Author: Ram Hegde

Nawanidhi Financial Services > Articles by: Ram Hegde

Debt mutual fund investments in current economic situation

Posted on by Ram Hegde

Many investors have started asking questions to continue in debt funds after the recent trouble in several debt MFs lead by Franklin. In last 1 year about 22 companies held by mutual funds defaulted. IL & FS,DHFL, Reliance ADAG and yes bank contributed to bulk of these defaults. Credit Risk funds & Medium Duration funds were the major ones to take this hit. In select cases even Short term & liquid funds gave negative returns.

Does this mean you should stop investing / withdraw from  debt funds? 

No, there are plenty of opportunities in debt funds if the categories and schemes are chosen carefully.

Not All debt funds are bad. There are total of 16 debt fund categories and it requires careful consideration over which debt fund category suits you.

Let’s focus on select debt fund categories that have good potential to meet or beat the bank FD returns at relatively less risk.

1.Corporate Bond Funds: You may notice, of all debt fund categories, only Corporate Bond Funds have a mandate on high credit rating . In corporate bond funds, more than 80 per cent of the portfolio has to be invested in securities rated AA+ / AAA. All other debt fund categories need not necessarily maintain high % of AAA securities &  it is open to what is mentioned in the AMC scheme documents , namely Scheme Information Document (SID) and the AMC fund manager’s decision. Less than 1% of securities have negative outlook in this category. Also, majority of the funds in this category are currently giving returns well above bank FD’s.

2.Banking & PSU Funds: These funds have a minimum 80% investment in debt instruments of banks, Public Sector Undertakings, and Public Financial Institutions. These are relatively safer and returns are likely to be above bank FD’s as less than 2% of the securities held by them have negative outlook.

3.Liquid & Overnight Funds: Overnight securities have maturity of 1 day & liquid funds upto 91 days. Returns on these funds tend to fluctuate less when compared with other funds. These are the safest among all debt funds. However, the returns are likely to be in line with your savings bank account. If you don’t have an account in a bank that does not give a  return of about 5% then you may consider this category, for parking your money for a very time. You may also consider Liquid/Overnight MF’s that offer instant redemption to serve your emergency needs better and choose funds that have overall high Tbill percentage.

4.GILT Funds : Multiple rate cuts by RBI in last 6 months led to a steep fall in bond yields .This in turn gave a big boost to the NAVs of long-term debt funds, such as GILT funds. Hence, majority of GILT funds have given about 16% returns in last 1 year.

Those who assume they have invested in safe govt bonds would be shocked to see that returns on the GILT funds can swing plus or minus 5% within a span of 2 weeks.

However, long-term SIPs in gilt funds have been quite productive in the past and have given good returns. You should expect returns inline with current YTM of the GILT MF.

Also, returns through tactical allocation based on 6 & 12 months moving average, of bond PE has beaten the SIP approach.

Its very important to take help of a Financial advisor while making ANY investments in GILT funds as they are more difficult to understand.

Diversification is the essence of your debt portfolio management. It is advisable to diversify your debt portfolio across different categories of debt MF’s based on your risk profile, liquidity needs &  investment horizon. While choosing the debt MF our suggestion is to choose funds that have100% AAA rated papers &  Sovereign/ RBI Bonds from Govt of India, until overall economic situation improves further.


Its very important to understand the investment philosophy, read scheme related document carefully and periodically go over the holdings of the debt mutual funds.

Demystifying Debt Mutual Funds

Posted on by Ram Hegde

Debt MF’s invest your money in Commercial papers, NCD’s, CD’s and other market securities. It is like someone investing in Fixed instruments/FD on behalf of you. By definition debt MF’s are designed to provide regular income generation in a relatively more stable manner as compared to equity-oriented funds when you choose correct MF’s fitting your Risk Profile

Debt MF’s are tax efficient as compared to bank FD’s. When held over 3 years or more they have indexation benefits. The overall tax that you would pay for the debt MF will be less than the bank FD’s.The returns in Debt Mf’s can be much higher than the bank FD when chosen correctly.

Unlike Equity MF’s debt MF’s are complex and there are about 16 categories of Debt MF’s of varying themes, maturity duration and risks The, returns offered by the debt MF’s vary mainly depending on type & duration of Mutual funds

You may notice out of the sixteen debt fund categories, only Corporate Bond & Credit Risk Funds have a mandate on credit rating [Quality of MF investments]. In corporate bond funds, more than 80 per cent of the portfolio has to be invested in securities rated AA+ / AAA & for credit risk funds, 65 per cent or more has to be in less quality papers i.e rated AA and below. All other debt fund categories, it is open to what is mentioned in the AMC scheme documents , namely Scheme Information Document (SID) and the AMC fund manager’s decision.

Debt Mutual funds are subjected to multiple risks such as Credit ,Interest & on few occasions Liquidity Risks.Any default or change in in the underlying investment rating affects the performance of the MF. Change in Repo rates by RBI [typically once in a quarter] impacts the MF returns.At times due to abnormal outflow in a MF leads to Liquidity crisis ( Recent Franklin issue) as the AMC will find it difficult to sell the underlying low rated papers.

Many of the ratings on popular sites tend to give more importance to the past performance & less value to the underlying quality of investments.These ratings are very generic & it is important to choose a mutual fund that fits your Goals, Risk profile & Investment duration.Choosing solely based on past Performance & Ratings may not be a wise decision in a long run

If you are interested to know suitability of a debt MF to your investment portfolio or require in depth review of your portfolio or require any services of a Financial Advisor to do feel free to contact us @

www.nawanidhi.com |  nawanidhif@gmail.com or info@nawanidhi.com

9820418134 | 9845818270

Term Insurance v/s Endowment Plan

Posted on by Ram Hegde

Majority of the people in India take Endowment plans mainly due to the lack of their knowledge or they are trapped by the agents with promise of “guaranteed return”.

Endowment plan is one of the most mis sold product. It is generally sold in multiple “emotional” forms such as children education, retirement, tax saving investment, money back plan, dual benefit plan etc. You will seldom come across an agent selling you a term plan.

  Term Insurance

Endowment


1.Protection offered till
what period?

Limited period as per your policy term
Limited period as per your policy

2.Do you receive money after
maturity?
 No
Yes


3.Is it an investment ?


No, Only life cover
Yes


4.Premium Amount


Less expensive
More Expensive


5.Premium paid for an Insurance cover of Rs.1 Crore by a 30 Year
old for 30 years period


Insurance is cheap. A non-smoker man needs to pay about Rs.9500 annually


Insurance component is very
expensive. He needs to invest of around Rs.1 lakh annually



6.Insurance for about Rs.20,000
premium paid annually by a 30 Year old, 30 years period




You can get sum assured of about Rs 2 crore+




You can ONLY get a sum assured of around Rs.16 lakh





7.Is it linked to market returns?


No

Yes, ULIP’s


8.Any bonus offered?


No

Yes. Varies across companies


9.Surrender Value



No



Yes. Depends after how many years after the policy is surrendered.


10.Section 80C tax benefit on the premium paid


Yes


Yes


11.Is the return taxable?


Not applicable


Yes, 1/3 of lumpsum received is not taxable

12.Are the returns good?



NA, no returns are offered




Effective returns are low, typically 5% to 6.5%


Both term plans and endowment plans offer multiple rider options. Though you will have to pay extra premiums to buy these extras, the benefits offered by them are good.  There are some riders that are available only with term plans, while some are available only with endowment plans. Some of the extras include critical illness rider, accidental death benefit rider, hospital cash rider, premium waiver rider etc. Life insurance plans are good tax-saving instruments. All the premiums you pay under a term plan are exempt from income tax deductions as per section 80C. The sum assured you receive are non-taxable under section 10(10D) of the income tax Act, 1961. Therefore, income tax exemptions are higher in endowment plans as compared to term plans.

Recommendation:

If your family is financially dependent on you, it becomes mandatory for you to have a term insurance plan. This is because in an event of death of the breadwinner of the family, the nominee will receive large sum assured depending on the chosen plan. Whereas in case of endowment/money back plan your dependents will receive only about 10 times the annual premium paid by you.

If your aim is wealth creation, then avoid endowment plans at all costs and stick to investments in Mutual Funds & Equity with option to enter & exit at your will. If you are a conservative investor you can explore options such as PPF, VPF & Sukanya Samriddhi Yojana (if you have girl child) etc in addition to a term insurance.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency. Consult your trusted financial adviser for further details.

Time Value of Money

Posted on by Ram Hegde

A common question that many of us have is “How much money I need to accumulate for a future goal?”

For the sake of understanding, lets plan for your child’s graduation. Let us assume that it costs Rs 30 lakh as of today. Next, let us assume 15 years are left for your child to join the graduation course.

Now, we need to find out how much will the course cost (which costs Rs 30 lakh today) after 15 years. That means we will have to find out how inflation will impact the course fee in 15 years. In this case you would need to accumulate ~Rs.72 lakh assuming 6% inflation.

The money that is available NOW is worth more than the same amount in the future, due to its potential earning capacity. This is called Time value of money.

When committing for a long-term investment it is very important to remember this aspect.

Do not make the mistake of thinking “Anyway, I am investing only Rs.20,000 per year, but I will get Rs.75 Lakh by the end of 30 years “. Get down to the basics & decide the future value first and then check the net returns a product would offer, else you may always take services of a trusted financial adviser.

Do you want to retire in your 40s?

Posted on by Ram Hegde

Early retirement is a dream for many, especially those who are in their mid 30s.

I have heard people repeatedly talking about quitting their current job & starting farming, poultry, dairy business, taking up some dealership business, setting up a food van etc; primarily to pursue their passion.

Almost all of them seem to be fed up with Corporate BS & 996 culture. Some genuinely forgot how to code, after being in Management for very long. Yet many of them are hanging on dearly to their job, that they don’t like anymore.

Very few could muster up enough courage, to really jump out of their jobs that they did not enjoy;

But why so many people are unable to retire early?

Here are possible reasons

1. Majority do not have enough. They did not spend enough time, in investing prudently. Almost all of their earning is taking rest in bank FD’s, while inflation is eroding their wealth.

2.Few of them have health scare.Its quite normal to find a diabetic in their 30s these days.

3.Many of them are worried about raising education expenses & some believe in accumulating for the marriage of their children.

4.Few of them going through adverse family situations such as divorce or large family to take care of or dependent parents.

5.Few of them are stuck with EMI’s /Loans; especially with real estate investments. Some of them are stuck with bad debt.

6.Many of them have invested in stocks / mutual funds /ULIPS/Endowment Plans based on star rating on popular finance portals & by “agents”

7.Few of them tried riding on their colleague’s investment strategy, without understanding their financial situation, goals & risk appetite.

8.Many of them don’t know how much saving is enough; Primarily scared of the unknown.

9.Of course, there are a few smart ones, who have invested prudently and accumulated enough wealth, but can’t stomach the idea of their new retirement status in society. Some of them can’t live without being in power and others do not know what to do next, as they don’t have any alternate plans.

From my personal experience, you don’t need to win a lottery or have a big inheritance or get a fat VRS cheque. You just have to be smart and disciplined with your money. You should be willing to put your journey to financial independence on fast track. If you have means of secondary income it will be a lot easier.

As long as you are not of Type 9 (as above) we can always assist you towards early financial independence.

Do get in touch with us.

MAKE REST OF YOUR LIFE BEST OF YOUR LIFE

Posted on by Ram Hegde

When you decide to retire, your retirement corpus should be large enough, to generate an inflation-protected income, for the rest of your life.

People who have reached financial independence can make it look easy. It is not so easy as it sounds like. It takes commitment and perseverance. The people who are the most successful at it, have compelling reasons for why they want it that way.

Having experienced myself, following are the 3 most important factors you should focus.

1. Save More

The key to retiring early is to start saving early, and to save a high proportion of your income. Later you start, the amount you have to save increases.

Even with common sense prevailing over spending, many people succumb to what is called, lifestyle inflation. The more money they make, the more money they spend, and their saving continues to remain the same/nil.

People often get into trouble with saving, thinking they have to stop everything they love, which is not true. Find a level of living that you’re comfortable with and then work on earning more without increasing your expenses.

Cut services you don’t use , free up more money for investments by cutting services you pay for but don’t use often. Analyze & take out all un necessary monthly expenses and turn them into monthly savings.

Don’t fall into social trap, your colleague buying a Duke to impress his girlfriend should not be a reason for you to buy the same.

Taxes can erode your savings, so it’s important to invest in a tax-efficient way. This means that you want to save into investments that can help your money grow tax-free, such as PPF /VPF/ELSS/NPS  etc.  

Prioritize rightly, many people make a mistake of buying a house by entering at a wrong price point. Evaluate your options of Renting v/s Buying a house. Anything more than 15 times the yearly rental value won’t make much sense to buy a house.

If you’re lucky enough to get a bonus at work, consider saving that immediately. If it’s not the money that you’re used to spending, then it will be easier for you to increase your savings rate without feeling any pain.

2. Earn More

In order to earn the kind of money where you can live on only half or less of your salary you need to focus on your career.

If you don’t work on your career pro-actively you are losing money big time

This career boosting exercise must start with analyzing future trends resulting in learning new technologies (AI, Machine Learning, Cloud , Security etc), new tools , earning advanced degrees & taking up certifications that will qualify you for higher paying positions.

Career in IT has become like the career of a Movie Star. Make the best use of it, when you are at your peak , especially during 30 to 40 years of age.

3. Invest More

Once you are in a right job, saving a high proportion of your income, you should focus on growing your money through compounding. You want to make sure your portfolio is well balanced, in line with your risk appetite & your future goals.

Majority of the people end up saving their money in Bank FD’s or Real Estate or investing in MF funds based on their star ratings on popular sites.

Majority of people that I worked with, don’t consider Insurance, especially health insurance as a must in their portfolio. They are contended with the health coverage (2L to 4L) provided by their company.

What if, you are fired from your job or your company closes or you are unable to continue, due to health/family issues and unable to find another job in time?

Medical expenses drain your savings faster than anticipated as it is expensive. Almost, all the Health insurance companies in India cover pre existing diseases from 2 to 4 year onwards. Some common diseases are not even covered in first 2 to 3 years. Some insurance companies don’t even give you health insurance if you are diabatic. Are you prepared for this?

There are all kinds of plans and investment options out there. Don’t sit back and not be informed. Engage with a trusted financial advisor so that you can understand what’s out there Or what are some gaps in your planning to be able to protect yourself and your family

Do get in touch with us if you need further assistance.

Investment Options For Senior Citizens

Posted on by Ram Hegde

1.Senior Citizen Savings Scheme

The Senior Citizen Savings Scheme enables you to invest a minimum Rs.500 to Rs.15 lakh maximum during your lifetime.

Currently, (July 1 to September 30, 2019) the interest rate on SCSS is 8.6% per year, payable quarterly.

It can be invested as soon you as you retire at the age of 58 years. However, it has its limitations as it cannot be availed for more than five years with one option to extend upto 3 years

It is a very safe investment option as it is from Govt of India

Investment qualifies for deduction under Section 80C of the Income-tax (I-T) Act. However, this tax benefit is under the overall current ceiling of Rs. 1.5 lakh per annum fixed for all investments under Section 80C. The interest received under this scheme is taxable in the hands of the depositors

It can be opened in Post offices and some of the SBI branches

2.Pradhan Mantri Vaya Vandana Yojana (PMVVY)

This investment has a tenure of 10 years and comes with a fixed return.

This can be done only through LIC of India, and the investment can be done either offline or online from LIC website.

PMVVY is available up to 31st March 2020.

The scheme can be purchased by payment of a lump sum called the ‘Purchase Price’. The pensioner has an option to choose either the amount of pension or the Purchase Price. The minimum and maximum Purchase Price are Rs. 1,44,578 and Rs. 14,45,783 for yearly pension, correspondingly providing an annual pension of Rs 12,000 and Rs 1.2 lakh respectively.

The pension rates for Rs.1000 of Purchase Price for yearly pension payment is Rs 83.00 per annum that makes PMVVY offer an annual return of 8.3 per cent. Considering falling interest rates, PMVVY can definitely be explored by senior citizens to invest a portion of their savings in it.

3.Post Office Monthly Income Scheme

This is the best savings scheme that enables you to deposit a maximum of Rs.4.5 lakh for single ownership and up to Rs.9 lakh for joint accounts.

This monthly income scheme in India offers you an interest rate up to 7.6% per year.

This option provides steady and safe returns unaffected by market forces.

It also has provision to transfer the returns directly into your savings account for ease of use.

This again has a maturity period of 5 years

4. Debt funds

Since these are mutual funds that focus on fixed income investments, they are considered safer

Long-term debt funds can offer you a higher value depending on the RBI Rate changes, market conditions & overall economy

They rank high in return on investment and provide you returns that can go as high as 15% per year.

They also offer high liquidity, though you may need to pay a charge for withdrawal before the minimum investment term.

For less than 3 years they are treated similar to bank FD’s i.e taxable as per the individual tax slab. However, if you hold more than 3 years, they are taxed at 20% after availing indexation benefit.

5.Tax-free Bonds

These are bonds that are issued by the government time to time to raise money

The interest returns are guaranteed and absolutely tax-free. There is no risk on your principal.

The tenor for these bonds can go from 10 years to 30 years, depending on the nature of the bond

The interest rate for these bonds usually range from 6% to 7.5% per year and these are currently on the decline owing to falling interest rates in the economy. Its good to buy them on the raising interest cycles.

These are offered by various government organizations such as Indian Railways Finance Corporation, Housing and Development Corporation, NTPC limited etc.

The maximum amount that can be invested is up to Rs.10 lakh.

However, these bonds do not offer flexible investment terms like FDs and the returns are not very lucrative when the economy is on a slow down.

6.Senior Citizen Fixed Deposits

The FD interest rates in most banks for senior citizens are higher than the regular rates by 0.25 % to 0.5%

These deposits have a flexible tenor ranging from 12 months to 120 months

This option is safe and free from market variables; however, the maximum amount insured is for Rs.1 L in the event of bank shutting down. One should restrict to public sector Banks or the top 3 private banks only.

A non-cumulative option is great for senior citizens as it helps them gain periodic interest payments (monthly, quarterly, or half yearly payout). They can use these payouts to meet regular expenses and for various other investments.

7. Company fixed deposits

Company or corporate fixed deposits are also popular amongst senior citizens who are willing to take slightly more risk. Currently, some FDs from NBFC’s such as Mahindra Finance FD or HDFC Ltd or Bajaj Finance FDs offer better interest rates on their fixed deposits in comparison to the banks.

It is important for seniors not go overboard and invest a sizable portion in them as they are relatively riskier than bank FDs. It is advisable to invest in a shorter term & to invest in highly reputed companies only.

 

Interest earned in your Employee Provident Fund (EPF) account is taxable, when there is no further EPF contribution (e.g Post Retirement or after leaving your job or self-employment)

Posted on by Ram Hegde

Majority of salaried individuals contribute 12% of their salary to Employee Provident Fund (EPF) account, and their employer matches their contribution. In addition, employees can voluntarily contribute up to 100% of their basic salary to the same EPF Account using VPF route. The overall contributions made to EPF account compounds, at a rate declared by the Employees’ Provident Fund Organization (EPFO) every year and this can be substantial amount for some.

Some of those who are just retired on attaining age of 58 years or those who are not working now or taken up employment with no EPF contribution/benefits , may not always withdraw the accumulated amount from the EPF account immediately. There can be various reasons why people do so, one such reason is EPF is safer than a bank & also on most occasions earns higher interest rates (8.65% for FY 18-19)

However, this amount remains a liability for the EPF Organization towards the account holder. To discourage provident fund subscribers from neglecting their EPF accounts, especially the ones in which no contributions are being made at all, in 2011 the EPFO stopped paying interest on accounts that had been inoperative for more than three years, or 36 months. But in 2016, the rule changed and the EPFO said that inoperative accounts will also earn interest till the account holder turns 58. But after the retirement of the account holder, the EPFO will not pay interest as the account becomes inoperative. However, there was an ambiguity about the taxability on interest earned on EPF balance post retirement.

In this context, a few years ago, a case was filed by Dileep Ranjekar (Ex.Wipro employee) at Income Tax Appellate Tribunal, Bangalore. Ranjekar  didn’t withdraw his EPF corpus for about nine years after retirement. Believing that the EPF corpus is tax free on withdrawal. He also reportedly did not declare it in his income tax return or pay any tax in the year he withdrew the funds or anytime after his retirement.

However, after scrutiny of his ITR by income tax department, the interest earned on entire EPF corpus after his retirement was added to his income by assessing officer, and Ranjekar was asked to pay tax on the whole amount. Ranjekar filed an appeal against the order with commissioner of income tax, and reportedly got the result in his favor. However, the I-T department escalated the matter and filed an appeal with the IT tribunal. In its decision, tribunal stated that interest earned before retirement will not get taxed irrespective of when it is withdrawn after retirement, but any interest earned post retirement will be taxable in the hands of the account holder. This is because the exemption is available only to an employee. Once an individual leaves their job or retires, he or she does not remain an employee; hence, any interest earned during this period attracts tax.

If you plan to retain the EPF corpus, when there is no contribution to the EPF account or on attaining 58 years, you should start including such interest under “income from other sources” in the ITR. This way you may pay tax as per the prevailing year’s tax slab instead of likely maximum tax slab later.