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 Yudishthira answers that the most amazing thing is that even though every day one sees countless living beings that are old and dying but no one can imagine him/herself as old or taking that last journey!

That’s why people have a natural tendency to avoid financial planning

Read the full details at RanjanBlog.com

Over the last year or so, there has been a sense of disquiet relating to the mis selling of financial products. Much of the complaints have been directed at distributors of insurance products, who are ever so keen on pushing unit linked insurance plans (Ulips) rather than plain vanilla life insurance plans. In the past, such charges had been hurled at mutual funds and issuers of credit cards as well.

While some of the charges may stick, it is striking that apart from the sophistication of new financial products and the growth in disposable income, there has been very little effort at boosting financial literacy levels.

Financial literacy, going by the definitions adopted in some of the major economies, would mean the ability or understanding to make informed judgments about money or financial services that is suited for one’s needs. Recently, IIMS Dataworks, which had carried out an income and savings survey, said in its report that unwillingness on the part of individuals to save was the most adverse of financial literacy markers. Its data showed that of the over 320 million paid workforce in India, close to 60% do not set aside any money to save in financial instruments, including gold and property.

The data provider and analyzer also said that there is a major misconception on the primary nature of an insurance product with most people viewing insurance products as an investment (read Ulips). Many investment advisers have indeed attempted to dissuade investors from this but the success of Ulips demonstrates that such isolated efforts have not worked.

India’s pensions regulator PFRDA had said a while ago that mounting a campaign across the country to inform and educate the vast number of citizens on the need to save for retirement incomes would be a priority. That may well kick off sometime. It may be facile to suggest that regulators in the financial sector that also have the mandate to develop markets besides oversight ought to do this. Some have gone one step further to say that these regulators should be tasked with this job considering that their corpus built through fees levied from intermediaries is substantial enough to run financial literacy campaigns.

Some regulators have done a bit of that but not sustained enough or across the country to leave any deep impact yet. Several years ago, when dematerlisation of securities, especially shares, was being encouraged, India’s leading depository, National Securities Depository (NSDL), did a lot of road shows to push the concept. It was also helped in this effort by a few depository participants.

A point that IIMS made, and rightly too, is that it cannot be left to the government or the regulator alone to carry out such literacy campaigns. Rather, in the short term, it is the financial services industry which should take on the burden of this responsibility. Players in the financial services segment, be it insurance, pensions or mutual funds, have a stake, selfish as it may sound, in this endeavour considering that a better informed citizenry can help them grow their business.

According to RBI data, as a percentage of financial savings, mutual funds constituted 7.7% of the financial savings of the household sector while insurance accounted for 17.5% and provident funds and pensions funds made up for 8.2% of the total financial savings during 2007-08. The predominant share fo savings was still parked in banks (55%). This goes to show how much ground providers of financial products have to cover.

One way out, IIMS said, would be to revisit agent training and the certification process of agents in retail finance sales by individual firms and the financial sector and by financial regulators. The aim would be to thus promote greater financial literacy among the agents themselves and ultimately firms would reap the benefit of higher sales.

Financial regulators could also perhaps nudge the players whose activities they police to start investing in this endeavour. The benefits to be had are enormous for the industry.

Pension and annuity are generally associated with security and stability in the sunset years.

A stable annuity is definitely desirable in retirement. Who wants money/ cash-flow worries when one would rather sit back and relax? But, are pension plans the best avenue for retirement planning? Probably not, as we shall see here.

Pension plans from insurance companies
Pension plans are generally offered by insurance companies. These may be traditional products or unit-linked insurance plans.

The points to ponder over in such plans are as follows:

• Pension plans from insurance companies have high cost structures, which impacts the corpus growth.

• In traditional pension plans, the insurers have guidelines on where they could invest. This is both good and bad - good because it brings in stability and dependability to the corpus and bad because such avenues generally tend to give low returns.

• At retirement, pension plans tend to distribute about 5.5-7% (as on date) of the corpus as pensions. This again is lower than what a person would be able to earn otherwise. Indeed, this is a double handicap - the corpus tends to grow slowly during accumulation phase and tends to earn lower than market rates in the distribution phase.

• Once the pension starts, the corpus cannot be taken back even if one wants to. At vesting, one could withdraw at the most 33%. So, even if there is some very good avenue for investment, the investor is stuck.

• Pension annuities are treated as income and are thus taxable. All other insurance proceeds, apart from the pension annuities, are treated as tax-free. This is probably one of the most important drawbacks. Like I asked in the beginning, who wants to pay tax in retirement, after having done that all life long?

The important points to note in these plans are as follows:

• While they do not suffer from most of the handicaps that afflict pension plans, the income is not tax-free even in their case. Under the options available, one could either claim long-term capital gains on the amount received at maturity or opt for dividend distribution where the mutual fund (MF) pays the tax (amounting to 14.16%) and the distributed income is tax-free in the investor?s hands. Either way, there?s no wishing away tax entirely.

• Both these pension plans invest up to 40% in equities and the rest in debt securities. It may not be desirable to have such a conservative portfolio, especially if the investor has over 10 years to retirement.

• One would be better served by being more aggressive in the accumulation phase and progressively pare exposure to equities and MFs as he comes closer to the retirement date.

Does one have any other option?
There are all kinds of investment products available. Here?s what one should keep in mind:

• One could use a judicious mix of equity, MF, Public Provident Fund, fixed deposit (FD) and fixed maturity plan (FMP), etc to build the corpus in the growth phase.

• Before retirement, the investments can be deployed in avenues like FDs, senior citizens? scheme, Post Office Monthly Income Scheme, MF investments with a systematic withdrawal option, FMPs in the dividend distribution mode and monthly income plans, etc to get periodic returns.

• Also, rental income could be an avenue in retirement. Even reverse mortgage could be considered in appropriate cases.

• A good advisor could plan a proper portfolio, which takes care of the liquidity requirements, risk containment and reasonable return concerns.

Remember, you can have a comfortable retirement without pension, and still have no tension

The writer is a certified financial planner who runs Ladder 7 Financial Advisories and can be reached atladder7@gmail.com

Union Bank of India announced the launch of Wealth Management Services to its High Net worth Clients at Hyderabad today. The Bank has tied up with Wealth Advisors (India) Pvt Ltd; one of the leading companies in the Wealth Management space and Headquartered at Chennai for this initiative. With this offering the Bank plans to offer a wider range of solutions to its customers.

With the rapid economic growth the number of customers who look for Wealth Management services is constantly on the rise. In fact, India is one of countries in the world where the growth in the High Net worth Population is in double digits and it is expected to grow at around 15% per annum for the next decade. As per World Wealth Report published by Capgemini & Merrill Lynch, India has 123,000 people with a net worth of $1 million and registered a growth of 22.7% over the previous financial year. The Bank launched its Wealth Management Services offering to its clients at Bangalore on the 18th of August 2008.

Mr. M.V. Nair, Chairman & Managing Director, Union Bank of India said, “At present the bank has more than 500 HNI clients at Hyderabad and expect the number to grow multi-fold due to various transformations that have been initiated in its system. As a part of our re-branding strategy under a new logo, we have promised our customers to deliver value for money. The Launch of Wealth Management Service is a step towards fulfillment of this promise. The bank is moving towards being a “ Financial Super Market”. In this initiative Union Bank has tied up with an established partner like WAI in the field to offer financial solutions to our customers.

The Wealth Management service in India is at a nascent stage and provides ample opportunity for growth in the coming years. This initiative will go a long way in establishing Union Bank as a provider of total financial solutions to its customers.” The customers will be provided with entire spectrum of Wealth Management Services. The solutions proposed will integrate Income & Asset Protection (Insurance) as well as Wealth Creation and Preservation (Financial Planning, Asset allocation & Investment Management), which will ultimately facilitate in growing, preserving and transferring their wealth.

Here’s a problem of plenty! What do you do when you find that you have fifty odd Mutual Fund schemes that you have invested in and are not able to keep track.

It must have been really tough to keep track of all these schemes on a weekly or monthly basis.

There was a time when people would throng to NFOs, confusing them with initial public offer (IPOs) of companies. They assumed that since the share which gets listed on IPO price mostly zoom to new highs in no time, the same would happen with mutual fund NFOs, too.

But mostly people have figured out that it wouldn’t happen in the case of mutual fund schemes. This is because the scheme is collecting money to invest and its net asset value (price of a mutual fund unit) will go up only after the appreciation of investments.

However, some of us are quick to clarify that they invest in NFOs mainly because of their interesting themes. For example, we finds global gold scheme or a commodity scheme very attractive. However, this is permitted only if a small percentage of the corpus is used for this purpose. Otherwise, it could lead to complications. 

Also, without realising we take a large exposure to the particular sector, say infrastructure sector.
Our expert was finding it difficult in deciding which schemes to get rid of because of the presence of many schemes with very little track record.

According to financial advisors, this is not a rare problem. To begin with, they say, an investor should try to invest in a diversified scheme with a performance record of at least five years. After that, they can invest a small portion of their corpus to sectors like commodity, infrastructure, pharma and so on. However, they should remember that a sector is a risky investment option as it may go t h ro u g h p h a s e s of high and low. Lastly, under no circumstances you should have more than six schemes in your portfolio.

Otherwise, monitoring them could be a problem.

The Long- Short strategy involves taking simultaneous long and short positions on two related stocks. When we say related stocks, it means that both the stocks belong to the same sector and there is an evident correlation in the price movement of the two stocks observed over a period of time. An adequate period of time would be a year or more while determining the correlation. The stock prices of two companies might reflect a correlation for a reason. For instance the share prices of two companies belonging to the same industry might trade in the proportion of their book values, which is quite likely in case of ‘value’ stocks. There are other relevant reasons for share prices of two companies to have a correlation. 

Let’s take an example for a clearer understanding of the concept. Our research team recently (1^st July’08) gave a long- short strategy based recommendation to investors involving Bank of India and Axis Bank. The details of the strategy are mentioned in table below

The above strategy entails going long on Bank of India futures (3 lots) and going short on Axis Bank futures (4 lots). It leads to an almost equivalent exposure on long and short futures positions, which is Rs 547200 and Rs 531000 respectively.  

Figure 2 above reflects the ratio between the share prices of Bank of India and Axis bank over a one year period. It can be observed that the ratio has been in the range of 2.5 and 3.  There has been a retracement every time the ratio breached the mark of 3 times on the upward side.

In the above example, the ratio of prices of the two stocks as indicated in figure 1 has moved to 3.07. This means that if one is to follow the past trend, the ratio is likely to once again come down below the 3 times mark assuming that there hasn’t been any material change in the fundamentals of both the companies. If this is to happen, then the spread between the share prices of the two stocks would reduce implying that the price of Axis Bank would fall and that of Bank of India would rise. The target ratio is 2.90. When the spread reduces to an extent that the price ratio becomes 2.90, then the investor would earn a sum of more than Rs 30,000 from the strategy.

The above strategy was actually recommended on 1^st July’08. On tracking the prices as on 15^th July’08, the strategy has reaped handsome returns for investors with the ratio between the prices of the two stocks well below 2.7 times, in the process even meeting profit target 2 mentioned in the strategy. Axis Bank and Bank of India closed at Rs 598 and Rs 231 on the NSE as on 15^th July’08.  

Risk involved

It is assumed that the historical relationship will hold good in future. However, any significant fundamental changes could lead to adverse results.  

The strategy should preferably be initiated at extreme levels of the spread. In spite of this, if there is any further increase in spread in the short term, it may result in marked to market losses.

• Almost two years after the UPA government referred the Insurance Amendment Bill aimed at raising the foreign direct investment cap in the sector from 26% to 49%to a Group of Ministers (GoM), the panel finally paved the way for the Bill to be introduced in Parliament.

Besides increasing the foreign investment cap, other proposed amendments would allow Indian promoters to continue to hold a majority stake in insurance companies. They would also allow public sector non-life insurers to sell a minority stake to raise capital. The proposed revisions would enable foreign reinsurance companies to enter the Indian market as well.

The reforms will require amendments to the Insurance Act, 1938; LIC Act, 1956; IRDA Act, 1999; and General Insurance Business (Nationalisation) Act, 1972.

Finance Minister, during his speech while inaugurating the Currency Futures Trading made a pertinent point.

Financial markets have continued to produce a multitude of new products including many new forms of derivatives, alternative risk transfer products, exchange traded funds and variants of equity. We in India have adopted all these slowly, some of these products but with considerable success. However, I may note that many years after these ideas were mooted we had to wait. For example, stock index futures took 5 years to be offered to investors after it was first conceived; exchange traded funds for Gold took 4 years to become a reality; interest rate derivatives though launched in 2003 have not taken off. These experiences highlight the risky environment that financial innovation faces in this country. This should change.

Galileo I believe said doubt is the father of invention; if I may add, doubting Thomases are impediments to progress. We need to continue to innovate and improve in the design of financial products.

Check out more excerpts here

Losses on various financial transactions can be set off against gains, which leads to reduction in tax liability.

Gains and losses are a part of the investment game. But while gains always bring a smile to the face, losses make one cringe. But then, losses are not too bad, especially if you know how to take advantage of them. Avoid the blues by proper tax planning.

As far as the capital market goes, if you are holding loss-making shares for over a year, it won’t be possible to set them off against any income. However, a slew of other financial transactions can used to reduce the tax outgo when losses are incurred.

For instance, loss on sale of property, dwindling salaries or falling profits – a simple rule for the taxpayer is to play off losses against gains. You can carry forward losses for eight long years. And even a fall in share prices or net asset values (NAVs) of mutual funds can be carried forward for four years.

In the income tax returns forms, there are schedules for showing carry forward of losses. The income tax (IT) department studies them, allows carry forward and adjusts the income tax to be paid in the current financial year. Besides this, here’s how you can book losses and bask in profits:

DWELL, ON THIS:
First, in case you have sold a house in distress, the loss incurred can be set off against the capital gains in the future. Also, a self-occupied property can also fall in value because the notional income is nil or zero and the interest payout on a home loan results in negative income. Further, one house’s income loss can be set against another’s income (profit), if there are two dwellings. However, remember to pay the municipal taxes without fail, or claims would be rejected. Where one property is rented out, you can set off the interest portion of the equated monthly instalment (EMI) against rent earned.

BUSINESS LOSSES:
If you have two businesses or more, it’s easy to neutralise losses from one against the other’s profits. In fact, the tax rules allow carrying forward of losses, with intention of setting them off against a new business too. The business income of spouse, clubbed together can be also used to offset business losses. If there are bad debts, like forfeiture of advance for raw material supply, you can classify them under losses.

OTHER INCOME:
It is essential that any losses under income form other sources is adjusted in this financial year. Otherwise, they would lapse. For example, an insurance agent can offset commission loss against rent from plot from land. Letting out machines or furniture, interest on bank deposit and examination papers checking are examples of income from other sources.

MAKE CAPITAL FROM FALLS:
If the value of shares, worth Rs 5 lakh fall to Rs 2 lakh after a sharp market fall, selling them at a loss of Rs 3 lakh would lead to short-term capital loss. This amount can be set off against any other short-term capital gains.

A word of caution – do not set off short-term capital losses against long-term capital gains. It would be bad tax planning. For instance, a short-term capital loss, say in shares, should not be set against long-term gains from mutual fund units or profitable listed shares. This is because there is no tax on them. However, if unavoidable, try to adjust them against long-term gains on gold, estate or debt mutual funds because they are taxed, but at a lower rate.

Don’t sell listed shares and equity mutual fund units, if you have held them for more than one year. Long-term capital losses in either category can’t be set off or carried forward, at all. However, long-term losses on debt funds and exchange-traded funds, if required can be set off against long-term gains from gold.

In case of fall in mutual funds after it has been held over a year:

Book losses and cut tax outgo by selling it to a relative, friend or spouse, at market rate at a loss. This can be shown and claimed as losses.

Debt funds, if sold after a year, attract 10 per cent capital gains tax (without indexation) or 20 per cent (with indexation). Holding them for five years and choosing the 10 per cent option would that reduces the tax outgo. (see table: Benefits of long term)
CUT LOSS THROUGH DEPRECIATION:
Make sure to claim depreciation, as they can be easily set off against your business profits. They would effectively reduce income from business. During the current financial year, if business earnings/profits are not sufficient, remember to carry depreciation forward for next assessment year. The advantage is that unabsorbed depreciation can be set off in subsequent years against any head, like house or income from other sources, and not just business alone.

Apparatus, fixtures or machinery – all suffer erosion in value and are covered. Computers (including software), cars and furniture also show depreciation. Mobile phones too can be placed under the depreciation head. The most important advantage is that any unabsorbed dip in depreciation can be filed, for years, and years. In fact, they can be carried forward, indefinitely. All other miscellaneous expenses like stamp duty, registration charges in house property transactions and legal and travel fees in share deals can be claimed when losses are set off or carried forward. Indexation is a great tool when selling property. It must be diligently calculated and availed to keep pace with inflation. It reduces the tax liability as well.

Always remember that there are tax laws that allow you to reduce the burden when you are in financial distress.The lesson here is simple – don’t get scared when losses are staring at you. Instead, work your way out of it.

Source: Business Standard

Indians may take the ‘a penny saved is a penny earned,’ maxim seriously, but a 9 per cent robust growth rate, saw an increasing number of them spending more than before. According to the Reserve Bank of India’s annual report, though net household savings in ab solute term went up by 8.18 per cent to 5,26,033 crore in 2007-08, as a percentage of gross domestic product (GDP) it is estimated to have fallen by 50 basis points (100 basis points equals one per cent) to 11.2 per cent during 2007-08. The reason: a robust growth of about 9 per cent boosting GDP during the year.
Investments in shares, debentures and mutual funds have seen a healthy growth last year. It also highlighted growing investor preference for riskier but high-yielding investment instruments compared to bank deposits.

The report said that investments in stocks, debentures and mutual funds grew by nearly 51 per cent to Rs 77,073 crore during 2007-08. In terms of share in the household savings it constitutes 10.5 per cent against 6.6 per cent at the end of previous year.

“The flow of household investments into mutual funds and growth in number of accounts with the industry in 2007-08 reflects this trend,” said AP Kurian, chairman, Association of Mutual Funds of India (AMFI).

However, growth is marginal when pegged to GDP—1.6 per cent against 1.2 per cent in 200607.

This growth is also not phenomenal when compared to global standards. “In the US, mutual fund corpus size is equal to over 70 per cent of the US GDP,” Kurian added.

Among the other components of household financial assets, assets in cash and investments in insurance, provident and pension funds went up by 21 per cent and 1.72 per cent respectively. But deposits (including bank, nonbank and trade debt) fell by about Rs 10,000 crore to Rs 4,15,245 crore, while claims on government became negative at Rs 27,042, against a positive figure of Rs 40,627 for the previous year, the central bank’s report said.