14 Jun

Mistakes people can make with the current state of equity markets

Equity markets in India have given very good returns in comparison with other asset classes (in the recent past). The higher returns of equity products are driving further investments into them. Their case is also made better because post demonetization in India, assets like gold and real estate have become stagnant. Also, interest rates on Fixed Deposits and Government Savings (like postal savings) are also being dropped continuously. Lower returns in other economies and easy liquidity is also attracting global capital to Indian equity markets.

Higher returns of equity would get reflected in one’s equity portfolio through stocks, equity mutual funds, Equity PMS and ULIP (Unit Linked Insurance Plans). However, during such euphoric phase’s lot of investors make fundamental mistakes, only to regret later. I have listed some of them for the benefit of readers. The word equity below would mean Direct Equity, Equity PMS, Equity Mutual Fund, Hybrid Mutual Fund and ULIPs (Unit Linked Insurance Plans).

1. Equity oriented Portfolio for regular monthly income: Lower Interest rates have made many first time investors move to hybrid equity products like balanced mutual funds for their regular income requirements. Many are driven by the high past returns in comparison to the current FD rates. Do note, equity portfolios are best suited for building wealth over a period of time. They are however very volatile in short term and can give lot of sleepless nights. Investors can have a terrible experience if equity assets are the predominant source of regular income. Do note 12% p.a. return over the last 5 years in not equivalent to 12% p.a. every year or 1% per month.

2. Equity oriented Portfolio as an alternative to banking products: : Many bankers and agents are suggesting equity oriented portfolios ( ULIP’s , equity mutual funds and balanced funds) to their customers as an higher return alternative to Fixed Deposits. Please note that these are market linked investments and hence do not assure higher returns. ULIPs, apart from having market risk, also carry higher charges/expenses. If one is coming in these for a time horizon less than 5 years, than the experience might not be very good.

3. Increasing allocation to Equity Oriented Portfolio due to past performance: Allocation to equity should be based on one’s risk profile and investment horizon. Having larger allocation in equity oriented portfolio with an investment horizon of less than 3 years would be extremely dangerous. Do not get influenced by the past returns.

4. Lured by assured dividends of equity/balanced funds: Many balanced mutual funds have started declaring regular monthly dividends which is attracting many investors believing these are assured regular income. Do note that, dividends are not a statutory obligation but are given as part of the profits of the mutual funds. Hence, investors should have made adequate provisions in other asset classes/financial products for regular income. Dividends should only be a secondary source of income.

5. Investing large portion in Midcap and Small Cap Stocks/Funds: Portfolios allocated to these have given phenomenal returns in the recent past. However, please understand that these carry very large risks in comparison to diversified portfolios.

To conclude, equity continues to be one of the best asset classes to beat inflation and to get tax efficient returns. However, not respecting the risk factors of equity can have a very bad effect on investor’s portfolio (in the shorter term) and their future experiences.

“It is best to learn from past mistakes than losing one’s hard earned money”.

Note:
1. Market linked investments like Mutual Funds and Equity share investments are subject to market risks. Kindly read the scheme information documents carefully before investing.
2. All other investments too have different levels of risk like credit risk, regulatory risk etc. Appreciate this before initiating any investments.
3. Past performance of any asset class is not an indicator of future performance.
4. It is very important to consult a professional planner while implementing any of the above ideas.
5. The above are mere suggestions and not Investment Advice as individual cases might differ.
In case, you would like professional financial guidance, than feel free to connect to me at 9845557582 or naveen@naveenrego.com.

Naveen Julian Rego-CFP
SEBI Registered Investment Adviser

14th June 2017

25 Nov

Investment Ideas – Nov 2016

1. Interest rates on Fixed Income options like Fixed Deposits and Postal Schemes would go down considerably as banks are flush with funds. This would affect lot of investors who have a larger share in such type of investments. However, such investors should be careful before shifting allocations to other investment options and the same should be done after clearly understanding the risk factors well. Do not invest in any financial product which you can’t understand well or else take services of a professional advisor.

2. Medium Term Debt Mutual Funds would have given around 10% p.a. post tax returns in last 3 years and above. Please understand the future returns of this too would fall, in line with overall downward movement in interest rates. However, they would still be better for conservative investors for their tax efficiency.

3. Liquid and Ultra Short Term Mutual Funds would also have a dip in returns due to the reasons mentioned above. They would however continue to be a better bet than savings/current account or short term deposits. Investors could look at debit card facilities with some liquid/ultra short term mutual funds. This would be a superior alternative to debit cards with bank accounts.

4. Equity markets are volatile and have dipped considerably due to numerous factors. While existing portfolios would have a dip in value, long term investors should not be really bothered with such developments. The following set of investors should look at increasing allocations to equity instruments in the current time:
a. Investors whose overall allocations in equity are lesser than 25% of their overall wealth. Typical investors would be retired individuals and conservative investors.
b. Investors who do not want the money for the next 5 years and are bit aggressive, should look at a minimum allocations to equity at 50% of their overall wealth.

However, allocations to equity should be done on a portfolio basis (ideally diversified equity mutual funds) with investments spread equally over next 6-12 months. Regular investing would help one to benefit from any further volatility. Regular investors in equity mutual funds could temporarily increase the SIP’s/STP’s for the next 6-12 months to benefit from the current opportunities. Kindly understand investments in equity products carry very large short term volatility and hence any investments should not be done with less than 5 years time frame keeping the overall allocations in mind.

5. Many bankers and distributors would be selling products like traditional/ market linked life insurance schemes and capital protection hybrid mutual funds as savings options better than FD’s(mostly to NRI’s) and balanced funds for regular income( to Retired people). Do note many of these are not well suited for an investor’s portfolio (but makes tremendous sense for seller). Do not fall prey to aggressive selling or an emotional push so that you regret later in leisure.

6. Real Estate would continue to disappoint for some more time. However, this phase would give opportunities for people to buy real estate for actual use. Bargain hard for discounts on completed projects. Also, do not jump into buying property just because the interest rates are lower. Do not have more than 50% allocation to Real Estate (excluding self occupied house) any time. Do not base your future return expectations on the basis of past performance.

7. Be tax compliant and use the provisions of tax laws to reduce taxable income. Invest in a good and reliable tax consultant. Government would be behind tax evaders with a vengeance.

8. Give lot of importance to estate planning. Have proper nominations in place and draft a will, if possible, to avoid future family conflict.

9. Always consult a financial planner (one who is certified and registered with the regulator) for professional guidance and see to it that his/her commercial interests are in alignment with your financial plans. The quality of advice received from a professional would have a large impact on your overall portfolio. There is nothing called free advice.
Note:
1. Market linked investments like Mutual Funds and Equity share investments are subject to market risks. Kindly read the scheme information documents carefully before investing.
2. Past performance of any asset class is not an indicator of future performance.
3. It is very important to consult a professional planner while implementing any of the above ideas.
4. The above are mere suggestions and not Investment Advice as individual cases might differ.

In case, some of the above ideas appeal to you and you would like professional guidance, then feel free to connect to me at 9845557582 or naveen@naveenrego.com.

Naveen Julian Rego-CFP
SEBI Registered Investment Adviser

19 Nov

India MODIFIED- the way forward

The actions taken by the Indian government to curb black money and counterfeit notes would have far reaching implications on the way one earns, spends and saves. While I would not like to go into the details, I have touched on the following which concerns individuals:

Impact of Earnings of Individuals: While the salaried would not get affected as their income was always fully taxed, the impact would be felt by self employed professionals and businessman (where there is chance of hiding a part of income). It would be good for this class of people to put their incomes in order and be fully tax compliant. The benefits of being tax compliant would be to get loans at cheaper rates and have total peace of mind. The accounted income/saving could also be deployed in tax compliant well regulated products (rather than in unproductive assets or expenditures) to get better tax efficient returns. The savings by lower loan rates and better growth through productive investments would more than make up for the taxes paid to the government.

Impact on Spending of Individuals: Transactions would be more electronic (cards or wallets) than cash and would be more from the accounted income. This would also curb unnecessary spending thereby bringing down the overall inflation and benefitting each one of us.

Impact on Savings of Individuals: Majority of savers in India have large allocations to Fixed Income bearing instruments like Fixed Deposits and Postal Savings including traditional Life Insurance Savings plan. Interest rates would go down considerably thereby impacting a large section of the savers. It would be prudent for this class of savers to look at instruments beyond fixed income to manage their earnings.

Other key points:

Real Estate would have a massive slowdown as most of the transactions had a cash component. It would however be an interesting asset class to watch as discounted sales would begin soon. This could be a value buy for investors after some serious discounts.

Equity and Equity Mutual Funds would be favoured asset class from a long term horizon (5 years and above) for giving inflation beating tax efficient returns. However, it would be very important to build this portfolio gradually to avoid any major heartburn. Do not invest with less than 5 years term or for getting regular income (even if promised).

Debt Mutual Funds would be a superior tax efficient alternative to Fixed Deposits for individuals in the higher tax bracket. The returns would be around the FD rates but would be highly tax efficient.

Gold also might not give fantastic returns due to curb on black money. However, investors could have allocation to this more from a diversification angle. Sovereign Gold Bonds issued by the Government from time to time would be a better way to accumulate this asset class.

Do not invest in Life Insurance Linked savings and pension plans as there are better and cheaper alternatives.

Do not give importance to rumours through various social media on taxation and currency related issues. Always check the authenticity of source before acting on it.

Conclusion:

While many would need to go through the short term pain, the long term outlook is a big positive for the country. Tax compliance and investments in productive assets would help our country to become a super power in the years ahead. Are you game?

Note:
1. All investments are subject to various types of risks. Kindly understand the risk factors clearly before investing.
2. It is very important to consult a professional; planner or Investment Advisor while implementing any of the above ideas.
3. The above are mere suggestions and not Investment Advice as individual cases might differ.
In case, some of the above ideas appeal; to you and you would like professional guidance, then feel free to connect to me at 9845557582 or naveen@naveenrego.com.
Do visit us at www.naveenrego.com to read the disclosure statement and past Investment Ideas in the blog section.

Happy Investing!!

Naveen Julian Rego-CFP
SEBI Registered Investment Advisor

10 Jun

Financial Consumers- Make the best choice

 

Financial Consumers- Make the best choice

The way one takes financial advice and buys financial product is going through a tremendous change globally including India. The purpose of this article is to give a clear understanding to the financial consumer on appropriate choices one should make. The word distributor used in the article stands for agents, broker employees or bankers selling financial products

Typically many of the financial consumers used to take financial advice from the distributors of the financial products. This inherently had a conflict of interest as the distributor would sell higher commission products then what is appropriate to the client situation. However, consumers liked this arrangement as the distributor/agent would handhold the client with documentation related work and charge no extra fees for the advice/service (though they still did earn commissions for this).

But this is changing big time as regulatory compliance, technology, introduction of direct options and disclosures are breaking the traditional models upside down.

Let me dwell more on the above areas:

Regulatory compliance: As per the regulator (SEBI), anyone giving financial advice has to be registered with it. These are called Registered Investment Advisers (RIA). To become a RIA one has to be suitably qualified (CFP or pass some certified exams). RIA should act as a fiduciary (always acting in the client’s interest) and disclose any conflict of interest upfront. RIA’s would charge fees depending whether it is one time sitting (like plan construction) or annual retainer model.

Technology: The execution of financial transactions would gradually move totally to a technology driven platform without much of paper work. Financial Consumers would be able to transact on their own or supported by the financial distributors. Financial and Portfolio reporting would be easily available through internet connecting devices.

Direct Options: Products like Mutual Funds and Life Insurance today come with Direct options. These could be bought directly from the financial institution bypassing the distributor. This would save costs for the consumer. Typically in a mutual fund the cost saving would be around 1% p.a. (equity funds) to 0.50% (debt mutual funds) which would be the remuneration of the financial distributor. In a life insurance, the online term plans would be cheaper by around 30-50% on the annual premium. However, the commissions for financial products would also be on their way down reducing the arbitrage between direct and intermediary option.

Disclosures: The regulator is making it mandatory for disclosures of salaries of important personnel of financial institutions (mutual funds/life insurance), brokerage and commission received by distributors and any conflict of interest in RIA’s working. This increases the transparency.

The way forward would be something like this:

Step 1: Approach a Registered Investment Adviser if you want unbiased advice on your financial condition. The fees charged would depend on the time taken and the size of portfolio. Opt for an annual retainer model in case you want regular reviews and discussions. Else, engage him/her only when required. Also, understand if the RIA would assist in implementing the plan and cost/charges for the same.

Step 2: Implement the financial plan execution through direct model on a technology driven platform to save costs. This could be done by the consumer or in assistance with RIA. Also, evaluate the implementation option (including the services) of the distributor if it still makes sense for ease of operation.

If you believe that your financial distributor is giving free advice, then these are the numbers for you. Assuming your entire financial networth is Rs 50 lakhs with Rs 30 lakhs in fixed income options (FD, PPF, EPF etc). The remaining Rs 20 lakhs is invested in Equity Mutual Funds through a distributor (who basically gives Mutual Fund related advice only). The earnings of the MF distributor (and cost to the customer) would be roughly Rs 20,000 p.a. The same consumer could approach a RIA around the same total remuneration and get comprehensive advice and implementation support.

Feel free to get in touch with me at naveen@naveenrego.com or 9845557582 for more clarity on this. We would be more than delighted to make your financial engagement better.
“Jago Grahak Jago”. After all it’s your money!!

Have a wonderful day!!

Naveen Julian Rego-CFP
SEBI Registered Investment Adviser

09 Apr

Investment Ideas-April 2016

Investment Ideas-April 2016

• Equity markets continue to be volatile for quite some time. Investors who have investment horizons greater than 5 years should use such times to increase their equity allocation. Actually, regular investments in equity mutual funds (SIP’s or STP’s) are the best way to benefit from market volatility. Do not get disturbed and postpone equity investments by focussing on your current equity portfolio values. Bad times in any asset class are good times to invest in that asset class.

• Debt or fixed income mutual funds are excellent tax efficient investment options for Residents compared to Fixed Deposits. NRI’s could use this to invest their NRO funds as they are quite tax efficient than NRO deposits. Also, returning NRI’s could plan investments in such schemes 3-5 years before their actual return to reduce their taxation post becoming a Resident. Returns of these schemes could be slightly better than FD but the clincher is tax efficiency.

• Residents and NRI’s (for their Indian income) should use the benefits of Sec 80C to reduce taxable income. Investments here should also take care of other financial goals. Our suggestion has been to invest monthly in tax saving mutual funds (ELSS). These not only give market linked returns over longer term but the gains and dividends are tax exempt. Regular investments reduce the risk of market timing and give inflation beating returns. Start investing right now.

• Investors can avoid investments in NPS to reduce taxable income or otherwise. Even after taking immediate tax benefits, the long returns of the product would be lower than a simple equity mutual fund. It would be better to pay tax and stay invested in a good equity mutual fund. The maturity proceeds of NPS are also quite complicated as on date.

• Interest rates (FD’s, PPF and Postal Savings) are on their way down. Do not increase the risk profile of your portfolio just to earn better returns. Have a proper asset allocation plan which takes care of safety, liquidity, returns and taxation. Stay away from any guaranteed/assured not regulated schemes. This might be a fraud.

• Investments for long term goals (like retirement, children’s education and marriage) should be done through equity linked instruments like equity mutual funds. These would be volatile in the short term but give inflation beating returns in longer term. Regular SIP’s are the best way to fund these goals. Review them as the goals are approaching near. Fixed income instruments like PPF, Sukanya Samruddhi Scheme, RD etc would never be able to beat returns given by equity funds over longer time frame.

• Retired investors should also have allocation to equity mutual funds of about 25% of their entire wealth. This would help them to give inflation beating returns besides tax efficiency. Fixed Deposits could be swapped with debt mutual funds for reducing taxable income. Drawing money (SWP) from debt or a hybrid mutual fund is an excellent tax efficient strategy to earn monthly income.

• Real Estate would continue to disappoint for some more time. However, this phase would give opportunities for people to buy real estate for actual use. Bargain hard for discounts on completed projects. Also, do not jump into buying property just because the interest rates are lower. Do not have more than 50% allocation to Real Estate (excluding self occupied house) any time.

• Avoid investment linked insurance schemes for funding any goals (tax saving, children’s saving, retirement etc) as these are non transparent, expensive and yield low returns. If you have already done this mistake then review and restructure at the earliest.

• Have a comprehensive medical insurance plan to take care of medical expenses. Also, have a pure term insurance plan if you believe you have large responsibilities and liabilities. Review them regularly.

• Do not fall prey to calls from fraudsters asking you to share your important details (password etc) or making you buy insurance with easy bonus. There is nothing called easy money.

• Avoid trading in direct equity and derivatives. These are for professionals and full timers. Else, wealth would get transferred from you to the brokers. Concentrate on your profession (for higher returns) and family (for peace and happiness) instead. Do not search for excitement in your financial portfolio.

• Be tax compliant and use the provisions of tax laws to reduce taxable income. Invest in a good and reliable tax consultant. Use their skills for reducing taxes and not for wealth building and financial planning.

• There is no point in accumulating wealth without a proper goal. Retire early whenever the portfolio is enough to take care of all important financial goals. Do not plan too much for nominees.

• Give lot of importance to estate planning. Have proper nominations in place and draft a will, if possible, to avoid future family conflict.

• Always consult a financial planner (one who is certified and registered with the regulator) for professional guidance and see to it that his/her commercial interests are in alignment with your financial plans. The quality of advice received from a professional would have a large impact on your overall portfolio. There is nothing called free advice.
Note:
1. Mutual Fund investments are subject to market risks. Kindly read the scheme information documents before investing.
2. It is very important to consult a professional planner while implementing any of the above ideas.
3. The above are mere suggestions and not Investment Advice as individual cases might differ.

In case, some of the above ideas appeal to you and you would like professional guidance, then feel free to connect to me at 9845557582 or naveen@naveenrego.com.

Naveen Julian Rego-CFP
SEBI Registered Investment Adviser

14 Jan

Investment Ideas-Jan 2016

Investment Ideas –Jan 2016

• The recent volatility in equity markets would have disturbed many investors. However, equity as an asset class is bound to be volatile over shorter time frames. That is their characteristic. To benefit the most from this asset class its best to go the professional way (equity mutual funds) and invest regularly. To give some figures, regular monthly investing (SIP)in top 25 equity funds over last 10 years would have yielded more than 15% p.a. despite all market noise. So if you can concentrate on your long term goal without being too much bothered about short term fluctuations, regular investing (SIP) in equity mutual funds is the way to build sustainable wealth.
• Fixed Deposits returns are on their way down and also extremely tax in-efficient. One could look at Medium term Debt Mutual funds for tax efficiency or hybrid mutual funds for better returns.
• Investors (especially retired) looking at regular monthly income should exploit the tax advantages of mutual fund portfolios and relatively better returns. A well designed regular income portfolio from mutual funds would yield very healthy regular income besides being extremely tax efficient. FD’s, Postal Monthly Income Scheme, Annuities or Senior Citizen Bonds would be no comparison to the above.
• Tax Savings Mutual Funds would be the best in its category to give tax deduction and inflation beating
• returns (dividends or capital gains). These have beaten the category favourite PPF both on returns (in the past) and tax efficiency and would continue to do so over the long term albeit with short term volatility.
• Avoid any insurance linked savings instruments as an investment avenue. This is true for resident and NRI’s. These would build wealth for the seller than the person buying them. Restructure these policies to avoid further damage. Buy pure term insurance instead, if you indeed need life cover.
• NRI’s planning to return to India (permanently) need to align their portfolios gradually with Indian tax laws. Always give importance to tax efficient returns while designing such portfolios. Mutual Funds would be a good vehicle.
• Be extremely careful of Financial Frauds. Never share your banking passwords and personal details with any unknown entities. Do not fall prey to greed and high return guarantee instruments. After all it’s your hard earned money.
• Real Estate would continue to struggle in giving good returns. Equity Mutual Funds invested well would be a better bet both for returns and tax efficiency.
Note:
1. Investments in all asset classes are not assured as they have market risks.
2. Matching your investment horizon with the right investment product can greatly reduce the sudden surprises.
3. We request you to consult us before initiating any strategy as your personal circumstances may be different from others.
4. Assured return strategies are highly taxable and do not beat inflation.

Wishing you all the very best in 2016.

Naveen Rego
CERTIFIED FINANCIAL PLANNER

01 Oct

Investment Options for the Retired

Interest rates on fixed income products like FD’s (including NRE FD’s), PPF and Postal Savings Schemes (Senior Citizen Bonds, Postal MIS etc) are on their way down. This will have large implication to Retired people having predominant allocation to these instruments and who are dependent on them for meeting their regular expenses.
The interest rates will get re-aligned downwards as and when the existing instruments mature. So what is the way out? While there is no clear cut answer as it should be investor specific, I have listed some guidelines which should be kept in mind for the above set of investors:
1. Fixed Income instruments will give regular income but fail miserably in beating inflation. Hence, it would be very important to have inflation beating instruments in some proportions in one’s portfolio. Also, many of the fixed income instruments have the implication of taxation which reduces the post tax income.

2. The allocation (of inflation beating products) should be minimum 25% for retired investors. Equity Mutual funds, while being volatile in the shorter time frame, would be good choice for these products. This would also reduce the taxable income (not the income as dividends from equity funds are tax exempt). Build this part of portfolio gradually through a staggered approach so as reduce the market timing risk.

3. The allocation of fixed income products for a Retired person should be done such that one has enough regular income but the income is such that it falls below the taxable income. Assuming 9% p.a. annual interest, one can invest maximum Rs 50 lakhs in taxable fixed income options like FD’s, Postal Schemes etc (non taxable income is Rs 4.50 lakhs i.e. Rs 3 lakhs basic exemption plus Rs 1.50 lakhs after investing under Sec 80C). If one has pension or rental income (fully taxable) of say Rs 2 lakhs per year, then the maximum investments in FD’s would be Rs 27.75 lakhs (approx).

4. The remaining allocation to fixed income options should be done through Debt Mutual Funds. There is common myth that debt mutual funds are very risky as they invest in shares. Kindly note that debt mutual funds invest (or loan) the money to government, banks, PSU’s or good corporate for a fixed period at a rate of interest. This is returned back to the investors after the expenses subject to the associated risks which are considerable lower than equity instruments.

5. Debt Mutual Funds also have a better taxation structure than your other fixed income instruments. Firstly, they are not taxed till withdrawn. That means you can postpone taxation till the money is required. Secondly, exits after 3 years are taxed at 20% net of inflation unlike FD’s which are taxed fully.

6. Investors can also invest in hybrid funds of Mutual Funds (having allocation between equity and debt instruments) and opt for regular monthly withdrawal. This would earn regular income but the taxable income would be very less. Assuming a Retiree invests Rs 25 lakhs and withdraws @ 10% p.a. (and assuming the long term returns of this scheme are 10% p.a.), the annual income would be Rs 2.50 lakhs and taxation would be less than Rs 4,000/- ( in the highest tax bracket) which is less than 2%. There would not be any TDS too.

7. One could avoid investing in real estate as the rental yields of apartments are quite low (not more than 3% p.a.) and fully taxed. These could be exited and re-invested in financial instruments as mentioned above.

8. NRI’s who are planning retirement in India should also bear the above points so that lower returns with large taxation do not hit them.
While the environment looks challenging for the retired investors, a prudent approach would help in securing one’s regular income. We advise you to seek a total view of your finances through a Financial Planner and not have a piecemeal approach.

Note:
1. The above are personal opinion and should not be construed as financial/taxation advice.
2. As each individual circumstance is different, please contact your tax consultant/advisor for more clarity.
3. The cases and assumptions above are only for illustration and made for understanding purpose only.
4. Mutual Fund investments are subject to market risks. Kindly be aware of the risk factors before investing.

Feel free to get in touch with me at naveen@naveenrego.com / 98455 57582 for further clarifications.

Happy Retirement Planning!!

Naveen Rego
CERTFIFIED FINANCIAL PLANNER

30 Jun

Taxation for NRI’s

My interactions with NRI’s (especially the Middle East variety) have made me conclude that there is a large information gap in understanding the taxation of their investments. While I am not a tax expert, the below thoughts would give some clarity. I have made this simple without any jargons.
1. Income earned by NRI’s in India is fully taxable like a Resident Indian. These could be interest earned on NRO deposits, rental income and short term gains in equity and mutual funds.
2. Indian Income of NRI’s upto Rs 2.50 lakhs is tax exempt (as the case of Resident Indians). Income above this would be taxed based on slabs (10% between 2.50 lakhs to Rs 5 lakhs, 20% between Rs 5 lakhs to Rs 10 lakhs and 30% above Rs 10 lakhs). One can reduce taxable income by Rs 1.50 lakhs by investing in Sec 80C instruments. Rental income could be netted with the interest paid on housing loan, if any.
3. Income earned by NRI on his global income is not taxed in India. These could be salaries, profits, interest on NRE/FCNR or other overseas deposits.
4. NRI’s who return to India for good would not become Resident Indians on the day of landing in India. Based on the number of years one was a NRI, his status would move from NRI to Resident but Not Ordinarily Resident (RNOR) and then Resident Ordinary.
5. The maximum years for the change from NRI to Resident Ordinary would be 2 years.
6. The moment one becomes RNOR from NRI he needs to change his bank account –NRE and FCNR to either Resident Account or Resident Foreign Currency (RFC). The interest income of NRE/FCNR if continued is fully taxable as Indian Income. It is also not legal to continue these accounts once an individual becomes RNOR/ Resident Ordinary from NRI (do not go by what the bankers say). If however, one converts the proceeds of NRE/FCNR to RFC when becoming RNOR, there would be no taxation till one maintains the status of RNOR (i.e. maximum 2 years). The moment one becomes Resident Ordinary then even RFC accounts are taxable. Even the global incomes of such individuals are taxed post becoming Resident Ordinary. Global income is not taxed for RNOR, subject to some conditions.
7. If you have a long term NRE/FCNR FD, do not believe that the interest is forever tax exempt. In case, there is change in your status you would be liable to tax as mentioned above.
So what should be a good way? My personal opinions are as follows:
• Returning NRI’s should take exposure in debt mutual funds for their tax efficiency. As per the current tax laws, long term gains (after 3 years) are taxed post inflation at 20%. Assuming the debt funds gave a return of 9% p.a. and the annual inflation was 8% p.a., then the tax would be only on the net 1% @20% which is like 0.20% ( as compared to 30% on FD’s). The taxation is only on withdrawals and not on growth like FD’s. It also helps to plan a regular income portfolio (for retiring NRI’s) with debt mutual funds as the taxation would be very low unlike FD’s.
• Debt Mutual Funds do not invest in shares/equities but invest in FD like instruments like government or corporate bonds. Hence, they are less volatile.
• Some portion of money could be invested in equity mutual funds (more volatile in short term) to get inflation beating returns. Dividends received from equity mutual funds are tax exempt and so are gains after 1 year.
• NRI’s could invest in Mutual Funds when they are NRI’s and then change the status to Resident Indians post becoming Resident Indian. There is no tax implication on the same.
• Invest in Resident FD’s only to the extent one is below the taxable limit and use the benefits of Sec 80C. Tax Saving Mutual Funds (ELSS) would be a good option.
• Don’t be poorer because of ignorance and be always on the right side of law. Consult right professionals and don’t google for information.
• NRI’s and who plan to continue for many more years could use the benefits of mutual funds for their Indian portfolio as a tax efficient alternative to NRO FD’s.
• NRI’s who plan to wind up in the next 5 years or less could gradually shift from NRE deposits to Indian Mutual funds.
• Avoid Life Insurance linked Savings/Retirement/Children schemes as the costs are prohibitive or returns do not even beat inflation.
• File your Indian taxes, if you are eligible to.
• Large allocation to income earning real estate would depress the regular income as the yields are lower and fully taxable.
• Finally, keep the entire portfolio simple and easy to manage!!

Note:
1. The above are personal opinion and should not be construed as financial/taxation advice.
2. As each individual circumstance is different, please contact your tax consultant/advisor for more clarity.
3. Mutual Fund investments are subject to market risks.

Feel free to get in touch with me at naveen@naveenrego.com / 98455 57582 for further clarifications.

Happy Investing!!

Naveen Rego
CERTFIFIED FINANCIAL PLANNER

09 Jan

Interesting Investment Ideas-Jan 2015

Interesting Investment Ideas-Jan 2015
Calendar Year 2014 clearly belonged to market linked financial assets. While Real assets like Real Estate and Gold stagnated or gave negative returns, equity gave 30% plus and long term bond funds earned 15% plus. Categories like small and mid cap funds gave above 100% too. Any disclaimer would suggest “Past performance is not an indicator of future performance”. So what are our ideas for 2015?
Our strategy would always be client situation specific and not market driven. We would re-iterate some of the following ideas:
1. Swap your Fixed Deposits with Medium and Long Term Debt Mutual Funds. The fall in interest rates and the tax concessions on debt mutual funds make them the best in their category. We particularly like the accrual strategy debt funds for their lower volatility. This also holds good for NRI’s who are planning to retire in the 3-5 years. However, do not get overexposed to fixed income options including FD’s as these do not beat inflation over long term.
2. One time long term investments should be invested in asset allocation funds rather than equity funds. This is because the near term performance of equity would not be any closer to last year’s returns. Another strategy would be to invest in short term debt funds and stagger the investments monthly into equity funds over next 3-5 years.
3. Investors running monthly investments into equity funds should continue them if their financial goals are more than 5 years away. The regular investments would average the volatility and give better risk adjusted returns.
4. Give a lot of importance to asset allocation and diversification. Don’t get too excited about the past returns. Equity allocation should be restricted around 25% to 50% of the overall long term wealth.
5. Trading in stocks and derivatives is a clear NO. Investments in direct equity should be only in the form of portfolio comprising of between 10-25 stocks. Do this if you have the resources and time. Else, leave this headache to a diversified equity fund.
6. Avoid insurance linked investment products and any complicated products which you can’t understand. Cancel past life insurance plans which have low life cover, wherever possible.
7. Real Estate would continue to stagnate. Invest only if you have very long term horizon. Exposure above 50% of your long term wealth could be dangerous.
8. Have at least 6-12 months of mandatory expenses parked in an ultra short term debt fund or banking product.
9. Expenses planned in next 3-5 years could be invested in safe debt mutual funds or conservative asset allocation funds. No equity, equity funds, gold or real estate for this.
10. Equity would continue to excite as it has done in the past. The long term returns of equity would outperform gold (albeit with severe volatility). Investors looking at accumulating gold for their long term needs (above 5 years) can start a SIP in equity fund instead. They could redeem equity funds and buy spot gold whenever required.
11. Take the benefit of Sec 80C to reduce taxable income. This holds good for NRI’s on their Indian Income. A maximum of Rs 1.50 lakhs could be invested in this under eligible instruments. We like equity linked savings schemes from mutual funds. Invest before 31st March 2015.
12. It makes sense to have a HEALTH portfolio apart from a health insurance plan. This would come in handy if there are exclusions or waiting period in the basic health plan. Invest periodically into asset allocation mutual funds.
13. If your finances cannot take care of the liabilities and family responsibilities, then do have a pure life insurance plan. Review them. Buy online for low premiums.
14. Check whether all your investments have proper nominees. Making a WILL also makes sense for proper distribution of your wealth.
15. Also, think of those less fortunate ones. One could make exclusive portfolios for philanthropic activities too.
“Discipline and Patience would be more rewarding than Intelligence.”
We wish you and your loved ones a very exciting and financially rewarding 2015.
Happy investing!!

Naveen Rego-CFP

Note:
1. Investments in equity markets and mutual funds are subject to market risks.
2. Allocation to various asset classes should be done based on one’s time horizon and risk appetite.
3. Do get in touch with us for understanding the implications of the above in your personal finances.

11 Dec

Fixed Deposits-Are they without Risks?

I was addressing a group of retiring people last month. I had given a simple case to them. A person retiring at age 60 years (could be earlier too) has Rs 50 lakhs corpus. His/her annual requirement was Rs 5 lakhs. A PSU bank was giving 10% p.a. on its 10 year deposit. It means if he/she invests their entire money in this, one would earn Rs 5 lakhs per annum. Was there any risk to this strategy?? Majority agreed that this was the safest strategy as older people should not venture into risky products. My take was entirely different:
Risk No. 1: Inflation
We live in a time where the cost of living increases every year. A Fixed Deposit product does not increase income annually. Assuming 7.5% p.a. inflation, the annual requirement would almost double in 10 years. Inflation of consumers is much different than that declared by the government as our consumption basket are different than the government basket (which is used for calculating inflation).

Risk No. 2: Re-investment Risk
The Fixed Deposit only assures returns till the maturity. Post that one has to re-invest them at the prevailing interest rates. A 10 % p.a. FD could go up or down depending on the scenario then. My NRI friends would recall that NRE FD rates were 15% plus in the 1990’s which came down all the way to 3% in early 2000’s. God forbid, the interest rates collapse on maturity!!

Risk No. 3: Taxation
Income from FD’s are taxed at one’s marginal tax rates. This would be as low as NIL to as high as 30% based on the total income of the individual. There would be an implication of Tax Deducted at Source (TDS) too. NRI’s investing in NRE deposits would not have taxation issues till they are NRI’s. Once they lose the NRI status, they too would be taxed on this NRE deposits as normal citizens.

Fixed Deposits from banks are wonderful products to give safety. But, in the case above they would have miserably failed to give the desired solution. The above person in addition to FD’s requires inflation beating products for his/her sustenance. Else, the person has to reduce his standard of living or depend on his children in the latter years.
Just as a thought, a well designed allocation between FD’s and equity mutual funds would have done the trick. While the FD proportion would have given safety, equity mutual funds being volatile in the short term would have given inflation beating returns and that too tax free.
So the next time, you are going overboard on FD’s please read the above risk factors.
Happy Investing!!

Naveen Rego
CERTFIED FINANCIAL PLANNER