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equity-surge

Sat Aug 10 11:38:53 IST 2019

The Union Budget presented in July proved to be a mixed bag, with Finance Minister Nirmala Sitharaman focusing on long-term growth measures to revive the agriculture sector and the larger economy. However, one particular measure that did not go down well was a higher tax surcharge proposed on the super-rich.

While the basic tax slab was kept unchanged at 30 per cent, the surcharge was hiked to 25 per cent from 15 per cent for individuals whose taxable income is between Rs2 crore and Rs5 crore, and to 37 per cent from 30 per cent for those earning over Rs5 crore. The increase in surcharge would mean that the effective tax rate—including 4 per cent cess—for those with an income of Rs2 crore to Rs5 crore would now be 39 per cent, and for those above Rs5 crore the tax outgo would go up to 42.74 per cent.

This higher tax outgo is likely to impact an estimated 40 per cent of the foreign portfolio investors (FPIs) investing in India. They are a worried lot, considering that this comes at a time the economy has slowed and corporate earnings remain lacklustre.

After pumping around Rs78,600 crore between January and June 2019, foreign institutional investors (FIIs) pulled out Rs12,400 crore from equity markets in July, even as they channelled in more than Rs9,000 crore in debt markets. The FII pullout led to the benchmark BSE Sensex falling more than 6 per cent in July.

“The budget announcement on taxation has adversely impacted investor sentiments and is reflected in the FPI outflows from the equity markets,” noted Sushant Hede, associate economist at CARE Ratings.

There were, however, also proposals in the budget aimed at attracting more FIIs to India’s stock markets. For instance, it has been proposed to increase the statutory limit for FPI investment in a company from 24 per cent to a sectoral foreign investment limit with option given to the concerned corporates to limit it to a lower threshold. FPIs will also be permitted to subscribe to listed debt securities issued by REITs (real estate investment trusts) and InvITs (infrastructure investment trusts).

The higher tax surcharge on the super-rich was not the only thing that spooked investors. They were left concerned after Sitharaman proposed that the Securities and Exchange Board of India (SEBI) consider increasing the minimum public shareholding in listed companies to 35 per cent from 25 per cent.

Increasing public shareholding in listed companies will lead to wider ownership of shares and deepen the market further. The move could also attract to the market foreign and institutional shareholders, who are keen to pick up some of the marquee stocks.

However, it would also pose a challenge for many top listed companies, including multinational corporations, who would have to bring down the promoter shareholding from 75 per cent to 65 per cent. Those who are not keen on it, may instead consider delisting their companies from Indian bourses.

According to a study by Jagannadham Thunuguntla, senior vice president at Centrum Broking, there are 1,174 companies, or close to 25 per cent of the total 4,700 listed companies, that had a promoter shareholding above 65 per cent. Promoters of these companies would have to pare their stake further if the market regulator is to go ahead and implement the proposal. “The quantum of sale that needs to be done by these 1,174 companies works out to about a whopping 03.87 lakh crore,” said Thunuguntla.

Among top companies that would have to divest the most are TCS, Wipro and Avenue Supermart (the owner of DMart supermarket chain) that have promoter shareholding of 72.1 per cent, 73.9 per cent and 81.2 per cent, respectively. Bandhan Bank, HDFC Bank, Hindustan Unilever, ABB, Abbott, Bosch, GlaxoSmithKline Pharma, Honeywell Automation India and Siemens are some of the other companies that would have to shed more than 5 per cent of promoter stake to comply with the proposed norms.

If not given enough time, it could lead to a flood of new paper into the market, which could suck up the liquidity. However, market experts feel if the proposal is implemented, it would be over a period of time, so that companies get enough time to take their decision.

“While we need to await SEBI regulations regarding how much time will be given to these companies to meet with these minimum public shareholding norms, the overhang of this requirement of off-loading of promoter shareholding can have significant impact on the markets and the specific stocks. The regulator needs to provide sufficient time to meet this requirement so as not to over-flood the markets with stake sales by promoters,” said Thunuguntla.

Similar norms were announced in 2010, when the market regulator had mandated minimum 25 per cent public shareholding in listed entities. At the time, companies were given three years to comply with the norms.

“This definitely cannot happen in one go. A sufficient timeframe will be given to companies to bring down the promoter stake, and over time, the additional supply will get absorbed,” said Mayuresh Joshi, portfolio manager at Angel Broking.

There are several state-owned companies, too, in which the government will have to substantially reduce its stake to comply with these norms, if and when implemented. The government is anyway going ahead with its divestment programme.

Disinvestment in public sector enterprises has been a key tool for the government to rein in its fiscal deficit target, given the shortfalls in direct and indirect tax revenue. For the year ending March 2020, Sitharaman has increased the divestment target to Rs1.05 lakh crore from Rs90,000 crore, proposed in the interim budget. This will be done via consolidation of state-owned companies in some cases, and strategic divestment in others.

Apart from launching offer for sale in individual companies, the government in recent years has also taken the exchange traded fund (ETF) route to pare down stake in PSUs.

In July, the government launched the sixth tranche of Central Public Sector Enterprises (CPSE) ETF. The government had set a base issue size of Rs8,000 crore for the sixth tranche. However, the issue got oversubscribed and the government exercised the green shoe option, taking the total offer size to Rs11,500 crore. CPSE ETF was first introduced in 2014 and has in subsequent tranches raised Rs38,500 crore.

An ETF is essentially a grouping of stocks that track an underlying index. For instance, several fund houses in India have the Sensex ETF that has a basket of stocks tracking the BSE’s benchmark Sensex index. In developed markets, ETFs could also contain bonds, commodities or there could be mixed ETFs.

Just like shares can be bought and sold, ETFs can also be traded on the stock markets, and thus are more liquid than normal mutual funds. The ETFs usually replicate the performance of the underlying index they track, compared with an active mutual fund, where the fund manager is looking to take bets that would help outperform the broader markets. ETFs also have lower expenses and fees.

The CPSE ETF tracks shares of 11 central public sector enterprises—ONGC, NTPC, Coal India, Indian Oil, Rural Electrification Corp, Power Finance Corp, Bharat Electronics, Oil India, NBCC, NLC India and SJVN.

Compared to some of the international markets, ETFs have not really taken off in a big way in India. Earlier, not much was done to promote ETFs, and lower fees and expenses meant distributors, too, did not get much margins by selling them. In turn, they did not promote them much. Furthermore, many actively managed mutual funds beat the benchmark indices, unlike in the more mature markets like the United States. So the active mutual funds always looked more attractive.

In the budget this year, Sitharaman may have just been able to draw the attention of retail investors towards at least the CPSE ETF. “ETFs have proved to be an important investment opportunity for retail investors and has turned out to be a good instrument for the government of India’s divestment programme. To expand this further, the government will offer an investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS),” said Sitharaman.

ELSS allows an individual investor a deduction from total income of up to Rs1.50 lakh under section 80C of the Income Tax Act. There is a lock-in period of three years, after which, an investor could continue to hold, sell or switch the units in the ELSS scheme.

Now, as per the budget proposal, the CPSE ETF will also get a similar tax treatment, a move that could also encourage long-term investments in state-owned enterprises.

There could be several advantages of investing in CPSE ETF, says broking firm HDFC Securities. “It enables large investment in blue-chip public sector enterprises without the constraint of market liquidity on the underlying individual stock. Investors will be able to diversify exposure across a number of public sector companies through a single instrument,” it said.

The PSU stocks selected in the CPSE ETF also have a lower price to equity (P/E) ratio, high dividend yields and are available at attractive valuations, HDFC Securities further added. However, it also notes that it is not very diversified and is skewed towards the energy sector.

Other wealth managers are not too convinced as far as CPSE ETFs are concerned. “We would not recommend CPSE ETF due to better investment avenues availability and with some risks associated: one, CPSE ETF consists of PSU stocks that are associated to energy sector, leading to concentration of risk to one sector. Two, PSU earnings can fluctuate depending on government policies, thereby it does not provide a clear long term view. Three, companies belonging to the public sector tend to suffer from slow decision making and lack of competitiveness, thereby resulting in reduced efficiency compared to private companies,” said Vijay Kuppa, cofounder of Orowealth.

Anant Ladha, founder of Invest Aaj for Kal, says granting investments in CPSE ETF a deduction under section 80C of the Income Tax Act is a welcome step, from the perspective that one more equity-linked instrument is being added to the basket, opening up another investment avenue for the salaried class looking to claim deductions. It will also help deepening of equity markets.

However, he too favours ELSS schemes over ETFs, for their underlying diversified investments. “ELSS schemes are much more diverse and have given better returns over the long-term compared with CPSE ETF,” said Ladha. In the last three years, the CPSE ETF has given returns of over 9 per cent. But, in the same period, ELSS has averaged over 11 per cent. Over a five-year period, too, ELSS funds have outperformed the CPSE ETF by a wide margin, Ladha pointed.

Just as the government has looked to generate more interest in CPSE ETFs and make them attractive, it also continues to push the national pension scheme (NPS) as a means to generate post-retirement income for the salaried class. In the budget, Sitharaman announced that withdrawals from NPS post maturity would finally be made tax-free, thus bringing it on par with other financial instruments like the public provident fund (PPF). This was a decision that the Union cabinet had already taken last year. But with it finding mention in the budget only now, its notification could be made soon.

So far, NPS had enjoyed an EET (exempt, exempt, taxable) status, wherein upon withdrawal, the NPS was partially taxable. Of the total accumulated corpus, 40 per cent had to be used to purchase an annuity plan. This portion was exempted from tax, although investors must remember that the annuity income is taxable as per the existing slab. Of the remaining 60 per cent of the NPS corpus, 40 per cent was tax exempt while 20 per cent was taxed. Now, effectively, the entire 60 per cent will become tax free.

“Under the existing provisions of section 10 of the act, any payment from the NPS Trust to an assessee on closure of his account or on his opting out of the pension scheme, to the extent it does not exceed 40 per cent of the total amount payable to him at the time of such closure or on his opting out of the scheme, is exempt from tax. With a view to enable the pensioner to have more disposable funds, it is proposed to amend the said section so as to increase the said exemption from 40 per cent to 60 per cent of the total amount payable to the person at the time of closure or his opting out of the scheme,” the finance bill says.

The finance minister has also proposed to allow deduction for employer’s contribution up to 14 per cent of salary from the current 10 per cent, in case of a Central government employee. Deduction under section 80C for contribution made to Tier II NPS account by Central government employees will also be allowed.

NPS can be one of the tools for the salaried class as a part of their investments towards building a retirement corpus. When you invest in NPS, the money is channelled to a mix of equity, government securities and corporate bonds. This, in a way reduces the risk that is generally linked to equity. There is an additional income tax exemption for individual subscriptions of up to Rs50,000 under section 80CCD1(B) of the Income Tax Act, which is over and above the Rs1,50,000 deductions that are allowed under section 80C. That could be another advantage.

In NPS, the fund management charge or service charge is as low as 0.01 per cent of assets under management per annum for the private sector and 0.0102 per cent of AUM per year for government employees.

Now, with withdrawals also becoming tax free, those particularly close to 50 or above should definitely contribute to NPS, to cash in on the additional tax benefits, said Ladha.

There are a few things that an investor seeking to contribute to NPS must consider, said Orowealth’s Kuppa. For instance, one has to invest for a very long term if she wants to accumulate a sizeable corpus. And, it is not a liquid instrument, which means one cannot withdraw fully before retirement. There is also the fact that 40 per cent has to be invested in an annuity plan of an insurance company.

“The investor has to decide if it is worth giving up extra tax-saving allowance, which can be invested in other instruments, but address the concerns of liquidity. In our view, NPS is still not an efficient tool to generate retirement income as the investor will be better off investing in equity-based mutual funds,” said Kuppa.

As can be seen, be it via the proposed increase in public shareholding of companies, or via CPSE ETFs or NPS, more money could certainly make its way to equity markets over time if and when the budget proposals are implemented. However, given the current environment of a slowing economy, tepid corporate earnings growth and troubles in the non-banking financial services sector, some would wonder whether it would be advisable for retail investors to buy stocks or put money in mutual funds now.

Since hitting a peak of 40,312.07 on June 4, the benchmark Sensex had fallen by 7 per cent by end of July. Joshi of Angel Broking says that in the short term, equity market is likely to remain “sluggish” and it is the debt holders who will make money. “A market re-rating hinges on earnings recovery, which is still only a hope. There could be some revival in consumption around the festive season and liquidity-related relief is expected in the second half,” he said.

Still, he says, systematic investments should continue in stocks. However, one should do a lot of due diligence and pickup quality stocks, Joshi added.

Many stocks currently have fallen sharply from their peak. For instance, small-caps are down 35 per cent from their peak in January 2018, while the mid-caps similarly have fallen close to 23 per cent, notes Sunil Sharma, chief investment officer of Sanctum Wealth Management.

While he expects markets to remain volatile in the near-term, there will be medium-term opportunities. “We continue to favour leadership stocks with competitive advantages and advise using times such as these to accumulate positions,” said Sharma.

fixing-finances-at-fifty

Sat Jun 08 17:13:22 IST 2019

Everyone dreams of retiring rich. But, it is easier said than done as it ultimately will depend on your financial planning and how early you started. You may have slogged through your job to get the higher increment and promotions. But, did you put the money to work wisely?

Today, the awareness about starting financial planning early is high. However, many still do not see the need for systematic investment and financial planning till in the later stages of their life, when expenses like a child’s higher education or wedding come up.

Typically, you are at the peak of your career when you are around 50. In an ideal situation, you would have already accumulated a sizeable corpus in your investment basket. Perhaps, some of you just depended on the monthly provident fund contribution that the employer deducted from your account, hoping that it would generate enough in your kitty over time. But, given the way the costs are rising, it may be extremely inadequate to meet all the expenses. Then when you are nearing 50, the realisation strikes that the savings are just not enough and you start worrying about funding large expenses. More importantly, you will have to consider how you will maintain your lifestyle post retirement. The dreams of retiring rich vanish as reality strikes.

But, all is still not lost. Though financial planners advise starting early and staying invested over long periods of time, it is never too late. Where should you park your money? Should it be left in the savings bank account? Should you open fixed deposits with scheduled banks? Should you buy bonds? Should you buy stocks or invest in mutual funds? The financial maze is a lot more complex than you think it is.

“I would like to quote Misty Copeland,” said Abhinav Angirish, founder of Investonline. “'Know that you can start late, be uncertain, and still succeed.’ It is never too late to start; the big challenge is to have a mix to have a steady income while ensuring capital appreciation.”

If you are a conservative investor, you might be inclined towards saving money in bank accounts or opening fixed deposits. But, savings bank accounts typically offer an interest rate of 3.5 per cent to 4 per cent, which is taxable. If you consider the average inflation to rise at 3 per cent to 6 per cent rate, just parking your money in banks is not going to help you accomplish your dreams. Some people choose fixed deposits, which offer a higher interest rate. However, that is also taxable, and coupled with the annual rise in inflation, your returns will not be much. Remember that if you are starting late, you have a shorter time horizon to invest and build a corpus.

Currently, State Bank of India offers an interest rate of 5.75 per cent (for term deposits up to 45 days), 7 per cent (for a period of one year to less than two years) and 6.70 per cent for three years to less than five years deposits. HDFC Bank’s deposit rates top off at 7.40 per cent. Other banks, too, offer interest rates in a similar range. The Reserve Bank of India has already reduced its benchmark repo rate twice and the expectation is that there will be more rate cuts this year to jump-start a slowing economy. So, the interest rates that banks offer are likely to fall. Add to that the income tax you pay as per your tax slab and the inflation rate; your returns on bank deposits will look too little.

“We must not forget that inflation is the only factor that stays forever,” said Angirish. “Any income will be subject to inflation. So if you are not beating inflation, then inflation will beat your capital. Traditional instruments like bank fixed deposits have lost their sheen due to falling interest rates.”

That brings us to equity or mutual fund investments. Many people consider it as a risky option, particularly in the short-term. At 50, one would rather protect the money one already has. But, the risk can be minimised by judiciously investing in a basket of quality equity funds, mixing it with debt funds of varied durations.

Pune-based Vinayak, 80, started investing in equity and mutual funds in his late 50s. Patiently investing across a mix of mutual funds and a small equity portfolio of quality stocks, he was able to grow a decent retirement kitty. “Earlier, I was saving up for my own house. So, I started investing very late. Now, half of my savings is in blue-chip stocks, and the other half is in equity mutual funds. Over time, the value of both the investments has continued to grow, which gives me confidence to stay invested,” he said.

There are different types of mutual funds. Pure equity funds invest the entire corpus in stocks; balanced funds invest 60 per cent to 70 per cent in equity, and the rest could be in money market or debt funds that invest in corporate bonds or government securities. There are pure debt funds, too, where some invest only in shorter-duration papers, while others invest in longer-duration instruments. Liquid funds can also be a great alternative to bank deposits. They invest in very short-term instruments like G-Secs and treasury bills, where the risk is very low. These funds offer yields in the range of 7 per cent to 8 per cent and are more tax efficient than bank deposits. So the post-tax returns are better. Another advantage is that many fund houses offer instant redemption facility with no charge or penalty. So, experts say, instead of leaving a lot of money in bank accounts, a sizeable portion should be parked in a liquid fund.

“Though bank deposits are a favourite, debt funds score over fixed deposits in term of better liquidity, diversification of portfolio and most importantly post-tax, inflation adjusted (real) returns,” said financial planner Ankur Kulkarni.

Equity investments can give annual returns of 12-14 per cent; some small-cap and mid-cap funds have also given more than 20 per cent returns in bull markets. With returns compounded each year, you will accumulate a respectable surplus, even though you have started late. Therefore, wealth managers say, equity investments should be an integral part of one’s portfolio. “While one might consider equity as being risky at 50, it becomes essential to add equity to deliver a decent corpus. Mixing it with debt can reduce the risks,” said Vidya Bala, head of mutual funds research at FundsIndia.

The other portion of the investment could be in fixed income assets like debt funds, company deposits or bank fixed deposits, which provide stable and regular returns.

There are advantages of starting investments early. Given the long time that you have on your side, you could accumulate a huge corpus with lower investments. But, if a person is starting at 50, the investments would have to be considerably higher. “Just as an example, an investment of Rs5,000 a month for 30 years through a systematic investment plan can deliver about Rs1.75 crore (at 12 per cent return). To just get the same corpus within 10 years, Rs75,000 a month of savings in necessary,” said Bala.

So, if you are starting late, you might have to do a careful study of your income and expenses and make sure that a larger corpus is earmarked for investment each month. “If the rate of savings is not high, no amount of investing in top products will help,” said Bala.

India has a large working class population. While government employees do get a pension, there is no such social security available to their private sector counterparts, except the provident fund. Therefore, over the last few years, national pension system (NPS) started being promoted as a tool for retirement planning.

Under the NPS, funds are invested in a mix of equity, G-Secs and corporate bond funds. It gets additional tax exemptions under section 80CCD of the Income Tax Act. The government has also tried to make it more attractive by making the withdrawals tax free. However, one must be aware of longer lock-in periods and that only 60 per cent of the amount can be withdrawn on retirement, which is tax free, and the rest has to be invested in an annuity (pension) plan of any insurance company, which will be taxed as per your income tax slab. Also, premature withdrawals are restricted barring a few circumstances.

Currently, there are eight pension fund managers for the private sector and three for the public sector. Investors can choose a fund manager after carefully studying their track records over various cycles. Here, too, the earlier you start, the larger the corpus you will end up with. Also, given that the investments are a mix of equity and debt funds, the risk is lower than pure equity funds.

“It has emerged as a good savings alternative,” said Angirish. “But while it provides tax benefit—up to 60 per cent of corpus can be withdrawn at the age of 60 tax-free—the funds get locked. For example, if you have accumulated Rs50 lakh as corpus in NPS, 40 per cent, or Rs20 lakh, gets blocked because it has to be compulsorily invested in annuity, and annuity is taxable in the hands of investor.” He recommends building a corpus via mutual fund investments and then opting for a systematic withdrawal plan after retirement based on the needs at the time.

If one is looking at investment plus tax saving as an option, then equity-linked savings scheme (ELSS) funds could be a good option. ELSS investments also get tax exemptions under section 80C of the Income Tax Act, and they have a lower lock-in period of three years. As ELSS funds invest in equity, they tend to give better returns than NPS, where equity investments are capped. “NPS can help by reducing tax burden and investing in market-linked products. However, given that there is a limitation on equity exposure to this product, especially with age, it can be used only in addition to mutual funds,” said Bala.

It is fairly clear that investments in equity-linked instruments will help you garner a larger corpus. However, if you are still averse to risk, traditional instruments like public provident fund (PPF) or a national savings certificate (NSC), which are secure and low-risk products, could help you diversify your portfolio. Just like a provident fund, PPF is a government-backed instrument, with an interest rate that is fixed on a quarterly basis; currently its at 8 per cent. A PPF account matures after 15 years, and subsequently it can be renewed for a period of five years at a time. Investments in PPF as well as the interest earned are exempted from tax.

One could also look at government-backed small saving schemes like NSC, which will become more attractive in times when interest rates are declining. This is also a fixed income instrument like a PPF. It can be brought from a post office with a fixed maturity period of five years or ten years. While, there is no maximum limit on the purchase of NSC, under Section 80C of the Income Tax Act, exemption is given only up to Rs1.50 lakh. Interest rate on NSC is also set quarterly by the government, which is currently at 8 per cent.

Banks offer tax saving fixed deposits, where the deposit is locked for five years. However, the interest earned is taxable and if interest rates continue to decline, interest rates offered on these tax saver FDs will also come down.

If you are only going to invest in fixed income instruments, then the amount you will have to invest will significantly go up, given that the returns are not as high as equity returns. If, for instance, you start at 50 and are targeting a corpus of Rs1 crore at the age of 60 through a mix of equity and debt instruments, at 10 per cent average annual returns, you would have to invest around Rs49,000 per month. In contrast, if you are only investing in instruments like term deposits and PPF, then at an estimated 7 per cent annual returns, you would have to invest close to Rs58,000 per month to reach the same goal of Rs1 crore.

So, while you will still be able to build a decent corpus, had you started earlier, say at the age of 30, the money that you would have had to invest per month would have been far lower at Rs4,400 (a mix of equity and other instruments), or 08,200 (if investing only in fixed income). So, the emphasis should always be on starting early and planning wisely.

A person at 50 must also take into account several other critical factors. Medical expenses have soared over the past few years and a sudden illness can hit an individual hard, wiping off a sizeable chunk of the savings. Therefore, an adequate health insurance cover is the need of the hour and this is the first thing that you should opt for unless you already have. “It shields your hard earned savings getting spent for your medical emergencies. In the absence of adequate health insurance, in case of any hospitalisation all the savings and investments may get wiped out leaving the family in tough times for the rest of the life,” said Kulkarni.

Premiums on health insurance go up every year. Also, gone are the days when health insurance was equivalent to a simple mediclaim policy. There are plans targeting particular diseases like heart ailments or critical illness. There are also family plans, so that your entire family (primarily self, spouse and two children) are covered.

Another critical thing to consider is your liabilities. Over the years, one takes several loans. Housing loan is often the biggest liability. You may have also bought things like cars, two-wheelers and consumer durables on loan. Then there is the credit card debt as well.

As you head closer to your retirement, you must pay back all your debts. As a thumb rule, you should try to make the full payment of credit cards each month on time. Not only is there a late payment fee, the interest charged is high, ranging from around 2 per cent a month to as high as 3.50 per cent. “Post-retirement, you would be looking for steady income. Hence, if you have outstanding debt, the interest outgo will be more than interest earned. This effectively defeats the purpose of investment,” said Angirish.

You might also want to look at converting some of your physical assets, like that second home, for instance, into financial assets, which will make things much more manageable after you retire.

Once you have built a corpus, you plan and use it with care in your post retirement years. One avenue could be the Pradhan Mantri Vaya Vandana Yojana, which is a pension scheme by the government for senior citizens. The minimum age of subscription to this policy is 60, and the policy term is ten years. You will get a pension of 8 per cent for ten years. Another option is mixing post office senior citizens’ scheme and senior citizens' bank deposits with low-risk liquid funds, which will help meet any emergency needs. At the same time, some savings could remain in equity funds, which will provide the long-term growth.

“There are a lot of people who knowingly or unknowingly delay retirement planning, which can hurt them significantly in their post retirement life,” said Kulkarni. “But, it is better late than never.”

emergency-exit

Sat Apr 06 20:05:01 IST 2019

Bengaluru-based IT professional Amit Kumar, who worked at the R&D centre of an American multinational company, had been doing well in his career. But one fine day, he was informed that he had been laid off as part of a global restructuring programme. The company gave him four months salary as compensation.

Kumar, 40, was shocked. He had a family to support—two school-going children and a homemaker wife. He had recently invested in a two-bedroom apartment in the city and had EMIs to pay. The severance package was just not enough to sustain him till he got another job. Kumar, however, had a habit of saving regularly for a contingency fund. And that was enough to manage for at least a year. Kumar landed a job in a few months, though not at the same level. The only thing, according to him, that helped him deal with the crisis was his contingency.

“One needs to do away with the ‘nothing-will-happen-to-me’ attitude,” said Sasikumar Adidamu, chief technical officer, Bajaj Allianz General Insurance. “Appropriate financial planning is important to live a life of dignity. One never wants to be in a situation where one has to borrow money to fulfil basic necessities or live hand to mouth. To avoid such situations, it is vital to have a contingency fund set aside that helps you deal with emergencies.”

Personal finance experts unanimously agree that contingency financial planning is a must. There can be unforeseen expenses in every sphere of life—a medical emergency, job loss or transfer. Prudent systematic saving and investing in various financial tools to meet such emergencies is an important part of maintaining financial stability.

While nothing can prepare one enough to face an emergency, having an emergency fund is the best one can do. “If one does not have an emergency fund, one should start working on one,” said Navin Chandani, chief business development officer, BankBazaar.com. “Ideally, it should be six to twelve months of your current monthly income kept in a risk-free and liquid instrument such as a fixed deposit. This emergency fund can help in situations such as loss of regular income. Try not to utilise this money for any other expenses.”

The objective of having a contingency fund is not limited to meeting unexpected events—one can channel it through planned events like job switch or marriage. “Those who don’t have a contingency fund should reconsider their monthly budget allocation, and try to minimise or cut off unwanted expenditure,” said Dinesh Rohira, founder and CEO at 5nance.com. “It is prudent to shell out at least 10 per cent of monthly income into an emergency fund, and gradually top up until it is sufficient to meet six months' expenditure. Nevertheless, it can also go beyond six months but it will block the money which can be deployed for wealth creation purpose. After reconsidering a budget, one should park this fund in a liquid scheme of debt mutual funds, and use it only for emergency purposes.”

An emergency fund is one of the most important aspects of any financial plan. While you put together one, you should factor in expenses such as payment of insurance premiums and EMIs. The contingency fund should ideally be parked into a separate bank account or liquid fund. “It is very common for people to panic in a state of confusion when faced with an emergency,” said Rahul Jain, head of personal wealth advisory at Edelweiss. “The first step is to utilise whatever savings or any investments one has rather than taking a personal loan or loan from friends or relatives. Within investment one should utilise the bank fixed deposit or any other fixed income instrument. Only if there is additional need of funds should one dip into long-term investments like stocks and equity funds. Personal loan should be the last resort.”

Job loss is one of the major reasons that land people in financial trouble. It can shatter them financially and emotionally. “If you have recently suffered a job loss, then the first step must be to reenter the job market,” said Chandani. “Full time, part-time, freelance, keep your options open. At the same time, cut down your expenses as much as possible. Stick to the essentials and cancel or reduce spending such as online subscriptions, eating out, buying gadgets, or travelling for leisure. Also, use your investments with care. Resist the urge to withdraw all money at once. Withdraw them in a structured manner according to your needs. Once you find employment again, make sure to put the money back in the investments. If you’re repaying a loan, you may be bound by contract to inform your lender about a change in your employment status. If you can continue to pay your EMIs, do so. But if you are struggling, work with your lender about increasing your tenure, lowering your EMIs, or any other way the loan can be restructured. Try not to let your insurance policies lapse. Most insurance companies offer you a 30-day grace period in which you can make your premium payments. Use this grace period to pay off your premiums.”

Another scenario in a salaried individual's life is changing a job for better opportunity, which leads to loss of primary source of income for a small period of time. It, however, may go longer than expected, leading to financial implications. In such a scenario, a person can use the emergency fund to meet the needs.

If the dry period lasts longer than you can manage with the contingency fund, you can opt for short-term loans. However, make sure you pay back the loan on high priority after getting a stable income.

Accidents and natural calamities can also lead to financial distress, and preplanning can help manage such events. A prudent approach is to insure oneself against such events with appropriate cover, and keep enough money aside to finance this policy.

Health care can be a major challenge in the absence a regular income. “If you are out of a job, you will not have your employee insurance to help you tide over. So always have your own, independent health insurance policy for your whole family in addition to whatever your employer provides. Also, consider a term plan if you have dependents. These are pretty low cost, and can provide you cover in case job loss occurs due to an accident or disability,” said Chandani.

Adidamu says health care costs can add immense pressure to a person's finances. “There is an increase in medical costs of at least 15 per cent annually, considering the inflation. Most of the people pay these expenses out of their savings, borrow money from their relatives or even sell their jewellery or assets. It is important to have a holistic 360 degree health insurance plan for yourself and your family members to deal with medical emergencies. One needs to have a basic health insurance plan of at least 05 lakh, considering the current medical costs along with a super top-up health plan that takes care of hospitalisation expenses in case the sum insured of the basic policy is exhausted. With change in lifestyle there’s also an increase in the number of people prone to critical illness. A critical illness plan provides you a lump sum amount in case you are diagnosed with the listed illness in the policy and it not only helps you with recovery, but also supports your family members,” he said.

People put in their lifetime's savings and pay huge EMIs to build houses, probably their most important asset. Then they spend huge sums on decorating it and to buy household items. One natural calamity can wipe off all this. A home insurance ensures that your years of labour does not go in vain and covers your home from dangers like theft, damage due to natural calamities and accidents. It not only covers the structure, but also the contents within.

Accidents can inflict serious damage on a family's financial health, more so if an earning member is involved. A personal accident cover can provide the much-needed financial support if a person meets with an accident that leads to disability or death. It is a benefit policy that also provides for children's education and medical expenses. This cover is an absolute must in addition to a life insurance policy that covers all causes of death.

The habit of planning finances needs to begin early, ideally right from the first paycheck one receives. So does a contingency fund. “One of the components of financial planning is adequate saving, which is invested in the right place to achieve growth so that when contingencies or emergencies arrive, one has a sufficient nest egg built up to tide over it,” said Dheeraj Singh, head of investments at Taurus Asset Management. “The fundamental principle of not spending more than one earns is sacrosanct. Even if one does take on debt to finance a big asset purchase, one should ensure that there is sufficient cushion in income to take care of servicing the debt. To build up a contingency fund one needs to start saving and investing early and spend only on things that one needs and not on things that one wants. Besides this one needs to invest in suitable instruments for growth. For instance, SIPs in mutual funds are a great disciplined investment mode to ensure long-term growth. Similarly, regular income needs can be taken care of through systematic withdrawal plans, which are also tax efficient. Also, one should prefer investing in liquid instruments (instruments that can be converted to cash quickly and easily) as opposed to illiquid instruments.”

Identifying and segregating your expenses as discretionary and non-discretionary is how you start with saving. “Consider your monthly household expenses, EMIs, school fees, medical expenses, etc. Buy a term plan and adequate medical cover and start saving for taking care for a minimum of six months of your non-discretionary expenses, invest them either in liquid fund or you can keep the same in a savings bank account as well,” said Rajesh Patwardhan of LIC Mutual Fund. “Save it in a separate bank account and try to add some money every month in the same. In case one has not planned for such a fund and an emergency arises, there are little choices left, but one has to be extra careful not to fall in debt trap. So either go for peer-to-peer short term borrowing or family borrowing, or selling family gold or going for loan against property or outright sale of property. Staying away from the debt trap will help you overcome the contingency period quickly when the bad phase passes. There are insurance policies available to cover such expenses, and if one feels he is into an unstable job and not in a position to build such a fund one should buy such a policy.”

Some experts are of the opinion that, if you don’t have a contingency fund, credit cards can prove to be helpful to pay for any financial emergency. “It is, however, not recommended to keep the credit card bills outstanding for long periods of time as it could be quite expensive,” said Raghvendra Nath, managing director, Ladderup Wealth Management. “Nowadays, many banks offer pre-approved personal loans depending on the financial track record of the individual, which could be at a very reasonable rate of interest. Other than this, if an individual owns gold jewellery, he can take a gold loan to deal with the short-term financial crisis. Also, if he has made any investments in mutual funds, equity shares or bonds, he may look to liquidate the investments to meet his financial emergency.”

Nath suggests one should keep at least nine months of expense requirement in liquid mutual funds or fixed deposits as an emergency fund. “Critical illnesses like cancer or tumour can also lead to high bills of surgery, medicines and hospitalisation together with no salary income. While health insurance policies can cover the individual for the expenses, the insurance claim can take two or three months to clear. In this case, the emergency fund would be required to cover the medical expenses in the absence of cashless health insurance policy and to meet the routine expense for the family without compromising the lifestyle. Also, as of now, none of the insurance companies offers a standalone job loss insurance policy. However, it is available as an add-on with other polices that cover larger risks such as accident and critical illness. The job-loss rider would cover an individual only in case of retrenchment by employer due to merger or acquisition. Considering the narrow scope of the cover, job loss insurance add-on does not seem to be a dependable option.”

Before buying any insurance policy as protection against contingencies, one should review and understand all the conditions mentioned in the policy documents and disclose accurate facts to avoid any delay in the claim settlement process. “Also, one should pay all his insurance premiums on time to avoid policy being lapsed,” said Nath.

Health insurance and critical illness plans need to be chosen carefully. “Though a health insurance plan (indemnity) typically covers expenses incurred during hospitalisation, pre and post-hospitalisation, a critical illness plan offers cover upon diagnosis of critical illness, where the insured can get lump sum benefit that can make up for his reduced earning capacity as a result of contracting the critical illness and can help his family to manage the cost of expensive treatment of critical illnesses. One needs to have a minimum hospitalisation insurance cover right from birth or young age,” said Shreeraj Deshpande, principal officer and key managerial personnel, Future Generali India Insurance.

Seeking a temporary credit line against mutual funds or stocks could also be considered in case of a financial emergency besides borrowing against traditional insurance policies or withdrawing from the provident fund kitty. “An individual can also redeem the most liquid asset class or fund category with the least loss and least exit cost,” said Shaily Gang, head of products, Tata Mutual Fund. “In the absence of financial assets, it will be difficult to tide over this situation, as physical assets would not be easy to liquidate immediately. Thus, it is extremely important to build a corpus by investing in mutual funds, SIPs, planning asset allocation basis risk appetite across equities and equity mutual funds, fixed income funds, bonds, provident fund and alternative assets. Also, cash balance in bank accounts and fixed deposits would be the first thing to come to the rescue in a financial emergency. Credit cards could be used for paying medical bills or making payments provided the person is mindful of the interest-free period available on the credit card. In case of a medical emergency, liquid funds redemption can be executed or a cashless mediclaim process can be initiated.”

There are some additional precautions that one needs to take in managing an emergency fund. “All bank accounts and investments should be easily accessible to more than one person in the family,” said Gang. “The best way is to maintain proper files with CAS reports, FD details sheet and policy documents. Expiries and renewals of policies should be tracked. Utmost care should be taken while making disclosures on policies, providing details while applying for policies and also while subscribing to any kind of investment. Return seeking should not take precedence over safety and liquidity while parking funds as contingency or emergency reserve. The investment objective of contingency funds is to keep the portfolio safe, liquid and then try to earn returns which are slightly higher than bank savings, current and short-term fixed deposits. Besides this, health insurance, mediclaim and term life insurance should be applied for in the life cycle. Also, a minimum of 50 per cent of the portfolio should be open ended. Nominations for all investments should be in place. Ideally, a will should also be planned and executed.”

While selling existing investments to meet an emergency fund requirement can save you from interest cost, it can adversely impact your long-term financial goals. “Redeeming market-linked investments during bearish market conditions can also lead to book losses,” said Naveen Kukreja, CEO and co-founder of Paisabazaar.com. “Those availing loans to deal with financial emergencies should visit online financial marketplaces to compare various loan offers available on their credit score, income and other parameters. Among various loan types, personal loans have the fastest disbursal time with most lenders disbursing personal loan within a few days. Their interest rates start from 11 per cent and their tenure can go up to five years.”

money-matters

Sat Feb 09 11:44:41 IST 2019

Indians had typically been averse to investing in equity and equity-linked instruments, instead preferring fixed deposits, property and gold. That, however, is changing. More and more Indians are buying stocks or channelling funds through systematic investment plans of mutual funds, although the percentage of the participating population is still quite low in comparison with some developed economies.

Since the NDA government came to power on May 26, 2014, the Sensex, the BSE benchmark, has jumped 46 per cent. In the year after demonetisation in 2016, the Sensex jumped 28 per cent. Bank interest rates have been falling ever since and the real estate market has not yet recovered from the shock of demonetisation. These things together led to massive flows into the equity markets.

The total assets managed by mutual funds have more than doubled, from Rs10.11 trillion in May 2014 to Rs22.86 trillion in December 2018. In May 2014, equity, balanced funds and equity-linked savings schemes (ELSS) together managed Rs2.31 trillion. In December 2018, it stood at Rs9.66 trillion, a four-fold jump.

Data from the Association of Mutual Funds of India shows that the share of equity-oriented schemes increased to 41.9 per cent of the industry assets in December 2018, from 40.3 per cent a year earlier. Individual investors held Rs12.91 trillion in mutual funds in December 2018. They now hold a higher share of industry assets at 53.6 per cent, 3 per cent up from a year earlier.

However, as mutual fund investments are market-linked, buying pure stocks or equity funds may not always give you good returns. Over the last one year, for instance, the market has been extremely volatile. It is currently down more than 7 per cent, since the high of 38,989.65 it hit on August 29, 2018. Small- and mid-cap stocks have seen a double-digit correction.

That has weighed on returns of equity mutual funds, which have ranged from a gain of around 5 per cent to a loss of 20 per cent. Most analysts do not expect the volatility to subside in 2019, at least not in the first half, as elections are round the corner, oil prices remain volatile and global trade tensions linger on. Corporate earnings, though looking up of late, are still not at their best. Expectations are still being moderated, even as the macro environment remains favourable. “Valuations remain a key issue dodging the market and fears of an adverse election outcome persist,” said Sunil Sharma, chief investment officer of Sanctum Wealth Management. “Cautious optimism remains our preferred path forward, which translates to strategies, managers and portfolios that minimise losses, while ensuring participation in gains.”

So, is it time to pare down the exposure to equity and switch to debt funds or traditional bank deposits?

Experts say one should never be worried about short-term uncertainties if the saving is for a long term. “One mistake that people often make is to look at the market as a get-rich-quick scheme. As an investor, bear in mind that equity investments are long-term investments. Focus on identifying a few strong companies for investing a part of your investment. Once you invest, have patience to ride through the ups and downs of the stock markets for the long term,” said Adhil Shetty, CEO of BankBazaar.

It is critical that one consider future goals, like saving up for a child’s higher education or retirement planning, or even foreign holidays, when making investments. One must not get swayed by near-term uncertainties. “More than timing the market, it is important to spend time in the market,” said financial planner Anant Ladha, founder of Invest Aaj for Kal. “Usually, in times like this, when keeping patience is difficult, it is very critical to manage emotions. I feel, now it is not the time to move out of the market. Rather, it is time to have patience and keep our goals in mind.”

Ladha expects at least one more correction in markets this year, and he recommends SIPs with a horizon of five years or more. “SIPs perform well, especially in fluctuating markets. But, one needs to have that five-year patience. For lump sum investment, selection becomes critical. We should stick to blue-chip, multi-cap or value-based funds,” he said.

And, an investor’s risk-return objective and the investment time horizon should drive her asset allocation. “If you are currently under-allocated in equities as per your risk profile, now would be a good time to start topping up allocations in equity funds. Investors should clearly focus on the long-term by cutting out short-term noise,” said Kaustubh Belapurkar, director, fund research at Morningstar.

Selection of right stocks is extremely crucial in uncertain times. “Mid- and small-cap funds are great wealth creators over the long term, but come with additional volatility as was witnessed in 2018. If your portfolio is under-allocated to small- and mid-cap funds as per your risk profile, there is a need to systematically start increasing exposure to this segment. But, the investment time horizon is crucial, as anything less than seven years in these funds could be counterproductive,” said Belapurkar.

Most analysts are of the opinion that large-cap stocks or funds investing predominantly in large-cap stocks should form the core holding in one’s investment portfolio. In recent years, a few asset management companies have even reduced their minimum lump sum investment requirement from Rs500 a month to just Rs100. This has helped even the people in the low-income category to put some money in mutual funds.

This is the time of the year when many people start hunting for last-minute tax planning options. ELSS funds are a good option for those who seek higher equity returns as well as tax benefits. This is a category of diversified long-term equity fund, where the investment is deductible under Section 80C. However, one must remember that investments in ELSS funds are locked-in for three years. Over a ten-year time horizon, most funds in this category have delivered returns ranging from 14 per cent to 20 per cent.

The government has taken many steps to make the National Pension Scheme more attractive. The withdrawals have now been made tax-free. Earlier, only the investments made each year were exempted. In a country where there is no social security offered or most private sector employees are without pension, NPS is a good option for saving for retirement.

In NPS, investments are mandatorily channelled to a mix of equity, government securities and corporate bonds, reducing the risk that is generally linked to equity. There is an income tax benefit for individual subscriptions of up to Rs50,000 under Section 80CCD1(B), which is over and above the Rs 1,50,000 deductions that are allowed under Section 80C. Another advantage of NPS is that the fund management charge is as low as 0.01 per cent of assets under management a year for the private sector and 0.0102 per cent of AUM a year for government employees.

However, remember that most of the funds are locked-in till you retire. Last year, there were some relaxations, but still only partial withdrawal (up to 25 per cent) is allowed. Also, equity investments remain capped at a maximum 75 per cent, and that also starts coming down after the age of 35. Another catch is, 40 per cent of the amount withdrawn post retirement would have to be put into an annuity plan, which will be taxed accordingly.

Despite the additional tax benefits, for the reason that equity investments are capped in NPS, some financial advisers recommend ELSS over NPS. “ELSS will continue to have an edge over NPS,” said Ladha. “First, lower lock-in period of three years. Historic average returns of ELSS have been more than 15 per cent compounded annual growth rate, and keeping India’s GDP and inflation in mind in future, too, at least 12 per cent returns can be expected.”

Conservative investors typically have little exposure to equity markets. Last year, when equity markets were volatile, many banks raised interest rates on the back of repo rate hikes by the Reserve Bank of India. In November 2018, State Bank of India, the country’s largest lender, raised term deposit rates to 6.80 per cent from 6.70 per cent for one year to less than two years. Interest rate for two years to less than three years was hiked to 6.80 per cent from 6.75 per cent. In the case of private sector lender HDFC Bank, interest rates currently range between 6.25 per cent for up to six months to 7.40 per cent for deposits for up to three years.

However, interest rates are unlikely to go up from here.

The 10-year benchmark yield on government securities (G-Sec) has fallen to around 7.30 per cent, from around 8.18 per cent earlier. With inflation trending below the band set by the RBI and low food inflation, it is expected that the Central bank will cut interest rates soon. Typically, interest rates and prices have an inverse proportion. When yields fall, the net asset value (NAV) of the scheme goes up. So, one could consider investing in debt funds.

“Foreign portfolio investors have turned positive on India’s fixed income market in the past two months with a net buying of $1.5 billion since November,” said Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management. “We believe there is a selective buying opportunity in the high quality corporate bond market as spreads have widened and yields have nicely priced risks.”

Investors who have a time horizon of less than four years should strictly stay away from equity at current valuations and look at debt instruments like liquid funds or short-term funds, said Ladha.

Liquid funds invest in short-term money market instruments such as government treasury bills, money markets, short-term corporate deposits and commercial papers. This makes them very liquid, and there is no exit load. A few fund houses also have liquid funds with instant withdrawal facility. People who usually maintain a large balance in bank deposits to meet sudden emergencies could look at this alternative.

“Most people maintain contingency fund in a savings bank account or a fixed deposit. They are easily accessible and can be liquidated when needed. However, keeping this money in a liquid fund will provide you higher returns than a savings account,” said Shetty.

As such, the interest rates offered by banks on deposits are less than what is offered by the Public Provident Fund. In the recent review, interest rate on PPF was left unchanged at 8 per cent. Traditionally, PPF has been seen as a tool to build a retirement corpus. The account matures after 15 years, which can be then renewed for five years at a time. But, experts point out that one would have to stay invested for a long period to build a sizeable corpus. A monthly investment of Rs10,000 for 30 years can help build a corpus of Rs14.6 million, at the end of the period. However, if the period is reduced by half, the returns will come down to a fourth, that is just Rs3.5 million.

Another option is the Sukanya Samriddhi Yojana (SSY), which has been floated with the goal of ensuring the welfare of girl children. A Sukanya Samriddhi account can be opened in a scheduled commercial bank or a post office by parents in the name of a girl child up to the age of ten. Like PPF, interest rates on this scheme are revised every quarter. Currently it is 8.5 per cent.

The rules for SSY were amended last year, lowering the minimum amount required to open an account to just Rs250, from Rs1,000 earlier. Deposits can be made into the account for 15 years and the account as such matures after 21 years. Contribution to SSY also qualifies for income tax deduction under 80C. But, one must remember that partial withdrawals here are only allowed after the account holder turns 18.

Another time-tested instrument is the National Savings Certificate (NSC). Just like the PPF, you will earn an interest of 8 per cent on NSC and it is more efficient than bank fixed deposits, considering that the interest earned is deductible under Section 80C.

The best option for senior citizens to earn a regular risk-free income post retirement is the Senior Citizen Savings Scheme. The interest rate that is being offered is 8.7 per cent, which is subject to review from time to time. This scheme is for people above 60 years and the account matures after five years, with an option to extend it for three years.

The real estate sector, which was rocked by demonetisation, has been showing some signs of a recovery. According to real estate consultancy Knight Frank, 2018 was the first time in this decade when annual numbers grew year-on-year. The total units launched last year in eight cities jumped 75 per cent to 1,82,207, and 60 per cent of the new launches were priced under Rs5 million, targetting the affordable and mid-range housing segments.

Sales also showed signs of uptick. In Bengaluru, sales were up 27 per cent. Elsewhere, the growth was more modest—Mumbai, Ahmedabad and Chennai seeing a 3 per cent growth, and sales in the national capital region and Hyderabad rising 8 per cent and 9 per cent, respectively. So, is it a good time to buy a house?

“This is, without doubt, a very favourable market for homebuyers looking to purchase properties for their own use,” Anuj Puri, chairman of Anarock Property Consultants. “One of the obvious reasons is the abundance of options in all categories of housing. Also, property rates have reduced considerably across cities.”

One thing to remember is that an under-construction property will attract a GST, so your net price will go up. Only those properties that have a completion certificate will now be eligible for exemption from GST.

If you are looking to just invest in residential real estate, a lot of due diligence will need to be done as market dynamics have changed in the last few years. “Capital appreciation is a reasonable expectation only in some categories, and in certain high-demand/low-supply areas. With some exceptions, luxury housing is currently not the best play. The preferred categories for investors currently are lower budget and mid-segment housing,” said Puri.

Though Indians traditionally invested heavily in gold, as returns fell over the past few years, the interest also diminished. 2018, however, turned out to be a surprise. Between January 26, 2018, and January 26, 2019, gold prices went up close to 7 per cent.

When equity markets are volatile, people tend to look at gold as a safe investment. Global gold prices topped $1,280 an ounce in the backdrop of falling equities towards the end of 2018, and some indications are that if the volatility continues into 2019, gold may continue to glitter.“We expect increased market uncertainty and the expansion of protectionist economic policies to make gold increasingly attractive as a hedge. While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Federal Reserve has signalled a more neutral stance. Structural economic reforms in key gold markets will continue to support demand for gold in jewellery, technology and as means of savings,” the World Gold Council said recently.

Ultimately, where you invest will depend on your risk appetite, time horizon and preferences. The thumb rule is, do not put all eggs in one basket. Always diversify your investments across asset classes. So, if equity does not give you returns one year, other asset classes may provide you a cushion. Also, do remember to stick to your goals.