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Posts Tagged ‘Investment Advisory’

Just like during the rest of his tenor, RBI Governor Raghuram Rajan avoided the theatrics and playing to the gallery with his last monetary policy. He maintained status quo on interest rates in today’s monetary policy review, much along expected lines. Going forward, whilst there will be a new RBI governor, policy decisions will be taken by a Monetary Policy Committee (MPC) and appointment of the members is under process for the same.

MPC pic

Your investments

Whilst the RBI governor did flag off some inflationary concerns due to the seventh pay commission impact, one could continue to expect a positive real rate of return due to a reduction in food inflation on the back of good monsoons. This could eventually bring down CPI inflation.The policy had an accommodative stance which means there could be a possibility of a rate cut going forward. On the domestic front there are a lot of positives like a pickup in Industrial production in May, indication of green shoots in manufacturing with Purchasing Managers and the RBIs industrial outlook indicating pick up in new orders, increased business confidence, Services sector PMI at 18 months high and early indications of a turnaround in exports. These should result in better corporate earnings in the coming quarters, supporting current market valuations which are a premium to long term averages.

On the FCNR (B) deposits maturity coming up over the next few months, RBI has said around 80-85% will be delivered through forwards and any shortfall will be adjusted from existing Foreign exchange reserves. They will intervene in case of increased volatility. The RBI will continue to support liquidity by conducting open market operations. With chances of falling food inflation on one hand and upside risk to inflation coming from the 7th pay commission on the other side, it is difficult to predict when the next rate cut will take place. Therefore, you need to have a blend of fixed income strategies in your portfolio including hold to maturity, acrrual and dynamic products where managers have the flexibility to decide where it may be most appropraite to invest.

Your loans

RBI mentioned it will analyse the impact of the MCLR (Marginal Cost of funds based lending rate) and make changes to if required. Therefore, on the loan side nothing changes unless the MCLR rate moves further down, which is expected to be a gradual process.

Way Ahead

With Raghuram Rajan’s term ending on September 4, 2016, the appointment of a new RBI Governor and formation of Monetary Policy Committee(MPC) means that we should watch out for whether we see more of the same in the next bi monthly policy on October 4, 2016, or whether there will be a big change from the past.

Image Credit: www.gograph.co

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A large number of NRIs do not file taxes, as they live overseas and therefore believe that there is no need. However, there are two major situations when NRIs should file returns in India. Firstly, if the income earned in India exceeds the maximum permissible limit as basic exemption. At this point, the maximum exemption limit is Rs. 250,000. Incomes like salary arising from services provided in India, income from house property, capital gains arising from sale of property in India, income from deposits held in India will be taxable in India. Secondly, they should be filed to claim return if deducted tax is more than what was payable, so that you can claim a refund.

There are two major situations when NRIs should file returns in India. Firstly, if the income earned in India exceeds the maximum permissible limit as basic exemption. At this point, the maximum exemption limit is Rs. 250,000. Incomes like salary arising from services provided in India, income from house property, capital gains arising from sale of property in India, income from deposits held in India will be taxable in India. Secondly, they should be filed to claim return if deducted tax is more than what was payable, so that you can claim a refund.

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A lot of NRIs are unaware of the fact that in order to track expenses and investments above a certain threshold for all individuals – residents or NRIs, Annual Information Reports (AIRs) have to be filed by various entities in India like banks, Mutual funds,  bond issuers, registrars for real estate purchases above a certain value, amongst other transactions. Therefore, you could get a notice due to these reasons if your name appears in an AIR and you are not filing tax returns. Whilst this may not mean that taxes are due, you will need to respond to the notice, which can be rather challenging if you are out of the country. Thus, it is advisable to have your taxes in India in order.

If you are a tax resident in geographies where you may be able to take tax advantage of the double taxation avoidance treaty between India and that country, you must take advantage of that. If you sell direct equity/stocks, short term capital gain applicable is 15%. The long term capital gain on sale of direct equity is Nil ie for equities held over 1 year. NRIs have to trade through a broker if they wish to invest in direct equities. They can trade only on delivery basis and intraday trades are not allowed. They have to open a Portfolio Investment Scheme (PIS) account where their trades get reported within 24 hours.

If you are a tax resident in geographies where you may be able to take tax advantage of the double taxation avoidance treaty between India and that country, you must take advantage of that.

Debt and Equity Mutual Fundshave different tax rules. For equity Mutual funds the tax rate applicable is 15% for holding period of less than 12 months and for holding period of greater than 12 months it is Nil. Non equity mutual funds ie debt funds, gold funds, are taxed like real estate ie the tax rate for a holding period of less than 36 months is as per the marginal rate. If you hold them for a period greater than 36 months a long term capital gain tax rate of 20% with indexation is applicable .

If you are looking at investment options to save for your retirement goal then New Pension Scheme is an option you can look at. NRIs are allowed to invest in NPS.

NPS is useful for NRIs living in Middle Eastern countries, since they do not have mandatory social security benefits in their countries of residence unlike many other geographies. NRIs own contribution is eligible for tax deduction u/s 80CCD (1) of income tax act up to 10% of gross income with overall ceiling of Rs. 1.50 lakhs u/s 80CCE of income tax act.From FY 201516investors are allowed tax deduction of additional Rs. 50,000 under 80CCD1(B).

NRIs wishingto invest in FDs can look at Foreign Currency Non Resident ( FCNR) deposits. It is in the form of a fixed Term deposit account denominated in foregin currencies. In this case NRIs can park overseas income as foreign currency in India without having toconvert it to Indian Rupees. The rates on these deposits depend on tenure of investment and the currency in which you park your funds. Principal and interest are fully repatriable. For NRIs interest is not taxable in India. However, they could be taxed in the country of residence of the NRI, for example in the US. Similar is the case with NRE accounts.

A resident foreign currency account (RFC) account can be used by NRIs who are returning back to settle in India, to park overseas income as foreign currency in India without having to convert them into rupees. Funds are fully repatriable and can be transferred from RFC to NRE and vice versa. Interest earned on RFC account will be exempt from income tax as long as you are Resident but not ordinary resident (RNOR).

Image credit: www.taxinsightworld.com

 

 

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L&T Infotech is a large global IT services and solutions company, NASSCOM (National Association of Software and Services Companies) ranked them the 6th largest India IT Services Company in terms of export revenues in 2014.

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L&T Infotech has come up with an IPO of Rs. 1228 Cr. The details are as under

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Data Source: JM Financial

Purpose of the issue

The purpose is to provide liquidity to the existing shareholders.

Quick facts

  • They offer IT services in diverse industries such as Banking & Financial services, insurance, energy and processes, consumer packaged goods, retail and pharma, media and entertainment, hi-tech and consumer electronics and automotive and aerospace.
  • Their range of services includes application development, maintenance and out sourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform based solutions.
  • Larsen & Toubro Ltd. was incorporated in 1996. The L&T group provides them with access to professionals with deep industry knowledge and its corporate and business culture

Besides India, they have global presence

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  • Their revenues from continuing operations increased from Rs. 34278million in FY 13 to Rs. 49680 million in FY 15.

Strengths

  • Their business to IT connect model

They are one of the very few IT service providers who are part of such a diversified business conglomerate. The experience and institutional knowledge of the L&T group helps them to capitalise on strategic opportunities at a faster pace.

  • The strong brand support

L&T provides them with a competitive advantage and helps them in attracting talent, clients, capital, benefit of parent’s global network, best corporate governance practices, etc. They can continue to capitalise on the ability to engage with strategic global clients, vendors and partners of the L&T group.

  • Established long term client relationships

Their client base includes world’s largest and well known organisations including 41 out of fortune 500 companies. They have a history of high client retention and derive significant amount o revenue from repeat business.

revenues from continuing operations

They carry out regular surveys which helps them ensure high level of client satisfaction. They provide customised client solutions flexible to their client needs through their “Thought Partnership program “ which is designed such that they work with business leaders from their clients on business specific needs like reducing run costs, realigning IT with business changes and helping tem envision their future technological needs.

 

  • Track record of established process

 

They have expanded their onshore, offshore and near shore presence thus developing their global delivery model. They have a reputation for delivering high quality IT solutions and timely completion of projects. They have a track record of executing a number of large, end to end critical projects in diverse business areas.

Risk Factors

  • Their business will suffer if they fail to innovate, anticipate and develop new services and enhance existing services to keep pace with change in technology.
  • Due to their global presence their revenues and profitability will be impacted by exchange rate fluctuations.
  • They derive a significant portion of their revenue from a limited number of corporate clients and their revenues could decline if they lose a major client.
  • They may be liable to client’s loss caused due to system failure, disclosure of confidential information or data security breaches.

Valuations

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Extracts from P&L

It has experienced earnings growth in all periods except 2013-14.

Earnings per Share

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PE Ratio based on 31 March 2015 EPS

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Comparison with peers

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PRE based on 31 March 2016 EPS

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Data source: JM Financial services, DRHP

Our opinion

You can consider subscribing to this IPO and exiting post listing.It has a reasonable valuation compared to peers at this stage, but it does not have a very differentiated business model.

Data Source: DRHP

Image credit: economydecoded.com

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Retirement is when you stop living at work and start working at living!

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Retirement is not merely a goal but it’s a journey. There is more to it beyond merely planning for a desired sum as your retirement corpus.

Now that you are retired and you have an accumulated corpus with you, you have to plan wisely in order to sustain the sum till the end.

Expense management

The starting point of your exercise will be to have an expense pattern which you broadly have to stick to. There are many changes which will occur in your expense pattern now that you are retired.

Your retirement expenses will also have phases. Initially in your60s you may see a certain type of expenses going up. For example travel expenses. Now that you have all the time for yourself and your spouse, you may wish to go for multiple vacations –  either domestic or international. Another expense that may increase could be group memberships. You may join a hobby group or a club of your choice. Also it will take some time for your lifestyle to undergo a change so your lifestyle expenses may not change much in the first few years. Later on with age your choices and preferences may change. For instance you may no longer prefer restaurants as often, as you used to prefer at one point in time.

As you move towards your 70s your medical expenses may increase. Your medical costs will go up due to need for regular checkups and dependence on medicines. Health insurance and critical insurance do not cover your costs after a certain age. Even if they do, the cost is very high as the premiums increase with age. Therefore having a health care provision for your retirement is critical.

Plan for a regular and tax efficient stream of income

Another major change is that you will no longer receive any regular salary or business income.

Now that you have an accumulated sum, you have to plan your investments in a manner so that you can have a regular and a tax efficient stream of income. Do not be overly aggressive or overly conservative. Whilst the exact investment strategy may vary from person to person, the focus should be to maintain and grow at least a part of your existing wealth.

On the asset allocation front you have to move a portion of your investments into debt/fixed income instruments, and allocate a limited portion towards equity.

In order to have a regular stream of income you can start a Systematic Withdrawal Plan (SWP) from your existing set of mutual fund investments.  Opting for a dividend payout option could attract Dividend Distribution Tax, especially for non equity oriented funds. Therefore, SWPs can work well. Also dividendscould be irregular at times depending on dividend paying history of the fund but in an SWP you can choose a fix amount that you wish to withdraw.

You can also invest in the senior citizen savings scheme as it provides a better rate of interest amount compared to other small savings scheme options.Do remember that small savings rates have gone down and will be altered on quarterly basis going forward.

You can also look at Bank FDs. These provide an additional 0.25% to 0.50% extra rate to senior citizens which varies from bank to bank. Company FDs can be a slightly riskier option as compared to bank FDs.

If you have a self occupied property which you feel is no more needed since you kids have moved out and it’s only you and your spouse who need to stay, you might consider selling it and buying two smaller properties. One you can use as self occupied and other you can use to let out to avail regular rental income. Do consider the capital gains tax angle to it.

Make a will

It is a very important step. This makes transfer of wealth to your future generation smooth and hassle free.

Also have a nominee attached to all your investments and insurance so that there is succession challenges are reduced. Also make sure that someone knows where all you wealth and investments are lying so that your family does not have to struggle to get what you have left behind for them.

Have a Happy Retirement!

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RBI in its monetary policy review earlier today, decided to keep rates unchanged as expected by most economists and the financial markets. However, he did provide some interesting insights that could impact your personal finances.

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Your investments

Whilst it maintained status quo, it indicated that there could be an upside risk to inflation, as has been evidenced in the last couple of months. A good monsoon, higher oil and commodity prices and consumption demand driven by the 7th pay commision could drive this upside risk to inflation. Whilst it maintained that the policy would continue to be accommodative ie there could be a possibility of rate cuts going forward, this will be driven by data going forward. Thus, adding exposure to fixed income portfolios dependent on the falling interest rates may need to be tempered, and accrual and short term/mediumd term strategies may be more suitable to lock into current yields. On the equity front, whilst consumption driven growth could be positive and an early signs of a recovery are evident , significantly higher oil prices and inflation could start to impact corporate earnngs that are just starting to show early signs of a recovery. Adding exposure to equities will also need to be tempered with slowing global growth data. Thus, a blended portfolio of equities bought with a long term view, and fixed income focussed on accrual strategies is most suited in this environment. The rupee could be negatively impacted by the potential outflows on account of FCNR maturities in September, and the intense debate on whether or not Rajan will get a second term as RBI governor.

Your loans

Since it has only been two months since the Marginal Cost of Lending Rate has adopted by banks, it will take some more time for RBI to be able to evaluate its actual impact on the ground. As per early observations, the transmission on the ground via cut in lending rates by banks has been slower thus far, but increased pressure on banks for tranmission is likely to result in this happening faster going forward.

What did RBI do?

The RBI in its policy review kept rates unchanged with Cash Reserve Ratio at 4%, Repo rate at 6.50% and Reverse repo at 6%.

On the liquidity front RBI had said it would provide some durable liquidity in the last policy review which was held in April and it did as promised. RBI will continue to provide liquidity as required in the system. RBI had also mentioned last time that there is an intention to move from a liquidity deficit to a liquidity neutrality position. RBI has not attached any time line to it and said it will depend on the market.

The FCNR B deposits that are due to mature in September have been matched with forward positions. RBI will intervene if excess currency fluctuation happens. On the issue of cleaning up of books of banks RBI mentioned that it will not reverse its action and will stick to its original target of March 2017.

What to expect going forward

Further policy action will depend on inflation numbers, oil prices, US Fed actions  and monsoons which are expected to be above average. Also withthe governor’s term with RBI ending in September, there is no clear indication whether he will continue for another term. This is likely to continue to be an area of intense debate till finally settled, which is unlikely immediately.

Watch out for the next policy on 9 August 2016.

 Image credit: www.canstockphoto.com

 

 

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“A dream is just a dream; a goal is a dream with a plan and a deadline.” – Harvey Mackay

Each one of us has some dreams which we want to achieve. It could be sending your child to one of the   best universities, taking a world tour, giving back to society, etc.  These will remain just wishes unless we articulate them as goals which we would like to achieve. Each of us is in different stages of our lives. Therefore goals and goal priorities will differ based on your age and circumstances. So how does one go about planning for goals?

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Image source: dreamstime.com

What you need to do?

The first thing that you need to do is to know what you want to achieve. For this you need to articulate your goals well. Know your goals. Write them down. Attach time lines to each of them. Know what it will cost you today to achieve them. Apply inflation to it to know what it will cost you in the year your goal will become due.

How you will do go about doing it?

  • Priorities: Arrange your goals in the order of your priorities.

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Image Source: www.canstockphoto.com

  • Review your existing assets and allocate them to your goals: This will help you know how much more you need to invest. In the process of reviewing your existing assets you might want to do away with the assets which have not been performing or correctly understand the reasons for the same. Book losses when required so that you can start fresh new investments.
  • Before starting investment know your risk profile. Do not determine the risk appetite based on your need for higher returns. Decide based on a combination of ability and willingness to take risk. If you are an aggressive investor, do not allocate 100% into equity. Similarly, if you are a conservative investor do not just stick to fixed income investments like PPF and Bank FDs. You need to have an asset allocation in place. The basics of investment like diversification and a need for asset allocation will not change whether you are an aggressive or a conservative investor.
  • Choice of asset class: Have a mix of debt, equity, real estate and gold in your portfolio. Align your investments in line with your goals. Decide based on how far away you are from your goal. For longer term goals allocate higher proportion to equity and real estate. Having more exposure towards debt and other low risky assets could yield returns which may not be inflation beating. Include equity as it will fetch you higher returns if you stay invested for a longer term. Include fixed income as it will provide you safety. Add a small portion of gold for diversification purposes. For near term goals have higher allocation towards fixed income to avoid adding risk of volatility.
  • Choice of product: Within the asset class you can choose products based on your risk appetite and whether the nature of your product matches the nature of your goal. For example you may choose growth option in Mutual funds and cumulative option in FDs in the accumulation stage. On the other hand you may switch to dividend payout options in Mutual Funds and Interest payout options in FDs which will fetch you regular income post retirement. If any product has a lock-in period make sure you allocate money towards it in line with your goals. Keep the liquidity aspect in mind while making choice of product.

If you have not yet planned for your goals, do it now.

“The best time to start was yesterday. The next best time is now.”- Unknown.

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Remember your college days when you had to manage your pocket money between stationery expenses, conveyance expenses and lifestyle expenses. The amounts may not have been large and budgeting was critical. So what’s changed in your life today – most definitely the amounts involved, but then so have your needs and wants.  So its budget time again. Budgeting could be at an individual level, at a family level, at an organization level or even at a company level. From a Financial Planning perspective, budgeting at an individual and family level is critical. Budgeting is all about managing your incomes, expenses and cash flows effectively.

Incomes can be of different types. You can basically distinguish between regular income and irregular flow of income. Regular incomes can be your net salary income, government pension, income from business. All the other incomes like professional income in the case of free lancers for example could be irregular, interest income will last till maturity of investment, rental income will last for the tenure that you have let out your property and variable pays/bonuses if any will fall under irregular income.

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Image Source: taxmantra.com                                                 Image Source: properji.com

If you have a regular flow of income then you should manage your expenses and develop a regular savings habit so that you can invest to achieve your financial goals.  If you have an irregular cash flow, then you need to plan your cash flows wisely because your income may not be regular but your fixed/non-discretionary expenses certainly are.

If you have an irregular cash flow, then you need to plan your cash flows wisely because your income may not be regular but your fixed/non-discretionary expenses certainly are.

There are two things you can do to address this. Depending upon the age you are in, you should invest in skill development which can earn you a regular income. If you are a freelancer for example or in a business which is seasonal in nature and it does not occupy your time all 365 days, then maybe you can master some professional skills which will enhance your already existing skill set or maybe enhance your career in one way or the other. Sports professionals and actors, for example, may have shorter earning life spans and thus may need to build their skills accordingly.

The other thing you can do is that you can plan a portfolio in such a way that your investments will provide you regular flow of income. It can be done in the following manner:

Emergency-funds

Image source: businessdayonline.com

  • Since your primary goal is always  to meet your regular expenses, start of by creating a contingency fund which accounts for at least 6 months of your non-discretionary expenses like your children’s school fees, your EMI if you have any, your basic monthly household expenditure, amongst other things. If both you are your spouse are working, you could plan for 3 months.
  • Do not block all your money into investments that are illiquid ,even though the returns they may be offering you could be tempting. Ensure you have enough liquidity at all points in time to meet your regular expenses. Locking in your money into illiquid instruments might not only make it difficult for you to exit but if you wish to exit in case of an emergency you may have to settle for a lower value. Investing in real estate is a classic example. People invest in it in anticipation of high returns growth but have to hold on to it for long periods till the time it gets an appropriate value, due to its cyclical nature. Emergency exits may require you to settle at lower valuations.
  • Invest in simple products which provide safety, liquidity and returns.
  • Investments should be made in line with your goals and not in isolation.
  • Have adequate life insurance cover so that in case something happens to you, it will help your family members to continue with same standard of living.
  • Health insurance and critical Insurance is a must. You certainly do not want to spend your hard earned money on high medical expenses.

Once you have your income and expenses in place, it is critical to begin the job of tracking them. Whether you use technology or an old fashioned diary for this, doing it is crtical. After all, a budget is not relevant if it is not tracked.

Whilst you may not be able to go to college again, you certainly can go back to budgeting for yourself and your family. It may be boring at first, but I promise you that you will enjoy the benefits of it some day.

 

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