Some Myths Associated with Mutual Funds

Mutual funds are an effective engine to route your investments in the equity markets. They offer several advantages over direct stock picking; but even after knowing the importance of investing in mutual funds, many people refrain from this instrument due to several myths. I have observed even informed investors making incorrect investment decisions based on incorrect or flawed information. I find it hilarious when people ask me the #1 fund. One gentleman went to the extent of asking me the best funds as he wanted to do SIP for 1 year only; so the best fund would give him the best returns.

 Let’s debunk these myths once and for all.

Myth 1: Funds with more stars/higher rankings make better buys.

Reality: The rankings and ratings are based on the past performances; and they do not ensure the future performance at all. At best, rankings and ratings can serve as starting points for identifying a broader set of "investment-worthy" funds. But investing in a fund based solely on its ranking/rating would be inappropriate

Myth 2: A fund with a net asset value (NAV) of Rs 10 is cheaper and so, more attractive than a fund whose NAV is Rs 50.

Reality: Fund A's NAV is higher than fund B's because the former has been around longer and had bought the script much earlier, which itself saw some appreciation. Any subsequent rise and fall in the NAVs of both these funds will depend on how the script moves. A mutual fund's NAV represents the market value of all its investments. Any capital appreciation will depend on the price movement of its underlying securities. Say, you invest Rs 1,000 each in a new fund, A (whose NAV is Rs 10) and an old fund, B (the NAV is Rs 50). You will get 100 units of fund A and 20 units of fund B. Let's assume both schemes have invested their entire corpus in just one stock, which is quoting at Rs 100. If the stock appreciates by 10%, the NAV of the two schemes should also rise by 10%, to Rs 11 and Rs 55, respectively. In both cases, the value of your investment increases to Rs 1,100.

Myth 3: Children's mutual fund schemes are ideal to assure a child's future.

Reality: MF children schemes work like any other MF scheme and their returns depend on the performance of the markets. Since most of these schemes are long term, your returns are optimized.

Myth 4: Funds that regularly declare dividends are good buys.

Reality: Fund houses declare dividends when they have distributable surplus. However, there are times when a fund manager declares dividends if he does not have adequate investment opportunities. Under worse conditions, a fund manager may sell some good stocks to generate surplus for dividend distribution. The motive is to attract investors.

Mutual Funds can only pay out dividends if they have made gains on the portfolio.  Dividends are like fruits on a tree...If you do not give enough time for the tree to grow where will the fruits come from?

It's important to note that a mutual fund dividend is not an additional benefit. The sum just gets deducted from the NAV of the fund and is paid to the investor. See it as a periodic profit booking, not as an additional gain as in the case of stock dividends. A mutual fund dividend is your own money being returned to you. Your investment gets depleted to that extent. If your fund has an NAV of Rs 50 and declares a 20% dividend (Rs 2 on a face value of Rs 10), the NAV of the fund will fall to Rs 48 after the dividend is paid.

Myth 5: A balanced fund is always equally balanced in a 50:50 ratio.

Reality: No this not the case. Balanced funds aim to achieve a balance between equities and debt; and this would depend on the nature of the fund. Equity oriented balanced funds typically invest at least 65% in equities and the rest in debt; others do this in a 40:60 ratio.

Myth 6: I can do better than the fund manager.

Reality: Like every industry, the MF industry has its share of good and bad fund managers. In the past 10 years, large-cap funds returned 19.21% on average. Despite the worst performing large-cap fund in the past 10-year period returned 7.70%, the top five funds returned 29.11% on average. Most of these funds have been around for more than 10 years and their individual corpuses have grown from Rs500 crores to more than Rs3,000 crores.

While it’s tough to beat the markets consistently—with the kind of corpuses MFs manage—you may avoid the MF route if you think you can navigate the markets on your own. For the rest, I’d suggest the MF bus, preferably through an SIP.

 More on mutual funds would follow soon. Till then happy investing!! Stay Blessed!!

Magic Of SIP

Remember the story of the thirsty crow? I heard it in my childhood and have read the same story to my son umpteen number of times. The smart crow kept on dropping the pebbles into the half filled pitcher till the water level came up. Birla Sun life Mutual Fund has very appropriately used this story in it’s advertisement to promote SIP. They say a smarter way to save regularly. Yes it is. There cannot be a better way of explaining the benefits of SIP.

The SIP or the Systematic Investment Plan works exactly in the similar manner. It simply means investing a fixed amount of money at regular intervals say a quarter or a month, with a clear financial goal in mind. You keeping putting in money just like the pebbles till you reach the desired goal.

Let’s understand this with an example. In this example three gentlemen A, B and C who are 30, 27 and 25 yrs old respectively; decide to save for their retirement at 60. Assuming an annual saving of Rs10000/- (approximately Rs.833/- per month) in an instrument providing a return of 15%; all three of them land up putting in 300000/-, 330000/- and 350000/- respectively. There is difference of only Rs 50000/- between the amount put in by A and the amount put in by C; however there is a whopping difference between Rs 4999569/- and Rs10133456/- received by them at the age of 60 yrs. This is power of compounding.

Another advantage of SIP is Rupee Cost Averaging. In RCA or Rupee Cost Averaging a fixed number of shares are bought irrespective of the price; more shares are bought when the price is low and vice versa. Eventually, the average cost per share becomes smaller and smaller and this helps you gain better overall profits as the market increases over the long term. It’s a long term strategy, and one has to keep in mind the smart working done by the thirsty crow. More on this to continue. Till then Happy SIPPING!! Stay blessed!!

Euro Crisis: Impact On India

The adage that America sneezes and the world catches flu held true in 2008.It was the huge subprime crisis in the US that triggered the last recession and engulfed the world; this time around it is the countries in Europe which are sending shivers. Enough has been already spoken and written about the Euro crisis and its causes, but my concern is with the impact it has on us.

Firstly it’s affecting us through the monetary route as euro is losing value, dollar is becoming more expensive. This, in turn, means Indian currency is losing value against dollar. Our large trade deficits, resulting from imports being far greater than exports, have made the things worse as the trade is funded with large buying of dollars. One of the main reasons for the last petrol price hike was the fall in rupee making imports costlier.

Secondly, hike in the interest rates by the RBI as a counter inflationary measure has already jeopardised Indian industry and led to a slowdown in credit off take from banks. The purpose of taming the rising inflation was not served but it led to a further slowdown in investments and industrial growth. Growth in industrial production slipped to a 21-month low of 3.3 per cent in July 2011. The country’s economic growth also moderated to 7.7 per cent during the April-June quarter this fiscal, the slowest growth in six quarters.

The market has already slowed down. When the economic growth slows down, a country also becomes unattractive for investment. No wonder the foreign direct investment (FDI) in the country has dropped significantly in the last few months and the stock markets are seeing flight of foreign capital as the FIIs are selling their holdings in hoards. A slower growth would mean lower asset prices and lower income growth. On the positive side, the commodity prices will come down. A beginning perhaps has already started which will bring down inflation and may allow RBI to cut rates. Lower rates will help demand and may allow growth to stabilize. Investors in equity and equity-related products will have to be very careful of what they are buying, while domestic debt investors may choose to lock into higher yielding safe products as interest rate may fall sharply. Now in such a scenario what should an investor do? My sincere advice is to remain invested. However should you decide to buy or sell; here are some simple rules which should help you in this regard.

1. Do not wait for the highest price.

Obviously you would want the best possible price for your shares but how would you know that a particular share has reached its peak? Sell as soon as you have made adequate profits on your investments. Most successful investors get excellent returns by buying and selling in intermediate range prices.

2. Sell a share when your target price is reached.

When you buy the shares of a particular company, you do so with a certain goal in mind. For example you may have bought some shares with the intention of doubling your investment in two years. I suggest you sell the shares the moment you reach, or cross your target. You may fee that you have missed out on the opportunity of making more money if the prices continue to rise; however, you should also keep in mind the converse possibility.

3. Once you realise you have made a mistake – sell!

In such a situation sell your shares immediately, even if it means incurring a substantial loss. There is no point in holding on in the vague hope that things may eventually improve; wishful thinking is not the way to get rich in the stock markets. Understand the importance of cutting your losses.

4. Make use of P/E ratio to assess share prices.

The price earnings ratio (P/E) expresses the relationship between the market price of a company’s share and it’s earning per share. In other words it’s a reflection of the market’s opinion of the earning capacity and future business prospects of a company. Companies which enjoy the confidence of the investors and have a higher market standing usually command high P/E ratio.

5. Check previous year’s highs and lows

The highest and the lowest prices recorded by a particular share in the previous year are helpful in providing a frame of reference for judging its current price. If you pick up a sound growth share at around its previous year’s lowest price or even at previous year’s average price then chances are that you are buying it at the right price.

6. Understand booms and recessions.
Booms and recession are cyclical phenomena; neither lasts forever. A boom means that the economy has over extended itself and a correction in the form of recession becomes due in order to restore the balance. A boom is the time to sell the shares and a recession is the appropriate time to buy at cheap prices. At such times most shares are grossly under priced, so almost any share you buy will give you an excellent return on investment once the economy pulls out of the recession. More on this would follow later; till then happy investing!! Stay Blessed!!

Reverse Mortgage: The Loan That Pays You!

Mrs. Sharma is a 62 yrs old widow living all by herself in a house built by her husband but the pension that she gets is not enough to bear her livelihood expenses and she hates to ask for the financial help from her children. Getting into old age without proper financial support can be a very bad experience. The rising cost of living, healthcare, other amenities compound the problem significantly. No regular incomes, a dwindling capacity to work and earn livelihood at this age can make life miserable. A constant inflow of income, without any work would be an ideal solution, which can put an end to all such sufferings. But is it possible?

 According to Oasis (Old Age Social and Income Security Project) report, only 4% Indians are financially independent at the age of 60; and 90% of our senior citizens live in poverty. Old age can be very challenging or rather miserable when there is no support from any source.

I strongly believe that creating a nest egg for a comfortable retirement is absolutely necessary and sooner one starts better it is; however, the fact is some people think everything will ‘just turn out ok’ and they make no concentrated effort towards planning for their retirement. On the other hand, it may not be a feasible thing to do for many; who have other loads of expenses.  Does it mean one should lead a life of penury and be a popper in the sunset years? No certainly not. Reverse mortgage is the silver lining in the dark cloud; and is especially useful if one has not saved enough for the retirement and for people who are brick rich but cash poor.

If you are looking for a regular tax free source of regular income after retirement you don’t have to look beyond the four walls of your house. Reverse mortgaging your house can get you a regular income in your old age. Banks are willing to give loans against property to senior citizens. In return, the bank becomes a part owner of the house. In this way, cash-strapped senior citizens can unlock the value of their property without actually selling it.Though the concept is very common in developed markets, reverse mortgage has not picked up in our country where real estate also has an emotional value. People love their homes so much that they cannot bear the thought of selling the property. 

It's time to get rid of this misconception about reverse mortgage. If an owner puts up his house for reverse mortgage, it does not mean he has sold it. He has merely taken a loan against it. The property is revalued every five years, and one can expect a higher income after the revaluation of the property as and when the value appreciates. After his death, his legal heirs will have the option to either repay the loan along with the interest and regain the property or let the bank sell it and give them the proceeds after deducting the borrowed amount.

This is how reverse mortgage works:

It’s opposite of home loan; instead of paying the EMI the person gets the lump sum or  monthly / quarterly / annually pay out from the Bank. The lump sum can be deposited in the borrower’s bank account and can be withdrawn as per requirement. The owner can borrow up to 60% of the value of the property; and since money received is a loan, its tax free. And the property is revalued every five years; one can expect a higher income after the revaluation of the property.

After owner’s death his heirs will have the option to repay the loan along with the interest and regain the property or let the bank sell it and give them the proceeds after deducting the borrowed amount. Only senior citizens can avail of reverse mortgage and they should be living in the house that is being mortgaged. Don’t compromise on the quality of life. Stay Happy!! Stay Blessed!!

Some Financial Tips for the Newly Weds

So you have just tied the knot and might still be basking in the excitement of your special day. But once your honeymoon is over, it's time to sit down and find out what each other's more substantive financial goals might be. Because one of the most critical changes you encounter after getting married is the financial reality. Single income can convert to double, but so can the debts; buying assets may become easier, but insurance liability could increase; your spending or saving habits could be a disastrous mismatch, but your long-term goals may be the same.

While it's not easy to find a snug financial match, it's not impossible to home in on feasible solutions either. These can work for or against you depending on how you deal with them. You not only need to harmonize the different financial ideologies and habits that you bring into a new relationship, but also streamline your individual finances in a way that you can work towards the combined goals. . Here we take a look at some of the important things newly-weds need to consider while preparing a financial plan:

1. Reveal your cards

My money, your money; everybody is possessive about his or her money. But as a couple, this equation changes.  It’s important to talk about your finances; preferably even before you get married. So be it your income or expenses, savings or debts, liabilities or assets, proclivities or aversions, habits or cravings, lay them all on the table. List out your outstanding debts like car loans or credit card bills and assets like jewellery, real estate or stock investments. Talk about your attitude towards money, your values, what you plan to do with it after marriage. While you should retain your individual bank accounts (this is especially necessary from the point of view of convenience in paying tax if both the partners are working), you need to open a new joint bank account with an initial deposit equivalent to the wedding receipts in it.

2. Managing Household expenses

  

Both the partners need to work and to arrive at any conclusion, the newly weds should take into account all the things impacting their life, as there are lots of things and issues which determine this factor. Another important thing to do is to make a list of household expenses (regular as well as one-time) that you expect to incur. You are just beginning to share your life with your partner. So it is advisable to add a bit extra to the initial estimates.

3. Frame a budget, fix the goals

If, after the revelations and discussions, you have not already set your goals, it would be the next logical step. Frame your short- and long-term goals in accordance with your priorities and earning capacities. So whether you plan to buy furniture, car or houses, establish a time frame. It is imperative to describe each long-term goal in financial terms in black and white and they should be reviewed atleast once a year. You should also discuss the financial implications of having a child, savings required for his/her education and marriage, vacations and, of course, your retirement. It's never too early to start planning and saving for such goals because the compounding effect of investments works in your favor.

4. Risk Management

After marriage one needs to review one's coverage to take adequate life cover in a bid to protect one's spouse and family from the risk of premature death. If the spouse is working, then her income earning capacity also needs to be protected and if she is a housewife, she needs to be given adequate protection which could safely tide her over any financial crisis that might occur in the absence of the breadwinner.

As the person matures and gets married, he/she needs to take an adequate life cover to protect his/her spouse and family from the risk of premature death of the breadwinner. At this time some critical illness cover is also required, so as to cover one against any mishappening which may lead to non-performance of job for some time. Medical treatment is getting more and more expensive thanks to the scary inflation. Your health is your most important asset. Buy health insurance when you don’t need it so that you can have it when there is a need.

When it comes to the matters of money, investments and your dreams and goals, two people may not have the same opinion. At times like these, it is best to visit a certified financial planner and recognize the best tools to invest your resources that will help you realize your dreams. Your certified financial planner can give you unbiased opinions and tools, which will work to fulfill your dreams. All the best. Stay Blessed!!

Insurance Myths: Busted

A gentleman I know has been thinking of buying insurance for quite some time; however, having other important matters to handle on priority, this was conveniently put on the back burner. Now that time of the year has come when most people scramble for investments in tax saving instruments at the end of the financial year and insurance comes at the top of the list; this gentleman too wants to buy an insurance policy urgently. He called and said “I want to buy insurance and pay 10000/-; which plan should I go for?” “Buy term insurance” I told him since I knew he was awfully under insured. “No, the money goes down the drain if I outlive the plan and I know I’m going to live long”, he said. There is no dearth of people like him but I sincerely hope that some day good sense would prevail. Insurance is an integral part of a sound financial plan. However, it’s highly misunderstood and often bought and sold for all the wrong reasons under the Sun. Let’s have a look at some myths associated with insurance.

Myth 1: Insurance is a tax saving instrument.

Section 80C tax benefit is only an added advantage and it should not be the main reason for buying insurance. The primary objective of insurance should be to provide protection to your family. Do not confuse premiums paid under sec 80C with adequate life cover. If possible, consult a qualified financial planner who can tell you how much insurance you need by looking at your profile and understanding your future aspirations. Your insurance requirement will change according to events in your family like birth of a child, new liabilities etc. For example if you have taken a home loan, the policy should definitely cover that.

Myth 2: Term insurance is a waste as I am just paying premium and not getting anything in return.

No, it's not. In fact it's one of the best insurance products ever -- simple, inexpensive and serves `its purpose. Each insurance product has this at its core and the cost is a part of the premium you pay. It gives you peace of mind through the years as you know that you are protected. That's exactly what insurance is supposed to do.

Myth 3: My Company’s group insurance cover is enough.

Your group insurance may be enough at the moment but what if you lose your job or change your job with a gap in between. You will suddenly be left without cover. If you just rely on group insurance and say you leave your job and start a business at age 40+, getting insurance becomes expensive due to age and health conditions. It's always advisable to keep a term insurance/health insurance policy running along with the group plan. You will realize the benefits when you stop working.

Myth 4: My credit card has given me free insurance. Why do I need more?

It's even riskier than your group insurance. In this case there is a big layer between you and the insurance company. A policy is a legal contract between the insurance company and you and that's how it should remain. Have you heard of anyone who has got insurance money from a credit card company? These should be seen as more of extra offerings for marketing purpose.

Myth 5: I should buy policy in my wife or child’s name.

No. Insurance should always be bought by the person who is supporting dependents. It should never be the other way around. Ask yourself a basic question: what will happen if something happens to me; the earning member of the family? Who will take care of dependents; the non-earning members; like your wife, kids, parents? The answer is insurance. It's a very simple concept -- don't complicate it. You should take a policy to insure yourself; not your dependants.

Myth 6: I don’t need insurance. I’m single without dependents.

Well in that case you really don't need life insurance but think of medical emergency or

health disorders. It can simply wipe out all your savings. It will make a lot of sense to take a health policy and some retirement planning product. If you start early you may retire rich. Health policy should be bought by every individual as it cushions your savings against unforeseen emergencies. More on this, later. Till then stay insured; Stay Blessed!!

Seven Mistakes You must Avoid While Writing a Will

This is in continuation to my earlier post and I strongly feel writing a will is the first step in succession planning; the peace of mind is guaranteed knowing that we have settled our affairs and taken care of our loved ones. However, all the efforts could go waste if the will has discrepancies. So below are some of the mistakes one must look to avoid....

1. IMPROPER EXECUTION

Your will needs to be properly executed or it can be a useless piece of paper. Proper execution involves two major steps. First, the person who is making the will needs to sign it. This is a crucial step, as a will can be written on any piece of paper and only the signature gives it authenticity. This needs to be followed by its attestation by two or more witnesses. Your will shall be considered properly attested only if the witnesses sign it in your presence. However, it is not necessary that both the witnesses sign the will at the same time. Also, the witness should have seen you sign the will or you must at least acknowledge in his presence that you have signed it. The Indian Succession Act does not specify any particular form of attestation. However, in most cases, if the will is not executed properly, it may stand null and void.

2. GIFTING PROPERTY TO ATTESTING WITNESS

If you gift property to an attesting witness in the will, the document will remain valid, but the witness will not be able to inherit the property. For instance, if you want to leave a house to your daughter, she or her husband should not attest as witnesses. If they do so, your daughter will not inherit the house. The property will instead pass on to the residuary legatee. The will may identify the person, who in the event any residue property for any reason whatsoever is left, would receive that property. The person identified in such a case is called the residuary beneficiary, or residuary legatee. If no such person is present, the residuary estate will pass to the testator's natural heirs. Of course, the residuary legatee also cannot be the witness.

3. USING NICKNAMES OR INCOMPLETE NAMES

You may love to refer to your son by his nickname, but do not refer this name in your will. Remember, you will not be there to provide explanations when your will comes into effect. So you must be specific regarding names. Suppose your nephew (your sister's son) is to inherit certain funds. You must clearly state your nephew's name as the son of that particular sister. This will help rule out ambiguity, which may arise if you have another nephew by the same name, or if you have two sisters, both having sons.

If you have written incomplete names, the court will use extrinsic evidence to understand what you may have meant. If you have passed on property to a niece named Rani, and you have two such nieces, the court may either divide the property between the two or will try to understand which one you may have referred to. In case of ambiguity, how your will is interpreted will depend on the court.

4. IMPROPER DESCRIPTION OF PROPERTY

You must clearly describe the property to be bequeathed. Where it is quantifiable, specify it. If you want to give Rs 50,000 in cash to your son, mention this amount clearly. A vague sentence like, "I wish to give cash to ...." may be considered ambiguous and, hence, void.

5. PASSING ON PROPERTY TO UNBORN PEOPLE

Unlike trusts, wills have no place for unborn people. Any property bequeathed to a person yet to be born will be considered invalid. However, this does not mean that the property you leave will necessary lapse. Though the person may not exist when the will is drawn, the validity depends on whether he exists when the will becomes operational.

6. NOT UPDATING YOUR WILL

This is one of the most common mistakes people make. They forget to update a will if they acquire a new property or a new member is added to the family. A will is revocable. In fact, even if you state that your will is irrevocable, it remains revocable. This feature enables you to keep updating it. All you need to do to revoke the will is to physically destroy it or create a fresh one. The old document is automatically revoked. The only time that the earlier will is not considered revoked is if its replacement is deemed invalid.

7. NO PROBATE

Probate is the process of certifying a copy of the will by a competent court. It establishes the legal capacity of the person making the will. In Mumbai, Kolkata and Chennai, it is mandatory to have a probate, though in other places, it is not necessary. In cases of immovable property, a probate is required. Even when it comes to bank accounts or other investments, financial institutions usually insist on a probate. So, it is advisable to have one.

Keep reading!! Stay Blessed!!