Physical gold or Paper gold......which one is good ?

From old days this yellow precious metal gold has been lured to the human being. Our country has been largest consumer of the gold. People buy it for festivals, religious sentiment or asset allocation in our country. Since last 12 year gold has witnessed straight gain in its price. According to IMF data in the month of march shows at least 12 countries boosted their gold reserves.

This year Akshay Tritiya sentiment, media hype, promotions and gift schemes could not boost the sales figure of physical gold and gold jewellery. However ETF gold, E-Gold and gold funds saw remarkable interest from various categories of investors. The ETF gold has saw increase in volume  compare with last year Akshya Tritiya figure. The exchanges were remained open till 8’o clock in night and done the Rs 600 crore plus volume.

Gold has proven to be a safe investment option because of it being a hedge against inflation. It has also low correlation with other asset classes, such as equity and debt. Gold has provided annualised returns of 19% over the past 10 years. There are two ways invest in gold, one is in physical form like jewellery, bar and other one is in paper form (dematerialised form) like ETFs, E-Gold etc. The main benefit of paper gold investment is that it is risk free from theft and storage. At present few paper gold options available in India:

Gold ETFs

These are passively managed exchange traded mutual funds that invest money in standard gold bullion. At present in India, assets managed under gold ETFs around  9,900 crore according to March 2012 data (this includes mark-to-market gains of 76% during the period). Due to traded on exchanges, gold ETFs provide high liquidity and transparency in prices. For investment in gold ETFs requires opening a demat account with a broker registered with exchange. You can easily view your gold ETF’s holding with the other stocks in demat account. You can purchase as little 1 unit (at 1 gram gold mkt price approx.) of gold ETF’s by instruct to you broker.

Gold Mutual Funds

These are fund of funds (FoFs) that invest the corpus in either their own gold ETFs or a foreign gold fund. Gold mutual funds provide investors the facility of systematic investment plans (SIPs), wherein they may invest in gold regularly and avail benefits of rupee cost averaging, i.e. buying more units when prices are low and less units when prices are high. At present indian fund houses offer 11 gold FoFs (including two foreign FoFs), managing average assets of . 4,700 crore as of March 2012. It also gives retail investors an opportunity to invest in paper gold in amounts as small as Rs. 500 via SIPs and without having to open a demat account .

E-GOLD

In our country investors can purchase gold in electronic form the National Spot Exchange (NSEL).Investors can buy and sell gold in denominations as small as one gram in e-gold form. A major advantage of e-gold is the investor gets an option to convert paper gold into physical gold with all the advantage of investing in gold in the dematerialised form. The operating expenses to run e-gold is very low compare with other options like E-Gold and ETFs.

Tax liability

Gold ETFs and gold FoFs are subject to long-term capital gains (LTCG) tax of 10% without indexation and 20% with indexation if held for more than a year and taxed as per individual income tax slabs for short-term capital gains (STCG) if held for less than one year. LTCG is taxed at 20% in case of physical gold and E-gold and investors need to hold them for more than three years to qualify for the same. STCG is taxed as per the individual tax slabs if sold within three years. In addition to this, wealth tax of 1% of the market value of the assets exceeding 30 lakh is charged on investment of physical gold and e-gold.

Gold as an asset class provides strong hedge against inflation and also gives an opportunity to maximise wealth over a longer timeframe. It is less voletile compare with other asset class. In the short-term, gold prices can be volatile due to demand-supply concerns and economic conditions. The percentage allocation to gold would be depend on an investor’s risk appetites and return objectives. So investment in paper gold more good option compare than physical gold

(Dear readers if you have some query about any financial product please feel free to ask. You are most welcome for your feedback and question.)

Regards,

Arvind Trivedi

Certified Financial Planner

Frequently key terms used  in RBI Policy

Reserve Bank of India(RBI) play very important role in our economy. We often hear about some most frequently used term like repo rate, reverse repo rate, CRR, SLR etc. It decide the key policy rates according to the economic scenario. Recently RBI has cut the repo and reverse repo rate. The key policy or ’signalling’ rates include the bank rate, the repo rate, the reverse repo rate, the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). These rates are the RBI’s powerful tool to control the inflation and ensure the country’s growth.

These terms we hear very often in each RBI policy and it is very important to know for common person what is the significance of these terms in the economic policy. Today we are going to understand these terms in very easy way.

RBI increases its key policy rates when there is greater volume of money in the economy. It means , when too much money is chasing the same or lesser quantity of goods and services. Conversely when there is liquidity crunch or recession, RBI would lower its key rates to inject more money into the economic system.

Repo Rate

Repo rate, or repurchase rate, is the rate at which RBi lends to bank for short periods. This is done by RBI buying government bonds from bank with an agreement to sell them back at a fixed rate. If the RBI wants to make to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money , it reduces the repo rate.

Reverse Repo Rate

Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term.  Like the repo, this is done by selling government bonds to banks with the commitment to buy them back at a future date. The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it. RBI can reduce the liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.

Cash Reserve Ratio (CRR)

CRR is the amount of funds that banks have to park with RBI. If RBI decides to increase the CRR, the available amount with banks reduce. CRR serve two purposes: One, it ensures that a portion of bank deposits are always available to meet withdrawl demand, and other, it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money.

Statutory Liquidity Ratio (SLR)

Apart from keeping a portion of deposits with RBI as cash, banks are also need to maintain a minimum percentage  of deposits with them at the end of every business day, in the form of gold, cash, govt bonds or other approved securities. This minimum percentage is called SLR. In the high growth times, an increase in SLR reduces lendable resources of banks and pushes up interest rates.

Dear readers if you have some query about any financial product please feel free to ask. You are most welcome for your feedback and question.

Regards,

Arvind Trivedi

Certified Financial Planner

Importance of Retirement Planning

Dear readers,

Retirement planning is very important part of the one’s financial planning. We should not ignore it. In our country joint family system was very much popular and due to this system most of people often did not made any proper retirement planning and was totally depend upon their family member. In last two decades due to massive urbanization, social norms are changing very rapidly and nuclear family system is spreading day by day. People are settling in big cities from villages. So there are very big question is who will take care of the people in their old age and from where they will get  financial support for daily living.

Now it has become very clear that retirement planning is very essential for all of us. Most of financial advisors suggest that you need less money for post retirement expenses. According to these advisors, you need only 70%-80% of your pre retirement expenses in your post retirement period. When you are preparing your financial plan don’t forget to factor inflation.

But there are one different opinion also exist that we may actually need 135% to 140% of our pre retirement expenses. Instead of asking expert first ask to yourself “How much do you need for retirement,” or “How do you want to live in retirement?” and “What activities do you want to engage in?” There are significant difference between need and desire. If your keep your need less than 70-80% of pre retirement expense figure is right but if you want to enjoy retirement to the fullest in style without  thinking of any financial constraint then you need more money for expenses than pre retirement expenses.

There are no fix formula of your needs, only estimate what your wants are. So how much you plan to save should be a factor of what kind of lifestyle you would like to live post retirement. It is not necessary that you would be requiring only 135% or 70% of pre requirement expenses. The whole idea of retirement planning to plan to create a corpus that would make you live a life that you want to.

For example if your wish is long world tour or any other activities to fill free time during retirement then you need bigger retirement corpus. To accomplish these wishes you would need a plan. Make out list of activities you would like to take up post retirement, check current cost and factor in inflation to find out how much it would be cost you after your retirement. Try to establish a fine balance between need and desire and do realistic assessment.

Now a days many retirement calculator available online. You can use it at free of cost. It is essential that estimate conservative projection of your returns for retirement corpus. If you don’t adopt conservative projection then you may not achieve your target corpus.

A safe and in smart way is that begin saving from today as much as you can, as soon as you can for your older days. Start early & save as much as you can is the MOOL MANTRA for retirement planning.

(Friends, please send your feedback and if you have any query related investment or financial product and want more clarity feel free to ask……I would appreciate your valuable feedback and any question.)

Regards,

Arvind Trivedi

Certified Financial Planner

Misselling of Financial product

Dear reader,

Now a days most of us  are victim of a misselling of financial product but few days back I was shocked when I had read  one article in Moneylife Magazine which is very popular magazine among investors for its true and honest view on all the financial product and services . Below is the same article which I read on the Moneylife site :

HSBC loots Suchitra Krishnamoorthi after big promises of 24% returns :

Moneylife Digital Team

This can happen to you—bank customers beware. Lack of financial literacy can cost you big time as reputed banks target the gullible with money to spare. PMS, insurance, loans are pushed by relationship managers to make a killing, at your cost!

HSBC Bank took Ms Suchitra Krishnamoorthi, a well-known singer and actor, for a ride over a five year period by promising an extravagant assured return of 24% from mutual funds as well as insurance. Each time the customer complained about losses in her account, the standard reply was that the relationship manager has been fired and that the bank will make up for the losses with judicious investments. Needless to say, the losses were never made good. The one-way road for the customer was downhill. If a well-known celebrity could be cheated with such impunity, it is surely happening routinely with others.

It is a case of systematic looting and exploitation of emotionally vulnerable who had got Rs3.6 crore as part of a settlement in September 2006. The money was supposed to be the means of livelihood for herself and for her daughter. The bank used confidential information about the hefty deposit in her savings account and began to market its toxic services to her. Since bankers are seen as trustworthy, she believed that her relationship manager was advising her correctly.

The modus operandi for HSBC in this case has been a combination of toxic churning of the portfolio management system (2% entry load on every purchase made by it on behalf of client), insurance products promising 24% returns, insisting her on taking a loan instead of withdrawing funds without even disclosing that the client was entitled for a smart loan.

The end result after five years was Rs83 lakh—direct loss from investment, Rs29 lakh in commission to HSBC, Rs8 lakh (50% of investment) lost from an insurance policy, Rs10 lakh (again, 50% of investment) valuation decline in insurance policy still in force, Rs4.5 lakh tax paid on redemption of short-term mutual funds (including Rs1.85 lakhpenalty to the Income Tax department due to non-disclosure of gain by HSBC to the client) and Rs58 lakh interest on home loan earned by the bank.

When Suchitra wished to surrender her insurance policies, HSBC refused to act for her by contending that they no longer had any tie-up with Tata AIG and that it was not their business to get client’s money back that they had recommended in the first place.

Apart from the losses, the so-called customer service was pathetic after the relationship started getting sour. The bank was appallingly evasive and non cooperative even for basic requests such as furnishing of documents or revoking power of attorney for the investment portfolio. It took the bank four months and repeated requests to furnish inchoate standard forms that Suchitra had signed at the time of appointing HSBC as her portfolio manager. Moreover, the documentation was incomplete.

According to Suchitra, “It took my chartered accountant six months to authenticate the figures of losses—as not only was the HSBC team adept at covering its paper trail. They also very conveniently refused/evaded furnishing me the documents to which I am legally entitled for over a year—giving me one silly excuse after another like mismatch of signature/officers being on leave, etc.”

She adds, “While I was warned that the legal system in India is such that the matter will drag on forever probably causing me further expenditure and loss of peace of mind and reputation, I was determined to see this through. It is my moral responsibility and a warning to other vulnerable targets—small investors like me should not get conned by aggressive MBA's in suits who are preying on their customers like sharks in the big bad ocean. All the while getting richer and richer while making us smallgold fish go bust.”

Last year Moneylife Foundation had conducted a seminar with Ravi Subramanian, banker and author of three well-known books like “If God Was a Banker”, “I Bought the Monk’s Ferrari” and “Devil in Pinstripes”. According to him, “Banks and relationship managers often indulge in cross-selling to earn more revenues and therefore, the customer has to be more careful while dealing with them. Bankers become ‘bhayankar’ when they fail to deliver what they have promised and try to hard-sell products on which they earn more money to the gullible customers. A customer can protect himself from falling into the hands of mercenary bankers by being alert, vigilant and at the same time doing due diligence.”Link to the article - http://www.moneylife.in/article/hsbc-loots-suchitra-krishnamoorthi-after-big-promises-of-24-returns/24975.html#.T4laTfnc8_o.email

I would welcome your suggestion / comments if any or if you also have been a victim of such mis-selling then you can share with us.

Also, pls forward this email to as many friends / relatives as possible and hopefully they may also benefit out of it.

Regards ,

Arvind Trivedi

Certified Financial Planner

                                          RBI Monetary Policy Update

Today the Reserve Bank of India (RBI) cut the repo rate by 50 basis points from 8.5 per cent to 8.0 per cent but did not touch the cash reserve ratio, which remains at 4.75 per cent. The cut in the repo rate is an indication that banks could reduce the interest rates on home and car loans.

Today's rate cut announced by the RBI in its annual monetary policy for 2012-13 is the first one in the last three years. The reverse repo rate under the liquidity adjustment facility, determined with a spread of 100 basis points below the repo rate, stands automatically adjusted to 7.0 per cent.

In another good news for the consumers, the RBI has abolished the pre-payment penalty on home. Accepting the Damodaran Committee recommendations to abolish foreclosure charges levied by banks on prepayment of home loans, the RBI has instructed permit banks to not levy foreclosure charges/pre-payment penalties on home loans on a floating interest rate basis.

While announcing the credit policy RBI Governor D Subbarao said that the liquidity conditions were moving towards RBI's comfort zone and added that there was a need to increase fuel prices for macro economic stability.

After hiking policy rates for 13 consecutive times between March 2010 and October 2011, the regulator took a pause to support India’s falling growth momentum. On April 21, 2009; the apex bank had last reduced its key policy rates by 25 basis points. But, it cut the CRR by 125 bps so far in 2012 to ease the tight liquidity situation.

The latest rate cut move came in line with market expectation. Many felt, RBI would give equal importance to growth after a series of rate cuts to stem the rising rate of inflation. Consequently, the rate of inflation eased to 6.9 per cent in March from 10 per cent during the fiscal year. The average inflation rate in India was 7.99 per cent between 1969 and 2010.

Regards,

Arvind Trivedi

Budget 2012: Impact of new rules on Insurance Sector

Dear readers,
Insurance is very crucial and critical part of financial planning. In our country insurance policy sold as an investment and tax saving instrument. In budget 2012, some new rules has been framed for insurance sector  which is very crucial for the insurance sector and beneficial to the individual.

Traditional insurance plans don’t offer very high return in first place. According to new rule only those insurance policy would be qualify for tax benefit under Sec 80C which offer sum assured (Death Benefit) at least 10 times of annual premium. The going will get tougher if the DTC insists on the higher multiple of 20 times of the annual premium. However, market experts believe this is unlikely.

Returns from traditional insurance policy will be further fall. A bigger amount of premium  will go towards mortality charges and service charges which has been hiked this year from 10.3% to 12.36%. So there will be a smaller amount available for investment every year. A calculation shows that the net return from the investment will fall by almost 40-50 basis points to 4.1%. This is less than that being currently offered by some banks on the savings account balance.

So in my view it is right time for investors to stop looking at life insurance policies as investment vehicles. No doubt, they help you save and offer tax-free income, but the returns will be far too low to justify the investment. Besides, other tax-free options, such as the Public Provident Fund, ELSS, etc. is available.

Now onwards Insurance Policies will have to be for longer tenures as ideally insurance is a long term contract but still short-term plans of 5-10 years are in high demand because the buyer doesn't have to block his money for long periods.The 10 times rule in this budget puts an end to short-term plans. A policy whose term is less than 10-12 years will fail the eligibility test for tax benefits.

The worst hit will be money-back plans, which typically have a higher premium

compared to endowment plans. Buyers will have to opt for longer tenures (at least 20-25 years for money-back plans and at least 15 years for endowment plans) if they want the tax gains.

The budget has very clearly defined life cover as the death benefit payable to the

insured person's nominee. It will not include bonuses and other maturity benefits.

The focus on the long-term tenure will sharpen after the DTC kicks in. Right now,

insurance plans can be surrendered before maturity. Under DTC, the surrender value will be made taxaxble.

Early buyers will find it easier to get tax benefits because the premium are lower. Younger people get lower rates and can lock in for a longer period. A younger person will find it easier to comply with the new 10 times rule than somebody who is in his 40s. An older person can get around this problem by taking a longer term plan, but beyond a certain age, even a long-term plan will not help.

The new policy in this budget and the DTC will shift the focus to term

insurance plan. These pure protection plans will not be affected by the new rule because they already offer very high covers. Pure protection term plans offer covers of 200-500 times the annual premium. The good news is that term plan premium rates have come down and insurance companies have started advertising these more vigorously than ever before. Today online term plans offer very low rates. Though the data pertaining to term plans is not available, there has been a marked rise in the number of regular premium, non-linked, non-participatory policies in the past year. Term plans fall within this category, though it also includes other types of insurance policies.

The biggest impact of the change will be on single premium plans. The existing plans offer a cover of five times the premium as required by the current tax laws. This ensures that only a small portion of the premium goes as mortality charge and a larger amount is invested. The new rule means a smaller portion will be available for investment, which would require a complete overhauling of the single premium category.

In the light of new rule now insurance companies will obviously focus to pure term insurance and re-engineer their plans so that the tax benefits stay and at the end it would be also beneficial for individual.

Please do send your feedback and query after read this article.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Importance of HOME insurance

Dear friends,

Owning own home is everyone’s dream. For achieving this dream all of us burn the midnight all. Particular in present time for middle class it has become almost impossible dream to become the master of own dream home. An old saying 'home is where the heart is' very true. After so much  hard work we get our dream home and it make perfect sense to ensure that our homes are protected from peril (unforeseen event) . The best way to do this is through home insurance.

In our country home insurance is not very well known term and very few people know about it. I have read so many article and discussed about it with many friends. I am trying here to some light on “home insurance”.

What is home insurance ?  This term ‘home insurance’ is  also known as home owner / house-holder insurance. It is an arrangement by which you can protect the structure of your home and also your precious belongings from perils such as fire, earthquakes, storms, floods or other calamities. It also can cover your valuable personal property such as electronics, jewellery, art and so on from burglary / theft and others.
So why we need home insurance that is the question every individual think. To make our dream home we spent our hard earned money and also put a lot of money into its beautification. Most of our life pass to pay home loan EMI or accumulate the money to purchase home in one payment. If something happens like a flood, a pipe bursting, a fire, an earthquake or any such calamity, within a few seconds or minutes, our wealth can be damaged or destroyed. This insurance will protect your wealth by reimbursing you for damages incurred through any such insured calamity.
The next question what is the cover under home insurance policy or what is not covered. It does not cover willful property destruction of structure of home or the belonging in the home. It also does not cover damage by nuclear fuel exposure  and terrorism , war or invasion regular wear and tear in the home , or damage caused by the insured person.
Now a days some insurance companies cover damage by terrorism by rider (optional cover). Some companies cover art, electronics and white goods also through other insurance policies or riders it depends upon what you need and which insurance company you choose for cover.

For sum insured of the policy there are two method , one is Reconstruction value and second is market value after adjusting depreciation. The sum insured for structure of the home is calculate by reconstruction value, while the contents of your home will be covered on the basis of their market value, after taking into account depreciation.
Reconstruction value is the value of built up area multiplied by construction rate per square foot. It always lower than actual purchase cost of home. It also known as Replacement Value.

Claim Procedure:

Once a claim filed by the insured person , the insurance company appoint a Surveyor. The Surveyor visit your home to assess the damage, and based on his assessment, the insurance company will settle the claim.

You can not insured your home under home owner insurance policies if you use your home for other activities (commercial or manufacturing) other than residence. Different policies have different inclusions and exclusions. Whether your policy covers, alternate accommodation, modular kitchens, your laptop or digital camera, jewellery cover and so on.  We should read carefully Policy Wordings in detail.

We purchase any insurance for protection purposes. We insure our health and the health of our family, our life, our vehical using various types of insurance policies like mediclaim, term Insurance, motor insurance etc. Home insurance is an excellent thing to insure your home. After all, it is your most valuable asset. Before taking any insurance policy however, it is important to go through the policy yourself, don't blindly listen to what your agent or broker tells you. You may find that one policy covers more things for the same premium as another which covers fewer things. Go through the documents yourself very carefully before taking any insurance policy. An expert financial planner can help you take control of your comprehensive financial life.

(The above article based on various article and study. You are most welcome to ask any query or giving your feedback.)

Regards,

Arvind Trivedi

Impact of inflation and taxes on investment return?

Now a days inflation is big worry for all of us. We often read and hear about it from media. Controlling inflation  is a big challenge for current Indian government . Both government and Reserve bank of India has put all the efforts to control it. So for general investor how important is it. In this article we are trying to analyze impact of inflation on investment return.  Everyone knows that inflation eats into savings and increases costs. So it is important to invest wisely for to maintain your current standard of living with increasing inflation.

Whenever you consider an investment option, remember to evaluate the expected rate of return in real terms. The real rate of return means deduct your expected compound annual rate of inflation for the investment period from the compound annual rate of return that you expect from your investment.
To understand it more clear we are taking one example here say you are considering a bank fixed deposit that promises you an 11% annual rate of return over the next five years and your expectation of inflation during this period is 7% (compound annual).

For this investment, your real compound annual rate of return is only 4%. If your income from this investment attracts a 30% tax rate, then your post-tax real rate of return further reduce to 0.7% only. This 0.7% is very shocking figure in compare with 11% that you might be using to evaluate this investment option. So inflation and taxes play vital role to fix the real rate of return.

On a 10-year investment point of view if Rs10,000 invested today in bank deposits (yielding 0.4% post-tax, real rate of return) it would be worth Rs10,722 whereas the same amount invested in an income mutual fund is likely to be 38% higher at Rs14,802. Presumably, this should compensate you for the slightly higher risk to which your investment is exposed. (To understand more about the impact of compounding returns on investments

The above example  that inflation and taxes are important factors to consider while evaluating investment returns and how a little more attention to your investment decisions can result in a significant improvement in your financial health. To understand the approach and benefits of financial planning more....keep reading my blog. I will put my best effort to bring more useful  information  about investment and financial planning.

Regards,

Arvind Trivedi