Tuesday, February 19, 2019


Why It is Important to have a Written Financial Plan?

The management of finances is a very important aspect of the life of every working individual and to ensure that one is able to lead a life free from worry, it is important that it is done properly in a well laid out manner. Everyone wants to ensure the financial well being of self and loved ones and this can be achieved by ensuring that there should be a well laid out strategy covering all the areas related to the personal finance of an individual. 
Thus it is recommended that one adopts Financial Planning approach towards the management of Finances .Financial Planning is the process of meeting various life goals of an individual through proper management of finances preferably in consultation with an expert like a Financial Planner or a Registered Investment advisor.  Financial Planning incorporates a comprehensive view of personal finances of an individual and covers the following areas including Insurance Planning, Retirement Planning, Investment Planning Tax Planning and Estate Planning
The process starts with determining of the financial goals of the individual in consultation with the planner. Many people do not have a clear idea about their life goals, as they fail to pay proper attention to these due to a long time left in the goals. Goals like retirement and children education look too far to be cared for at the early stages of life, which if ignored to a later date might become difficult to achieve .
Thus the primary function of a Financial Planning becomes to identify these goals with the help of a Financial Planner who can also help to put these goals in the measurable format which will make them clear. Once these goals are clearly spelt out it becomes very important to priorities them in order of importance, so that one is not compromised on the expense of other. Financial Planning involves the analysis of these life goals and put them in an order in terms of the financial commitments that need to be put towards them in terms of amount and timing.

The table below which analyses some of the financial goals can explain the case in point.





S. No
Purpose/Life goal.
Time
Priority
Importance
1
Buying a House
Short Term
Immediate
Necessity
2
Saving for Retirement
Long Term
Immediate
Necessity
3
Vacation to Las Vegas
Long Term
Later
Aspirational
4
Children Education
Long Term
Immediate
Necessity
5
Holiday Home in Goa.
Long Term
Later
Aspirational
6
Protection to life
Short Term
Immediate
Necessity
7
Protection of Property
Short Term
Immediate
Necessity
In developed countries this process is fast picking up and the practice is expected to pick up in India. In Germany 15% of the people approaching Financial Planners take comprehensive Financial Planning Services which is expected to increase to 21% by 2015. In Canada 81% of the people availing Financial Planning services have admitted improvement in their financial positions post the same.
Advantages of a Written Financial Plan
A well documented Financial Plan is a comprehensive document that contains and summarizes all the information related to the personal finance landscape of the individual. It has several advantages over and above the normal orally delivered investment advisory, some of which are listed below.
  1. Financial Discipline: A well documented Financial Plan contains all the data related to finances of individual and keeps one well informed about his/her income and expenses status vis a vis long term financial goals, thus keeping a sense of discipline in the spending pattern.
  2. Regular Monitoring: A written Financial Plan is monitored at regular intervals, thus giving the individual clear reflection of the financial position along with time and any contingencies arising may be negotiated with more effectively.
  3. Record Keeping: Since Financial Plan is a dynamic document, keeping the record at various points in time will give one reflection of his/her own financial position over a period of time. Important documents like Income tax returns, investment proof, property ownership documents are easily accessible when required.
  4. Comprehensive Coverage: Since the Financial Plan is written after thorough analysis and deliberation, the chances of any particular area being avoided are very thin and even the areas which people have low focus on like retirement planning and Estate Planning are covered.
  5. Tax Efficiency: A well documented Financial Plan shall ensure that one takes maximum advantages provided under the Income Tax Act, 1961 such as the ones under Section 80C, 80 CCC, 80 D, and section 24 which give various deductions from the taxable income.
  6. Planner Accountability: Since the financial position and the recommendations made by the planner are well documented in the written Financial Plan, it may serve as a tool to judge the efficacy of these recommendations and whether they are truly working in the interest of a client.

It is important to note here, that one should ensure that proper nomination should be done at the time of opening, for all financial accounts viz. Bank accounts, Demat Accounts, Mutual Fund Investment, Life Insurance etc for the convenience of the loved ones in case of
any contingency.
A written financial plan shall ensure that an individual is continuously updated about the vital parameters of his financial life i.e Income v/s Expenditure statement and Net worth Statement and any financial contingency arising out of sudden events can be negotiated with efficiently.

Thus it could be said if one engages a Financial Planner and gets a comprehensive Financial Plan drafted,   one may get to lead a life which is free from financial worries, at the same time ensuring that one’s financial goals are identified and met, well in time.


Friday, August 28, 2015

The Chinese Conundrums: What and Why?

The Chinese Conundrum
The Chinese Currency Yuan has been devalued twice in last one week and there are a lot of concerns around the world including the anxiety about the imminent collapse of Chinese economy triggering a downward spiral  in the growth rate pushing the world economic environment in depression.
On the face of it, the move looks as a step to boost the country’s exports by making them more attractive for foreign buyers, thus providing an impetus to the economic growth that china has been struggling to maintain in the recent years, the same step would make the exports from other countries into china unattractive and countries like US, UK , Australia which have china as a major trading partner could see this as a warning signal leading to fall in the stock prices in these markets.
China is the second largest economy in the world after USA and any adverse movement in the economic parameters have far reaching impact across the world.  If we go deeper in the phenomenon, the devaluation could be a move towards the natural progression towards the free float system where the value of the currency is determined by the market forces and not managed by the government which is the case with Chinese currency which is pegged against a fixed basket of currencies, china may be looking at moving towards the free float system which is followed by most of the developed countries in the world. This could also be seen as a step towards getting yuan included in the basket of Special Drawing Rights (SDR) of IMF in which it grants loans to member countries.
This devaluation looks more natural than in the years around 2008 where the country was accused of keeping its currency cheaper for making exports attractive, the kind of growth trajectory that china has followed over last two decades is very difficult to sustain unless there is continuous economic activity. China has been deriving its growth from the exports where the numbers of economic parameters might not have been reported that correctly which puts a question mark on the rosy picture painted by close to the double digit growth over a decade. The next spurt of Chinese growth will come from the widespread domestic consumer spending and the measure that the government takes might be the stepping stones in this direction.
Another reason for currency devaluation could be to keep the Chinese currency competitive in such a market where major competitive currencies were losing more value and as a result Chinese export were losing competitiveness.
The move has seen knee jerk reaction from stock markets across the world with Indian bourses registering historic falls before recovering a bit, In terms of resilience Indian markets are fundamentally strong and these falls may best be considered as temporary in nature.
If we look at the movement of rupee, devaluation of Yuan has an adverse impact on the price of rupee and it has moved down, but it is still to be seen that whether it is a long term phenomenon or a one off event , in terms of export Indian exports have been declining for months, but as a result of global slowdown imports have also been declining keeping the balance of payment stable , but if the rupee movement goes out of hand RBI may have to intervene with policy measures like rate cuts to keep the fluctuation of currency in comfortable limits. Volatility in rupee may make imports costlier stoking inflation due to which RBI might have to stick to high rate regime.
While the fall in value of Rupee should help exports, it may not necessarily be true because of global economic slowdown and the fact that India and China compete for many item exports like textile, gems and jewelry etc.
What Indian Corporate sector is wary about is the possy of dumping of Chinese goods in India as a result of cheaper yuan
As for the stock markets in US , some believe it to be overvalued for a long time  so the correction is taking place for some time which has been compounded by the signals of crisis in China. Overall all now Fed is in much better position to intervene and make amends than it was in 2008 global financial crisis, the over dependence on china for trade and exports is causing some jitters in the US stock market which should even out with time.

In regards to India, the fundamentals of the economy look strong enough , Rupee with the intervention of central bank should weather the storm set up by Yuan devaluation and the possibility of currency war look like a distant possibility. With the Chinese dragon weakening in its flight, the time is ripe for Indian Elephant to move fast and attract FDI in addition to FII to strengthen the fundamentals of economy to move into decade of sustained double digit GDP growth.


Saturday, February 28, 2015

Union Budget 2015-16:-- Neither Drastic nor Fantastic

The Union budget is on the expected lines where  the finance minister did not touch the tax rates and slabs maintaining the status quo for the most part. While this was widely expected as we had mentioned in article on the expectations from the budget, it can be termed at most insipid from the point of view of a salaried individual.
There are some unexpected good moves like the phased reduction of the rate of corporate tax to 25% over a period of 4 years and diverting 62% of the tax receipts to the state. With this move the finance minister has increased the responsibility of states in terms of public spending.
While nothing much has been done on the front of individual taxation and the limit of investment under section 80 C has been kept at 150000, the limit for deduction from taxable income of   premium paid on health insurance has been increased to 25000 for individuals and 30000 for senior citizens under section 80 D. Tax free transport allowance which has been hovering at Rs 800 has been thankfully increased to 1600 per month. No other exemption or deduction has been tampered with as the time lag between the last budget and this budget has been barely 9 months and many limits had been increased by the finance minister last time around.
The replacement of Wealth tax with the 2% surcharge on the Super rich (Taxable income > 1 Cr) would yield additional revenues of 8000 cr to the government and would save the hassle of valuation and measurement of wealth every year.
For a resident individual while the relief in tax  is not visible there  is an additional burden in the form of increased service tax from 12.36% to a lump sum rate of 14%, this would certainly  have an impact on the  wallet of the common man as there are hardly any services which do not come under the net of Service tax and we  only can  hope that when the GST will come into play in 2016, this additional burden would be rationalized.
There has been intent on the part of the government to counter the menace of black money by putting in place stricter legislations including the scope for rigorous imprisonment for stashing money abroad.
There has been a focus on job creation and encouragement to the entrepreneurship with initiatives like SETU ( Self Employment and Talent utilization) and more could be expected in future.  Quoting JAM ( Jan Dhan yojana, Aadhar and Mobile) in economic survey as a means of Financial Inclusion could have far reaching effects
Thus while this budget  falls short on instant gratification for the common man, One hopes that the measure initiated are in the right earnest and fulfill the objective of sustainable and inclusive growth and development in the targeted time frame.



Tuesday, February 24, 2015

Budget 2015 -16: What to  Expect

So the rituals begin and we are in the budget week when every tax payer ( Aam Aadmi) looks at the finance minister with a lot of hope and this year the expectations are even more owing to the following factors.
  1.     This is the first full fledged budget of the  New incumbent (  NDA Government) which stormed into the corridors of power riding on the slogan Sabka sath   Sabka Vikas,  now is time for them to walk the talk and induce the  much needed confidence in the  industry as well as general public.
  2.     The budget comes on a close heels of a severe defeat in the Delhi Elections for the ruling party, the first since the general elections in may 2014 and the government needs to send a strong message through this budget  that it is still strong  on the policy front and does not lack political will to carry out the strong measures required  for the growth  and development.

While these are the factors which we believe will be the major forces determining the direction of the budget, it should also contain the measures which will give fillip to the economic growth leading inclusion of all the sections of the society.
On the front of personal finance, there are expectations on many fronts as mentioned below
1.      To  raise the basic exemption limit to Rs  300000/- , while this would be a populist measure , this will pressurize the exchequer more than other measures
2.      Another expectation could be raising the limit for 80 C investment to Rs. 200000, although it was  increased to 150000 last year only, there are little chances, it will be done again so soon
3.      Deduction from Taxable Income on interest payment of housing loan  (u/s 24) was increased to 200000 in the last year’s budget , and it would be a bit too Optimistic to expect it to increase this time also.
4.      While 80 D which provides Deduction on the premium paid for the self and Senior citizen parents  till the limit of 15000 and 20000 respectively , these limits can be expected to be revised as they have been for some time
5.      Some of the Allowances and reimbursement need to be looked into , like the tax free transport allowance is Rs 800 per month would make for taxi ride for a single day in some cases, similarly the tax free Medical Reimbursement of Rs 1250 per month seem very little looking at the cost of medicines and the cost of medicine consultancy charges, Tax Free Child Education Allowance of Rs 100 per child per month looks inadequate .
6.      Short term Capital Gain Tax on Sale of Equity Shares: While there have been voices on changing the definition of the short term for this purpose, we do not foresee this coming in the near future, while reducing the short term capital gain tax rate to 10 % would be a welcome move for the equity markets.
7.      Securities Transaction Tax:  There  has been demand to abolish this tax which is charged at a rate of 0.1% of the transaction value in the equity market. It is expected that this move might encourage retail participation in the market
In addition the finance minister will have to show intent by moving forward in the matters of GST, Direct Tax Code and other such forward looking measures which could not see the light of the day in the tenure of UPA government.
Another measure which government should set as target would be the ease of doing business in India, Entrepreneurs are an integral part of any developing and vibrant economy and the success which they achieve depends on the economic and regulatory environment in which they operate in their home country.
Targets like containing fiscal deficit to an acceptable limit needs to be achieved, while the government has the cushion of falling crude prices to ensure the same, the same should not be done at the cost of general public.

Thus our expectations are simple, friendly and simplified tax regime, more jobs for the youth , more opportunities of entrepreneurs, more amenities for the public and more growth for the country and the first Step in the direction of “ Sabka Sath Sabka Vikas”

Thursday, November 20, 2014

Physical Assets: Can You Depend on them?



The acquisition of various assets during the life of an individual depends on the income level, financial goals and aspirations of the individual. One acquires assets either for current consumption or future welfare. Current consumption includes perishable items and physical assets as well. Physical assets are bought either towards some enumerated financial goal, Social esteem or based on some long held belief about the asset. For example one would put the money in fixed deposit towards the achievement of some future financial goal, but will buy an expensive item like an artifact as a Hussein painting for the purpose of glory.
In the Indian Scenario as per a survey conducted by National Council for Applied Economic Research (NCAER) and Max New York Life in 2008, 23% savings of Indian households are parked in physical assets.  In this note we would like to evaluate their dependability as stores of Wealth

Before arriving at a conclusion whether the asset in question is dependable or risky, one needs to evaluate the purpose for which the asset is acquired. Following points, if kept in mind could help in such an analysis.

a)   Notions about the Physical Assets

People tend to acquire the assets without proper notion about the nature and characteristic of the asset. If one is investing in an asset for the purpose of glory, then the same asset would not add value to the net worth of the individual from the point of view of achieving some financial goals and individual even after allocating the funds would still be in want of allocation towards the achievement of the financial goals.

b)    Stakes in the Assets ( opportunity cost)

 The next question that an individual needs to ask while making a decision to acquire an asset is the stakes in question, if an individual is acquiring a depreciating asset at the cost of a future financial goal like retirement then it must be strictly avoided. An example could be the purchase of car on loan reducing the amount available to be invested periodically for retirement.

c)   Debt against these Assets/( Liquidity Potential)

 With the availability of credit it has become easier for people to acquire a physical asset, but caution must be exercised whether debt must be taken for acquiring this asset. Debt must not be taken against a depreciating asset unless there is a possibility of investment arbitrage and an individual has the corpus available to pay off the debt in short term if required. For e.g. if one buys a car on loan, then it is preferable that one has the amount equal to the loan he/she has taken for car available with him which can be deployed in  another investment option which could generate a return which is higher than the rate of interest one has to pay on the loan
However in case of appreciating asset like house property , taking debt could be a good option as  the rise in value of the house property will increase the net worth of the individual and at the same time one would be able to take the advantage of tax benefits under section 22, 23 and 24 of the Income Tax Act, 1961 under which interest on the housing loan is deductible from taxable income up till a limit of Rs 200,000 in case of a self occupied property, while there is no limit if the property is let out. Additionally one can claim the deduction with regards to principal repayment up to a limit of Rs. 150000 under section 80C.

d)   Appreciation/ Depreciation in the value of the assets

Another question that may be asked is whether the asset being acquired is depreciating or appreciating in nature. While an asset of appreciating nature will aid in increase of the net worth, the depreciating asset will reduce the net worth which should be taken care by some alternative strategy to set off the reduction.


e)    Regulatory Infrastructure

In case of physical assets, there is lack of regulatory infrastructure as available for financial instruments and the possibility of market imperfections cannot be ruled out.

Based on the above factors, it may be inferred that a particular physical asset is dependable or risky for a particular individual. Notwithstanding the above, goal based financial planning approach should be employed at all times and it must be ensured that no long term financial goal is compromised at the same time maintaining a reasonable corpus in short term for emergency requirement.

Only purchasing power  or debt repayment capacity should not be the reason to motivate one towards the acquisition of these assets , ( e.g. :An individual who is capable of paying off 20000 Rs per month should not get into buying a bigger car taking loan without proper need and benefit analysis). The Decision to acquire an asset using debt is sensitive and should be done after proper analysis of appreciating/depreciation potential of the Asset preferable in consultation with a financial adviser. Following table gives an indicative list of physical assets and whether the same should be procured using debt.

Following Table gives an indicative list of Physical Assets and suggestion w.r.t. procurement through loan.

S. No
Asset
Loan to be sought
Conditions
1
House Property
Yes
Provided (1)25% margin is utilized
(2) tax Benefit in case of Self Occupied Property
(3) Income generating in case of second Property
2
Land
Yes
Provided there is appreciation potential
3
Gold/Bullion
No
N/A
4
Vehicle for personal use
No
Not Encouraged except in case benefit claimed out of investment arbitrage (for individuals) and depreciation arbitrage (for professionals)
5
Lifestyle Assets(Mobile/Watches)
No
N/A
6
Vehicle for Commercial Use
Yes
Provided the income generated covers the cost of credit.
7
Artifacts
No
N/A
8
Jewellery
No
N/A
9
Art
No
N/A

Thus it could be said that loan should be sought against only those physical asset which are expected to appreciate in value. In case of real estate there is an additional advantage in terms of tax benefit as mentioned above.

In conclusion one could infer that while acquiring a physical asset could be undertaken if one’s financial position allows, whether it is for glory or one fancies it, the same should not be done at the cost of financial  goals and needs.

Tuesday, October 21, 2014

Gold as an Investment Asset  
                                                                                  By: Anshul Srivastava

For conservative investors who are looking to diversify their portfolio beyond Debt and Equity Investments, gold may serve as an avenue for diversification, but not without additional risks and costs.

In the current times, with high levels of volatility in various asset classes especially equity, when individuals are increasingly seeking portfolio diversification to be able to meet their various life goals with higher certainty, gold is fast emerging as an investment asset class along with more preferred asset classes like debt on account of a perception of an enduring and a stable asset class and due to the traditional affinity towards the asset class in the form of jewelry.

However, for conservative individuals who hold major proportion of their portfolios in debt instruments, the risk-return matrix needs to be evaluated carefully to arrive at optimal diversification which provides risk reduction as well as leads to enhancement of returns; which are the primary objectives of portfolio diversification.

Though, the exposure to debt can be taken through various instruments viz. small saving schemes and post office deposits, bank deposits, company fixed deposits, and debt mutual funds etc proper analysis of the risk return characteristics of all are warranted ., the investments in precious metals predominantly gold  requires a detailed understanding.

The Golden Allure

Gold has traditionally been used as a store of wealth and medium of exchange in the human civilizations, In the international scenario gold has been used as the relative standard for currencies .Till 1971 US dollar was measured against the gold where a specific value of dollars was assigned to one ounce of gold. In addition the physical accessibility and portability of gold make it a preferred asset to hold in the times of financial exigency. Jewelry constitutes more than two thirds of the demand of gold while industrial, medical and dental uses account for the usage of closely 12 % of the gold produced. India accounts for nearly 27% of the demand for gold jewelry in the world and thus gold holds an special allure for Indian investor.

For any asset class there are certain characteristics on which it is judged and we can compare gold and debt on the following.



S. No
Parameter
Debt Instruments*
Gold
1
Safety
Issuer Risk
Safe , risk of theft or burglary in Physical Form
2
Safety
Interest Rate Risk
Not there.
3
Liquidity
Highly Liquid
Highly Liquid
4
Growth
Moderate
Generally Moderate, very High in 3-5 yr Period
5
Taxation
Capital Gain Tax
Capital Gain Tax+ VAT at the time of purchase
6
Income Generation Potential
Yes
No.
Investment Avenues

As it has been mentioned above that investment in debt can be done in various forms, investment in gold can also be done in various form, which can include gold in the physical form in the form of jewelry, or bullion in the form of Coins, bars or biscuits. All these forms carry a risk and inconvenience, so if the aquisition is purely for the purpose of investment then using the vehicles like Gold Exchange Traded Funds (ETF) can be used to take advantage of the price appreciation of gold. .ETF is an open-ended mutual fund whose units represent physical gold that is 99.5% pure, with each unit representing 1 gram of gold. These units are traded on the stock exchanges like a single stock of a company. ETFs are exempt for Securities Transaction Tax and VAT, Which is applicable on physical gold and small amounts can be invested which can be accumulated for buying gold in future if required saving oneself from the upside price volatility of gold. While there is a fund management charge which is levied on the investors, the same can compensate for the inconvenience one saves as compared to holding physical gold.

 Following are the benefits that can accrue to investors of gold.
  • Store of Wealth
Gold has been used as a store of wealth for centuries, even in the modern times of today where markets rise and fall, gold has been able to retain its value most of the times and if we look at the last ten years data gold has beaten all the other asset classes in terms of the returns generated.
  • Safe refuge
During the time of calamities like war or any sort of economic crisis, currency and other investment assets like shares and debt securities may lose their value but gold does not lose its value and thus has been held by people as a protection against such risks for a long time.
  • Inflation Hedge
Gold has long being used as the store of wealth. While the value of the currency might fall over time, gold has been able to hold its value and expected to do so in future thus providing a very effective hedge against purchasing power risk.
  • Portfolio improvement
Adding gold to a portfolio introduces an entirely different asset class. Portfolios that contain gold are generally more robust and better able to cope with market uncertainties than those which don't. Recent independent studies have shown that traditional diversifiers (such as bonds and alternative assets) often fail during times of market stress or instability. Even a small allocation of gold has been proven to significantly improve the consistency of portfolio performance during both stable and unstable financial periods.
  • Diversification
Diverse investments help protect the portfolio against fluctuations in the value of any single asset class. Gold is a very effective portfolio diversifier as it has a weak correlation with equity and its movement is independent of the movement in the other asset classes.
  • Liquidity and Tangibility
Gold is an asset which has both the qualities of being tangible and liquid also. The other tangible asset like real estate rate low on liquidity. And with the options like gold loans available in the market , one does not need to part with the gold while monetizing it up to limit of  Loan to Value decided by the lenders
 Pricing

There are various factors involved in the pricing of gold, which makes the gold pricing a complex process. The main factors that affect gold pricing are:

  1.  Global Supply and demand levels ( Jewelry and Industrial)
  2. Activities of Central Banks.
  3. Gemological characteristics of the diamond
  4. Movement of Capital Markets
  5. Paper trading and short selling
  6. Market Expectations

While the supply and demand level tend to affect any industry , more recently the factors which are affecting the gold prices range from trading to market expectations following the Global Financial Crisis and Euro zone Crisis. The expectation from the central banks of the major economies of the world also plays a part in the movement of the price of the gold. India, being the largest consumer of gold in the form of Jewelry in the world, the dynamics of pricing also includes the factors like seasonality where in wedding and festive season see a considerable spurt in the demand for gold thus sustaining the price at a higher level domestically.

Returns
Gold gives a moderate return in the long term with the shorter time periods in between in which it give very high return in the short term. Since the price of the gold depends on many factors most of which are international in nature, the price of the gold cannot be predicted with certainty, From 2010  till 2012 gold had given very high return but post 2012 , the returns have been minimal, thus only a small portion of the total investment portfolio should be attributed to gold.
In 2012 gold was 31900 and in today it is around 27000, the return over the last 3 years has been dismal.
However, from the Financial Planning perspective investment in both gold and debt requires a detailed understanding of the asset class, along with a thorough mapping of such investments to the individuals’ life goals and their risk appetites.


Gold Insurance
The holding of gold in a physical form gives rise to additional risks of theft, loss etc., therefore it may be necessary for individuals to seek insurance for such holdings. The most common insurance under this category is jewelry insurance which is provided as a part of householders’ policy, or even a standalone insurance policy. However the terms of coverage and the policy wordings need to be examined thoroughly to ensure a complete peace of mind.  Debt products are generally safe based on the reputations of the issuers and the rating given by various rating agencies, so the need of insurance does not arise.
The cost associated with gold insurance should also be taken into account while considering investment in diamonds.

Taxation
It is essential to note that gold investment in physical form, may give rise to wealth tax beyond a certain limit in addition to the normal Value Added tax (VAT) at the time of purchase and Capital Gains tax at the time of sale. This is often the most overlooked aspect by individuals investing in gold The wealth tax is charged at the rate of 1% of the total wealth exceeding Rs. 1 crore as on March 31 every year. Debt also attracts capital gains tax which has a specific treatment under the Income tax act of 1961.

Conclusion

Gold has traditionally been an attractive buy at all the auspicious occasions in the Indian set up, but if you are looking at gold as pure investment then the same should be done after proper analysis in the right instrument preferably with an expert advice.