Have you considered investing Start SIPs, rejig some investments … · 2018. 5. 31. · savings of...
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S Saravanan replies Y our future goals are not clearly defined at today’s cost. So we have made some assump- tions like (a) your current living expenses are Rs 30,000 per month, (b) The car that you want to buy is worth Rs 7.5 lakh today and (c) The house that you wish to acquire is worth Rs 50 lakh now. With the above assumptions, a monthly savings of Rs 47,000 in mu- tual funds each month, giv- ing you an expected return of 12% will take care of all your goals, factoring in in- flation between 6% and 8%. Additionally, you would require to set aside a sum of Rs 25,000 every month to meet the cost of your annu- al foreign trip (inflation ad- justed). It is possible that both you and your spouse are also contributing in the EPF. Being a young couple, we suggest that the accu- mulation through EPF is assigned for retirement planning goal and your current PPF contribution of Rs 1.5 lakh each be di- rected towards equity mu- tual fund (both as ELSS to the extent of section 80C requirement and balance into diversified funds). Your current health in- surance is good enough. You may complement it with a critical care insur- ance, if you or your spouse have a family history of specified critical illness. Your life insurance is in- adequate and sub optimal (3~5%) in returns. We sug- gest that both you and your spouse be covered with a term life insurance for a sum assured of at least Rs 1.2 crore each (20 times your monthly salary as a thumb rule). We also suggest that both you and your spouse initi- ate a personal accident in- surance for a Sum Insured of Rs 50 lakh each to pro- tect loss of income due to accident-led disability. The residual savings and future fortunes after meet- ing the above recommenda- tions can be directed to- wards building an emer- gency corpus equalling at least six times your monthly expenses, and the same can be accumulated either through a systematic invest- ment plan or one-time in- vestment in a liquid / ultra short term mutual fund. However, it is financially prudent to prioritize the emergency corpus accumu- lation over all other goals. We would request you to kindly contact your finan- cial advisor for specific recommendations of prod- ucts in line with your risk profile. Saravanan S is a financial planner with Purplepond Investment Advisory, Chennai This article has been exclusively created for UTI SWATANTRA TIMES NEWS NETWORK R ecently at a presentation on passive funds and the ensuing debate on passive investing versus active fund management, a senior fund industry professional made an interesting observation. His take on the debate was this: Suppose you are driving on the road and have your destination in your mind. You have two options. Firstly, you could be one of the disciplined drivers, go with the flow, maintain lane discipline and not push the car too much. The other option is to travel at a higher speed than the average speed of the other cars on the road, shift lanes and gears, and may be you would reach your destination a bit ahead of others. Investing in passive funds is like the first driver who goes with the flow. In this type of investing the fund manager follows a pre-set benchmark index and mirrors his fund exactly like the structure of the benchmark. He/she has very little leeway to deviate from mirroring the index’s structure. In contrast, active fund management style is like the second driver where the fund manager has the freedom to construct his/her own portfolio and manage it as per his/her discretion and try to beat the benchmark index. In case of passive style of fund management, the investor takes the fund manager-risk out. This means since the fund is almost perfectly mirroring its benchmark index and the fund manager doesn’t have any discretion with the portfolio, the investor’s investments in the fund is dependent only on how the index performs. And almost nothing to do with the fund manager. In contrast, in an actively managed fund, the fund manager has substantial discretion to construct and manage the portfolio. According to industry professionals, another great advantage that passive funds enjoy over actively managed funds is the low expense ratio, that is lower fund management cost. Since this cost is borne by the investor, a lower cost adds up to the amount of money that is there for the investor to invest. “In passive funds, given the low cost structure, more amount goes into the market and participates in the market. With the compounding effect, the final positive impact of the outcome in the long run could be substantial,” said a top fund industry official. In India, when the fund management costs are compared in regular plans, for passive funds it could be one-third of what an investor would pay for active funds, that is about 33% of costs an investor would pay for active fund management. And in case of direct plans, the costs advantage could be even wider: The investor in a passive fund would pay about 20%-25% of the costs in active funds. According to fund managers and mutual fund industry officials, every investor should have some part of his portfolio invested in passive funds. While selecting a passive fund, one of the factors that an investor should keep in mind is the nature of the index that the fund is benchmarked to. The index should be a stable one and a well thought out, they say. This article has been exclusively created for UTI SWATANTRA DEMYSTIFIER Of late there has been a rush by companies to tap the market to raise money through non- convertible debentures (NCDs). These are a form of company bonds, a fixed income instrument, with a pre-fixed tenure issued by companies to meet their funding needs. In most NCDs the rate of interest is also fixed, although there are some in which interest rate is linked to some other rates like rate of inflation, central bank rates etc. NCDs are redeemed when the tenure ends and can not be converted into equity shares of the issuing company, unlike convertible bonds. WHAT ARE NCDs? These funds come with lower management costs and almost nil fund manager-risk This article has been exclusively created for UTI SWATANTRA MAY I KNOW SOMETHING IN DETAIL ABOUT SYSTEMATIC WITHDRAWAL PLAN (SWP) AND HOW IT STANDS TO PAY LOWER TAX COMPARED BANK FIXED DEPOSITS? A K Verma Rajnish Kumar Gupta replies A systematic withdrawal plan (SWP) is like a regular income plan from your mutual fund corpus. You can withdraw a pre-fixed amount every month, quarter or every year. An SWP could be set up in equity and debt funds. But it should be under the growth option only and not under dividend option since the latter doesn’t make any sense. In case of an SWP in an equity plan, the taxation could be either on short term or long term capital gains. Usually SWP is set by people after investing in equity funds for several years. In such a case, they pay a tax at the rate of 10% on the capital gains that is more than Rs 1 lakh per annum and this rate is imposed without indexation benefits. In case of debt funds, the long term capital gain is calculated after three years of investment at 20% after indexation. The tax rate for short term capital gains is 15% plus surcharges and cess. SWP is also different from dividend option in two aspects: SWP is at the choice of the investor while dividend is at the discretion of the fund house. Also for paying dividend, a fund house has to pay dividend distribution tax that is much higher than what an individual would pay even as a short term capital gains tax. In case of band FDs, the individual pays the tax at the slab rate, that is 0%, 10%, 20% or 30% (plus other surcharges and cess). Also in case of FDs, tax has to be paid every year ever if the money is not withdrawn. However, in case of SWP in mutual funds, tax is paid only when the money is redeemed and not every year. Rajnish Kumar Gupta is an IFA based in Rewa, MP This article has been exclusively created for UTI SWATANTRA STEPS TO DOWNLOAD AND SCAN A QR CODE ● Download QR code app on your phone ● Run app and scan the QR code ● Your smartphone will read the code & navigate to the destination CASE STUDY Start SIPs, rejig some investments My wife and I are assistant professors. Our family income is about Rs 1.2 lakh per month. I am 36, my wife is 35 years old and we have a nine-month old daughter. Both of us have separately taken money-back life insurance policies of premium of Rs 78,000 annually. I have a family-floater medical insurance of Rs 5 lakh cover. My saving is through PPF and we are planning to save around Rs 1.5 lakh annually. Our future goals are our daughter's education and her career-related needs, an emergency fund, around Rs 2.5 lakh every year for a foreign trip, a decent car after 1-2 years, a house and a decent retirement corpus. We require an investment plan that could meet our goals. - Pawan Kumar NEXT EDITION In our next edition we would discuss about the international experience relating to passive investing. Have you considered investing in passively managed funds? ILLUSTRATION: SACHIN VARADKAR INVESTOR QUERY Goal (Year of Present Inflation Resource Expected Additional SIP to achievement) cost (Rs) available return reach goal (Rs) Retirement 30,000 6% Rs 3 lakh 12% 3574 (2041) /month contribution to PPF Daughter's education 10 lakh 8% Nil 12% 9028 UG (2034) Daughter's education 5 lakh 8% Nil 12% 6277 PG (2038) Car (2020) 7.5 lakh 6% Nil 9% 9582 House (2023) 50 lakh 7% Nil 12% 24952 ➋ The savings from lower costs is invested in the market ➎ You take only the market- linked risks THE ADVANTAGES OF INVESTING THROUGH PASSIVE FUNDS ➌ This compounds to a substantial amount over the long run In passive funds, given the low cost structure, more amount goes into the market and participates in the market ➊ You pay lower fund management cost ➍ There are almost nil fund manage-related risks Scan this QR Code to know more about about Passive Investing THINKSTOCK THINKSTOCK THE TIMES OF INDIA, MUMBAI TUESDAY, MAY 29, 2018 19 CCI NG 3.7 Product: TOIMumbaiBS PubDate: 29-05-2018 Zone: MumbaiCity Edition: 1 Page: TOIMSPO2 User: sanjay.dighe Time: 05-28-2018 22:15 Color: C M Y K
Transcript of Have you considered investing Start SIPs, rejig some investments … · 2018. 5. 31. · savings of...
S Saravanan replies
Your future goals arenot clearly defined attoday’s cost. So we
have made some assump-tions like (a) your currentliving expenses are Rs30,000 per month, (b) Thecar that you want to buy isworth Rs 7.5 lakh today and(c) The house that you wishto acquire is worth Rs 50lakh now. With the aboveassumptions, a monthlysavings of Rs 47,000 in mu-tual funds each month, giv-ing you an expected returnof 12% will take care of allyour goals, factoring in in-flation between 6% and 8%.
Additionally, you wouldrequire to set aside a sumof Rs 25,000 every month tomeet the cost of your annu-al foreign trip (inflation ad-justed).
It is possible that bothyou and your spouse arealso contributing in theEPF. Being a young couple,we suggest that the accu-
mulation through EPF isassigned for retirementplanning goal and yourcurrent PPF contributionof Rs 1.5 lakh each be di-rected towards equity mu-tual fund (both as ELSS tothe extent of section 80Crequirement and balanceinto diversified funds).
Your current health in-surance is good enough.You may complement itwith a critical care insur-ance, if you or your spousehave a family history ofspecified critical illness.
Your life insurance is in-adequate and sub optimal(3~5%) in returns. We sug-gest that both you and yourspouse be covered with aterm life insurance for asum assured of at least Rs1.2 crore each (20 timesyour monthly salary as athumb rule).
We also suggest that bothyou and your spouse initi-ate a personal accident in-surance for a Sum Insuredof Rs 50 lakh each to pro-
tect loss of income due toaccident-led disability.
The residual savings andfuture fortunes after meet-ing the above recommenda-tions can be directed to-wards building an emer-gency corpus equalling atleast six times your monthlyexpenses, and the same canbe accumulated eitherthrough a systematic invest-ment plan or one-time in-vestment in a liquid / ultrashort term mutual fund.
However, it is financiallyprudent to prioritize theemergency corpus accumu-lation over all other goals.
We would request you tokindly contact your finan-cial advisor for specificrecommendations of prod-ucts in line with your riskprofile.
Saravanan S is a financialplanner with Purplepond
Investment Advisory, Chennai
This article has beenexclusively created for
UTI SWATANTRA
TIMES NEWS NETWORK
R ecently at apresentation onpassive funds and the
ensuing debate on passiveinvesting versus active fundmanagement, a senior fundindustry professional madean interesting observation.His take on the debate wasthis: Suppose you are drivingon the road and have yourdestination in your mind.You have two options. Firstly,you could be one of thedisciplined drivers, go withthe flow, maintain lanediscipline and not push thecar too much. The otheroption is to travel at a higherspeed than the average speedof the other cars on the road,shift lanes and gears, andmay be you would reachyour destination a bit ahead
of others.Investing in passive funds
is like the first driver whogoes with the flow. In this typeof investing the fundmanager follows a pre-setbenchmark index andmirrors his fund exactly likethe structure of thebenchmark. He/she has verylittle leeway to deviate frommirroring the index’sstructure.
In contrast, active fundmanagement style is like thesecond driver where the fundmanager has the freedom toconstruct his/her ownportfolio and manage it as perhis/her discretion and try tobeat the benchmark index.
In case of passive style offund management, theinvestor takes the fundmanager-risk out. Thismeans since the fund
is almost perfectly mirroringits benchmark index and thefund manager doesn’t haveany discretion with theportfolio, the investor’sinvestments in the fund isdependent only on how theindex performs. And almostnothing to do with the fundmanager.
In contrast, in an activelymanaged fund, the fundmanager has substantialdiscretion to construct andmanage the portfolio.
According to industryprofessionals, another greatadvantage that passive fundsenjoy over activelymanaged funds is the lowexpense ratio, that islower fund
management cost. Since thiscost is borne by the investor, alower cost adds up to theamount of money that isthere for the investor toinvest. “In passive funds,given the low cost structure,more amount goes into themarket and participates inthe market. With thecompounding effect, the finalpositive impact of theoutcome in the long run couldbe substantial,” said a topfund industry official.
In India, when the fundmanagement costs arecompared in regular plans,
for passive funds itcould be one-third ofwhat an investorwould pay foractive funds, thatis about 33% of
costs an
investor would pay for activefund management. And incase of direct plans, the costsadvantage could be evenwider: The investor in apassive fund would pay about20%-25% of the costs in activefunds.
According to fundmanagers and mutual fundindustry officials, everyinvestor should have somepart of his portfolio investedin passive funds. Whileselecting a passive fund, oneof the factors that aninvestor should keep in mindis the nature of the index thatthe fund is benchmarked to.The index should be a stableone and a well thought out,they say.
This article has beenexclusively created for
UTI SWATANTRA
DEMYSTIFIER
Of late there has been a rush by companies to tap themarket to raise money through non-convertible debentures (NCDs). These area form of company bonds, a fixed incomeinstrument, with a pre-fixed tenure issuedby companies to meet their funding needs.In most NCDs the rate of interest is also fixed,although there are some in which interest rate islinked to some other rates like rate of inflation,central bank rates etc. NCDs are redeemedwhen the tenure ends and can not beconverted into equity shares of the issuingcompany, unlike convertible bonds.
WHAT ARE NCDs?
These funds come with lower management costs and almost nil fund manager-risk
This article has been exclusively created for UTI SWATANTRA
MAY I KNOW SOMETHING IN DETAILABOUT SYSTEMATIC WITHDRAWALPLAN (SWP) AND HOW IT STANDS TOPAY LOWER TAX COMPARED BANKFIXED DEPOSITS?
A K VermaRajnish Kumar Gupta replies
Asystematicwithdrawal plan(SWP) is like a
regular income planfrom your mutual fundcorpus. You canwithdraw a pre-fixedamount every month,quarter or every year.An SWP could be setup in equity and debt
funds. But it should be under the growthoption only and not under dividend optionsince the latter doesn’t make any sense.
In case of an SWP in an equity plan, thetaxation could be either on short term orlong term capital gains. Usually SWP is setby people after investing in equity funds forseveral years. In such a case, they pay a taxat the rate of 10% on the capital gains that ismore than Rs 1 lakh per annum and this rateis imposed without indexation benefits. Incase of debt funds, the long term capitalgain is calculated after three years ofinvestment at 20% after indexation. The taxrate for short term capital gains is 15% plus
surcharges and cess. SWP is alsodifferentfromdividendoption intwoaspects:SWP is atthe choiceof the
investor whiledividend is at the
discretion of the fundhouse. Also for paying
dividend, a fund house hasto pay dividend distribution tax that ismuch higher than what an individualwould pay even as a short term capitalgains tax.
In case of band FDs, the individual paysthe tax at the slab rate, that is 0%, 10%,20% or 30% (plus other surcharges andcess). Also in case of FDs, tax has to bepaid every year ever if the money is notwithdrawn. However, in case of SWP inmutual funds, tax is paid only when themoney is redeemed and not every year.
Rajnish Kumar Guptais an IFA based in Rewa, MP
This article has been exclusivelycreated for UTI SWATANTRA
STEPS TO DOWNLOAD AND SCAN A QR CODE● Download QR code app on your phone● Run app and scan the QR code● Your smartphone will read the code & navigate to thedestination
CASE STUDY
Start SIPs, rejig some investmentsMy wife and I are assistant professors. Our family income is about Rs 1.2 lakh permonth. I am 36, my wife is 35 years old and we have a nine-month old daughter. Both ofus have separately taken money-back life insurance policies of premium of Rs 78,000annually. I have a family-floater medical insurance of Rs 5 lakh cover. My saving isthrough PPF and we are planning to save around Rs 1.5 lakh annually. Our future goalsare our daughter's education and her career-related needs, an emergency fund, aroundRs 2.5 lakh every year for a foreign trip, a decent car after 1-2 years, a house and adecent retirement corpus. We require an investment plan that could meet our goals.
- Pawan Kumar
NEXT EDITIONIn our next edition we would discuss about the international experiencerelating to passive investing.
Have you considered investingin passively managed funds?
ILLU
ST
RA
TIO
N:
SA
CH
IN V
AR
AD
KA
R
INVESTOR QUERY
Goal (Year of Present Inflation Resource Expected Additional SIP to achievement) cost (Rs) available return reach goal (Rs)Retirement 30,000 6% Rs 3 lakh 12% 3574(2041) /month contribution
to PPFDaughter's education 10 lakh 8% Nil 12% 9028UG (2034)Daughter's education 5 lakh 8% Nil 12% 6277PG (2038)Car (2020) 7.5 lakh 6% Nil 9% 9582House (2023) 50 lakh 7% Nil 12% 24952
➋The savingsfrom lower
costs isinvested inthe market
➎You take onlythe market-linked risks
THE ADVANTAGES OFINVESTING THROUGHPASSIVE FUNDS
➌This
compounds toa substantialamount overthe long run
In passive funds,given the low coststructure, moreamount goes intothe market andparticipates in themarket
➊You pay
lower fundmanagement
cost ➍There are
almost nil fundmanage-related
risks
Scan this QR Code to know more aboutabout Passive Investing
TH
INK
ST
OC
K
TH
INK
ST
OC
K
THE TIMES OF INDIA, MUMBAI TUESDAY, MAY 29, 2018 19
CCI NG 3.7 Product: TOIMumbaiBS PubDate: 29-05-2018 Zone: MumbaiCity Edition: 1 Page: TOIMSPO2 User: sanjay.dighe Time: 05-28-2018 22:15 Color: CMYK
