Small Savings – Big Benefits

Beneficial changes in Small Savings Schemes

Updated: 27th March, 2012 with the new rates announced:

In my earlier post - Rebalancing Portfolio I had mentioned that small savings can be a part of the debt component of one's portfolio.

Several changes, implemented from December 2011 have been announced in small savings schemes. Take a look here at the round-up of what you get from which instrument and make your choice...

To make the return on small savings more realistic, the government had decided to link rates to the average yield on G-Secs of similar maturity during the preceding year. The rate of returns on small savings instruments will be announced every year on or before 1st April. Investors get G-sec rate plus 25-100 basis points (bps) i.e 0.25% to 1% higher, depending on the instrument.

PPF: A must invest

PPF returns are now approximately 25 bps (0.25%) more than the 10-year G-Secs. This means PPF will give 0.25% more than the average yield on 10-year G-secs during the preceding calendar year. For the 2011-12 the rate was set as 8.6% against 8% earlier. For 2012-2013, the rate has been increased to 8.8%. Thus, the contribution you make as well as the entire earlier balance would earn 8.8% interest in 2012-13. Currently PPF has an edge over other small savings instruments because of the tax benefit.

Tax Benefit EEE retained:  Investment in PPF qualifies for a tax deduction up to Rs. 1 lakh u/s 80C of the Income-tax Act. On withdrawal the entire amount is tax exempt. An 8.8% risk free, tax free rate makes PPF extremely attractive as an investment. Even if interest rates go down, the tax incentive makes it very attractive with higher yield than 10 year G-Secs.

Scheme	Earlier	Now
PPF	Interest - 8.6%;  - EEE benefit	Interest - 25 basis points above 10 yr. G-Sec, 8.8 % this year; Investible amount 1,00,000.00; tax benefits EEE retained

Senior Citizens Savings Scheme: Bank tax-saving FDs currently offer higher rates

The rate on Senior Citizen Savings Scheme (SCSS) would be upto 100 bps (1%) more than the G-Sec rate and for the 2011-12 the rate was unchanged at 9%. The same has been increased to 9.3% for 2012-13.   The investment under this scheme, meant for senior citizens (above 60 years) qualifies for a deduction under section 80C and this is a five year scheme. However, the interest is taxable. 

 

Scheme	Earlier	Now
SCSS	Interest - 9%; 5 yr. Scheme;	Interest - 100 basis points above G-Sec; this year 9.3%, dedcution u/s 80 C continues;

PO MIS: Not so attractive

The post office monthly income scheme is a five year scheme and you get 0.25% interest more than the five-year G-Secs. Bonus was done away with. It compares poorly currently with Bank FDs. The interest for 2011-12 was 8.2% . The same has been increased to 8.5% - again not too great in the current scenario. The bonus on maturity was removed earlier!

Scheme	Earlier	Now
PO MIS	Interest - 8.2%	Interest - 25 basis above 10 yr. G-Sec, 8.5 % this year; (maturity 5 years)

NSC:

A new National Savings Certificate (NSC) for 10 years had been introduced. The returns on new 10-year NSC has been benchmarked to 10-year G-secs with positive mark-up of 50 bps (0.50%). For 2011-12, the rate was 8.7% per annum. The same has been increased to 8.9%

The old NSC had been reduced from six years to five years. The returns on the five-year NSC will be approximately 0.25% higher than the 5 year G-Secs and is increased to 8.6% for 2012-13. The investments in NSC qualify for a deduction under section 80C. However, the PPF is more attractive as an investment option due to the EEE tax benefit.

Scheme	Earlier	Now
NSC	5 yr. Scheme - Interest 8.4%, deduction u/s 80C 10 yr shceme - 8.7%	5 yrs scheme 8.6%. 10 yrs scheme - 8.9% this yr;Deduction  retained u/s 80C; interest taxable

Note: The  Kisan Vikas Patra has been discontinued since 2011-12.

PO Time Deposits – also market linked: 

 

Premature withdrawal has now been allowed for PO Time Deposits. The interest paid would be 1% less than the time-deposits of comparable maturity. For premature withdrawals made between 6 and 12 months investors would be paid at the PO Savings Bank rate of 4%. The highest rate for a 5 year deposit currently is 8.5%. 1, 2 and 3 year deposits will fetch 8.2%, 8.3% and 8.4% respectively this year. Banks offer more attractive rates currently.

A five year RD will fetch you 8.4%.

Please note that the interest on PPF will vary on your deposits every year. However, the interest on FDs will be the rate at which you enter. for exmaple if you place an amount in FD for 5 years on 3.4.12, the interest on the FD will fetch you 8.5% throughout and will not change.

The interest rate on these instruments for the current year has thus gone up. Do keep in mind that interest rates would vary in future and look out for the the yearly announcement of the interest rates!


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Financial Resolve 2012 – Tracking & Rebalancing our Portfolio

Most of us, especially working professionals are investors even without our design. We are forced to invest money in PPF, ELSS schemes, bank tax saving fixed deposits for tax-saving and even may buy equity if we find it attractive.

Many others among us invest on impulse - get a ‘tip’, listen to a colleague and invest! Still others - informed investors, make an investment in a product of their liking at random, without sticking to a strategy.

However, randomness would finally end up in investors succumbing to greed - buying high in a bull market - and fear - selling low in a bear market.  Since we can never predict when that unknown torpedo will come out of the dark and smash the price of a stock and some of our investments, the question is: what do we do to build a portfolio systematically, take profits and at the same time reduce risks.

The answer: Have a deliberate tracking and rebalancing strategy – our financial resolve for 2012:

What is this?

A simple rebalancing strategy is explained below

First evaluate your portfolio – how much you have and invested where. If you have not done this evaluation before, you will probably be in for a surprise!!

Next, a decision should be made based on our risk profile and goals as to how much one should invest in equity and how much in debt and investors may take assistance a financial advisor. In equity we include shares, equity mutual funds and we include fixed deposits, NCDs, bond funds, PPF in debt. (Investors can even include other asset classes like gold, real estate etc)

Let us say we have deliberately decided to have a 60-40 equity-debt ratio allocation. Rebalancing is the deliberate, periodic realigning of a portfolio of investments to bring it back to the original target asset allocation. This way we systematically capture returns and reduce unintended risks created by over-exposure to one category.

An example would help us understand rebalancing:

Let us say we have decided to have a 60-40 ratio and have invested Rs. 60000.00 in Equity Mutual Funds and Rs. 40000.00 in Debt – comprising of FDs, Debt Funds etc. on January 01, 2012.

Assuming the debt portion is worth 42000.00 on June 30, 2012. Let us assume that the market was good and the equity portion has gone up to 78000.00. This would mean that the equity to debt ratio in your portfolio is 65-35. Now after taking stock, the investor reduces exposure in equity in  and invests in debt.

If however, equity has gone down, then one should reduce debt and invest in equity to bring the balance back.

So how do I go about this?

For a start 

• Evaluate your current portfolio
• Decide the allocation. Investors may take assistance in this from a financial advisor. 
• Mutual Funds, with the wide range of schemes and advantages for retail investors form a good avenue of investment
• It will be difficult to make an exact ratio and you may allow yourself a small gap -for e.g. equity may go between 57% to 63%
• Follow a policy of checking and rebalancing every 6 months - i.e moving assets to maintain the proportion

Point to note:

Investments  can be made as an SIP to gradually bring up your equity level. Assistance from a financial advisor is recommended for those who don’t have time to construct a portfolio.

For working professionals this would help achieve:

Discipline and awareness of the portfolio and its performance

No random investments made out of fear or greed. Without a well laid-out rebalancing strategy, investors could be driven by greed to buy late into a bull market, or driven by fear to sell late into a market going down.

Risk reduction due to the rebalancing

If one component has deviated away from the originally intended target asset allocation, rebalancing is required



       Happy and profitable investing in 2012!


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Learn and Earn

“Money isn’t the most important thing in life, but it’s reasonably close to oxygen on the “gotta have it scale” and while NOT an end, plays a major part in helping us achieve our goals. Again, we all work at our job, business and earn the bucks, however, what can shoot you upwards is managing the bucks – making money work for us .

Superficial Knowledge, impulsive investments, burnt fingers

Sadly, most of us DO NOT pay much attention to gaining knowledge of products we invest in. Most of the knowledge is superficial – from advertisements, colleagues, tips from uncles and all one ends up doing is investing impulsively. What happens – “When a person with money meets a person with experience, the person with the experience winds up with the money and the person with the money winds up with the experience”.  The only one who ends up making money is the uncle through whom you invested. I was shocked when I recently addressed colleagues at work. Not one approved of the idea of a pure Term Insurance plan. “What!! An insurance policy that will give me nothing!? You must be joking!”

A colleague invested in a policy (through a relative) and later discovered that Rs. 12000.00 first premium was worth only Rs. 4000.00. She discontinued,  not  having understood the product features... Now her only investments are in bank deposits (mostly savings account)! Another acquaintance invested in a ”Superb” investment scheme (MLM) and ended up losing only Rs. 58000.00 but gaining good experience. Well, who said that knowledge is free!

So, what do I do?

Resolve – to gain in-depth knowledge of some financial products

There is good money to be made in the long term provided one knows what he wants, has studied the products and is willing to invest in what one understands for the long term.

Read Debashis Basu's column in the Business Standard – beautifully written; only underscores the need for us to be financially informed.

“Too many companies will design products that are complex, harmful, and sold with high-pressure tactics — after which the customer can run from pillar to post to have his problems redressed. Sounds too bleak and cynical? Well, the faster we wake up to this fact, the better for us.”

“Most savers don’t have the time, interest and skill — and get gypped repeatedly. And after that, disgusted, they conclude that bank deposits, “money-back” insurance policies, and annuities are the safest products, if not the smartest, and thus serve their purpose fine.”

Bank deposits and insurance policies which give us a return of 5-6% wont even cover inflation and I will get gyped investing in products I dont understand!

Suggestion:

As a start, I would suggest that every youngster as a start (and others), equip himself/herself comprehensively about:

• Mutual Funds – including all the products available
• Insurance Policies
• Small savings products
• Tax rates, the tax structure
• Basics of the stock market

First, learn to understand where we must not invest!

Regular reading of good financial publications and a financial daily is a great start. Several web portals give details of products and their performance, product details and you can google what you wish to see.

Use social media and search for what you want - excellent stuff available to give you in-depth knowledge of not only products and importantly, where one should not invest.

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Happy and Profitable Investing!!

Index based investing – a Primer

  

Index based investing is gaining popularity in India.  Mutual Funds have a wide range of Index Mutual Funds and ETFs giving investors the opportunity to ‘invest in an Index’. The concept is explained below.

What do you mean by Index Mutual Fund schemes and ETFs? How can I invest in these?

An Index is a selection of stocks which is representative of the market and captures the ‘mood’ of the market or a certain section of the market. A bellwether index is one that represents all sectors of the market. Examples of such indices are the NIFTY and Sensex. There can be indices for certain specific sectors and segments of the market like midcap stocks, Banking, IT and Automobile sectors which are selection of stocks representative of that particular sector.

Traditional Index Mutual Fund Schemes

These are regular mutual fund schemes which invest only in the securities that are part of an index e.g. the NIFTY or Sensex and are intended to track the returns of a particular index. The fund manager invests only in the stocks that comprise the index. Unlike actively managed equity funds, index funds do not attempt to outperform the benchmark index. The returns of such funds mirror the returns of the index that is tracked.

As an investor, you can submit application forms, transaction slips at the Service Centre of the Registrar/AMC just as you would do to purchase units of any other scheme. You may also invest online.

The purchase price / redemption price would be NAV based and the rules regarding applicability of NAV apply.

Thus, investors who wish to track the returns of an index could subscribe to such schemes. 

Then what are ETFs?

Exchange Traded Funds are essentially index funds that are listed and traded on exchanges like stocks. The fund manager of the ETF also invests in the basket of stocks that make up the index.

These Mutual Fund units are converted into share-like securities and traded on the exchange.  The units can be bought and sold like shares on the stock exchange at any time during trading hours. Purchases and sales are not through a Registrar, but on stock exchanges.

A point to note is that even though the ETF’s trading value is based on the net asset value of the underlying stocks that it represents, i.e. the stocks which make up the index, but the trading value may not be the NAV. It is a Mutual Fund that investors buy and sell in real-time at prices that change throughout the day.

Thus ETFs are share-like securities, traded on the exchanges which also mirror an index and offer investors the convenience of buying into an index.

The differences:

• Demat Account: This is required to buy or sell ETFs. Demat accounts are not required to purchase index mutual funds.

• Transactions: ETFs may be purchased like shares through a trading member i.e. broker of the exchange. For traditional funds, the purchase may be made through the Registrar/AMC.

• Redemption of Index Funds can be done in the same way as you would redeem any other Fund you hold. In the case of ETF, liquidity is possible by selling the ETFs on a stock exchange.

• Price: In the case of ETF, the price of purchase or sale will be close to the NAV but not necessarily the NAV and may change throughout the day. The price for traditional index mutual fund schemes is fixed at the applicable NAV. Load if any is applicable.

• Minimum Purchase Amount: Can be one share for ETF. For a Mutual Fund it is specified in the KIM, often Rs. 5000.

Points to Note:

1. Tracking Error

Since these Funds are supposed to faithfully follow an Index, the performance is measured by noting the tracking error. This refers to the difference between the performance of the Fund and the index that it tracks.

The reasons can be many including the necessity of keeping a cash balance ready for redemptions and I will deal with this in another post. However, financial websites publish the tracking error and one must note this when investing.

2. Liquidity

If you have invested in an ETF, you may find it difficult to sell the shares in the exchange if the ETF is not widely held and has a small AUM. Please be careful in buying ETFs and go only for large ETFs. In this matter, Index Funds are more liquid since the Fund has to redeem at NAV! Selling an illiquid ETF could mean that you get a much lower price than NAV.

Common Account Statements - Mutual Funds

Greetings on Dasera!


Personal Finance and all things connected being my passion, this will be the theme of most of my posts.


Today, I wish to focus on the Consolidated Account Statement which has been mandated for investors. Many are not even aware that if they transact in 3 or 4 Funds during the month, they will only receive only one physical Account Statement after the 10th of the following month giving transaction details of all Funds. Most Funds are participating in this. Of course, those investors opting for email statements will receive one for each transaction and this rule applies to those opting for physical statements. While the industry has worked out the details, I personally feel there are several shortcomings and few advantages.


First the advantages:


The Industry feels this is will reduce costs. Secondly they have presupposed that one common account statement , i.e a one-view statement is what investors want.


Now the short-comings and issues faced:


1. A first-time investor has invested in 4 Funds. He will get one statement next month . The personal data printed on the statement will be from any one of the Funds and the investor has no idea if the personal details and bank details are correctly captured with all Funds. With errors found in statements earlier, I am apprehensive!


2. What about security? Do you get your bank account statements from different banks all-in-one? How is the industry guaranteeing the security of  data? Who is the data held by different Funds being shared with? Who will print and dispatch the statements and ensure that my financial details are not leaked. Earlier, the Fund would send me a statement and be responsible for not leaking my financial data


3. Now, if you are aged, have not opted for email, you have to wait for a month to receive confirmation of your transaction! The industry has earlier set a standard of dispatching a statement within a day or two of transactions. Now, we regress.


4. Branding is dead!! Earlier, the statement with the Fund logo was like popularizing a brand. However, only the smaller Funds will lose some brand-identity.

The Registrars already give Consolidated Account Statements through their websites for those with email ids registered. Just visit their websites and get one if you want. To cut costs, the Industry should go all out to encourage email Statements. Currently, investors can still get a duplicate statement at any time and even after this rule is enforced, nothing stops you from asking Funds to send their regular statement.

So, what is the solution? Yes, the industry needs to cut costs; however the above aspects need considering.

Update: 23.12.2011

I understand that first time investors will get a full account statement with all details. However, all the other concerns mentioned above remain.