LONG TERM SIP

Systematic Investment Plan

SIP ( Systematic Investment plan) by Sunil Lalge

Income funds score over fixed deposits

by Vidya Bala on February 19, 2013 in Mutual funds, Personal finance

For most investors, mutual funds mean investing in equities and therefore come tagged with risks.

Given this, for a risk-averse investor, there may be little choice left than to invest in plain vanilla bank fixed deposits. But did you know that a three-year deposit that you invested in 2010, for example, would not beat inflation (post tax), when you receive the maturity amount out in 2013? (Please see table below for returns).

What if you had a similar debt product that can deliver returns superior to fixed deposit returns and beat inflation? Would you not consider that?

If you are investing for not less than two years, then ‘income funds’ a class of debt mutual funds can deliver superior returns compared with bank deposits. That means you can earn a bit more than traditional debt avenues, by still staying invested in debt.

What are income funds and what makes them attractive?

Income funds
Income funds are a class of debt mutual funds that invest in a combination of government securities, certificates of deposits, corporate bonds and money market instruments. They are managed by expert fund managers who actively try to manage the portfolio based on interest rate movements, while at the same time keeping the portfolio credit worthy.

In other words, they seek to generate returns both in declining and rising interest rate scenarios by managing their portfolio actively. They either generate interest income by holding the instruments till maturity or manage gains by selling them in the debt market if the price of the instrument rallies well.

That means that these instruments will not guarantee you fixed returns like deposits. Yet, over the last 10 years, they have beaten three-year deposit rates, irrespective of the year in which you invested. Let us look at income funds’ features and how they score over fixed deposits.

Income fund advantages
• Highly liquid. Can with draw money anytime unlike fixed deposits that come with a fixed lock-in period
• Actively managed. Seek to generate returns from varying interest rate cycles. Fixed deposits, on the other hand, carry re-investment risk. When a deposit matures and is reinvested, you may fall into a low interest rate regime and get lower returns than before.
• Have historically generated superior returns than fixed deposits. Please see data given.
• Very tax efficient, especially for those in the 20% and 30% tax brackets. Long-term capital gains (for holding over one year) are taxed at 10% without indexation or 20% with indexation. Interest on fixed deposits, though, is taxed at your income slab. Please see table for post-tax returns
• Offers high flexibility. Besides investing systematically you can even withdraw money systematically thus generating regular cash flow for yourself.
How to use income funds
• Invest your money in a combination of traditional fixed income options such as deposits and income funds to pep overall returns. You need not put your money in one basket.
• When you build a mutual fund portfolio, consider investing over one half of your capital in income funds when you have a time frame of say 2-3 years
• Use income funds, along with equity funds, as part of a long-term asset allocation strategy to build wealth. Choose the growth option.
• You can use income funds to also provide for some monthly cash flows by opting for a systematic withdrawal plan after first holding it for at least two years.

Note: If you have a time frame of less than 18 months, there are other short-term debt schemes that mutual funds offer. Income funds will not fit a short time frame. Also, remember that income funds do not guarantee fixed returns nor are they covered by insurance as is the case with bank fixed deposits (up to Rs 1 lakh). To this extent, they do not top the safety chart.
However, for longer periods, the interest rate risks are taken care of, thus generating superior returns for the limited risks assumed.
Birla Sun Life Dynamic Bond fund, IDFC SSI Medium Term Plan A, Templeton India Income Opportunities and HDFC Medium Term Opportunities are some of the consistent performers in this category.

BEST TAX SAVINGS OPTION "ELSS"

There are so many tax saving investment options; how Mutual fund ELSS Schemesstand out from all other options?

A Mutual Fund ELSS is similar to diversified equity funds. That means the fund manager can invest in shares of various companies across various industries. The difference is ELSS has got the added tax benefit, something a diversified equity fund does not offer.

ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction from income up to Rs.1 Lakh. This gives the tax payers benefits from 10 per cent to 30 per cent (excluding the educational cess) based on their current tax slab.

The other tax saving investments like NSC, PPF will give only 8% return p.a whereas the Mutual Fund ELSS has got the potential to deliver more than 12% return p.a. Also the lock-in period in Mutual Fund ELSS is 3 years and with NSC it is 6 yrs lock-in and with PPF it is 15 years. Among the various tax saving investment option, Mutual fund ELSS has got the least lock-in period.

Ulips are also one of the tax saving investment options. But now everyone has realized that Ulips has got heavy front loaded charges. Moreover smart investors want to separate their insurance from their investments. They no longer see insurance as an investment; they see insurance as a protection plan. So the smart investors go only for pure term insuranceand reject ulips.

This is how Mutual Fund ELSS stands out of the crowd.

Before deciding to go for Mutual fund ELSS, here are some points to ponder over. First check your overall portfolio. Does it need more equity exposure? If yes then you can go for ELSS; if no then you can go for PPF or NSC.

Second thing is to keep in mind, the equity investments are for long term, say 5 years or more. Though the lock-in period in ELSS is 3 years it is better to invest with a time horizon of 5 yrs or more.

Also investors need to keep in mind, SIP is the best form of investing in mutual funds and ELSS is not an exception. So doing an SIP in ELSS is a good strategy to be followed.

The poor performing ELSS has given around 10% annualized return in the last 5 years whereas the best performing ELSS has delivered around 25% annualized return in the last 5 years. So investors need to be careful in choosing the right ELSS scheme. Past performance, risk adjusted return, consistency are a few parameters to be evaluated in selecting a best performing ELSS scheme. Investors also can approach financial advisors for selecting the right scheme.

There are two groups of ELSS investors. Majority of investors belong to the first group. They will wake up late to these tax saving investments. For salaried individuals, it is typical that they will be informed by their accounts department somewhere around end of January to provide proof of tax saving investment immediately or else extra tax will be deducted from their February salary. At the neck of the moment, the choice ends up being guided by convenience alone. They tend to think about tax first and investments later. As long as something saves tax, its real benefits and features as an investment are paid less attention to. That means the investments will be chosen more for convenience than for suitability.

There is another group of investors. Though this group is a very small group, it is a very smart group. They will not rush for tax saving scheme at the last minute. They will plan in advance. That means they will have more time to choose the right product. They will save tax as well as choose a good investment option. They will also check whether this particular tax saving scheme will suit their overall portfolio or not; will this tax saving investment is going to fit into their comprehensive financial plan. That means they will consciously choose an investment which saves tax as well as helps them in achieving their financial goals like children’s higher education, buying a house, retirement plans.

So…now just check up which group you are in.

The above matter views of Mr. Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in

3 Simple ways to become RICHER in 365 Days

You have got complete 365 days. Why don’t you chalk out a plan to become richer by next year? The good thing is you don't have to employ some highly esoteric investment strategies or complex algorithms to become richer in a year's time. Some simple reorganisation in your personal finance management could make you richer. Almost always, the simplest are the most profound.

1) Make a Financial Plan: 

This is the first and foremost important step to become financially successful. It is not your income, but your wealth that counts. People with high income like Michel Jackson died with a lot of debts. So a careful personal finance management is more important than how much you earn. To have an effective personal finance management system in place for you, you need to have a personalized well written financial plan.

What are the things you want to save and invest for? It may be for buying a home, buying a car, children’s higher education, retirement planning. Decide how many years from now you need to achieve each and every goal. Because you need to take into consideration the inflation for all those years and also you need to choose investment options based on the timeframe for investments.

You need to create your own list of financial goals. If you don’t know where you are going, you may end up somewhere you don’t want to be. To end up where you want to be, you’ll need a roadmap, a financial plan.

So create a financial plan for you and your family on this. There is a lot of help available for you online to create a financial plan in various websites with financial calculators. But if you want to create a more workable financial plan, you may seek assistance from professional financial planners.

2) Pay off all high interest debts: 

You need to create a plan to come out your high interest debts like personal loan, credit card outstanding, car loan and the like. Credit cards can make it seem easy to buy expensive things when you don’t have enough cash. But it is not free money. To come out of debt, you need to have specific strategies that can work in your own situation. There are 11 ways to get out of debt and stay out of debt. You can choose one or a few ways from this to become debt free.

If you are not giving enough attention to your debt, then it can sink your financial ship. So take some time on this to list down all your borrowings and make out a plan to come out.

3) Start Saving and Investing: 

As soon as you have paid off all your high interest debts, you need to start saving and investing for your financial goals. To save more either you need to spend less or you need to earn more. So you check up what are all the ways and means available for you to spend less and earn more.

If you are spending more than your income or all your income and you don’t have any money left to save or invest, you need to look for ways to cut back on your expenses. When you check where you are spending your money, you will be surprised to know how everyday petty expenses that you can do without add up over a year. You need to understand what makes us spend more and strategies to have self control with money to spend smart and save more.

When you started saving money, you need to convert your savings into investments. When you are choosing your investment option you need to take into account, the timeframe for investments, risk you can afford to take, inflation and your financial goals. Also you need to be careful in avoiding the biggest investment mistake. That is to choose a scheme in sync with basic investment principle. Make sure that you are not violating any investment principle. Don’t fall for speculative gains, ponzi schemes and get rich quick schemes.

Mutual fund investment by means of SIP ( Systematic Investment Plan ) is best saving option

If you follow these simple but authentic steps, by next year you will be richer than what you are in this year. Celebrate this year with much more confidence and peace of mind by following these simple steps for financial success.

The above matter views of Mr. Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in

Financial Planning

What is Financial Planning?

Financial planning is the process of establishing personal and financial goals and creating a way to reach them by beating Inflation (Purchasing power eater). The financial goals can include buying a house, saving for your child’s education / marriage or planning for your retirement or simply creating a wealth in future.   

 

Benefits of Financial Planning

1. Knowing & understanding your financial needs / goals

2    Achieving your goals with optimum use of resources

3    Understanding impact of investment choices

4    Adapting to changes in personal & financial situations

5    Peace of mind – ensuring that your goals are not compromised

 

Effect of inflation (Prices of commodities)

 

Items	1957	1982	Present		2025
A Kg of Rice	0.30 paisa	Rs 4	Rs 30	Average 7% to 8% Inflation	82
A Kg of Tur Dal	0.50 paisa	Rs 8	Rs 70		190
A liter of Milk	0.50 paisa	Rs 2	Rs 30		82
A Liter of Petrol	0.25 paisa	Rs 3	Rs 75		204
A Kg of Sugar	0.15 paisa	Rs 3	Rs 35		95

What are available investment option

 

Opportunities	Indicative Returns	Indicative Risk	Indicative holding period
Fixed income Bank FD / RD, Postal RD / MIS, PPF, Debt Mutual fund	8% to9% ( Pre tax)	No	Ad per Desired holding period  ( 1to 3 years)
Equity ( Stocks /MF/ PE )	12% to 20%	High	Easy liquidity ( 5+ years)
Metals ( GOLD ETF / MF)	10% to 15 %	Moderate	Easy liquidity  ( 3 to 5 years)
Real Estate	15% to 18%	Moderate	Not liquid  (5 + years )

 

Performance of various Assets since 2000 to 2010 If Rs 100000 invested in Jan 2000 

Assets	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	Average	Maturity value
Equity	-20.60	-17.87	3.52	72.89	13.08	42.33	46.70	47.15	-52.45	75.5	16.7	20.63%	Rs 787061
Gold	0.10	0.33	14.00	4.50	14.00	2.60	3.30	15.5	20.00	23.00	23.80	13.71%	Rs 410946
Debt	10.8	22.46	15.68	9.95	-3.15	3.47	0.76	5.29	20.78	-5.5	8.4	8.09%	Rs 235310

Equity is more volatile than others & also gives more returns than other assets over longer period investment.

So considering INFLATION, 

  Fixed income option – This can only preserves the investment value.

  Equity (MF) & Gold can create wealth.

 

Goals	Investment period	Suggested Asset class	Rate of returns
Emergency Funds	No lock in OR Up to 1 year	Bank SB a/c MF Liquid schemes	4% 7 to 9%
Child Education    OR Child Marriage	1 TO 3 Years 3 to 5 years 5 years & above	Bank FD / MF Debt schemes MF Hybrid / Gold schemes MF Equity / Gold schemes	7 to 9 %     / 7 to 12% 9 to 15% 12 to 18%
Retirement	5 years & above	MF Equity / Gold schemes	12 to 18%

We have use these assets based on our goals and investment period

 Others goals ( Dream House, Four Wheeler, Foreign tour etc)  can be set as per available investment period.

 

15 YEAR SIP RETURNS FOR SIP OF Rs 10000 PER MONTH

115 DIVERSIFIED EQUITY SCHEME CONSIDARED

 

YEAR STARTED	2009	2007	2005	2002	2000	1997
Invested Amount	360000	600000	840000	1200000	1440000	1800000
YEARS	3	5	7	10	12	15
MAX RETURNS %	15.76	18.21	15.41	24.01	27.28	26.79
MAX RETURNS Rs	454746	944927	1454739	4276954	8580924	17450539
Average Returns %	1.73	7.73	8.64	17.84	19.94	20.29
Average Returns Rs	369687	729187	1142390	3064256	5228736	9802547

                      Data source    NJ SIP WATCH   August 2012