Saturday, July 1, 2017


The recent demonetisation drive by our government has benefitted banks the most as SBI alone reported garnering deposits more than Rs. 1.2 lakh crores in 10 days. It has been estimated that the combined banking system will receive deposits of more than Rs. 4 lakh crore. By curbing the cash withdrawal limit, the biggest impact will be on the consumption which is expected to bring down inflation below 4% by December end. The chain effect of all this is expected to lead RBI to reduce rates in the next monetary policy meet scheduled in December 2016.
Banks have already started reducing interest rates on deposits as they now have excess money which must be ultimately lent to borrowers. Our country’s biggest bank – SBI has already reduced rates on fixed deposits to less than 6% for tenures of 1 year and above. Other banks are expected to follow and reduce their interest rates too. Where does this leave the investors, who have been religiously investing in Bank Fixed deposits for safety and fixed income purpose? Do fixed income investors have an alternative now which can help them earn better than FDs and provide the safety net that banks used to provide? The answer lies in Debt Mutual funds.
Debt mutual funds are schemes which invest predominantly in fixed income instruments such as treasury bills, certificate of deposit, debentures, corporate and government bonds, etc. Depending on the nature of the scheme the investments are done accordingly.
Investors can invest in these debt schemes as per their time horizon and after understanding the risk factors associated with it.
1.       Liquid Funds: These funds ideally invest in very short term securities such as treasury bills issued by RBI and Certificate of deposit which carry a fixed return. These funds are ideal for investors who want to keep aside idle cash rather than maintain in savings account. Also, if you have plans to do a major purchase in next 1-2 months then too the funds can be maintained in these funds as the funds get credited into the account the next day on redemption. Secondly these funds are currently providing a return in the range of 7-8% annualised which is much more than savings account.

2.       Ultra-short term funds: These funds invest in securities of duration ranging from 3 months to 6 months and primarily invest in debentures, certificate of deposits and commercial papers too. If you have a 3 to 6 month holding period, then these funds are ideal with a return potential like liquid funds and higher at times.
3.       Short Term funds: If one has a time horizon of 1 to 2 years then these funds are ideal as they invest in securities of slightly higher duration which can be more than 1 year. These funds invest in debentures, bonds and even government securities. These funds are ideal investments against 1-2 year Fixed deposits as they return more than ultra-short term funds. These are much safer than most other long term debt funds.
4.       Accrual funds: These funds are also known as credit opportunities funds as these funds primarily invest in debentures and bonds of corporates. The ideal tenure for such funds should be 3 years and above as these funds invest in rated bonds with the intention of earning a regular fixed income (accrual). While investing in these funds care should be taken to check the ratings of the securities held in the portfolio and only those holding AAA rating should be considered. Some of the securities in the portfolio may face credit risk and hence investors with utmost safety in mind should avoid such funds.

5.       Dynamic Bond funds: To overcome the risk faced by Gilt funds, Dynamic bond funds have been created. These funds dynamically manage the different bonds in the portfolio as per market trends and situations. In the current situation, these bonds are best suited to ride the trend and give better returns.

First time investors will do well to stick with ultrashort and Short term debt funds and the level of safety is high and returns volatility is minimum. For investing in accrual and dynamic bond funds, one has to understand the pros and cons of  how these funds perform in changing interest rate scenarios and therefore should be considered only by an informed investor.

Apart from good returns over Fixed deposits, debt funds have a more favourable taxation structure. If the debt funds are held for more than 3 years, then the gains on the funds are categorised as long term capital gain and tax must be paid at 10% on the gains or 20% after indexation. This is much lower than FDs as the entire income on deposits gets clubbed with your income and you are taxed as per your slab. In times of need you need not withdraw the entire amount like FDs but redeem what you need and rest remains invested. This is a good time to diversify beyond FDs but first do your due diligence and consult your financial advisor to select the right funds as per your needs.

Is it right to buy insurance policies for children?

Mr. Rao (31) recently walked into his bank to open an account for his 2-year-old daughter. During the account, opening formalities, he was suggested by the bank executive to buy a Children’s insurance policy which according to the executive could take care of his daughter’s educational funding requirement.  After a session of Q & A, Mr. Rao promptly gave the go ahead for the insurance policy and purchased a Rs. 5 lakh sum assured insurance policy for an annual premium of Rs. 30000. Similarly, Mrs. Smita (34) was advised by her life insurance advisor to buy an insurance policy for her twin sons aged 1 year. Many a times insurance purchase is an emotional affair in India. The main bread earner may not be sufficiently insured but he would like to take a policy for his son/daughter as soon as he or she is born. No investment logic works in front of emotions. The belief that the insurance policy will enable a forced saving for the child/ children’s educational funding is partly true but is it the right investment for the child? To answer this question, we need to understand how the children’s insurance policies work.
Insurance policies are of two types viz- Traditional and Unit Linked. Traditional insurance policies are those insurance policies where the monies that you pay as premium are invested as per the regulations set by IRDA. These policies have to invest namely in Government bonds and approved securities of select Public sector institutions including social / infrastructure sector. These policies are non -transparent and announce an accrued bonus rate each year based on the performance of the company. They facilitate payment of a part of the sum assured at certain milestone age of the child for example, 20 – 25% of the sum assured will be payable when the child turns 18, 20 etc to facilitate the payment of higher education fees. At the current bonus levels the best annualised return calculated for the entire holding period ranges between 4.5 to 6%. Going ahead with falling interest rates, the bonus rates will fall further thereby further reducing the overall return. Of course, insurance advisors will argue that it also offers tax benefits and premium waiver in case the insured parent (proposer) dies in between, but then how many people today depend on the insurance premiums to complete their tax savings of paltry Rs. 1.50 lakhs per annum when there are better options available. The second type of insurance policies are unit linked polices which provide a range of investment options to choose from within the policy. For example, you could choose to invest in an equity fund which comprises of 100% shares or balanced funds where the equity allocation can be upto 65% and rest into government bonds and securities. These policies are more transparent in terms of disclosure. They provide a regular unit statement like mutual funds and one knows the status of the investment at any point of time. But unit linked plans do not provide any guaranteed amount at maturity as the risk is borne by the policy holder. Here one has the flexibility of changing funds regularly and there is a possibility of earning much more than traditional policies but one needs to keep a few things in mind while buying unit linked children’s plans.
1.       The policy will charge towards insurance (mortality charges), fund management and administration which will reduce your overall return
2.       Understand the risk-reward equation particularly if you are opting for equity oriented funds
3.       Unit linked polices will work only if held for its complete term as the stock market is very volatile in the short term but performs better in the longer term.
The bread earner of the family needs insurance protection not the child as he is the income earner and his/her death might result in financial loss. So, ensure good level of insurance protection for self-first with the help of term insurance which is the cheapest form of insurance and to meet the investment needs of the child for his future educational expenses, start investing in systematic investment plans (SIP) in good balanced and equity funds. Remember to keep the investment period longer to coincide with the milestone years of the child to ensure better returns. To ensure tax benefits these SIPS can be done in Tax saving mutual funds known as ELSS funds (Equity linked savings scheme).

IF you aren’t a disciplined investor, then unit linked plans might be the best solution for your children’s goals as the contributions (Premiums) tend to get paid regularly and due to the emotional connect with children, people don’t touch these investments. Due to IRDA’s constant intervention nowadays most unit linked policies charges have reduced substantially. Take some time to understand the policies as once you complete the 15 days free look in period of the policy, you cannot do anything for 3 years in case of the traditional policy and 5 years in case of unit linked policies.  

Tuesday, October 13, 2015

Are you saving regularly

We have all heard the famous quote “A penny saved is a penny earned” which actually indicates that saving some money is like earning it else it could have been used for spending. Typically in the younger age when one starts working, most don’t feel the need to start saving as there needs to be a strong reason to save. Most young and working individuals have parents who are still in their employment and they have a house and all amenities provided by their parents which doesn’t create the seriousness to save. It also depends on what money values one acquires in the younger age from their parents.
For buying anything today we require money. We live in a world full of uncertainties and our jobs also don’t provide us with any security. What if there is a lay off? What if someone in the family falls critically ill or needs to be hospitalised and there is no medical cover? One can be exposed to such contingent events and not having the money to see through those difficult times can push one into debts. Therefore one motivation of saving can be to create a contingency fund or maintain some surplus cash separately to face crisis situations. Satish (36) and Anil (31), who have been working in the oil rigs as technicians have lost their jobs recently. Even though both are tensed on the future of the oil industry and their careers, Satish is still better off than his younger colleague due to his good savings and investments that he has done over the last 10 years. Anil never felt the need to save regularly as his parents were independent and his income was good enough to take care of his wife and child’s regular expenses. Most of us wake up only when crisis reaches our doorstep. 
We also need to save if we intend to make purchases in the future like buying a car, house, etc. Retirement is also a reality which one needs to plan in advance and for which one needs to start saving early.
There is no standard rule which can apply to everyone. People in the early 20s can start with 20% as their income would be less initially and other expenses also need to be factored in. As income increases, this percentage should go up. Having a budget enables one to estimate the regular expenses and explore the savings potential. For example, Keshav(25) stays in his parents’ house and most of his household expenses are taken care of by parents regular income. He draws a monthly salary of Rs. 18000 and he is able to manage his travelling/ other expenses within Rs. 10000. So he has the potential to save around 45% of his income. For someone who has additional expenses like rent, parent’s medical expenses, etc, the savings could be lower. The important point is to save at least some amount regularly. For someone in the higher age brackets (30-40) the savings % should be higher than 30%. Saving enables one to invest that money as per their goals and also earn a better return.   
The early you start saving and investing, the better you are in terms of achieving your financial goals. The power of compounding comes in play when you give more number of years to your investments. For someone who starts late, the number of years available is less and the investment that one will need to achieve that goal also shoots up. For example, Ajay and Jai (both of 25 yrs) decided to save to create a down-payment of Rs. 25 lakhs in the next 10 years to buy a home. Ajay started in the first year itself by investing in balanced mutual funds. He invested Rs. 10900 per month to reach his goal assuming the returns were in the range of 12%. Jai started investing 3 years later in the same funds but since he is 3 years late, he needs to invest Rs.19150 to reach his goal. Starting early certainly helps.
Setting goals early can help in inculcating savings habit. For example when you are clear that you want to buy a car in next 5 years, you will certainly start saving the required amount every month. Whether it’s an RD or Sip in mutual funds, once you have decided the amounts, you only have to instruct for auto debit once and then it becomes part of a regular process. Technology has actually enabled ease of saving regularly. The best part could be to provide debit dates immediately after your salary credit dates so that you meet your targeting saving goal. 
(This was published in moneycontrol on 7th October 2015)

Friday, May 30, 2014



Very soon IRDA is going to make it mandatory for all Life insurance companies to issue policies in Dematerialized form. According to IRDA all Life Insurance companies should link their systems to insurance repositories with an option to hold policies in electronic form.

NSDL Database Management Limited, Central Insurance Repository Limited, SHCIL Projects Limited, CAMS Repository Serviced Limited and Karvy Insurance Repository Limited these are the five authorized insurance repository service providers.

Insurance repositories are the same like depositories in the capital markets. Investors needs to open only one time depository account, the repository requires policyholders to open an e-insurance account free of charge.

The service was incorporated from September but as on today only 1 lakh e-insurance accounts have been opened and some thousand policies have been dematerialized. The reason behind this performance is only 10 insurance companies have signed up to provide demat policies out of 24 companies. Soon many are expected to follow suit.

Demat policy is beneficial for both the customer as well as the insurance company. Since it is in demat form there is no requirement for submission of original policy at the time of maturity or death claim. The question of loss of policy documents will not arise. This can be a boon to many policy holders as it will do away with having to store the physical policy in a safe place. Being in a soft form, it can be accessed anytime.

The insurance companies would be benefited as most of the back office work sending reminders and maintaining records would be undertaken by the repository. This will be similar like Mutual Funds industry where most of the back office work is taken care by the registrar and transfer agents. It helps to save huge costs for companies.

Also a one time KYC has to be done.
(as reported in Economic times on 22nd May)

Monday, May 19, 2014

Post elections, Continue your regular investments systematically

With the NDA having got a comfortable majority in the just concluded elections, there is high level of confidence among foreign investors who have been buyers for most part of last week taking the BSE sensex to its highest levels achieved ever. Many brokerage houses and analysts have also started predicting the sensex figures for the next 1 year, indicating bullish trends. 
For the average investor there is every possibility of getting swayed by the positive scenario showcased by analysts and it is during such time that its very necessary to reflect on what your investment strategy should be. 

The famous Henry Ford once said " If you do not know where you want to go, any road will do". This means that firstly identify your financial goals and decide the time frame for those goals. If your financial goal is at least 5 to 10 years down the line, then you can think of allocating funds to equity. Many would be already having their SIP (Systematic Investment plans) investments going on. Continue with the same and don't go overboard to do lumpsum investments at present. Even though the new government is expected to boost investments and prop up the economy with the right policy decisions, the actual impact of those decisions will take time to percolate through the economy.  Don't expect any magic in the short term. Remember what the great Benjamin Graham said " In the short term the market is a voting machine while in the long term its a weighing machine".

As always, the markets will continue to remain volatile as we all know that international events also have an impact on our markets.

Investors planning to take short term bets need to be cautious as history has shown that you can never time the markets. In the end patience will prevail. 

Look at equity investing through mutual funds especially through diversified mutual funds and focus on long term wealth creation. In this race of earning good returns in the markets, its the tortoise that wins and not the hare.

Monday, October 14, 2013

Understand Asset class behavior before investing


Sanjay (29) has been investing in the form of sips in diversified equity funds for the last 3 years as advised by his financial planner for his son’s post graduation funding which is nearly 15 years away. Of late his patience seems to have run out after seeing his equity funds portfolio in the red for quite some time now. He is thinking of stopping his sips as he now believes that the equity markets will fall more in the coming days which will further reduce his portfolio value. Mr. Rao (45) had invested a lumpsum amount in a gold savings plan a few months ago and is now ruing his decision as that fund has fallen by nearly 10% reflecting the correction in gold prices.

Many investors like Sanjay invest in equity without understanding the behavior of that asset. The very fact that unlike fixed deposits and postal savings, the returns on equity, gold or real estate are not assured which makes it vulnerable to price volatility in the short term. Each asset class is different and so is its behavior during different situations.


An understanding of the past performance of equity markets or equity diversified funds can give an indication of the volatility that’s associated with equity. Warren Buffet has famously said that Only buy something that you'd be perfectly happy to hold if the market shut down for ten years”. This gives an indication of the long periods of uncertainty that can affect equity markets but only those who stay put with their investments are suitable rewarded. So if you do not have the risk appetite nor want to see any risk associated with your investments, then equity investments are not for you. Secondly invest in equity only if your goals are of fairly long term after having understood that you may see long periods of negative return especially in times such as the one that we are currently going through.

Real Estate

We have seen real estate prices going through the roof in the last 10 years. Many have forgotten the decade before 2003, when the real estate asset prices had collapsed and many investors who had invested at the peak in the 1990’s lost out big time when they sold out at a discount. Real estate as an asset class is good but again if the investment is done as a long term asset associated with your goal.


Gold has had a dream run for several years now. Many investors who invested in gold as an asset class a few years back have gained handsomely but at present gold prices have been correcting for the last few months. Therefore one need to understand that even gold prices are volatile and therefore investing in a staggered manner can be beneficial if gold has been suggested as a part of your portfolio.

Debt funds

This category offers a huge variety of funds to choose from depending on the time horizon. While one is at least aware that equity funds can give negative returns during certain periods, not many know that there are certain debt funds which display a cyclical pattern in terms of returns and are very sensitive to interest rate changes. Most Gilt funds and some income funds typically invest predominantly in government bonds which are vulnerable to interest rate changes. At the moment the interest rate is showing a declining trend going ahead which bodes well for gilt funds as the government bond prices increase resulting in higher nav for the funds which in turn results in higher returns. A reverse situation can pan out during the interest rate cycle going up, which can result in lower or negative returns in gilt funds.

The intention of a well diversified portfolio is to reduce risk and allocate assets as per your goals and time horizon. Secondly diversified portfolio is relevant because during different time periods, there could be one asset class which will perform better than the other. Therefore understanding each asset class before making it part of your portfolio is important in order to avoid any knee jerk reactions at extreme situations which might nullify the entire objective of building the diversified portfolio.