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“Is there something like hedging investment portfolio of MFs?” A client sent this message this morning. My mind was thinking.

Why would she ask that? Someone else has done it and told her? She has read about it somewhere and is curious? Is she scared about the current market scenario and how it will unfold in days to come?

Well, for all I know, it could be all of the above.

For the past year or so, markets have been very volatile, so much so, that the investor is feeling edgy. She can’t take any more of the red.

On the other hand is the investor, who has some gains in the portfolio. But the volatility rattles her. She wants to protect whatever gains the portfolio has.

Both the investors unknowingly are following Warren Buffets’ famous dictum – “Never lose money.

Coming back to my client’s dilemma about hedging the portfolio. Hedging is much like buying insurance. In this case, if the markets benchmarks go down significantly, the hedge protects the portfolio value.

How do you hedge? You can simply go cash, diversify or buy futures / options. My client was more likely referring to futures/options.

Hedging comes at a cost including the premium you pay for buying the put option or a future contract. Then there is brokerage and taxes. You may have to keep rolling over your hedge with additional costs.

Should you hedge the investment portfolio?

No, if you are adequately diversified across asset classes. The volatility affects only one portion of the portfolio.

Yes, if only have stocks / equity mutual funds in your portfolio and can’t take the volatility.

Yes, if you want to use your money soon for another purpose. Ideally, in that scenario, you should not be in equities at all.

No, if you have a long term horizon.

No, if you are don’t want to forego a part of your returns due to costs of hedge and resulting taxes.

Yes, if peace of mind is the only thing that matters to you. But then why be in equity?

“Your portfolio is well diversified, positioned for the long term and invested through conservatively managed funds. Hedging may protect you from short term volatility but the costs can impact your returns.” I sent my response along with this post.

Do you hedge your investment portfolio? What is your approach? Do share your thoughts in the comments space.

The post Should you hedge investment portfolio against a market fall? appeared first on Unovest.

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NRIs have a distinct edge in building an internationally diversified winning portfolio across bonds, stocks and ETFs from around the world, at low costs and taxes.

Do you know India’s share in the world GDP is just about 3%? There are is a large investment opportunity from the world GDP you can tap outside India too.

Your savings can be deployed into variety of these stocks, bonds, funds, REITs and ETFs. This allows you to access a variety of investment options from various countries in an easy and low cost way.

One of the best places to build this investment portfolio is Singapore. The low or no taxation and a variety of options are a boon for the NRI based in Singapore.

So, while you may wish to return to India post-retirement, it makes ample sense to use your current tax status and time in Singapore to build an internationally diversified and winning portfolio.

As an NRI in Singapore, what all exposure can you get in your investment portfolio? What are the key points to note while investing?

Quite simply, you can invest in stocks, funds or ETFs from US, UK, Japan, Hong Kong, China and many other countries. Just be sure about how the particular investment will add value to your portfolio as well as the taxation for the same.

While most banks that you have an account with, will offer you platforms to trade or invest, it can be very expensive. Instead, what you can do is consider opening an account with Interactive Brokers, which has very low trading fees including for currency conversion and brings you investment options from around the world.

For example, you can buy a Vanguard S&P 500 ETF if you wish to take exposure to some of the best US stocks through a market index. You can even take exposure to technology stocks via the Vanguard Information Technology ETF.

However, you need to know where to buy these from. US has a withholding tax on income. Hence, it is better to buy the Vanguard S&P 500 ETF listed on the London / Ireland Exchange and not the US listed one. The London/Ireland exchange listed ETF has incurs half the withholding tax than the one listed in the US.

If you have to take exposure to the India large cap market via an ETF, you can do that too. No need to change the currency and yet get exposure to Nifty stocks via an ETF. If you want to buy direct stocks, you need to have a trading/demat account in India.

Apart from stocks and ETFs, Singapore offers another investment option in REITs or Real Estate Investment Trusts. There is a deep market there. Instead of buying physical property, which can be illiquid and maintenance heavy, one can buy REITs, specially those focused on commercial properties. For those who are conservative in their approach or looking for income, this may be one of the better options. Remember, REITs are traded in markets and are subject to price volatility.

The best part of being in Singapore is the low taxation. Singapore follows a progressive tax rate from 0% for upto S$20,000 to 22% for incomes above S$320000. There is no capital gain or tax on most dividends for individuals, including from REITs. Individuals are taxed only on the income earned in Singapore. Isn’t that great?

If you are in Singapore, what do you do for your portfolio? Please do comment and share.

Disclaimer: None of the investment products or platforms mentioned above are recommendations. You should consult your investment advisor before making any investment decisions. You have to take into account your individual requirements, tax brackets and risk profile to decided what suits your portfolio.

The post Here’s how an NRI in Singapore has an edge in building a winning portfolio appeared first on Unovest.

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Large numbers tend to scare us, we can’t process them mentally. We are more comfortable with smaller ones. This in essence is the denomination effect.

Of the several cognitive biases that affect us as individuals, Denomination Effect is an important one. It comes in our way everywhere – buying a phone, property or even mutual funds and stocks.

Let me ask you – What’s bigger – a Rs 500 note or 10 notes of Rs. 50 each? 

“Stupid”, you might think.

Well, not so much. Let me put it another way. 

An upfront payment of Rs. 60k for the smartphone or an EMI of Rs. Rs. 2500 per month for 2 years. 

As per current practice, several people are expected to pick the second one.

Same is true for real estate. Rs. 75 lakh apartment might be expensive but a Rs 55,000 EMI suddenly makes you feel “hopeful”.   

Our mind feels just fine agreeing to and processing the smaller numbers. The cognitive bias that tricks you is the “Denomination Effect.”

Rs. 60k for a phone sounds expensive, but Rs. 2500 per month payment is completely workable. 

So, on the one side it influences how you spend and which things you buy, it can also influence your savings and investments.

When you plan your goals and investments, the numbers matter a lot. If I tell that you need Rs. 2 crores for your retirement, you are going to be taken aback, frozen. 

Wait! What if just a Rs. 5000 per month of investment through EPF + Equity Mutual Fund Systematic Investment Plan will do the trick? 

This feels like a relief.  

Talking of SIPs and mutual funds, the denomination bias works negatively too. 

The Case of High mutual fund NAV

I have found so many investors complain about the high Net asset Value or NAV of a mutual fund scheme. 

So a fund with an NAV or the price at which you buy or sell per unit, of Rs. 600 looks high. They think it is expensive and will have very little room to grow.

Fortunately, it doesn’t work that way. A mutual fund scheme’s NAV is only a reflection of the value of underlying investments.

Today, at Rs. 600 NAV, I could sell all of my holdings in the fund and convert to cash and yet the valued remains at Rs. 600 / unit. The only difference is that the underlying holding is cash and not stocks/bonds. 

I can then buy stocks or bonds again for the same money, afresh and still have the same Rs. 600 NAV.

Investors may sometimes take time to understand this. But in the meanwhile, they tend to make mistakes. Such as to for those Rs. 10 NFO. At least, the concept used to sell a lot in the past.

A lower NAV is perceived to be of a lower denomination, more affordable, cheap, etc. It’s just the wrong perception.  A standalone NAV is not at all relevant in selecting your mutual fund scheme.

Let’s take some examples. 

Here are some of the names of a few mutual fund schemes that have existed for over 15 years and their current NAVs (as on May 10, 2019). Only direct plans considered. 

Scheme Name

Current NAV (Rs.)

Franklin Bluechip

477.668

Franklin Prima

980.334

HDFC Equity

681.565

HDFC Top 100 (previously Top 200)

503.792

Sundaram Midcap

464.985

Do you consider these funds “expensive” or “over valued”? 

Actually, the higher the NAV reflects a bigger experience of money management over market cycles and hence makes the scheme more valuable, may be even more reliable. 

Does the denomination effect work in direct stocks too?  

Same story.

So many investors filter for stocks priced under Rs. 100 or under Rs. 50, even penny stocks. The cheap ‘denomination’ stocks are mistaken to be value buys. Nothing can be further from reality.

In my own shortlist of about 40 companies for buying direct stocks, only 6 companies have a current market price of less than Rs. 100.

Here are some of the high price companies with the current market price / share.

Stock

Current Market Price (Rs.)

MRF

53,947

Page Industries

21,295

3M

22,936

P&G

10,389

Gillette

6,922

Maruti

6,631

Source: screener.in; Prices as on end of day May 10, 2019. 

I hope you agree that the price itself says nothing about the valuation or quality.  

Biggest surprises may sometimes come in small packages. That may not be true everywhere. Don’t fall for the denomination effect.

Does this bias affect you at times? How do you manage? Do share your thoughts in the comments section.

The post How the denomination effect messes up your decisions? appeared first on Unovest.

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As I plan to increase my insurance cover, I evaluate one of the most popular term plans out there – HDFC Life Click2Protect 3D. Well, turns out that the good old simple term insurance now comes with a lot of bells and whistles. If you don’t know what you want, you can end up paying extra premium unnecessarily.

I bought the original Click2Protect many years ago. But now that I evaluate it again, I am not sure how useful are these bells and whistles?

I set out to do a detailed analysis of this plan and see what makes sense and what does not. Hopefully it helps you too.

What does 3D stand for in CLick2Protect 3D?

No, you are not getting free 3D glasses!

The 3Ds stand for Death, Disability and Disease. (The country is undergoing an acronym overload.)

Death is the most important provision of a life insurance policy. In case of death, the insurance company pays out the Sum Assured under the policy to the dependents/nominees. Suicide too is covered after 12 months of policy existence.

There is an additional built in provision for Terminal Illness too. If 2 certified doctors given an opinion in writing that the life insured has a terminal illness and can survive a maximum of 6 months survival, the sum assured is paid out to you. Terminal illness excludes HIV/AIDS.

Disability covers loss of income due to total permanent disability only. Loss of 2 or more limbs / parts, as defined by the policy.

Note: The policy already has a built in waiver of premium benefit in case of permanent total disability. No need to pay anything extra for it.

Disease here refers to critical illness. The policy provides a lumpsum benefit in case of detection of 19 critical illnesses, as defined under the policy.

#1D – Death Benefit

This is the most important part of any life insurance policy. You select the amount of insurance cover. I am looking to buy Rs. 1 crore cover policy.

When you choose the Base Sum Assured, there are several other bells and whistles, also called Add Ons, which you can add to your policy. Let’s take a quick look at them.

  1. Top up of policy benefits – You can increase the Base Sum Assured and other benefits under the policy from 0.1% to 10% every year.
  2. Waiver of premium due to critical illness – On detection of any of the 34 listed critical illnesses, all your future premiums will be waived off.
  3. Accidental Death Cover – If death takes place due to accident, then an additional sum assured is paid out. You choose the amount at the time of buying the policy.
  4. Income Replacement Benefit – over & above the Death Benefit OR just the income replacement. The premium payable is higher for income over & above the death benefit.
  5. Return of Premium (ROP)- If you survive the policy tenure and end up making no claim, you will get a refund of all your premiums paid.

The top up benefit is mainly about ensuring that your insurance cover remains relevant to costs and changing needs of your dependents. A 10% annual increase in insurance cover can be good, but remember that it also increases your premium every year. The increase in benefit is logically followed by an increase in costs. In my experience, if you are under 30, you might find the need to increase your premium, however, in the 40s, as you gather assets and build wealth, the need for a life insurance cover may go down. It can vary from case to case. I am not going for this add on.

The Waiver of Premium due to critical illness seems to be a reasonable benefit and it comes at a very low cost too. I will go for it.

The Accidental Death Cover option is redundant too. If I am planning my life insurance, I want to work it on the primary truth that I might not live and my dependents need money. Now, I die because of an accident or a disease, is not in my control. I would plan my base sum assured to account for all eventualities. No need of this add on too.

The Income Replacement Benefit is one of the reasons I want my insurance cover, but I don’t my insurance company to do this for me. I prefer that my family gets the lumpsum benefit and it decides how best to use it for any goals or to meet expenses.

The ROP or return of premium is the most ridiculous add on available. It more than doubles the premium amount. Basically, you are paying them up more money to return your premiums in the future, the absolute amount, without any increase / growth. You take ROP option only when you don’t understand the concept of insurance. As is obvious, I am not taking it.

#2D – Disability Benefit

You can opt for an additional sum assured for Disability Benefit. With this benefit, if 2 of your limbs/parts are permanently disabled, then the policy pays out 1% per month of the Sum Assured under this benefit for 10 years.

So, if I add another Rs. 1 crores under Disability Benefit then on the occurrence of the event, I will be paid Rs. 1 lakh per month for 10 years.

Unfortunately, this is the only benefit under Disability cover and makes it look very deficient.

Typically, if you were to go for a stand alone accident and disability policy, you get a lumpsum payout of the Sum Assured in case of Total Permanent Disability. In case of Total Temporary Disability, you get paid a weekly / monthly income benefit.

Hence, the disability benefit under Click2Protect 3D is not worth opting for.

#3D – Disease or Critical Illness Benefit

Under this benefit, the policy pays out a separate Sum Assured as defined for this option. The benefit clicks in after 90 days of policy issuance. You have to survive for at least 30 days before you can make a claim under this option. Remember, only 19 critical illnesses are covered under this benefit. (Yes, the waiver benefit enjoys a bigger list!)

It is a fact that as individuals, we are underinsured for health covers. A Critical illness treatment can burn a big hole in your pocket. IN that scenario, this option can make sense.

Compared to stand alone critical illness policy offered by HDFC Ergo, which offers max Rs. 10 lakh Sum Assured, the rider with HDFC Click2Protect 3D is more generous. With a one crore base cover, I can opt for Rs. 25 lakhs Critical Illness benefit.

Now look at it another way. If you have adequate health insurance cover say of Rs 30 to Rs. 50 lakhs, you are protected for treatment costs for almost all kinds of illnesses and treatments. With an adequate life cover, your family gets the required money, that is, in case of death. Overall, the Critical Illness policy option becomes useless. Now, you may want to skip this option too.

Comparison of premium with various options of Click2Protect 3D

Source: HDFC Life online. The above calculations are for a male, age 39.

From the 3Ds, Disease or Critical Illness is the biggest contributor of premium. In the Add Ons, the return of premium (ROP) option almost doubles the premium (taking from one hand to give to the other).

As you can notice, if you choose the right and relevant options, you can save a lot of money. Unless, you are an HDFC Life shareholder, this extra premium is effectively money down the drain.

Well, I am going for the basic life cover with waiver of premium option (the last column).

What are you likely to do?

The post HDFC Life Click2Protect 3D Plus Online Term Plan – It’s complicated! appeared first on Unovest.

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Sir John Templeton is known as one of the leading investment managers of the 20th century. A closer association you may recognise is Franklin Templeton, the money manager.

Templeton listed 16 Rules of Investment Success. Most of them will resonate with you even though you have heard or read them before.

Here they are:

#1 Invest for maximum Total Real Return

The real number that you have to worry about is what is left after taxes and inflation. The two can have a brutal affect on your returns. Even when your returns are enough to take care of the 2 devils, you just protect your purchasing power. Only when your returns go beyond them, do you create wealth.

#2 Invest – Don’t Trade or Speculate

The market is not a casino. But you may it turn into one with frequent buying, selling, using exotic investments, derivates, options, etc., which you may hardly understand and thus often lose money in.

Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote, “is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’

#3 Remain Flexible and Open-minded about Types of Investment

There are times to buy blue chip stocks, cyclical stocks, corporate bonds, Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities. The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.

You have to choose your investments with careful research, study and analysis.

#4 Buy Low

Easy to say, difficult to do.

Heed the words of the great pioneer of stock analysis Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”

Bernard Baruch, advisor to presidents, was even more succinct: “Never follow the crowd.”

#5 When buying stocks, search for bargains among Quality Stocks

What is Quality?

Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a well known trusted brand for a high profit-margin consumer product.

How do you find quality in mutual funds? Read here.

#6 Buy Value, not market trends or economic outlook

The stock market and the economy are not always tuned in together. Ultimately, it is each of the stocks which form the market and not vice versa. You have to go after value of an individual stock than chase trends or outlooks.

#7 Diversify

No matter how careful you are, you cannot predict nor control the future.

You have to diversify to protect your investments from the unknown unknowns – risks that remain despite your best efforts to eliminate them. You need to diversify by risk, by industry and by country.

#8 Do you homework or hire wise experts to help you

You need study and analysis to zero down on the investments that suit you and are likely to work for you. Do your homework enough before you invest your money. If that is not possible, hire an expert to help you evaluate, analyse and build a framework for making investment decisions.

#9 Aggressively monitor your investments

While enough has been said about the need to be patient, a good investor tracks his/her portfolio on a regular basis (once a year, as an example).

Now that you have laid down your framework including an investment strategy and asset allocation, monitor it regularly and make required changes, as and when required.

This will enable you to keep your portfolio healthy and weed-free.

#10 Don’t Panic

When you act out of panic, you undo some of your best efforts. If you sell your investments just because of a temporary decline, you end up making the loss permanent. As a result, you may put yourself back financially by months and/or years.

You may also continue to stay with a losing investment, a result of a wrong decision as it continues to wreak havoc on your portfolio.

In investing, patience is a virtue. Thinking with a clear mind will save you all the pain. A clear mind can only be a result of an investing framework tested over time.

#11 Learn from your mistakes

That is the biggest trait of successful people and successful investors too. You may lose the money, but never lose the lesson.

If you want to altogether avoid mistakes in investing, the only way is to avoid investing, which can be the biggest mistake by itself.

#12 Begin with a Prayer

Whatever be your method. A prayer allows you to focus, cut the noise and think clearly.

#13 Outperforming the market is a difficult task

He said that for the US. However, in India too, most investors find it extremely difficult to do that. The reasons are not too far to seek. We only want to buy when others are buying. We want to identify with the crowd.

#14 An investor who has all the answers doesn’t even understand all the questions

This is a hard hitting one. You can never be sure of what you know and what you don’t know. Keep your humility intact and remember that there is a far greater force out there.

#15 There’s no Free Lunch

You may want to invest based on a free TIP you received. But do you ask why did the person with the tip passed it on to you? Why did he not use it all for himself?

Are you getting free advice? Why is it free? Think. Ask.

You may be saving the money but what you may be giving away can be far more precious.

#16 Do not be fearful or negative too often

There will always be ups & downs, wars, calamities and disease. Governments will change. However, that has been norm in the past too. We survived and we continue to move on. Hopefully, it will remain true for the future as well.

Be cautious, but not fearful.

You can download the source document of the 16 Rules of investment success here.

The post 16 Rules of Investment Success by John Templeton appeared first on Unovest.

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Principal Small cap Fund offering comes from the underlying belief of fund houses that there is money to be made in small caps. Whether this money is for the fund or for you the investor, remains a question.

Having worked with 100s of clients and interacted with many others, my view is that most investors are not ready for a dedicated small cap fund.

The patience that is required to make money with a small cap fund is plain absent. The investor is not ready to face the drawdowns – sometimes as much as 50%. If the fund performs poorly on past 3 year or 5 year returns basis, there is an urge to move out and invest in another fund with a better performance.

The fund houses / AMCs understand the investor behaviour very well and play it accordingly. Just a little portion invested in large caps or mid caps, over and above the mandatory 65% into small caps, does the job. It smoothens the NAV, lowers the volatility and dresses the ratios well.

You still get compared with other small caps and stand out. The perception management is as important as fund management within the universe.

A pure small cap fund which gravitates towards micro caps, and is subject to more pain than the other finely adjusted similar fund, loses out in the perception battle.

In this scenario, when being a pure small cap can spell your doom and take the investor away, the only way investors will stick is by being upfront and transparent about what you stand for, what the fund stands for and clearly telling who should not invest?

Where does Principal Small cap Fund stand?

As a regular reader of the blog, you know the answer already. In fact, I had written a Funny Money note on a small cap NFO or New Fund Offer. I am humoured to say that the note as it is applies without change to the Principal Small cap fund NFO.

The no. 1 reason Principal MF is doing this NFO is because it has a vacancy to fill. For all the funds allowed by SEBI, the fund house does not have a fund in the small cap category. Time to do it!

The no. 2 reason is that there is a general view in the market about small cap valuations moderating from earlier. Some of them are good businesses available for adding to the portfolio. For all the fundamental talking, professionals also find it difficult to ignore macro events / non events. In this case, it is the elections 2019. A lot of them are banking upon a post-election uptick to take their careers forward.

The no. 3 reason is that the distributor community needs to be kept engaged with a new product, new offering, something new to talk about. The investors keep asking “what’s new” and the distributor can reply “here’s something for you.” (Rhyming is incidental)

From an investor’s point of view, none of these are good reasons to invest in a small cap fund, more so in this fund. Of course, the bigger reason is that you are not ready for a small cap fund.

Like it or not, investor seeks a straight line return even from an equity investment. A time horizon of 5, 10 or 15 years is easy to say but difficult to put into practice. A few months or years of staying behind makes you nervous.

Avoid the pain now, don’t invest.

The post Principal Small Cap Fund – NFO – Should you invest? appeared first on Unovest.

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If you have come across an FMP sales pitch, it almost always is that “it is as safe as a Bank FD”, yet, “it will give higher returns than an FD.” An easy lure for most investors since ‘safe returns’ is a primary criteria.

You don’t like that FMP word any more. Do you?

In 2016, I wrote how FD returns have reduced and fund houses are doing the best to offer an alternative to the ‘safe but higher return’  seeking population.

People did invest then. And the ghosts have come back to haunt. One of the FMPs launched then, HDFC Fixed Maturity Plan – 1148 Days – Feb 2016 is due for maturity. Unfortunately, it has exposure to the Zee group (almost 20% of the FMP investments), which is doubtful of recovery for now and the Zee group promoters have asked for time to pay up.

The fund house along with other lenders has complied to their request believing that it is in the investor’s best interests. And so, it asked its investors to make a choice – take the money on maturity with a cut for the bad investments OR rollover (delay the maturity) for a chance to recover the full money.

Unfortunately, that is not what the investor signed up for. Her idea of an FMP was a safe return product, which gave better return than an FD as also better taxation. Turns out she was wrong!

No good time than the current crisis to rebuild a fresh perspective on FMPs and ask if they should be a part of your portfolio?

What is an FMP or a Fixed Maturity Plan?

If you have invested in a Bank FD before, you know that it comes in for different tenures of 1 year, 3 year, 5 year, etc. 

Now, you have probably also heard of a debt mutual fund.

If, no then you should read about debt mutual funds here.

An FMP is sort of a hybrid of the two. It is a debt mutual fund but with a defined tenure or period like a Bank FD.

To take some examples of names of FMPs –

  • HDFC Fixed Maturity Plan – 1148 Days – Feb 2016
  • DSP BlackRock Fixed Maturity Plan – Series 155 – 12 months
  • Birla Sun Life Fixed Term Plan – Series LQ – 368 days

So, an HDFC Fixed Maturity Plan – 1148 days – Feb 2016 means that it is a FMP that is going to start in Feb 2016 with a maturity of 1148 days or roughly 3.14 years.

Similarly, the Aditya Birla Sun Life FMP is for 368 days.

But is an FMP as good as a Bank FD?

Yes, that is the top question on your mind. Frankly, an FMP resembles a Bank FDbut only in the way it is structured. They come in several tenures too including 1 year, 3 years, sometimes longer.

Recently, 3 years+ tenures have become a norm and that is because of the long term capital gains implication. You get cost indexation benefit and hence pay lower tax.

Now, to list some of the differences between an FMP and a Bank FD:

  1. Bank FDs offer guaranteed returns in the form of interest. There is no guarantee of returns in FMPs.
  2. The principal amount that you invest in Bank FDs is also guaranteed by the government to the extent of Rs. 1 lakh. No such guarantee with FMPs.
  3. FMPs have a daily price unlike FDs and are affected by changes in interest rates. FDs are a straight line.
  4. If something goes wrong with one of the investment made by an FMP, it has to reflect in its value, which is adjusted (usually downwards) and affects you as an investor. With an FD, even while NPAs are the norms with banks, an FD continues to pay its promised interest and principal back.
  5. But let’s look at another side too. FMPs are more transparent in terms of disclosures about where they invest the money, average maturity and credit quality of the portfolio, and other details. On transparency basis, Bank FDs are a black hole. But then who cares?

You would also find that with an FMP, the average portfolio is of a reasonably high credit quality that is AA / AAA. That means lower risk.

Does an FMP give you better returns than Bank FDs?

It could but that is not guaranteed. Most fund houses attempt to generate a higher return than a Bank FD, since that becomes a major selling point.

To generate higher returns, an FMP would have to invest in not so high credit quality instruments, thus taking on relatively higher risk.

Now if you see, a year ago, the 1 year Bank FDs were available for 6 to 7% interest rates. (Senior citizens get half to 1 % more.) The return generated by FMPs in the last one year has been in the range of 7% to 8%.

Returns do not look like a differentiator for FMPs.  

What about taxation?

With Bank FDs, you have to add the interest that you earn as a part of your income and it is taxed accordingly.

As you would know, debt mutual funds such, as FMPs, attract short term and long term capital gains tax. If you sell or redeem your debt mutual fund or FMP within 3 years, you will attract short term capital gains at the marginal rate of your income tax bracket. The same would be long term capital gains tax of 20% after indexation, if you sell or redeem after 3 years.

For High Net worth Individuals or corporates, using debt mutual funds turns out to be more tax-effective. By paying indexation based long term capital gains on debt funds instead of tax on FD interest, they are able to save a precious rupees.

Does the lock-in make sense?

If you look at comparative data between Liquid, Ultra short term funds and FMPs, the former turn out to be better.

As you would know, liquid funds and ultra short term funds are open ended, that is, you can invest or redeem any time you want. There is no lock in.

Liquid and UST funds also hold an equally good credit quality (investment grade AA / AAA) in their portfolios.

As for returns, they have in some cases delivered a better return than FMPs.

So, getting into a lock-in with an FMP has no additional benefits.

What should one do – invest or not?

If we were to summarise the key aspects of an FMP, it would be:

Liquidity – Lock-ins with windows of redemption, but with exit loads;

Safety – Depends upon the kind of instruments the fund invests in; Typically is investment grade quality. Current experience has started to point otherwise.

Returns –  No significant difference in returns with reference to Bank FDs or Liquid / Short term funds. Remember, every bit of extra return comes at a cost, usually lower quality of portfolio (higher risk).

Taxation – Can be tax effective on an indexation basis for HNIs and Corporates. For a retail investor in the lowest tax bracket, this too ceases to be a differentiator.

As a retail investor, you are better off ignoring the marketing noise. Avoid FMPs. Based on your time horizon and risk appetite, choose a Bank FD or a liquid fund or an ultra short term fund. You will sleep well.

Between you and me: Have you been affected by the recent FMP crisis? Or you are simply a Bank FD fan? How do you go about making your fixed income / debt investments? Do share in the comments.

The post The FMP mess – Should you invest in a Fixed Maturity Plan? appeared first on Unovest.

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Ajay Gupta (name changed) fell prey to greed. A distant relative approached him a few months ago with an existing investment opportunity. A guaranteed return of 3% per month or 36% per year. This offer was a difficult one to ignore, plus he trusted the person making it. He took it.

Ajay worked with an MNC in Mumbai and now was sending almost 50% of his salary every month into this incredible investment opportunity. The results were showing up. Every month he received a fat interest which he reinvested.

The family was not to be left behind. Ajay’s sister and parents too jumped in with their money. How could they miss out on this never before opportunity? So much so, that they withdrew their bank deposits which were earning, in comparison, meagre returns of just 7% interest per year.

Until one day. Suddenly, the relative was nowhere traceable. After a few weeks of hectic following up, the news arrived. The ‘party’ who he had lent the money for the incredible returns has declared bankruptcy.

The hard earned money of the entire family vanished in no time. It was a great shock to take in. The financial foundation was shaken to the core. Bitterness with the relative followed.

Those who found out asked the ‘investors’ just one question – “how come you turned so ‘greedy‘?”

Fear and Greed rule your mind too and the world’s

Ajay and his family are not alone in letting emotions rule them, specially when it comes to money.

Einstein said, “There are 3 great forces in the world. Stupidity, fear and greed.”

Your stupidity can make you fearful or greedy. Or, if you are being fearful or greedy, you are actually being stupid.

Fear and greed rule our minds. In any given situation, it is highly likely that our mind will swing towards one of them.

Take a simple instance. How many things have you been buying which you do not really need?  The world of advertising uses this fear-greed mechanism to influence you to buy these “not needed” things.

Fear of rejection makes you buy that expensive car and that skin whitening cream. Fear of losing makes you sell your investments when markets show even a slightest sign of weakness.

Greed drives you to invest in expensively priced stocks or buy that dud insurance policy that has nothing to do with your real insurance needs. And yes you also buy that deodorant that will make you attractive to the prettiest or the most handsome.

The Drivers of your Financial Behaviour

Fear and greed are big drivers of financial market behaviour too.

I have heard several stories about of investors who, clutched tight by fear or greed, lost their money, sometimes all of it, in the financial markets.

Carl Richards of Behaviour Gap put it very aptly in his sketch.

It is just not easy to escape the fear-greed duo.

What should I do?

Yes, we fail to check these emotions. Yes, we let them control us and then make disastrous decisions.

And this is because, our mind is not trained to handle them.

That does not mean, you can’t. You can train your mind to deal with these rogues effectively and take control of your decisions.

As simple as it may sound, here is an idea for you to remember. Don’t be impulsive with your decisions.

Whenever you are faced with a decision, stop yourself and ask:

Is my fear or greed driving this decision?

Ask not once but 3 times. And if you will be able to see the hidden fear or greed, if it is there. Once you know that, you will also know what to do.

Over time with practice, you will learn to use these emotions to your advantage instead of they using your mind to inflict harm on you.

Practice this simple idealong enough and you are well set to travel the road to being rich and happy.

Between You and Me: What’s your experience with fear and greed? How have you used them?

The post Do fear and greed rule your mind and your money too? appeared first on Unovest.

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The year 2018 saw the introduction of long term capital gains tax on equity investments (mutual funds or direct stocks) at the rate of 10%+surcharge. As you file your tax returns, here are some key points to wade through the calculations.

If you have sold your equity investment (held for more than 1 year) in the financial year 2018-19, you are required to calculate your long term capital gains and pay taxes on them.

Before you start cursing the government for introducing one more tax, do know there’s a breather in the law. If you invested in mutual funds on or before Jan 31, 2018, any gains made till that day are exempt from this tax.

For the purpose of calculation of your capital gains, you can take the higher of your ‘actual buy price‘ or ‘price as Jan 31, 2018 as your actual cost‘ and calculate your gains accordingly.

The set off against long term capital loss!

The other benefit that has come out of from this tax is that you can now also set off your realised long term capital losses against your realised long term capital gains.

Means, that if you invested in Mutual Fund A and sold it after one year at a loss of Rs. 10,000, then you can deduct this loss from another Mutual Fund B, that you sold for a profit of Rs. 20,000. The net capital gains in this case is (Rs. 20,000 – Rs.10,000) = Rs. 10,000.

What is the capital gains tax that you pay?

Here’s how it works.

  1. In any financial year, long term capital gains on equity mutual funds are exempt till Rs. 1 lakh.
  2. Over this Rs. 1 lakh, you pay 10%+surcharge as long term capital gains tax.

So, in the above example, assuming that the total capital gains is only Rs. 10,000, there is no tax payable as the net capital gains is less than Rs. 1 lakh.

What if the total gain was over Rs. 1 lakh?

Suppose, the total gain is Rs. 1.5 lakh. In this case, the first Rs. 1 lakh is free of tax. For the balance Rs. 50,000, the tax amounts to 10.4% of Rs. 50,000, that is, Rs. 5,200.

What if there is an overall realised loss?

Good question. Suppose, you sold some of your long term investments in the past year and overall you made a loss of Rs. 50,000.

First thing, you don’t need to pay any tax on the loss.

Second, you can note down the loss and set it off against any future gains, till the next 8 years.

How? Suppose, the next year, you end up realising a gain of Rs. 175,000 on sale of your equity mutual funds. You can now set off the earlier Rs. 25,000 loss against this gain. This reduces the overall gain to Rs. 1.5 lakhs. Isn’t that great?

Can I set off my short term capital loss against long term capital gains?

Yes, of course. If you have made a short term capital loss (STCL), that is, on sale of equity mutual fund held for less than 1 year, you can set off this loss against long term capital gains.

The rule to note is that you can set off STCL against Short Term Capital Gains first and if there is still a balance in STCL, then against Long Term Capital Gains.

Phew!

I know this sounds like a lot of work but most investment tracking platforms can help you get these numbers. If you are using the services if a CA, s/he will help you with the same.

Your primary job is to ensure that you have the calculations done correctly basis the transactions you have carried out in the financial year ending March 2019.

Read more: Long Term Capital Losses

Further reading: Capital Gains Tax – All that you need to know in a single place

The post How to calculate your Capital Gains Tax on Mutual Funds in 2019 appeared first on Unovest.

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Who wouldn’t want to? But how? The good news is that I now know someone who does that all the time.

I got to know Saakshi and her husband, Ajay, as clients and when I first met them, the conversations kept gravitating towards places to see, eat at & shop from. I realised that there was a traveller hidden there. This caught my attention and what Saakshi told me then blew my mind. She travels international and that too for low or no spend. Tickets and hotels are paid off, hold your breath, only by credit card reward points.

How could that even be possible? She told me all, in this free-wheeling chat and I am happy to share it with you here. Let us all fly, free and to be Free!

Who are you?

Saakshi: I usually like to define myself as a Marketer, a Sous Chef, a Deal Digger, a Nomad, a Dancer, a Conversationalist, a Mentor, a Friend, an Author, a Student & a true-blue Middle-Class Indian.

You caught me on “Nomad”, which probably also means, you love travelling?

Saakshi: Traveling should be my middle name. My father is in a transferable job & I have lived in around 12 cities like Jammu, Nazira (Assam), Surat, Mumbai, Bangalore, etc. In fact, to date, I never let myself get too comfortable in one place. I usually switch houses to live in a different area if I end up living in the same city.

You are a certified Nomad then. Now the big question. You told me that you have been travelling using only your credit card reward points. That literally means free. Sounds like a scam! Help me understand this. You really do it? 

Ajay & Saakshi – Traveling the world for free

Saakshi: Don’t worry; it’s completely legit. Although I have always dreamt of going around the world & stay in the fanciest of the hotels possible I never had deep pockets plus my monthly expenses are really high. So, being the Marwadi I am, I started scouting for hacks that I could implement to realise my dream & yet not compromise on my hard earned savings. I have been halfway around the world with this. I have travelled to countries like  Singapore, Philippines, Indonesia, Thailand, Sri Lanka, Malaysia to name a few.

Wow! That’s awesome. But tell me, this must also mean having a few lakhs of credit card reward points. How do you even get all those points?

Saakshi: Amassing reward points isn’t a challenge. We need to find the right credit card basis our spend types & it will give you a lot of points for every swipe or spend. Also, you don’t need to have lakhs of points to reap in the benefits, need to be smarter with your card & trip planning.

Give me more on this. What does being smarter with your card mean? – What is the best way to accumulate reward points? Can you give us details of one trip that you planned?

Saakshi: The best way to accumulate points is to replace any other payment form with your credit card. You will get points for every spend & credit card companies run a lot of promotions, so the likelihood of receiving 10x more points is substantially higher too. Now you can also get rewarded for paying the credit card bills on time.

There are some things you should be aware of while planning the trip:

  • Try to plan at least a quarter in advance. The sooner you plan, the better rates you get.
  • Always & I repeat, always use an incognito mode to check all your fares. The sites have cookies & they increase the prices on a certain route based on your search history.
  • Planning a trip can be overwhelming & exhausting. That’s why planning ahead helps. You can take your time to research. Just like everything else have a checklist for this too.

I have shared more handy tips here.

Let me tell you about one of my favourite trips.

It actually was the first time I tried to combine 3 countries in a single trip. Our destinations were Vietnam, Malaysia & Thailand. We usually decide on the part of the world we would like to visit & let everything else unfold itself.

We shortlisted the cities we wanted to see in Vietnam. Langkawi was on my mind for a while & it made sense to add that to the trip due to the proximity. We ended up adding Thailand too, although we have been there thrice already as the flights were the cheapest to Bangkok & the connectivity from there to Ho Chi Minh city is pretty awesome. We usually  finalize all the flights first depending on the best prices available post and then move onto booking hotels.

We do a general survey of the prices & also do a tally of the total points we have to optimize the usage. Since we always plan ahead, it gives us flexibility with the dates. Skyscanner & Kiwi are two portals that come in really handy for finding the best flights at the cheapest fares in your date range. Once the identification is done using these portals, we do the booking using the credit card portal. They are just like any other booking portal the only difference being you can use your points or a combination of points & money for the booking.

We have noticed that the hotel rooms booked using the card points are a tad expensive but they are usually the better rooms & are most likely to get you an upgrade.

Also staying loyal towards one hotel chain helps you in a big way. You can get free upgrades, better facing rooms & some other perks like an exclusive discount on spa, etc.

The wisest thing to do is to take stock of all the points you have, make a budget for the trip & then make the bookings.

So, it is not just about a few clicks. Planning is crucial. Saakshi, which credit cards are high on your list to accumulate reward points to fund an international holiday?

Saakshi: Well, I have used over 12 credit cards & I would highly recommend HDFC Diners Black. It gives you high value for every buck you spend & it has the lowest foreign currency markup too.

The other card that comes pretty close is HDFC Infinia Card. Apart from the rewards, you get an array of benefits like Vistara Gold Membership with a couple of upgrade vouchers, Taj Inner Circle membership etc.

The other two cards that come close are SBI Elite & IndusInd Legend card.

I wrote a note covering this card and others available in the market here.

Doesn’t that mean annual fees or minimum spends and other eligibility criteria to have these cards in your pocket?

Saakshi: There are at least 20 really good credit cards available in the market & it’s not a one-size-fits-all kind of a thing. I highly recommend spending some time researching to find the best card that fits your requirements. An online shopper or an avid traveller are two distinct profiles & hence your card needs to maximize the returns on your spending pattern.

Some cards come with annual fees, but it is totally worth it just because the rewards are far higher than the fees that you pay. Additionally, there is usually no minimum spend criteria if you are comfortable with the renewal fee.

Pro tip: Most of the banks forego your renewal fee/annual fee if you spend the minimum amount specified by them. If you think you won’t be able to utilize that amount, look for a card that has a lower threshold or no annual fee.

Let’s come to the other side. You would agree that it is easy to go wrong using credit cards… overspending, revolving credit, fees, interest and what not? Have you fallen too? How do you protect yourself from these?

Saakshi: When I first started using credit cards, my parents being the typical middle-class parents were strictly against it. It was royally announced that ‘I don’t need that thing if I need to buy it on credit’ & it does hold true for a lot of people who spend mindlessly, but if you are diligent with your spends & pay up on time, you are likely to get far more rewards.

One also needs to instil some amount of discipline; people are more comfortable with debit cards or cash as one would only spend what they had so the control was enforced externally. With credit cards, one needs a lot of internal discipline. I still keep track of my spends. Earlier I used to do it manually with every spends being recorded in my notepad but thanks to technology, there are a lot of apps that help you track all the spends with their category end to end. Not only this, they give you timely notifications to assist you in paying up on time to avoid all extra charges.

I am sure that discipline is very necessary. I am sure you are also saying that no revolving credit on your card spends. Timely payment is very important else it would take no time to enter a debt spiral.

Saakshi: Absolutely! It’s a very vicious cycle. As human beings, we do have the tendency to procrastinate. While it can work just fine for some cases, here it might weigh heavily upon you. It’s only fun till you have complete control over it.

Thank you Saakshi! You took me and I am sure all the readers on a flight of imagination, which they will soon convert into a real one. I am going to use all the ideas you have shared. Thanks again!

Saakshi writes about her travel experiences and credit cards on www.imbalance.com. Go take a dive.

The post How to travel the world for free by using credit card reward points? appeared first on Unovest.

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