Navigating volatile markets – Are you armed with a personal financial plan?

 

As the media and dailies flash all the news and noise around the downgrade of debt securities of some of the IL&FS group companies and the ‘so called blood bath’ on the dalal street triggered by the sale of certain DHFL bonds, the average investor is obviously concerned about their investments. Spooked by these recent events and the volatility of both equity and debt markets investors are now wondering whether to continue their SIPs in mutual funds, buy stocks or just exit and hold cash? So what should you do?

There is no one size fits all solution to this problem. The answer lies in your long and short term objectives and whether you have a detailed drawn out financial plan. Situations like these (market volatility and uncertainty) truly highlight the need of a good weapon – your financial plan- your investment road map. When investors invest without a goal and financial plan in sight they do not know how much to invest, how long they should continue their investments and how close they are to their goals; thus how much volatility their portfolio can withstand.

 

Should you turn conservative?

Let’s assume that you have been been saving for the last 8 years for your child’s higher education and you have about 3 years left until you need the money. Now irrespective of whether the market is volatile or not, it is imperative that you re-balance your portfolio by moving your money in to conservative debt investments. This strategy should anyways have been a part of the financial plan to protect the corpus from short term market fluctuations and should be used only when you start approaching your goal.

If applied sooner than needed then you may run into the risk of falling short of the target amount. Also remember, getting closer to your goal is not the time to get speculative and increase your aggressive equity exposure.

 

How to deal with the amygdala hijack (the emotions and the panic)?

Turning conservative in tough market conditions is easy, staying focused on your goals and continuing your investments as you see the market giants come crashing down requires a lot of courage, focus and some science, data and rationale. Investors are believed to be irrational when it comes to dealing with money. When the markets are rallying investors want to be a part of it and they willingly invest. However as soon as they experience turbulence they drop their investments like hot potatoes in fact hurting their investments and networth. Market fluctuations affects a part of your brain called amygdala which induces fear. The fear leads to panic and the sell off frenzy begins.

At this point you have to go back to your financial plan and remind yourself what your goals are and follow your financial plan to avoid any knee jerk reaction. If your next milestone is 8-10 years away then the current volatility does not need you to act and also your portfolio can withstand this short term fluctuations.

 

How following your financial plan helps?

Staying on track with your financial plan and road map pays off in more than one way. Once you know your milestones and risk appetite through your plan:

• You avoid taking unnecessary exits thereby saving unnecessary capital gain tax or any exit loads that may be applicable that could further reduce your profits.Money saved is money earned.
• You stay invested (example SIPs) through a down cycle of the market , which actually helps you get a better value for your money invested. This over the long term can improve your portfolio returns and catapult corpus generation.
• You may even get opportunities to start newer investments in good quality companies basis your risk profile and time horizon

An example to detail this : Sep 2008 is a period set in time; this is when the infamous Lehman brother crisis shook the global financial markets and sent the indices in India and across the world in a massive tailspin. It was a difficult time for investors, however the ones who persevered and continued their Sips reaped the benefits later.

Lets assume you had a plan and understood the corpus that you needed say in 2018 and started a simple SIP in a mutual fund. The chart below shows the trajectory of such an SIP of Rs 10,000 started in Oct 2008 in 3 different categories of funds.

	SIP amount	Total Amount invested in 10 yrs	Current Value (Rs.)	CAGR
Value Fund	10,000	12 lakhs	34.18 lakhs	18.26%
Multi Cap Fund	10,000	12 lakhs	28.80 lakhs	15.53%
Large Cap Fund	10,000	12 lakhs	28.43 lakhs	15.33%
Nifty 100	10,000	12 lakhs	25.98 lakhs	13.86%

 

Remember, in volatile times, people lose more money by fearing and holding back their investments and possibly denying themselves good opportunities that may present themselves in the form of a market downturn.

Markets will fluctuate and will be volatile, that is their inherent quality. Navigating these carefully is necessary for investors. A sound financial plan and the guidance of an independent and unbiased financial planner would help. In short, you need to stay on track and to follow your financial plan. This financial plan will be your guide and navigator during volatile markets.

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Simple strategies to meet your cash flow needs after retirement

India is a saver’s economy. During the working years sacrifices are made for the benefit of the  family and retirement is keenly looked forward to. Advertisements of retirement products paint a picture of a comfortable retirement by the sea and that your life could be one happy vacation. However, in our experience as and when individuals start approaching their retirement they start to dread it. Questions such as are they well prepared for retirement, have they saved enough, and biggest dilemma faced is  where to invest this large sum of money in order to get a regular cash flow to become financially independent. What do you do to actually turn your retirement into one big happy vacation?

Effective cash flow management is the key to a successful retirement. The magic lies in creating a strategy that generates a regular inflation adjusted income for you and your surviving spouse, lasts you a life time and offers liquidity.

Strategy 1: Create a regular income stream

Every individual wants to be financially self sufficient. In the absence of a joint family, being financially independent is not a desire but a must have in your golden years. If you need money for your day to day expenses, then getting a payout once in 3 or 6 months doesn’t help. A lot of retirees rely on dividend income either from stocks or their mutual funds. This is a huge mistake which becomes evident with time when the steady income from salary has stopped completely. Receiving a dividend from your investments when you have a  salary feels great because it provides an additional income. What most people don’t realize is that the dividend is actually paid out at irregular intervals and the amount is also inconsistent. Similarly, the interest payout from your corporate FD might be on a quarterly basis or twice a year and now locked in until maturity.

How to execute this strategy?

To be financially independent at all times you have to ensure you have created multiple income streams and timed the out flow to suit your requirement. If you need to pay salaries and bills towards the start of the month, then set the payout around that time. Opt for monthly interest payout from FDs and set up a Systematic Withdrawal Plan (SWP) from your Mutual Fund investments on a monthly or bimonthly basis. This way you will know exactly when your next payout will happen and manage your expenses and bill settlements better. You will also be more in control of your finances rather than being helpless because of a bad strategy which can now not be easily changed.

Strategy 2: Generate an inflation adjusted income

Thanks to the increase in programs aimed towards investor education, many individuals understand and are aware of the impact of inflation on their income and wealth. The income that you receive should be able to beat inflation and help you live your life comfortably and on your terms. The current consumer inflation rate is at 4.17% however, it is essential to consider your lifestyle inflation which rises faster than food inflation. It would be wise to adjust your income against an inflation of 7-8%. The income that would have sufficed today will not manage to cover the same expenses next year due to inflation. On a yearly basis, you will notice that your bills are rising, so will the salary of your staff.

How to execute this strategy?

The interest income coming from your Fixed Deposits will not be able to implement this strategy since the returns are fixed and the amount is locked until maturity. You would not have the option to choose a higher payout even at the cost of wealth depletion.

This strategy can only to executed through a Systematic withdrawal Plan (SWP). With an SWP you have the option to increase or decrease the amount that is withdrawn from the investment. For eg. If your cash flow requirement is Rs 25000/month for the 1^st year, then with a Systematic withdrawal Plan you have the flexibility to adjust the payout by increasing it to Rs 27000/month which would be inflation adjusted. This way you can increase the payout from your debt funds using SWP strategy.

Strategy 3: Avoid excess liquidity as a part of contingency planning

Most senior citizens seek comfort in keeping large amounts of cash lying in their bank accounts. This they say is for emergencies and contingencies in case they need a lot of cash all of a sudden. Assume you have Rs 50 lakhs for your retirement corpus out of which if  5-10 lakhs are kept in your bank account for comfort then this is a very expensive way to deal with emergencies. With high inflation and increasing life expectancy, one can not afford to keep 10-20% of their wealth idle. At your age you will need every cent and penny to work as hard as it can.

How to manage liquidity?

If you have parked a large sum in your bank account, the reason has  less to do with emergencies and more to do with liquidity. With most of your money parked in illiquid assets like bonds, fixed deposits or real estate how do you get your money if a need arises. Liquid debt mutual funds are a perfect option since they provide both higher returns and offer liquidity. Liquid funds can generate a return of up to 6.5% and are highly liquid as the name suggests. You can redeem your units from a liquid any time and encash your money. You will receive your money in your bank account the next day.

Strategy 4: Plan your cash flow to avoid wealth depletion during your lifetime

With the advancement in medical sciences the average life expectancy in India has risen to be around 85 years. There is also a risk that both you and your spouse might outlive your life expectancy and live longer than what you had accounted for. This poses a threat to your financial independence as there is a possibility of your wealth getting depleted while you both are still alive. It therefore becomes important to invest your money in such a way that your portfolio can provide a steady cash flow not just for you but for your surviving spouse too and a little over your assumed life expectancy.

How to make this strategy work without compromising on your dreams?

As a retired person wealth preservation is of utmost importance however, if inflation and longevity poses a threat to your wealth and goals then you have to go beyond your comfort zone and add more growth assets in your portfolio. However, if there is a gap between the income that your portfolio can generate and your needs, then instead of taking excess equity exposure it is advisable to taper your expenses instead.

An expert financial planner will be able to execute and implement this strategy for you by creating a realistic portfolio which meets your income expectation and risk profile. A combination of debt and equity mutual funds should do the magic.

The secret to a successful retirement is a little bit of planning which can go a long way to turn your retirement into a happy vacation.

 

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New Mutual Fund Classifications – What you should know

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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What investors should know about the Indian Stock markets?

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 6^th 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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Is the D’mart IPO worth it ?

Issue Detail:
Issue Open: Mar 8, 2017 – Mar 10, 2017
Issue Type: Book Built Issue IPO
Issue Size: 62,393,631 Equity Shares of Rs 10 aggregating up to Rs 1,865.57 Cr
Face Value: Rs 10 Per Equity Share
Issue Price: Rs. 295 – Rs. 299 Per Equity Share
Market Lot: 50 Shares
Minimum Order Quantity: 50 Shares
Listing At: BSE, NSE

D’mart (Avenues Supermarket), which is in the retail business with 118 stores, selling products such as food and groceries (55 per cent of revenues), home and personal care products (20 per cent of revenues) and general merchandise, such as crockery, furniture, garments, footwear, and home appliances (25 per cent of revenues), has clearly come at a time where the global view on equities has turned positive, and volatility in equities is at record lows. IPOs like Snapchat in the US have created significant short term gains for investors, and Indian investors are seeking a repeat.  The fact that D’mart is associated with Radhakrishan Damani, believed to be one of the sharpest long term investors in India, has only added to the frenzy. The penetration and development of retail businesses in India have been a much discussed opportunity over the last decade, and the shift from unorganised to organised, and from offline to online, continue to be much talked about.

Whilst there is no doubt that this shift has begun and is only likely to increase significantly going forward,  as individuals and families gain more and more comfort with these formats and decide which one works best for themselves, one needs to keep in mind that margins in most retail businesses tend to be very slim, and thus investors will need to be very patient with these businesses, as they scale and maintain/try to grow margins simultaneously, in spite of significant competition. Customer loyalty across these formats will also be tested , as consumers do tend to be very price sensitive in most retail segments.

Whilst revenue and earnings growth for the business have been very decent at 35 – 40% CAGR  over the last few years, and the profit margins and other numbers are better than competition, with further scope to possibly expand through the use of private labels, one will need to remember that businesses of this type will create wealth for investors if they are truly thinking very long term. At a P/E of 36 times, even though cheaper than other players in the retail space, and with a model that is very efficient with use of capital, real estate and its supply chain, this IPO is  not cheap.

With expectations of significant listing gains pushing investors to try to get a share of the pie, and the issue size being only about Rs 1870 crores, most investors in the retail segment are not likely to get any shares at all, or even if they do, the net impact on their portfolio is likely to be minimal due to the small holding that they will get. For high net worth investors taking leveraged positions, a very high over subscription rate could essentially mean that their interest costs are also likely to be very significant.

With an uncertain global environment on the back of a possible US rate hike coming up, this issue is appropriate only for investors with a high risk appetite, or investors taking a very long term view of their portfolio in our view.

Just like Retail is all about detail, stock investing is all about earnings so keep your eyes focussed there and see how retail businesses continue to grow their earnings going forward, and deal with significant competition pressures.

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Large-Cap funds best option for investors with long-term goals – Article by Shalini Dhawan in TOI

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Are your personal finances more about you and less about finance?

I absolutely love summer, despite the intense heat in India. There are two reasons for this – firstly, summer vacation for kids which makes them so much happier ( I’m not sure if it’s the vacations or the mangoes that brings a broader smile on their face though), and secondly, unlimited ice cream to keep oneself cool and refreshed. A recent afternoon out with friends and family allowed me a double delight – having icecream with kids. Whilst each of us made our selection of ice cream, I realized that it had taken us the better part of an hour for four adults and four children to decide which ice cream flavor we wanted. The decision making process involved multiple criteria from the way of the ice cream looked to the sweetness of the ice cream, flavor, mood, etc . As I stood there and watched, I realized how personal each decision was in terms of the ice cream that was selected.
This seemed to be in sharp contrast to the way many investors take buying/selling decisions on their finances. When gold fell sharply last month, investors flocked to jewelers to buy gold, irrespective of the gold that they already have in their lockers and homes. When stock markets fall sharply, everyone looks for the exit door before it falls further, even if all they have left in their stock portfolios over the last few years is only a small percentage of their overall wealth. The boom in real estate has made selling a piece of real estate look stupid unless it was traded for a bigger piece of real estate. As investors become aware of the benefits of buying term insurance, everyone wants to have some of it in their portfolio, so what if they are old enough or wealthy enough not to need term insurance any more.
In my view, there really is no one size fits all strategy for your finances. What’s good for your closest friend with a salaried income, may be terrible for you as a self employed professional? What seems like a perfect investment strategy for your parents who are retired in India could be terrible for the money that you are sending to India to take care of your retirement 20 years later?
The moot question is – Do you have a financial plan that is for you or is it someone else’s plan/ product/ suggestion that you are following? To me, following someone else’s plan sounds a lot like going to a pharmacy, to buy a drug on the basis of the doctor’s prescription for your uncle.
Your personal financial plan needs to be about you – your vision for your ideal retirement destination, your vision for your retirement lifestyle, your vision for the quality of education for your children, your vision of how you would like your family to be taken care of in case something happened to you or your spouse, your vision of how you would like to be treated medically in case something happened to you. Basis your thoughts on each of these, your financial plan should incorporate your ideas and desires, which can get you where you want to be.
Whilst you enjoy time with your children and ice cream this summer, please take some time off to think if your finances are about you and your thoughts and ideas. If not, it’s time to use the summer break to think and draw up your personal financial plan, a plan that’s about you.

Author – Vishal Dhawan

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Do NRIs need a Financial Plan

From our experience of interactions with nonresident investors, we have found that a significant number of investments by NRIs tend to be made during their short visits to India.

During that period, when they visit their bank or speak to relatives/ friends, they get a broad view on what is happening to various asset classes – be it real estate, stock markets, or bank deposit interest rates. Between the various social obligations, time with family, and other things to do in their action packed agenda, quick investment decisions tend to be made, a large number of which tend to be long term commitments through investments in long term insurance policies/ real estate investments. Unfortunately, a large number of these investment decisions are not necessarily aligned to long term financial goals of the NRI and his family. Once NRIs return back to their home overseas, they then tend to wonder if it was the right investment decision or whether haste made waste, especially as they now get time to think about it. They wonder whether these investments fit in case they wish to return to India at a latter point in their lives or in case they wish to use these investments for children’s education or their own retirement, or to support their family members back in India.

In addition to the alignment to financial goals for self and family, it is critical to ensure that the investment products chosen allow non residents to invest in them, the repatriation restrictions (if any) on the principal amount and the gains, as well as the taxation of the gains in both India as well as the overseas location of the NRI. A lot of these answers can only be obtained when there is clarity in terms of what role the investment is expected to play for the NRI in his portfolio.

It is therefore critical to ensure that the focus on working to a financial plan is given the same degree of importance, irrespective of whether the individual is a resident or a non resident. In fact, working to a plan tends to be even more critical for a non resident than a resident, due to a legacy holdings and finances that they may have from their days in India.

A very large number of NRIs tend to leave India during a phase of their life when they have already begun their financial life – they have probably opened regular savings bank accounts in their names, bought investment products like stocks/mutual funds/insurance products/PPF accounts, or even made a real estate investment. Since there is a tendency to leave India on an overseas assignment/project, a higher education and then decide to settle down overseas, the starting point for a financial plan is to get your existing portfolio of investments in order.

 

The following steps need to be taken to ensure that the existing finances are aligned to the needs of a non resident

1. Close all resident bank accounts or convert them to nonresident ordinary (NRO) accounts. These NRO accounts can be used to credit amounts from investments that may have been made earlier, for example, dividends from stocks, rental income, amongst others.

2. Ensure that the tax returns in India have been filed. Whilst filing a tax return is not mandatory if the income is less than the taxable limit, it is important to be sure that the total income is less than the taxable limit.

3. Review your demat accounts so that they can be converted to nonresident demat accounts.

4. Change your mutual fund portfolios (if any) to a non resident status and link your NRO bank accounts to these investments.

Once the legacy portfolio of investments have been put into order, it is crucial to begin the process of setting up your financial goals through a financial plan. Whilst a financial plan may sound rather complex, it is simply a roadmap that allows you to think about what you want to achieve with your life goals and how your finances will allow you to get there.

Let me illustrate this with an example. Let’s say one of your life goals is to have your child study at a particular post graduate program. How would you design your financial plan towards this life goal?

1. Establish the current cost of the education that you want to plan for – The costs for higher education vary significantly depending on the type of college, country of education, type of program and number of years of education. The total costs of education should be established including the costs of living and travel and not just education costs.

2. Understand the impact of inflation on current costs – Inflation rates on education may vary significantly depending on whether you wish to plan an education in India or overseas. You need to establish the corpus required for the education after adjusting for inflation.

3. Choose the appropriate asset mix to achieve your target – It is critical to establish the right balance of stocks and fixed income exposure so that you understand the returns and associated risks that you will take on the portfolio in order to reach your target.

4. Choose the appropriate product/products to achieve this targeted amount – Once the above steps have been undertaken, you can move to the product selection stage where you can look at the merits/demerits of using deposits, mutual funds, insurance plans , stocks or other options to achieve your target.

5. Evaluate the progress towards your goal at regular intervals – It is important to review the progress of your financial plan to ensure that you are on track to achieve your financial goals. However, it is important that you give your products adequate time to deliver as per their designed objectives. A review once a year should be adequate.

A financial plan can be developed for all your life goals accordingly. You may need to take the help of a financial planner to integrate all your goals into a plan so that your overall finances can be aligned to all your goals. For example, your retirement plan could vary depending on whether you wish to finally settle down in India or continue to live overseas once you retire.

In addition to each of planning for your financial goals, you need your financial plan to cover:

1. Taxation of these investments in your home country – Tax treatment of investment products in the home country may be different from those in India. For example whilst there is no long term capital gains tax on equities or equity mutual funds in India, capital gains tax may be chargeable on these investments in the country that you live in. It is therefore critical to understand the tax implications at both levels as a part of your financial plan. You may need to seek the help of a tax advisor in both India and your home country, so that there is complete clarity on the same. In addition, there may be double tax avoidance treaties in place that allow you to set off the taxes you pay at in one country against taxes due in India, so that you are not taxed twice on the same amount. Your tax advisor should be able to help you on this.

2. Succession planning – Inheritance laws tend to vary from country to country. In addition, whilst India does not currently have any estate duties and taxes, a large number of countries have an inheritance tax. Since you could end up inheriting assets from your parents/ other family members and also having your assets transferred to your family members on death, it is critical to ensure that succession planning documents like wills are created keeping the inheritance laws of both countries in mind.

Once you are clear about your financial goals, taxation and succession laws, you will be in a position to pick your investment products far more easily and can focus on tracking how your investment products are taking you closer to your financial goals.

 

This article was written by Vishal Dhawan, CFP^CM 

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Jadoo ki Jhappi for your finances

“Jadoo ki Jhappi” gained popularity after its clever use and depiction in the blockbuster Munnabhai MBBS. Medically the benefits of a hug have been well known for a long time with a simple hug helping to lower blood pressure, reduce heart rates and improve blood circulation, amongst other benefits. Just like a hug, some of the simplest things are likely to be the most beneficial for your health-eating well balanced meals in moderation, eating on time, getting adequate sleep, daily exercise and a daily dose of meditation. In much the same way, your financial health can also be well taken care of through the use of some simple steps. These include:

• Having a contingency/emergency fund of at least three months of expenses to take care of unforeseen job losses/medical emergencies
• A well controlled expense to income ratio ( ideally less than 65%) and loan to income ratio ( ideally less than 40%).
• Adequate life insurance to protect your family’s lifestyle in case something was to happen to the primary bread earner
• Health coverage for yourself and your dependents so that a medical emergency does not derail both physical health and financial health.
• Insurance for your home that is likely to be your most valuable asset
• A well diversified portfolio that consists of a combination of investments that have traditionally beaten inflation like real estate and equities, and assets that have fairly predictable rates of return like deposits and bonds.
• A small portion of your portfolio in gold to act as a protection for the rest of your portfolio.
• Clearly defined goals for what you want your money to do for you – education for your children, an independent retirement for yourself and your spouse, a larger home,etc
• A well thought out tax saving strategy that is aligned to your financial goals
• Undertaking an annual financial health checkup. If you believe you need professional help for this, do not hesitate to seek it.
• Avoid using products that are too complex and you do not understand
• Avoid putting all your money into a single investment type or asset class just because it has given the best rate of return in the recent past.

 

To conclude, the simple things in life are often the most effective and make the most difference, so keep your finances simple and your hug handy. Simplicity should keep you in great physical and financial health.

This article was written by Vishal Dhawan, CFP^CM 

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Applying Newton’s law to your investment portfolio

“For every action, there is an equal and opposite reaction“. As I sat with my son running him through Newton’s law for his science lesson, it got me thinking about how much this universally accepted law of physics tended to get  applied in investment portfolios as well.

The extreme volatility that we have seen over the last few weeks with sharp swings on the downside for stock markets globally and sharp increases in gold prices have left a large number of investors wondering what they need to do now. Whether it is TV show callers that we respond to or investors that we speak to, the two questions most commonly posed to us currently are ” Should I be selling equities now?” or ” Should I be buying gold now?”

Whilst it is very natural to be concerned about all the news flow from a stock market point of view, especially since a large amount of it is negative, investors need to take a balanced view. Similarly, with gold prices hitting record highs each day, there is a natural tendency to want to buy gold at this point.

For virtually all other products, there is a tendency to want to buy products that are offered at a discounted price and a tendency to buy lesser of products that are more expensive. Stock markets are however treated very differently wherein investors tend to buy much more when they are becoming more expensive and much lesser when they become cheaper. Most investors will vividly remember 2007 when they were willing to commit large chunks of monies as stock markets kept going higher each day, and the bottoms of 2009 wherein no one was willing to buy. Most investors in 2007 are yet to recover their principal, whilst investors in 2009 have doubled their money in spite of the recent volatility. Against a long term average return of 17% pa from equities, the five year returns from equities are in the region of 7% pa probably indicating that there is potential for attractive returns from equities over the next 5 years.

Similarly investors who bought gold 10 years ago have seen their money grow five times over this period. However, for 20 years before that, gold gave a negative rate of return.

Our recommendation therefore is that if you follow Newtons third law closely, you would end up buying when others are selling and end uo selling when others are buying. Following this law could end up doing your portfolio a lot of good.

This article was written by Vishal Dhawan, CFP^CM and appeared in the EXIM INDIA newsletter on 9^th September 2011 .

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