Ever wondered if you have a single source to manage, execute and account for all your personal financial planning needs like retirement planning. insurance planning, taxation planning, investment planning, loans, mortgage and cash flow management. It would make lives considerably easy cause you wont have to run behind ten different people to get a hold of all your personal finance documents and account statements. With a financial planner your financial management will be easy swift and all in one place.

The biggest advantage of a financial planner is that he will not be a salesman trying to sell products to you with the main intention of filling his pockets with the commissions of the products he sells to you. His main goal and motive is to keep you financiallly safe and secure and help you achieve your goals.

Many agents and salesmen in India pronounce themselves as a financial planner but the diffrenciating factor is that if a person is an agent or a representative of any company then he will not be in a position to give you unbiased advise as his aim will be to tell you some story and sell his companies’ products to you. To be an unbiased advisor the person must be able to provide a comparison of various available product options.

Financial planners charge fees from their clients for the advise given just like a doctor, lawyer or an architect. The advise is genuine and based on the clients needs, budget and after a detailed analysis of several available options

My article last week in the DNA Money (Ref: Get your gold over time via a SIP dated 7^th April, 2010) evoked keen response amidst readers who wanted to know the process of investing in SIP of gold ETF.

Not only this, many readers also wanted to know from where and how they can go about doing it. Indeed it speaks volumes about the love for gold we Indians have!

If you are one of those, I hope this piece of information will be of great help.

So for the beginners, it is a step-by-step process.

First and foremost you will need to open a Demat account with a depository participant before opening an account with a broker as brokers normally insist on opening a demat account before you can open a trading account with them. (In case you already have these then you can start right away after reading the article).

A Demat account is like a saving account of securities where you can electronically deposit or withdraw your shares like your money in savings account. When you buy any share, these are credited in your Demat account by your broker. There are broking Companies which provide Demat services also, therefore you can open the share trading account with one such brokerage houses. You can have more than one Demat account as well as share trading account.

For opening a Demat account, a valid PAN number and an Operative bank account is mandatory besides documents for your address proof like ration card, driving license, voter Id card, rent/purchase agreement in respect of the property or latest insurance policy status for a live insurance policy are required. You can also provide documents like electricity bill, bank statement, telephone bill or bank for the purpose.

In case your broker also offers Demat services known as Depositories Services, then both your Demat and share account are opened simultaneously.

However in case you have opened your demat account with depository like Stock Holding Corporation  Limited,  you need to open an account with a share broker, which is popularly known as trading account, for the purpose of buying the Gold ETF. The documents required for the purpose of opening the share trading account are almost the same as required for opening a Demat account.

Let me tell you that for buying or selling the Gold ETF units you do not have to open a new Demat or share trading account.

For purchasing and selling of Gold ETF you may call up your broker and place the order. Some brokers allow you to trade Online also.

The scrip name with underlying gold quantity and exchange code of major schemes of Gold ETF on Bombay Stock Exchange are given below as a ready reference for the people who buy stocks On line and for others to convey to their brokers what they want to buy specifically:

Except for the ETF of Quantum Mutual Fund which has a quantity of half gram against each unit all others have one gram of gold underlying each unit of Gold ETF.

These units are traded on stock exchanges and cannot be purchased from Mutual Funds. Here you cannot set up a SIP (Systematic Investment Plan) in its traditional way. But you can set the target of quantity of gold to be bought in a year and accordingly decide to buy the quantity spread over the year evenly. This will help you in absorbing the volatility in the price of gold.

Suppose you want to accumulate 10 gram of gold every month, you can plan to buy Gold ETF on alternate day of one unit or alternatively one unit of quantum for each day when the stock exchange is open as the market is on average open for 20 days in a month and if you buy 1 unit of quantum Gold Fund ETF on every day or 1unit of any other Gold ETF on every alternate day. Based on your target quantity of gold required in future, you can set the quantity and frequency of units to be purchased.

To give effect to the above plan, you can instruct your broker to buy the Gold ETF on the days fixed in advance. It will help if you set up your personal reminder for purchase of Gold ETF on fixed days. Some of the Online trading sites allow you to set up for auto purchase of shares. This arrangement will bring in financial discipline in those of who are careless about their money as they have to honor the cheques for payment of Gold ETF regularly and religiously.

As you are planning to purchase the Gold ETF on regular basis and the payment of money has to be made within three days normally, making of payment involves some logistics difficulty in arranging for payment frequently. In such cases where the payment of the purchase amount is automatically debited in the bank, like Online broking companies affiliated or floated by bank does not pose major logistics problem.

However in cases where the bank account and broking account is not linked, you can solve this difficulty by handing over a few cheques periodically. Do not forget to make the cheques for  not above a particular amount, which you think can be maximum  payable  in respect of purchase of Gold ETF during the relevant period. However please ensure that you maintain adequate balance in your bank account during currency of the self devised gold ETF.

So if you follow the SIP way, you can be a proud owner of gold over a period of time.

guarantee on the highest NAV of their ULIP scheme. ULIP funds invest in market listed securities which can be both

equity and debt related. Since these schemes are long term in nature, investors invariably choose 100% equity

allocations. Such investors had taken a huge beating during the crash of 2008 and have seen significant erosion in

their investment values. This volatility had put off potential as well existing investors from committing more funds into

these schemes.

Now “Assured Highest NAV” schemes have been projected as the ultimate solution to market risk. You are guaranteed

the highest Nav during a certain period, or fund value whichever is higher at the end of term. What sold to investors is

the idea that the fund will be invested completely in equities and the highest returns from such an equity portfolio will be

made available to them. This is not the truth.

First let us understand how these products work

1. The initial investments may be 100% equity or a combination of debt and equity depending on the strategy followed

by the fund manager

2. The fund manager follows a portfolio insurance strategy that can be done by allocating funds between debt and

equity – Here the fund manager sells equity as the market falls, so as to protect the downside. Unfortunately the

‘guarantee’ on highest Nav does not allow for the reverse to happen i.e. to buy equities as the market recovers. This

results in sub-par returns from the Equity portfolio

3. Money removed from the Equity portfolio is invested in debt. The proportion of debt increases steadily and soon the

debt part of the portfolio will become large enough to ensure the highest NAV.

So let’s say over the next 10 years a 100% equity portfolio will deliver a 15% CAGR. A ‘highest NAV assured scheme’

will deliver anything between 6 to 10% CAGR during the same period. From this further deduct costs that when spread

over the duration of the scheme could range from 3 to 4% p.a. You also pay for insurance (mortality charges). So cut

out that too from your returns and you will see that these are really inferior products. In fact they are inferior to even

regular ULIP products because the guarantee on highest NAV is available only if you survive the term. If you die during

the term, your nominees will get the prevailing value of the fund. They are inferior to even a regular debt product

because of the high cost structure.

A guaranteed NAV does not guarantee ‘equity linked’ returns. There is no way of knowing what the highest NAV would

be and that Nav would probably have nothing to do with the stock market’s highest level during the same time. The so

called guarantee is a marketing gimmick and is implicitly a result of the way the investment is structured i.e. with high

proportion of debt. As an investor you are paying for such a guarantee, by accepting less than optimal returns.

Please evaluate your insurance needs and asset allocations before investing in any product. And it is best to avoid

expensive investments for your long term goals. To get equity related returns invest in equities. A good quality, well

constructed portfolio is a better guarantee to optimal returns.

by kavitha menon

I was pleasantly surprised to receive a call from Raj Gupta, who has been a close friend since my CA days. But bigger surprise unfolded when he told me that he had won an argument with his wife for the first time in life,  all because of me!

He was very excited, thanked me profusely for my article in DNA. ( Refer my article on October 3 – Buy another home…)  I was even more surprised to note that my advice can make people win an argument with their wives. ( A thing that I have personally never been successful at).

Naturally my interest level in the conversation rose. I was keen to know the details. He explained that for last few months he has been arguing with his wife over buying ready made farm house-cum-plot near Karjat, approx. 100 Kms from Mumbai. His  wife has been opposing the plan, closing that it was a luxury that they could ill afford at this point of time.

And my above article extolling the virtues of buying a second home helped him in convincing his wife that it was not a luxury purchase but an investment he was making for their retirement.  Raj said, “See, even Harsh supports my view”.  Hence Raj was extremely happy with the article. 

Paradoxically I need to clear this illusion not only for Raj but for all of you who have stretched my advice a bit too far. What my article really suggests is that buying another house which is capable of being rented out.  It can be a good retirement planning tool. Moreover it should not be important that whether you would have yourself liked to stay in that house or treat it as weekend gateway. You should buy from a rental perspective. In fact buying a house in smaller towns that you have some knowledge and connection with, might be a great decision given the fast pace of growth that is likely to be experienced by smaller towns and might give good returns over a long period of 20 years.

But what Raj  was proposing is not in consonance with my suggestion, as a leisure property  could hardly be rented out on a continuous basis. Besides it is difficult to liquidate a leisure property as it cannot be sold easily thus becomes difficult to realize the value of such properties in India. Despite growing economy, FDI influx, rising urban incomes, reach of internet and many such factors, leisure property market is not very well developed in India. Moreover, there is lack of transparency at the operational level and so is the depth in such markets. Hence, getting resale value of a leisure property is very difficult, getting rental for the leisure property is even more difficult.

Let me add here that even the builders of such leisure properties have to rely on large marketing organization and marketing campaign to sell them and it is quite time and effort consuming process. This is not practical for an individual looking to sell his leisure property.

So should you never buy a leisure property? No, I am clearly not saying that, But it should not be bought, thinking it is a good investment. It should be bought from that part of your assets that are allocated to pay for luxury that most people are entitled to after achieving a certain earnings and savings status. Buying it under the mistaken notion that it is a great investment, could perhaps be a big financial mistake. In the event of any stress in your financial life, your ability to liquidate that leisure property quickly might be very difficult. But clearly all those of you who want to get away from all the distress around and connect with your families over the weekend, in a self-owned weekend gateways can positively impact your overall lifestyle and improve your earning potential. To that extent it can be considered to be well spent.

So I am not surprised that once again another wife has won the argument.

Alas! my friend Raj’s happiness was short lived. But then he, like most of us, is a good loser and gives in with grace when he knows he cannot win the argument.

Most people build a nest egg for their retirement by investing a regular sum of money into a Systematic Investment Plan (SIP) of a mutual fund or buy a pension plan from an insurance company or regularly invest in a bank recurring deposit or government backed instruments such as PPF and NSC, etc. A very few well-informed consumers are also opting for the newly launched New Pension Scheme.

But there is another very effective means to build a sizeable pension corpus - Buying another residential house for the purpose of deriving rental income as well as long-term capital appreciation.

I will illustrate this with an example.

Mr. Prabhat Varma has ability to pay a down payment of Rs. 2 lacs and can service an EMI of Rs. 6,000 every month (in other words he is able to save Rs. 6,000 per month).

This means that he can invest in a house worth Rs. 11 lacs for which he will be able to get a loan of around Rs. 9 lacs. The EMI for this 20-year loan at 9% is around Rs. 8,100 per month, which Mr. Varma will easily be able to pay from the rental income (estimated at around Rs. 3,000 per month), clubbed  with the existing savings of Rs. 6,000 per month. The tax deduction on the home loan (for rental properties the tax deduction will continue even under the new Direct Tax code) and any potential increase in rent in later years is just an icing on the cake.

Even if we assume a rather conservative 10% p.a. capital appreciation the property will be worth Rs. 74 lacs at the end of 20 years. Thus the easy availability of home loans even for residential property bought for the express purpose of renting it out effectively turns this investment into a SIP into real estate. 

While Mr. Varma crystallises his plan for another house purchase, he should keep few of these things in mind:  

1)      This is not about the house that you are staying in, the house in question here is  purely for investment purpose. 

2)      An investment horizon of at least 10 years is needed for this to be effective,  so if you are planning to retire by 60, and then this is not for you if you are already above 50 years of age.

3)      This is much riskier than a bank fixed deposit (the expected returns obviously are higher to compensate for the higher risks) and so if your risk appetite is low then this investment is not for you

4)      A meaningful Real estate investment will require much larger initial investments as also much larger continuing investments. Also the flexibility to miss an regular investment instalment is not available since the continuing investment is by way of loan repayment.

5)      It is not important that whether you would have yourself liked to stay in that house or not. You should buy from a rental perspective. In fact buying a house in smaller towns that you have some knowledge and connection with, might be a great decision given the fast pace of growth that is likely to be experienced by smaller towns and might give good returns over a long period of 20 years.

6)      Investment in real estate is a relatively high maintenance investment in terms of dealing with societies, finding and dealing with tenants, etc.

7)      Though state and local laws are fast changing tenancy laws in some states and property taxes in some cities make renting out a property a non-viable option. So avoid investment in such areas.

So this investment proposition is ideal for the likes of Mr. Varma who like saving regularly in traditional assets such as real estate.

How about you? Are you like Mr. Varma?

I have always entered the stock markets, when scripts were overvalued and exited it,when they were near the rock bottom. My broker used to say that I lost money due to the “volatile markets” . Nowadays, I dread the word “volatility” so much that, I want it to pay for all my misfortunes. Finally I think my prayers have been answered in form of “Arbitrage funds”.

The arbitrage fund takes advantage of the difference in pricing between the cash and the derivative markets. Going long in the cash market and short in the futures market and vice versa. This hedges the risk and ensures that the returns are green in color.

But is that so easy? No it’s not! It important to spot the arbitrage opportunity in the market which is the forte of an efficient Fund Manager. The fund manager thrives on volatility in the market. So did the fund managers lap it up when market provided an opportunity to die for on may 18?

So how did the arbitrage funds perform on the Golden Monday?

The average growth of such funds for 2008-2009 was around 8%p.a. but the average growth for the month of May 09 itself is 5%. Hence, it clearly means that at the 5% growth rate, the average per annum growth will be 60%, This is stupendous, even if one compares growth rate of the best performing stocks in the share market. The arbitrage funds have proved that it performs best, when there is volatility in the market.

The arbitrage funds have proven to be a consistent performer over a period of time. The arbitrage funds gave a return of around 8% even when most other equity funds saw their net asset values (NAVs) falling by over 40 per cent.

From April 2008-09, when the net asset values (NAVs) of mutual funds declined by 30 to 50 per cent and the Sensex also declined by about 60 per cent, during the same period arbitrage funds have given returns of about 8.5 per cent. For arbitrage funds, stock prices are not significant but volumes in futures are of much more importance. In 2008-09, volumes in future trading were about Rs 85,000 core per day and now they have come down to about Rs 15,000 crore per day. For better returns in arbitrage funds, both volatility and volumes are required as they create more investment opportunities.

The most important feature of arbitrage fund is that it generates returns irrespective of whether the markets are in positive or negative. It’s gives returns regardless of the market situation. It’s a win win situation for the investors.

Although, the arbitrage funds are equity linked, the investors should not compare it with normal equity funds. The major difference is that the arbitrage funds are partially exposed to the equity market. They just take the advantage of price difference between the cash and the derivative markets. The arbitrage funds are low risk compare to the equity funds. Such funds render some stability to the portfolio and ensure positive returns in volatile times. It is advisable to allocate a small part of your portfolio to such schemes.

The only downside of this is that the investors are not realizing the potential of the arbitrage funds. The arbitrage fund’s Asset Under Management (AUM) saw a considerable dip during last year, when the investors were vary of any equity linked funds. A part of this can be attributed to the fact that some of the investors are not aware of the real benefits of the arbitrage funds. The other reason can be the investors inability to differentiate between normal equity fund and the arbitrage fund.

The arbitrage funds are a win-win situation for investors. It’s the exact remedy for the volatility in the market . An investor should realize this and make the most of it.

Now you know how to make most of the volatility in the market, get the arbitrage advantage and make volatility pay back to you.

More than “Kaun Banega Crorepati?‘, its time now to have a look at “Kaise banoge crorepati?“. Clearly every individual is not a Dhirubhai Ambani or a Siddharth Mallya who has either the entrepreneurial vision or an inherited business empire. It doesn’t really take a lot of effort to fulfill this dream of yours. This piece will show you that.

The three “to-do’s” of this not-so-tedious task would be

1. Start early
2. Be disciplined in your investments
3. Know the power of Compounding

The chart below gives you a better picture of how the above three mantra’s can be conveniently implemented.

* Interest Rates are without considering Inflation

*** Assuming retirement age is 55years

If you’re 30 years old currently, on a basic rate of return of 8%p.a. compounded monthly, you would need to save about Rs.10514.96 per month. However if your asset allocation in your portfolio is strong enough, over a span of 25 years, on an average if you could receive a 12% pa return, then would just need to save Rs.5322 per month. So sooner the better! Clearly, the way you allocate your assets will help you understand how much do you really need to save!

Ultimately its WE ourselves individually who need to be disciplined in our savings and its respective asset allocations rather than having a fancy investment plan or a disciplined product. Saving every month or quarterly in equal sums rather than lump sum amounts at anytime during the tenure will incur discipline in savings and avoid ad-hoc savings.

However, if one wants to understand what goes behind this, then here it goes… “The Power of Compounding” With simple interest, you earn interest only on the principal (that is, the amount you initially invested); with compounding, you earn interest on the principal and additionally earn interest on the interest. In other words, it’s a way of making your money work harder for you, and is perhaps the most powerful tool that an average investor can use to plan for many of life’s financial goals, including retirement. Yes! So Benjamin Franklin was right when he said it was the Eighth wonder of the world!

Difficult as this economic climate appears, I want to stress that this is still a very good time to invest. The third quarter saw a correction morph into a bear market and panic. Steep stock market deterioration was concentrated in late September and October. Extreme volatility is reminiscent of typical bear market bottoming, forming the classic V-shaped market. Many stocks today are at their 52-week lows, many below listing or IPO price, valuations higher than the market price!

But there’s an important hitch - we need to be much more careful in our stock selections. As long as we remain prudent investors, you and I stand to see massive gains in the weeks and months ahead. This is one of best profit opportunities of our lifetime.

Everything today looks good for a buy but does that mean we buy anything? I have listed below four simple fundamentals that you need to look at when buying in these volatile markets.

The Best Measure: Return on Equity (ROE)

The foremost thing you need to do is zero in on a company with high ROE. This is a benchmark to find the efficiency of the company. This measure will actually tell you how much profit a company is making on the equity it has. ROE is a report card for a company’s management. We can’t always know what management is up to, but by analyzing a company’s ROE, it lets us know how prudent they’ve been with their shareholders’ money. Management should never forget exactly who it is they’re working for. An ROE number above 15% is good, and anything above 25% is outstanding.

Avoid Companies that Spend More than They Earn

Next to look for are companies with strong cash flows. Examine a company’s cash flow because it’s something that’s hard to manipulate. The simplest definition of cash flow is earnings plus depreciation. What cash flow tells us is how much cash is coming into the company from its business compared with the amount of cash going to fund its operations. The problem is that some companies generate a lot of cash, but they require even more to keep things going. Whenever we see that, we should know it’s not a good sign. By looking at cash flow, we can cut through the thorns and see how healthy a company really is.

Companies with Big Profit Margins

The third step is to find stocks with expanding operating margins. This is very important because it shows us a company that can grow its earnings faster than its sales. When a company has growing operating margins, it usually means the company has pricing power in its market. That’s crucial in this economic environment. More often than not, such a company can grow its profit margins because it has a dominant niche in its market.

Outperforming Other Stocks

The final step in spotting winning stocks is to find companies that are having their earnings estimates revised higher. Beating earnings expectations is great, but we also want to hear a company say that future earnings are going to be better than expected. Spotting earnings revisions is a great way to uncover value stocks before the crowd does.

I hope my readers would now look into these four fundamentals discussed above before buying or selling stocks.

Kirtan Shah, a Certified Financial Planner, is a partner at AmbestinQ Consultancy Services.

http://economictimes.indiatimes.com/Personal_Finance/Insurance/Insurance_news/IRDA_message_reposes_faith_in_local_insurance_cos/articleshow/3538435.cms
AIG is on the brink of filing bankruptcy. It has shaken the Indian insurance markets to a very great extent. AIG is a major share holder in Tata AIG general and Tata AIG Life insurance. The question being asked by people is safety of the money invested by them in Tata AIG, and policies they bought from the same company.

Insurance in India is a highly regulated industry. Any company that wants to set up an insurance business has to follow very stringent norms given by the Insurance Regulatory & Development Authority (IRDA).

If anyone is tense about investments in any insurance companies like Tata AIG, rest assured, they need not worry about the same. IRDA has prescribed the norms of solvency margin of 150% for all insurance companies including private players. It also imposes that no insurance companies should be investing overseas and that their investment portfolio should be in sync with the norms laid down by the IRDA.

The regulator has taken into consideration policy holders’ interest and is committed to maintain financial stability in the insurance sector.

Tax is the most terrifying word for one who needs to pay it. There are many provisions in the IT act by which you can plan and minimize your taxes. One of the provisions through which one can reduce tax liability is by taking deductible from gross income to the maximum limit of Rs.100000 under Section 80C of the Income Tax Act. This can done by investing into life insurance policies, PPF, equity-linked saving schemes etc.

So where to invest to get deduction under Section 80C?

Let’s look at some basics and then we would be in a position to compare them:

An Endowment Policy is a traditional policy which has a risk cover policy for a specified period. At the end of the policy tenure the maturity benefit is paid off. The maturity benefit in this regards is the sum assured and the bonus accumulated during the term of the policy.

A term policy as the name suggests covers the risk for the particular term selected. It is the cheapest of all the life insurance policy, as it is the purest form of insurance the premium collected will not include any investment element in to it.

Public provident fund (PPF) there is a lock in period of 15 years with a minimum amount of Rs.500 and maximum of Rs.70,000 to be invested every year. PPF earns 8.00% p.a.

Equity linked savings schemes (ELSS) are basically a tax saving tool; which safeguards an investor from the short term volatility of the market. As it has a lock–in–period of 3 years. It is a high risk, high return investment. The asset allocation of an ELSS would ideally be 90–98% equity exposure and the balance may be in money market or government security. This makes an.

In an endowment policy the liquidity is blocked for the tenure of the policy and you miss out on the opportunity of booming economic conditions. One more negative which is associated with the endowment policy is that the bonus which is declared in the financial year is not compounded and investor is paid only the actual amount of bonus received in the subsequent financial year at the time of maturity. In case you surrender your policy you get a surrender value after paying a certain surrender charges for it.

On the other hand if you purchase a term policy along with a PPF or a term policy along with ELSS you will get a better return on your investment as compared to an endowment policy.

Let us understand with an example. If you take an endowment policy with a sum assured of say Rs.10 lakhs for tenure of 20 years. The annual premium payable would be Rs.47,000. If you buy a simple term life insurance policy for the same sum assured i.e. Rs.10 lakhs for 20 years the annual premium payable would be Rs.2920. The balance of the premium i.e.Rs.44,080 (47,000 - 2920) if invested yearly in PPF for 20 years at 8%p.a. the accumulated amount would be Rs.20,17,187. In other case if you invest the difference of the premium i.e. Rs.44,080 on a yearly basis in ELSS which gives you a compounded annualized growth rate of 12.00% p.a. the accumulated amount would be Rs.31,76,072.

A risk-averse investor should look in for a term insurance along with a PPF option. A risk-liking investor should look in for a term insurance along with an ELSS option since ELSS is more aggressive - its inclination is mainly into equity investments which yield better returns in a longer tenure, beating inflation.