Financial Advisor

Thursday, July 31, 2014

Do not ignore debt mutual fund..!!!

Are you ignoring debt mutual fund at this moment…??

In these days most of the market expert and economist are very bullish on equity for investment. We are reading the news paper and watching business channel and the majority of people (including expert and common person) express the hope of rosy days. Everyone hope for better days (Achhe Din). I am also not against it. After all UPA govt mess, we the citizen of India have chosen the full majority government and hope for some good action in each front including economy, internal security, defense, foreign policy, social sector etc.

If we analyze, we will find that UPA-2 was worst than UPA-1. Increasing inflation, increasing fiscal deficit, higher interest rate has translated into the poor manufacturing growth, unemployment, and bad shape of economy. The slow decision making on many key issue has added the problem more and our GDP has reduced to almost 4.5% at the end of UPA-2 government.

After September, 2013 the announcement of PM candidate Mr. Narendra Modi from BJP, equity market has shown spectacular performance and it has been continued throughout election campaign till the budget which has presented by the newly elected government. Now the big question is whether this rally would be continued till the next couple of the year in the same manner or not. Mutual fund house, stock broker and equity market participants are still very bullish and positive about the share market performance in the next one or two year.

After analyzing all the above past events, I have come with some key points for the investors which every investor should keep in mind before investment at the present scenario.

Do not expect or hope and magic from the new government in near term. This government has good intention and capacity to bring the economy on the right track but for this you will have to wait. Keep in your mind, there are no magic stick for economic reform. The government will take time like 2-3 years to repair the economy after that there may be come positive results.

I always say and write in my previous articles that equity investment is the best option for long term investment but for short term it will always volatile. So please do not enter in this market for some short term gain. There is always risk in the market in short term performance.

Do not try to time the equity market, you will lose the money in majority of the time. According to AMFI data, last year in June 2013 there was huge inflow in debt market and the inflow was very poor in equity market. Everyone can see the performances from last June to this June, equity asset class has outperformed to every available asset class. It means majority of speculator and market timer was wrong at the time of last June 2013.

We are seeing the same trend at this moment after the big market rally, now the inflow of fund has increased many folds in equity segment in compare with the inflow of last year at the same period and inflow has reduced surprisingly in the debt mutual funds. Here, you can see the very clear trend that majority of investor only try to time the market and want to make money in the short term.

In my suggestion, stick with your financial plan and keep investing in both assets equity and debt accordingly. Equity will always outperform to all the asset class in the long term. Do not ignore debt asset class at the present scenario. Do your proper asset allocation and avoid overweight towards any asset class particularly equity.

It seems, I should stop at this moment as the article has become lengthy already. We will discuss more in next articles.

If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Tuesday, July 15, 2014

Budget hit Debt Mutual Fund Market

Budget hit Debt Mutual fund Market

In this budget, the debt oriented mutual fund has got tax shock by finance minister. In his budget proposal the finance minister has proposed to raise long term capital gain to 20% from 10%. The long term investment period has been defined 36 months now for non equity mutual funds or debt mutual funds. Before budget, the long term period was 12 months. Stunned by changing in tax rule for non equity funds, the fund houses has deferred their forthcoming issues and even some fund houses have returned the money to the investors which they had collected last week.

While interest income on fix deposit is taxable as per tax slab, returns from debt funds were taxed at 10% if hold more than 1 year. Now, returns from FMPs and other non equity mutual funds held for less than 3 year will be taxed as normal tax slab applicable to the investors.

The worst thing is that according to finance minister statement, it would be implemented from 1st April, 2014. For example, if one investor who is in 30% tax slab and invested in 1 or 2 year FMPs or in debt mutual funds with 10% tax in mind. Now he will be paid 30% tax instead of 10% if the 1-2 year FMP matured after 2014. One or two year FMPs schemes have got worst affected.

Now the fund houses and 1-2 years debt fund investor are looking towards government for some relief statements.

If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Sunday, March 30, 2014

How to get benefit from interest rate cut?

How to get benefit from interest rate cut?

These types of questions commonly asked and discussed in the investors or fund managers forums. What should you do in current scenario when majority of analyst expect rate cut within a year as government’s fiscal deficit number and Indian rupee dollar exchange rate also improving. We have already seen rupee dollar exchange rate around 60 and expected even below from current 60.

As a gilt fund are most interest rate sensitive so to take advantage from interest rate cut investor should go with these types of fund. Although it is tough to predict when rate cut will happen so there may be some wild moment happen in NAV of these types of fund. But if you have time horizon around 2 year you should definitely go with long duration fund to take advantage of interest rate fall. There are chances of double digit return from the long duration fund.

For example, if fund’s yield to maturity (YTM) is 10% and modified duration is 3 year. In this case if interest rate cut by 100 bps point then the total return would be (YTM+Modified Duration) 13% and if interest rate go up by 100 bps then the return would be 7%. If the interest rate remain unchanged, in that case investor earn around 10%. The return is totally depend on interest rate movement.

Many fund house like Franklin Templeton, Birla Sunlife, IDFC, HDFC etc. offering very attractive debt funds. Investor should have the patience to wait for the rate cut. For those who do not have risk appetite and cannot wait for one and half or 2 year, those investor should invest in short term bond fund.

If you have more than one year time horizon and do not want take any risk in that case you should go with FMPs (Fixed Maturity Plan) as it give indexation benefit also.

For all our investors and readers Happy Navratri, Happy Nav Vikrami Samvat and Happy Gudi Padwa. I wish for all of you happy and prosperous life. If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Monday, March 24, 2014

Debt Investment: Part 2

Debt Investment: Part 2

We are discussing about investment asset classes in these days. In the last blog we had discussed about debt investment. In today’s article, we are going to talk about debt investment products and its suitability. In our country, the awareness about debt mark is not as wide. Some debt investment avenue we are going to discuss below:

Government Securities:

It is issued by the government of India through RBI for borrowing from the public to meet various spending. In simple term government take loan from public and return that loan on fix date with fix interest rate. It is the safest product in debt category for capital protection and return. It is also known as gilt securities. Gilt securities include all government bonds, T-bills, state and central govt run instruments.

Post office saving schemes:

It is very famous among the investors as some of post office saving schemes gives saving option and tax benefit both through various schemes. It comes with different investment tenure and return rate. It provides safe investment opportunity to the investors. It is the one of the largest saving vehicle for the investors.

Public Provident Funds (PPF):

PPF is also a saving tool for wealth accumulation in long term. It come with 15 year lock in period and provide fix rate of compounding interest. The rate of interest announce by the govt every year. The investment in PPF and return from PPF both are tax free. The tax saving investment limit in PPF at present is Rs 1 lakh. Many banks are providing PPF facility in these days.

Debt Mutual Fund:

Investor can access debt market’s benefit investing in debt mutual fund. By investing in debt mutual funds investor get the benefit of various type of investment as debt mutual fund deploy their money in various government securities, corporate debt, bank securities etc. The main aim of these mutual fund are to provide capital protection with income generation. It comes with different maturity period so according to the need investor choose schemes very carefully.

Bank fixed Deposits:

It is traditional investment avenue for the investors in our country and is very popular among the investors. It comes with different maturity period. Rate of return on these fix deposits are taxable. Its post tax return is even not able to beat inflation but it is still popular as investors have a lot of trust in bank for capital protection. Keep in mind, fixed deposits upto Rs 1 lakh are covered under DICGC (Deposit Insurance and Credit Guarantee Corporation).

Corporate deposits, bonds and debentures:

Many corporate issues bonds, debentures for raising the money and offer a fixed rate of return. These types of investments carry credit and interest rate risk. Many credit agency issue the rating of these types of schemes. Understand all aspects like rating, tenure and return before investment in these types of schemes.

Its Suitability:

It is very good for those investors who prefer capital protection than return. It is less volatile than equity. It is safe bet for conservative investors. It is ideal investment for those whose goal approaching near. Those who needs regular income flow it is good investment for them. Before investment in debt securities, first assess your time horizon and then invest accordingly. There are wide ranges of debt products offer depending on your investment time horizon.

It is very vast subject and we cannot cover it in one article. If you want more information regarding debt investment or you have any other query related investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Saturday, March 22, 2014

Debt Investment : Part 1

Debt Investment : Part 1

We have discussed about equity as asset class in details our previous blogs. Now we are moving towards debt investment. Debt means loan. It means borrower have obligation to return money with interest to lenders.

In debt market investor invest money as a loan with issuer at a predefined coupon rate. Issuer may be any institution, banks, government, public sector companies, private companies. Coupon rate is nothing but interest rate which issuer pays to the investors at predefined regular interval.

Advantage and disadvantage of debt investment:

It is less volatile than equity market. Conservative investors invest in debt market for safety of principal amount. They feel more comfortable in debt compare with equity investment.

In debt investment, investors get regular cash flow in the form of coupon which is predefined. Investors get coupon income at regular interval.

It works on interest rate moment. The bond prices increase when interest rate goes down and investor can take advantage of capital appreciation.

The return on debt investment is fixed. That is the reason investors feel more comfortable in this investment.

However, it has less risk than equity but it gives low return and merely beat inflation. In majority of debt investment post tax return even not able to beat inflation.

It is low risk and low return investment and retail investor cannot direct participate in the debt market. They participate in the debt market through bonds, debt mutual fund and PPF etc. Right price discovery is also problem in debt market.

Debt investment has interest rate risk and credit risk also. We will discuss further about these risks in our further blogs.

We will discuss in our next blog about the various available debt avenues and its suitability to the investors. If you want more information regarding debt investment or you have any other query related investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Saturday, February 15, 2014

Are you paying 30% tax on Bank FD…?

I have seen since my childhood that majority of us feel very comfortable invest in bank fixed deposit. Either you educated or illiterate most of us assume that bank FD is safest and the best instrument for investment. If you are in 20% or 30% tax bracket, you have to pay tax according to your tax slab on your earned interest income from FD. There are many fixed maturity plans (FMPs) available which are safe compare with equity market investment and you can also save a huge amount of tax or many times pay nil tax. When you invest in debt funds and hold it more than one year you have two choices to pay the long term capital gain. Either pay flat 0% on capital gain or pay 20% using indexation method. Let us take a simple example for better understanding.

Bank FD investment:

Mr A has deposited Rs 1 lakh in bank FD for one year and earn interest Rs 9,000 at the rate of 9%. If Mr A is in 30% tax slab then the tax liability is Rs 2700. In means after post tax his real gain only Rs 6300. In reality, Mr A has earned after paying tax only 6.3% on his bank FD investment which even does not cover inflation also.

FMP investment:

Mr B has invested Rs 1 lakh in 365 days FMP in Feb 204. After one year Mr B would earn around 9.5%. It means Mr B would earn Rs 9,500 after one year on his Rs 1 lakh investment. Now Mr B has two options to pay the tax, either pay flat 10% on capital gain or use indexation tax benefit method and pay 20% on gain.

If calculate according to flat 10% method Mr B would pay Rs 950 tax. Before calculate tax according to indexation tax benefit, first understand about it.

What is Indexation Tax Benefit Method ?

The government of India announces a number called the cost inflation index (CII) every year. It represents the inflation movement of our country. We adjust our investment value according to this CII index. The CII for the year 2013-14 is 939 and expected CII index for 2014-5 would be 1,005 if assuming inflation 7%. The formula of obtaining the inflation adjusted value is as given below:

Inflation adjusted value = Invested Amount X (CII at the time of sale/ CII at the time of purchase)

Inflation adjusted investment value = 1,00,000 X (1,005/939) = 1,07,028

Net capital gain : 1,09,500 - 1,07,028 = 2,472

Tax Payable: 2,472 X 20% = 495

So Mr B have two choices either he can pay Rs 950 according to flat tax calculation method or pay Rs 495 according to inflation indexation method. Obviously Mr B would like to pay tax Rs 495. So the real gain after tax would be1,09,005 (1,09,500 – 495).

If Mr B uses Indexation tax method then after post tax return would be 9.05% whereas in the case of bank FD Mr A’s after tax return would be 6.3%.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Tuesday, March 19, 2013

Systematic Withdrawal Plan

SWP (Systematic Withdrawal Plan)

Many of you have must hear about SWP (Systematic Withdrawal Plan). You can implement it in many ways. If you have sizable amount of sum for invest and want to invest in equity capital appreciation for long term but you are not sure about market in short and medium term. You can invest your sum in debt mutual fund and through SWP you can keep SIP in equity mutual fund.

Before understand use of SWP for retirement planning let us first understand about annuity. Annuity schemes are often aggressively promoted by life insurance companies. In annuities plan people receive a fixed sum per month over a period of time against lump-sum investment.

The yield of these annuity plan issued by life insurance companies hardly 7% and post tax it reduces further. You can apply SWP in smarter way in debt mutual fund for your post retirement income. For this you should invest lump-sum amount in debt schemes of mutual funds after consulting qualified certified financial planner. Use SWP facility to get a fix sum every month on specified date. In pre specified date you will get credit pre specified amount in your bank account.

If you compare it with life insurance promoted annuity scheme you will get much better return to apply SWP in mutual fund debt schemes.

For more detail about SWP or if you have any other query related investment you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

Tuesday, October 23, 2012

Balance Mutual Fund

Balance Mutual Fund: Better investment avenue for beginner

Often first time investors are very much confused for investment in mutual fund. A lot of query came across to me that which mutual fund is good for investment. In this year union budget a new scheme also introduced by government called Rajiv Gandhi Equity Saving Scheme. Now it has also included ETF fund also. While the details of the proposed scheme are still sketchy, it has caught the attention of non-equity investors. In my opinion there is also a good investment option available for new investor. For beginner, balanced mutual funds are safe option compared with pure equity fund. It is much safer and offer decent return in bad market condition also.

Balance mutual funds that invest both in fixed income instruments and equity to strike a balance between risk and return. In our country usually, such funds invest at least 65 per cent of the corpus in equity, while the rest of corpus is in debt. The allocation to equity and debt may vary across funds depending on the prevailing market condition. For instance, if the fund manager believes that the outlook for the equity markets is bright, he may allocate more resources to it. The onus is on the fund manager, not the investor, to decide on the optimum mix of assets. Balanced fund can provide you with the perfect portfolio diversification without having to invest in multiple funds.

As it do not invest all the money in equity, they are less risky and volatile than pure equity funds. This conservative approach helps balanced funds deliver steady returns to investors across each market scenario. If you do not have much high risk appetite but still some risk want t o take then you should consider a balanced fund.

If your investment horizon is short to medium term or 3 to 5 year it is ideal investment vehicle to help you meet your critical financial goals and also offer the stable return without worrying about market risk. Investment through Systematic Investment Plan (SIP) in these schemes will help you to safely build a sizeable corpus over 3-5 years and meet your financial targets in very smooth way. Investing in these funds also give you hassle free portfolio rebalancing automatically.

In the point of view of taxation, the balanced funds that invest at least 65 per cent in equity are treated at par with equity investments and attract no tax liability on capital gains if held for more than a year. The debt-oriented funds come under the debt fund category, where capital gains are taxable. Therefore it makes sense for you to invest in balanced funds for 3-5 years towards a particular goal, if you are new to the equity market and still want to the benefit of market.

If you have any query regarding investment please feel free to ask.

Regards,

Arvind Trivedi

Certified Financial Planner