Wednesday 29 October 2014

ELSS funds: Are they worth your buck?

Come December, and it's time to submit the proof for your tax-saving investments.  Or be ready for some steep cuts in your salary.  As we all are aware the annual standard deduction under Section 80 C has been enhanced to Rs 1.5 lakh from Rs 1 lakh. 

But, do you want to wait till the last day to invest in a tax-saving instrument when the time is ripe to invest in equity linked savings schemes. 

Markets have been off their highs. However, many on Dalal Street are confident this is the year of multi-year bull run backed by the new government, improving macroeconomic fundamentals and a step up in the financial reforms.

Secondly according to Value Research, ELSS as a category has given average returns of 19.24% (as on 28th October 2014). In the same period, Nifty posted average returns of 16.52%. 

ELSS: What works?

1) Low Lock in period
 The lock in period is only 3 years as compared to those of other tax saving investments, which fall in the range of 5-15 years.

2) Beats Inflation
 Equity investments offer better inflation adjusted returns than most asset classes in the 

3) Tax-Free Returns
The final corpus at maturity is not taxable. Even dividends (if you opt for dividend option) are tax-free.  Moreover, since the lock in period is 3 years, any gain on redemption is exempt from capital gains tax. 

Monday 16 June 2014

Mahabharata of Investing:



Do you want to be a part of the Mahabharat of Investment? Then first identify who you are- Bhishma, Vidura, Dhritarashtra, Karna, Bhima or Arjun and then look at the strategy you could choose. I am only highlighting these 6 characters – all positive characters. I am not evaluating Duryodhana, Shakuni or Shishupal!

Bhishma: You are the one who has taken a Bhishma Pratidnya- “ I will only invest in Real Estate” “I will not invest in Equity” “I will invest in FDs”. While each asset class has its pros and cons, a Bhishma who invests in FD would have to be watching like a lame duck during the Bull run in Equities or Gold. Just like Bhishma, who, due to his Pratidnya could never ascend the Throne of Hastinapur even upon the death of his step-brothers – Chitrangada or Vichitravirya or despite his grandsons Pandu and Dhritarashtra being disabled.
Vidura: You are the most intelligent and capable of advising most people. But when it comes to your own self, you develop cold feet. Either an inferiority complex or the supposed unavailability of requisite funds is preventing you from pursuing your own investment plans. Just like Vidura- who was the most wise and capable person, but could not take over the reins because he was born to a Servant-mother. Also, he could only helplessly watch when Draupadi was being disrobed!
Dhritarashtra: You are blindly attracted to the pomp and show of Relationship Managers from various high profile Banks –just as Dhritarashtra was blind towards his son, Duryodhana. Whether the RM of the Bank sells you an expensive but poor performing Insurance Product or a PMS which has average performance but gives him a huge commission, you would still blindly trust him, because he is employed by your Bank and hence could do no wrong.
Karna: You are the most skilled and accomplished, but unlucky! You understand various assets like equities, gold, real estate and techniques like rupee cost averaging (SIP), value averaging (Flex STP), asset allocation etc. But always end up investing at the wrong time! You invested in Equities in 2008 at 21000 levels, thinking they would rise to 25000 and lost. You invested in Dynamic Bond Funds last year, hoping to cash in on the rally that would accompany lowering of interest rates by the RBI governor. However, instead of falling, the rates went up! Just like Karna, who had his Kavach Kundala stealthily being taken away by Lord Indra or Parshuram cursing him that he would be incapable of using his weapons when he needed them most!
Bhima: You are extremely ambitious and demanding. When Equities give an average of 17-18% returns, you want 25%. While most FDs are giving 9%, you would want 11%. At times you may even have your way, but what could happen is that people would be scared to advise you and hence would suggest conservative products to you rather than optimal ones, fearing that a slippage on returns / risk could invite your wrath!
Arjun: You are the best because you always wanted to be the best. You understand most assets and also market timing. Most of the time you even make it big by hitting the bulls eye. Usually by investing in Equities when markets are at 8000 levels and then rise to 22000 or in Bond Funds when yields are at 9% and fall to 7%. Where you could get stuck is in the following chakravyuhas:
-You need to pay your next installment for your weekend / second home and need to withdraw money from          your FD yielding 10% or from your MFs when the Sensex is at 8000 like in Oct 2008.
- You need to withdraw from the corpus meant for your child’s education to pay for your parent’s Hospital Bills
- You have just lost our job and have not planned for it and now the Bank authorities are at your doorstep to recover the car that you bought on Loan!
If you are stuck in a Chakravyuha, you end up being an Abhimanyu rather than Arjun!
So, what are the solutions for the above Mahabharat Characters?
Bhishma: He had a boon- he could die when he wanted to-ichha mrityu. Hence, he created a situation where Lord Krishna rose to kill him, but he chose to die to an arrow shot by Arjun. In investment, the equivalent of iccha mrityu is “no exit load”. Even if you are in a FD, you should have easy exit and minimum exit penalty. If you are invested in Equities, those must be in stocks which are easy to liquidate and don’t suffer much loss even in a bear market.
Vidura: You may not have much to invest but so what, start small – SIP of 1000/2000 but invest over long periods of time- 10/20 years, and keep on revising the SIP amounts as and when possible. Keep your unnecessary expenses in control so that you get more money to invest.
Dhritarashtra: He was not just blind but also obstinate. He hardly ever listened to Bhishma or Vidura in matters of Governance and kept on favoring Duryodhana even when he knew that Pandavas were superior. You should start asking questions to your favorite Bank RM or CA. Demand performance charts/regular reports from him to ensure that you are on the right track as regards your investments.
Karna: As much as possible, keep patience- you may have invested at wrong times, but so what? Time cures most illnesses. Even if you are stuck in Equities where you invested in Jan 2008, look at them now, after 6 years-mostly you would have recovered your losses and even made some profit. However, if you are stuck in Sectoral Funds like Infrastructure or Power, you need to wait a little more!
Bhima: Calm down. Introspect. What is the risk you are taking to get higher returns? Are you investing in a 12% Sahara FD when a HDFC FD of 9% would be better? Are you investing in a FMCG / Banking Fund when you should be investing in a Diversified Equity Fund?
Arjun: Even Arjun required a teacher like Dronacharya and a Sarathi like Lord Krishna to guide him to victory. Like Arjun, hire an advisor who would be your Sarathi in bad times as well as good. Let that Dronacharya advise you on where and how much to invest even when you are aware of most things. After all, it was Dronacharya who taught Arjun to be the best archer and pierce every Chakravyuha!

Happy Mahabharat Investing!!

Why Equities are actually the best Hedge against Inflation


Do you really know why Equities are actually the best Hedge against Inflation?
Suppose we take the following case. Say Steel is available at Rs 1 lac per ton. A Maruti Car needs half a ton or Rs 50000 worth of Steel. Let us assume that the cost of the car is 2 lakhs and that price of the car is directly proportional to the price of steel. Further, the profit margin on each car is assumed to be 20000.
Suppose the price of steel increases by 10% - to 55000 per ton. Steel input cost will be 55000 per car. Price of the car will increase to 2.2 lakhs, because Maruti Udyog would pass on the material cost increase to the customer. The margin on each car will go up from 20000 to 22000.
Thus, the inflation of 10% does not affect the share price of Maruti, because the margins or profitability also has gone up by 10%. In other words, Earnings have kept pace with inflation. And it is just a matter of time before price rises to match the increase in Earnings. The car became expensive due to material cost increase, but the company’s profit margin did not come down.
That’s the beauty of Equities!
What about gold? Gold has generally kept pace with inflation, but not significantly beaten inflation. In 1980, price of gold was Rs 2000 per 10 gm. Eggs then were priced at Rs 3 per dozen. While gold has gone to 30000 in 2013, eggs have gone up to Rs 48-60 per dozen. Bananas were at Rs3 /dozen in 1980 as against Rs 40-45/dozen today. Bread was available at Rs 1 per loaf, today it is Rs 20 per loaf.
So, while Gold has kept pace with Bananas, Eggs and Bread have moved up faster than gold. Diesel prices which were Rs 1.20 per litre in 1980, are Rs 60 per litre today! Only if one could have invested in Diesel instead of Gold!! But while Diesel price has gone up 50 times, Sensex has gone up 200 times !! So, whether diesel or bread or eggs, Equities have all bases covered!