Monthly Archives: March 2017

Thursday Trivia ~ Year Ending —> Bonus and Appraisal Time

Around December each year, generally salaried professionals start to worry about their bonus and appraisals. Expectations and anxiety run parallel, until one takes over the other at the date of announcement. Conversations about their end use are usually topics at coffee cups or glass of wine. Well, everyone is not expected to be really happy with their bonus and appraisal. At the end of the day, it is money. Rather than spending haphazardly depending on which emotion was triggered, it will make a lot better sense to sit with your financial advisor and brainstorm at it.

           

Do you plan to purchase the latest gadget or that new car for which you were waiting since your college days? Or are you planning a vacation abroad?

However, it’s better to clarify that any financial advisor is not against enjoying life to the fullest. At the same time, it makes better sense to stick to the ground financial reality. If there is an existing expensive debt, it is a good idea to settle off that loan rather than buying the latest gadget or a new car.

In this trivia, let’s discuss on how an annual bonus can be spent effectively.

  • Outstanding credit card debt

There are several cases where a person has to struggle to settle existing credit card dues in full in February and March since priority is always to make tax-saving investments. Credit card debt is the most expensive debt in the organised finance sector, along with it are it’s close cousins namely, heavy penalty for non-payment and service tax. If a person belongs to this category, this is the time to get their financial health back.

  • Expensive loans

Apart from credit card debt,it there is an expensive personal loan, bonus can be used to square off such loan. Such loans will come with prepayment penalty clause. A close assessment is needed to understand the cost of pre-payment before any decision to prepay is taken.

Even if part prepayment of home loan is carried out, it will either bring down Equated Monthly Instalments (EMI) or shorten the loan tenure. Either way, lesser interest on loan will be paid during the term of the loan.

  • Life and Health Insurance

Insurance portfolio is equally important to an investment portfolio. However, not many times a second chance is granted to rectify mistakes in an insurance portfolio.

Unfortunately, many of us don’t pay requisite importance to our insurance portfolio. The focus is more on investment portfolio. The irony is that investment angle is predominant even while opting for buying insurance. Traditional life insurance plans and ULIPs are prime examples.

If existing life and health insurance falls short due to a revise in asset allocation or substantial increase in income level, this may just be the right time to get our insurance portfolio in order.

Tax benefits are like cherry on the top of a cake. Premium paid for life and health insurance plans qualifies for tax deduction under Section 80C and Section 80D respectively.

  • Emergency fund

Emergency fund is a small amount parked in the form of fixed deposits or several liquid funds. These can be accessed at the time of an unplanned expenditure. Very often, creation of emergency fund is ignored as the inherent understanding is that nothing can go wrong in just 3-6 months. If an emergency fund is not created, it is a good idea to allocate part or entire bonus towards emergency corpus.

At least 3-6 months of monthly expenses should be parked in an emergency fund. An emergency corpus helps you tide over short-term crisis such as loss of job or a medical emergency.

  • Tax-saving investments

Procrastination is best at play when the wait of last quarter of financial year to make tax-saving investments.  And that’s where a lot of money is spent in purchasing useless financial products, which are least understood, but just because they are tax saving, that’s enough not to give it a second thought.

This year, try a different approach.Stop procrastinating.

Make or plan all your tax-saving investments in the first quarter itself. Do not wait till the last quarter. Sit with your financial advisor and ask him each and every question about it.

 If there is a plan to invest in tax-saving mutual funds, earmark the funds to start a SIP. For instance, if you intend to invest Rs 60,000 in ELSS during the financial year, you can invest Rs 60,000 lump sum or earmark the funds for SIP of Rs 5,000 per month.

  • Build up a corpus for down payment for house or car

This may not apply to everyone. If there has been a plan to purchase a house or a car, part of bonus can be used for making down payment for house or car.

  • Portfolio Review

Beginning of the financial year is the right time to review entire portfolio. A structured rebalance can take place on the portfolio if any of investments has outperformed or underperformed.

If there is an expectation to fall short of the amount needed for a goal, bonus can allocated towards that goal.

  • Most important of all ~ Enjoy too

As wealth managers, we are often seen with an eye of skepticism. If every penny is invested then there will not be anything left to spend on. Well, let’s change this perspective. It’s extremely important to enjoy and secure your future at the same time. Most important of all, when you decide to party with your bonus money, do include your financial advisor too.

Money is not an end. It is merely a means to an end.Don’t feel guilty to splurge a bit. But yes, exercise some restraint.

Jinay Savla

 

Thursday Trivia : Have you asked this question to your financial advisor yet?

More often, the term ‘Financial Advisor’ is looked at a person hard selling an investment scheme. However, wealth is an important part of an individual’s life and how loosely they still consider making any decision for it. One of the primary reason is that most advisors are viewed as sales people from select mutual fund companies. It’s not wrong for anyone to have that sort of an opinion, but that’s how the industry has evolved over the years. It’s of no surprise, when two people sitting and discussing about which mutual fund or insurance policy was sold to them. The best part about the conversation is, one whose mutual fund is giving excess returns has a better financial advisor. Not the one whose portfolio of mutual fund has performed consistently over the years.

Let’s draw a small parallel. When an individual visits a doctor, there is no inclination to being sold a medicine. Nobody is bothered about which medicine is sold and in how many days they will get better. Infact, if they take more time to recover, they would rather blame it on their illness. When a financial advisor does a bad job, no individual ever says that he got greedy and wanted more. The unspoken rule of equity markets is ~ buy when others are selling and sell when others are buying. Yet, most of the times, individuals find their solace in being ‘others’ regardless of the fact when their financial advisor tells them not to.

Why does this happen?

A significant part of the above question lies in the fact as to what we ask a financial advisor. Since, an individual is so glued to making more money, questions are always around investment schemes and their performance. Yet, very few individuals want to know, as to what that very same advisor does with his own money?

SKIN IN THE GAME ?

Have you asked your financial advisor, ‘How much is your skin in the game?’

The term skin in the game was coined by renowned investor Warren Buffet. It simply means, when a professional is selling something, how much is at stake for him/her during that transaction. Isn’t it important to know, does your advisor actually practices the stuff which he is preaching you? Yes, it’s damn important. Although, we tend to miss it all the time. So much importance has been provided to returns on investment, multi baggers, etc. over the course. However, it’s very important to look into those things. There is no second guess to knowing fully well about the risks and rewards before starting an investment journey. Although, it gives more comfort to know that your chef eats the same food which he serves you at the restaurant. It will be unwise to know if a chef eats at any other restaurant in which he works.

To understand the concept of skin in the game better, let’s look at a story. ‘Taste of Turtles!’

You who caught the turtles better eat them ~ goes the ancient adage.

Its origin is as follows. It was said that a group of fishermen caught a large number of turtles. After cooking them, they found out at the communal mealthat these sea animals were much less edible that they thought: not manypeople were willing to eat them. Mercury happened to be passing by –Mercury was the most multitasking, sort of put-together god, as he was theboss of commerce, abundance, messengers, the underworld, as well as thepatron of thieves and brigands and, not surprisingly, luck. The group invitedhim to join them and offered him the turtles to eat. Detecting that he wasonly invited to relieve them of the unwanted food, he forced them all to eatturtles, thus establishing the principle that you need to eat what you feedothers.

Similarly, next time ask your financial advisor, whether he holds a similar a portfolio of schemes which he suggests you to do it? It will enhance your faith. On a subconscious level, it will provide for a great satisfaction that your advisor is giving equal importance like he would do it for himself.

Jinay Savla

Thursday Trivia – EPF to NPS : Should you switch?

Brief History

At the Union Budget of 2015-16, Government had put out a proposal for members of the Employee’s Provident Fund (EPF) to move their retirement savings to National Pension Scheme (NPS). While, NPS is becoming a more popular way of saving money for retirement, it was thought that if there could be an easy access to transfer amounts from provident funds too. The amount so transferred will not be treated as income for the current year and hence it will be tax free. However, for this to take place, a member must have a NPS Tier 1 account. It can also be opened online via eNPS on the NPS Trust website or the employer of the member can do it incase they have implemented it in their organisation.

Transfer of Funds

Transfer request needs to be made by approaching the concerned Provident Fund (PF) office, through the current employer of the member. Then PF Trust will have to initiate transfer of the fund as per the provision of Trust Deed read with provisions of the Income Tax Act, 1961.

In case of government employee, a request to the PF Fund to issue a letter to the present employer mentioning that the amount is being transferred from the fund to be credited to member’s NPS Tier-1 account.The present employer or point of presence (POP), i.e. the nodal office, while uploading the fund will mention on the transfer from PF Fund in the remarks column while uploading. The upload has to be made as per request letter of the ex-employer.

In case of private sector employees, including subscribers covered under All Citizen’s Model NPS, the employees should request the recognised PF Fund to issue a letter to the present employer/ PoP as the case may be, mentioning that amount is being transferred from the PF Fund to be credited in the NPS account of the employee/ individual Tier-I account.The POP will get the amount collected and the same has to be uploaded in the NPS account of the subscriber.

Should you switch?

  • Equity exposure, like seriously?

    One of the reasons why NPS is considered to be a superior product than EPF is because of it’s exposure to equity. It is enough to give goosebumps to a lot of people. Although, maximum allocation to equity in NPS has been restricted to 50% while EPF is fully a fixed income based product.

    But then considering your retirement is several years away, not like immediate 5-7 years, then a mere exposure of 50% to equity in NPS doesn’t make a good reason. It is more beneficial to have EPF going and park the rest of capital into an equity based mutual fund. Chances of better performance and more exposure of equity are higher than NPS.

  • Taxation : The Ultimate Saga

    The word ‘Tax’ in India is enough for any person to mindlessly invest in anything just so that some money can be saved. It’s the oracle word for making any kind of investments. As if, we are more concerned with saving tax rather than making money.

    Consider this, any EPF withdrawal after 5 years of continuous service is tax free. However, NPS has some other rules. Only 40% is tax free, while the balance is subject to tax based on the tax slab of the individual. And yes, that 40% is parked in annuity which is not redeemable. So there are no free lunches in this country with regards to taxation.

  • Liquidity, the exposure to money

    EPF can be withdrawn completely upon maturity. Now an individual may argue, ‘so what?’
    But, with regards to NPS, only 60% of the money is eligible for withdrawal upon maturity. While the rest 40% is parked in Annuity, plus the rate of return on annuity will be based upon the rates prevailing at that period of time. Yes, it may go up or it may go down! Now that’s far into the future with very little certainty.

    Individuals because of their fear of taxation, always forget that the ultimate aim of saving or investing money is to use it at a certain point in time. It’s a form of myopia which a lot of people go through. At the end of the day, everyone enjoys if they catch 2 birds with one shot. But does that really work?

    Getting an exposure to equity in NPS will restrict the individual to only 60% of his corpus upon maturity while a fixed income based EPF will be available for withdrawal completely. The shot just got a little tough.

  • Hope – NPS will become tax free!

    We forget so easily, it was just last year, central government wanted to tax EPF! So it will be a little unwise to hope for a miracle in NPS. Tax is the revenue for Government on which they are able to run the country, if they start giving free lunch to everyone then it will become difficult for them to exist.

    So to keep such high hopes of NPS being tax free in the future will lead to disappointment.

Even if the offer of NPS looks lip smacking delicious, there are these tiny devils in details. It will not be a great option to switch the existing EPF account to NPS account. Rather, if an individual can gradually increase his overall exposure to equity through the help of his advisor, then NPS would automatically become meaningless. While saying this, there is no intention of portraying NPS as a bad product but if the retirement of an individual is several years away then it will make more sense to participate in the growth story of India by investing in direct equity or equity based mutual funds. At the end, an individual could also brag like, ‘Yes, I paid a little more tax but in return got more benefit because India progressed.’

Jinay Savla

Thursday Trivia  : Top 3 Investing Disciplines from the Life of Rahul Dravid

Rahul Sharad Dravid has been a great ambassador for the game of Cricket. His contribution to the world of cricket is unparalleled. As much as he has contributed to the game, he has also provided an immense contribution to everyone by the very nature of his being. Sachin Tendulkar once quoted him as a perfect role model for youngsters. His performance as a coach to India A team looks as if the little master just knew about the future.

In this Trivia, let’s look at what disciplines we can learn from Rahul Dravid. As Charlie Munger says, it’s important to learn from various things from various people and subjects.

“For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldnt stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody elses discipline. So I just grabbed in all directions for the big ideas that would really work.”

~ Charlie Munger

  Top 3 Investing Disciplines from the Life of Rahul Dravid

 Temperament

Rahul Dravid seems to have mastered temperament. A career with almost no fights with anyone on the field and he never lost to anyone’s view about him both on and off the game of cricket. Australians had once said that he is mentally the toughest cricket they have encountered. He was never like the flamboyant Virat Kohli or a genius like Sachin Tendulkar. Yet, he had a solid control on his game and would never play a shot just to show off. Which is the reason why, when an opener was out, no cricket fan ever panicked as they see Dravid walking the crease.

 

Exactly in the same way, to be a successful investor, it’s not necessary to have a high IQ. Warren Buffet has repeatedly said that any IQ above 130 is practically useless for an investor. Also, being a wizard at mathematics or finance is not really important. The promoters of Long Term Capital Management (one of the great failure stories on wall street) were all doctorates in mathematics and finance. By temperament, it simply means having a common sense on how the world of investing really works.

Almost everyone knows that if a particular stock which seems good today, will not remain as good tomorrow. Yet, there is a great urge to buy something which was fantastic yesterday as some expert told on television. If the outcome is positive, then an investor gets more greedy and if the outcome is negative, then the very same investor becomes fearful. An investor’s view of the equity market changes with a slight change in his temperament. That’s why the results are mostly never in their favour.

  1. If it’s boring, it’s beautiful

As a cricket fan, watching Sehwag in a Test Match against Pakistan is a real treat. He would play them across the park. Just like VVS Laxman who would eat a different breakfast while he was playing with Australia. When it comes to Rahul Dravid, with that solid defence techniques often times it looked boring. Often times, bowlers would just not want to bowl against Dravid. He played few shots which made him difficult to get out. He would tire them out through the day and once he saw that bowlers have lost their steam, he would whack them everywhere on the cricket ground. For most part of his innings, he will be standing there like a Wall.

 

Same goes with the game of Investing. It’s super boring. It’s not about scoring off every opportunity. Infact, just like the game of cricket it can be super dangerous. Discipline of investing comes from taking fewer actions. Not trading on a daily basis. Sometimes, even sitting for years on an investment. When the power of compounding kicks in, it is then becomes beautiful. However, for a large part of an investment remains boring. There are days when there is no movement. It’s imperative for an investor to simply ignore the noise and focus on his own money rather than everyone else.

  1. Grit to be Great

In the book, Rahul Dravid : Timeless Steel chapter 4, Sanjay Manjrekar talks about how Dravid maybe the least talented of the masters which India had produced before him with the likes of Sunil Gavaskar and Sachin Tendulkar. However, when a cricket fan talks about Dravid amongst them in a single breath, it shows his immense dedication to preparation and work ethic. Manjrekar goes on to say something brilliant ~ “I must confess, Dravid’s attitude at the start of his career concerned me. As young cricketers we were often reminded to not think too much – and sometimes reprimanded by our coaches and senior team-mates for doing so. Being a thinker in cricket, it is argued, makes you complicate a game that is played best when it is kept simple. I thought Dravid was doing precisely that: thinking too much about his game, his flaws and so on. I once saw him shadow-play a false shot that had got him out. No problem with that, everyone does it. Just that Dravid was rehearsing the shot at a dinner table in a restaurant! This trait made me wonder whether this man, who we all knew by then was going to be the next No. 3 for India, was going to over-think his game and throw it all away.”

 

Even the best Investors of the World today were not born to be that way. They struggled, worked very hard and put in immense dedication to their craft to fulfil their dreams. How often, the word ‘Genius’ has been loosely used for them. It makes a retail investor induced into believing that others are born with that skill or just have an immense amount of luck working for them. Investing is a really hard game. It includes tonnes and tonnes of reading and gaining an insight into how the markets actually work. Warren Buffet still reads around 500 pages everyday. Unbelievable as it may sound, it has helped him to create a great wealth for himself. But still, most retail investors rely on a tip from someone to create their wealth. In that sense, the grit to be great is lost.

To sum it up, Harsha Bhogle once spoke about how he wants to retire and yes, he mentioned Rahul Dravid.