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The Indian rupee has been depreciating against the US dollar since 1966, and Here we shall look at some of the reasons why the Indian Rupee (INR) has been depreciating against the US Dollar (USD). The INR is now close to the 70/USD level.

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Was Re. 1 worth Us Dollar 1 in 1947?

It’s a myth that INR 1 was worth USD 1 when India gained her independence on August 15, 1947. Before the USD became the standard global currency, we measured the INR against the British Pound. The INR was devalued in 1966 and pegged to the USD. In 1966, USD 1 was equal to INR 4.76, and after the devaluation, USD 1 was equivalent to INR 7.50.

Devaluation happened because India was facing her first big financial crisis. The crisis depleted her foreign currency reserves, and the INR became unacceptable overseas. India was unable to pay for imports and the only option left was to borrow money abroad.

In 1947, India was not engaged in trade and had no external borrowings, so it was not possible for INR 1 to be equal to USD 1. Besides, India had weak growth of 0.8% at that time, so it was not possible for the INR to have the same value as the USD.

Let’s take a closer look at the factors that have contributed to the depreciation of Indian Rupee against the US dollar:

Crude oil prices

The price of crude oil has always had a significant impact on the value of the INR against the USD. When the price of crude oil rises, the INR depreciates. In the same way, when crude prices decline, the INR appreciates because India imports around 80% of her crude oil and pays for those imports in USD.

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Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) can affect the value of the Indian Rupee. High FDI flows have given stability to the Indian Rupee. When foreign investors withdraw their money from India, there is significant demand for the US dollar. The value of the Indian Rupee falls, and this leads to even more selling.

Currency wars

A currency war occurs when countries try to boost exports by devaluing their currencies. Currency wars tend to harm all the nations that engage in them. However, when one country devalues its currency to make its exports cheaper, other countries are forced to retaliate.

Also Read:A guide to investing abroad through Liberalised Remittance Scheme (LRS)

The Dollar Index

The Dollar Index (DXY) is an index of the US dollar’s strength against a basket of hard currencies. It also measures the weakness of other currencies against the US dollar. The Indian Rupee moves in line with the other currencies against the US dollar. If the Dollar Index strengthens, the Indian Rupee weakens, and vice versa.

 The Fed’s monetary stance

The monetary stance of the Federal Reserve (Fed) of the US decides the future direction of interest rates. The Fed’s stance affects the course of action of global investors. If they can earn higher returns by investing in safe US bonds, there is no need for them to invest in risky emerging markets. When the Fed raises interest rates, the US dollar strengthens, and the Indian Rupee weakens.

Current account and balance of payments

 The current account of a country reflects its balance of trade and earnings on overseas investments. It reflects all the transactions, including imports, exports, and debt. A current account deficit occurs if a country spends more of its currency on imports than it earns from exports. Higher imports of crude oil, gold, products, raw materials, etc. can make the INR depreciate against the USD.

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Government debt

The central government’s debt is also known as the national debt, public debt, or government debt. A country with high government debt is less likely to attract foreign capital, resulting in inflation. Overseas investors will sell their bonds in the open market if government debt is expected to rise, causing a decline in the value of the currency.

Inflation rate

Changes in the rate of inflation can make the exchange rate go up or down. The currency of a country with a lower inflation rate is likely to appreciate. When inflation is low, the prices of goods and services go up at a slower pace. The currency of a country with consistently low inflation tends to appreciate.

Also Read: Interesting facts about Coinage and Currency notes in India

Interest rates

Inflation, interest rates, and forex rates are all interconnected. A change in the interest rate affects the value of the currency and the exchange rate. If the interest rate goes up, the currency appreciates. A higher interest rate gives greater returns to lenders, attracting more foreign capital and raising the exchange rate.

Political stability

Political stability and economic performance also impact the strength of the currency. A country with a lower risk of political turmoil will attract more foreign investors. Growing foreign capital flows make the value of the currency appreciate. If a country has sound trade and financial policies, there is more certainty about its currency.

Also Read:6 Factors that Affect Stock Prices in India

Recession

A country that is going through a recession is likely to have a falling interest rate, reducing its chances of attracting foreign capital. Its currency will weaken as compared to countries with stronger economic performance. Foreign investors tend to move their money to countries with better economic performance.

Speculation

If investors expect the currency of a country to appreciate, they buy more of it to make quick profits. The expectations of speculators can make the currency appreciate. The higher demand for the currency makes its value go up. Negative expectations can also cause a fall in its value.

Terms of trade

The “terms of trade” is the ratio of export prices to import prices. It is related to the balance of payments and current account. If export prices increase at a higher rate than import prices, the terms of trade of the country improve. Better terms of trade increase the revenue, causing more demand for the country’s currency and appreciation in its value.

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Conclusion

The Indian Rupee can depreciate against the US dollar due to a combination of local and global factors, and this trend may continue as India is a developing nation. The exchange rate can have a profound impact on the economy. The RBI targets a particular exchange rate, and it may choose to actively intervene in the market by buying or selling US dollars.

The post 13 Reasons for Indian Rupee Depreciation Against US Dollars appeared first on Mymoneysage Blog.

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Parents of a child with special needs have to make financial plans for two generations. They need to provide for their own needs and their child’s current and future needs. Planning is necessary for the period when they will not be there to provide guidance and support.

“As special needs parents you might not have the power to make life “fair,” but you do have the power to make life joyful.” And to do so, you need have your financial plan in place.

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Parents of a child with special needs have to make financial plans for two generations. They need to provide for their own needs and their child’s current and future needs. Planning is necessary for the period when they will not be there to provide guidance and support.

The cost of bringing up a child is high. Raising a special needs child requires an even more significant commitment. It isn’t easy to plan for the current and future financial needs of your special needs child.

Parents need to consider the cost of medication, therapy, specialized care, and education. They also need to keep the high inflation of health care costs in mind. Also, need to make a monthly budget that covers these costs. This budget will help them to make a financial plan for the child’s future needs.

Special needs kids may need help from a guardian who will help them to manage their affairs. Parents need to look for trusted people who will take care of their loved one when they are not there.

Raising a special needs child can be challenging, but it is also rewarding. It’s essential to ensure that parents enjoy a good and meaningful life. They need to seek support from friends and family members who care about them and their child.

Let’s take a closer look at things to consider while making a financial plan for your special needs child:

Also Read: Financial Planning for Single Woman

Create a support system for your special child

Kids with special needs may not be capable of taking financial decisions even when they become adults. Their parents need to make plans to ensure that they will get the guidance they need. They need to look for people who can manage the financial affairs of their kids without any selfish motive.

It’s essential to create a support system which will take care of your special child. Look for friends and relatives who can provide the guidance and care your child needs. Involve people who have the capability, time, and inclination to help from the beginning.

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Parents need to assess the type and extent of the child’s disability to see if the child will be capable of taking financial decisions in the future. This assessment is crucial because many special needs kids don’t understand financial matters.

They are not capable of taking financial decisions independently. If you think that your child will be able to take financial decisions, there will not be any need to appoint a guardian. Unfortunately, many children with mental disabilities need lifelong care.

Also Read:Financial Planning for the Self-employed

 Make a financial plan

Parents of special needs kids have to make realistic financial plans. They need to plan for their own financial needs as well as for their child’s current and future needs. They may have to hire caregivers for kids who will need lifelong care and may even have to arrange for a child care facility.

Lifelong care requires a significant amount of money. Parents of special kids need to plan for their retirement as well. They need to create an investment corpus that is big enough to achieve both of these goals. If the corpus is inadequate, they may have to work for more years, be more frugal, or look for other sources of income.

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Build a corpus to support your child

Build a corpus that is large enough to provide for the future needs of your loved one. Family members who are willing to support your child can contribute to the corpus.

It is best to start building an investment corpus as soon as you discover your child’s disability. The earlier you start, the more money you will accumulate. For long-term needs, invest more money in equities. For short-term requirements, put more money in debt.

Make a budget for your child’s monthly needs and estimate future needs after factoring in inflation. Determine the size of the corpus that you will need to provide for the child’s monthly expenses. Decide how much you need to invest now in building the corpus. You can also invest in real estate to get a regular rental income.

Also Read:Financial checklist when your child turns major

Arrange for adequate insurance

It may not be easy to get a health insurance policy for your special needs child. You can check to see if your employer’s health insurance policy will cover your child. Get adequate health insurance as well as critical illness cover for yourself to ensure that any medical emergency will not derail your plans.

Get term insurance while you are young to qualify for lower premiums. Personal accident insurance is also necessary to protect your loved one’s future. The sudden demise of a parent can endanger the child’s future if there isn’t enough money in the corpus.

Make a will and trust

You need to make a will and bequeath your assets and the corpus to the trust. Appoint a guardian who will provide guidance and support if you pass on while your child is a minor. The trust will manage and protect the assets for your child. Your savings and gifts received from family members and friends can go to the trust.

Set up the trust as soon as possible, even if you don’t have any money to put in it. Assign your life insurance to the trust and bequeath your estate to it. Seek professional legal advice to make your will and set up a trust.

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Conclusion

A financial plan will ensure the well being of your special needs child even when you are not there. You need to get adequate insurance and start building a corpus as soon as you discover your child’s disability. Build a support system of trusted family members and friends who are capable and willing to guide and support your child. Make a will and set up a trust without delay. The future well being of your special child depends on making the right arrangements at the right time.

The post 6 reasons to secure your Financial plan for kids with special needs | My Money Sage appeared first on Mymoneysage Blog.

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Sharia investments are also known as Halal investments. They encourage people to invest in a socially-responsible way according to Islamic principles. These investments have to follow a detailed set of Sharia requirements and rules.

Shariah investments or Sharia compliant investments follow the principles of Islamic law. They encourage people to invest in a socially responsible way. There is a lot of scope for Shariah-compliant mutual funds in India because many Muslims believe that it is wrong to give or take interest on loans.

Here we will look at the goals of Shariah investment and the different investment options in India.

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What are Sharia investments?

Sharia investments are also known as Halal investments. They encourage people to invest in a socially-responsible way according to Islamic principles. These investments have to follow a detailed set of Sharia requirements and rules. A considerable effort is necessary to ensure that investments follow Sharia principles.

Investments in gambling, alcohol, weapons, pork products, smoking, pornography, etc., are not permitted. A Sharia board ensures compliance with rules, and there is an annual Sharia audit. Certain types of income, like interest, must be purified through donations to charity.

Islam encourages investments, trade, and charity. It disapproves of receiving and giving interest, or Riba, which is considered to be exploitation. Shariah rules do not allow people to earn a fixed income, like interest. They also caution against too much speculation.

Anyone who believes in socially-responsible investing can invest in Sharia mutual funds. Unfortunately, there are very few Shariah-compliant mutual funds in India.

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At present, there are three Shariah-compliant mutual funds/ETFs in India:

  1. Reliance ETF ShariahBeES
  2. Taurus Ethical Fund
  3. Tata Ethical Fund

The Reliance ETF ShariahBeES is an exchange-traded fund (ETF). It invests in the Nifty 50 Sharia Index. The Taurus Ethical Fund and the Tata Ethical Fund are open-ended, actively-managed, multi-cap funds. They both have the Nifty 500 Shariah TRI as their benchmark.

Also Read: Mutual Funds Vs. ETFs: Where to invest?

What is the Sharia Index?

The Sharia Index can be the basis for Sharia-compliant investment products. These products attract Muslims who want to invest without violating Sharia principles. They avoid investing in companies that engage in activities that Islam does not allow.

The NIFTY 50 Shariah Index is based on the Nifty 50 Index. Companies that follow Sharia principles are part of the NIFTY 50 Shariah Index. The NIFTY 50 Shariah Index tracks the performance of the parent index.

The NIFTY 500 Shariah Index is based on the Nifty 500 Index. Companies that follow Sharia principles are part of the NIFTY 500 Shariah Index, which tracks the performance of the parent index.

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Reliance ETF ShariahBeES

This ETF aims to provide returns that correspond with the total returns of the Nifty 50 Shariah Index. It does this by investing in securities that make up the Nifty 50 Shariah Index in the same ratio as the index. Its benchmark is the Nifty 50 Shariah (TRI).

It suits investors seeking capital growth by investing in the Nifty 50 Shariah Index. However, the fund’s website states that it is not a Shariah-compliant scheme.

According to Value Research, this unrated exchange-traded fund (ETF) is in the equity large cap category. Its assets were worth ₹3 crores, and it had an expense ratio of 1.16% as on February 28, 2019. It’s one-year, three-year, and five-year returns as on March 26, 2019, are given below:

Taurus Ethical Fund

The Taurus Ethical Fund is a multi-cap fund, which invests according to the Islamic investment philosophy. The fund manager uses specific screening norms to pick companies.

It invests in stocks from the S&P BSE 500 Shariah Index. The excluded sectors are financials, banks, tobacco, alcohol, gambling, pork, pornography, etc.

This fund suits investors seeking long-term capital appreciation from Sharia-compliant investments. Its benchmark is the S&P BSE 500 Shariah TRI.

According to Value Research, this unrated mutual fund is in the equity thematic category. Its assets were worth₹36 crores as on February 28, 2019, and it had an expense ratio of 2.60% as on January 31, 2019. It’s one-year, three-year, and five-year returns as on March 26, 2019, are given below:

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Tata Ethical Fund

This fund aims to provide capital appreciation from Shariah-compliant, diversified equity investments. It invests in growth and value-oriented companies, and its benchmark is the Nifty 500 Shariah TRI.

The excluded sectors are casinos/gaming, alcoholic beverages, and non-halal food products, etc. Investments are not allowed in financial institutions that earn from interest (Riba).

It invests in companies with low leverage and avoids companies with high debt-to-equity ratios. A Sharia adviser ensures purification of any prohibited income every year. It suits investors who want to invest in a Sharia-compliant mutual fund.

The Tata Ethical Fund has obtained Shariah compliance certification. This certification is from Taqwa Advisory and Shariah Investment Solutions (TASIS).

Which of these mutual funds/ETFs is right for me?

Reliance ETF ShariahBeES may be the right choice if you want to invest in the Nifty 50 Shariah Index. However, this fund’s website states that it is not a Sharia-compliant scheme. It invests in the Nifty 50 Shariah Index and is suitable for passive investors who want to get returns that beat inflation.

You will have to open a Depository and Trading Account to invest in the Reliance ETF ShariahBeES. Liquidity may be inadequate because of low trading volumes in this ETF. One of the reasons for this is the lack of awareness about this ETF within the community.

The Taurus Ethical Fund and the Tata Ethical Fund are actively-managed multi-cap funds.  They may offer higher returns than an ETF as they can invest across market caps. You will not have to open a Depository and Trading Account to invest and will enjoy much more liquidity.

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Conclusion

Sharia funds suit people who want to invest according to the principles of Islam. These mutual funds do not invest in companies that deal with prohibited products and services. Earning interest and too much speculation are also not allowed. An actively-managed, multi-cap, Sharia-compliant mutual fund may offer higher returns than an ETF.

The post Complete Investment Guide On Shariah Investment Portfolio In India | My Money Sage appeared first on Mymoneysage Blog.

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Your residential status determines which investments you can make and how much tax you will have to pay.  Many of our clients ask us about whether they are Non-Resident Indians (NRIs) or residents.

They are not able to make sense of the rules under the Foreign Exchange Management Act (FEMA) and the Income Tax Act. These rules often contradict each other, adding to the confusion.

Here we will look at how to determine whether you are an NRI or a resident under FEMA and the Income Tax Act:

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Why are the FEMA and the Income Tax Act rules so important?

If you are an NRI as per FEMA, you can open a Non-Resident External (NRE) account or a Non-Resident Ordinary (NRO) account. Your residential status according to FEMA determines whether you can invest in mutual funds as an NRI or as a resident.

Your residential status according to the Income Tax Act determines how much tax you will have to pay. The Income Tax rules also cover the income you earn from your NRE or NRO account.

Your residential status may differ as per FEMA and the Income Tax Act. The Income Tax Act determines whether you are an NRI or a resident based on the number of days you spend in India. FEMA also considers the intent to determine your status.

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An NRI can transfer overseas earnings to an NRE account in India. Interest earned on an NRE account is tax-free, and you can repatriate it. You can deposit funds in foreign currency and withdraw them in Indian Rupees.

What’s a Non-Resident Ordinary (NRO) account?

An NRI can use an NRO account to manage income earned in India. The interest earned on this account is taxable, and you can repatriate it. You can also repatriate the principal amount subject to set limits. You can make deposits in both foreign and Indian currency and withdraw funds in Indian Rupees.

What does FEMA say about residential status?

According to FEMA, there are two types of residential status:

1.A person resident outside India, who is a citizen of India is an NRI

2. Resident in India

Also Read: Should NRIs invest in Indian Real Estate?

Who is an NRI according to FEMA?

A person who has been in India for 182 days or less in the previous financial year is resident outside India or an NRI under FEMA. However, this rule does not apply in the following conditions:

1. If a person visits or stays in India for any purpose that shows the intention to live in India for an uncertain period.

2. If a person comes to India for business or vocation

3. If a person visits or stays in India to take up employment

In such cases, the person is a resident even if the period of stay in India is less than 182 days in the previous financial year.

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Who is resident in India according to FEMA?

A person who has lived in India for more than 182 days in the previous financial year is resident in India according to FEMA. However, this rule does not apply in the following conditions:

  1. If a person goes abroad or stays there for any purpose that shows the intent to remain overseas for an uncertain period.
  2. If a person goes to a foreign country or stays there for business purposes
  3. If a person goes abroad or stays there for employment

In such cases, the person is resident outside India or an NRI even if the period of stay in India is more than 182 days.

What does the Income Tax Act say about residential status?

According to the Income Tax Act, there are three types of residential status:

  1. Resident and Not Ordinarily Resident (RNOR)
  2. Resident and Ordinarily Resident (ROR)
  3. Non-Resident Indian (NRI)

Also Read: 11 points checklist before you gain an NRI status

Who is a resident according to the Income Tax Act?

As per the Income Tax Act, a person who fulfills one of these two conditions is a resident:

1.A person who has been in India for 182 days in the financial year, or

2. A person who has been in India for 365 days in the four preceding fiscal years and 60 days in the relevant fiscal year.

The second condition ensures that most people who go abroad for the first time will not qualify for NRI status. This condition does not apply to crew members of Indian ships who are leaving India for employment. It also does not pertain to PIOs who reside abroad but are visiting India.

Who is an RNOR according to the Income Tax Act?

The term RNOR applies to NRIs who are returning to India. Even if a person is a resident, he/she can be either an RNOR or a ROR.

A person who fulfills any the following conditions is an RNOR:

1.A person who has been in India for a maximum of 729 days in the seven years before the financial year in consideration.

2.A person who has been an NRI for nine out of the ten years before the financial year under review.

Your RNOR status is also taken into account after you have been an NRI for several years. The overseas income of an RNOR person is not taxable in India, with a few exceptions.

Also Read: RNOR Tax Status – A boon for returning NRIs

Who is an NRI according to the Income Tax Act?

A person who does not fulfill any of the conditions mentioned above is an NRI. As per the Income Tax Act, an NRI is a citizen of India or a person of Indian origin (PIO) who is not a resident. You would be a PIO if either of your parents or any of your grandparents were born in undivided India.

How does my residential status affect my investments?

FEMA governs your investments. You have to be an NRI according to FEMA to have an NRE, NRO, or FCNR(B) account. Your eligibility to buy agricultural land or open a PPF account depends on your residential status according to FEMA.

FEMA rules govern investments by NRIs in Indian mutual funds. An NRI can invest in an Indian mutual fund from an NRE or NRO account on a repatriable or non-repatriable basis.

The Income Tax Act governs the taxation of your income. It’s possible that you are an NRI as per FEMA and a resident as per the Income Tax Act. The opposite can also happen.

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Conclusion

Your residential status determines which investments you can make and how much tax you will have to pay. Your residential status according to FEMA and the Income Tax Act can differ. While the Income Tax Act determines residential status based on the number of days you stay in India, FEMA also considers the intent. It’s essential to decide on your residential status before making investments.

The post 11 Rules to know – Am I an NRI under FEMA and the Income Tax Act? | My Money Sage appeared first on Mymoneysage Blog.

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An inverted yield curve shows that an economic slowdown may be imminent.

The yield curve is one of the leading indicators that analysts use to predict the direction of the stock markets. In the United States, analysts have used it to forecast all the recessions in the last five decades. The yield curve has not been given much attention in India.

Let’s take a closer look at what an inverted yield curve is and what it means:

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What is the yield curve?

The yield curve is a line on a graph that tracks the yield of bonds that have the same credit quality against their maturities. Most reports compare the yield curve of three-month, two-year, five-year, and thirty-year US treasury debt. The yield curve serves as a benchmark for different types of debt, such as bank loan rates and mortgage loan rates.

What are the main types of yield curves?

The yield curve’s shape predicts changes in future economic activity and interest rates. The primary forms that a yield curve can take are normal, flat, and inverted.

Normal yield curve

Normally, bonds with a longer maturity have a higher yield than shorter maturity bonds because of the risks related to time.

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Shorter-term yields and longer-term yields are very close to each other in a flat or humped yield curve. A flat yield curve can predict an economic change.

Inverted yield curve

Shorter-term yields are higher than longer-term yields in an inverted yield curve. An inverted yield curve shows that a recession may be imminent.

Also read: How P/E and market cap-to-GDP ratios can help you in investing

What is the basis of the yield curve?

The basic premise of the yield curve is that longer-term bonds should offer a higher yield than shorter-term bonds. Investors usually expect lower returns when they invest for shorter periods. They expect higher gains when they invest for more extended periods. For example, a one-year bond ought to offer a lower yield than a ten-year bond.

However, at times, shorter duration bonds offer higher yields than longer duration bonds at times when investors lack confidence in the economy. They invest in shorter duration bonds because they expect the value of short-term bills to fall in the future.

What does an inverted yield curve show?

An inverted yield curve is the rarest of the three main types of yield curves. It is also called a negative yield curve and is a predictor of a recession. The yield curve inverts when long-term debt instruments have a lower yield than short-term debt instruments with the same credit quality.

Yield curve inversion has occurred before many US recessions, showing that the yield curve can predict turning points in the business cycle. Yield curve inversion had also predicted the global financial crisis of 2008, two years before it occurred.

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What did the yield curve inversion of December 2018 indicate?

The yield curve inverted on December 3, 2018, and this was the first yield curve inversion since the global financial crisis of 2008. The yield curve was back to normal on December 14, 2018.

Investors and analysts are keeping a close watch on the movements of the yield curve. If it inverts once again and remains inverted, it could mean that a recession is imminent.

Is the yield curve relevant in India?

The yield curve has not been a reliable indicator of recessions in India, but once it inverts, equity markets start falling. In the last 15 years, yield curve inversion occurred on four occasions in 2008, 2011, 2013, and 2015. The markets had delivered negative returns during these periods.

There is a negative correlation between stock market indices and the gap between the ten-year bond yield and the one-year bond yield. As this gap narrows, the likelihood of a fall in the equity indices increases.

Also read: Financial Ratios Analysis for Investors

Is a recession likely to occur soon?

There is a time lag between yield curve inversion and an economic slowdown. A slowdown may not occur immediately after the yield curve inverts. Yield curve inversion occurred more than two years before the global financial crisis of 2008.

Worries about an imminent economic slowdown in the US have increased in recent months. Investors are worried about the disturbing signals emanating from the US bond market.

The US yield curve has been flattening, and some parts of it inverted in December 2018, indicating the direction in which the economy is heading.

Yield curve inversion causes negative sentiment

The yield curve is making markets nervous, and investors have been dumping stocks. Yield curve inversion is considered to be the top predictor of a recession. Yield curve inversions have occurred before the last seven recessions.

Yield curve inversion impacts investor sentiment, creating a negative feedback loop. Worries about stocks and the economy result in lower bond yields, leading to misgivings about yield curve inversion, which causes even more stock market weakness.

Markets are aware of the implications of yield curve inversion, and this can turn into a self-fulfilling prophecy. A recession could occur because people believe that it is likely to happen.

People start behaving like a recession is beginning and turn their worries and fears into reality. While you shouldn’t ignore the flattening of the yield curve, this isn’t the only indicator to consider.

Financial conditions are still relatively accommodative, and the recent tightening is limited compared to the shocks that came earlier. Economic conditions could ease if leaders can resolve risks like the US-China trade war and Brexit.

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Conclusion

Yield curve inversion is one of the main predictors of a recession. The yield curve had inverted more than two years before the global financial crisis of 2008. A flattening yield curve impacts investor sentiment and this can create a self-fulfilling prophecy. However, the yield curve isn’t the only indicator to consider.

The post What is yield curve inversion? How does it impact markets | My Money Sage appeared first on Mymoneysage Blog.

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It’s important to have big dreams, but it isn’t easy to turn your dreams into reality. Pick goals that you are passionate about and believe that you can achieve them. Make realistic plans that you can meet and track your progress.
Here are six simple steps to reach your financial goals,

“Set your goals high, and don’t stop till you get there.”

BO Jackson

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I am sure like many,  you are also inspired by the above quote, while it’s true that you have to set your goals high, at the same time it’s imperative to keep it realistic.

You may dream about starting a business, buying a house, being debt-free, or going for a round-the-world trip. Planning can help you to make it happen.

If you don’t have any goals or objectives, you will not be clear about what you want to do. You will keep living from day to day without any sense of direction. Those who achieve great things have clear goals and make plans to reach them.

It’s important to have big dreams, but it isn’t easy to turn your dreams into reality. Pick goals that you are passionate about and believe that you can achieve them. Make realistic plans that you can meet and track your progress.

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I am hereby listing six simple steps to reach your financial goals.

Set goals that you are passionate about

Ask yourself if you want to achieve your goal. It’s not enough to want something because everyone else wants it or because you think it will make you look good. If your heart’s not in it, you will not be passionate about achieving the goal. You will not have the motivation to do whatever it takes to succeed.

If you are half-hearted about the goal, you will probably lose interest. For example, you are more likely to own your dream house if you have a burning desire to make it happen.

Choose realistic goals

Pick realistic goals that you can achieve in the given time frame. Consider the gap between where you are and where you want to go. Can you get what you want within a reasonable period? If you believe that you can achieve the goal within the given time frame, you are more likely to succeed.

You need to choose an achievable goal to avoid frustration. Break the goal down into smaller milestones. Reaching each of them will motivate you to move forward.

Think about whether you are trying to do too much. You need to have enough time to focus on each of your goals. Time is your most precious resource, and it isn’t possible to do everything at the same time. It’s best to be clear about your priorities and do the things that matter most to you.

Also read: Asset Allocation: The key to your financial success

Make a detailed plan

You must have a plan if you are to achieve your financial goals. Be specific, and define the objective, the timeframe and the milestones in monetary terms. Be realistic and set achievable goals. Set deadlines for each goal and milestone. Since you are making the plan, you are more likely to succeed.

A flexible plan will help you to stay on course even if you are unable to reach some of the milestones as scheduled. Unforeseen events can cause delays, and at times the goal may seem unreachable. There is no need to get disheartened and give up. Your plan needs to factor in such unexpected delays so you can keep moving towards your goal.

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Use standing instructions

Use standing instructions to invest money every month. There should not be any need for you to do anything to move your money to an account or mutual fund. You can issue standing instructions to your bank to transfer funds, and set up systematic investment plans (SIPs) to invest in mutual funds.

You can transfer money to a recurring deposit account or a few mutual funds every month. Everything will happen automatically, and you will keep moving towards your goal every month. You are more likely to reach your targets because you will not have to do anything to make it happen.

Move money out of your main bank account

If you set up a recurring deposit account or SIP, money will move out of your main bank account every month. You will get used to making do with the remaining amount. You are less likely to spend the money if you move it to an account in a different bank. As soon as your main bank account’s balance falls, you will have to curtail spending.

Funds invested in mutual funds are not instantly accessible, so impulsive spending is less likely. It’s unlikely that you will redeem your mutual fund investments unless you must.

Also read: Are you a victim of Financial Infidelity?

Be positive and visualize success

You need to be positive while setting goals and visualize success. Spend time thinking about success every day. If you are full of doubts and think about all the things that could go wrong, you may not succeed. Your mind creates an environment for success.

If you can visualize a goal and believe that you can achieve it, you will succeed. That’s why you must to choose a goal that you think is achievable. If you picture yourself achieving your goal, you will make it happen. Being positive is one of the critical factors for success.

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Conclusion

You can make your dreams come true by setting specific goals, defining them in monetary terms, and preparing detailed plans. Break each goal down into milestones and track your progress. Give standing instructions to your bank to invest money every month. Move money out of your main bank account to avoid impulsive spending. Be positive and visualize success to achieve your goals.

The post 6 Simple Steps To Reach Realistic Financial Goals | My Money Sage appeared first on Mymoneysage Blog.

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Mutual fund advisers use jargon that can be quite confusing for newbie investors. Here we discuss some of the most commonly used mutual fund terms. Knowledge of these terms will help you to understand what your financial adviser says.

Mutual fund advisers use jargon that can be quite confusing for newbie investors. Here we discuss some of the most commonly used mutual fund terms. Knowledge of these terms will help you to understand what your financial adviser says. You will be able to make the right investment decisions as an informed investor.

These terms will also help you to make sense of advice provided by news channels, websites, and financial publications.

Let’s take a closer look at some of the terms that are often used by mutual fund advisers and analysts:

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Let’s take a closer look at some of the terms that are often used by mutual fund advisers and analysts:

What is indexation?

Indexation is a technique used to adjust taxes using a price index. It accounts for inflation from the time when you purchase an asset to the time when you sell it. It inflates the price at which you bought the asset, which reduces your tax liability.

Indexation applies to long term capital gains earned from debt mutual funds after three years. It does not apply to equity mutual funds and portfolio management schemes.

Also read: 9 Mutual Fund investing myths busted

What is Rupee cost averaging?

Rupee cost averaging is a technique used to invest a fixed amount of money at regular intervals in a mutual fund scheme. Systematic investment plans (SIPs) use Rupee cost averaging.

You buy more units when the market falls, and fewer units when the stock market rises. This method distributes investment risk across movements in market levels.

This approach is a lot safer than investing a lump sum at one time because you avoid the risk of catching a market top. If you keep waiting to buy when the market bottoms, you may miss out if the market rises suddenly.

What is an entry load?

An entry load is a fee that a mutual fund charges at the time of investment. SEBI abolished entry loads in June 2009, so mutual funds stopped making deductions at the time of investment.

The following example will help you to understand how entry loads worked before they SEBI abolished them in 2009. If you invested Rs.1 lakh in a mutual fund with an entry load of 1%, the fund house would deduct Rs.1,000 and invest Rs. 99,000 in the fund.

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What is an exit load?

An exit load is a fee that you may have to pay if you withdraw your money from a mutual fund within a specified period. Exit loads don’t apply to liquid mutual funds. They are more likely to apply to duration debt funds and equity funds.

Exit loads penalize short-term investors who enter and exit mutual funds frequently. Short-term investors can cause volatility. They reward long-term investors who stay invested for the long term.

For example, an equity mutual fund may charge an exit load of 3%of the redemption proceeds if you withdraw your money within 90 days. If you take out Rs.100,000 within 90 days, you will have to pay an exit load of Rs.3,000.

What is the turnover ratio?

The turnover ratio is the percentage of the portfolio that a mutual fund replaces in a year. It can depend on the type of fund, its goal, and the fund manager’s investment style.

For example, if a mutual fund has a turnover ratio of 100%, it replaces all its holdings in a year. A fund with a low turnover may incur lower trading costs and pay less short-term capital gains tax. However,a low turnover, buy-and-hold strategy does not assure higher returns in the long term.

Learn how to mange your money & create wealth, Download your FREE eBook now What is risk grade?

Risk grade is the quality rating of a mutual fund, which depends on the risk of loss associated with it. Analysts use it to assess the risk-return profile of a mutual fund.

Overnight funds, which invest in securities with a maturity of one day, are the least risky. Liquid mutual funds invest in debt and money market securities with a maturity of up to 91 days. Liquid funds are slightly more hazardous than overnight funds. The level of risk increases as the duration goes up.

In the same way, hybrid mutual funds are less risky than pure equity mutual funds. Large-cap funds are less dangerous than mid-cap funds, which are less risky than small-cap funds.

You can pick a product that aligns with your goals, risk tolerance, and time horizon. A liquid fund may not be the safest investment if you have a time horizon of 10 years.

Also read: 5 Mistakes to Avoid While Investing in Mutual Funds

What is Alpha?

Alpha is return earned by a mutual fund that exceeds its underlying benchmark. It is the value that a fund manager adds when someone invests in an actively-managed mutual fund.

People invest in actively-managed mutual funds because they believe the fund manager’s skills will help them to beat the index. For example, if the Sensex delivers a return of 12% in a year and your mutual fund returns 14%, the 2% excess return is the Alpha.

What is Beta?

Beta can be defined as the systematic risk or volatility associated with a portfolio as compared to a benchmark or the entire market. It mirrors the tendency of a portfolio to respond to swings in the market.

The market has a beta of 1%. If a mutual fund’s beta is more than 1%, it is high, and if it is less than 1%, it is low.

For example, if your mutual fund has a beta of 1.3, it means that if the market goes up by 1%, your mutual fund will go up by 1.3%. And, if the market goes down by 1%, your mutual fund will go down by 1.3%. A mutual fund with a beta of 1.3 is aggressive and riskier than the market.

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Conclusion

Understanding financial terms relating to mutual funds can help you to make the right investment decisions. You can compare different investments and maximize your returns in the long run as an informed investor. Bank relationship managers and agents will not be able to push you to invest your hard-earned money in products that don’t suit you.

The post 8 Commonly Used Mutual Fund Terms & Jargons A Newbie Investor Must Know | My Money Sage appeared first on Mymoneysage Blog.

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Your mutual funds would not have generated the kind of returns you are getting if it weren’t for him. As mutual fund investors, we need to thank Bogle for helping us to get more from our mutual funds

John Bogle changed the mutual fund industry by reducing costs and helping investors to earn higher returns.He passed away on January 16, 2019, at the age of 89.

Your mutual funds would not have generated the kind of returns you are getting if it weren’t for him. As mutual fund investors, we need to thank Bogle for helping us to get more from our mutual funds.

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Let’s take a closer look at John Bogle’s ideas and how he used them to provide higher returns to mutual fund investors:

How Bogle transformed the mutual fund industry

Bogle said that investors’ returns depend to a great extent on lower costs. He believed that it is not possible for fund managers to beat the market indices consistently. He put these ideas into practice at Vanguard, the mutual fund company that he founded.

Bogle’s ideas and the success of Vanguard have resulted in continuous efforts to reduce mutual fund costs across the world. Lower expenses have helped investors to earn higher returns.

Investors have realized that fund managers cannot outperform the markets consistently. As a result, low-cost, passively-managed index mutual funds and ETFs have become popular.

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Bogle founded Vanguard in 1976. It was the first mutual fund in the world to offer low-cost index investing to individuals. Vanguard is a non-profit organization owned by the mutual funds it manages. These mutual funds are in turn owned by the people who put their money in them.

Today, Vanguard is the largest mutual fund company in the world, managing assets worth $5 trillion (around Rs.355 lakh crore). $5 trillion is a little more than the U.S. government’s budget and nearly 12 times the annual budget of the Indian government.

He made mutual fund investors rich

Another remarkable aspect of Bogle’s personality is that he didn’t set up Vanguard as a business venture owned by him. Vanguard is like a cooperative, and its profits go to the people who invest in it in the form of higher returns. In any other Wall Street company, the benefits would have gone to the investors.

Vanguard has made its investors richer, but it didn’t make Bogle very wealthy. He said that he was proud that he was not a billionaire. He was worth less than $100 million at the time of his death. Others who set up much smaller and less significant business ventures earned a lot more.

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Bogle’s early days

Bogle understood the importance of money because he was born just before the start of the Great Depression in the United States. He published a paper titled ‘The Economic Role of the Investment Company’ at Princeton University. This paper became the foundation of his career and life. It urged mutual funds to cut sales and management fees and not claim to be superior to market averages.

This paper helped Bogle to land his first job with Wellington Management. He convinced the board to allow the mutual funds to own the company and run it at zero cost to benefit its investors. He named the company Vanguard and launched the Vanguard 500 Index Fund in December 1975, which was the first index fund in the world. Investors were not happy, and agents and distributors opposed him.

Also read: Benchmark & its importance in Mutual Funds

His ideas are still relevant today

Bogle’s desire to help investors instead of trying to accumulate wealth is unique in the competitive world of finance. Even though Bogle retired nearly 20 years ago, his ideas and Vanguard command unmatched respect in the financial world today.

Bogle’s ideas helped millions of investors to make more money, but as a result, the financial industry is earning lower profits. Both outcomes are welcome because of the way the financial sector has been functioning. Investors are getting the returns they deserve. The financial sector has also become more transparent and efficient.

Index investing in India

In India, actively-managed mutual funds have been outperforming passively-managed index funds. As a result, index funds and ETFs have not been popular. However, this may change because fund managers will have to show that they can keep beating the index.

The outperformance provided by fund managers is likely to become less common in the future due to the following reasons:

  1. SEBI’s categorization has made things transparent and forced mutual fund managers to stick to their mandate.
  2. SEBI has asked mutual funds to benchmark their performance against the total return index (TRI). The use of the TRI shows actual mutual fund performance.
  3. As markets become more efficient and transparent, there will be less room for fund managers to outperform the index.

Also read: How to use Investment horizon to choose Mutual Funds

Will index funds become more popular than actively-managed funds?

Index funds have not been popular in India because actively-managed funds have beaten their benchmarks. People prefer to invest in actively-managed funds because they outperform passively-managed index funds.

However, most actively-managed mutual funds were not able to beat the Nifty in 2018. Index funds and ETFs provided better results than most of the actively-managed funds. Time will tell if this trend will continue in the future.

It’s clear that index funds will gain ground, but actively-managed funds may provide better returns than the index for some more time.

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Conclusion

We need to thank John Bogle for helping us to earn higher returns from our mutual funds. He said that investors’ return depends to a great extent on lower costs, and most fund managers could not beat market indices consistently. He put these ideas into practice at Vanguard, the mutual fund company that he founded. Passively-managed, low-cost index funds, and ETFs have become popular because of him.

The post Father Of The Index Funds, John Bogle transformed mutual funds | My Money Sage appeared first on Mymoneysage Blog.

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Emergency Fund: Methods To Save Very few people think about putting money aside to deal with an emergency. Most of us are not prepared to face a crisis, because we feel that something like this will never happen to us.

The following story will help you to understand the importance of creating an emergency fund:

Mr. Gupta’s 4-year-old son’s finger was almost cut off in an accident. He rushed to a private hospital, where the doctors said that emergency surgery was necessary to save his child’s finger.

He did not have medical insurance, so the hospital asked him to deposit Rs.50,000 immediately. There was not enough money in his bank account. He did not have any family members or friends in the city.

Mr. Gupta was distraught and didn’t know what to do. His coworkers heard about his plight and provided a loan to pay for the surgery. The surgery was successful, and the doctors were able to save the child’s finger.

That’s why every  financial plan must include an emergency fund, which is money set aside to prepare for any unexpected crisis. A cash reserve can help you to pay for any unexpected expenses. It can help you to get through a sudden job loss or reduction in income.

An emergency can occur without any warning and upset your financial plans. We cannot predict a crisis before it happens, so it’s essential to prepare and set up an emergency fund without delay.

If you have an emergency fund, you will not have to borrow money from your family members, friends, or coworkers. There will be no need to dip into your long-term savings, which can impact your long-term goals.

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Let’s take a closer look at what an emergency fund is and how you can create one:

What is an emergency fund?

An emergency fund is a sum of money that is held in reserve to deal with emergencies. It is kept separate from funds used to meet daily expenses and is not a part of long-term savings. The fund must be liquid so it can be accessed quickly at any time without any exit load.

Emergency funds need to be kept in liquid instruments which are safe and not volatile. Your emergency fund should provide adequate returns, which will ensure that it will keep growing. You can choose liquid investments that suit you.

Also read: Succession Planning is not only for the Rich

How much money should you keep in your emergency fund?

You can create an emergency fund that covers your living expenses for 3 to 6 months. For example, if your monthly household expense is around 20,000, you can keep 120,000 in an emergency fund.

If you have an irregular income, you may need a larger emergency fund. A more substantial amount may be necessary if there are sick or aged family members who may need medical assistance. However, if you keep a big amount in liquid investments, you will miss out on returns.

How to create an emergency fund

Once you have decided on the size of your emergency fund, put aside a small amount every month until you reach your target amount. For example, you can invest Rs.5,000 or Rs.10,000 every month in a separate savings bank account.

You can reduce your long-term investments while you are creating your emergency fund. Instead of starting a new systematic investment plan (SIP) in an equity mutual fund, open a recurring deposit bank account or start a SIP in a liquid fund. Regular investments will help you to build an emergency fund gradually.

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Split your emergency funds between cash, a separate savings bank account, and a liquid mutual fund. You can keep a certain amount of money at home, but this involves the risk of theft, and you will not earn any interest on it.

You can keep some money in a separate savings bank account, which will provide an interest rate of around 4%. The rest can be in a liquid mutual fund, which will provide a higher return of about 7%.

For example, if you want to create an emergency fund of Rs.120,000, you could keep Rs.20,000 in cash, Rs.40,000 in a savings account, and Rs. 60,000 in a liquid fund.

Also read: All that you wanted to know about your Credit Score

How to access your emergency fund

You can keep some money at home to prepare for emergencies. However, it’s unsafe to have too much cash at home. Funds held in a savings bank account can be easily accessed using a debit card. Your debit card will allow you to get money at any time of the day or night through ATMs or point-of-sale (POS) machines.

You can access money invested in a liquid fund quickly without having to pay any exit load. You may be able you to withdraw up to 50,000 or 90% of the investment instantly through any mutual fund’s app like Mymoneysage.in. The money will move to your bank account at once. In any case, you will be able to access your money within one working day.

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Conclusion

Most of us have heard of emergencies faced by others, but we think it’s unlikely to happen to us. Emergencies occur suddenly, and most of us are not prepared to meet them. It’s essential to create an emergency fund that covers your household expenses for around 3 to 6 months. You can split the money between cash, a separate savings bank account, and a liquid mutual fund.

It’s never too late, to create an emergency fund, all you have to do is open a free mymoneysage account, and start investing in direct plans of liquid funds.

The post Emergency Fund – How to Save and Where To Invest | My Money Sage appeared first on Mymoneysage Blog.

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If you are wondering whether Gold should be a part of your investment portfolio, then this is a must read for you.

Usually, Investors, when constructing a portfolio tend to limit their diversification strategy to equity and debt thereby ignoring gold, let’s evaluate if it makes sense to add Gold to your portfolio

Gold protects investors from stock market volatility and uncertainty. It has a negative correlation with stocks, so it provides essential diversification. Gold reduces volatility and optimizes long-term returns, but it cannot generate a regular income.

People prefer to invest in gold during periods of stock market uncertainty. Even though gold provides lower returns than equity, it ought to be part of your portfolio.

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Let’s take a closer look at the advantages and disadvantages of investing in gold:

Benefits of investing in gold

It has a negative correlation with stocks

Gold and stocks tend to move in opposite directions. Gold is a safer investment than stocks, and it helps to diversify the portfolio. Most investors use it as a hedging instrument rather than as an investment.

It acts as a hedge against inflation

The value of gold tends to rise in line with the cost of living. When inflation is high, prices rise, stocks fall, and the value of currency declines. Most currencies have depreciated against gold over time. That’s why people like to invest in gold.

It acts as a hedge against geopolitical risk

While most asset classes lose value during a geopolitical crisis, the price of gold tends to rise during such periods. Gold prices also increase when people lose faith in the government. Investors see gold as a safe investment at times when geopolitical risk is high.

Also read: No Tax on Gold Jewellery acquired through legitimate/exempted income

Disadvantages of investing in gold

It does not provide a steady income

Gold cannot generate a regular income, so it may not suit all investors. You will not get any interest or dividends that you can use to meet your living expenses. You will only enjoy capital appreciation when you sell your gold investments.

The price fluctuates based on global markets

Fluctuations in global gold prices affect the price of gold in India. The value of the dollar also impacts gold prices. The cost of your gold can go up and down due to these factors.

How to invest in paper gold

You can invest conveniently in paper gold, which offers several advantages over holding gold in its physical form. There is no need to worry about purity, price, and safe storage.

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Here are three ways to invest in paper gold:

Gold exchange traded funds (ETFs)

Gold ETFs track the price of gold. Usually, each unit of a gold ETF is equal to one gram of gold. You will need a demat account to invest in a gold ETF. The expense ratio of a gold ETF is lower than that of a gold mutual fund, but you will have to pay brokerage and taxes.

Gold ETFs trade on the stock exchanges, so they offer liquidity and fair prices for sellers and buyers. However, the level of liquidity varies depending on the fund house.

Gold mutual funds

You can invest in an open-ended gold mutual fund in which the underlying asset is a gold ETF. A demat account is not needed to invest in a gold fund. A gold mutual fund may be the right option if you don’t have a demat account and are not inclined to get one.

The expense ratio of the gold ETF in which a gold mutual fund invests is part of the overall cost. The expense ratio of a gold mutual fund is higher than that of a gold ETF.

Learn how to mange your money & create wealth, Download your FREE eBook now Sovereign gold bonds

The Reserve Bank of India (RBI) issues sovereign gold bonds in multiples of grams from time to time. Gold bonds are available in both paper and demat form. The issue price of the bonds depends on the price of gold in the week before the subscription date.

The bonds are issued for eight years and provide an exit option in the fifth, sixth, and seventh years. The redemption price is based on the prevailing rate of gold at that time. Apart from price appreciation, gold bonds also provide interest @ 2.5% per annum.

Also read: Sovereign gold bonds vs Gold ETFs

Gold investments vs. equity investments

Equities have outperformed gold over different periods. A study showed that equities provided higher returns than gold over twenty years, ten years, three years and one year.

Gold attracts investors during periods of uncertainty and distress. It outperformed other asset classes during the global financial crisis of 2008.

Gold also outperformed equity after the tech bubble burst in 1999-2000. In India, gold plays the role of a currency hedge. It appreciates when the value of the Rupee falls against the US Dollar and vice versa.

Equities have been volatile, and investors are facing uncertainty on many fronts. They fear a repeat of the 2008 financial crisis, when both equity and fixed income fell. People rushed to invest in gold, raising its price.

However, a repeat of the 2008 financial crisis is unlikely, so it doesn’t make sense to invest too much in gold. Putting a significant amount in gold will reduce your long-term returns. Allocating 5% to 10% of your funds to gold ought to be enough.

Equity mutual funds and debt mutual funds will give you higher returns than gold in the long run. You will experience the power of compounding, and may also get better post-tax returns.

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Conclusion

Equity tends to outperform gold but gold plays a vital role in the portfolio. Gold has a negative correlation with equity. It reduces portfolio volatility and optimizes long-term returns. You can invest 5% to 10% of your funds in gold to diversify your portfolio.

The post 3 Benefits of having Gold Allocation in your investment portfolio | My Money Sage appeared first on Mymoneysage Blog.

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