Is your investment in housing a paying one?

It is widely believed that an investment in real estate will give good returns and appreciation. However data from the NHB Residex which measures changes in housing prices and which covers data from 26 cities shows that the average real appreciation ( after taking inflation into account) in housing prices was NIL for the period 2007 - 2014. 

Quoting from an article in the Business Standard - Does a housing investment pay at all? , -  Data shows that there has been no real appreciation in residential property in urban India over 2007-14

The author writes:

The NHB Residex (an index constructed by National Housing Bank based on "actual transaction prices") covers 26 cities all over India. The index stood at 100 in 2007 for each city. For January-March 2014, the all-India index was 178.69 (arrived at by taking a simple average of the index levels for the 26 cities). An increase from the base value of 100 in 2007 (on, say, 30-6-2007) to the recent value of 178.69 (on, say, 31-3-2014) translates to an average appreciation rate of 8.97 per cent annually.

Further, it is written:

There has been an average annual inflation rate of about 9.25 per cent since 2007-08 (this is based on the data used for computing real capital gains for income tax purposes). Inflation eats into whatever returns there are.An 8.97 per cent nominal appreciation alongside a 9.25 per cent inflation rate implies the real appreciation rate over the period 2007-14 is a negative 0.28 per cent annually. Let us simplify and say the real appreciation has been zero. This is the basic story according to NHB data. This contradicts widely held beliefs in India.

One is bound to find city-wise divergence in appreciation as seen in this graph . Note that the index value of Chennai is 349, which translates to a growth of more than 19% annualised. Remove Chennai from the picture and the overall average decreases.

Quoting from the article:

Kochi has seen real depreciation at an average rate of about 11.5 per cent every year since 2007! Delhi and Mumbai have seen average real appreciation of 1.47 per cent and 3.8 per cent, respectively. 

The NHB data is consistent with a recent IMF Report. It showed an international comparison of real appreciation in real estate in 52 countries for 2013, fourth quarter or latest (annual per cent change). There are 18 countries which had witnessed depreciation in real terms. And, guess what? India showed the maximum depreciation in real terms, at about eight per cent! (http://www.imf.org/external/research/housing/index.htm). The NHB data shows there has been hardly any real appreciation in urban residential property in India in the past seven years or so. We do not know anything about real appreciation in the earlier years from NHB data. Then, real appreciation might have been high. This can explain why people historically believe residential property is a good asset for investment purposes.

Please note that the NHB data covers only the change in price of housing property. The price of land may have appreciated more and that is not covered in the NHB Residex. It must be noted that such data and this index will have limitations but is a useful indicator for all of us.

Such data re-inforces our view that while we must have an asset allocation and distribute our assets over various classes, over-dependence on property may be counter-productive. For some professionals who have invested in housing property, it is natural due to the high value of such investments, that the allocation is skewed heavily towards property and the allocation to equity is minimal. This may hamper wealth creation.

Read the full Business standard article here.

My twitter handle: @invest_mutual

Use Systematic Investment Plans correctly

Use SIPs correctly

Use SIPs correctly

A systematic investment plan, or SIP, is a popular method of investing in equity funds. This idea of disciplined investing has been marketed successfully. The biggest merit of a SIP is that it allows one to invest regularly without thinking about about the right time to jump in. However, based on interactions in our workshops, we find that some investors have not understood the use of SIP as a tool for fulfillment of long term goals and we put down some thoughts on using SIPs correctly.

1) First, SIP is only an investment process, a method of investing. Instead of timing the market - trying to invest when you think the market is undervalued and will rise, SIPs facilitate a participation in the market through ups and downs.

Since a fixed amount is invested regularly over time, SIPs enable averaging the cost of investment over a period. The returns from an SIP are not likely to be different from those of the mutual fund in which the investment is made. Investors must note this. The returns will depend on how the fund has performed. 

2) Second, SIPs are all about disciplined investing; enabling a systematic and consistent approach to investing savings. If you are a salaried person with a regular income and monthly saving, SIPs are just the thing for you. You invest something every month when you can save, whenever you have a lump sum, you can put it to work too. Maintaining discipline is the key to successful SIP investing. Without an SIP  i.e. without this discipline of regular investment - you may not have participated in the down market. Those who kept SIPs going over the last 3-4 years have benefited greatly in the recent run-up.

3) Third, SIPs work best when the investment is made with a goal - a long term goal in mind.  Assume that you have a goal in mind to save an X amount for retirement, the money most likely will not accumulate by random or accidental investing. With the goal in mind before the investment is made, we are clear about the product we want to invest in, the amount and the period of investment. The goal will ensure the discipline required to put away the amount regularly and the best way to do so is by way of regular SIP in equity mutual funds. 

The markets have risen sharply over the last few months. Many investors ask - " Is is too late to start now?" or "Should I now discontinue Equity SIPs?" With the goal as the predominant factor in your mind,  along with your asset allocation, such questions wont arise. You are not timing the market, you are investing for a long term goal, clear about the fact that equity investing is beneficial over the long run.

Many get discouraged in a bear market and have discontinued SIPs then. Note that money moves with the market in an SIP, and when one leaves and re-invests via SIP at will, one is trying to time the market and often this leads to buying at peaks and selling at lows. This defeats the very purpose of an SIP.

4) Fourth, SIPs will benefit you only over the long run. Over the short term, an SIP investment may go down  in value. The benefit of SIP investing can be measured across market cycles - i.e periods in which markets go up and periods in which the trend is down. If you invest via an SIP as the markets are moving up, obviously the market value today will be higher since you have invested at lower levels, and the total value of your investment will be higher than cost.

However, assume your SIP installments have been in a period of a falling market, the value  of your investment today will be lower than cost! SIPs work best if you persist across cycles - periods when the markets are going up and down.

5) Fifth, It is futile to compare lump-sum investments and SIPs. They are two different ideas. If you invest a lump sum amount at the beginning of a goal period, the whole amount naturally works for a longer time. SIP investing is a completely different idea where you build wealth slowly with each installment and really useful for those with regular incomes like salary.

If you have a lump sum, and wish to invest for a goal as per your asset allocation, go ahead and do it. When you invest a lump sum, a larger chunk of your money works for a longer period of time.

6) Finally, I see some people advocating SIPs in debt funds and feel this is not efficient. Income is accumulated steadily when one invests in debt and there is no point investing little drops. If you have a big sum and wish to get an income at the market rate, invest the whole amount and not in trickles.  

SIPs are meant to give you a disciplined approach to investing. Invest in SIPs with a goal in mind and cut out all the other noise and comparisons with lump sum etc. An SIP in equity WILL always be subject to market volatility but SIPs have done well for investors over the long run. Maintain your discipline and accumulate wealth using SIPs. 

Follow us on twitter

Workshops we conduct

Super mail from Quantum Mutual Fund CEO to investors

The below is the text of an email received from Quantum Mutual Fund, asking investors not to worry about their making the 50 Crore net worth requirement! Had to share this one...

The Mathematics of Rs 50 crore

Dear Investor,

Ever since SEBI has announced the "be a serious player" minimum Rs 50 crore net worth criteria for an AMC; many of you have written to us, asking "What will happen to Quantum Mutual Fund? We love what you do and what you stand for, but what if you don't achieve the INR 50 crore mark over the next 3 years, what will happen to my investment in Quantum Mutual Fund?"

Absolutely the right question, dear investor. As the CEO of Quantum AMC, I take this opportunity to put to rest your concerns.

The mathematics of Rs 50 crore.

In May, 2014 SEBI decided to raise the minimum net worth for an Asset Management Company to Rs. 50 crore instead of the earlier level of Rs. 10 crore. This, according to SEBI, will keep the serious players in the industry. SEBI has given AMCs that do not currently have a net worth of 50 crore, a period of 3 years to achieve the same.

Quantum Mutual Fund is one of those AMC's that have a net worth of less than 50 crore. Our net worth as on March 31, 2014 stood at Rs. 28 crore.

In our view if we grow at the same pace of profitability of approximately Rs 3 crore per year (our average rate of profitability for the past 3 years) then we will have added Rs 9 crore to our net worth byMarch 31, 2017. This will take our net worth to Rs 37 crore - still short by Rs 13 crore to reach the magical Rs 50 crore mark as suggested by SEBI.

At that stage, our Sponsor and parent Quantum Advisors will inject the required Rs 13 crore (or more) capital into Quantum AMC. Quantum Advisors' current net worth is over Rs 60 crore and - in theory - Quantum could inject the balance Rs 22 crore (Rs 50 crore - Rs 28 crore existing net worth) today.

So, there is no need to worry.

We plan to stay on in the "profession" of investment management.

But, what if Quantum does not make it to the Rs 50 crore mark?

Despite the reality of past profits and a strong sense of commitment, you may still have a doubt. "What if", you ask, "What if Quantum AMC fails to reach the Rs 50 crore net worth mark?"

This is a very valid point, my dear investor, very valid.

In the very unlikely scenario that Quantum AMC does not reach its minimum net worth, we will have to wind down our mutual funds. And you will have to take the savings you trusted with us elsewhere. There will be no loss to you - well, you will lose having a relationship with us, that is true!

But your money will never be at risk. And you will have to choose another fund house. You will need to find someone you can trust, someone whose very existence is to serve you.

Yes, it is scary. This, in the end, is a test of your faith - as much as it is a test of our commitment. If you believe what we are doing at Quantum Mutual Fund is right. And if you believe what we are doing at Quantum Mutual Fund is helping you reach your financial goals. Then, you cannot let us be at risk. You need to ensure that more of your savings are deployed in the Quantum Mutual Fund. If we succeed, you will succeed. If you succeed, we will succeed. No other fund house has that simple - but powerful - equation. The regulator has thrown a road block in your way. We are ready to cross it - will you cross it with us?

My twitter handle: @invest_mutual

Budget 2014 - Changes in Personal Income Tax

Summary of changes in personal income tax which affect us are given below:

• Tax slab for individuals raised by Rs. 50000 - this means that for individuals, the exempted limit would be Rs. 2,50,000.00 ; for senior citizens, it is Rs. 3,00,000.00 . Please note that there is no change in the limit for senior citizens above 80 years old - the exempted limit remains at Rs. 5,00,000.00
• Deduction u/s 80C increased to Rs. 1.5 Lakhs - simultaneously, the PPF investment limit has also been raised from Rs 1 Lakh to Rs. 1.5 Lakhs
• Deduction for interest paid for a housing loan u/s 24, has been increased to Rs 2 Laksh from Rs. 1.5 lakhs. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.
• Indexation benefit for debt mutual funds ( all non-equity mutual funds) : To qualify as long term investment, the period of holding of a non-equity mutual fund is now increased to 3 years from 1 year earlier.This amendments will take effect from 1st April, 2015 and will accordingly apply, in relation to the assessment year 2015-16 and subsequent years. If you are investing in any existing debt fund / FMP or any non-equity mutual fund, you will have to hold on to the units for 3 years to have the investment qualify for indexation benefits.  

• Capital Gains deduction under Sec 54 EC - for assets sold after September, ambiguity regarding investment amount due to change of financial year has been removed:  The existing provisions u/s54EC of the Act provide that where capital gain arises from the transfer of a long-term capital asset and the assessee has, within a period of six months, invested the whole or part of capital gains in Capital Gains Bonds the proportionate capital gains so invested in the long-term specified asset, out of the whole of the capital gain, shall not be charged to tax. This investment made in the long-term specified asset during any financial year shall not exceed fifty lakh rupees. However, the wordings of the proviso had created an ambiguity. As a result the capital gains arising during the year after the month of September were invested in the specified asset in such a manner so as to split the investment in two years i.e., one within the year and second in the next year but before the expiry of six months. This resulted in the claim for relief of one crore rupees as against the intended limit for relief of fifty lakh rupees. Accordingly, it is now proposed that the investment made by an assessee  in the long-term specified asset, out of capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees totally. This means that exemption is limited to Rs 50 lakhs. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year 2015-16 and subsequent assessment years.

Some changes and points to note

• TDS on non-exempt insurance payments above Rs. 1 Lakh: Under the existing provisions of section 10(10D) of the Act, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is exempt subject to fulfillment of conditions specified under the said section. Therefore, the sum received under a life insurance policy which does not fulfill the conditions specified under section 10(10D) are taxable under the provisions of the Act. In order to have a mechanism for reporting of transactions and collection of tax in respect of sum paid under life insurance policies which are not exempted under section 10(10D) of the Act, it is proposed to insert a new section in the Act to provide for deduction of tax at the rate of 2 per cent. on sum paid under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) of the Act. In order to reduce the compliance burden on the small tax payers, it has also been proposed that no deduction under this provision shall be made if the aggregate sum paid in a financial year to an assessee is less than Rs.1,00,000/-. This amendment will take effect from 1st October, 2014.
• Kissan Vikas Patra to be re-introduced
• No change made in deductible amounts u/s 80 D - payments for mediclaim policies

Follow me on twitter @invest_mutual

A Bloomberg India TV video on ULIPs

Recently we've read a lot on the mis-selling of ULIPs

A must see video of Bloomberg TV

Bloomber India TV - Vivek Law on mis-selling of ULIPs

               The ULIP mis selling menace

Why people miss out on creating wealth - I

Personal Finance Workshops

I have recently started conducting personal finance workshops and training programmes on financial awareness.

Our first three workshops were attended by youngsters all under 30 and most of whom were in their first job. Sharing a few thoughts from our first few workshops on why people do not build up wealth. 

Many simply do not believe they can become wealthy:

Some youngsters just out of college with salaries between Rs. 15000 and Rs. 20000 a month, told me that it was difficult or impossible to accumulate / build up wealth. A corollary of this belief was that they did not start the wealth building process though almost all of them were savers.

They do not know how to start:

Many salaried professionals believe that wealth will be created automatically as their salaries increase and they rise up the corporate ladder.

Again, there was a lack of awareness of instruments of investment and confusion is compounded by TV and print media advertisements. Many of those who attended the workshops had been ensnared into 'investing' in sub-optimal insurance products. Others had only tax-saving investments all made through relatives, friends who were agents.

One youngster had Rs. 3.75 lakhs lying in her savings account! The workshop was an eye-opener for her. 

Some do not save anything:

A couple who together earn about Rs. 1.5 Lakhs every month had absolutely no emergency savings! In fact their credit card payments had not been made. Simply put, they were living well beyond their means and had not started the wealth creation process. Of course, they admitted that their first good investment was attending the workshop.

We will put down more thoughts as I do more workshops.

Twitter handle: @invest_mutual

Workshops

Mutual Fund investors - KYC through a KRA

KYC is an acronym for “Know your Client”, a term commonly used for the Client identification process. Basically, the identity and address of investors is verified. All applicants must be KYC compliant while investing with any Mutual Fund.

However investors may need to open accounts with other SEBI registered intermediaries for the purpose of trading / investment in the securities market, and have to undergo the same process of KYC again and again. Therefore, to avoid duplication of the KYC process with every intermediary, a mechanism for centralization of the KYC records has been developed by SEBI. W.e.f January 2012, SEBI has introduced a common KYC application form for all the SEBI registered intermediaries viz. Mutual Funds, Portfolio Managers, Depository Participants etc.

I. KYC to be verified by a KRA

Earlier each financial intermediary  like depository participant would do its own KYC and register an investor account. For Mutual Funds the process was centralised with CDSL Ventures Ltd (CVL) and MF investors would go to any Point of Service of CVL and submit the KYC form.

Now SEBI allows KYC verification for all SEBI intermediaries through a KYC Registration Agency (KRA). There are expected to be a few KRAs servicing investors. However, currently the only KRA is CVL. I will update this post with details of other KRAs and please comment if any reader has information on other KRAs.

II. Process for first time investors in Mutual Funds:

Such investors who have not completed the earlier KYC process with CDSL Ventures, should do the following:

1. Download the KYC application form here and fill in the details  - all requirements for proof of address and proof of identity are given therein.

2. Mutual Fund investors have to currently submit this form only along with a transaction slip for purchase / switch of units. I understand that a stand-alone from is not accepted! Therefore, fill in the application form for purchase of units and submit to the Service Centre along with this form.

3. Investors would have to visit the Service Centre of the Mutual Fund (or Registrar, if the Fund has authorised the Registrar) and submit the form in person.

4. (In-person verification) IPV of the documents has to be done by the AMC or the intermediary.

5. The MF Service Centre executives will scrutinize and stamp the application form -  KYC APPLICATION RECEIVED. This is itself a confirmation of submission of the form and documents.

6. Documents will be forwarded by the intermediary i.e. the Mutual Fund to the KYC Registration Agency (KRA) and the KRA will send a letter to the investor within 10 days confirming the details.

7. This IPV at the Mutual Fund Service Centre is sufficient for an investor to start investing, while the KRA completes the rest of the process. (Attach the KYC acknowledgement with future transaction slips till KYC is verified)

8. Investors may check here --> https://www.cvlkra.com/ if KYC is verified successfully. Once verified, investors can attach the screenshot whenerver they invest.

9. Once an investor status is verfied, any SEBI registered intemediary can upload the investor KYC status from the KRA and investors need not undergo the process again.

III. Mutual Fund investors who are already KYC Compliant earlier with CVL

Many investors have already completed the process earlier with CVL. This is still valid - but only for investing in Mutual Funds. If they wish now to register with other intermediaries in the securities market, they have to go through the process once more!!! It is advised that they complete the process with a KRA.

If any reader has additional details and clarifications on the KYC process, please comment and share. I will update this post.

Follow me on Twitter @invest_mutual

Mutual Funds: Paperwork - changing bank details

Recently a colleague tried to change his bank details in a mutual fund folio. Not being in touch with the new rules, he was surprised when the request to change bank details in his account was rejected.

Being of vital importance, I wish to share the requirements for successfully registering a new bank account in mutual folios. In addition we will look at the new facility of adding additional bank accounts in your folios.

I. When you give a letter asking for the bank details to be changed:

The below documents are required along with your request letter for BOTH the new bank you wish to enter in the folio as well as the old existing bank account which is already registered:

An original cancelled cheque leaf where the account number and first unit holder’s name is printed on the face of the cheque (for both the old and new bank accounts). 

OR

Since many banks do not print the customer name on the cheque, a copy of the bank pass book or statement having the name and address of the account holder (again for both the old and new account). The copy should be certified by the bank manager with his / her full signature, name and bank seal and contact number.

OR

A letter from the bank on its letterhead certified by the bank manager with his / her full signature, name, employee code, bank seal and contact number certifying that the unit holder maintains/maintained an account with the bank, giving details of the account (When the old bank cheque leaves / recent statements are not available).

If you do not wish to submit the originals, you may also bring a copy of any of the documents mentioned above along with the original documents to the Service Centres of the Fund. These can be verified over the counter and returned.

On checking with the Funds, the executives answering my calls were particular about these details. Explanation was given that avoiding incidences of fraud was the reason these details were required and while investors might be inconvenienced, they should look at these requirements as a means to safeguard their interest. 

II. Register additional bank accounts in your folio

All Funds now offer a facility to register up to 5 bank accounts for individuals in their folios. A form is available at all fund websites for addition / deletion of bank accounts and this is to be filled, signed and submitted with the attachment described above as proof of the additional account(s) (a cancelled cheque leaf with name printed / bank statement attested by the bank manager or by the Fund counter staff). 

Once you have registered additional accounts, if any account is closed at a later date, just fill the same form for deletion of an account. No  attachment would be necessary.

Default Bank Account: Any one bank account should be chosen as a default bank where all dividends would be paid out. You may ask for a redemtpion to be paid to any of the accounts and if you do not mention any bank in the transaction form, it will be paid into the default account. It is recommended that all investors register all their bank accounts in their folios. 

Point to note:

If you submit a change in bank details along with a redemption, it is likely that funds do not process the change in bank details and pay the proceeds to the existing account. 

Follow me on Twitter

Workshops we conduct  

Mutual Fund SIPs vs Stock SIPs

While the SIP concept is accepted and popular for Mutual Funds, we find stock SIPs being advocated.

An SIP  in a fund which allows you to invest in a fund through regular installments over a length of time, works well. However, the same concept applied to individual stocks will significantly increase the risks to your portfolio.

Mutual Fund SIPs

The inherent advantages gained by investing in Mutual Funds, along with the advantages of systematic investing have proved beneficial. 

A few relevant advantages you get from a Mutual Fund SIP are highlighted

• No need of market timing and stock selection
• Cost averaging – You get more units when the market is low and similarly buy fewer   mutual fund units when the markets are high.
• Light on the wallet: You can commit small amounts to invest in a larger portfolio
• Risk is spread - you buy into a whole portfolio of stocks across market cap/sectors  depending on the Fund

Most of us invest in equity funds because we believe that they will deliver better returns than most other avenues over the long term.  However, the fact is that individual stocks don't deliver returns in an orderly fashion.

Stock SIPs

With mutual fund SIPs extremely popular, many brokers and trading platforms today offer SIPs in individual stocks. Just like in Mutual Find SIPs, investors can accumulate a stock by buying it based on standing instructions at a frequency of their choice.

However, in the case of individual stock SIP you are exposed to:

·   Concentration risk: SIPs in an individual stock may result in portfolio concentration and large exposures to a single asset. The same in a mutual fund SIP would mean the same amount spread across a diversified portfolio of stocks. If that one stock takes a beating due to company / sector specific factors…

·    Risk in selection of stocks: The second risk arising from stock-specific SIPs is that you could well be accumulating the wrong stock... Since investments are automatic and set, it would mean that while you are accumulating more and more of an asset, you may not monitoring and rebalancing. It is our view that if investors are not well informed and nimble, this could harm investor interest.  Especially, in today's environment, where regulatory changes, fluctuation in the currency value, loss of a big client can cause a drastic shift in a company's fortunes.

Even savvy investors find some choices going horribly wrong. Stock SIPs would mean bigger bets, month after month, on a few stocks of one’s own choice, which can subject one’s portfolio to considerable damage.

In conclusion:

If one chooses to invest in stocks, one can do so based on research and deliberate investing. Automating an investment in stocks will mean automatically investing in an asset even if the situation warrants an exit from a stock.


Investing in an active fund would mean that the fund manager is likely to be closely monitoring the portfolio and replacing stocks at regular intervals to be able to beat the benchmark.  This is the real benefit of an SIP in an equity fund.


Follow me on Twitter @invest_mutual

A lighter look at Annual Appraisals!

A friend who recently completed his annual appraisal, commented that the most important financial event in a professional's life is the Annual Performace Appraisal. His take on appraisals is reproduced...

Now, your communication skills are activated. They were always there - but in dormant condition. You are a picture of eloquence, when writing about yourself.....descriptive words, phrases, adjectives and adjectival clauses hitherto never part of your diction now garnish your write-up. Maybe this is the best way to learn to acquire Presentation Ability --- presenting yourself !!!!!!

People are at their creative best now. Suddenly everyone has turned into Merlin the Magician, conjuring up accomplishments out of nowhere.

As one fills in the several columns in the online appraisal form, one  discovers new facets about oneself. Latent talents, skills, abilities all surface during the period of the appraisal - only to become latent again after the 31st!

Self help books become redundant - you already have discovered yourself to be the best and a winner - only the appraisers dont think so! Maybe they need the self help books!

While filling details of 'Performace during the year', why cant they have more than 100% as an option! Not fair to those who score 1000 out of 100.

You rate yourself highly on your ability to train others; only forgetting to mention that your knowledge may be vague - but the ability is there! One is surprised about being asked about one's reliability -  we all experts in relying on our subordinates to complete all tasks. Only, they rely on their subordinates.... and it does not  matter that the final guy is not reliable.

An ex-employee is known to have rated himself "excellent" in his 'Communication Skills'. Whenever words failed him, he used sign language effectively! 

As it comes to a close and one is asked about one's strengths and improvements, as a guy once told me - "There is scope for improvement always - others' improvement!" Strengths fill in a 2 MB word document.

As one ends, one can look back at his/her creation in satisfaction - the place wont run without him, in fact can't run without him.

As they say - 'There is a fine line between fact and fiction'

Follow me on Twitter @invest_mutual