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Posts Tagged ‘Stock market’

For the past few months, there has been a debate on whether starups set up by teams in their twenties are more likely to succeed than those set up by teams in their 40s and 50s . While youth does stand for innovation as shown by Carwale, Ola, age also stands for wisdom as is evident from IBM, GE, Nestle and Ryanair. Just like myths exist around start-ups,there are many such myths surrounding personal finance too. This article was written by Vishal for the Indian Express five years ago. Whilst the blackberry mentioned in this article is probably dated, the myths around personal finances are still as relevant.. Please do comment if you have heard any other things that could be myths around personal finance in your view, please let us know and we would love to share our thoughts.image-0001

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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, CFPCM 

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“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, CFPCM and appeared in the EXIM INDIA newsletter on 9th September 2011 .

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