Monday, November 20, 2017

How are equity savings funds different from monthly income plans?


In some of our earlier articles, we have covered various hybrid funds. One such category was the MIP or the Monthly Income Plan – a hybrid fund that invests predominantly in debt securities and marginally in equity. Such a combination offers stable, but potentially higher than debt fund returns over long periods.
In the last few years, a new variant has been introduced that works very similar to an MIP, but comes with a small difference. These products are known as the “equity savings funds”, popularly.
Click here to read more about these funds ...

__________________________________________________________________________________
The English translation of the article is as under:


In some of our earlier articles, we have covered various hybrid funds. One such category was the MIP or the Monthly Income Plan – a hybrid fund that invests predominantly in debt securities and marginally in equity. Such a combination offers stable, but potentially higher than debt fund returns over long periods.
In the last few years, a new variant has been introduced that works very similar to an MIP, but comes with a small difference. These products are known as the “equity savings funds”, popularly.
These funds are a hybrid of three portfolios, instead of two in case of MIP. The three parts of an equity savings fund are: equity portion, debt portion and arbitrage portion. The exposure to the debt securities is kept below 35% in these cases, to ensure equity exposure (combined between pure equity and through arbitrage positions) at all times is above 65%. As we discussed in case of the arbitrage funds, keeping equity exposure above 65% gives these funds the status of equity-oriented funds for the purpose of income tax. Due to that, the dividends from these funds are tax-exempt in the hands of the investor as well as exempt from dividend distribution tax. The short term capital gains are taxable @ 15%, if the gains are booked within one year. If the holding period is longer than one year, the capital gains are qualified as long term and hence such capital gains are tax-exempt.
This offers a wonderful investment option for the conservative investor – stable portfolio returns with high tax-efficiency.
However, one must keep certain points in mind about this portfolio.
1.     This is not a debt fund, but a hybrid fund, having exposure to equity
2.     The fund has net positive exposure to equity, unlike arbitrage funds, where open equity exposure is covered by derivatives. Such a net positive equity exposure means the fund can exhibit higher volatility than arbitrage funds.
3.     The net equity exposure may be higher than in case of MIP, such schemes could deliver higher long term returns with high volatility in the short term. The risk is higher.
Given this, it is advisable to consider these funds only if you have money to be invested for medium to long term periods. These funds are not suitable for short term investments. Given the tax advantages, these funds could be a better option in comparison to MIPs.
- Amit Trivedi

Sunday, November 19, 2017

Avoid falling prey to insurance mis-selling ...

While IRDAI can nudge the sector towards better practices, buyers need to view this as an instrument that provides risk cover, not as a tax saving or investment product

Read my article in today's Business Standard below ...

Avoid falling prey to mis-selling of insurance

Monday, November 13, 2017

Did the markets go up 21% due to demonetization?

Amit Trivedi examines if the Nifty rise of 21% for the one-year period since the announcement of demonetization is a coincidence, correlation or cause.

Click here to read the article ...

Monday, November 6, 2017

What are arbitrage funds? When are these funds appropriate for you?

In the last couple of years, one category among the mutual funds has gained popularity – the arbitrage funds. It is important to understand what these funds are, how they work and what purpose these serve. One must also understand the risks involved in these funds. Click here to read my article published in Mid-day Gujarati edition.

___________________________________________________________________________________
The English translation of the article is as under:


What are arbitrage funds? When are these funds appropriate for you?
In the last couple of years, one category among the mutual funds has gained popularity – the arbitrage funds. It is important to understand what these funds are, how they work and what purpose these serve. One must also understand the risks involved in these funds.
We covered this category in our column on February 6, 2017 with proper example. However, we feel that there are a few misconceptions around this category that need to be clarified, especially looking at the amount of money getting parked in these funds. Many consider this as safe as liquid funds, with the benefit of lower (or zero) taxation.
Arbitrage is a strategy to generate returns due to the price difference between two different markets for the same (or similar) securities. This often happens between the cash segment and futures segment of the stock markets, on account of what is technically known as the “cost of carry”. This “cost of carry” is akin to interest charged for short term borrowing.
However, since the money is invested in stocks (at least 65% of the scheme’s corpus), the fund is treated as “equity oriented fund” according to the Income Tax Act. This means the dividend is tax exempt in the hands of the investor, as well as exempt from the dividend distribution tax. Capital gains are tax-exempt, if the holding period is more than one year. Even when the capital gains are booked for a holding period of less than a year, the same is taxed at a lower rate of 15% and not clubbed with the income.
This tax arbitrage is drawing a lot of money towards these funds. However, it is important to understand the investment before getting on to the discussion of taxation. The investment theory must precede considerations of tax and the investment theory would help one analyse the risk-reward trade-off.
First of all, let us make one point clear: as per the classification for purposes of income taxes, arbitrage funds may be classified as equity-oriented funds, but in terms of investment theory, these are alternatives of liquid funds. Hence, please do not expect returns in line with equity funds. These funds can generate investment returns very similar to those generated by liquid funds.
At the same time, while liquid funds invest in money markets and debt markets; arbitrage funds exploit arbitrage opportunities between two different segments within the equity markets.
Pure arbitrage is considered to be an almost zero risk strategy, since the prices converge on expiry of the futures contract. However, there is a possibility that the spreads widen before the contract expires. In such a case, there could be negative returns, temporarily. One must be aware of this.
Such short term negative returns may coincide with your parking horizon and thus, you may end up with very low or even negative returns, if you have parked money for very short periods of time. This only means that one should not treat arbitrage funds as a total replacement of liquid funds, but use these only when the time horizon is slightly long, say at least one month.
In spite of the risk highlighted, the arbitrage fund could be a good place to park your fund and enjoy the reduced taxation.
-       Amit Trivedi



Monday, October 23, 2017

Understanding exit loads in mutual funds

What is an exit load? How does it affect an investment's returns?

Click here to know the answers...

_______________________________________________________________________________
The English translation of the article is as under:




Exit load
What is exit load?
Certain mutual fund schemes carry an exit load. This is the charge levied when an investor exits the fund scheme, or redeems the money. However, this charge is levied if the exit is made before a certain pre-defined time period. If the investor stays beyond this period, there is no exit load. Let us look at some examples. Various mutual fund schemes may have exit load structures like this:
(1) 1% exit load if redeemed before completing 1 year; Nil thereafter.
(2) 1% exit load if redeemed before completing 1 year; 0.5% exit load if redeemed after completing 1 year but before completing 2 years; Nil thereafter
(3) 0.5% exit load if redeemed before completing 6 months; Nil thereafter
(The above are only some examples. You may check the exit load applicable in the scheme of your choice.)
Which schemes have exit load?
Close-ended funds and ETFs do not have exit loads. Any open-ended mutual fund scheme can have an exit load. However, normally, liquid funds do not have it. Whereas all other schemes may have exit load, the same is not necessary. There are many equity and debt mutual funds that do not have any exit loads. It is also important to keep in mind that the same scheme may have different exit load structure at different points in time.
Though the exit load may be different at different times for the same scheme, in case of any investment the applicable exit load would be the one that was prevailing at the time of investment and not at the time of redemption.
In case of SIP too, the applicable exit load would be the one that were prevailing at the time of each of the SIP installments and thus, different installments may have different exit loads applicable.
How does this exit load work?
The exit load is charged by adjusting the redemption amount for the same. The amount payable to the investor would be less to the extent of the exit load. Let us see that with a calculation:
Let us assume that the exit load is 1%; NAV at the time of redemption is Rs. 20; the balance in the folio is 25,000 units and the investor has opted for redemption of all units..
In that case, the redemption price = NAV X (1 – exit load)
Redemption price = Rs. 20 X (1 – 1%) = Rs. 20 X (0.99) = Rs. 19.80
Amount received on redemption = no. of units X redemption price
= 25,000 X Rs. 19.80
= Rs. 4,95,000
Consider this amount in relation to the money that the investor would have got in the absence of exit load. (Rs. 20 X 25,000 units = Rs. 5,00,000).
Due to the exit load, the investor got Rs. 5,000 less than the value of investments on the day of redemption. This Rs. 5,000 is the exit load or the exit charge paid.
Then again, Rs. 5,000 is 1% of Rs. 5,00,000.
This is how exit load works.
-       Amit Trivedi

Thursday, October 19, 2017

Wish you a Happy Diwali ...

-->

Diwali, the festival of light, is when Hindus perform a Laxmi pooja. What are we asking for when we pray to Goddess Laxmi? We ask for prosperity, not just money. There is a difference between the two. In order to understand the same, let us look at the photo of the goddess we use for the pooja.

One of my favourite Diwali posters is one that shows Goddesses Laxmi and Saraswati along with Lord Ganesh. It is not for no reason that these three are shown together.  
 
While we all need blessings of Goddess Laxmi to be successful in life and grow, she must come in our life flanked by Goddess Saraswati – the goddess of knowledge and Lord Ganesh – the god of wisdom. If Laxmi comes along with these two, it stays and brings bliss in life. And that is true wealth – not mere financial wealth.
Trying to earn more and more money without proper knowledge and wisdom can lead to ruins. Money may come but that would not bring bliss in life.
The difference between “knowledge” and “wisdom” also must be understood at this juncture. “Knowledge” is to know something – to be aware of something – to understand and being able to explain it. “Wisdom” is intelligence – it is about being able to judge – to use discretion – being able to separate the good from the bad – the right from the wrong.
First, let us address the knowledge part. It is critical to know what one is doing. “Look before you leap” is not just a proverb; it’s a great advice. Whether it is income, expenses, loans or investments, it is important to know.
Questions on income:
·       How sustainable is the income?
·       How stable is the source of income? This is especially critical for self-employed persons and small business owners. However, in the present times, even jobs are also not guaranteed.
·       Do you understand the taxes on the income?
Questions on expenses:
·       Know the monthly budget – the expenses you incur
·       How much of the monthly budget is spent on necessities and how much on luxuries? Which of the luxuries can you cut down?
·       Is it possible to reduce some expenses through finding alternatives?
·       Have you kept provision for these expenses in case there is an emergency, e.g. health issue or loss of job?
Questions on loan:
·       Have you understood the terms of the loan?
·       What is the interest rate on the loan? Is it too high or too low? If it is too low, is there a catch?
·       What are the various penalty clauses?
·       What are the flexibilities?
·       Can you terminate the loan earlier without any penalty, in case you get funds suddenly?
·       What is the security required by the lender?
Questions on investments:
·       Have you understood the terms of the investment?
·       What is the (expected) rate of return?
·       Is it too high or too low? If it is too high, is there a catch?
·       Is the risk too high? Understand the risk involved. If you do not understand the risk, please avoid the investment. Every investment carries some risk.
·       Is there a lock-in or is the investment liquid?
·       At what rate would the earning be taxed?
This is not an exhaustive list, but only an indicative one.
Discretion is required both while earning as well as spending. Is the money coming in through the right means or are you taking some actions, which may be incorrect ethically or morally? Are you spending too much money for luxuries than fulfilling your responsibilities?
Wisdom and discretion must be applied to the assets and liabilities, too. Are you borrowing wisely? Is it really required? Is it a good loan? Are you investing smart? Or are you acting on tips without understanding the risks? There have been many instances when one has asked “Is it safe?” or “I hope there are no risks” in stead of asking “Please tell me about the risks present. And how do we manage those”.
So, this Diwali, make sure to pray for Laxmi to arrive at your place – but the right type and through the correct means. Pray to Goddess Laxmi to stay in your life forever. Make sure your life is worth for her to stay forever.
-        Amit Trivedi
The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.


Wednesday, October 11, 2017

7 ½ lessons in personal finance from the screen life of superstar of the millennium


Today is the 75th birthday of Superstar Amitabh Bachchan. On this day, we pay a tribute to the biggest entertainer and superstar of the screens – he started with films and is making waves on television through his popular show Kaun Banega Crorepati. `
On his 75th birthday, we pay tributes to Mr. Bachchan by taking some clues from his many roles on screen. Here is a list of 7.5 lessons, one each for every decade of his life. ...
Click here to read our tribute to the superstar of the millennium ...

The English translation of the article is as under:
________________________________________________________________________________________________________________

7 ½ lessons in personal finance from the superstar of the millennium
On 11th October 2017 is the 75th birthday of Superstar Amitabh Bachchan. On this day, we pay a tribute to the biggest entertainer and superstar of the screens – he started with films and is making waves on television through his popular show Kaun Banega Crorepati.
On his 75th birthday, we pay tributes to Mr. Bachchan by taking some clues from his many roles on screen. Here is a list of 7.5 lessons, one each for every decade of his life.
Lessons from his famous dialogues
1. DeewarMain aaj bhi phenke hue paise nahin uthata
Earn money with respect. Even when Amitabh’s role was played by a child artist, he tells Iftikhar Ahmed, “Mein pheke hue paise nahin uthata, saab.” Later, Amitabh Bachchan reminds him of the incident and repeats the same lines.
Whether he had money or not, he never picked up money that was thrown at him. He respected money and he expected the others to respect labour of anyone. Money must be earned in a respected way, and not otherwise.
2. KaaliaHum jahan khade hotey hain, line wahin se shuru hoti hai
In a famous scene in the movie Kaalia, Amitabh Bachchan speaks these lines in a jail. Every time I have watched this movie in theatres, the audience goes wild when he says this. Now, let us understand very clearly. He is Amitabh Bachchan. He has the right to utter these lines. He is the superstar. How many of us can claim to be even good at investing? None. So we tweak this above dialogue and say “Jahan line hoti hai, hum wahan khade ho jaate hain.” So many investors queue up to buy (or sell) something only because all the others are doing it. We call it herd mentality. This is seen across centuries, across countries and across investment options – we have seen it happening in equity shares, IPOs, real estate, gold, and currently Bitcoins.
Standing is queue may be good in certain situations – man is a social animal, after all. However, in financial markets, those in queue may end up buying costly or selling cheap.
Learn about an investment and take independent decisions. If you cannot, take the help of wise experts.
3. Satte pe Satta
Ek dost ki party mein gaya tha, wahan jabardasti chaar baatli pila diya
Many of us remember this scene for what follows next in the dialogue – “Daaru peeney se liver kharab hota hai”, but we are focusing on the above line for a specific reason.
There are so many instances when the investor says that someone came and sold a product. Well, that may be true, but it is exactly like saying what Amitabh said in the lines mentioned above. While someone may come and offer any product or service, it is our duty to always remember “Caveat Emptor” or “Buyer Beware”. Ask questions till you do not understand the pitch. There is no hurry.
4. Trishul
Aaj aap ke paas aap ki saari daulat sahi, sab kuch sahi, lekin maine aap se jyaada garib aaj tak nahin dekha. Good-bye, Mr. R. K. Gupta.
Trishul was an epic battle between a father and the son of his discarded lover. After Sanjeev Kumar strains his relationship with his family and is left alone at his luxurious house, with all his wealth, Amitabh utters the above words.
Wealth is nothing if the family is not with one. After all, what do we earn the wealth for, if that does not make us happy and fulfilled in life?
5. Laawaris
Apun woh kutte ki dum hai, jo baara baras nalli ke andar daal ke, nalli tedi hoti, apun seedha nahin hota!
This is superb depiction of human nature. Our experiences have shaped the way we take decisions. It is not just one lifetime, but the cumulative experiences accumulated since the birth of the first humans that we have learnt how various things work and those lessons influence our decisions and actions.
Many of those actions, and biases are reflected in the way we deal with money – sometimes such biases protect us and on other occasions, put us into troubles. Very often, it is our limited abilities that we do not know which lessons to apply when.
Lessons from the movies
6. Chupke Chupke
Dr. Parimal Tripathi, played Amitabh Bachchan was asked to pretend to be Dr. Sukumar Sinha in the movie. However, when he went in front of Vasudha, played by Jaya Bachchan, he fell in love and was in two minds: whether to play the role of Sukumar Sinha or that of Parimal Tripathi – his original self in the movie. This confusion lands him into trouble.
In the world of money, a large number of people are confused of their own role – whether they are investors or speculators. While they try to be investors in the beginning, the moment they see Vasudha – be it financial news; or any hot tip; or simply their own emotions of greed, hope or fear – they forget that they are supposed to be investors and start acting like speculators. This gets them into trouble.
7. Baghbaan 
The whole movie is around an old couple that spent their life and their life’s savings on their kids, only to find in their golden years that the kids were not in a position to help them at all.
Many parents have assigned a lower priority to their own retirement years and spent every bit of saving on education and marriage of their kids. The lesson in the movie is very powerful. You are on your own in your retirement years. Please plan properly.
And now the message # 7 ½:
It is a half message as it is taken from the small screen. This lesson is from the popular game show – Kaun Banega Crorepati.
 As you know, the time allotted for each question is 45 seconds in the beginning. Once you cross the first “padaav”, the time available for each question goes up to 60 seconds. On crossing the second “padaav”, there is no time limit and in the words of Mr. Bachchan, “kaantaben shaant ho jayegi”. This is the real meaning of wealth – the significance of wealth in life. As you get wealthy, you should have more time available. If wealth is not releasing your time, you are living a life of bartering life for money – a really bad deal.

There are many more lessons that we can learn from Mr. Bachchan’s life on screen as well as his real life.
In the end, let us remember another great movie, where he played a second lead. “Anand” in the movie “Anand” tells Dr. Bhaskar, Amitabh Bachchan, “Babu Moshay, zindagi badi honi chahiye, lambi nahin.” We wish Mr. Bachchan a “badi” and “lambi” zindagi. Thank you Sir. We wish you many more years of happy, healthy and wealthy life.
- Amit Trivedi
The views expressed here are the personal views of the author. He has written a book titled “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”.