It is time Non-Resident Indians and foreign investors took note of India.
Not just because a much publicized report has predicted that the Indian economy will become one of the world's largest by year 2050 -- which is anyway too far out to invest for.
But because there are real changes happening here; changes which will have a significant impact on India's prospects in the next decade. The opportunity is here and it is beckoning you.
It was in July 1991 that Dr Manmohan Singh, the then finance minister of India, presented his first Union Budget. India was in a crisis then and drastic measures were needed to tide over the emergency. The two-stage devaluation of the rupee marked a turning point in the Indian history. Talk of import substitution was replaced by export promotion. What transpired over the last 13 years or so is for all to see.
External sector
It is widely thought that India's external sector performance will continue to be good. To believe this, one needs to look at the outsourcing revolution that is taking place across the globe, in not only the services but also the manufacturing and research sectors. On the investment side, liberal rules and better and well-regulated markets are drawing in capital to fund India's growth.
Crises
Unfortunately, the same degree of success is not evident when it comes to India's finances.
The numbers pretty much tell the story. But one needs to keep in mind that during this period the world witnessed several crises involving Mexico (1995), South-East Asia (1997), Russia (1998) and then, of course, the global economic slowdown that followed the stock market meltdown in early 2000. These crises spread to other countries too. But the impact on India was more muted than one would have expected.
As the Reserve Bank of India often highlights, this is so because of the 'resilience' of Indian economy. This resilience is clearly illustrated in the overall economic growth posted by India over the last many years (last 10 year average of 6.1 percent p.a) and the benign inflationary environment
But then this is history. And investing today requires a good understanding on what can be expected going forward. This is where one can take a break from numbers and list out five big reasons you should invest in India.
1. You can't ignore the resilience
It has been close to 20 years since the reforms process started, with the main push coming with the twin devaluations in 1991. During this period numerous developments have taken place that have contributed to the resilience of the Indian economy.
Key amongst these are the opening up of the Indian economy to foreign investment, strengthening of the domestic financial system, liberalization of imports, rationalization of interest and exchange rates, a more conducive environment for investing in industry, and of course, the people-intensive services sector.
This resilience is clearly reflected in the fact that average economic growth rates have moved up (peaking at 8.2 percent in the financial year ending March 2004) and India has emerged as one of the fastest growing economies in the world. Even the change in the government has not stymied growth completely (in fact, there is an improvement in overall growth rates).
Going forward the benefits of these measures will become more pronounced as focus shifts to implementation. Coupled with the expected shift in the demographics which should see a larger share of the Indian population falling in the 'working class' age bracket, the Indian economy can be expected to perform better over the next decade.
2. Renewed focus on agriculture, infrastructure
In recent years there has been a renewed focus on two key but long ignored segments of the Indian economy – agriculture (about 22 percent of the economy) and infrastructure. The focus on agriculture and related activities, which supports approximately 65 percent of the Indian population, should provide a new thrust area for economic growth.
Although the results will take time to show, when they do, the impact will be huge. An increase in output, productivity and value-add will lead to higher income levels for India's large rural population. This will aid investment and consumption activity leading to higher overall economic growth in the long term.
Steps
Belatedly the government has taken note of the poor state of infrastructure. Highway development, power sector reforms and substantial investment in building a pan-India telecom/internet network are just three of the several new initiatives underway which will help improve the quality of infrastructure.
An overall improvement in infrastructure will add to the competitiveness of the economy. Of course, in the interim, as these projects are implemented, the economy will get a boost as investment demand will surge (for example to build roads you need among other inputs people, machinery, steel and cement).
3. Benefits of foreign direct investment
Undeniably, foreign direct investment (FDI) inflows have stagnated in recent years (though interest in India is unarguably increasing). But its significance cannot be lost (we only need to look at China to understand this). Not only does FDI augment domestic capital and help increase productive capacity of the economy, it also brings in with it world class technology, processes and products/services, and jobs.
The benefits of these lessons are likely to be more pronounced in India, which is way behind developed countries. This should help the economy leapfrog in some sense, boosting productivity and competitiveness. Higher productivity could again trigger a virtuous circle of higher incomes, higher consumption activity and even higher investment.
4. The global outsourcing boom
Whenever one talks about outsourcing, Indian business process outsourcing companies come to mind. More often than not, the understanding is that the BPO is a call centre. Rightly so, given that this is where it all started. But there is much more to this outsourcing boom than is commonly understood. Fortunately, India stands to benefit from it in a great measure.
Some examples of the kind of 'outsourcing' work that could find its way to India: research and development for various products and services (including pharmaceuticals), manufacturing of auto parts (forgings, et cetera) and complete IT departments and networks. As confidence in India's abilities grows, more value-added work would come through.
Competitiveness in this sector would be sustained by declining/stagnating infrastructure costs (a case in point is the declining telecom rates which are a key cost for BPOs) and ample supply of skilled manpower.
As outsourced services tend to be people intensive (in 2002 it was estimated that 4 million jobs in the sector and support services will be created by 2008), significant benefits could be reaped by India over the next decade. Higher employment and better incomes would once again contribute significantly to overall economic growth.
5. Well-regulated and deep capital markets
The Indian stock and debt markets (including banks and mutual funds) are well regulated by the Securities and Exchange Board of India and the RBI. Not that there are no irregularities that are committed (we are still trying to book all the culprits of the scams that rocked the country in 1992 and 2000). But the overall regulatory environment has improved dramatically in recent years.
Measures
Redressal measures are well laid out and this makes it easier to protect one's interest. In terms of infrastructure the Indian institutional framework is improving rapidly, backed by a strong financial system. By some measures Indian markets compare with the best globally!
In terms of choice, the Indian markets are right up there. Be it stocks, mutual funds, deposits or life insurance. The market is deep and liquidity is no major concern for individual investors.
India today offers a great investment opportunity. To make the most of it, investors need to take adequate precautions while committing funds to India. One way you can minimize the risk of fraud or bad advice is by selecting a credible financial advisor.
Finally, a note of caution. There will be ups and downs. Things may even not turn out the way one expects them to. But then if you have done your home work well, you stand a better chance of meeting your goals
Find tips and resources that help you save your hard-earned money. Lots of financial schemes to provide you with guaranteed returns. Visit Insurance, PPF, NSC, PostalSaving, Tax, Credit Card, Salary, NRI, Tax Saving account in Pune Post Office
January 22, 2008
NRI: Investing in India or in USA???
Everyday we came across hundreds of Non-Resident Indians (NRIs) who are debating whether or not to shift all or a part of their savings to India. In many instances the thought is triggered by the recent run up in Indian stock and property prices and not by a 'real need' i.e. the intention is usually to speculate and make some quick money. For such NRIs, we have little to offer other than guidance on what probably could be better reasons to consider investing in India.
We also come across NRIs who are looking at India from a 'real need' perspective. This note will help them take several steps forward in planning their India exposure.
What is a 'real need'?
Take for instance you have parents in India for whom you wish to provide a monthly income. Or say you are planning to relocate to India in the future and therefore want to accumulate some local currency (i.e. Rupee) denominated assets. Or maybe you wish to diversify your portfolio of assets by taking exposure to India. These are just a few examples of a real need.
Before you, an NRI, get down to actually investing in India, there are three critical questions that you need to answer or get answered; all questions are broadly linked to each other and answers to them will form the basis of your investment planning.
1. What is the objective for investing.
2. How much of your savings that are abroad should be in India.
3. what are the likely prospects of the Indian Rupee and how will it influence the answer to the second question.
Clear on the objective
Before making any investment, it is imperative that you be clear on the objective/s for investing your money. Unless you are clear on what your goal/objective is, no one can help you. The objective/need, some of which have been mentioned above, needs to be well-defined both in terms of the desired result and the tenure.
So if you are planning for retirement, one critical question that must be answered is 'where are you likely to settle down post-retirement'?
Once you are clear on your objectives, which by no means is an easy task, you should look at your asset allocation and ascertain whether the same is geared to meeting your objectives. In all probability you will need the help of an expert to reach a conclusion. It is here that you will have to decide in which asset class to invest, in what proportion and in which country (as you have options apart from India).
Allocation
Let's take an example to understand how you should go about allocating money to India. Suppose your objective is to plan for your retirement ten years from now; you plan to settle down in India. Presently, you reside in say the USA and most of your monies are invested in US Dollar-denominated assets.
There are two ways you can go about allocating your assets for this need.
1. One, you can take a neutral view on the currency and deploy the required sum of money in India that will help you take care of your retirement. This will ensure that in case there are some adverse currency movements between now and the time of your retirement, you need not worry much about the same; your assets, and thereby the income they generate, and your expenditures are in the same currency i.e. Indian Rupee.
2. The other option is that you allocate your assets depending on where you believe the risk-adjusted return will be maximum i.e. you take a view on the currency and basically bet that when you approach retirement, your investments would have generated a better return, after factoring in the appreciation/depreciation in the Indian Rupee.
In our view it is best that you take a neutral view on the currency for that portion of your assets which you ultimately wish to transfer to India to meet your needs.
Parents
Let's take another objective that NRIs often have - to provide a regular income to their parents and/or other dependents in India. Usually the methodology adopted by NRIs is to set aside a lumpsum, the income generated from which takes care of the need of the parents/dependents. Here again you need to decide whether to invest the lump sum in India or to invest in assets denominated in other currencies as well.
Given that the money is 'sacred' for the parents/dependents, it is probably best you take measures to reduce the volatility in the income generated i.e. take less risk. One way to reduce the overall risk is to avoid taking on the risk that any adverse currency movement may have on returns. Ideally, in such circumstances one should opt for Rupee-denominated assets which generate steady tax-efficient returns.
Where the Rupee headed?
And this brings us to the third question - Where is the Indian Rupee headed? A cautious view would be a gradual decline, in the range of 3.0% - 5.0% every year. However, if India were to get its act right as far as attracting foreign investment is concerned, the foreign currency inflows could support the Rupee. We would recommend that you opt for the cautious view
(India still runs a hefty fiscal deficit and relies on imported crude oil).
But then if the currency is likely to persistently depreciate by 3.0% - 5.0% p.a., is it not better to invest in assets that are denominated in currencies which are likely to strengthens (as this would add to overall returns)? This may not necessarily be true.
Stock Market
Take for example the prospects that the Indian stock markets hold out for the next 3 - 5 years. In our view, the returns from a well diversified carefully selected basket of stocks should be about 15.0% compounded annual growth rate (CAGR). Warren Buffett, arguably the most successful investor ever, estimates the long-term return from US equities to be about 6.0%. Well, that is quite a spread; it takes care of currency depreciation and more.
Even if you compare debt instruments, the 10-Year government bond in the US yields 4.6% while the comparable Indian bond yields 7.6% (as on the 28th of September 2006); a spread of 3.0%.
Of course the spread would vary from time to time; but as any economist will tell you, the interest rate differential between comparable bonds denominated in different currencies tends to reflect the expected change in the exchange rate of the currencies over a period of time i.e. you are probably getting a higher rate of interest in India via-a-vis the US because over a period of time, one expects the Indian currency to depreciate against the US Dollar to the extent of the differential (ofcourse there are many other factors that impact interest rates and exchange rates and therefore the result may turn out to be different).
To conclude, in our view, it is best to avoid taking a call on the currency when it comes to "deploying assets" to take care of 'real needs'.
We also come across NRIs who are looking at India from a 'real need' perspective. This note will help them take several steps forward in planning their India exposure.
What is a 'real need'?
Take for instance you have parents in India for whom you wish to provide a monthly income. Or say you are planning to relocate to India in the future and therefore want to accumulate some local currency (i.e. Rupee) denominated assets. Or maybe you wish to diversify your portfolio of assets by taking exposure to India. These are just a few examples of a real need.
Before you, an NRI, get down to actually investing in India, there are three critical questions that you need to answer or get answered; all questions are broadly linked to each other and answers to them will form the basis of your investment planning.
1. What is the objective for investing.
2. How much of your savings that are abroad should be in India.
3. what are the likely prospects of the Indian Rupee and how will it influence the answer to the second question.
Clear on the objective
Before making any investment, it is imperative that you be clear on the objective/s for investing your money. Unless you are clear on what your goal/objective is, no one can help you. The objective/need, some of which have been mentioned above, needs to be well-defined both in terms of the desired result and the tenure.
So if you are planning for retirement, one critical question that must be answered is 'where are you likely to settle down post-retirement'?
Once you are clear on your objectives, which by no means is an easy task, you should look at your asset allocation and ascertain whether the same is geared to meeting your objectives. In all probability you will need the help of an expert to reach a conclusion. It is here that you will have to decide in which asset class to invest, in what proportion and in which country (as you have options apart from India).
Allocation
Let's take an example to understand how you should go about allocating money to India. Suppose your objective is to plan for your retirement ten years from now; you plan to settle down in India. Presently, you reside in say the USA and most of your monies are invested in US Dollar-denominated assets.
There are two ways you can go about allocating your assets for this need.
1. One, you can take a neutral view on the currency and deploy the required sum of money in India that will help you take care of your retirement. This will ensure that in case there are some adverse currency movements between now and the time of your retirement, you need not worry much about the same; your assets, and thereby the income they generate, and your expenditures are in the same currency i.e. Indian Rupee.
2. The other option is that you allocate your assets depending on where you believe the risk-adjusted return will be maximum i.e. you take a view on the currency and basically bet that when you approach retirement, your investments would have generated a better return, after factoring in the appreciation/depreciation in the Indian Rupee.
In our view it is best that you take a neutral view on the currency for that portion of your assets which you ultimately wish to transfer to India to meet your needs.
Parents
Let's take another objective that NRIs often have - to provide a regular income to their parents and/or other dependents in India. Usually the methodology adopted by NRIs is to set aside a lumpsum, the income generated from which takes care of the need of the parents/dependents. Here again you need to decide whether to invest the lump sum in India or to invest in assets denominated in other currencies as well.
Given that the money is 'sacred' for the parents/dependents, it is probably best you take measures to reduce the volatility in the income generated i.e. take less risk. One way to reduce the overall risk is to avoid taking on the risk that any adverse currency movement may have on returns. Ideally, in such circumstances one should opt for Rupee-denominated assets which generate steady tax-efficient returns.
Where the Rupee headed?
And this brings us to the third question - Where is the Indian Rupee headed? A cautious view would be a gradual decline, in the range of 3.0% - 5.0% every year. However, if India were to get its act right as far as attracting foreign investment is concerned, the foreign currency inflows could support the Rupee. We would recommend that you opt for the cautious view
(India still runs a hefty fiscal deficit and relies on imported crude oil).
But then if the currency is likely to persistently depreciate by 3.0% - 5.0% p.a., is it not better to invest in assets that are denominated in currencies which are likely to strengthens (as this would add to overall returns)? This may not necessarily be true.
Stock Market
Take for example the prospects that the Indian stock markets hold out for the next 3 - 5 years. In our view, the returns from a well diversified carefully selected basket of stocks should be about 15.0% compounded annual growth rate (CAGR). Warren Buffett, arguably the most successful investor ever, estimates the long-term return from US equities to be about 6.0%. Well, that is quite a spread; it takes care of currency depreciation and more.
Even if you compare debt instruments, the 10-Year government bond in the US yields 4.6% while the comparable Indian bond yields 7.6% (as on the 28th of September 2006); a spread of 3.0%.
Of course the spread would vary from time to time; but as any economist will tell you, the interest rate differential between comparable bonds denominated in different currencies tends to reflect the expected change in the exchange rate of the currencies over a period of time i.e. you are probably getting a higher rate of interest in India via-a-vis the US because over a period of time, one expects the Indian currency to depreciate against the US Dollar to the extent of the differential (ofcourse there are many other factors that impact interest rates and exchange rates and therefore the result may turn out to be different).
To conclude, in our view, it is best to avoid taking a call on the currency when it comes to "deploying assets" to take care of 'real needs'.
Fixed Income: Playing safe!
Over the last few years, an overbearing concern for investors in the fixed income (and small savings) segment was rationalisation of interest rates. Attractive returns offered by small savings schemes (like National Savings Certificate - NSC and Public Provident Fund - PPF) coupled with tax sops, in the midst of a soft interest regime, was a dichotomous situation. The general consensus was that interest rates on the small savings schemes would be trimmed down and brought in line with prevalent market rates. However, the authorities chose to leave the rates unchanged. Instead a rather novel approach to rationalisation was adopted.
For example, some schemes (like Deposit Scheme for Retired Government Employees) were discontinued; similarly, small savings schemes were put outside the investment purview of entities like trusts and Hindu Undivided Family (HUF). In other cases the benefits were trimmed, for example the 10% maturity bonus on Post Office Monthly Income Scheme (POMIS) was scrapped. Interestingly, most of these changes were implemented outside of the Union Budget.
At present, we are faced with a situation wherein the interest rate cycle has turned around and interest rates are moving northwards. The Reserve Bank of India's recent move to hike the Cash Reserve Ratio (CRR) bears testimony to the same. Clearly, any reduction in interest rates on small savings schemes seems unlikely at this stage.
From an investor's perspective, the portfolio of fixed income instruments that offer tax sops (under Section 80C) is a comprehensive one. NSC and tax-saving bank fixed deposits can find place in the investor's portfolio who wishes to invest for relatively shorter time frames. Conversely, those planning to provide for long-term needs like retirement and child's education can employ PPF. Similarly, other schemes (sans tax benefits) which provide for specific needs like providing regular income i.e. POMIS and Senior Citizens Savings Scheme are also in existence.
For example, some schemes (like Deposit Scheme for Retired Government Employees) were discontinued; similarly, small savings schemes were put outside the investment purview of entities like trusts and Hindu Undivided Family (HUF). In other cases the benefits were trimmed, for example the 10% maturity bonus on Post Office Monthly Income Scheme (POMIS) was scrapped. Interestingly, most of these changes were implemented outside of the Union Budget.
At present, we are faced with a situation wherein the interest rate cycle has turned around and interest rates are moving northwards. The Reserve Bank of India's recent move to hike the Cash Reserve Ratio (CRR) bears testimony to the same. Clearly, any reduction in interest rates on small savings schemes seems unlikely at this stage.
From an investor's perspective, the portfolio of fixed income instruments that offer tax sops (under Section 80C) is a comprehensive one. NSC and tax-saving bank fixed deposits can find place in the investor's portfolio who wishes to invest for relatively shorter time frames. Conversely, those planning to provide for long-term needs like retirement and child's education can employ PPF. Similarly, other schemes (sans tax benefits) which provide for specific needs like providing regular income i.e. POMIS and Senior Citizens Savings Scheme are also in existence.
Where to invest in times of inflation?
First, let's demystify the jargon. Inflation is a situation where there is 'too much money chasing too few goods'. In such times buyers bid up prices of scarce products/services. The scarcity could be caused by supply issues or a faster than expected rise in demand. Irrespective of what causes inflation, the impact is the same. The value of the currency you are holding declines.
Let's explain this with the help of an example. Suppose the Indian Rupee was freely exchangeable with only one commodity - crude oil. Let's assume the conversion rate is Re 1 = 1 barrel of crude (wish it were true!). Now there is tension in the Gulf region resulting in reduced supply. Due to the subsequent rise in price of crude oil in international markets, we would now have to pay more Rupees for every barrel of oil. Suppose crude prices rise by 10%. The new exchange rate will be Rs 1.1 = 1 barrel of crude. In real terms (i.e. in terms of the commodity) the value of the Rupee would have declined from 1 barrel of crude per Rupee to only 0.91 barrel of crude per Rupee. This is the erosion in the value of the currency that we are talking about. Also note that while the Indian Rupee may be appreciating vis-a-vis other currencies, in the 'real sense' there is an erosion in value.
Another important fallout one can expect due to rising inflation is higher interest rates. The central banks aim to reduce demand in the economy by raising the cost of money.
We are not going to debate whether or not interest rates will rise or the Indian Rupee will depreciate going forward. This we will leave to the experts. If you wish to have a go, click here for the What if Yield Calc. We will focus on what to do in times of inflation.
When making fresh investments or evaluating your existing holdings in potentially inflationary times you need to keep two things in mind:
The possibility of higher interest rates
The erosion in the value of the currency
What you should avoid?
Fixed income instruments life fixed deposits and relief bonds that have long maturities
Other long term debt instruments like long term debt funds
Shares of companies that are unable to pass on the rise in raw material costs to their consumers i.e. they are not price setters.
Where should you invest?
1. Commodities
The key factors that determine the price of a commodity like gold for example (mine output for one) are different from factors that impact the value of other investments like shares and bonds. Investing in commodities therefore helps in diversifying the risk element in your portfolio. Not to suggest that they will surely do well but in inflationary times, but people do increase their allocations towards commodities. (Read more on gold)
Furthermore, gold can now be deposited with institutions like the State Bank of India. While this will earn you a very marginal interest, it will nevertheless take care of storage costs etc.
Investing in a commodity takes care of the risk arising due to erosion in value of the currency (since most currencies are priced in US Dollars).
2. Stocks
When it comes to beating inflation, few asset classes can better stocks. For example, over the last three years stocks have returned in excess of 15% p.a. (the BSE Sensex), beating inflation, which averaged about 5% - 6% p.a., by a very large margin. If one were to use a diversified mutual fund as a benchmark for stocks, the difference would have been even larger!
However, stocks carry significant risk, especially if one is attempting to build his/her own portfolio of stocks. For those who wish to minimise this risk, equity mutual funds are the best option.
For the more adventurous type, two sectors that are relatively immune to inflation are pharmaceuticals and software.
3. Inflation indexed bonds
Such bonds compensate you for the rise in inflation (or the decline in the purchasing power of the currency). Unfortunately in India such bonds are not on offer for us individuals (though the RBI has spoken about reintroducing them in today's policy). But with the RBI permitting Indians to invest abroad, one can always buy them in international markets.
4. Short term deposits and funds
These instruments will give you the required liquidity you need while ensuring that you do not lose out in case interest rates were to rise.
5. Property
Property is again a preferred avenue of investment as in such times prices tend to rise upwards in line with the increase in cost of construction. The only deterrent here is that the minimum amount you need to invest here is substantial and beyond the reach of most investors. An alternative can be real estate mutual funds, which are very popular in international markets. Apparently, SEBI is considering allowing such funds in India.
To conclude, it is important that at all times investors should ensure that their portfolios are well diversified, taking into account their needs and aspirations.
Let's explain this with the help of an example. Suppose the Indian Rupee was freely exchangeable with only one commodity - crude oil. Let's assume the conversion rate is Re 1 = 1 barrel of crude (wish it were true!). Now there is tension in the Gulf region resulting in reduced supply. Due to the subsequent rise in price of crude oil in international markets, we would now have to pay more Rupees for every barrel of oil. Suppose crude prices rise by 10%. The new exchange rate will be Rs 1.1 = 1 barrel of crude. In real terms (i.e. in terms of the commodity) the value of the Rupee would have declined from 1 barrel of crude per Rupee to only 0.91 barrel of crude per Rupee. This is the erosion in the value of the currency that we are talking about. Also note that while the Indian Rupee may be appreciating vis-a-vis other currencies, in the 'real sense' there is an erosion in value.
Another important fallout one can expect due to rising inflation is higher interest rates. The central banks aim to reduce demand in the economy by raising the cost of money.
We are not going to debate whether or not interest rates will rise or the Indian Rupee will depreciate going forward. This we will leave to the experts. If you wish to have a go, click here for the What if Yield Calc. We will focus on what to do in times of inflation.
When making fresh investments or evaluating your existing holdings in potentially inflationary times you need to keep two things in mind:
The possibility of higher interest rates
The erosion in the value of the currency
What you should avoid?
Fixed income instruments life fixed deposits and relief bonds that have long maturities
Other long term debt instruments like long term debt funds
Shares of companies that are unable to pass on the rise in raw material costs to their consumers i.e. they are not price setters.
Where should you invest?
1. Commodities
The key factors that determine the price of a commodity like gold for example (mine output for one) are different from factors that impact the value of other investments like shares and bonds. Investing in commodities therefore helps in diversifying the risk element in your portfolio. Not to suggest that they will surely do well but in inflationary times, but people do increase their allocations towards commodities. (Read more on gold)
Furthermore, gold can now be deposited with institutions like the State Bank of India. While this will earn you a very marginal interest, it will nevertheless take care of storage costs etc.
Investing in a commodity takes care of the risk arising due to erosion in value of the currency (since most currencies are priced in US Dollars).
2. Stocks
When it comes to beating inflation, few asset classes can better stocks. For example, over the last three years stocks have returned in excess of 15% p.a. (the BSE Sensex), beating inflation, which averaged about 5% - 6% p.a., by a very large margin. If one were to use a diversified mutual fund as a benchmark for stocks, the difference would have been even larger!
However, stocks carry significant risk, especially if one is attempting to build his/her own portfolio of stocks. For those who wish to minimise this risk, equity mutual funds are the best option.
For the more adventurous type, two sectors that are relatively immune to inflation are pharmaceuticals and software.
3. Inflation indexed bonds
Such bonds compensate you for the rise in inflation (or the decline in the purchasing power of the currency). Unfortunately in India such bonds are not on offer for us individuals (though the RBI has spoken about reintroducing them in today's policy). But with the RBI permitting Indians to invest abroad, one can always buy them in international markets.
4. Short term deposits and funds
These instruments will give you the required liquidity you need while ensuring that you do not lose out in case interest rates were to rise.
5. Property
Property is again a preferred avenue of investment as in such times prices tend to rise upwards in line with the increase in cost of construction. The only deterrent here is that the minimum amount you need to invest here is substantial and beyond the reach of most investors. An alternative can be real estate mutual funds, which are very popular in international markets. Apparently, SEBI is considering allowing such funds in India.
To conclude, it is important that at all times investors should ensure that their portfolios are well diversified, taking into account their needs and aspirations.
Pension Plans: Planning for old age
A lot of investors take pains to plan for their short-medium term needs like buying a car or providing for children's education. While this is a good thing, they must also show the same enthusiasm while planning for long-term needs, in particular retirement planning.
An inevitable outcome of the brisk pace at which our economy is growing is a decline in the purchasing power of currency i.e. inflation. Put simply, a product that costs Rs 100 at present, would cost Rs 105 a year from today, assuming that prices rise at 5%. This is the impact of rising prices over just 1-Yr, over a 30-Yr period, assuming that inflation continues to rise at 5%, the same Rs 100 product will be available at Rs 432.
It is apparent that if investors are not prepared to counter the looming prospect of rising prices, retirement (when income ceases, but expenses continue) can be a challenging phase. Another factor that needs to be considered is changing lifestyles.
Keeping this in mind, investors must plan for retirement in a manner so as to ensure that their finances are sound enough to provide for their expenses and to help them in maintaining their desired lifestyles. This is where pension plans can play a vital role.
What are pension plans?
When an individual opts for a pension plan, he has to pay a fixed amount, known as the premium, to the insurance company, over a pre-determined period of time, known as the term of the policy. The premium (net of expenses) will be invested by the insurance company in various instruments to earn returns and build a corpus over the term of the policy. The amount paid as premium is eligible for deduction under Section 80C of the Income Tax Act, upto an upper limit of Rs 100,000.
How pension plans work
At the time of opting for the pension plan, the policy holder defines his retirement age (known as vesting age in industry parlance); at this age, typically, he will be provided with one-third of the accumulated corpus as a lump sum payment. This lump sum payment (subject to a maximum of one-third of the corpus) is tax-free in the hands of the policy holder. The balance amount (accumulated corpus less lump sum payment) is converted into a monthly income, also known as annuity. In other words, the policy holder can choose to invest the balance sum with any life insurer to obtain a monthly income for the rest of his life. The period over which he will receive the monthly income is known as the annuity period; the monthly income is taxable as per the policy holder's tax slab.
In a plan, wherein there is a lag between the policy holder making the lump sum payment to the insurance company, and he receiving annuities, is known as a deferred annuity plan.
Another form of annuity is the immediate annuity wherein the policy holder pays a lump sum amount upfront and the insurance company begins paying the annuity immediately. In India most insurers offer deferred annuities, with only the Life Insurance Corporation of India (LIC) providing immediate annuities.
Like any other investment, if the pension plan is taken earlier on, the returns can be that much higher, as the benefits of compounding set in. Also, most insurers offer the option of increasing the premium over the policy term, which can be availed of by the policy holder as his income rises.
While LIC offers good traditional pension plans, most of the private insurance companies, offer ULIP (unit linked insurance plan) based pension plans, thus offering a wider choice to investors.
An important feature of most pension plans available in the Indian market is the absence of an insurance benefit. For instance, Bajaj Allianz UnitGain Easy Pension Plus does not offer any life insurance cover. On the other hand, ICICI Prudential LifeTime Super Pension offers the policy holder the option to opt for a life insurance cover. But it must be understood that the policy holder will have to bear the cost of insurance. The charges (i.e. premium for life cover) would be deducted from the pension plan premium paid by the individual and the same would impact his returns
An inevitable outcome of the brisk pace at which our economy is growing is a decline in the purchasing power of currency i.e. inflation. Put simply, a product that costs Rs 100 at present, would cost Rs 105 a year from today, assuming that prices rise at 5%. This is the impact of rising prices over just 1-Yr, over a 30-Yr period, assuming that inflation continues to rise at 5%, the same Rs 100 product will be available at Rs 432.
It is apparent that if investors are not prepared to counter the looming prospect of rising prices, retirement (when income ceases, but expenses continue) can be a challenging phase. Another factor that needs to be considered is changing lifestyles.
Keeping this in mind, investors must plan for retirement in a manner so as to ensure that their finances are sound enough to provide for their expenses and to help them in maintaining their desired lifestyles. This is where pension plans can play a vital role.
What are pension plans?
When an individual opts for a pension plan, he has to pay a fixed amount, known as the premium, to the insurance company, over a pre-determined period of time, known as the term of the policy. The premium (net of expenses) will be invested by the insurance company in various instruments to earn returns and build a corpus over the term of the policy. The amount paid as premium is eligible for deduction under Section 80C of the Income Tax Act, upto an upper limit of Rs 100,000.
How pension plans work
At the time of opting for the pension plan, the policy holder defines his retirement age (known as vesting age in industry parlance); at this age, typically, he will be provided with one-third of the accumulated corpus as a lump sum payment. This lump sum payment (subject to a maximum of one-third of the corpus) is tax-free in the hands of the policy holder. The balance amount (accumulated corpus less lump sum payment) is converted into a monthly income, also known as annuity. In other words, the policy holder can choose to invest the balance sum with any life insurer to obtain a monthly income for the rest of his life. The period over which he will receive the monthly income is known as the annuity period; the monthly income is taxable as per the policy holder's tax slab.
In a plan, wherein there is a lag between the policy holder making the lump sum payment to the insurance company, and he receiving annuities, is known as a deferred annuity plan.
Another form of annuity is the immediate annuity wherein the policy holder pays a lump sum amount upfront and the insurance company begins paying the annuity immediately. In India most insurers offer deferred annuities, with only the Life Insurance Corporation of India (LIC) providing immediate annuities.
Like any other investment, if the pension plan is taken earlier on, the returns can be that much higher, as the benefits of compounding set in. Also, most insurers offer the option of increasing the premium over the policy term, which can be availed of by the policy holder as his income rises.
While LIC offers good traditional pension plans, most of the private insurance companies, offer ULIP (unit linked insurance plan) based pension plans, thus offering a wider choice to investors.
An important feature of most pension plans available in the Indian market is the absence of an insurance benefit. For instance, Bajaj Allianz UnitGain Easy Pension Plus does not offer any life insurance cover. On the other hand, ICICI Prudential LifeTime Super Pension offers the policy holder the option to opt for a life insurance cover. But it must be understood that the policy holder will have to bear the cost of insurance. The charges (i.e. premium for life cover) would be deducted from the pension plan premium paid by the individual and the same would impact his returns
SIP: All you need to know
Regular visitors and clients of Personalfn appreciate the importance of the systematic investment plan (SIP) route of investing in mutual funds. However it is surprising to note that it takes difficult times (read volatile markets) for the investing community at large, to appreciate the importance of such a handy facility.
Simply put, investing via an SIP entails making regular investments (generally) in smaller denominations as opposed to making an one-time lump sum investment. The intention is to capitalise on the volatility in equity markets by lowering the average purchase cost. While few would dispute the utility that an SIP can offer, there is a flipside to the same as well. In this article, we discuss the pros and cons of SIP investing.
How an SIP helps...
1. Lowers the average purchase cost
Perhaps the single most important advantage offered by an SIP is the opportunity to lower the average purchase cost. This is achieved in periods when equity markets experience a turbulent patch. Since the investment amount for each installment is fixed, the investor gains by receiving a higher number of units. An example will clarify this better. Suppose the monthly investment installment is Rs 1,000 and the fund's net asset value (NAV) is Rs 50; this will lead to 20 units of the fund being credited to the investor. However, in the next month on account of the volatile markets, the fund's NAV falls to Rs 40. This will lead to a lowering in the average purchase cost; as a result, the investor will have 25 units credited to his account. In other words, an SIP can help investors benefit from volatility in equity markets.
2. Induces disciplined investing
Lack of disciplined investing is one of the major reasons for investors not achieving their financial goals. For example, often monies that are kept aside for investment purpose end up getting used for extraneous purposes. As a result, the investor is even further divorced from his goals. An SIP ensures that the investor continues to be invested in a disciplined manner and thereby stays on course to achieve his financial goals.
3. Lighter on the wallet
An often heard excuse for not investing is lack of monies. SIP takes care of this problem by lowering the minimum investment amount. For example, while the minimum investment amount for a lump sum investment in a diversified equity fund could typically be Rs 5,000, for an SIP it can be as low as Rs 500. As a result, investing via the SIP route becomes lighter on the wallet.
4. Makes market timing irrelevant
Alongwith cricket and movies, timing the market ranks as a popular pastime. Investors have an inexplicable urge for timing markets and trying to get invested when markets have bottomed out. It's a different matter that timing markets to perfection and doing so consistently is beyond most investors. An investment via the SIP route makes market timing irrelevant. On account of the on-going investments, investors can afford to bid adieu to one of their favourite pastimes and concentrate on more pressing matters.
When an SIP won't deliver...
1. In rising marketsAn SIP could fail to deliver on its proposition of lowering the average purchase cost, if equity markets rise in a secular manner. Such a scenario is fairly possible over shorter time periods. As a result, investing via an SIP could prove to be more expensive vis-a-vis a lump sum investment. Hence, the solution lies in opting for an SIP that runs over an appropriate time frame, say at least 12-24 months.
2. A directionless SIPBy a directionless SIP, we are referring to an SIP that is not a part of an investment plan or an aimless SIP. It should be understood that an SIP is not an 'end'; instead, it is the 'means' to achieve an end. Hence starting an SIP in isolation is unlikely to be of too much help. Instead, the SIP should form part of an investment plan aimed at achieving a predetermined objective.
3. An SIP in the wrong fundInvesting via the SIP mode doesn't improve the prospects of a wrong fund. A poorly managed fund stays that irrespective of the investment mode. Its shortcomings will not be eliminated by an SIP. Hence the key lies in first selecting a well-managed fund that is right for the investor and then investing in it via an SIP.
As can be seen, the SIP mode of investing has a fair number of advantages to offer; conversely, there can be instances when it may not deliver as expected. Investors on their part should make well-informed investment decisions after acquainting themselves of both the pros and cons.
Simply put, investing via an SIP entails making regular investments (generally) in smaller denominations as opposed to making an one-time lump sum investment. The intention is to capitalise on the volatility in equity markets by lowering the average purchase cost. While few would dispute the utility that an SIP can offer, there is a flipside to the same as well. In this article, we discuss the pros and cons of SIP investing.
How an SIP helps...
1. Lowers the average purchase cost
Perhaps the single most important advantage offered by an SIP is the opportunity to lower the average purchase cost. This is achieved in periods when equity markets experience a turbulent patch. Since the investment amount for each installment is fixed, the investor gains by receiving a higher number of units. An example will clarify this better. Suppose the monthly investment installment is Rs 1,000 and the fund's net asset value (NAV) is Rs 50; this will lead to 20 units of the fund being credited to the investor. However, in the next month on account of the volatile markets, the fund's NAV falls to Rs 40. This will lead to a lowering in the average purchase cost; as a result, the investor will have 25 units credited to his account. In other words, an SIP can help investors benefit from volatility in equity markets.
2. Induces disciplined investing
Lack of disciplined investing is one of the major reasons for investors not achieving their financial goals. For example, often monies that are kept aside for investment purpose end up getting used for extraneous purposes. As a result, the investor is even further divorced from his goals. An SIP ensures that the investor continues to be invested in a disciplined manner and thereby stays on course to achieve his financial goals.
3. Lighter on the wallet
An often heard excuse for not investing is lack of monies. SIP takes care of this problem by lowering the minimum investment amount. For example, while the minimum investment amount for a lump sum investment in a diversified equity fund could typically be Rs 5,000, for an SIP it can be as low as Rs 500. As a result, investing via the SIP route becomes lighter on the wallet.
4. Makes market timing irrelevant
Alongwith cricket and movies, timing the market ranks as a popular pastime. Investors have an inexplicable urge for timing markets and trying to get invested when markets have bottomed out. It's a different matter that timing markets to perfection and doing so consistently is beyond most investors. An investment via the SIP route makes market timing irrelevant. On account of the on-going investments, investors can afford to bid adieu to one of their favourite pastimes and concentrate on more pressing matters.
When an SIP won't deliver...
1. In rising marketsAn SIP could fail to deliver on its proposition of lowering the average purchase cost, if equity markets rise in a secular manner. Such a scenario is fairly possible over shorter time periods. As a result, investing via an SIP could prove to be more expensive vis-a-vis a lump sum investment. Hence, the solution lies in opting for an SIP that runs over an appropriate time frame, say at least 12-24 months.
2. A directionless SIPBy a directionless SIP, we are referring to an SIP that is not a part of an investment plan or an aimless SIP. It should be understood that an SIP is not an 'end'; instead, it is the 'means' to achieve an end. Hence starting an SIP in isolation is unlikely to be of too much help. Instead, the SIP should form part of an investment plan aimed at achieving a predetermined objective.
3. An SIP in the wrong fundInvesting via the SIP mode doesn't improve the prospects of a wrong fund. A poorly managed fund stays that irrespective of the investment mode. Its shortcomings will not be eliminated by an SIP. Hence the key lies in first selecting a well-managed fund that is right for the investor and then investing in it via an SIP.
As can be seen, the SIP mode of investing has a fair number of advantages to offer; conversely, there can be instances when it may not deliver as expected. Investors on their part should make well-informed investment decisions after acquainting themselves of both the pros and cons.
5 things to look at in an FD
A fixed deposit (FD) probably ranks as the most conventional investment avenue for domestic investors. More importantly, given its offering, it makes an apt choice for risk-averse investors. In this article, we present 5 things investors must look at in an FD.
1. Credit profile
The FD's credit profile is an indicator of the degree of risk associated with it in terms of timely repayment of the principal and interest payment. For example, an 'AAA/FAAA' rating is indicative of the highest level of safety. Typically, an FD with a higher rating would offer lower returns vis-a-vis an FD with a lower rating. The additional return in a lower rated FD is in effect a compensation for the higher risk borne. Investors would do well to decide on the quantum of risk they are willing to bear and then select an FD.
2. Rate of return
Rate of return or interest rate indicates the return that the FD investor will clock. At any point in time, it is not uncommon to find various entities like banks, small savings schemes and corporates offering differential returns on similar rated FDs. Investors on their part would do well to scout various options and select the FD that offers them the best return at a rating that suits them.
3. Interest payout options
Investors can generally choose between various interest payout options like monthly, quarterly, annually or on maturity. Ideally, the investor's need for liquidity should be used to determine which interest payout option is chosen. Selecting the interest payout 'on maturity' option can help investors benefit from the compounding effect and clock a higher return.
4. Tenure
The FD's tenure is the period over which the investor stays invested. By and large, a longer tenure translates into a higher rate of return. Investors must match their investment tenure with their needs/objectives. For example, if the investor has an expense to meet 3 years hence, he can invest an appropriate amount in a 3-Yr FD to ensure that the maturity proceeds match his future obligation. On the same lines, if there is a 5-Yr investment tenure, then investments can be considered in tax-saving FDs; this will help the investor simultaneously benefit from tax sops under Section 80C.
5. Premature withdrawal
An often-ignored aspect of FD investing is the premature withdrawal clause. Investors opting for a premature withdrawal can be penalised by either being given a lower rate of return or zero interest depending on the terms and conditions of the FD. Investors would do well to acquaint themselves with the implications of a premature withdrawal before making an investment
1. Credit profile
The FD's credit profile is an indicator of the degree of risk associated with it in terms of timely repayment of the principal and interest payment. For example, an 'AAA/FAAA' rating is indicative of the highest level of safety. Typically, an FD with a higher rating would offer lower returns vis-a-vis an FD with a lower rating. The additional return in a lower rated FD is in effect a compensation for the higher risk borne. Investors would do well to decide on the quantum of risk they are willing to bear and then select an FD.
2. Rate of return
Rate of return or interest rate indicates the return that the FD investor will clock. At any point in time, it is not uncommon to find various entities like banks, small savings schemes and corporates offering differential returns on similar rated FDs. Investors on their part would do well to scout various options and select the FD that offers them the best return at a rating that suits them.
3. Interest payout options
Investors can generally choose between various interest payout options like monthly, quarterly, annually or on maturity. Ideally, the investor's need for liquidity should be used to determine which interest payout option is chosen. Selecting the interest payout 'on maturity' option can help investors benefit from the compounding effect and clock a higher return.
4. Tenure
The FD's tenure is the period over which the investor stays invested. By and large, a longer tenure translates into a higher rate of return. Investors must match their investment tenure with their needs/objectives. For example, if the investor has an expense to meet 3 years hence, he can invest an appropriate amount in a 3-Yr FD to ensure that the maturity proceeds match his future obligation. On the same lines, if there is a 5-Yr investment tenure, then investments can be considered in tax-saving FDs; this will help the investor simultaneously benefit from tax sops under Section 80C.
5. Premature withdrawal
An often-ignored aspect of FD investing is the premature withdrawal clause. Investors opting for a premature withdrawal can be penalised by either being given a lower rate of return or zero interest depending on the terms and conditions of the FD. Investors would do well to acquaint themselves with the implications of a premature withdrawal before making an investment
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