Wednesday, December 3, 2008

Savings and Investments

Today in this global economic crisis, everyone is worried about future money, where to put hard-earned (or how so ever you may have got) money as to get better and secure returns. And as per current situations, it is really a tough job to give good advice and many people have again started looking for our traditional savings instruments like PPF, NSC and other stuffs. And there is no doubt, that these instruments will ever fail or may not give you returns. These are really guaranteed instruments where one is always sure how much money he/she will be receiving at the day of maturity.

But always do a good amount of research before putting all your money even in these instruments. There are large numbers of schemes present where you will get guaranteed returns, and all have some different rate of interest or some have taxable interest, some are tax-free. And if somebody is not interested in saving tax while depositing money, you may find other schemes with some higher returns. So always analyze yourself, your requirements, do some research and then invest your money.

Now the question arises, should we stop putting our money into equity market?
The answer for this question is with you only. You have to analyze how much risk appetite you have. But as per some rules or equations defined by experts, one should have equity exposure depending on your age, and the formula is 100 - (your present age). Suppose you are 30 years old, then 70% (100 – 30) equity exposure you can have. But if you have faced this present heat, then you will certainly doubt this and I too start having doubts on these equations. So answer is with us only, how much we can expose ourselves to this market segment.

What I’ll suggest someone is always first do your investment of Rs. 1 lac under section 80c, if you come under tax bracket. And if you can afford home-loan, it is best to utilize that for 80c. But if you cannot afford home-loan and as per current property rates in metros, it is really difficult to take one. In this case, you have to make proper planning, do a thorough research, which options are best and again how much equity exposure you can afford. For section 80c, the best options that I like is to put some money around 15-30% in PPF (Public Provident Fund), do not confuse with PF or EPF. Some percentage of money (around 20-25%) you can put in Tax-Saving Fixed deposits, now I’ll prefer PSU banks like SBI, PNB or any other such bank instead of private banks irrespective of better services offered by private banks, and you may have got the reason for that…

Now you have done almost 55% of your savings, now time comes for equity exposure. For me it is a must to put some money in this segment also, just to move ahead than inflation but yeah with a risk involved. But ELSS as per overall records, have always given 10-20% returns if you invest for a period of minimum 5 years, may be there would be some exceptions that I may have missed-out. So I’ll suggest exposure for around 20-30% in this market. You may also consider going for ULIPs if you are really a fan of it, but for me it is a kind of No-No, you may find some of the reasons in my earlier post. It is always better to have term insurance plan than to go for ULIP. You can put 5-10% in LIC term plans.

Now your savings for section 80c have almost finished, and you can analyze your needs and make some calculations and change the above figures as per your needs and risks. And you will not end up in losses, I bet.

Now the big question comes for those reading this article, if I do not want to save tax, then what?

Then again I will repeat, analyze your needs and risk appetite, sorry for repetitions…
Again I’ll suggest you to go for PPF just to get secure returns but yeah with 15 years lock-in period, but your money is secure with Tax-Free returns. Go for some Fixed-deposits as per your need, check the interest rates, duration, and put your money in small chunks in order to have some liquidity.
Go for good Mutual Funds, ‘good’ you will find by doing some research. And if you have good risk appetite, you may expose to direct equity, but it needs some time to regularly check your portfolio, and if you are some what new to this, read my earlier article, you may find some good tips.
You can also go for commodities, like you may invest in Gold, I do not mean go and buy some jewellery or a bar, but go for Gold ETFs, again you may refer to my earlier post for the benefits of that.

And one thing more, do not invest all your money, always have some good amount of money into your savings account, you never know when you may need some urgently.

Well I think this is enough in this article, if I’ll get some other better options I’ll let you know. And if you have some better options or any other comments, please post a comment so that everyone will come to know about that. Always share your knowledge, it will only grow…

Tuesday, April 22, 2008

ULIPs vs MFs

To invest your money in ULIPs (Unit-Linked Insurance Plans) or MFs (Mutual Funds), and to chose in between them, there are many factors that you have to look upon.

Firstly you must know for how many years you want to put your money, means for short-term, mid-term or long-term, same case as with equity market but here you do not have to track it daily or weekly. Once in a month or two is more than enough.
And secondly whether you want to have life-insurance coverage with your plan or not.

Major factor here is time-period, as ULIPs are beneficial only if you want to invest for more than 5-10 years. In case of ULIPs initial years charges are too high. So if you have time horizon for more than 10 years and also want some life-insurance benefit then you can go for ULIP plan. And if you basically want to invest money for some less time period then you should go for MFs. Again in MFs there are several plans available to you like complete equity, and some with combination of debt and equity, so you can invest and take plan as per your risk appetite.

Also if you do not want any life coverage then MF is always a better option. And you can go for separate life-insurance policy which is pure life-insurance policy (term-insurance plan) with no money-back. If you want to go for pure life-insurance, then you can take policy for any amount, and it depends on person to person how much that person wants to give to his/her dependents in case of any mishappen.

Insurance companies themselves admit that if your investment horizon is anything less than 7 years, don't even consider a ULIP. This is because, the charge structure in a ULIP is vastly different from a mutual fund. In the first year, a large chunk of the charges are recovered from investors. It could be as high as 40 per cent, in terms of some annual charges, fund management charges and some other charges as well.

ULIP tend to be expensive propositions (in comparison with mutual funds) during the initial years. However, over longer time horizons, the expenses balance out and ULIPs work out to be cheaper as compared to mutual funds. However, even if the lower expenses of a ULIP vis-à-vis that of a mutual fund scheme were to be considered, the latter would still surface as the better option.

You can make adjustments to your mutual fund portfolio. If you believe you have made a wrong investment decision, you can redeem your investment in a particular mutual fund and invest in another one. Such adjustments are not entirely feasible in a ULIP. If you want to switch in a better ULIP plan of another company, then again you have to start afresh, means again you have to pay those heavy initial charges.

Switch over between ULIPs of different insurance companies is not possible in case their performances are below par. Worse, most ULIPs do not even disclose details about their fund management and their portfolio to the investors.

A simple mutual fund or even a few blue-chip stocks would get you much higher returns and keep your portfolio simple to understand.

So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you. So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need. Both can co-exist in your basket of needs. So identify your needs with a financial planner and then pick the product suitable for you. In a ULIP, your premium is divided into your risk cover and your investment. That means, out of the total premium that you pay, a certain percentage will be deducted as risk cover to provide for your insurance and the balance will be invested in a fund. Your risk cover charge will increase every year with your age. As a result the investment allocation will reduce.

Check out various other low risk investment options to invest your money.

Thursday, April 17, 2008

Thursday, March 20, 2008

Gold: An Investment Option

In just a span of two years we have seen the prices of gold more than double from around 6000 levels in early 2006 to more than 12,000 recently. There has always been a good demand for gold in India making it the largest consumer of gold in the world. Gold has been popular in India because it acted as a good hedge against inflation.

Not many people know that there are various investment options in gold like gold bars, numismatic coins, and gold accumulation plans by banks and financial institutions, and gold mutual funds.

Traditionally, the only option available to buy gold was in the physical form – whether as jewellery or as bars/coins. But now there are alternatives of buying gold in the demat form using 'Gold Exchange Traded Funds'.

Studies conducted by Security Exchange Board of India (SEBI) reveal that gold has been the second most preferred option among the Indian public after deposits in banks. An increased pace of liberalization measures in India will account for many new options to emerge to invest in gold bars, gold coins, gold funds and gold options.

Gold can’t be printed like a banknote can so it’s finite in supply. It has to be mined from the ground and that’s why it will always be used as a store of value. In short its attraction is its rarity value.

In case gold is being bought purely for investment purposes, then Gold ETF scores over Physical gold.

* Low cost: When you buy Gold ETF you have to pay only the brokerage charges, which is usually around 0.5%. Vis-à-vis this, you may have to shell out anything between 10 to 20% as premium and/or making charges if you buy physical gold. To store physical gold, you have to incur locker/insurance charges, while in ETFs one pays the annual fund management charges of 0.5-1%. Though physical gold kept at home with no insurance can save annual costs, it is quite risky.
* Transparency: For ETFs, the rates are quite transparent as they are linked to the international prices. But there is no commonality in prices of gold across various jewellers/banks even within the same city.
* Purity: You need not be concerned about the purity of gold in Gold ETF.
* Security: No one can steal your Gold ETF units.
* Capital Gains Tax: In case of physical gold the LTCG tax becomes applicable only when the holding period exceeds 3 years. This limit is just 1 year in case of Gold ETFs.
* Wealth Tax: Physical gold attracts Wealth Tax whereas Gold ETF is exempt from Wealth Tax
* Convenience: Just call up your broker and your job is done. You don’t need to visit the nearest jeweller with loads of cash.

Gold is essentially a game of demand and supply. And it is not easy to predict the demand-supply scenario because of multiple factors – both national and international - affecting it. But if we look at the past 15-20 years’ record, it is seen that Gold is a hedge against inflation.

In 1996, gold price was near to Rs. 5,700 per 10 gm and in year 2001, it was near to Rs. 4,400 nearly 25-30% depreciation but after that period, it has not seen those bad days and have quite a good future ahead.

Inflation will have no impact on the price of gold, other factors remaining the same thereby lending support to your wealth. In fact, in times of inflation, more money tends to move to gold, thereby driving up its price. In other words when the stock market crashes or when the dollar weakens, gold continues to be a safe haven investment because gold prices rise in such circumstances.

It could be said that one may invest a small portion of one’s corpus in gold as a means of portfolio diversification. But one should not expect high returns.