The clock's ticking away and the taxman's waiting. If you haven't managed to get your act together yet, here is a quick guide to calculating your tax liability. Doing it right is more than a matter of being conscientious; you'll have to cough up a penalty of 100-300% of the tax amount you're caught evading.
In addition, you'll be liable to pay interest at the rate of 1.5% a month on the outstanding amount, which is charged from the day your tax returns ought to have been filed. It's far simpler to get your math right and to do it before the due date of 31 July.
To compute your total tax liability, you need to consider more than the Form 16, and the profit & loss account. Don't forget to factor in 'Income from other sources' lest you find yourself an unwitting tax offender. Here are some of the other sources from which you can derive an income.
Interest income
Never mind how minuscule the amount, the interest earned on your savings account, fixed deposits, bonds and National Savings Certificates (NSC) is taxable and must be declared. Be sure to factor in any accrued interest. This refers to any interest amount that you've earned during the year even if you expect to receive the money after the deadline for filing returns. The total interest earned has to be added to your income and taxed according to the slab that applies to you.
Gifts
Cash gifts of over Rs 50,000 received in a financial year from anyone who does not qualify as a specified relative falls in the ambit of income from other sources. Specified relatives include parents, grandparents, spouse, siblings, your spouse's or your parents' siblings, children, grandchildren and their respective spouses. All non-cash gifts too have to be accounted for and the value to be declared is the cost of the asset on the day it was gifted. However, gifts received on your wedding as well as any inheritance will not be taxed.
Income from gifts
If you invest the cash gifted to you in, say, shares, the income generated from this will be taxed. Though the one who receives the gift has to bear the tax burden on any interest earning from it, the case is different in the case of spouses. Says Homi Mistry, partner, Deloitte Haskins and Sells: "Suppose a man gifts his spouse Rs 5 lakh and the entire amount is put in a fixed deposit earning 9% interest a year. This means that the wife will earn Rs 45,000 as interest income, but this money will be added to the husband's account and he will have to pay tax on it."
Sunday, July 17, 2011
Benefit from flexibility of multi-cap funds
When you put your money in an equity mutual fund, do you also tell the fund manager which stocks to buy? No, and yes. While investors don't give any instructions, a fund with a fixed investment mandate picks only those type of stocks.
For instance, a large-cap fund will invest only in index-based heavyweights and other blue chips. You won't find a small-cap company in its portfolio. This is why large-cap funds tend to move slowly and surely compared with other categories. Similarly, a small-cap fund will focus on smaller companies, forever hoping to zero in on the next Infosys that will turn it into a multibagger.
On the other hand, multi-cap funds invest across the entire spectrum of stocks, starting from large-caps all the way down to small-caps. They have a flexible mandate, which helps them pick winners from across market capitalisations.
"Wealth creation happens when the fund management process has flexibility. Multi-cap funds have an in-built mandate to capture the upside across the market spectrum," says Om Ahuja, head of private wealth management and strategy at Emkay Global Financial Services .
The performance of multi-cap diversified equity funds bears this out. In the past three and five years, this category has given higher returns than those from other categories of diversified funds (see table). As companies belonging to different market segments demonstrate different levels of volatility and returns, it is best for investors to hold stocks of varying market capitalisations.
"Multi-cap funds provide the investors with the offer to build a diversified portfolio by giving them access to all kinds of equities," says KN Sivasubramanian, chief investment officer, Franklin Templeton Investments .
For instance, in the past one year, mid- and small-cap funds have done exceedingly well, but in the long-term, multi-cap funds have consistently outperformed the other categories. "Multi-cap funds are the best investment option for creating wealth in the long term," points out Ahuja.
Work in all market conditions
The flexible mandate of multi-cap funds gives them access to greener pastures in all market conditions. At the beginning of a bullish phase, it is usually the large-cap bellwether stocks that do well. Midway through the bull run, these large-cap stocks reach high valuations and the focus of the investing community shifts to mid-cap and then finally small-cap stocks.
"Retail investors cannot gauge which part of the market will perform well-large-caps, mid-cap or small caps. By investing in multi-cap funds, they can gain in all market conditions," says Saurabh Jain, associate vice-president, retail equities research, SMC Global Securities .
The 'go anywhere' strategy works well during downturns as well. "While a given set of conditions may not benefit one part of the multi-cap fund portfolio, it could benefit the other, thereby creating a counter-balance effect that generates long-term results," says Maneesh Kumar, managing director, Burgeon Wealth Advisors. When the bears are on the prowl, small-cap and mid-cap stocks fall harder than large-caps. Multi-cap funds are able to cushion themselves better than funds which are focused only on these vulnerable segments.
A deft fund manager can realign the fund's portfolio rapidly and thus benefit from the changing market mood. "Besides, in a black swan kind of a scenario, such as the financial crisis that we experienced in 2008, a multi-cap fund will be able to bear redemption pressures better compared with a mid- and small-cap fund as it is likely to be more liquid," adds Kumar.
For instance, a large-cap fund will invest only in index-based heavyweights and other blue chips. You won't find a small-cap company in its portfolio. This is why large-cap funds tend to move slowly and surely compared with other categories. Similarly, a small-cap fund will focus on smaller companies, forever hoping to zero in on the next Infosys that will turn it into a multibagger.
On the other hand, multi-cap funds invest across the entire spectrum of stocks, starting from large-caps all the way down to small-caps. They have a flexible mandate, which helps them pick winners from across market capitalisations.
"Wealth creation happens when the fund management process has flexibility. Multi-cap funds have an in-built mandate to capture the upside across the market spectrum," says Om Ahuja, head of private wealth management and strategy at Emkay Global Financial Services .
The performance of multi-cap diversified equity funds bears this out. In the past three and five years, this category has given higher returns than those from other categories of diversified funds (see table). As companies belonging to different market segments demonstrate different levels of volatility and returns, it is best for investors to hold stocks of varying market capitalisations.
"Multi-cap funds provide the investors with the offer to build a diversified portfolio by giving them access to all kinds of equities," says KN Sivasubramanian, chief investment officer, Franklin Templeton Investments .
For instance, in the past one year, mid- and small-cap funds have done exceedingly well, but in the long-term, multi-cap funds have consistently outperformed the other categories. "Multi-cap funds are the best investment option for creating wealth in the long term," points out Ahuja.
Work in all market conditions
The flexible mandate of multi-cap funds gives them access to greener pastures in all market conditions. At the beginning of a bullish phase, it is usually the large-cap bellwether stocks that do well. Midway through the bull run, these large-cap stocks reach high valuations and the focus of the investing community shifts to mid-cap and then finally small-cap stocks.
"Retail investors cannot gauge which part of the market will perform well-large-caps, mid-cap or small caps. By investing in multi-cap funds, they can gain in all market conditions," says Saurabh Jain, associate vice-president, retail equities research, SMC Global Securities .
The 'go anywhere' strategy works well during downturns as well. "While a given set of conditions may not benefit one part of the multi-cap fund portfolio, it could benefit the other, thereby creating a counter-balance effect that generates long-term results," says Maneesh Kumar, managing director, Burgeon Wealth Advisors. When the bears are on the prowl, small-cap and mid-cap stocks fall harder than large-caps. Multi-cap funds are able to cushion themselves better than funds which are focused only on these vulnerable segments.
A deft fund manager can realign the fund's portfolio rapidly and thus benefit from the changing market mood. "Besides, in a black swan kind of a scenario, such as the financial crisis that we experienced in 2008, a multi-cap fund will be able to bear redemption pressures better compared with a mid- and small-cap fund as it is likely to be more liquid," adds Kumar.
SMART THINGS TO KNOW: Mutual fund switches
Mutual funds allow investors to switch money from one scheme to another within a fund house using transaction slips.
The transaction slip has to be signed according to the holding pattern of the mutual fund folio and submitted to the investor service centre.
Investors have to indicate the number of units/amount to be switched. The transaction is treated as redemption from the source scheme and purchase in the destination scheme.
The switch is carried out on the basis of the NAV and depends on the day and time of transaction. It does not include specific costs. Taxes are applicable on the type of the source scheme.
After the switch, investors receive an account statement showing the transaction and the number of units redeemed and purchased.
Switches may not be allowed across all schemes. Investors should check availability of this facility for both source and destination schemes.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL).)
The transaction slip has to be signed according to the holding pattern of the mutual fund folio and submitted to the investor service centre.
Investors have to indicate the number of units/amount to be switched. The transaction is treated as redemption from the source scheme and purchase in the destination scheme.
The switch is carried out on the basis of the NAV and depends on the day and time of transaction. It does not include specific costs. Taxes are applicable on the type of the source scheme.
After the switch, investors receive an account statement showing the transaction and the number of units redeemed and purchased.
Switches may not be allowed across all schemes. Investors should check availability of this facility for both source and destination schemes.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL).)
Time ripe to bet on international funds
International mutual funds have been on a roll. Seven of the top-10 equity funds in the past year have been international funds. "We have been recommending international funds for diversification purposes," says Suresh Sadagopan, a certified financial planner who runs Ladder 7 Financial Advisories. There are several compelling reasons why you should take a close look at them.
FOOD PRICES TO GO UP
Politicians would like us to believe the rise in food prices is a temporary phenomenon. But, that need not be the case. As environmentalist and author Lester R Brown Brown says: "As a country industrialises and modernises, cropland is used for industrial and residential development and takes valuable land away from agriculture... as rapid industrialisation pulls labour out of the countryside, it often leads to less doublecropping, a practice that depends on quickly harvesting one grain crop once it's ripe and immediately preparing the seedbed for the next crops."
This scenario is already playing out in China, the world's largest producer of rice and wheat, and that is likely to be the case in India (world's secondlargest producer of rice, wheat) and other countries, pushing up global food prices. Politicians have a role to play in deciding the food prices. Take the case of Thailand, where incoming prime minister Yingluck Shinawatra won the election by promising to pay rice farmers a minimum of 15,000 baht per tonne, against the current price of 9,000 baht per tonne. Thailand is the largest exporter of rice in the world and accounts for nearly 30% of the world trade. The export price of Thai rice is the de facto price at which rice is sold internationally.
This move, if implemented, as it is likely to be, will push up rice prices worldwide. "It means that the export price of Thai white rice will spike up by 60%... to at least $800 per tonne," analysts Billy Wang and Zuo Li of IIFL institutional equities wrote in a recent report. So how do you benefit from this trend of rising food prices? The opportunities available in the Indian market are fairly limited. But you can look to exploit the opportunity by investing in funds like the DWS Global Agribusiness Offshore Fund and Birla Sun Life Commodity Equities -Global Agri Ret Fund. As Satyajit Das, the author of the upcoming Extreme Money: The Masters of the Universe and the Cult of Risk, puts it: "I said in 2008 that food and energy were probably attractive investments - people have to eat. My views haven't changed."
ABUNDANT COMMODITIES NO MORE
Hydrocarbons have largely driven the industrial revolution over the last two centuries. Petroleum is a liquid form of carbon, whereas natural gas is a gaseous form. Coal, which is an impure form of carbon, has been used to generate massive amounts of power used by industries. As Jeremy Grantham, chief investment strategist at GMO, an asset management company and one of the most respected fund managers in the world, writes in Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever: "For a small window of time, about 250 years, from 1800 to, say, 2050, hydrocarbons partially removed the barriers to rapid population growth, wealth, and scientific progress." In fact, courtesy the industrial revolution, more ores and industrial commodities were found and dug up. This, in turn, led to stable commodity prices.
FOOD PRICES TO GO UP
Politicians would like us to believe the rise in food prices is a temporary phenomenon. But, that need not be the case. As environmentalist and author Lester R Brown Brown says: "As a country industrialises and modernises, cropland is used for industrial and residential development and takes valuable land away from agriculture... as rapid industrialisation pulls labour out of the countryside, it often leads to less doublecropping, a practice that depends on quickly harvesting one grain crop once it's ripe and immediately preparing the seedbed for the next crops."
This scenario is already playing out in China, the world's largest producer of rice and wheat, and that is likely to be the case in India (world's secondlargest producer of rice, wheat) and other countries, pushing up global food prices. Politicians have a role to play in deciding the food prices. Take the case of Thailand, where incoming prime minister Yingluck Shinawatra won the election by promising to pay rice farmers a minimum of 15,000 baht per tonne, against the current price of 9,000 baht per tonne. Thailand is the largest exporter of rice in the world and accounts for nearly 30% of the world trade. The export price of Thai rice is the de facto price at which rice is sold internationally.
This move, if implemented, as it is likely to be, will push up rice prices worldwide. "It means that the export price of Thai white rice will spike up by 60%... to at least $800 per tonne," analysts Billy Wang and Zuo Li of IIFL institutional equities wrote in a recent report. So how do you benefit from this trend of rising food prices? The opportunities available in the Indian market are fairly limited. But you can look to exploit the opportunity by investing in funds like the DWS Global Agribusiness Offshore Fund and Birla Sun Life Commodity Equities -Global Agri Ret Fund. As Satyajit Das, the author of the upcoming Extreme Money: The Masters of the Universe and the Cult of Risk, puts it: "I said in 2008 that food and energy were probably attractive investments - people have to eat. My views haven't changed."
ABUNDANT COMMODITIES NO MORE
Hydrocarbons have largely driven the industrial revolution over the last two centuries. Petroleum is a liquid form of carbon, whereas natural gas is a gaseous form. Coal, which is an impure form of carbon, has been used to generate massive amounts of power used by industries. As Jeremy Grantham, chief investment strategist at GMO, an asset management company and one of the most respected fund managers in the world, writes in Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever: "For a small window of time, about 250 years, from 1800 to, say, 2050, hydrocarbons partially removed the barriers to rapid population growth, wealth, and scientific progress." In fact, courtesy the industrial revolution, more ores and industrial commodities were found and dug up. This, in turn, led to stable commodity prices.
Friday, July 15, 2011
How to avoid a financial disaster
What conditions can be classified as a financial disaster? Are your spending habits taking you towards one? How can you avoid a financial disaster without being too harsh on yourself?
The definition of a personal finance crisis might differ from person to person. The balance between your desires and your spending ability is what determines your financial health. It is essential to identify common financial problems that you may face and plan for them so that you sidestep potential financial crises.
Does this mean that you give up today’s enjoyment for tomorrow’s security? Certainly not. It just means that you take a realistic view of your circumstances and decide upon spending limits giving due consideration to your needs and your income, and accommodating your desires to a certain extent. Here are some simple ways to avoid a financial disaster:
Draw up a priority list for expenses, make a budget that will accommodate both needs and reasonable desires and spend accordingly. You should also plan for emergencies, and invest in proportion to your income.
Investments are provisions for your future; make them wisely. Diversify your portfolio to minimize your risks. Of course not all sectors on your portfolio will bring in similar returns but it is a safe practice to spread your money over different sectors.
As far as expenses go, you should be level headed while spending. Limit your credit card use, say, in emergency situations when you need to buy essentials and are caught without cash. It is easy to indulge oneself buying stuff with a credit card, but do spare a thought for the bill that will reach you later. It can be quite a sobering thought. Control over credit card usage can make a tangible difference in personal finance.
Banish the ‘enjoy now, pay later’ concept from your life. This will give you a realistic view of your spending abilities. The peace gained from a debt-free situation is sure to outweigh any disappointment that you feel from not having indulged all your spending whims.
Can savings and investments happen regardless of levels of income? Can the very rich head for financial crises due to unwise spending? What do you do to mitigate the risks in your life? Does insurance play a major role?
Search Amazon.com Magazines for
The definition of a personal finance crisis might differ from person to person. The balance between your desires and your spending ability is what determines your financial health. It is essential to identify common financial problems that you may face and plan for them so that you sidestep potential financial crises.
Does this mean that you give up today’s enjoyment for tomorrow’s security? Certainly not. It just means that you take a realistic view of your circumstances and decide upon spending limits giving due consideration to your needs and your income, and accommodating your desires to a certain extent. Here are some simple ways to avoid a financial disaster:
Draw up a priority list for expenses, make a budget that will accommodate both needs and reasonable desires and spend accordingly. You should also plan for emergencies, and invest in proportion to your income.
Investments are provisions for your future; make them wisely. Diversify your portfolio to minimize your risks. Of course not all sectors on your portfolio will bring in similar returns but it is a safe practice to spread your money over different sectors.
As far as expenses go, you should be level headed while spending. Limit your credit card use, say, in emergency situations when you need to buy essentials and are caught without cash. It is easy to indulge oneself buying stuff with a credit card, but do spare a thought for the bill that will reach you later. It can be quite a sobering thought. Control over credit card usage can make a tangible difference in personal finance.
Banish the ‘enjoy now, pay later’ concept from your life. This will give you a realistic view of your spending abilities. The peace gained from a debt-free situation is sure to outweigh any disappointment that you feel from not having indulged all your spending whims.
Can savings and investments happen regardless of levels of income? Can the very rich head for financial crises due to unwise spending? What do you do to mitigate the risks in your life? Does insurance play a major role?
Search Amazon.com Magazines for
Avoid pre-wedding financial jitters!
Excited and nervous about your wedding, but dreading the thought of the bills? Worried about how you’ll pay off the debt? With a little forethought, planning and a little honesty, your wedding can be just as you dreamed.
You’ve grown to adulthood managing your own money. So has your fiancée. Now as you approach the wedding of your dreams, you’re faced with the thought of how to pay your bills after the honeymoon.
Firstly, be completely honest with your partner about your financial situation. Money may be furthest from your mind when in love, but is a harsh reality after marriage. Discuss your money, investments, debts, and how to share these after marriage. Don’t let poor finances ruin your relationship.
Work out your budget according to your situation. An expensive marriage may impress your neighbors, but does nothing good for your future finances. The average wedding will set you back by $25,000. Most of this will be taken up by your credit cards, so you’ll not feel the pinch immediately. But you’ll have to live with it for some time.
Several agencies offer you comprehensive wedding packages that include advice, easy loans, travel and honeymoon services, insurance and even a credit card. Check out these wedding planners and select the one that suits you.
If your partner or you own a home or a condo, you could go for a home equity loan. If you already have some money stashed away, let it grow, time permitting, in the money market or other short-term investments.
Don’t ignore the long term. Invest independently in long-term securities, and don’t ignore the IRA. Try and rationalize multiple accounts into the minimum number of joint and separate accounts that you need.
Identify a good financial planner who will help you put away enough for that dream wedding, while also advising you to cut back on the non-essentials. Try and maintain an emergency fund.
You don’t have to let the specter of debt ruin your wedding and honeymoon. Plan your way to a happy married life, and live debt-free ever after.
Planned a great wedding without burning a huge hole in your pocket? How did you do it? Did you seek professional help? Trade tips with us. Help other couples in love plan a wonderful wedding without having to shell out pots of money!
You’ve grown to adulthood managing your own money. So has your fiancée. Now as you approach the wedding of your dreams, you’re faced with the thought of how to pay your bills after the honeymoon.
Firstly, be completely honest with your partner about your financial situation. Money may be furthest from your mind when in love, but is a harsh reality after marriage. Discuss your money, investments, debts, and how to share these after marriage. Don’t let poor finances ruin your relationship.
Work out your budget according to your situation. An expensive marriage may impress your neighbors, but does nothing good for your future finances. The average wedding will set you back by $25,000. Most of this will be taken up by your credit cards, so you’ll not feel the pinch immediately. But you’ll have to live with it for some time.
Several agencies offer you comprehensive wedding packages that include advice, easy loans, travel and honeymoon services, insurance and even a credit card. Check out these wedding planners and select the one that suits you.
If your partner or you own a home or a condo, you could go for a home equity loan. If you already have some money stashed away, let it grow, time permitting, in the money market or other short-term investments.
Don’t ignore the long term. Invest independently in long-term securities, and don’t ignore the IRA. Try and rationalize multiple accounts into the minimum number of joint and separate accounts that you need.
Identify a good financial planner who will help you put away enough for that dream wedding, while also advising you to cut back on the non-essentials. Try and maintain an emergency fund.
You don’t have to let the specter of debt ruin your wedding and honeymoon. Plan your way to a happy married life, and live debt-free ever after.
Planned a great wedding without burning a huge hole in your pocket? How did you do it? Did you seek professional help? Trade tips with us. Help other couples in love plan a wonderful wedding without having to shell out pots of money!
Retirement planning tips for NRIs
Are you an NRI planning to live in India post-retirement? Wondering how and how much to save to live a peaceful and carefree retired life? Fluctuating interest rates, lower returns, increasing investment risks, increased life expectancy combined with growing health problems and cost of treatment have made retirement planning essential.
All you need for retirement planning is good foresight. If you’re young and are earning well, retirement may be the last thing on your mind. But the time to start planning your retirement is now. Whether you’ve just commenced working or you’re at the end of your career, make a comprehensive plan to achieve your retirement goals. It’s never too early or too late!
The right investment mix
If you’re in your mid or late twenties, you must invest about 60% of your income in higher risk instruments, such as equity-linked plans, pension plans or a SIP of a mutual fund with allocation proportionate to your risk appetite. Invest the rest in tax-saving schemes to derive dual advantage of tax benefits and healthy returns. In your mid-thirties you must have a balanced investment portfolio with about 30-40% exposure to equity and the rest in fixed-income instruments, since you still have over twenty years to retire. In your mid-forties and beyond, your investment mix must be 85% in instruments, such as Employees Provident Fund (EPF), Public Provident Fund (PPF), Post Office Monthly Income Scheme (POMIS) and National Savings Certificate (NSC), and the balance 15% in a pension plan or equity-linked mutual fund scheme. If you have surplus cash, consider investing a small amount in a Systematic Investment Plan (SIP) of a growth fund. Select the options that suit you aptly after carefully weighing the pros and cons.
Retired already?
If you’ve retired already and received a sizeable retirement corpus, invest wisely to generate a good cash flow for the next fifteen, twenty or twenty-five years. Inflation may erode your income from safe investments. Set aside an amount that you may need for regular expenses in the next 2 or 3 years as reserve, and invest in cash or short-term instruments. Invest about 20% - 30% of the corpus in stocks or equity-linked funds to outrun inflation. Invest the balance in bonds to beat interest rate fluctuations. Ladder your bond maturities such that about 10% of your bonds mature each year for the next 5 or 10 years.
Your portfolio must be diversified with a well-balanced mix of appropriate instruments suitable to your profile. The ”rule of 72”(it helps you figure out when your investment will double or halve), a fundamental rule of economics, can help you determine the compounding impact of your choice of savings options. Continuously monitor and churn your portfolio based on the changing external conditions and your needs.
Spend wisely and save early to continue the same lifestyle and live a happy and contented life post-retirement.
Have you planned your retirement already? Do you have different strategies to those mentioned here? Do share your views with our readers, both the young and the young at heart.
All you need for retirement planning is good foresight. If you’re young and are earning well, retirement may be the last thing on your mind. But the time to start planning your retirement is now. Whether you’ve just commenced working or you’re at the end of your career, make a comprehensive plan to achieve your retirement goals. It’s never too early or too late!
The right investment mix
If you’re in your mid or late twenties, you must invest about 60% of your income in higher risk instruments, such as equity-linked plans, pension plans or a SIP of a mutual fund with allocation proportionate to your risk appetite. Invest the rest in tax-saving schemes to derive dual advantage of tax benefits and healthy returns. In your mid-thirties you must have a balanced investment portfolio with about 30-40% exposure to equity and the rest in fixed-income instruments, since you still have over twenty years to retire. In your mid-forties and beyond, your investment mix must be 85% in instruments, such as Employees Provident Fund (EPF), Public Provident Fund (PPF), Post Office Monthly Income Scheme (POMIS) and National Savings Certificate (NSC), and the balance 15% in a pension plan or equity-linked mutual fund scheme. If you have surplus cash, consider investing a small amount in a Systematic Investment Plan (SIP) of a growth fund. Select the options that suit you aptly after carefully weighing the pros and cons.
Retired already?
If you’ve retired already and received a sizeable retirement corpus, invest wisely to generate a good cash flow for the next fifteen, twenty or twenty-five years. Inflation may erode your income from safe investments. Set aside an amount that you may need for regular expenses in the next 2 or 3 years as reserve, and invest in cash or short-term instruments. Invest about 20% - 30% of the corpus in stocks or equity-linked funds to outrun inflation. Invest the balance in bonds to beat interest rate fluctuations. Ladder your bond maturities such that about 10% of your bonds mature each year for the next 5 or 10 years.
Your portfolio must be diversified with a well-balanced mix of appropriate instruments suitable to your profile. The ”rule of 72”(it helps you figure out when your investment will double or halve), a fundamental rule of economics, can help you determine the compounding impact of your choice of savings options. Continuously monitor and churn your portfolio based on the changing external conditions and your needs.
Spend wisely and save early to continue the same lifestyle and live a happy and contented life post-retirement.
Have you planned your retirement already? Do you have different strategies to those mentioned here? Do share your views with our readers, both the young and the young at heart.
Top mistakes in real estate investment in India
Why do people invest in real estate? Is it always a profitable venture? Are there any risks involved in a property deal? What should you do to ensure that your investment gives you the right returns?
Investment in real estate has the potential of earning high returns. However, like any other investment, trading in real estate is not without risks. Property dealings can become a handful, especially if you are an amateur in this field. Here are a few mistakes that people often make:
Not thinking matters through
Real estate is a big investment. It is something that most people go in for only once in their lifetime and it may be a decision that affects their lives in a big way. However, a common mistake that investors make is not to plan their purchase. It is important to think things through before you put money into a property. Your plan should cover all the factors that are necessary to reach an informed decision – the type of property, the locality, the rate of return you seek, the purpose of the purchase, budget and more.
Money matters
Real estate should not be a matter of impulse buying. Often people make the mistake of going overboard on the cost of the house, thinking that they can make up for the shortfall in funds sometime in the future. Get your finances in line first. Talk to your financial advisor and also work with your bank on the loan amount before you finalize your purchase. Once you know your budget, do not exceed it.
Market research
A common mistake – people try to isolate their deal from the market environment. The property prices, value appreciation and your bargaining capacity all depend on market trends. A thorough study of market trends will also help you forecast the growth rate of your property.
Flexibility
One cannot make hard and fast rules for a real estate investment. People often have a fixed set of ideas as to what they wish to do with the property. However it is important to keep room for changes, to maximize profits from your investment. For example, if you cannot find a good buyer immediately, your plan should be able to accommodate renting out the property for a while before finally selling it when the market is right. Have a contingency plan ready.
Property is an investment that often has emotional associations that could skew your decisions. Today there are professional courses where one can understand the protocol of real estate investing and also be educated about the common errors people make.
Do you think it worth arming yourself with such objective information before you invest in property or would you rather go by your instincts? Have you had any bad experiences you’d like to warn other readers about?
Investment in real estate has the potential of earning high returns. However, like any other investment, trading in real estate is not without risks. Property dealings can become a handful, especially if you are an amateur in this field. Here are a few mistakes that people often make:
Not thinking matters through
Real estate is a big investment. It is something that most people go in for only once in their lifetime and it may be a decision that affects their lives in a big way. However, a common mistake that investors make is not to plan their purchase. It is important to think things through before you put money into a property. Your plan should cover all the factors that are necessary to reach an informed decision – the type of property, the locality, the rate of return you seek, the purpose of the purchase, budget and more.
Money matters
Real estate should not be a matter of impulse buying. Often people make the mistake of going overboard on the cost of the house, thinking that they can make up for the shortfall in funds sometime in the future. Get your finances in line first. Talk to your financial advisor and also work with your bank on the loan amount before you finalize your purchase. Once you know your budget, do not exceed it.
Market research
A common mistake – people try to isolate their deal from the market environment. The property prices, value appreciation and your bargaining capacity all depend on market trends. A thorough study of market trends will also help you forecast the growth rate of your property.
Flexibility
One cannot make hard and fast rules for a real estate investment. People often have a fixed set of ideas as to what they wish to do with the property. However it is important to keep room for changes, to maximize profits from your investment. For example, if you cannot find a good buyer immediately, your plan should be able to accommodate renting out the property for a while before finally selling it when the market is right. Have a contingency plan ready.
Property is an investment that often has emotional associations that could skew your decisions. Today there are professional courses where one can understand the protocol of real estate investing and also be educated about the common errors people make.
Do you think it worth arming yourself with such objective information before you invest in property or would you rather go by your instincts? Have you had any bad experiences you’d like to warn other readers about?
Credit Cards: convenience or debt trap?
Credit cards – a convenient option aren’t they? Your personal safety net when you need the dough but don’t have it. Do you feel that credit cards make life easier for you? In reality you could end up in heavy debt if you aren’t careful with your credit card. Expensive, impulsive purchases by swiping your credit card – is it worth it? Do you end up living beyond your means because you bank on your credit card?
Nearly everyone today owns a plastic. Many have several in their wallets. After all, it frees you from carrying large amounts of cash while shopping and lets you shop online too! But is there a dark side to plastic money? Yes, there is and you could end up being an unsuspecting victim if you don’t practice caution while using your credit card. You could run up bad debts that could cast a shadow over your finances for a long time.
When not to use your credit card
While using credit cards we tend to underestimate what we spend. For instance when you use your credit card while shopping at the supermarket, money is taken from your card. The money in your wallet doesn’t reduce so you don’t really realize your expense! Small amounts will add up quickly this way and you could end up in debt.
Don’t use your credit card to pay your utility bills
If you use your card because you can’t afford your bills, you need to re-assess your personal budget plans.
Never use your credit card for impulsive purchases
Your spontaneous shopping spree is one of the worst times to use your credit card. If you want to treat yourself to a surprise, go ahead but remember that your surprise might cost you more with the interest you’ll have to pay with your credit card.
Avoid using your credit card while buying gifts
Make sure that you buy gifts with cash/debit cards. You don’t want to borrow and pay heavy interest for things you’re going to give away do you?
Do you feel that one ends up living beyond means while using credit cards? Do you prefer cash equivalents like debit cards? How can you stay in control while using credit cards? Share your helpful tips with us.
You may also be interested in :
Get the most out of your credit card
Credit card schemes: rich rewards or banker’s bait?
What to do if you lose your credit card
Paying ’Minimum Due’ on credit cards is a debt trap!
Nearly everyone today owns a plastic. Many have several in their wallets. After all, it frees you from carrying large amounts of cash while shopping and lets you shop online too! But is there a dark side to plastic money? Yes, there is and you could end up being an unsuspecting victim if you don’t practice caution while using your credit card. You could run up bad debts that could cast a shadow over your finances for a long time.
When not to use your credit card
While using credit cards we tend to underestimate what we spend. For instance when you use your credit card while shopping at the supermarket, money is taken from your card. The money in your wallet doesn’t reduce so you don’t really realize your expense! Small amounts will add up quickly this way and you could end up in debt.
Don’t use your credit card to pay your utility bills
If you use your card because you can’t afford your bills, you need to re-assess your personal budget plans.
Never use your credit card for impulsive purchases
Your spontaneous shopping spree is one of the worst times to use your credit card. If you want to treat yourself to a surprise, go ahead but remember that your surprise might cost you more with the interest you’ll have to pay with your credit card.
Avoid using your credit card while buying gifts
Make sure that you buy gifts with cash/debit cards. You don’t want to borrow and pay heavy interest for things you’re going to give away do you?
Do you feel that one ends up living beyond means while using credit cards? Do you prefer cash equivalents like debit cards? How can you stay in control while using credit cards? Share your helpful tips with us.
You may also be interested in :
Get the most out of your credit card
Credit card schemes: rich rewards or banker’s bait?
What to do if you lose your credit card
Paying ’Minimum Due’ on credit cards is a debt trap!
Top 8 money tips for NRIs
NRIs, have you’ve been toiling hard to rake in that extra bit but unable to fathom where all your money disappears by the end of the month? Chances are there’s a money leak. Fix it right away with a financial budget says Geeta Nair before your expenses balloon to unimaginable proportions leading you to a debt trap.
A financial budget can help you set your finances in order. It’s all about personal finance. And it’ll help you allocate your income appropriately among your needs, wants and desires enabling you to meet your financial goals easily.Here’s how NRIs can go about managing their finances:
Ascertain your total income: Jot down all your sources of income. Apart from your regular employment, your part time jobs, dividends, interest income from investments are all sources of income. Total them all.
Save atleast 20% to 30% of your gross income: Says Kairav Shah, Vice President, Personal Finance, Apnaloan.com, “Make it a point to set aside 20% to 30% of your total monthly income towards savings always. Leave this money untouched. And depending on your age, goals and risk profile invest this amount in mutual funds, equities, fixed income among others.” But then do you have a good support system in place? For instance if you’re living in places like Australia wherein children’s education, retirement, health are supported by the government there’s not much to worry. States Shah, “If you’re covered under a social security in whichever country you reside, you may reduce the said percent by about 5%.”
Buy property at the earliest: NRIs, buy a home at the earliest wherever you stay outside India. Opines Shah, “Most NRIs make the biggest mistake of not buying a home in the foreign country they stay and continue to live in rented apartments for long periods. You must consider buying a home at the earliest. This is because over a period of time property gets expensive, and if you continue to wait, back home too you’ll not be in a position to buy on your return after several years since by then the same may get unaffordable. You’d lose out both ways.” Besides real estate investment in India is important too.
Are you spending on a need or a want? Paying up your monthly rent, electricity and grocery bills are all needs you can’t do without. But you can surely cut down on your several outings at expensive restaurants and shopping sprees that burn a deep hole in your pocket. With several malls around convenience is in, no doubt. But think. Are you buying goods that you really need or are you following herd mentality? Have you used that food processor you bought last Christmas or is it still lying in a sealed pack in the corner of your kitchen unused? Analyse your past purchases and you’ll know your spending habits.
Put off impulse purchases: Do you go berserk when you hear of heavy discount offers, free gifts and cashback schemes. Stop! Simply put off impulse buying. That buy-one get-one free offer may not be as good as it seems. Besides, give a thought – do you really Need that shirt now or do you Want it because it simply appears to be a good offer?
Follow the 60:30:10 ratio: Try maintaining a ratio of 60:30:10 between your needs, wants and desires. Maintain a list of each of your expenses howsoever insignificant they may seem. And you’ll know how much you’ve ended up spending on items you don’t really need. Segregate the fixed and variable expenditure. While there’s not much you can do with the former, you can easily fine-tune your variable expenditure.
Contingency fund is a must: Financial emergencies such as loss of employment, illness in the family, accidents etc can spring up unpleasant surprises just anytime. You need a contingency fund that can take care of sudden financial needs. Opines Shah, "Keep aside three to six months of your income for emergencies. And you won’t have to dip into your savings in case of a financial crisis."
Stick to your budget, review regularly: Creating a budget is easy but its hard to stick to it. Ascertain each time how closer you have been to your laid out plan. Make necessary changes wherever needed, fine tune and stick to your budget always come what may. Do a review to find out how far you’re on track and whether there is a diversion at all. If yes, make up for the same in the next month and soon you’ll be on the right track to achieving your goals.
A financial budget can help you set your finances in order. It’s all about personal finance. And it’ll help you allocate your income appropriately among your needs, wants and desires enabling you to meet your financial goals easily.Here’s how NRIs can go about managing their finances:
Ascertain your total income: Jot down all your sources of income. Apart from your regular employment, your part time jobs, dividends, interest income from investments are all sources of income. Total them all.
Save atleast 20% to 30% of your gross income: Says Kairav Shah, Vice President, Personal Finance, Apnaloan.com, “Make it a point to set aside 20% to 30% of your total monthly income towards savings always. Leave this money untouched. And depending on your age, goals and risk profile invest this amount in mutual funds, equities, fixed income among others.” But then do you have a good support system in place? For instance if you’re living in places like Australia wherein children’s education, retirement, health are supported by the government there’s not much to worry. States Shah, “If you’re covered under a social security in whichever country you reside, you may reduce the said percent by about 5%.”
Buy property at the earliest: NRIs, buy a home at the earliest wherever you stay outside India. Opines Shah, “Most NRIs make the biggest mistake of not buying a home in the foreign country they stay and continue to live in rented apartments for long periods. You must consider buying a home at the earliest. This is because over a period of time property gets expensive, and if you continue to wait, back home too you’ll not be in a position to buy on your return after several years since by then the same may get unaffordable. You’d lose out both ways.” Besides real estate investment in India is important too.
Are you spending on a need or a want? Paying up your monthly rent, electricity and grocery bills are all needs you can’t do without. But you can surely cut down on your several outings at expensive restaurants and shopping sprees that burn a deep hole in your pocket. With several malls around convenience is in, no doubt. But think. Are you buying goods that you really need or are you following herd mentality? Have you used that food processor you bought last Christmas or is it still lying in a sealed pack in the corner of your kitchen unused? Analyse your past purchases and you’ll know your spending habits.
Put off impulse purchases: Do you go berserk when you hear of heavy discount offers, free gifts and cashback schemes. Stop! Simply put off impulse buying. That buy-one get-one free offer may not be as good as it seems. Besides, give a thought – do you really Need that shirt now or do you Want it because it simply appears to be a good offer?
Follow the 60:30:10 ratio: Try maintaining a ratio of 60:30:10 between your needs, wants and desires. Maintain a list of each of your expenses howsoever insignificant they may seem. And you’ll know how much you’ve ended up spending on items you don’t really need. Segregate the fixed and variable expenditure. While there’s not much you can do with the former, you can easily fine-tune your variable expenditure.
Contingency fund is a must: Financial emergencies such as loss of employment, illness in the family, accidents etc can spring up unpleasant surprises just anytime. You need a contingency fund that can take care of sudden financial needs. Opines Shah, "Keep aside three to six months of your income for emergencies. And you won’t have to dip into your savings in case of a financial crisis."
Stick to your budget, review regularly: Creating a budget is easy but its hard to stick to it. Ascertain each time how closer you have been to your laid out plan. Make necessary changes wherever needed, fine tune and stick to your budget always come what may. Do a review to find out how far you’re on track and whether there is a diversion at all. If yes, make up for the same in the next month and soon you’ll be on the right track to achieving your goals.
Lease your second house as a serviced apartment
Did you know that your vacant apartment can earn some money for you and, that too without having to rent it out? Lot of people who buy residential property in other cities for the sake of investment are often wary of renting it out to some unknown tenants. The common fear is that the tenant may lock into a long-term contract and ultimately cause problems when asked to vacate the property. If this is what is keeping you from renting your property, then you can look at serviced apartments as an investment avenue.
A serviced apartment is often a fullyfurnished accommodation which is available for short-term or long-term stays. These apartments come with basic amenities for daily use, which include a kitchen with cooking range, kettle , microwave, a washing machine etc. If you don't want to cook or do the routine chores, you can even sign up for a complementary breakfast, laundry etc.
The concept of serviced apartments was started in the US and was adapted in India by the early 2000s, as more and more expatriates started to live in India for a medium-term period. The concept was easy to handle as India has a legacy of high-quality services and excellent hospitality. "Most obviously, the concept was implemented first in locations like Delhi, Mumbai, Bangalore and Chennai .
The market segmentation for the same is almost entirely corporate, who engage serviced apartments for their managerial staff and long-stay expatriates . Key demand drivers for service apartments are IT/ITeS, biotechnology, services sector, BFSI and medical tourism . Even while the concept of serviced apartments is well understood, the actual number of serviced apartments is fewer than the actual market potential in India," says Shveta Jain, director , Residential Services, India, Cushman & Wakefield .
Rising demand
"The concept of serviced apartments works very well in the metros and larger tier-II cities, where starred hotels are notoriously overpriced. Serviced apartments are the emerging trend in the corporate hospitality sector. Often, the executive traffic of many MNC and domestic companies is too erratic to justify a standalone company guesthouse," says Badal Yagnik, managing director, Chennai & Coimbatore , Jones Lang LaSalle India. Also, the needs of such business occupants are very different from those of the usual hotel occupants.
Serviced apartments, which invariably offer a suitable 4-star service and facilitation level, are the natural choice. "Serviced apartments offer business travellers facilities such as fully-equipped kitchens with self-catering facilities and various bedroom choices, and are far more costeffective than hotels in the vicinity of workplace hubs," Yagnik adds.
How to tap the right clients?
There are a number of operators whom you can engage to run a serviced apartment . This will help you to reach out to the right clients and improve the flow of customers and your business. "Economic viability can be achieved by engaging the services of an expert who can take away your headache of finding potential takers and run the business for you. The nature of operations and design, of course, are totally different for an individual to attain economic viability on his own.
Alternatively, an individual could market the serviced apartment by approaching the administration /human resources department of companies in the surrounding areas. Another marketing initiative could be the choice of various property websites which have a separate segment for listing service apartments. One can also create a website, which can target a larger audience looking for service apartments," Jain adds.
Location is key
With a booming economy and IT and ITeS sectors being in demand, a growing number of expat professionals are looking to oversee business operations in India. And this is exactly the fraternity that is pushing the growing demand for service apartments in India. "There is a good demand for well-run serviced apartments in India, particularly in the six major metros in India which can easily absorb the current supply of service apartments.
There is substantial potential for this market to grow, though the base is pretty small right now, particularly due to the services sector and increased penetration in not just primary, but secondary and tertiary markets as well," says Jain. "The concept works best in businessoriented cities. The best locations are in and around the city's CBD and SBD areas. Currently, India's highest demand and rate of development in serviced apartments is in Bangalore, Pune, Mumbai, Delhi, Chennai and Hyderabad," Yagnik adds.
Service apartments vs hotels
Serviced apartments are 20% cheaper vis-à-vis hotels for longer stays. Hence, many companies opt for serviced apartments for a medium-to-long-term stay for their employees. A company wanting to house a large number of its employees on a four-month training programme in a metropolitan city would opt for serviced apartments, as the cost of a star hotel would be prohibitive. Similarly, employers look at serviced apartments for expatriate relocation where the quality of housing is a key concern.
A serviced apartment is often a fullyfurnished accommodation which is available for short-term or long-term stays. These apartments come with basic amenities for daily use, which include a kitchen with cooking range, kettle , microwave, a washing machine etc. If you don't want to cook or do the routine chores, you can even sign up for a complementary breakfast, laundry etc.
The concept of serviced apartments was started in the US and was adapted in India by the early 2000s, as more and more expatriates started to live in India for a medium-term period. The concept was easy to handle as India has a legacy of high-quality services and excellent hospitality. "Most obviously, the concept was implemented first in locations like Delhi, Mumbai, Bangalore and Chennai .
The market segmentation for the same is almost entirely corporate, who engage serviced apartments for their managerial staff and long-stay expatriates . Key demand drivers for service apartments are IT/ITeS, biotechnology, services sector, BFSI and medical tourism . Even while the concept of serviced apartments is well understood, the actual number of serviced apartments is fewer than the actual market potential in India," says Shveta Jain, director , Residential Services, India, Cushman & Wakefield .
Rising demand
"The concept of serviced apartments works very well in the metros and larger tier-II cities, where starred hotels are notoriously overpriced. Serviced apartments are the emerging trend in the corporate hospitality sector. Often, the executive traffic of many MNC and domestic companies is too erratic to justify a standalone company guesthouse," says Badal Yagnik, managing director, Chennai & Coimbatore , Jones Lang LaSalle India. Also, the needs of such business occupants are very different from those of the usual hotel occupants.
Serviced apartments, which invariably offer a suitable 4-star service and facilitation level, are the natural choice. "Serviced apartments offer business travellers facilities such as fully-equipped kitchens with self-catering facilities and various bedroom choices, and are far more costeffective than hotels in the vicinity of workplace hubs," Yagnik adds.
How to tap the right clients?
There are a number of operators whom you can engage to run a serviced apartment . This will help you to reach out to the right clients and improve the flow of customers and your business. "Economic viability can be achieved by engaging the services of an expert who can take away your headache of finding potential takers and run the business for you. The nature of operations and design, of course, are totally different for an individual to attain economic viability on his own.
Alternatively, an individual could market the serviced apartment by approaching the administration /human resources department of companies in the surrounding areas. Another marketing initiative could be the choice of various property websites which have a separate segment for listing service apartments. One can also create a website, which can target a larger audience looking for service apartments," Jain adds.
Location is key
With a booming economy and IT and ITeS sectors being in demand, a growing number of expat professionals are looking to oversee business operations in India. And this is exactly the fraternity that is pushing the growing demand for service apartments in India. "There is a good demand for well-run serviced apartments in India, particularly in the six major metros in India which can easily absorb the current supply of service apartments.
There is substantial potential for this market to grow, though the base is pretty small right now, particularly due to the services sector and increased penetration in not just primary, but secondary and tertiary markets as well," says Jain. "The concept works best in businessoriented cities. The best locations are in and around the city's CBD and SBD areas. Currently, India's highest demand and rate of development in serviced apartments is in Bangalore, Pune, Mumbai, Delhi, Chennai and Hyderabad," Yagnik adds.
Service apartments vs hotels
Serviced apartments are 20% cheaper vis-à-vis hotels for longer stays. Hence, many companies opt for serviced apartments for a medium-to-long-term stay for their employees. A company wanting to house a large number of its employees on a four-month training programme in a metropolitan city would opt for serviced apartments, as the cost of a star hotel would be prohibitive. Similarly, employers look at serviced apartments for expatriate relocation where the quality of housing is a key concern.
'Focus on the entire portfolio, not just equity'
Vetri Subramaniam
Age: 41 years
Qualification: B.Com, PGDM (IIM Bangalore)
Current position: Head, Equity Funds, Religare Mutual Fund
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What is the Vetri Subramaniam way of investing?
I don't have a bias in terms of growth or value orientation. To be able to create alpha, it is important to have a large, in-house research-driven process. This should be combined with a disciplined framework in terms of fund management.
What factors do you consider while choosing a stock?
I am uncomfortable with companies that tend to raise capital and dilute frequently. The best firms are those that need little and infrequent capital infusion and are self-sustaining. The company should either generate a healthy return on capital and equity, or indicate clearly that in the future, it will be able to deliver an economical return on the capital.
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How do you prioritise your investing goals?
The premise on which we offer our funds is that we will outperform the benchmark. So, more than anything else, we are guided by our alpha relative to the benchmark.
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Which has been your best decision?
Avoiding the infrastructure sector in late 2007-8 turned out to be a good proposition because the valuations were very unattractive at that point of time.
....and your worst decision?
Missing out on the commodity upcycle, which played out from 2002 to 2007. I regret not having participated in it well enough.
Age: 41 years
Qualification: B.Com, PGDM (IIM Bangalore)
Current position: Head, Equity Funds, Religare Mutual Fund
What is the Vetri Subramaniam way of investing?
I don't have a bias in terms of growth or value orientation. To be able to create alpha, it is important to have a large, in-house research-driven process. This should be combined with a disciplined framework in terms of fund management.
What factors do you consider while choosing a stock?
I am uncomfortable with companies that tend to raise capital and dilute frequently. The best firms are those that need little and infrequent capital infusion and are self-sustaining. The company should either generate a healthy return on capital and equity, or indicate clearly that in the future, it will be able to deliver an economical return on the capital.
The premise on which we offer our funds is that we will outperform the benchmark. So, more than anything else, we are guided by our alpha relative to the benchmark.
Which has been your best decision?
Avoiding the infrastructure sector in late 2007-8 turned out to be a good proposition because the valuations were very unattractive at that point of time.
....and your worst decision?
Missing out on the commodity upcycle, which played out from 2002 to 2007. I regret not having participated in it well enough.
Private banking: Easy banking for high net worth individuals
Private banking is personalised financial and banking services offered to a bank's high net worth individuals (HNIs). In India, it is offered by foreign banks and a few private sector banks. Banks like Citibank , Standard Chartered , HSBC , HDFC , ICICI and the likes offer such services.
The main advantage of private banking is that a dedicated relationship manager is assigned to the customer who takes care of all his/her banking and financial needs. Be it a simple thing like wanting cash delivered at your doorstep, or complex financial planning for your kids, or your retirement, drafting a will, investing short-term surplus money, or buying a complex structured product - all of it is taken care of by the private banker.
Private banking is offered to high net worth customers. Depending on the perception of your financial wealth, the bank would offer you these services.
Different banks have different norms for customers eligible for such services. Some banks offer private banking to clients with 30 lakh investible surplus, while some others give them to those with 1 crore and above.
Your wealth would include things like fixed deposits, your investments in mutual funds, the balance in your savings account and so on.
The private banker helps you in all your banking and wealth management needs. To start with, the banker has to understanding the customer. So a private banker has initial meetings with the client to understand his/her risk profile, cash flows, needs and wants.
Based on the details obtained from such meetings, he develops an asset-allocation ratio for the client.
Using this model, he allocates the client's wealth into various assets that he feels opportune, such as equities, debt or real estate.
Within each category, he offers various products. Once a portfolio is restructured and built, it is monitored on a monthly or quarterly basis. The private banker comes up with appropriate strategies to enhance returns from the portfolio.
A private banker's role is to anticipate and understand client needs and to help achieve his immediate and long-term wealth goals. So whether you run a business, or are employed or a professional, a private banker should be able to help you.
The main advantage of private banking is that a dedicated relationship manager is assigned to the customer who takes care of all his/her banking and financial needs. Be it a simple thing like wanting cash delivered at your doorstep, or complex financial planning for your kids, or your retirement, drafting a will, investing short-term surplus money, or buying a complex structured product - all of it is taken care of by the private banker.
Private banking is offered to high net worth customers. Depending on the perception of your financial wealth, the bank would offer you these services.
Different banks have different norms for customers eligible for such services. Some banks offer private banking to clients with 30 lakh investible surplus, while some others give them to those with 1 crore and above.
Your wealth would include things like fixed deposits, your investments in mutual funds, the balance in your savings account and so on.
The private banker helps you in all your banking and wealth management needs. To start with, the banker has to understanding the customer. So a private banker has initial meetings with the client to understand his/her risk profile, cash flows, needs and wants.
Based on the details obtained from such meetings, he develops an asset-allocation ratio for the client.
Using this model, he allocates the client's wealth into various assets that he feels opportune, such as equities, debt or real estate.
Within each category, he offers various products. Once a portfolio is restructured and built, it is monitored on a monthly or quarterly basis. The private banker comes up with appropriate strategies to enhance returns from the portfolio.
A private banker's role is to anticipate and understand client needs and to help achieve his immediate and long-term wealth goals. So whether you run a business, or are employed or a professional, a private banker should be able to help you.
Financial planning: Faster way to reach you goals
Rahul Somani, 33, has been investing whenever he has had surplus money. His modus operandi till recently was something like this: he would consult his friends working in financial institutions, ask them for stock tips or recommendations to invest his surplus cash. Often, he would also subscribe to a new fund offer (NFO) of a mutual fund, sold to him by his mutual fund agent.
This continued for almost five years. Since his expenses were taken care of by his salary, Rahul was not really worried about how his investments were doing.
Last year, he zeroed in on his dream house and sat down to calculate his savings to make an upfront payment for the property. To his shock, he found it difficult to estimate how much he had invested and what was the returns he got. While some of the shares he bought had dipped almost 80% from the levels he had bought at, some mutual funds did not perform as he had anticipated. Rahul then realised his finances were in a mess, and he had no clue where he was heading with his investments. It was then that Rahul realised he didn't have a financial plan to begin with.
The need for a financial plan
Many individuals like Rahul do not have a clear picture about their finances. While we do have some basic goals, like our kids' education, buying a house and retirement, in mind, the point is they are not well documented.
"If things are in the air, you will end up being emotional and try to time the markets," says Sumeet Vaid , founder, Ffreedom Financial Planners . "Once you have a plan for yourself, it works much better as you go by what is written down and well documented."
Simply put, a financial plan is a budget for spending and saving for future income.
Financial experts reckon that every individual should have a financial plan. "In fact, before you start investing even a rupee, you should make a financial plan for yourself," says Vishal Dhawan , founder, Plan Ahead Wealth Advisors.
Financial planning allows you to ensure you will have funds available to meet your present and future needs.
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"As we age, expenses tend to increase - from kids who want toys, to teens who want cars and need tuition, to being an adult, buying a home, a car," says K Ramalingam, a Bangalore-based certified financial planner. In addition, we often find unexpected things happening all the time, like a medical emergency. So, being financially ready for such things makes life much easier. Once you have a financial plan, a lot of financial issues smooth out.
People who don't plan often find themselves living from this month's salary to the next month's or struggling to come up with money in case of an unexpected situation
This continued for almost five years. Since his expenses were taken care of by his salary, Rahul was not really worried about how his investments were doing.
Last year, he zeroed in on his dream house and sat down to calculate his savings to make an upfront payment for the property. To his shock, he found it difficult to estimate how much he had invested and what was the returns he got. While some of the shares he bought had dipped almost 80% from the levels he had bought at, some mutual funds did not perform as he had anticipated. Rahul then realised his finances were in a mess, and he had no clue where he was heading with his investments. It was then that Rahul realised he didn't have a financial plan to begin with.
The need for a financial plan
Many individuals like Rahul do not have a clear picture about their finances. While we do have some basic goals, like our kids' education, buying a house and retirement, in mind, the point is they are not well documented.
"If things are in the air, you will end up being emotional and try to time the markets," says Sumeet Vaid , founder, Ffreedom Financial Planners . "Once you have a plan for yourself, it works much better as you go by what is written down and well documented."
Simply put, a financial plan is a budget for spending and saving for future income.
Financial experts reckon that every individual should have a financial plan. "In fact, before you start investing even a rupee, you should make a financial plan for yourself," says Vishal Dhawan , founder, Plan Ahead Wealth Advisors.
Financial planning allows you to ensure you will have funds available to meet your present and future needs.
"As we age, expenses tend to increase - from kids who want toys, to teens who want cars and need tuition, to being an adult, buying a home, a car," says K Ramalingam, a Bangalore-based certified financial planner. In addition, we often find unexpected things happening all the time, like a medical emergency. So, being financially ready for such things makes life much easier. Once you have a financial plan, a lot of financial issues smooth out.
People who don't plan often find themselves living from this month's salary to the next month's or struggling to come up with money in case of an unexpected situation
Have a budget, stick to it to escape debt trap
They are young. They are smart. At least that is what they believe. And, they are in debt. However, they don't think there is any need to seek someone's counselling. The general refrain seems to be: Who wants to listen to the same old save-for-arainy-day cliche? In fact, that is exactly what Arun (name changed) means when he says he doesn't believe in hoarding money. He is a youngster working in the BPO sector. He and his friends, all in their early 20s, have some form of debt - EMI for bikes, credit card payments and so on. On certain occasions, they feel the burden of debt, but otherwise they are managing well. Thank you.
Trapped In Debt
"We had a few youngsters who were perpetually in debt," says Suresh Sadagopan, chief financial planner, Ladder 7 Financial Advisories. "They didn't think it is important to clear off the debt. After repeated sessions, we figured out they are not mentally prepared to clear the mess," he says. "Eventually, we had to let them go because there was no point in trying to drive home the same point." "There is a section of people that believes it knows all," says Sumeet Vaid, founder, Ffreedom Financial Planners, which helps people with financial management. "These are educated people with family backgrounds where money was discussed. It is a clear case of a little knowledge becoming very dangerous," he says.
"Another set of people has deep mistrust when it comes to listening to anyone on financial matters. This could be because of a negative thought process or due to some deep-rooted psychological issues." According to Gaurav Mashruwala, a certified financial planner, "Most people don't realise the kind of turbulence servicing debt can cause in their lives. They think they can go on repaying without ever having to bother about the uncertainties in the future." Financial experts have many stories - some funny, some sad -to recount about these people. "Earlier, when people used to come to financial advisors, they would have some money in their account. These days, they have only debt," laughs a financial advisor, who doesn't want to be named.
"I asked this young guy how he managed to run up so much debt and he said his friends have done 'even better'." Needless to say, the guy didn't believe in tightening his belt (another oldfashioned expression) and parted company with the advisor. Another sob story is about a couple who had huge debt but refused to listen to the advice of their financial planner, who suggested they repay more rather than invest money in the stock market. "Sadly for the couple, the market fell drastically and one of them also lost the job during the economic slowdown in 2008," says the planner.
Some Things Never Change
Even if one studiously cuts out worn-out expressions like 'saving for the rainy day', 'tightening the belt' and so on, one cannot emphasise enough the importance of certain rules of money management, say experts. Sure, depending on the expert, the tools may differ. Some may run you through an excel sheet or a powerpoint presentation and give you numbers for saving, investment, holiday, etc. However, the basics remain the same. And one such basic is having a budget. "Prepare a budget and follow it religiously," says Vaid.
"When you try to stay within a budget, certain numbers would call for your attention. That will tell you whether you are stretching yourself unnecessarily or for a genuine reason," says Sadagopan. The next step is to identify major financial goals in your life, such as buying a home, child's education, your retirement, and so on. "Prioritise your goals and try to quantify them," says Vaid of Ffreedom Financial Planners. Simply put, you should project how much money you need to take care of your financial milestones many years away from now. You should always use the actual numbers and inflate them by a certain percentage to account for inflation over a period of time.
This will give you a clear idea of how much you have to save and how much you should earn to reach the target figure. This, in a way, will also help you to decide on the investment vehicle. For example, if your target corpus requires double-digit returns, you have to think of taking extra risk and investing in the stock market. If you need to grow your money at a smaller pace (in other words, you have lots of money to invest), then you don't have to take any risk and invest in safer avenues liked fixed-income instruments.
Tackling Debt
Now, you would probably wonder why these experts are talking about the need for a budget and identifying financial goals when you are actually troubled by debt. Well, the exercise would help you realise whether your debt is within manageable limits. For example, if you are really neck-deep in debt, it is very unlikely that you will stay within your budget or will have enough money to invest for your financial goals. "If you are going to repay your debt for 10 or 15 years, it is very unlikely that you wouldn't have a situation where you would find it impossible to service it. The reasons could be beyond your control. For example, it could be a career change, family crisis, medical emergency...," says Mashruwala.
"The so-called smart dudes of the new generation think they have a salary of 13 months, as they can roll over money for a month with their credit cards. But spending with your credit cards requires higher discipline. This is because it is easy to fall into the debt trap if you don't clear your dues every month," says Vaid. According to Sadagopan, all one needs to do is to ask whether you actually need a credit before you go for it. "You should take a loan only if there is no way out. It has to be need-based." Sorry, it may sound old-fashioned, but this is the only way to distinguish good and bad credit. For example, if you are taking a loan to tide over an unexpected financial crisis, it is fine. But it is definitely not cool if you are taking an expensive loan to buy an LED TV.
Another tricky area is to figure out whether one should continue with regular investments when one is faced with huge debt. "You should be able to take a call on it. For example, there is no point in earning 8% in an FD when you are paying 30% interest on your debt," says Sadagopan. "It all boils down to the planner or advisor. You can, for instance, take a more humane approach and decide whether you should aggressively repay your debt or have some legroom for comfort," says Mashruwala.
Trapped In Debt
"We had a few youngsters who were perpetually in debt," says Suresh Sadagopan, chief financial planner, Ladder 7 Financial Advisories. "They didn't think it is important to clear off the debt. After repeated sessions, we figured out they are not mentally prepared to clear the mess," he says. "Eventually, we had to let them go because there was no point in trying to drive home the same point." "There is a section of people that believes it knows all," says Sumeet Vaid, founder, Ffreedom Financial Planners, which helps people with financial management. "These are educated people with family backgrounds where money was discussed. It is a clear case of a little knowledge becoming very dangerous," he says.
"Another set of people has deep mistrust when it comes to listening to anyone on financial matters. This could be because of a negative thought process or due to some deep-rooted psychological issues." According to Gaurav Mashruwala, a certified financial planner, "Most people don't realise the kind of turbulence servicing debt can cause in their lives. They think they can go on repaying without ever having to bother about the uncertainties in the future." Financial experts have many stories - some funny, some sad -to recount about these people. "Earlier, when people used to come to financial advisors, they would have some money in their account. These days, they have only debt," laughs a financial advisor, who doesn't want to be named.
"I asked this young guy how he managed to run up so much debt and he said his friends have done 'even better'." Needless to say, the guy didn't believe in tightening his belt (another oldfashioned expression) and parted company with the advisor. Another sob story is about a couple who had huge debt but refused to listen to the advice of their financial planner, who suggested they repay more rather than invest money in the stock market. "Sadly for the couple, the market fell drastically and one of them also lost the job during the economic slowdown in 2008," says the planner.
Some Things Never Change
Even if one studiously cuts out worn-out expressions like 'saving for the rainy day', 'tightening the belt' and so on, one cannot emphasise enough the importance of certain rules of money management, say experts. Sure, depending on the expert, the tools may differ. Some may run you through an excel sheet or a powerpoint presentation and give you numbers for saving, investment, holiday, etc. However, the basics remain the same. And one such basic is having a budget. "Prepare a budget and follow it religiously," says Vaid.
"When you try to stay within a budget, certain numbers would call for your attention. That will tell you whether you are stretching yourself unnecessarily or for a genuine reason," says Sadagopan. The next step is to identify major financial goals in your life, such as buying a home, child's education, your retirement, and so on. "Prioritise your goals and try to quantify them," says Vaid of Ffreedom Financial Planners. Simply put, you should project how much money you need to take care of your financial milestones many years away from now. You should always use the actual numbers and inflate them by a certain percentage to account for inflation over a period of time.
This will give you a clear idea of how much you have to save and how much you should earn to reach the target figure. This, in a way, will also help you to decide on the investment vehicle. For example, if your target corpus requires double-digit returns, you have to think of taking extra risk and investing in the stock market. If you need to grow your money at a smaller pace (in other words, you have lots of money to invest), then you don't have to take any risk and invest in safer avenues liked fixed-income instruments.
Tackling Debt
Now, you would probably wonder why these experts are talking about the need for a budget and identifying financial goals when you are actually troubled by debt. Well, the exercise would help you realise whether your debt is within manageable limits. For example, if you are really neck-deep in debt, it is very unlikely that you will stay within your budget or will have enough money to invest for your financial goals. "If you are going to repay your debt for 10 or 15 years, it is very unlikely that you wouldn't have a situation where you would find it impossible to service it. The reasons could be beyond your control. For example, it could be a career change, family crisis, medical emergency...," says Mashruwala.
"The so-called smart dudes of the new generation think they have a salary of 13 months, as they can roll over money for a month with their credit cards. But spending with your credit cards requires higher discipline. This is because it is easy to fall into the debt trap if you don't clear your dues every month," says Vaid. According to Sadagopan, all one needs to do is to ask whether you actually need a credit before you go for it. "You should take a loan only if there is no way out. It has to be need-based." Sorry, it may sound old-fashioned, but this is the only way to distinguish good and bad credit. For example, if you are taking a loan to tide over an unexpected financial crisis, it is fine. But it is definitely not cool if you are taking an expensive loan to buy an LED TV.
Another tricky area is to figure out whether one should continue with regular investments when one is faced with huge debt. "You should be able to take a call on it. For example, there is no point in earning 8% in an FD when you are paying 30% interest on your debt," says Sadagopan. "It all boils down to the planner or advisor. You can, for instance, take a more humane approach and decide whether you should aggressively repay your debt or have some legroom for comfort," says Mashruwala.
Thursday, July 14, 2011
ETFs are an ideal hedge in a multi-class-asset portfolio
Exchange Traded Funds (ETF) as an investment basket come with some unique features that make them an ideal avenue for hedging an existing equity or a multi-asset-class portfolio.
The key attribute is a defined set of rules that determine the composition of an ETF or the underlying index. ETFs, therefore, fall into any of the parameters that define market sectors or asset classes. For example, banking sector ETF, gold ETF, or the more exotic re-weighted broad market ETF and foreign ETF.
Characteristics Of A Hedge
Before we get into the characteristics of a hedge we must first define what a hedge is. Investopedia defines a hedge thus: "Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security." This forms a simple hedge where an investor takes an offsetting position in a derivative contract. However, given the complexity and leveraging effect of derivatives, these are not suitable for all investors. A better approach to portfolio hedging would be to use a correlation based hedge, in instruments (like ETFs), which the investor is comfortable with. Unlike a normal investment objective, the importance of a hedge is simply to protect against downside risk. This can be achieved by using weakly correlated assets or some that are weakly/negatively correlated. An example of this kind of hedging is to use investment portfolios from different geographies like India and the US. The longterm and intermediate term correlation between the Indian large-cap index, the Nifty, and the growth NASDAQ-100 Index is between Rs 25 to Rs 27 depending on the exchange rate used and interpolation techniques to align the two data sets.
An Example
A sample portfolio is constructed by taking an equal proportion of the NIFTY (via any Nifty ETF) and using a NASDAQ-100 ETF such as MOSt Shares NASDAQ 100. The portfolio is denominated in Indian Rupees, hence, is not a currency hedged investment. The portfolio is rebalanced exactly once every year to equalise the proportion of the Nifty and NASDAQ-100. As the weak correlation comes into play and the two indices, being high growth, do not move up or down in tandem, the volatility that the investor is subjected to gets reduced. This, in turn, reduces the drawdowns (except in extreme market conditions like the bursting of the tech bubble in the early naughties). The rebalancing has the precise effect of profit-booking, thereby preventing downside risk post a high-growth period. In the simulation that was run for the above example, for the 15-year period from February 1995 to February 2011, the Nifty gave annualised returns of 11.7%, the NASDAQ-100 returned 14.7% and the sample portfolio returned about 15.5% and that too at lower volatility.
Conclusion
While this example looks at two indices, ETFs can be used to hedge any actively managed, stock selection portfolio. Additionally, using some of the commodity/metals ETFs, inflation (which has a direct bearing on commodity prices) can be hedged. Interest rate positions can be managed by using fixed-income or money market portfolios.
(Nitin Rakesh, MD& CEO, Motilal Oswal AMC)
The key attribute is a defined set of rules that determine the composition of an ETF or the underlying index. ETFs, therefore, fall into any of the parameters that define market sectors or asset classes. For example, banking sector ETF, gold ETF, or the more exotic re-weighted broad market ETF and foreign ETF.
Characteristics Of A Hedge
Before we get into the characteristics of a hedge we must first define what a hedge is. Investopedia defines a hedge thus: "Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security." This forms a simple hedge where an investor takes an offsetting position in a derivative contract. However, given the complexity and leveraging effect of derivatives, these are not suitable for all investors. A better approach to portfolio hedging would be to use a correlation based hedge, in instruments (like ETFs), which the investor is comfortable with. Unlike a normal investment objective, the importance of a hedge is simply to protect against downside risk. This can be achieved by using weakly correlated assets or some that are weakly/negatively correlated. An example of this kind of hedging is to use investment portfolios from different geographies like India and the US. The longterm and intermediate term correlation between the Indian large-cap index, the Nifty, and the growth NASDAQ-100 Index is between Rs 25 to Rs 27 depending on the exchange rate used and interpolation techniques to align the two data sets.
An Example
A sample portfolio is constructed by taking an equal proportion of the NIFTY (via any Nifty ETF) and using a NASDAQ-100 ETF such as MOSt Shares NASDAQ 100. The portfolio is denominated in Indian Rupees, hence, is not a currency hedged investment. The portfolio is rebalanced exactly once every year to equalise the proportion of the Nifty and NASDAQ-100. As the weak correlation comes into play and the two indices, being high growth, do not move up or down in tandem, the volatility that the investor is subjected to gets reduced. This, in turn, reduces the drawdowns (except in extreme market conditions like the bursting of the tech bubble in the early naughties). The rebalancing has the precise effect of profit-booking, thereby preventing downside risk post a high-growth period. In the simulation that was run for the above example, for the 15-year period from February 1995 to February 2011, the Nifty gave annualised returns of 11.7%, the NASDAQ-100 returned 14.7% and the sample portfolio returned about 15.5% and that too at lower volatility.
Conclusion
While this example looks at two indices, ETFs can be used to hedge any actively managed, stock selection portfolio. Additionally, using some of the commodity/metals ETFs, inflation (which has a direct bearing on commodity prices) can be hedged. Interest rate positions can be managed by using fixed-income or money market portfolios.
(Nitin Rakesh, MD& CEO, Motilal Oswal AMC)
Can a foreigner working in India withdraw Provident Fund?
Mr. John, an employee of a US company has received an offer from his employer for a two year assignment to India. The salary and assignment benefits offered by the employer look very attractive and John is contemplating accepting the offer.
However, the immediate questions which pop up in his mind regarding social security are: Is he required to contribute towards social security in India? If yes, is there any exemption available from contributing towards social security in India as he intends to continue contributing towards social security in US?
Can he withdraw the balance lying to the credit of his social security account in India on completion of his Indian assignment and whether the balance can be credited to his bank account outside India? All questions are obvious for a person being deputed to a foreign country.
Till a couple of years ago, the simple answer to all these questions was 'No worries. Foreign nationals being deputed to India were not required to contribute to the Indian social security'. Since November 2008, the position has been reversed and foreign nationals who qualify as International Workers (IWs) are required to contribute towards social security in India.
The definition of the term IW includes individuals not holding an India passport and working for an establishment in India to which the Employee Provident Fund (EPF) Act applies. An IW from a country with which India has signed a Social Security Agreement (SSA) may contribute towards social security only in his home country by obtaining the 'Certificate of Coverage'.
An SSA is a bilateral instrument between two countries to protect the social security interests of workers of one country posted in the other country. It generally provides for equality of treatment and avoidance of double coverage. India has been active in signing up SSAs with many countries. As of date, SSAs with Belgium, Germany, Switzerland, France and Luxembourg have come into force.
As per the current social security provisions in India, withdrawal of Provident Fund (PF) is possible in two scenarios: where an IW is covered under a SSA, withdrawal is permitted as per the provisions of the relevant SSA. Otherwise, an IW can withdraw PF amount when he retires or reaches the age of 58 years,
whichever is later.
Exceptions to the above rule have been specified including, retirement on account of permanent and total incapacity for work or on suffering from tuberculosis, leprosy or cancer.
Also, where an IW is covered under a SSA, withdrawal proceeds may be credited to his bank account outside India based on the terms of the SSA. In case an IW is not covered under a SSA, the amount shall only be credited to his bank account in India.
Earlier, foreign nationals were required to close their bank accounts in India at the time of repatriation from India. However, the Reserve Bank of India has recently permitted the foreign nationals to maintain the bank accounts in India to collect their pending dues in India
However, the immediate questions which pop up in his mind regarding social security are: Is he required to contribute towards social security in India? If yes, is there any exemption available from contributing towards social security in India as he intends to continue contributing towards social security in US?
Can he withdraw the balance lying to the credit of his social security account in India on completion of his Indian assignment and whether the balance can be credited to his bank account outside India? All questions are obvious for a person being deputed to a foreign country.
Till a couple of years ago, the simple answer to all these questions was 'No worries. Foreign nationals being deputed to India were not required to contribute to the Indian social security'. Since November 2008, the position has been reversed and foreign nationals who qualify as International Workers (IWs) are required to contribute towards social security in India.
The definition of the term IW includes individuals not holding an India passport and working for an establishment in India to which the Employee Provident Fund (EPF) Act applies. An IW from a country with which India has signed a Social Security Agreement (SSA) may contribute towards social security only in his home country by obtaining the 'Certificate of Coverage'.
An SSA is a bilateral instrument between two countries to protect the social security interests of workers of one country posted in the other country. It generally provides for equality of treatment and avoidance of double coverage. India has been active in signing up SSAs with many countries. As of date, SSAs with Belgium, Germany, Switzerland, France and Luxembourg have come into force.
As per the current social security provisions in India, withdrawal of Provident Fund (PF) is possible in two scenarios: where an IW is covered under a SSA, withdrawal is permitted as per the provisions of the relevant SSA. Otherwise, an IW can withdraw PF amount when he retires or reaches the age of 58 years,
whichever is later.
Exceptions to the above rule have been specified including, retirement on account of permanent and total incapacity for work or on suffering from tuberculosis, leprosy or cancer.
Also, where an IW is covered under a SSA, withdrawal proceeds may be credited to his bank account outside India based on the terms of the SSA. In case an IW is not covered under a SSA, the amount shall only be credited to his bank account in India.
Earlier, foreign nationals were required to close their bank accounts in India at the time of repatriation from India. However, the Reserve Bank of India has recently permitted the foreign nationals to maintain the bank accounts in India to collect their pending dues in India
Appoint a nominee, avoid future conflicts
When you opened a bank account, a demat account or made some investment, you would have come across a column on nomination.
You may have skipped the column because you didn't have a photograph, necessary documents or the patience to read through the entire form before parking your money in that investment. But what many don't realise is that nomination is important.
A nomination gives the nominee - usually a family member - a rightful claim to your hardearned money, especially at the time when they have a pressing liquidity need. Also, not every investment works like a term insurance, which ensures that your family gets the benefit after your life time. If you have not filled up the nomination form, don't fret.
It is never too late to go back to the bank, the company or the AMC to fill in those details. They have a separate form for nomination, which can be filled up even after you have made the investment.
THE IMPORTANCE OF A NOMINEE
Every bank account holder, investor or owner of any immovable asset should have a nominee. It is not necessary that the nominee of the bank account, asset or investment has to be the final beneficiary. The nominee will be the custodian of the account after the death of the actual investor/ account holder.
"It is not the bank or the AMC's prerogative to ensure every account holder or investor has a nominee. The onus is on the investor to ensure hassle-free transfer of assets after his/her death," says Sandeep Nerlekar , MD & CEO, Warmond Trustee and Executors.
THE PROCESS
The nomination process is very simple. One has to just fill up a form to assign nominees to your bank account/investment. Usually, there is a column on nomination in an application form for opening a bank account or starting an investment.
If you did not fill up the details in the application form, you can still walk up to the bank branch or the company and do the needful. However, the process is a tad different in case of properties. "Typically, a house is in a cooperative housing society and is owned by virtue of owning shares.
These shares can be transferred to the nominee and the ratio of the share ownership has to be mentioned in the share certificate. But, again, this nominee is a mere custodian of the property and not the owner unless stated in the will," says Nerlekar.
CHOOSING A NOMINEE
It is best to choose a major - your grown-up child, spouse or dependent parents - as nominee. Married couples usually choose their spouse as the nominee; some nominate their spouse and children. The assumption here is the child usually lives longer than the spouse or the investor's parents.
"There are situations where a couple separates or the investor's spouse may die unexpectedly. In such cases, the investor has the flexibility to change the nominee. Even a simple change of mind can be a reason for changing the nominee," says Suresh Sadagopan, a certified financial planner with Ladder 7 Financial Advisories .
"Hence, there is no sacrosanct rule that the nominee cannot be changed. Therefore, even if you are uncertain, just fill the nominee details. It can always be changed later if you want."
But, if your nominee is a minor, you have to choose a trustworthy guardian to ensure there is a credible custodian for your assets till your child becomes legally eligible to inherit your wealth.
NOMINEE AND SUCCESSION RIGHT
Does the nominee have succession rights? The answer lies in the nature of investment. "If the investment is in the form of a company bond or equity, the nominee would be the beneficiary of such investments. As per the Companies Act, a nomination always supersedes the will.
For instance, if you nominate your daughter as the nominee for the shares of a particular company held by you, your daughter will be the final beneficiary of the investment after your death. It does not matter even if the will states your son will be the beneficiary of all your investments," says Narlekar.
"However, for all investments falling outside the purview of the Companies Act, such as real estate, bank accounts or mutual funds, the will supersedes the nomination. Hence, ensure the nominee(s) of your various investments and the beneficiary or beneficiaries in the will are the same to avoid confusion or any family feud after your life time," he says.
In short, for all investments except company bonds and equity, nomination does not provide ownership of your assets. The nominee will only be the custodian of the asset till it is given to its beneficiary. To ensure the nominee becomes the final beneficiary, you have to ensure there is a will to bequeath your wealth in a hassle- free manner.
'EITHER OR SURVIVOR' CLAUSE
You can opt for the either/or survival clause, which makes your spouse the natural owner of your investments in case of any unexpected turn of events. This is a viable option especially in case of joint bank accounts or investments. A joint investment/bank account needs signature of both the parties.
If you opt for an 'either or survivor' mode of holding, then transactions can be carried out by either of the individuals. Secondly, if one of the investors/ account holders dies, the transaction is not stopped. It can be carried out by the survivor.
"In case of just a joint holding, the survivor (living individual) has to submit the death certificate of the deceased along with the application to the bank/asset management company. Thus, the 'either or survivor' clause is legally a sound option. You have the option of joint investments as well, but the survivor clause is a good option," says Kartik Jhaveri, a certified financial planner with Transcend India.
vidyalaxmi.v@timesgroup.com
You may have skipped the column because you didn't have a photograph, necessary documents or the patience to read through the entire form before parking your money in that investment. But what many don't realise is that nomination is important.
A nomination gives the nominee - usually a family member - a rightful claim to your hardearned money, especially at the time when they have a pressing liquidity need. Also, not every investment works like a term insurance, which ensures that your family gets the benefit after your life time. If you have not filled up the nomination form, don't fret.
It is never too late to go back to the bank, the company or the AMC to fill in those details. They have a separate form for nomination, which can be filled up even after you have made the investment.
THE IMPORTANCE OF A NOMINEE
Every bank account holder, investor or owner of any immovable asset should have a nominee. It is not necessary that the nominee of the bank account, asset or investment has to be the final beneficiary. The nominee will be the custodian of the account after the death of the actual investor/ account holder.
"It is not the bank or the AMC's prerogative to ensure every account holder or investor has a nominee. The onus is on the investor to ensure hassle-free transfer of assets after his/her death," says Sandeep Nerlekar , MD & CEO, Warmond Trustee and Executors.
THE PROCESS
The nomination process is very simple. One has to just fill up a form to assign nominees to your bank account/investment. Usually, there is a column on nomination in an application form for opening a bank account or starting an investment.
If you did not fill up the details in the application form, you can still walk up to the bank branch or the company and do the needful. However, the process is a tad different in case of properties. "Typically, a house is in a cooperative housing society and is owned by virtue of owning shares.
These shares can be transferred to the nominee and the ratio of the share ownership has to be mentioned in the share certificate. But, again, this nominee is a mere custodian of the property and not the owner unless stated in the will," says Nerlekar.
CHOOSING A NOMINEE
It is best to choose a major - your grown-up child, spouse or dependent parents - as nominee. Married couples usually choose their spouse as the nominee; some nominate their spouse and children. The assumption here is the child usually lives longer than the spouse or the investor's parents.
"There are situations where a couple separates or the investor's spouse may die unexpectedly. In such cases, the investor has the flexibility to change the nominee. Even a simple change of mind can be a reason for changing the nominee," says Suresh Sadagopan, a certified financial planner with Ladder 7 Financial Advisories .
"Hence, there is no sacrosanct rule that the nominee cannot be changed. Therefore, even if you are uncertain, just fill the nominee details. It can always be changed later if you want."
But, if your nominee is a minor, you have to choose a trustworthy guardian to ensure there is a credible custodian for your assets till your child becomes legally eligible to inherit your wealth.
NOMINEE AND SUCCESSION RIGHT
Does the nominee have succession rights? The answer lies in the nature of investment. "If the investment is in the form of a company bond or equity, the nominee would be the beneficiary of such investments. As per the Companies Act, a nomination always supersedes the will.
For instance, if you nominate your daughter as the nominee for the shares of a particular company held by you, your daughter will be the final beneficiary of the investment after your death. It does not matter even if the will states your son will be the beneficiary of all your investments," says Narlekar.
"However, for all investments falling outside the purview of the Companies Act, such as real estate, bank accounts or mutual funds, the will supersedes the nomination. Hence, ensure the nominee(s) of your various investments and the beneficiary or beneficiaries in the will are the same to avoid confusion or any family feud after your life time," he says.
In short, for all investments except company bonds and equity, nomination does not provide ownership of your assets. The nominee will only be the custodian of the asset till it is given to its beneficiary. To ensure the nominee becomes the final beneficiary, you have to ensure there is a will to bequeath your wealth in a hassle- free manner.
'EITHER OR SURVIVOR' CLAUSE
You can opt for the either/or survival clause, which makes your spouse the natural owner of your investments in case of any unexpected turn of events. This is a viable option especially in case of joint bank accounts or investments. A joint investment/bank account needs signature of both the parties.
If you opt for an 'either or survivor' mode of holding, then transactions can be carried out by either of the individuals. Secondly, if one of the investors/ account holders dies, the transaction is not stopped. It can be carried out by the survivor.
"In case of just a joint holding, the survivor (living individual) has to submit the death certificate of the deceased along with the application to the bank/asset management company. Thus, the 'either or survivor' clause is legally a sound option. You have the option of joint investments as well, but the survivor clause is a good option," says Kartik Jhaveri, a certified financial planner with Transcend India.
vidyalaxmi.v@timesgroup.com
A mix of top-down, bottom-up methods ideal for investments
Traditionally, there exist two strategies for investing in stock markets. One is the 'top-down approach', where the investor analyses the overall macroeconomic scenario, picks sectors that will do well in the given macro scenario and then selects stocks from those sectors that are cheap.
This approach presumes that macro factors influence the sector and stock performances more. The second approach is the ' bottom-up approach , where the investor directly considers a universe of stocks based on independent analysis and parameters.
Within the universe, he or she identifies stocks with good potential irrespective of the sector to which the stock belongs, without giving much weightage to the overall macroeconomic scenario. This approach presumes that stockspecific factors carry more weight than the macro ones.
The top-down approach usually requires knowledge and understanding of the economy in general and also about the specific sectors and stocks within it. In the bottom-up approach, the emphasis is on in-depth analysis of the specific stock that is to be purchased or sold.
The sectors where the price performance is linked positively to the economic cycles are known as cyclical sectors (high beta). Metals, automobiles, and real estate, etc, fall under this category. Sectors that are little less influenced by economic cycles are known as defensive sectors (low beta).
Pharma, utilities, and consumer staples, for example. Such defensive sectors and stocks have steadier earnings and more predictable cash flows. The top-down approach assumes that by allocating money across different sectors (cyclical and defensive), the investor will be able to diversify his portfolio risk.
Even if a sector is extremely attractive, the investor won't be able to invest all his money in it. Many professional money managers using topdown approach usually have sector limits, too. Similarly, in the bottom-up approach, too, there will usually be a limit on the exposure to a single stock.
But which strategy works all the time? The key to the topdown approach is that sector returns should be negatively co-related to each other. A 100% co-relation is perfect comovement with each other and -100% is perfect co-movement with each other but in the opposite direction.
The cyclical ones should usually offset some of the weakness in the defensive ones and vice-versa. But as of now, many of the cyclical sectors and the defensive ones have higher and positive co-relations of more than 90% with each other. This breaks down the theory of price movements of cyclical and defensive sectors being self-balancing at least to a reasonable extent.
For instance, the traditional defensive sector such as pharma, has a co-relation of more than 80% positive with major sectors, including cyclical ones such as automobiles (98%) or metals (94%). In fact, the major sector co-relations now are reasonably higher and positive with each other, with many of them above 90%.
This does increase the systemic risk in the markets, especially in the event of a steep fall, as all the sectors are vulnerable to the same source of risk or to the same set of factors or to the same type of trades being unwound. The power/utilities sector, a defensive one, has relatively lower positive correlation with other sectors.
Surprisingly, only the real estate sector, which typically falls in the cyclical category, has maximum negative co-relation with other sectors such as auto, pharma, and FMCG. This high positive co-relation between sectors may sometimes defeat the objective of the top-down approach, as defensives act more like cyclical ones.
Typically, in the early stages of an economic recovery, especially after a crisis, most of the sectors and stocks exhibit higher positive co-relations with each other as macro-factors dominate more than stock-specific ones. This is in tandem with the margins recovery in general driven by operational leverage, though revenues remain sluggish. As the market recovery matures, sector co-relations should move lower as stock-specific factors start exerting higher influence on prices.
The incremental margins typically peak in the later stages of an economic recovery as revenue growth drives earnings. In other words, when sectors' or stocks' co-relations are higher and are expected to move down, it's appropriate to adopt a bottom-up or a stockpicking strategy.
And when the co-relations are lower and are expected to move higher, it's time to adopt a top-down or macro strategy. Thus, an appropriate mix of top-down and bottom-up strategies is advisable, depending on the prevailing scenario.
By: Devendra Nevgi
FOUNDER & PRINCIPAL PARTNER
Delta Global Partners
This approach presumes that macro factors influence the sector and stock performances more. The second approach is the ' bottom-up approach , where the investor directly considers a universe of stocks based on independent analysis and parameters.
Within the universe, he or she identifies stocks with good potential irrespective of the sector to which the stock belongs, without giving much weightage to the overall macroeconomic scenario. This approach presumes that stockspecific factors carry more weight than the macro ones.
The top-down approach usually requires knowledge and understanding of the economy in general and also about the specific sectors and stocks within it. In the bottom-up approach, the emphasis is on in-depth analysis of the specific stock that is to be purchased or sold.
The sectors where the price performance is linked positively to the economic cycles are known as cyclical sectors (high beta). Metals, automobiles, and real estate, etc, fall under this category. Sectors that are little less influenced by economic cycles are known as defensive sectors (low beta).
Pharma, utilities, and consumer staples, for example. Such defensive sectors and stocks have steadier earnings and more predictable cash flows. The top-down approach assumes that by allocating money across different sectors (cyclical and defensive), the investor will be able to diversify his portfolio risk.
Even if a sector is extremely attractive, the investor won't be able to invest all his money in it. Many professional money managers using topdown approach usually have sector limits, too. Similarly, in the bottom-up approach, too, there will usually be a limit on the exposure to a single stock.
But which strategy works all the time? The key to the topdown approach is that sector returns should be negatively co-related to each other. A 100% co-relation is perfect comovement with each other and -100% is perfect co-movement with each other but in the opposite direction.
The cyclical ones should usually offset some of the weakness in the defensive ones and vice-versa. But as of now, many of the cyclical sectors and the defensive ones have higher and positive co-relations of more than 90% with each other. This breaks down the theory of price movements of cyclical and defensive sectors being self-balancing at least to a reasonable extent.
For instance, the traditional defensive sector such as pharma, has a co-relation of more than 80% positive with major sectors, including cyclical ones such as automobiles (98%) or metals (94%). In fact, the major sector co-relations now are reasonably higher and positive with each other, with many of them above 90%.
This does increase the systemic risk in the markets, especially in the event of a steep fall, as all the sectors are vulnerable to the same source of risk or to the same set of factors or to the same type of trades being unwound. The power/utilities sector, a defensive one, has relatively lower positive correlation with other sectors.
Surprisingly, only the real estate sector, which typically falls in the cyclical category, has maximum negative co-relation with other sectors such as auto, pharma, and FMCG. This high positive co-relation between sectors may sometimes defeat the objective of the top-down approach, as defensives act more like cyclical ones.
Typically, in the early stages of an economic recovery, especially after a crisis, most of the sectors and stocks exhibit higher positive co-relations with each other as macro-factors dominate more than stock-specific ones. This is in tandem with the margins recovery in general driven by operational leverage, though revenues remain sluggish. As the market recovery matures, sector co-relations should move lower as stock-specific factors start exerting higher influence on prices.
The incremental margins typically peak in the later stages of an economic recovery as revenue growth drives earnings. In other words, when sectors' or stocks' co-relations are higher and are expected to move down, it's appropriate to adopt a bottom-up or a stockpicking strategy.
And when the co-relations are lower and are expected to move higher, it's time to adopt a top-down or macro strategy. Thus, an appropriate mix of top-down and bottom-up strategies is advisable, depending on the prevailing scenario.
By: Devendra Nevgi
FOUNDER & PRINCIPAL PARTNER
Delta Global Partners
Play your card right against fraud attacks
One can never be too careful when it comes to using credit and debit cards. Constant vigil is a must while executing even the most routine transactions, be it online, or offline at point-of-sale (PoS) terminals in hotels, malls, shops, etc.
Sure, most users take precautions to safeguard their passwords and other security parameters. Also, with the Reserve Bank of India mandating two-factor authentication, thus adding another layer of safety to prevent online frauds, credit card transactions have certainly become more secure. Now, similar action is likely in the offline setup, too.
Recognising the need to further tighten the security of 'card-present' transactions, the banking regulator had instituted a working group, which has submitted a report with recommendations, including the issue of chip cards and additional PINs (personal identification numbers) for such transactions. While these measures have to be initiated by the regulator and the bank, you, too, can take certain steps to check any slippages at your end.
At PoS terminals
Here's a quick memory test: How many times have you handed over your card to the hotel staff to make a payment, while being seated at your dinner table? The chances are that you would be doing this all the time. After all, it is very convenient and seems like a routine thing to do, the attendant takes your card, swipes it for the payment amount and returns with the counterfoil.
Since you need to sign this charge-slip, the entire chain is secure, you would assume. However, this may not always be the case. For one, your card may be cloned - that is, duplicated to be misused using the information on its magnetic strip, if the staff has a devious motive. Likewise, even lost or stolen cards can be used to make purchases. "Merchants are supposed to verify that the card-holder's signature on the charge-slip matches with that at the back of the card. Most merchants do not check this diligently or the signatures look very similar.
Hence, stolen cards can be easily misused by miscreants before the real card holders realise that they have lost the card," says Shyamal Saxena, general manager, retail banking products, Standard Chartered Bank . Also, be alert while authenticating the slips. "Ensure that the cashier swipes the card in your presence, check the amount on the transaction slip before signing and also save the receipts to check them against monthly statements," advises Sandeep Bhalla, business head, credit payment products, Citibank India .
At ATMs
In many ATMs, there is no screen or partition to block others' view while you punch your ATM PIN (personal identification number). This could make your card vulnerable to misuse if it is stolen, as both the plastic and the PIN would have been compromised. Therefore, you need to take some precautions.
"When the PIN is to be entered at the ATM or at a PoS, one should keep his hand above the keypad to prevent the capture of PIN by any third person or by any camera device kept by any fraudster," says Sameer Nemavarkar, CEO, Atos Worldline India, an electronic payment services company
Sure, most users take precautions to safeguard their passwords and other security parameters. Also, with the Reserve Bank of India mandating two-factor authentication, thus adding another layer of safety to prevent online frauds, credit card transactions have certainly become more secure. Now, similar action is likely in the offline setup, too.
Recognising the need to further tighten the security of 'card-present' transactions, the banking regulator had instituted a working group, which has submitted a report with recommendations, including the issue of chip cards and additional PINs (personal identification numbers) for such transactions. While these measures have to be initiated by the regulator and the bank, you, too, can take certain steps to check any slippages at your end.
At PoS terminals
Here's a quick memory test: How many times have you handed over your card to the hotel staff to make a payment, while being seated at your dinner table? The chances are that you would be doing this all the time. After all, it is very convenient and seems like a routine thing to do, the attendant takes your card, swipes it for the payment amount and returns with the counterfoil.
Since you need to sign this charge-slip, the entire chain is secure, you would assume. However, this may not always be the case. For one, your card may be cloned - that is, duplicated to be misused using the information on its magnetic strip, if the staff has a devious motive. Likewise, even lost or stolen cards can be used to make purchases. "Merchants are supposed to verify that the card-holder's signature on the charge-slip matches with that at the back of the card. Most merchants do not check this diligently or the signatures look very similar.
Hence, stolen cards can be easily misused by miscreants before the real card holders realise that they have lost the card," says Shyamal Saxena, general manager, retail banking products, Standard Chartered Bank . Also, be alert while authenticating the slips. "Ensure that the cashier swipes the card in your presence, check the amount on the transaction slip before signing and also save the receipts to check them against monthly statements," advises Sandeep Bhalla, business head, credit payment products, Citibank India .
At ATMs
In many ATMs, there is no screen or partition to block others' view while you punch your ATM PIN (personal identification number). This could make your card vulnerable to misuse if it is stolen, as both the plastic and the PIN would have been compromised. Therefore, you need to take some precautions.
"When the PIN is to be entered at the ATM or at a PoS, one should keep his hand above the keypad to prevent the capture of PIN by any third person or by any camera device kept by any fraudster," says Sameer Nemavarkar, CEO, Atos Worldline India, an electronic payment services company
Why shifting your home loan from BPLR to base rate is beneficial
In 2004, Delhi-based Radhakrishnan Nair took a home loan of `7.28 lakh from a private sector bank at 7.5%, even as other nationalised banks were offering higher rates. Today, the same bank is charging him 14.75%. More importantly, the loan that should have been repaid by the time he retires eight years from now has been extended by 21 years.
Nair is not alone. There are many like him whose home loan rates have shot up to 15% what with the rates rising for the third time since the start of this financial year. Such people could benefit by shifting from the BPLR or the benchmark prime lending rate to the base rate. How?
How will shifting help?
If you had applied for a home loan before 1 July last year and it hasn't been renewed since then, in all likelihood, the interest on your loan is still based on BPLR. It has now been a year since the Reserve Bank of India directed banks to move from the BPLR to base rate as the benchmark interest rate for loans granted after 1 July. No banks are allowed to lend below this base rate.
"If you have taken a loan just after 1 July, ensure that your bank has linked your rate to the base rate. This is applicable for clients who have borrowed before 1 July," suggests Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy. While borrowers may not find immediate relief in shifting to the base rate, they can benefit later when the rates start to drop because these will fall faster than those linked to the BPLR.
This is because base rate is more transparent then BPLR. If the interest rates fall, banks will have to lower the base rate, which is a function of the cost of funds in the market. As all the variable rates of interest are pegged to the base rate, the borrowers will gain from any cut in this rate. Hence, it is advisable to opt for it. "If you are one of the old borrowers who had taken a loan around 2006, right now you might be paying 13-14% on your home loan. There may not be an immediate benefit on interest rate, but you will get on to a system that is more transparent," says Harsh Roongta, chief executive officer at
What if rates don't reduce immediately?
If your home loan rate doesn't come down immediately after shifting to the base rate, don't worry. It will the moment the RBI decides to reduce rates. However, the BPLRlinked home loan rate may not fall. "Under the benchmark prime lending rate, banks increase these when the rates are going up, but do not reduce these when they go down. Also, the differential treatment given to old borrowers vis-a-vis new borrowers will be reduced under the base rate scenario," says Roongta.
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"Since the introduction of the base rate, the rates have been consistently rising and, hence, it is difficult to gauge and give a practical instance of benefits derived by consumer on account of the base rate. Assuming the banks will adopt the same policy and pass on the benefits of softening of credit/monetary policy, the base rate regime may prove beneficial to consumers," adds Patel
Nair is not alone. There are many like him whose home loan rates have shot up to 15% what with the rates rising for the third time since the start of this financial year. Such people could benefit by shifting from the BPLR or the benchmark prime lending rate to the base rate. How?
How will shifting help?
If you had applied for a home loan before 1 July last year and it hasn't been renewed since then, in all likelihood, the interest on your loan is still based on BPLR. It has now been a year since the Reserve Bank of India directed banks to move from the BPLR to base rate as the benchmark interest rate for loans granted after 1 July. No banks are allowed to lend below this base rate.
"If you have taken a loan just after 1 July, ensure that your bank has linked your rate to the base rate. This is applicable for clients who have borrowed before 1 July," suggests Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy. While borrowers may not find immediate relief in shifting to the base rate, they can benefit later when the rates start to drop because these will fall faster than those linked to the BPLR.
This is because base rate is more transparent then BPLR. If the interest rates fall, banks will have to lower the base rate, which is a function of the cost of funds in the market. As all the variable rates of interest are pegged to the base rate, the borrowers will gain from any cut in this rate. Hence, it is advisable to opt for it. "If you are one of the old borrowers who had taken a loan around 2006, right now you might be paying 13-14% on your home loan. There may not be an immediate benefit on interest rate, but you will get on to a system that is more transparent," says Harsh Roongta, chief executive officer at
What if rates don't reduce immediately?
If your home loan rate doesn't come down immediately after shifting to the base rate, don't worry. It will the moment the RBI decides to reduce rates. However, the BPLRlinked home loan rate may not fall. "Under the benchmark prime lending rate, banks increase these when the rates are going up, but do not reduce these when they go down. Also, the differential treatment given to old borrowers vis-a-vis new borrowers will be reduced under the base rate scenario," says Roongta.
"Since the introduction of the base rate, the rates have been consistently rising and, hence, it is difficult to gauge and give a practical instance of benefits derived by consumer on account of the base rate. Assuming the banks will adopt the same policy and pass on the benefits of softening of credit/monetary policy, the base rate regime may prove beneficial to consumers," adds Patel
Control your investment optimism
I recently ran into a cousin who had become a member of an online survey company and was trying to convince me to do the same. When I asked him how the company planned to make money, he came up with some mumbo jumbo about a proprietary business model and how the details were not to be shared as competitors could copy the model.
It reeked of a Ponzi scheme, a fraudulent investment plan wherein the illusion of a successful business model is created by using the money being brought in by new investors to pay off the earlier ones. My cousin was convinced it would put him on the road to riches; he was undoubtedly a victim of overconfidence.
Overconfidence or overoptimism
Overconfidence or overoptimism is a highly visible trait in everyday life as people exhibit great faith in their own physical and mental abilities. In fact, psychologists have performed several experiments over the years to conclude that people rate themselves very high on their positive personal characteristics. "Most people think they are smarter than average, better drivers than average, and indeed simply better people than average," states Tyler Cowen in the book Discover Your Inner Economist. Cowen also runs the world's most followed economics blog www.marginalrevolution.com.
This is the reason that we take on stronger opponents in contests, drive more recklessly, do not crosscheck facts, often ending up taking bigger risks than we should and losing more money and self-esteem than we need to. This is also the reason that gymnasiums find it easy to drive up their revenues. As Cowen points out, "Most people overestimate how often will they visit the gym. They buy gym memberships that make sense only if they are exercise hounds, and, of course, many of them are not."
It's easy to cross over from confidence to overconfidence because there is a very fine line dividing the two. While the former is a pragmatic assessment of one's ability, the latter is an unrealistic, subjective opinion about one's prowess.
Overconfidence in finances
This trait filters into the investing world as well. People are overconfident about their ability to make accurate estimates and believe they will never be victims of financial fraud, especially if they've had no negative experience in the past. This is the reason they fail to ask the obvious questions-and end up losing money.
Investors are overconfident that they can predict the future and often find themselves saddled with losing stocks or poor performing mutual funds. This is also the reason they stick to losing assets for longer than they should. They also go on to trade more frequently and, subsequently, perform the worst. This has even been proved by a research conducted by American professors Brad Barber and Terrance Odean, who studied 35,000 investor brokerage accounts and found that most stock market investors are overconfident.
They asked the investors about the kind of return they expected from their portfolios over the next 12 months. They also asked the investors about the returns they expected from the stock market during the same period. Most people believed that their investments would do better than the overall market, with men more confident than women. They expected their investments to beat the market by 2.8%, compared with 2.1%. in case of women. The actual results were exactly the opposite of what the investors expected. Women underperformed the broader market by 1.72% per year, whereas men underperformed the broader market by 2.65% per year.
It reeked of a Ponzi scheme, a fraudulent investment plan wherein the illusion of a successful business model is created by using the money being brought in by new investors to pay off the earlier ones. My cousin was convinced it would put him on the road to riches; he was undoubtedly a victim of overconfidence.
Overconfidence or overoptimism
Overconfidence or overoptimism is a highly visible trait in everyday life as people exhibit great faith in their own physical and mental abilities. In fact, psychologists have performed several experiments over the years to conclude that people rate themselves very high on their positive personal characteristics. "Most people think they are smarter than average, better drivers than average, and indeed simply better people than average," states Tyler Cowen in the book Discover Your Inner Economist. Cowen also runs the world's most followed economics blog www.marginalrevolution.com.
This is the reason that we take on stronger opponents in contests, drive more recklessly, do not crosscheck facts, often ending up taking bigger risks than we should and losing more money and self-esteem than we need to. This is also the reason that gymnasiums find it easy to drive up their revenues. As Cowen points out, "Most people overestimate how often will they visit the gym. They buy gym memberships that make sense only if they are exercise hounds, and, of course, many of them are not."
It's easy to cross over from confidence to overconfidence because there is a very fine line dividing the two. While the former is a pragmatic assessment of one's ability, the latter is an unrealistic, subjective opinion about one's prowess.
Overconfidence in finances
This trait filters into the investing world as well. People are overconfident about their ability to make accurate estimates and believe they will never be victims of financial fraud, especially if they've had no negative experience in the past. This is the reason they fail to ask the obvious questions-and end up losing money.
Investors are overconfident that they can predict the future and often find themselves saddled with losing stocks or poor performing mutual funds. This is also the reason they stick to losing assets for longer than they should. They also go on to trade more frequently and, subsequently, perform the worst. This has even been proved by a research conducted by American professors Brad Barber and Terrance Odean, who studied 35,000 investor brokerage accounts and found that most stock market investors are overconfident.
They asked the investors about the kind of return they expected from their portfolios over the next 12 months. They also asked the investors about the returns they expected from the stock market during the same period. Most people believed that their investments would do better than the overall market, with men more confident than women. They expected their investments to beat the market by 2.8%, compared with 2.1%. in case of women. The actual results were exactly the opposite of what the investors expected. Women underperformed the broader market by 1.72% per year, whereas men underperformed the broader market by 2.65% per year.
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