MONEY LESSONS FROM GOLF

As a game, golf is slow and boring to watch; yet it is addictive to play. This is probably the reason for its limited fan following as compared to more adrenaline pumping games like football or basketball. Unlike other games, where you try to beat an opponent at every stage, in golf you play against yourself – in other words concentrate on your own game. This is because there is no concept of a defence against the shot of your opponent. Ultimately, what matters are how well and near perfectly (perfection being nearly impossible to achieve in golf) you hit your shots to win the game. However, quality and dispassionate coaching plays a crucial role for success in competitive golf.

Lesson: Learn to read and understand the market yourself and do not try to copy other investors. A financial advisor’s truthful and unbiased advice is of essence to take sound financial decisions. Nevertheless, remember that it is your money and you are the best judge to take the final call.

A round of golf consists of 18 holes and a tournament can run over three to five such rounds. The tournament result counts the cumulative performance of the player spread across all these rounds and an inconsistent player may have one or two fabulous rounds but is unlikely to maintain the tempo through all the rounds. Therefore, a consistent player normally emerges the winner.

Lesson: Consistency in investment pays in the end. Invest through systematic investment plan (SIP) in mutual funds, systematic equity plan (SEP) in direct equity or recurring deposits in fixed income instruments.

Most professional players start at an early age and build up their game over years of dedicated practice. Starting early in life affords them certain distinct advantages of suppleness of body to develop a correct swing, availability of long hours of practice due to lesser responsibilities in life, and longer time horizon to understand competitive golf, learn to tackle its stresses and absorb its ups and downs.

Lesson: Start investing early in life for wealth creation. It provides you a longer period for investment and to understand the markets, which in turn helps you to offset the market volatility. By starting early, you learn to stay calm and invest during the intimidating falling markets and book profits during the rewarding rising markets.

Professional golfers play scratch or below par, i.e. complete a round of 18 holes in 72 strokes (Par 72) or less. In amateur golf, handicapping is a numerical measure that indicates the number of additional strokes, over and above par 72, which the player will take to complete the round. Therefore, a better player has a lower handicap number and weaker player has a higher number, e.g. an 8-handicapper is better than a 14-handicapper. Therefore, handicap creates a level playing field for all participants by giving advantage of additional strokes to weaker players. He applies the handicap while calculating the scores as per varying formats of the game, viz. Match play, stroke play or stable ford.

Lesson: Know your handicap in money matters and apply them as per the varying situations. A person acknowledging his handicap of poor knowledge of direct equity investments, then adopts the mutual fund route.

The amazing aspect of golf is that a 300-yard drive or a one-foot putt equal as one stroke on the scorecard. In fact, the short game (played on or within 50 yards of the green) contributes more to your success than the long drives since it comprises more than 60 percent of the game.

Lesson: You must understand the contribution of each of your asset towards meeting your financial goals. If equity giving 12 percent return comprises only 20 percent of your wealth, then fixed income instruments giving 8 percent return but forming 60 percent of your portfolio will contribute more towards your financial well-being. See the table below to understand this better.

Asset Proportion of Assets Amt Invested % Returns Contribution Future Value after 10 Years
Equity 20% 20,00,000 12% 2.40% 62,11,696
Debt 15% 15,00,000 9% 1.35% 35,51,046
Fixed Income 60% 60,00,000 8% 4.80% 1,29,53,550
Gold 5% 5,00,000 7% 0.35% 9,83,576
Total 100% 1,00,00,000 2,36,99,868

 

            When you play a par 5 hole, you try to cover the longer distance with a driver shot and as you come closer to the green, you use shorter irons for the approach shot or a chipper to chip onto the green and finally use the putter on the green. The driver is the least forgiving club and a mistimed or bad shot can land you in the rough or hazard. However, you have chances to recover with your second or third shot. The shorter irons are more accurate and help you to close in with the pin. Finally, to sink the putt in the hole, you require precision and accuracy in speed and line of the putt for which you use the putter.

Lesson: Equity investments are akin to playing the driver shot and used for longer time horizon. A bad investment can put you in rough or tight spot from where you can recover in due course of time. Since the market volatility will not last, probability of negative returns also reduces with time. As you approach your financial goals, you must switch your equity investment to debt or fixed income instruments for stability and capital protection guarantee.

A dilemma for a golfer while playing an approach shot (within 200 yards of the green) towards a green surrounded with sand bunkers or water bodies is whether to attack the pin or take a lay by. In case he plays aggressively to attack the pin and miscues the shot, his ball will land in the bunker or water obstacle from which he will find it difficult to recover or incur a penalty. If he plays safe and takes a lay by, then he uses an additional stroke but can pull through with a good chip and putt subsequently. Golf is a game of probability and the player plays based on his potential to play the shot consistently with reasonable accuracy.

Lesson: When you approach your financial goals, you must secure the capital from the market risks and volatility by switching it from equity to safer financial instruments. An aggressive investor may continue his equity investment with the inherent risk of capital erosion due to falling markets at the time of meeting his financial goal. A modest or conservative investor who opts for switching may earn lesser returns but will ensure that the capital is available to him in full measure at the time of his choosing. A reasonable period to switch from equity to debt funds is 12 to 18 months prior to the date of financial goal. However, to avail maximum tax benefits through indexation you must hold the capital in debt funds for minimum 36 months.

SIMPLIFICATION OF MUTUAL FUNDS

SEBI RE-CATEGORIZES AND RATIONALIZES MUTUAL FUNDS 

Ø  Background: There were 42 SEBI registered Asset Management Companies (AMC) in India with 2,043 Mutual Funds (MFs), which offered 9,680 possible choices to investors through their various plans and schemes. This confused the stakeholders and made it very difficult and cumbersome to choose the correct scheme. Therefore, the Securities and Exchange Board of India (SEBI) decided to classify and rationalize the plethora of MF schemes. In its circular SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 6, 2017 it reasoned that “it is desirable that different schemes launched by a mutual fund are clearly distinct in terms of asset allocation, investment strategy etc. Further, there is a need to bring in uniformity in the characteristics of similar type of schemes launched by different MFs. This would ensure that an investor of MFs is able to evaluate the different options available, before taking an informed decision to invest in a scheme.” This circular was applicable to only open ended schemes as follows: schemes in existence; schemes for which SEBI has issued final observations but have not yet been launched; schemes in respect of which draft scheme documents have been filed with SEBI as on date and schemes for which a mutual fund would file draft scheme document. After considering representations received from Association of Mutual Funds in India (AMFI), it issued some amendments to the ibid circular as per its circular SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 4, 2017.

Ø  New Categorization: These two circulars issued instructions to categorize existing schemes that permitted one scheme per category except these three: Index Funds/ETFs replicating/tracking different indices; fund of funds having different underlying schemes and sectoral/thematic funds investing in different sectors/themes. MFs were to carry out the necessary changes in all respects within a maximum period of 3 months from the date of observations issued by SEBI on the analyzed and detailed proposals submitted by MFs. The aforesaid proposals of the MFs were to include the proposed course of action (viz., winding up, merger, fundamental attribute change etc.) in respect of the existing similar schemes as well as those that are not in alignment to the categories. SEBI classified the schemes broadly in the groups and sub categories as given in the table:

Main Category Number of Sub Categories Details of Sub Categories of Funds
Equity Schemes 10 Multi Cap, Large Cap, Large and Mid Cap, Mid Cap, Small Cap, Dividend Yield, Value, Contra, Focused, Sectoral/Thematic and ELSS
Debt Schemes 16 Overnight, Liquid, Ultra Short Duration, Low Duration, Money Market, Short Duration, Medium Duration, Medium to Long Duration, Long Duration, Dynamic Bond, Corporate Bond, Credit Risk, Banking and PSU, Gilt, Gilt with 10 Year Constant Duration and Floater
Hybrid Schemes 6 Conservative Hybrid, Balanced Hybrid, Aggressive Hybrid, Dynamic Asset Allocation or Balanced Advantage, Multi Asset Allocation, Arbitrage and Equity Savings
Solution Oriented Schemes 2 Retirement and Children
Others Schemes 2 Index/ETFs and Fund of Funds (Overseas and Domestic)

Ø  Market Capitalization Norms: Until now each fund had its own definition of large, mid and small cap stocks. Therefore, even in a large-cap category the weighted average market capitalization of mutual funds ranged from Rs. 29 thousand crore to Rs. 1.9 lakh crore. Therefore, to ensure uniformity in respect of the investment universe for equity schemes, SEBI defined market capitalization norms for the listed companies. For its implementation and compliance, it asked MFs to adopt the list of stocks, to be prepared by AMFI and updated every six months. The defined market capitalization categorization is as follows:

v  Large Cap: 1st -100th company in terms of full market capitalization

v  Mid Cap: 101st -250th company in terms of full market capitalization

v  Small Cap: 251st company onwards in terms of full market capitalization

Implications for AMCs

Ø  Actions: The above circulars entailed that the MF houses undertake the following actions:

v  Change in scheme name

v  Change in investment objective

v  Fundamental change in investment strategy

v  Change in portfolio asset allocation

v  Change in category or investment theme

v  Change in fundamental attributes of a fund

v  Merger of schemes

Ø  Portfolio Management: Scheme merger will bring down the number of portfolios to be managed, thereby giving time to fund managers to focus their efforts on generating alpha. Fund managers may have to reshuffle scheme portfolios every six months based on AMFI revising the market cap list, which will increase their costs and impact their returns.

Ø  Trails and Commissions: Merging of various schemes might bring uniformity in commission paid by asset management companies (AMCs). However, merger of schemes will result in the renegotiation of distributor commissions and the management of trails, thereby increasing transaction costs.

Ø  Equity Funds: Some of the large cap funds will lose their sheen and returns since they will not have the flexibility to invest beyond the large cap basket of 100 companies to generate alpha. There will be only 150 companies categorized under the mid-cap universe as compared to the current 400 stocks, as a result of which fund managers will have limited options to invest under the mid-cap category. This may force the investors to turn towards multi cap funds that afford greater flexibility to the fund manager to generate a better alpha.

Investor Awareness:

Ø  Changes: The changes by SEBI create uniformity in the characteristics of similar types of schemes, enhance transparency and standardize disclosure requirements. It groups and names mutual fund schemes based on investors’ underlying investment objectives and offers flexibility to investors on the nature of investments and risk exposure. The new categorization will facilitate the investor to make an apple to apple comparison. Not only will this help him to choose the scheme, it will also help him to know and understand the impact each scheme or fund will make in his portfolio.

Ø  Hurry Not, Worry Not: Almost all the fund houses have mentioned that these proposed changes are to be effective from 3rd or 4th week of May 2018. Investors need not hurry or worry to exit and re-enter funds at this stage based on returns alone, without knowing whether the fund will fit you in its new category and attributes. Instead, they must wait for funds to settle into their new categories and then take considered decisions based on their risk profile. If there is a minor change in the fund mandate, then investors could ignore the past performance and wait for the fund to build a track record.

Ø  Debt Funds: The NAV of debt funds fall when the interest rates rise and vice versa. Therefore, SEBI has chosen the Macaulay duration (a measure of how much the NAV will vary when the interest rates change) to classify how volatile the debt fund NAV is to the interest rate movements. SEBI has also made an effort to segregate credit risk by differentiating corporate bond and credit risk funds. However, gilt category does not have any restriction on duration and this can be painful for investors who wish to avoid credit risk completely and also minimize rate risk. The naming convention of debt schemes is as per the risk level of end investments. The nature of risk carried by debt schemes may still not be understood well by investors as simply changing the name might not highlight the quantum of risk element in these schemes.

Ø  Hybrid Schemes: Under the current categorization, these have been defined into three types: Conservative hybrid fund, balanced hybrid fund and aggressive hybrid fund. For an investor, the scheme differentiator will still remain a concern.

Ø  Portfolio Review: The new categorization necessitates a portfolio review by the investors based on their risk profile and financial goal planning. The problem is that investors who wish to exit or switch a scheme that has changed mandate or has merged, will have to pay capital gains tax because of this SEBI ruling. In case they decide to continue with some of their ongoing schemes, then they must monitor the returns closely for the next 12 months and then take a call.

Ø  Financial Advisory Services: Last but not the least, it is better to check your choice of funds with your advisor to ensure you are not comparing funds whose past record is not comparable. Be wary of going merely by the ratings offered by various websites (unless they clearly state what their new methodology is), if comparison is done with new peers based on past data. When it comes to reviewing your funds, stick to comparing the fund with its respective benchmark and check if the fund is able to deliver 2 to 3 percentage points more than the benchmark in the case of equity.

PS: Dhirendra Kumar, CEO Value Research, suggests “Practically speaking, if you are an individual investor whose financial goals are the normal ones that most people have, then you can easily ignore 32 of these 36 schemes. Here’s what remains: multi cap for long term investing, aggressive hybrid funds for medium term savings, ELSS funds for tax saving combined with long term savings, and short term debt funds as a superior alternative for bank fixed deposits. That’s it.”

MARKETS BULLISH BUT PORTFOLIOS REMAIN BEARISH

Ø  Investor Concern: Investors are concerned these days that although the markets are rising and touching new highs frequently, their investments in mutual funds (MFs) are not rising proportionately. In the last six to seven months, the SENSEX 30 navigated between a high of 36,283 on 29 Jan 18 to an all time high of 37,606 on 31 Jul 18. The ebb came when it touched 32,596 to hit its low point on 23 Mar 18. Similarly, the NIFTY 50 traversed between its record high of 11,171 on 29 Jan 18 to an all time high of 11,360 on 03 Aug 18 with the low point on 23 Mar of 9,998. The reasons are explained in the subsequent paragraphs.

  •  Average Returns: As on 20 Jul 18, equity large cap had generated a negative average return during the last six months of -1.85%. The multi cap generated -4.96%, whereas the mid cap generated -10.65% and small cap of -17.44%. Equity sector (technology) generated the best returns at 13.48% followed by debt funds at about 3 to 3.5%. The worst performer was equity sector (infrastructure) that generated negative returns of -18.71%. Given below is the chart indicating the six months (Jan to Jun 18) returns of various fund categories as per Value Research.
  •  Market Performance: In the last three months, 26 out of 30 large cap MF schemes under performed their benchmark. In fact, only 3 to 7 big companies are driving the market and their market caps are zooming to new highs. About 60% of the NIFTY 50 constituent stocks are in the red. Only 19 stocks in the Nifty outperformed the index with positive returns. 31 stocks, comprising more than 50 percent of the Nifty, under performed the index. The poor conditions of the banking sector due to their large NPAs and unbelievable frauds have dipped their stocks to the bottom 10 of the list. The mid and small cap stocks dropped between 20 to 50 percent with some companies going down by almost 80 to 90 percent. Corrections in the mid and small cap space are primarily attributable to the mismatch between earnings and valuations. The stocks in the mid and small cap section had premium valuations that their earnings could not support. So their dream run of last two years started crashing after the Budget 2018. In the Nifty, only 27 percent of mid cap and 19 percent of small cap stocks delivered positive returns.
  • Advance Decline Ratio: The advance decline ratio is a popular market-breadth indicator used in technical analysis. It compares the number of stocks that closed higher against the number of stocks that closed lower. If we compare the total stocks that advanced or declined at the two bourses over last six months, we realize that the ratio has crossed 1 only in April. This indicates that in the other five months, more stocks have declined at these bourses than advanced. 
  •  Tightening of Regulatory Process: The other major contributory reason to the poor performance is the recently implemented SEBI guideline to re-categorize and rationalize the MFs into five broad categories, viz. equity schemes, debt schemes, hybrid schemes, solution oriented schemes and other schemes. Along with this, SEBI also redefined the market capitalization norms for the large, mid and small cap companies resulting in the eligibility of first 100 companies only for large cap. Although this will help the investors in the long term, it has severely constrained the fund managers in the near and short term by reducing their flexibility to decide the market cap norms and switch funds to generate better alpha. Besides, SEBI has mandated all equity schemes to benchmark their performance against a total returns index (TRI), which are calculated after adding the dividends of the underlying companies. Effectively, these results in raising the hurdle for fund managers as the return of TRI indices are typically 1.5-2.5 percent higher than regular indices. Moreover, SEBI has also cracked down on MF Houses who were breaking the norms by investing outside the scheme’s mandate to generate higher returns.
  • Other Reasons: The other reason is the global headwinds generated by the likelihood of trade wars and Fed tightening. The market outflows by FIIs due to falling rupee have adversely impacted the sentiments, which the domestic investors mitigated to a large extent through their sizable inflows. At the national level, FY 2018-19 is governed by eight assembly polls followed by general elections in 2019.

Ø  Investor Advisory:

  •  The investors are advised to maintain their calm and should not prematurely churn their portfolios or exit from under performing schemes. The market cycle auto corrected such dichotomous market situations on its own.
  • Stay invested in equity MFs while maintaining a long term investment horizon and continuing the existing SIP. The market cycle will auto correct after the political and global headwinds.
  • Watch the performance of hybrid funds over the next two quarters since they may stabilize after the turmoil created by the new SEBI regulatory order forcing mergers and fundamental change of attributes.Park your funds in short duration debt funds or FMPs to negate the market volatility and generate better returns than fixed return instruments.

PERSONAL FINANCIAL MANAGEMENT FOR THE ELDERLY RETIREES

Adopt a balanced approach to avoid impoverishment during sunset years

According to Population Census 2011, there are nearly 104 million elderly persons (aged 60 years or above) in India and their share and size is increasing. It was 5.6 percent of the population in 1961 and increased to 8.6 percent in 2011. By 2050, the population of Indians above 65 years will increase almost three times (predicted by US-based Population Reference Bureau). The growth in elderly population is due to the longevity of life achieved because of economic well-being, better medicines and medical facilities, and reduction in fertility rates. In the urban areas, only 56 percent of male and 17 percent of female population is financially independent while the others are partially or fully dependent. Most elderly people become penurious by falling into financial trap due to their overcautious approach to investment. They do not realize that given the longevity, their retired life may extend for 30 or 40 years, which is as long a period as their working life or even more. When a retiree sees a large corpus available to him at the time of his retirement, he may tend to splurge by undertaking leisure vacations, gifting to his near and dear ones or even investing in some fraud schemes to get unrealistically higher returns. Alternately, he becomes a conservatively timid investor who deposits everything in safe and fixed income instruments that give lower returns. Our endeavour in this article is to look at the criticalities of financial planning and systematically explain adoption of a balanced approach for leading a financially stable retired life.

 

There are two types of retirees, viz. Pensioner and non-pensioner. While the former has regular financial backing through his pension, the latter has no such guarantee. This implies that the non-pensioner will have to start with a larger corpus to sustain his monthly expenses, while a pensioner may start his retired life with relatively smaller corpus and sustain through regular pension income. Let us assume that the current monthly expense for both is rupees one Lakh, which will rise @6% per annum due to inflation. If they both live up to the age of 90 years, then their monthly expense during their 90th year will be rupees 6.02 Lakh per month. To sustain his regulated monthly expenses through 30 years of retirement, the non-pensioner requires to start with a corpus of rupees 274.74 Lakh at the real rate of return @1.89% (annual percentage return realized on the investment of 274.74 Lakh @8% and adjusted for changes in prices due to inflation @6%). Hypothetically, if the pensioner starts his retirement with a monthly pension of rupees 0.75 Lakh, he has to cater for a monthly shortfall of 0.25 Lakh and for that, he requires a corpus of rupees 68.68 Lakh.

Given this longevity of life, a question that haunts every elderly person is as to how long will he live and how much money will he require to take care of his old age? We can broadly divide 30 to 40 years of post retirement life into 3 or 4 decades. The first decade of sixties that holds 5.3 percent of Indian population is one of reconciliation and acceptance of the retired life, and then adjusting into it. The next decade of seventies, which is of prime concern for 2.4 percent of the Indian population, is of consolidation of assets and health. Thereafter, the decade eighties is of fragile health and growing dependence on children/domestic help for 0.9 percent of Indian population, whose old-age dependency proportion has climbed from 10.9 percent in 1961 to 14.2 percent in 2011. Finally, only a miniscule percentage attain the extraordinaire decade of the nineties.

When a retiree invests, he is cautious, risk averse, and puts everything in safe income instruments; so, he will not beat the inflation. Although this is sensible and apt for capital protection, it does not help to overcome the inflationary pressures. The primary inflationary pressure is from rising medical and hospitalization costs, which is about 15 percent as compared to the average consumer price index inflation rates of 6.27 percent (average monthly of a calendar year taken over past 20 years). The real rate of return of fixed income instruments is much lower than their indicative interest rate due to the taxability of the interest earned and the inflation cost. We have exemplified this point for better understanding of the readers. Rupees one Lakh invested @ 8% gives a retiree rupees 8,000 as interest in one year. If he pays 20.8 percent tax (inclusive of 4 percent cess) on it, then interest left in hand is rupees 6,336 only, which is effectively 6.34 percent. Further, 5 percent inflation eats into this 6.34 percent interest to give a meagre 1.28 percent real rate of return. Since 1972, even gold has only given average 7.4 percent returns. Therefore, he must invest some percentage of his cash asset in the equity market, directly in stocks, if he has market experience and confidence, or through mutual funds, since they have given average return of 14.3 percent in past 10 years.

The question that arises in the mind is about the asset allocation percentage. As a guideline, he must keep 50 to 60 percent in fixed income instruments to ensure capital protection, about 20 to 30 percent in equity, 10 to 15 percent in debt mutual funds and 5 to 10 percent in gold. The elderly will do well to understand the decision dilemma created due to the risky inverse relationship between size of corpus and percentage of equity investment. If the retiree has a large corpus, then he can afford to invest a smaller percentage (up to 20 percent) in equity since his investment in other assets will take care of his financial needs. However, if his corpus is small, then he should invest a larger percentage (maximum up to 40 percent) into equity to generate better returns to meet his financial needs. Initially the retiree may invest the retirement corpus as per this guideline through systematic transfer plan (STP) in equity and lump sum in other assets.

Asset Diversification Percentage Amt Invested@ Expected Returns Real Rate of Return* Inflation Adjusted Value after 10 Yrs Inflation Adjusted Value in 30 Yrs
Equity 20% 20,00,000 15% 8.49% 45,18,037      2,30,56,281
Debt 15% 15,00,000 9% 2.83% 19,82,885        34,65,056
Fixed Income# 60% 60,00,000 8% 1.89% 72,33,195      1,05,12,063
Gold 5% 5,00,000 7% 0.94% 5,49,224          6,62,685
TOTAL 1,00,00,000 1,42,83,340      3,76,96,085
@ Assuming the retiree has a corpus of rupees 1 Crore to invest

* Assuming CPI Inflation Rate as 6%

# Includes contingency fund (equal to six months expenses) to cater for emergencies invested in Sweep FD for better liquidity.

Thereafter, he should invest to save about 15 to 20 percent of his gross monthly income in equity mutual funds through systematic investment plan (SIP) or directly in stocks. This investment will give a fillip to his savings in his eighties or nineties as their holding period would have exceeded 15 to 20 years. To illustrate and emphasise my point: A retiree investing rupees 10,000 per month in an equity mutual fund over 20 years, generating 12 percent return, will accumulate rupees 99.91 Lakh with a growth of 76 percent in his investment of rupees 24 Lakh.

He must diversify to hedge, which is a technique designed to reduce or eliminate financial risk; for example, gold and equity will offset each other if markets change. As the time goes by, the investment returns from equity start performing better than the benchmark indices since volatility decreases and so does the probability of loss, which is only 3.7 percent after 10 years and becomes zero after 15 years. If required, the retiree must make withdrawals from his fixed income instruments. The usual dilemma is how much to withdraw in a year from the fixed income corpus. Suppose a retiree invests rupees 60 Lakh in fixed income instruments @8% return in an economic environment of 6 percent annual inflation and annually withdraws 5 percent from the corpus. Then, the value of his investment after 10 years, as per real rate of return, will reduce to rupees 43.32 Lakh. If he desires to protect his capital, then he can annually withdraw a maximum 2 percent from his corpus, to match the real rate of return @1.89%. The retiree should hold his equity investment preferably for minimum 5 years so that it can generate returns and then withdraw from it to meet financial goals or augment his sustenance income.

The retiree must also correctly comprehend the tax structure of all these assets to derive maximum advantage. Government levies tax on interest earned in most fixed income instruments, and short and long-term capital gains (STCG and LTCG) tax on equity and debt schemes at varying rates. The point to understand is that government levies tax on entire interest earned during the financial year through fixed income instruments, immaterial of the fact whether the retiree withdraws it or not for his use. However, it levies capital gains tax only on the actual gains made by the retiree during redemption or switching done in the financial year. Government adds short-term debt fund (less than 3 years) gains to the retiree’s income and taxes it at his applicable tax slab rate, whereas, it taxes long-term gains at 20 percent after the indexation benefits. This aspect and the applicable tax rates make investment in debt mutual funds more attractive than fixed income instruments. If the retiree is in the higher tax slab with income more than rupees five Lakh, then financial wisdom dictates that his debt fund investment should be more than his fixed income investment.

Particulars Debt Funds Fixed Deposits
Investment 10,00,000 10,00,000
Return Rate 8% 8%
Lock-in period 3 3
Amount after 3 Years 12,59,712 12,59,712
Effective Return Rate 8.66% 8.66%
Inflation 6% 6%
Indexed Cost of Purchase 11,91,016
Gains (Taxed Amount) 68,696 2,59,712
Tax Paid* 13,739 80,251
Net Gain 2,45,973 1,79,461
Returns after tax 8.20% 5.98%
*LTCG Tax after indexation benefit @20% on for debt fund and Income Tax @30.9% for FD including Health and Education cess @4%

 

A lot is also made of investment in property for financial security and independence. In old age, property becomes a liability due to its regular maintenance and encroachment issues. Therefore, financial prudence lies in staying cash rich and asset meagre. Feel blessed to have one residential property that the retiree occupies and invests his cash assets to provide regular cash flows. The retiree must guard against holding lot of liquid cash that he can withdraw easily or his children may coerce him to withdraw. To obviate this, he should consider making lump sum deposit in the following instruments as they restrict liquidity and give decent returns. One, Pradhan Mantri Vyaya Vandan Yojana (PMVVY) that provides an assured monthly pension of rupees 10,000/- on maximum permissible investment of rupees 15 Lakh @8% per annum for ten years, with an option to also opt for pension on a quarterly, half-yearly or annual basis. Two, Senior Citizen Savings Scheme (SCSS) that provides risk free quarterly returns @8.3% (revised on quarterly basis), on maximum permissible investment of rupees 15 Lakh for five years, which is extendable by another 3 years. Three, Government of India Savings (Taxable) Bonds, which give 7.75 percent assured returns, have 7 years tenure and no maximum investment limit. Four, Public Provident Fund (PPF) that gives 7.8 percent returns (revised on quarterly basis) on maximum permissible investment of rupees 1.5 Lakh per year for fifteen years, which is then extendable by another 5 years. All these enjoy tax benefit under sec 80C of the IT Act, but their returns are taxable as per the retiree’s applicable tax slab except PPF, which enjoys tax exemption.

Mutual Fund VS Unit Linked Insurance plan

 

Few days ago, two of my friends, one in corporate aged 50 and the other in Defence Services aged 35, came to me and said that of late an insurance agent has been pressing them to buy Unit Linked Insurance Plans (ULIP). He is giving the logic that Budget 2018 proposal to re-levy the long term capital gains (LTCG) tax on MF has made them less attractive vis-à-vis ULIP. I told them to let me carry out an objective assessment and then put across both these products. The assessment transpired as follows:

MF – A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s investments and attempt to produce capital gains and/or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

ULIP – It is a combination of insurance and investment. As a single integrated plan, the investment part and the protection part can be managed according to specific needs and choices. As a structured life insurance product, this provides risk cover for the policy holder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds. Here policyholder can pay a monthly or annual premium. A small amount of the premium goes to secure life insurance and rest of the money is invested just like a mutual fund does. Policyholder goes on investing through the term of the policy – 5, 10 or 15 years and accumulates the units. ULIP offers investors options that invest in equity and debt. An aggressive investor can pick equity oriented fund option whereas a conservative one can go with debt option.

Comparison

Ø  Costs – Until 2010 the cost structure unequivocally favoured the MF that only levied Total Expense Ratio, and entry/exit loads whereas ULIP levied multiple charges like premium allocation, policy administration, fund management, surrender and mortality. While the MF charges aggregated to about 1.5 to 2.25%, the ULIP went as high as 25 to 30% in the first year and reduced thereafter. Consequent to directions of the insurance regulator (IRDA), the maximum reduction in yield, excluding mortality charges, due to ULIP costs are now capped in the first 5 years at 4%, from 5 to 10 years at 3% and from 10 year onwards at 2.5%. Moreover, the costs of ULIP are front-loaded (mostly levied in the first five years of the investment) whereas those of MF are even-loaded (levied regularly and evenly through the entire duration).

Ø  Returns – MF have consistently delivered better returns than ULIP in all time horizons. It is only after 12 to 15 years that ULIP come at par with MF for returns. A comparative chart by Advisorkhoj proves this point:

Category Top Performing MF Top Performing ULIP
Large Cap equity 13 – 14 % 11 – 14%
Flexi cap Equity 14 – 16% 8 – 9%
Small/Mid Cap Equity 14 – 18% 13 – 15%
Balanced 13 – 14% 10 – 13%
Debt oriented Hybrid 10 – 12% 10 – 11%
Income 8.5 – 9.5% 8.5 – 9.5%

Ø  Cost-Return Relationship – The ULIP have equitable cost for investment in debt and equity oriented schemes. However, the TER charged by MF is more in case of equity oriented funds and less in case of debt funds. This implies that in accordance with the lower returns of a debt MF, an investor pays lesser investment cost and pays more for investing in equity MF that give higher returns. However, in ULIP he pays uniform cost for investing in debt and equity schemes, which is not beneficial for the investor.

Ø  Taxation – This is where the ULIP scores heavily against the MF after the recent budget proposal. Earlier, the taxation policy was slightly biased in favour of ULIP since they provided the Sec 80C relief to the investor, which MF, except ELSS, did not provide. Moreover, ULIP offered tax free returns after staying invested for 5 years whereas only equity MF gave tax free returns after one year lock in. The tax free advantage of ULIP extends beyond the equity funds to the fixed income space, which is not the case in MF.

Ø  Liquidity – The ULIP are less liquid than MF since they have a five year lock in period and permit only partial withdrawal after that period. In the case of MF only the ELSS have a three year lock in period. In other MF the investor can redeem fully or partially after paying an exit load of about 1 to 1.5%, if redeemed within one year from the date of investment.

Ø  Flexibility – This has two aspects. The first is flexibility to redeem when required that is more in case of MF as discussed under liquidity. The second aspect is switching funds or stopping investment, which is afforded more by MF than ULIP. In MF, one can switch investment at will between different schemes of the same Asset Management Company (AMC) or even switch to other schemes of different AMC. However, this is not possible in the case of ULIP where one is allowed to switch only between offered schemes of the same AMC.

Ø  Transparency – MF are relatively more transparent since they are more widely tracked by numerous agencies vis-à-vis ULIP. Moreover, charge structure of ULIP is fairly complicated and some of the charges levied by ULIP are not built into the NAV, unlike the MF, but are deducted directly from the units held.

Ø  Choice – The choices available in MF are far more than those available in ULIP. There are 42 AMCs with over 2400 schemes available in MF, whereas ULIP count runs only into a hundred plus. Besides choice, it is easier to invest online in MF than ULIP, once KYC is done, as ULIP requires more documentation and insurance being an insurance product.

ULIP COMPARISON POINT MF
Higher COST Lower
Less RETURNS More
Lower TAXATION Higher
Less LIQUIDITY More
Lesser FLEXIBILITY Greater
Less TRANSPARENCY More
Less CHOICE More

Luring Investors

Ø  Insurance Cover –The investor must understand that the insurance cover provided by ULIP is inadequate. Ideally, an earning member must insure himself for ten times his annual income. However, ULIP provides life cover that is only 10 times the annual premium, which is far lesser than annual income. Moreover, ULIP certainly does not cover deaths due to war and most of them also exclude death due to terror or terror related activities. Therefore, read the fine print (especially defence and paramilitary personnel) for exclusions before signing on the dotted line.

Ø  Wealth Creation – ULIP is normally sold as a wealth creation instrument. One must remember that investment prudence suggests mixing up investment and insurance in one product is less productive from wealth creation point of view than separate investment (MF) and insurance product (term plan). The wealth creation normally takes place after 12 to 15 years of investment when the ULIP starts generating higher returns with lower costs.

Ø  Age of Investor – Lot of agents incorrectly sell ULIP to retired or retiring people by saying that they must take an insurance product since their corporate or group insurance policies will cease after their retirement. Normally agents selling ULIP as an insurance product entice investors of all age groups by quoting tax free returns, 10 fold insurance cover of the premium and its wealth creation ability. ULIP is a reasonably good product for young and high tax bracket investor. Entering ULIP after 50 or 55 years of age has some distinct disadvantages. First, you require regular cash flow to pay regular premiums or lump sum investment for one time premium. Second, the lock-in period of 5 years restricts your flexibility and usability of the funds. Third, wealth creation takes a long time (12 to 15 years) and thus may not be feasible for aged investors.

Exiting ULIP

Ø  Free Look Period – By and large if you are not satisfied with the terms and conditions of the policy, you can return the policy document to the Company for cancellation within 15 days from the date of receipt of the policy document or 30 days from the date of receipt of the policy document, if the policy is purchased through distance marketing.

Ø  Policy Surrender – Normally during the first five policy years, if you surrender the policy, the Fund Value including top-up fund value, if any, after deduction of applicable discontinuance charge, shall be transferred to the Discontinued Policy Fund (DP Fund). You or your nominee will be entitled to receive the DPF Value, on the earlier of death or the expiry of the lock-in period. Currently the lock-in period is five years from policy inception. However, on surrender after completion of the fifth policy year, you will be entitled to the fund value including top-up fund value, if any.

Ø  Partial Withdrawal – In general partial withdrawals are allowed after the completion of five policy years and on payment of all premiums for the first five policy years. You can make unlimited number of partial withdrawals as long as the total amount of partial withdrawals in a year does not exceed 20% of the Fund Value in a policy year. The partial withdrawals are free of cost. Partial withdrawals and switches are not allowed during the settlement period.

Exiting MF

Ø  Exit Load – In case you decide to exit fully or partially, before one year then you are liable to pay exit load that is charged at the time of redeeming (or transferring an investment between schemes). The exit load percentage is deducted from the NAV at the time of redemption (or transfer between schemes) and this amount goes to the scheme.

Ask these Questions Before Investing?

Ø  What is your risk appetite?

Ø  What are your financial goals?

Ø  Do you need insurance cover?

Ø  What is your investment horizon?

Ø  Do you clearly understand the complicated structure of ULIP?

Ø  Can you organize regular and sustained cash flow to pay your premiums?

Ø  Are you an active investor to switch within the structured ULIP products?

Ø  Are you willing and equipped to continue the ULIP until its maturity or you will be forced to exit early?

PENTAGON OF PERSONAL FINANCIAL PLANNING

Lot of us leave our financial planning to our parents during the early years of our career or to our financial advisers during the latter half of our lives. It is your money and leaving it to others to plan your finances is escapism due to lack of knowledge. It is not difficult to crack the numbers and plan your finances wisely. After all, you are the best person to know your needs and goals. In this article we give you an insight into five important aspects of financial planning that you must know and understand.

First and foremost is financial discipline. One must understand that a monk seeking self-realization (his goal) leads a rigorously self disciplined life. In the same way, you must also lead a financially self disciplined life to realize your financial goals. A sure way to achieve this is to inculcate the habit to ‘first invest and then spend’. Lot of us tend to first meet our expenses and then invest what we manage to save. Warren Buffet had once famously remarked, “If you buy things you don’t need, you will soon sell things you need.” The habit to invest before spending helps one to differentiate between his needs and wants. Therefore, it mitigates the habit to overspend on wants, a widespread financial indiscretion. Once you have decided to invest first and spend later, then you must invest regularly to achieve rupee cost averaging to beat the market volatility. For the market related instruments, this is best done through a systematic investment plan (SIP) or systematic transfer plan (STP) for mutual funds or systematic equity plan (SEP) for securities. In case of fixed income products, you have the option to invest through monthly installments in recurring deposit (RD) or public provident fund (PPF).

Second important aspect is goal formulation. Half the battle is won if one correctly formulates his financial goals. Your financial goals may include purchase of house, children education and their marriages, your own retirement, purchase of consumer products, vacations, and creation of emergency funds etc. Simply put, it entails that you first list out all your financial needs or requirements along with their tentative year of realization. Then calculate the number of years to their realization from the current year. This way you can classify these into short, medium and long-term goals. Goals falling between 0 to 3 years will be classified short-term, 3 to 7 years will be medium term and above 7 years is long term. This will then help you to correctly invest in the appropriate financial product. Ensuring capital protection is the singularly important consideration to meet the short-term goals. Therefore, one must invest in fixed income products like fixed deposit (FD) or RD, or ultra short or short-term debt mutual funds. In the case of medium-term goals, one must look to achieve growth of the investment while ensuring capital protection. Therefore, investment in balanced schemes or accrual debt schemes of mutual funds, or tax saving FD or bonds (5 to 7 years tenure) or PPF is a good option. For long-term goals wealth creation is the main consideration. Therefore, an investment in direct equity, equity oriented mutual funds or unit linked insurance plan (ULIP) is a good option. For the conservative investor, long-term debt (hold till maturity) mutual funds are a suitable option.

Third is the aspect of taxation. If you only concentrate on investments based on returns and not keep taxation in mind, then you may come to grief at the end of the financial year when your tax return will show large amount that you owe the taxman. In so far as taxation is concerned, you must first understand the different income tax sections under which one can save tax. You should judiciously invest to save maximum of Rs. 1.5 Lakh under Sec 80C under various available financial instruments. Take a medical insurance policy for yourself and your dependents that will provide you a relief of up to Rs. 60,000/-, if senior citizens are involved. One must also try and capitalize on home and education loan interest repayment deduction under Sec 24 and 80E respectively. Similarly, use Sec 80GG for saving from HRA. Next, is the implication of short and long term capital gains (STCG and LTCG) on various mutual fund schemes or securities, tax on dividend distributed income and income tax on fixed income products. After the 2018 budget, all equity mutual fund schemes and securities are taxable at @15.6% for STCG and other than equity are taxable as per applicable income tax slab rate of the individual. Further, all equity schemes have now been included under the ambit of long-term capital gains (LTCG) @10.4% without indexation and other than equity schemes @20.8% with indexation. Although all dividends are tax free in the hands of the investors, however, companies have to pay dividend distribution tax (DDT) @11.65% for equity oriented schemes and @20.8% for other than equity oriented schemes, which implies lesser dividend payout to the investor. All these tax rates include the surcharge and cess. When it comes to returns from interest income, they are mostly taxable as per the investor’s applicable income tax rate, except investments in PPF/EPF, Sukanya Samriddhi Yojana (SSY) and ULIP that enjoy the EEE status (exempt during investment, accumulation and redemption phases).

Fourth is to understand asset diversification. Proverbially, asset diversification implies that you don’t put all your eggs in one basket. The primary asset classes are real estate, equity, fixed income and gold. You can invest in each of these either directly or through a broker. Digitization of markets has brought in tremendous transparency for the learned investor to take well researched and considered decision to avoid falling into a trap. One must carry out diversification to beat the market volatility after his financial goal planning and assessment of risk profile, which is function of his age and liabilities. Overexposure in any these asset classes run the risk of either capital erosion or low returns that cannot beat the inflation. Moreover, before investment you must also understand their liquidity value so as to maintain balance between cash and asset holding. During your investment and accumulation phases of life, plan and invest with the aim to achieve ‘cash abundance and minimal assets’ for a comfortable and hassle free post retirement years.

Last but not the least is the Portfolio Review and Re-balancing. The first phase of reviewing the portfolio entails going through your entire portfolio in detail to see if it is on track to meet your designated financial goals. It must also find out the out performer and under performer schemes in your portfolio. In the second phase of re-balancing, one must exit from the under-performing schemes after due consideration for the exit load and tax implications while holding on to the outperforming schemes. In case your portfolio is not in sync with your financial goals then one must carry out asset diversification to re-balance after considering his risk profile. Re-balancing is best achieved through a judicious mix of switching from one scheme to another of the same fund house, redeeming to invest in an outperforming scheme of another fund house through SIP or STP, or merely starting a fresh SIP to bolster the portfolio.

DO NOT PUT ALL YOUR EGGS IN ONE BASKET: DIVERSIFY

Introduction

➢ Diversification is a fundamental of investing. Oxford dictionary defines diversification (especially in business) as the act of developing a wider range of products, interests, skills, etc. in order to be more successful or reduce risk. Online portal Investopedia elaborates diversification as a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

➢ Why Diversify? Diversification will safeguard your portfolio against total loss, hedge your investments to cater for market volatility and accommodate your financial goals at varying timelines. Ipso facto, diversification of the portfolio must take place in the under mentioned varied asset classes.

Asset Classes
➢ Large numbers of asset classes, as follows, are available in the Indian market and it is important to understand their peculiarities before investing in them:-
Real Estate. Investment in real estate can be done by purchasing residential or commercial property (land, bungalows or flats), REIT (Real Estate Investment Trust) or REMF (Real Estate Mutual Fund). Investment in real estate is capital intensive and thus should be done early in life by availing home loan option to avail its tax saving advantage. Even so, one must avoid using entire savings towards payment of home loan EMI and concomitantly invest a portion of it, preferably through SIP, to ensure wealth creation. To avail maximum advantage, investment in this asset is for long duration of at least a decade plus. Property market, which is fuelled by black money is on the decline due to Government instituted measures to restrict its use in the economy. Thereby, this asset may yield lesser returns in India in the coming decade. Retail investors should be wary of frauds and cheats galore in this sector and should carefully check the documents before striking a deal.
Equity (Stocks). Investing in equity or stock market is a good option in the long run (minimum 7 to 10 years to ensure good returns). Investment in equity can be done directly by the investor through demat (dematerialization) account or through mutual funds (MFs) with high equity exposure. While the MFs are managed by professional fund managers, investments in demat account will require the investor to manage them himself. For this, the investor should be abreast with the market trends and carefully select the stocks (large, mid or small cap) based on his risk profile. Since 1990 till date, Indian stock market has returned about 17 percent to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average, stocks have paid 1.5% dividend annually. A safe expectation would be 15 to 18 percent average return provided the investor stays invested for more than 5 to 7 years. It is felt that 100 minus your age is the percentage of your total net worth that should be invested in this asset class. E.g., if your age is 40 years then 100-40=60% of your portfolio must comprise of equity. Nevertheless, this is just a yardstick and one must seek his financial advisor’s advice before investing. The relationship between risk and returns in this asset class is directly proportional.
Fixed Income Instruments. Indians by nature, especially the burgeoning middle and salaried class, are moderate or conservative investors. Probably, this was one of the reasons that helped us tide over economic meltdown of 2008 with relative ease. A wide array of fixed income instruments is available in India for a retail investor. To name a few – bank/post office fixed and recurring deposits/provident funds, Government/Corporate Bonds and plethora of Debt MFs. These instruments give an effective post tax yield of 6 to 8 percent per annum that barely beats the inflation. Moreover, the interest earned is also taxable in most cases that further compounds to the investor woes. However, these instruments are a good means of investment to give stability to your portfolio since erosion of principal investment due to market volatility is nil to bare minimum. As the investor’s age advances, these instruments become prudent investments for the elderly.
Cash/Liquid. This investment is suitable for investors to cater for short to ultra short term financial goals. Investing in Liquid or money market/cash instruments is a good option since they have high credit quality and are highly liquid. Considering the low risk, the returns in these instruments vary from 6 to 8 percent per annum.
Bullion. Traditionally, Indian investors are crazy about investment in gold. The market now offers gold Exchange Traded Funds (ETFs) that rule out physical holding of gold with freedom from ensuring its security. The latest Government launched Sovereign Gold Bonds is another good option since they carry sovereign guarantee, on the interest, and an individual is exempted from Capital gain tax arising on their redemption. They are available demat and paper form with a minimum tenor of 8 years with option to exit in 5th, 6th and 7th years. Another metal, silver is also a good option to invest. Bullion is good to hedge your portfolio against market volatility and about 5 to 10 of your net worth must comprise of this asset. Investing in jewelry is not a wise decision because you lose 15 to 20 percent of the asset value on each transaction due to non refundable labor charges. The best way for physical holding is buying coins & bars from reliable sources.
Arts and Antiques. This form of investment is gaining ground for high net worth individuals or genuine art and antique lovers. This form of investment is fraught with danger of fakes and swindling. However, a genuine masterpiece can fetch you your asking rate if the buyer needs it.

Conclusion
➢ Is it prudent to invest in all the above asset classes? The answer to this question will depend on the investor’s risk taking ability based on his age, financial goals and cash flow. Ideally a twenty to thirty year old investor starting his career must invest 80 percent in equity, 10 to 15 percent in fixed income and bal in gold. During his middle age, he must invest in real estate to own a shelter by the time he retires and avail tax benefit. However, he must continue his equity exposure after moderation to take care of his home loan. During his sunset years, he must reduce his equity exposure and enhance his fixed income exposure to safeguard his principal investment and also get assured monthly income from investments.

OWNERSHIP Vs FIXED INCOME INVESTMENT

Initial Investment: Back in 2000, four friends made a New Year resolution to invest their savings of about Rs. 50,000/- each with the intention to ‘invest and forget’. Accordingly, on 01 Apr 2000, in the new financial year, friend A bought 7093 shares of AXIS Bank @ purchase value of Rs. 50,006/-, B bought 1015 shares of HDFC Bank @ purchase value of Rs. 50,029/- and C bought 2571 shares of SBI @ purchase value of Rs. 50,006/-. However, their fourth friend, being conservative, invested his savings in the cumulative FD of SBI @ 9.5% initial interest rate. Now in 2018, they decided to see their investment values and compare their returns. Thus, what they saw of their returns astonished them and we have summarized it below for your better understanding:

Investment Type Amount Invested on  01 Apr 2000 Value on 01 Feb 2018 Growth of Corpus XIRR Dividend
AXIS Bank (Friend A) Shares (Ownership) 50,006 38,14,261 7528% 27% 1880%
HDFC Bank (Friend B) Shares (Ownership) 50,029 19,07,946 3714% 23% 3008%
SBI (Friend C) Shares (Ownership) 50,006 6,98,669 1297% 16% 3750%
SBI (Friend D) FD (Investment) 50,000 1,96,315 293% 8% 0%
Notes:

ØThe holding period of the securities is 6515 days or 17 years and 10 months.

ØThe FD is quarterly compounding and a cumulative deposit.

ØDividend earned is on the face value of the shares .

Concept of Ownership: This concept entails that you buy shares of the bank or company that you want to take ownership. Buying some shares of the bank/company makes you a shareholder and provides your part ownership. However, prudence demands that before buying these shares you must check the fundamentals of the company to be sure that you put your money on a winner. The other point to be borne in mind is that you should undertake ownership for a long duration to cater for adverse market cycles and give time for the bank/company to grow adequately. Nevertheless, a word of caution that ownership is subject to market risks and subject

Concept of Fixed Investment: In this concept, you give your money to a bank/company for investment in a fixed deposit. By this, you ensure capital protection of your money but the returns are far lower than ownership. In fact, at times these returns cannot even beat the inflationary costs and gradually erodes the time value of you money. In the given example, the bank gives you a XIRR of 8% on your cumulative FD investment. In case, you require a business loan of larger amount then the same bank will provide a loan at 12%. Now, if you have to repay this loan, then your investments must fetch you a minimum of 18% return to repay and beat the inflation.

Taxation: As per the taxation policy in vogue, the capital gains (difference of sale value from cost value) from shares is taxable only in the short term (less than one year holding) @15%. No tax is applicable in the long term (more than one year holding). However, the income (interest) from FD is taxable at the applicable tax slab rate of the investor, irrespective of its holding period. The 2018 budgetary proposal has introduced long-term capital gains tax @10% (without indexation) on gains more than Rs 1 Lakh with effect from 01 Apr 18, but left short-term gains and interest income taxation unchanged.

Asset Allocation: An investor must remember that he must not risk everything in one type of investment. He must follow the cardinal principle of diversification of asset allocation and invest in equity as per his risk return profile, which is function of his age, risk appetite and liabilities. Normally you must invest 100 minus your age percentage in equity. Therefore, if your age is 60 then you may allocate up to 40% of your investments towards equity or if your age is 30 then the equity exposure can go up to 70%.

Lessons: Owning shares is ownership of the bank/company and is beneficial in the long-term than merely investing in FDs. Firstly, shares give much higher returns than fixed income instruments. Secondly, shares additionally earn dividend income that does not come with fixed income instruments. Thirdly, shares have lesser tax liability than fixed income instruments. However, while investment in fixed income instruments ensures capital protection, investment in shares is subject to market risk. Therefore, have faith in ownership of shares with a long-term investment horizon of more than 7 years.

Disclaimer: We have obtained the data for the above chart and graphs from Moneycontrol.com and RBI site. This example is to highlight that ownership is better than investment but equity investments are subject to market risks.