  • Lack of awareness: Distributors receive negligible commission for recommending and executing an investment into an ETF. Because of these low margins not much efforts have gone into promoting ETF’s. Thus, most investors are unaware of what an ETF is and how it can add value to their portfolio.
  • Relative Underperformance over long term: While in theory ETF’s should out perform active managed funds in an efficient market, the point to note is that India is still some time from achieving that status. Hence actively managed equity funds, especially in the top quartile, are able to beat the underlying index, and ETF’s over long term horizons. This currently results in alpha creation which ETF’s may take time to match up to. The following table is a comparison between a random mix of actively managed equity funds and equity oriented ETF’s:
  1yr 3yr 5yr 10yr
Aditya Birla Sun Life Frontline Equity 26.62 10.21 16.89 10.61
Franklin Templeton Franklin India Prima Plus 24.86 11.17 18.22 10.87
HDFC Top 200 28.42 8.39 14.99 10.65
IDFC Premier Equity 30.35 11.72 18.68 14.08
ICICI Prudential Nifty 100 iWIN ETF 27.54 8.44    
Kotak Sensex ETF 23.88 5.36 10.7  
Reliance ETF Nifty BeES 26.78 6.7 11.91 5.75
S&P BSE Sensex 25.58 5.01 11.15 5.14
NSE Nifty 100 26.97 7.55 12.71 6.08
source: value express , date (07 Dec 17), returns data CAGR        

As in the Indian economy continues its march towards being recognized as a developed nation, there is fair certainty that ETF’s will have a far larger role to play. However in current scenarios, practical hurdles continue to keep them out of favor among investors. We believe that assigning a small allocation towards ETF’s, after due diligence, is sufficient basis investor’s risk appetite and investment horizon. As Indian Equity markets evolve, so will the ETF space and this will increase investors interest towards them.

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Landing airplane

This 7th of December is the International Civil Aviation Day and marks the 50th Anniversary of the signing of the Convention on International Civil Aviation.The purpose of this day, as pilots all over might be well aware of, is to recognize the importance of aviation to the overall development of the world.

And while pilots draw great confidence from being able to manage the process of reaching passengers to their destinations safely and comfortably, a more pressing question can be that are they confident when it comes to management of their finances?

The profession of a pilot demands almost all their time all year round. Hence they are left with limited personal time which they wish to live to the fullest. And like most busy professionals,more often than not money management seems to come at the end of this wish list. Pilots go through meticulous preparation and planning for their flights daily but sometimes are unable to do so for their finances.

While money is not the end, it is definitely a means to achieve certain objectives. Proper planning and structure to a pilot’s personal finances can result in he/she being prepared for all kinds of life events and responsibilities. Events such as:

  1. Sudden Illness:The requirement for pilots to be medically fit is of prime importance as they are responsible for the lives of hundreds of passengers daily. Every pilot needs to ensure a good health cover to cover sudden illness and hospitalisation. A pilot may wonder why would he need insurance when he is already covered. But if one actually things about, it might be prudent to have a separate health insurance cover for times when you may not be employed or between jobs or in cases where employer insurance is inadequate.
  2. Need for upgradation of Skill Sets:Like all professions, skill updation is a critical requirement that must be met by all pilots on periodic basis. But these do not come at a cheap cost. Ensuring enough provision and funds are kept aside and is available at the time of requirement can go a long way in avoiding last minute stress.
  3. Contingency Needs: A major issue plaguing the aviation industry is the availability of opportunities. The last few years have clearly demonstrated that problems are plenty in the Indian aviation sectors. For eg. Airlines have closed down, pay cuts are becoming common, or there have been significant delays in salary payments. Such events can have huge financial implications on pilots and their families. Having contingency funds parked in highly liquid assets can help bring some normalcy in such difficult times.
  4. Retirement and Sunset Years:Insufficient planning for your golden years i.e. Retirement can cause stress. In case of pilots, who are among the top earners amongst professionals, this only magnifies the problem. Why so? Pilots more often than not tend to have busy lifestyles with high discretionary expenses. As such they are accustomed to a lifestyle that will only get more and more expensive as years pass This year on year rise in prices is called Inflation and it is an important factor that more often that not, is grossly underestimated. Furthermore, like any other busy professional, even pilots like to keep themselves occupied during retirement years. The interests or activities that they might pursue would also usually have financial implications. Activities such as investing into various ventures, pursuing hobbies or dream goals, continuing leisure flying by enrolling in the local flying club can be just some of the examples. To be able to fund these without affecting retirement corpus requires careful planning early on.

Take the case of pilot Mr. Sharma. Currently aged 30, the household expenses for him and his family is Rs. 12 lakhs per annum. Even if we assume a general inflation of 8%, the same Rs. 12 lakh will become Rs. 1.75 crores at the age of retirement at 65. ( Rules permit pilots to fly till the age of 65 ). In other words, Mr. Sharma would need to have a big enough corpus at retirement that will provide them atleast Rs 1.75 crores every year that will help them maintain current lifestyles.

Pilots are aware of the importance of planning. Each flight requires hours of pre flight preparation which means going through weather reports, system checks among other items to ensure that the flight goes by without any hitch. Similarly having a strategic plan in place for one’s finances can also help prepare for any “rough weather” that could come along in a pilot’s financial life.

 

 

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indian-stock-market-news-update-as-on-april-02-2014

India is currently among the most watched Emerging Market nations. To top that, the Indian Equity Markets have witnessed unprecedented growth in the recent months. The YTD returns for Sensex alone has been 26% (data from BSE India). The euphoria and high confidence on the Indian Equities has continued to remain, especially from the institutional investors both foreign and domestic.

This is also leading to make many individual investors question whether they should invest in equities or sit on the sidelines. While individual risk appetite and time horizon would be some of the basic factors to understand before investing, there are many other fundamental factors to track. While the debate has been raging on as to which indicators should be looked at or ignored to make sense of the valuations of the Indian equity markets, the following factors can help bring some sense of clarity to the overall picture. Factors such as:

Current Price to Earnings Ratio (P/E Numbers): One of the most traditional tools used globally at gauging the valuations of an equity market of a country. In the last one year alone (based on data from Oct 16 to Oct 17), the P/E Ratio for S&P BSE Sensex has averaged close to 22 times in comparison to its historical average of approximately 17 on a trailing basis. For the BSE Mid Cap and Small Cap of the same period, the P/E valuations are at an average of 33.8 and 81.13 times.

Corporate Earnings: P/E Ratios are directly linked to the corporate earnings of the country. As per Kotak Institutional Equities Estimates, the Expected Earnings for companies representing the Nifty 50 Index are approximately 2% in FY 2018. A variety of reasons are attributed to these low earnings expectations, most famously discussed are the implementations and effects of Demonetization and Goods and Service Tax (GST).

Crude Oil Prices: Nearly 80% of India’s energy needs are import dependent. A direct consequence of this is the risk to the country’s inflation rate if the prices of crude oil are to rise. A rise in oil prices results in lower cashflows/profits for companies and higher prices for consumers. Brent crude oil prices are currently firming up at prices upwards of 60$ per barrel. This is a definite concern from an Indian economy perspective.

Exchange Rates: The Rupee is currently considered overvalued basis its 10 year average (Source: Kotak Research). This has a dual impact on the economy i.e. (A) it increases attractiveness of imported products, resulting in increased competition for domestic companies and lower profits; (B) it decreases the value of exported products and therefore hurts the margins of export based industries such as the IT sector. Both have resulted in muted growth prospects for these respective industries.

Bond Yields: In an growing economy like India, both equities and bonds compete for capital. In a equity bull rally, money is taken out from bond markets and pumped into equities, forgoing risk to capital for riskier investments. Currently bond yields are inching up to the mid 2017 high of 6.987% yield for the 10yr G-Sec. However there has only been net inflows into fixed income. Foreign Portfolio Investments into Government Securities have already reached 83.94% of their allotted limit (data dated as per 6th Nov NSDL)

Inflation Rate: Inflation brings about it own risks to the stock markets. In the last Monetary Policy Committee meeting, the RBI revised the inflation projections for the rest of FY 2018 upwards to 4% – 4.5%. This may indicate a stop to future rate cuts, freezing any possibilities of reduction in lending rates. Medium term consequences for companies could possibly mean dearer than expected debt to  service, resulting in subdued profits and revenue.

Role of FIIs: The way that Foreign Institutional Investors park monies in the market can give an indication to the current picture of that market. While FIIs were very bullish on Indian Equities for most part of the calendar year, starting June they slowly but surely tapered inflows in equity, finally resulting in net outflows in the month of September and October. (Source: moneycontrol)

Global Scenario: On a global scale, economies are starting to look up, with further growth expected. According to IMF Economic Outlook, average expected GDP growth for FY 2017 is 2.5%. Globally, equity markets have participated in this growth including India. What probably may need to be put in perspective is that the rally in Indian Equities may be partly due to the global rallies taking place. Therefore the Indian equities are associated with risks in terms of foreign external factors like outbreak of war in the Korean Peninsula. Such events are likely to have negative impacts on the domestic markets.

Keeping in mind the above mentioned factors, Plan Ahead Wealth Advisors has a definite view that current equity markets are over valued and investors should exercise caution. The not so positive indicators from these mentioned factors should mean a significant correction cannot be discounted, keeping us wary of diving too much into equities without first educating investors of the potential risks in the short to medium term horizon.

 

 

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FinalTreasuryManagmentAs the owner and /or CEO of your HR Consultancy firm, cash flow management is a constant topic of discussions with the finance and accounts team.

What do with the excess cash in hand? Where should it be deployed so that it works a little bit more and grows whilst being highly liquid and safe? How does one ensure that enough reserves are maintained to fund working capital expenses during the low business cycles?

What makes cashflow management critical is that it helps the firm maintain the business flow and also balance better returns for idle money. This in turn goes a long way in ensuring operational functioning and continuity. The question is how is this achieved?

First things first, when you talk about treasury management, you are indirectly referring to constant flow of money in very short time periods. And as most boutique/SME’s face volatile business turnovers, money can be required on priority basis at any point. Hence the priority in Treasury Management primarily lies in ensuring liquidity and safety of capital invested rather than high returns.

Secondly, while significant growth in short term investments should not be expected; it should not necessarily be considered that there are no better options other than the company current account. While Fixed Deposits and Recurring Deposits have been traditional avenues for company owners to park extra monies, they remain inefficient from a taxation perspective. Tax Deducted at Source (TDS) is a definite thorn as tax incidence is occurring even though there are no capital gains received in hand.  Furthermore, falling interest rate scenarios are making them an even less attractive option.

An alternative that should be considered is liquid/ultra short Term/ short term debt mutual funds. Two aspects they score over traditional avenues is (A) they usually do not have any exit penalties  as compared to bank FDs and (B) they are more tax efficient due to tax deferment, as tax incidence only occurs at the time of realised capital gains at the hands of the investor, and they are eligible for indexation benefits as gains from any debt mutual fund investment held for 3 years or longer are taxed at 20% after indexation, thereby improving post tax returns.

In addition, often companies decide to park certain monies with a longer term view. This could be to prepare for possible expansion/acquisition as envisaged in their business plans. But as the requirement of funds is not in the immediate future, short term investment options might not work out in the best interest. Hence separate planning should be considered for such investment purposes.

Last but not least, understanding past company cashflows and extrapolating the data to approximate future cashflows is essential to determine the kind of investment strategy would be ideal. This analysis, while including business growth projections, should also include current liability repayments and expected abnormal gains in the future.

While managing cashflows will indeed be a constant objective, through efficient planning and proper advisory it need not become a source of constant headaches.

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Crisis 5

In today’s ever changing world, with all the geo-political, social, and technological dynamics, job surety is no more a luxury anyone can afford. Be it the CEO of a M.N.C. or a mid level manager, the changing landscape compels us now more than ever to be prepared for the worst.

Even pilots aren’t immune to such extremes. From domestic industry uncertainties to global events, pilots need to be equipped to face such an eventuality. One such recent example is the Qatar diplomatic crisis. With the neighbouring countries cutting diplomatic ties with Qatar and shutting down their airspace for any Qatar bound plane or vice versa, a sense of being besieged looms in the country.  Now while this does not directly result in job losses, such incidents raise the fear, specifically for businesses closely linked to Qatar.

Therefore prudence calls for having certain provisions in place that can help ease this fear. A sort of backup or cushion for facing an event you might have never fathomed.

A checklist of such provisions could possibly look as follows:

Self funded health insurance coverage is important – Most pilots would argue that the employer already provides for this. But that’s the point right? What happens if you get the golden handshake? Guess what, no more health cover. And even if you get a new one, they always come with a waiting period. This means you won’t be covered for a certain period from any pre existing illness. This would not be a situation that you would like to end up with.

 

Personal Accident Policy and Critical Illness Policy coverage – Extending the above point, it’s critical that pilots have a personal accident and a critical illness policy. In the months of no income, one needs to ensure that one is covered for all kinds of risk. In cases where families may have accident or critical illness exigencies during such a period, such types of policies are a godsend. Such personal accident policies, for example provide the insured with either weekly allowances or in some cases a lump sum payout depending on the terms and features of the policy. These payouts can be used for medical expenses that come along with treating such eventualities.

 

An Emergency Fund is a must have – A highly liquid investment is the preferred choice to host such a fund, as it’s meant for immediate use. While Bank FDs and saving accounts is the age old choice, research and time has proven they are better options out there. One such alternative is Liquid Mutual Funds. These typically provide the similar liquidity and safety – principal features that a bank savings account offers, but with the added incentive of significantly higher returns on the investment. These returns currently are in the range of 6-7% versus 4% on your savings account.

 

The objective of this corpus should be to provide enough to maintaining the essential household expenses + EMIs in case of sudden exigencies and or temporary absence of income. Thumb rule states this corpus should ideally support 6 months of household expenses, including EMI’s and Insurance Premiums.

 

Move towards conservative assets – If you feel the crisis period is going to be prolonged then you are better off cutting down on riskier investments and moving towards conservative assets. Why so? Because liquidity needs could crop up anytime. Hence capital protection and not capital appreciation must take the driver’s seat.

 

While in all probability this crisis might be short lived, planning for it should not be left unattended. Like the saying goes, “Better to be safe than sorry”! And checking off this list could just go a long way in maintaining that safety net at all times, even when you might feel down in the dumps financially.

 

Till then, happy flying!!!

 

 

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Retirement 1Retirement is usually something that is not considered by most of us till we are nearing it, so naturally we do not plan for it, until it is probably too late. This general ignorance or lack of attention to retirement planning can have far reaching consequences.

Retirement planning in the simplest sense means preparing for life after the tenure of paid work ends.  This does not only include the financial aspect, but other aspects such as what to do during retirement, the lifestyle choices that one can take and what dreams one might want to pursue during the remainder of the years.

While the concept of Retirement Planning applies to pilots just as it does to other individuals, there are certain unique points that are exclusive to retirement planning for commercial pilots. These unique points are crucial while developing a retirement plan for a pilot.

Firstly, under the current DGCA rules, the retirement age in India has been pushed up to 65. This is an entire 5 years longer than the mandated retirement age in most other industries. This translates to more income earning years, probably at the highest salary slab of the industry, since usually pilots around this age are most likely to have their designations as Captain. This extra income earning period is crucial in formulating and ironing out the retirement plan before the pilot ultimately retires. The significant income flowing could be the difference between living a compromised and a fulfilling retirement.

One of the most important things a commercial pilot has to consider is Lifestyle Inflation. Because commercial pilots have one of the best salary packages amongst all industries, they tend to have more lavish lifestyles. And they are comfortably able to match up the ever increasing expenses that come alongside their lifestyle choices. But on retirement, the salary stops. Yet expenses continue to stay, with inflation only adding to it. But more significantly no one would want to compromise on their lifestyle they have become accustomed to. As such it becomes imperative to plan much ahead so that lifestyle compromises don’t become the norm during your golden years.

Just to drive home the impact of inflation, let’s take an example. Consider a pilot Mr. A, currently 30 years of age and has a monthly expenditure of Rs 12 lakhs every year (not a very high amount, from what we hear from our pilot clientele). Assuming he will retire at age 65 and taking an average of 8% lifestyle inflation till retirement,  the same Rs. 12 lakhs expenditure will inflate to approx Rs. 1.75 crores. In other words, to maintain the lifestyle that costs Rs 12 lakhs as of today, Mr. A would require Rs 1.75 Crores annually to maintain the same expenditure choices, forget upgrading!

Furthermore, pilots are used to having extremely busy schedules. So when retirement hits, they are unprepared to handle the ample time in hand. Hence they always look for options to keep themselves engaged. This could mean, taking long leisure trips or finding, researching on and investing lump sums in “exciting investment avenues”, committing money to be part of a start up or just following their long drawn passions or enrol at the local flying clubs just so that they can regularly indulge their lifetime love of flying. All this comes at hefty financial expenditures.

All of the above means that Pilots would need to plan and develop customized retirement plans for themselves to ensure a smooth flight during retirement.

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Debu Blog Image

As a passenger, getting from point A to B simply includes sitting on your assigned seat and enjoying the flight till the destination. You are completely unaware of the preparation and planning that goes behind every flight.  A smooth flight is an end result of the meticulous preparatory work including facing any emergency.

All sorts of emergencies can happen during a flight. Engine malfunctions, instrument failures and unanticipated weather issues are just some of the emergencies pilots can face at any time.  In such times the long hours of training, learning from past experiences and pre flight preparations comes to the front and saves the day. Sometimes passengers are blissfully unaware of the issue and continue to enjoy the flight. All this all possible because one aspect, planning! More specifically, planning for an emergency.

Yet, more often than not, pilots in the Indian aviation sector seem to be unprepared for one kind of emergency that is their own personal financial emergencies.

Personal financial emergencies can be broadly classified into two types based on nature of emergency i.e. (A) loss of job or life and (B) unexpected big ticket financial commitments.

While both can prove to be a heavy toll on one’s finances, if we look back to the last 5 years of the Indian Aviation Industry, job losses have been a major theme throughout.

Now as a pilot you earn a handsome salary starting from a young age. Hence your lifestyle tends to be on the more plentiful side.  And this only increases in significant jumps as you climb higher in your career. As such expenses are always on higher side. Luxury cars, high discretionary expenses, significant EMI’s and top notch education for children. All well within your reach. That is as long as you continue to earn that kind of money.

But what happens if you can’t? What if salaries are not paid for months or worse, you are given the golden handshake. What then? Take a step back and think about this for a minute. Ask yourself, will I be able to continue to live the life I have led so far under such circumstances; at least temporarily till I can get things back on track?

A majority of pilots will fail to have an answer to this. And that’s far from ideal!

So what should you do now? How do you start preparing for such unforeseen events? A thousand questions and ideas might run through your mind. Maybe you can get it right, maybe not. But with the help of a trusted financial advisor, who knows the intricacies of the aviation sector, you could stand a much better chance of confidently facing such troublesome periods, safe in the knowledge that you were geared up for it in advance. Exactly like handling an emergency while flying a plane.

As professionals specialized in planning for the worse, it definitely be worth your time for us to meet and discuss how to enrich your life.

Till then, happy flying!

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