Is It Time To Look At Dynamic All financial goals …...balanced fund. In most balanced funds, the...
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Times News Network I nvestors with basic or no knowl- edge about investing often face the dilemma about where they should invest their hard earned money. The usual options they have are stocks, bonds, FDs, gold etc. Such dilemma is not unusual and at times is also good. After all an investor with such a dilemma is less likely to commit grave mistakes while in- vesting. He/she would rather be conservative than reckless. At times investors do take the ini- tiative to learn the tricks about how and in which assets they should dis- tribute their funds. They could also take the help of an experienced and registered financial planner or ad- visor to do the same for them. DYNAMIC ASSET ALLOCATION FUNDS To lessen the burden of those investors who want to go alone some mutual fund houses have launched schemes which allocate funds across stocks and debt, and in some cases a small portion in gold, as per some pre-set cri- teria or at the discre- tion of the fund man- ager. These funds are called dynamic assets allocation schemes. HOW IT’S MANAGED A dynamic asset al- location plan is the one in which the fund manag- er has the free- dom to change the proportion of these assets as per his/her view of the market condition, mainly the direction in which the prices of these assets could move in future. Alternately fund houses also set some criteria, like price-to-earnings ratio, rate of inflation and the ex- pected direction of the same, the yield on the 10-year gilts etc. to switch be- tween assets. According to financial planners and advisors, investing in such a fund could be a better op- tion for an investor who is trying to decide the perfect asset allocation himself/her- self but lack the required ex- pertise. Dynamic asset allocation funds are very flexible about how much they should in- vest in which assets. If the fund manager thinks or the pre-set data signal that the equity market is ex- tremely over-sold and a bull rally could start anytime, they could shift all the money they manage into stocks. In this case there will not be any allocation to debt or gold. The reverse is also true: If the signals are that the end of a bull run is nearing, the fund would shift all their money into debt and may be a small part in gold too, financial planners and advisors say. DYNAMIC ASSET ALLOCATION VS BALANCED FUNDS There is a fundamental difference between a dy- namic asset allocation fund and a balanced fund. In most balanced funds, the equity portion will never fall below 65%. This is done for bet- ter tax efficiencies. On the other hand, dynamic asset allocation plans are not restricted by such rules. So in these funds in the search for higher returns, the investor may have to pay a bit more tax than a pure balanced fund. So if you are invested in a dy- namic asset allocation fund, and get a post-tax return that’s higher than what you get in a balanced fund, you are a winner. ROLE OF GOLD Given Indians’ affini- ty for gold, some dy- namic asset alloca- tion plans allocate a small portion of the portfolio in gold, which is used as a hedge against in- flation. Manpreet Singh replies Y our goals need to be infla- tion-adjusted till you re- tire. We assume a 6% annual rate of inflation. So your re- tirement corpus of Rs 2 crore today should be Rs 10.8 crore in July 2046. For your house, given the present real estate market conditions, there may not be any increase in prices in five years. So we keep it at Rs 1 crore only. For your trav- el & vacations, you would need about Rs 13.5 lakh pa for at least 15 years post retire- ment, assuming a life ex- pectancy of 75 years. Till re- tirement you would need Rs 1.7 crore for which an SIP of Rs 3,000 pm should work. We suggest you invest the funds in your savings ac- count in liquid funds yield- ing returns comparable to 1- year bank FDs. Your PPF should be re- placed by ELSS since com- pared to the current PPF re- turn of 7.9%, ELSS could generate 12-15% return. A partial withdrawal from your current PPF balance of Rs 7 lakh could be used for down payment of your house. Since you are already in- vesting in a pension fund, I suggest you invest the Rs 10 lakh in your FDs in balanced funds which could give you tax free returns of 10%+. Based on your earnings, your current life cover is too low. You should have a life cover of at least Rs 1 crore. So go for a term cover. Also at this age (accumula- tion phase) you don’t need a dividend option in your MFs. So go for the growth option. Also you should keep money in liquid funds instead of in post offices. The maturity amount from your NSC and KVPs should be used for downpayment when you buy the house. Your investments of Rs 15,000 pm in NPS is too high since it has lesser liquidity. My advice is use SIP in MFs for retirement planning. For example Rs 15,000 in an SIP for 29 years at 15% pa return will give you a corpus of Rs 7 crore. If the SIP amount is enhanced to Rs 18,000 pm, your retirement goal of Rs 10.8 crore could be achieved. Manpreet Singh runs Sant Consultancy, Panipat R Raja H aving discussed the role of emotions and our inability to moderate their influence in the last two issues, it is time now to discuss a few biases that affect our investment decisions. In investment, we may be hard-wired to focus on short term. We tend to live in a world without later. We live in ‘permanent present’, trapped forever in the perpetual now. It’s like a world without end, a time without later. Time__the duration for which an investment will be held, during which investment results can be measured and judged__is crucial to any successful investment program because it is the key to getting the right asset mix. Time transforms investments from least attractive to most attractive and vice-versa. This is because while the average expected rate of return is not at all affected by time, it substantially changes the range or distribution of actual returns around the expected average. Given enough time, investment that might otherwise seem unattractive become highly desirable and vice versa. The longer the time over which investments are held, the closer the actual returns in a portfolio will come to the expected average. The actual returns on individual investments, in contrast, will be more and more widely dispersed as the time period lengthens. As a result, time changes the way in which the portfolios of different kinds of investments can be used by different investors in different situation with different objectives. Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. Two competing explanations as to why consumers have trouble with financial decisions are gaining momentum. One has to do with financial literacy. The other is about investors’ impatience. In the next article we will deal with these issues. R Raja is with a leading domestic fund house Yours Behaviourally is a monthly column on psychology that impacts our investment decisions DEMYSTIFIER CASE STUDY All financial goals must be inflation-adjusted I am a 31-year old single woman, a government employee. My current take-home salary is Rs 70,000 per r month (pm), expenses are Rs 25,000 pm. I have no liabilities and my parents are self-dependent. My y current investments and savings are: SB accounts: Rs 13 lakh, PPF: Rs 7 lakh (I invest Rs 1.5 lakh pa), FD: Rs 10 lakh (to mature in 2018), Life insurance policy: Premium of Rs 25,308 pa till 2020 (S Sum assured: Rs 3 lakh), MFs: One SIP of Rs 2,000 pm since February 2015, one lump sum payment of Rs 1 lakh and one of Rs 2 lakh in ELSS (Dividend income of about Rs 20,000 pa), Postal savings account: : Rs 50,000, NSC and Kisan Vikas Patra: Rs 3 lakh each (since January 2017) and NPS: Rs 9.5 lakh (con ntributing Rs 15,000 pm) Kindly suggest how I should plan my investments to achieve these major finan ncial goals: Retirement corpus: Rs 2 crore (Retirement in July 2046), a house in Mumbai costing Rs 1 1 crore by 2023, Rs 2.5 lakh per annum (pa) for travel and vacations and adequate health cover. - R Bhattacharya WHAT’S GST NETWORK (GSTN)? Swatantra Kumar explains: As India progresses towards launching Goods and Services Tax, the country’s most ambitious tax reforms in decades, the IT backbone that has been set up to make the GST process smooth, is called the GST Network (GSTN). It’s a non-for-profit company in which the central government holds 24.5% equity in its Rs 10 crore paid up capital, while all the states and union territories together hold another 24.5%. The balance 51% is held by private entities. GSTN has been set up to provide the IT infrastructure for the central and state governments, the tax payers and all other stakeholders who will be part of the GST. GSTN will run the portal that will facilitate this one-nation-one- tax system, including filing, maintaining, tracking and all other transaction-related activity. Through GSTN the central and the state governments will be able to track down each and every transaction in the country. GOAL YEARS TO GOAL SUGGESTION Retirement 29 Rs 20,000 pm in MF SIP House 5 Rs 41 lakh combined from balanced fund, PPF, KVP & NSC, liquid funds, a new Rs 22,000 pm SIP in balanced fund. At least Rs 40 lakh home loan Travel & 29 (for 15 years SIP in MF for Rs 3,000 pm vacation post retirement) Mediclaim Immediate Provided by employee Life insurance Immediate At least Rs 1 crore term plan NEXT EDITION We will discuss about how retired people could make their portfolio more tax efficient. An automatic asset allocation plan could help small investors put their money in assets like equity, debt and gold through a pre-set model without personal intervention ILLUSTRATIONS: SACHIN VARADKAR Is It Time To Look At Dynamic Asset Allocation Models? DEBT GOLD EQUITY BIASES THAT AFFECT INVESTMENT DECISIONS 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 Scan the QR Code for POINTS YOU SHOULD KEEP IN MIND FOR A GOOD ASSET ALLOCATION STRATEGY http://www.beswatantra.com/uploads /infographics/uti-beswatantra-asset- allocation-0342489001496730922.pdf Yours Behaviourally RETURNS FROM DYNAMIC ASSET ALLOCATION FUNDS (ALSO CATEGORIES AS HYBRID ASSET ALLOCATION PLANS) TIME PERIOD: 1-YEAR CATEGORY RETURN: 16.6% RANGE : 23.2-11.2% TIME PERIOD: 2-YEAR CATEGORY RETURN: 11.9% RANGE : 16.7-8.3% TIME PERIOD: 3-YEAR CATEGORY RETURN: 10.1% RANGE : 14.4-7.8% TIME PERIOD: 5-YEAR CATEGORY RETURN: 14.3% RANGE : 18-10.9% Source: Valueresearch online.com 90% 70% 50% 30% 10% 82% 53% 35% 27% 20% 267% -10% -30% -50% 24% 18% 18% 17% 6% 3% 0% 0% 17% 16% 15% 6% 7% -2% -5% -15% 1 year Minimum Returns Maximum Returns Average Returns 3 year 5 year 10 year 15 year 20 year -47% 15% In percentage Probability of Negative Returns Average Returns Long term investment reduces the probability of negative returns S&P BSE Sensex values taken for every FY-Month-end March till March 2017 to calculate returns THE TIMES OF INDIA, MUMBAI TUESDAY, JUNE 13, 2017 23
Transcript of Is It Time To Look At Dynamic All financial goals …...balanced fund. In most balanced funds, the...
Times News Network
Investors with basic or no knowl-edge about investing often facethe dilemma about where they
should invest their hard earnedmoney. The usual options they haveare stocks, bonds, FDs, gold etc. Suchdilemma is not unusual and at timesis also good. After all an investorwith such a dilemma is less likelyto commit grave mistakes while in-vesting. He/she would rather beconservative than reckless.
At times investors do take the ini-tiative to learn the tricks about howand in which assets they should dis-tribute their funds. They could alsotake the help of an experienced andregistered financial planner or ad-visor to do the same for them.
DYNAMIC ASSETALLOCATION FUNDSTo lessen the burden of thoseinvestors who want to goalone some mutual fundhouses have launchedschemes which allocatefunds across stocks anddebt, and in some casesa small portion in gold,as per some pre-set cri-teria or at the discre-tion of the fund man-ager. These funds arecalled dynamic assetsallocation schemes.
HOW IT’S MANAGED A dynamic asset al-location plan isthe one in whichthe fund manag-er has the free-dom to changethe proportion
of these assets as per his/her viewof the market condition, mainly thedirection in which the prices ofthese assets could move in future.Alternately fund houses also setsome criteria, like price-to-earningsratio, rate of inflation and the ex-pected direction of the same, the
yield on the 10-yeargilts etc. to switch be-
tween assets. Accordingto financial planners and
advisors, investing in sucha fund could be a better op-tion for an investor who istrying to decide the perfectasset allocation himself/her-self but lack the required ex-pertise.
Dynamic asset allocationfunds are very flexible abouthow much they should in-
vest in which assets. If the fundmanager thinks or the pre-set datasignal that the equity market is ex-tremely over-sold and a bull rallycould start anytime, they could shiftall the money they manage intostocks. In this case there will not beany allocation to debt or gold. The
reverse is also true:If the signals are thatthe end of a bull run isnearing, the fund wouldshift all their money intodebt and may be a smallpart in gold too, financialplanners and advisors say.
DYNAMIC ASSETALLOCATION VS BALANCED FUNDSThere is a fundamentaldifference between a dy-
namic asset allocation fund and abalanced fund. In most balancedfunds, the equity portion will never
fall below 65%. This is done for bet-ter tax efficiencies. On the other
hand, dynamic asset allocationplans are not restricted by such
rules. So in these funds in thesearch for higher returns,the investor may have topay a bit more tax than apure balanced fund. So ifyou are invested in a dy-namic asset allocationfund, and get a post-taxreturn that’s higherthan what you get in abalanced fund, you area winner.
ROLE OF GOLD Given Indians’ affini-ty for gold, some dy-namic asset alloca-tion plans allocate a
small portion of theportfolio in gold,which is used as ahedge against in-flation.
Manpreet Singh replies
Your goals need to be infla-tion-adjusted till you re-
tire. We assume a 6% annualrate of inflation. So your re-tirement corpus of Rs 2 croretoday should be Rs 10.8 crorein July 2046. For your house,given the present real estatemarket conditions, there maynot be any increase in pricesin five years. So we keep it atRs 1 crore only. For your trav-el & vacations, you wouldneed about Rs 13.5 lakh pa forat least 15 years post retire-ment, assuming a life ex-pectancy of 75 years. Till re-tirement you would need Rs1.7 crore for which an SIP ofRs 3,000 pm should work.
We suggest you invest thefunds in your savings ac-
count in liquid funds yield-ing returns comparable to 1-year bank FDs.
Your PPF should be re-placed by ELSS since com-pared to the current PPF re-turn of 7.9%, ELSS couldgenerate 12-15% return. Apartial withdrawal from yourcurrent PPF balance of Rs 7lakh could be used for downpayment of your house.
Since you are already in-vesting in a pension fund, Isuggest you invest the Rs 10lakh in your FDs in balancedfunds which could give youtax free returns of 10%+.
Based on your earnings,your current life cover is toolow. You should have a lifecover of at least Rs 1 crore.So go for a term cover.
Also at this age (accumula-
tion phase) you don’t need adividend option in your MFs.So go for the growth option.Also you should keep moneyin liquid funds instead of inpost offices. The maturityamount from your NSC andKVPs should be used fordownpayment when you buythe house.
Your investments of Rs15,000 pm in NPS is too highsince it has lesser liquidity.My advice is use SIP in MFsfor retirement planning. Forexample Rs 15,000 in an SIPfor 29 years at 15% pa returnwill give you a corpus of Rs 7crore. If the SIP amount isenhanced to Rs 18,000 pm,your retirement goal of Rs10.8 crore could be achieved.
Manpreet Singh runs SantConsultancy, Panipat
R Raja
Having discussed the roleof emotions and our
inability to moderate theirinfluence in the last twoissues, it is time now todiscuss a few biases thataffect our investmentdecisions.
In investment, we may behard-wired to focus on shortterm. We tend to live in aworld without later. We live in‘permanent present’, trappedforever in the perpetual now.It’s like a world without end, atime without later.
Time__the duration forwhich an investment will be
held, during whichinvestment results can bemeasured and judged__iscrucial to any successfulinvestment program becauseit is the key to getting theright asset mix.
Time transformsinvestments from leastattractive to most attractiveand vice-versa. This isbecause while the averageexpected rate of return is notat all affected by time, itsubstantially changes therange or distribution of actualreturns around the expectedaverage. Given enough time,investment that might
otherwise seem unattractivebecome highly desirable andvice versa.
The longer the time overwhich investments are held,the closer the actual returnsin a portfolio will come to theexpected average. The actualreturns on individualinvestments, in contrast, willbe more and more widelydispersed as the time periodlengthens. As a result, timechanges the way in which theportfolios of different kinds ofinvestments can be used bydifferent investors in differentsituation with differentobjectives. Investment basedon genuine long-term
expectation is so difficulttoday as to be scarcelypracticable.
Two competingexplanations as to whyconsumers have trouble withfinancial decisions aregaining momentum. One hasto do with financial literacy.The other is about investors’impatience. In the next articlewe will deal with these issues.
R Raja is with a leading domestic fund house
Yours Behaviourally is amonthly column on psychology
that impacts our investmentdecisions
DEMYSTIFIER
CASE STUDY
All financial goals mustbe inflation-adjusted
I am a 31-year old single woman, a government employee. My current take-home salary isRs 70,000 perr month (pm), expenses are Rs 25,000 pm. I have no liabilities and my parentsare self-dependent. Myy current investments and savings are: SB accounts: Rs 13 lakh, PPF: Rs 7 lakh (I investRs 1.5 lakh pa), FD: Rs 10 lakh (to mature in 2018), Life insurance policy: Premium of Rs25,308 pa till 2020 (SSum assured: Rs 3 lakh), MFs: One SIP of Rs 2,000 pm since February2015, one lump sum payment of Rs 1 lakh and one of Rs 2 lakh in ELSS (Dividend income ofabout Rs 20,000 pa), Postal savings account:: Rs 50,000, NSC and Kisan Vikas Patra: Rs 3lakh each (since January 2017) and NPS: Rs 9.5 lakh (conntributing Rs 15,000 pm)Kindly suggest how I should plan my investments to achieve these major finanncial goals:Retirement corpus: Rs 2 crore (Retirement in July 2046), a house in Mumbai costing Rs 11 crore by 2023, Rs 2.5 lakh per annum (pa) for travel and vacations and adequatehealth cover. - R Bhattacharya
WHAT’S GST NETWORK (GSTN)?Swatantra Kumar explains: As India progresses towardslaunching Goods and Services Tax, the country’s mostambitious tax reforms in decades, the IT backbone that hasbeen set up to make the GST process smooth, is called theGST Network (GSTN). It’s a non-for-profit company inwhich the central government holds 24.5% equity in its Rs10 crore paid up capital, while all the states and unionterritories together hold another 24.5%. The balance 51% isheld by private entities. GSTN has been set up to providethe IT infrastructure for the central and state governments,the tax payers and all other stakeholderswho will be part of the GST. GSTNwill run the portal that willfacilitate this one-nation-one-tax system, including filing,maintaining, tracking and all othertransaction-related activity. ThroughGSTN the central and the stategovernmentswill beable totrack downeach andeverytransactionin thecountry.
GOAL YEARS TO GOAL SUGGESTION
Retirement 29 Rs 20,000 pm in MF SIP
House 5 Rs 41 lakh combined from balanced fund, PPF,KVP & NSC, liquid funds, a new Rs 22,000 pm SIPin balanced fund. At least Rs 40 lakh home loan
Travel & 29 (for 15 years SIP in MF for Rs 3,000 pm vacation post retirement)
Mediclaim Immediate Provided by employee
Life insurance Immediate At least Rs 1 crore term plan
NEXT EDITIONWe will discuss about how retired people couldmake their portfolio more tax efficient.
An automatic asset allocation plan could help small investors put their money inassets like equity, debt and gold through a pre-set model without personal intervention
ILLUSTRATIONS: SACHIN VARADKAR
Is It Time To Look At DynamicAsset Allocation Models?
DEBT GOLD EQUITY
BIASES THAT AFFECTINVESTMENT DECISIONS
STEPS TO DOWNLOAD AND SCAN A QR CODE● Download QR code app on yourphone ● Run app and scan the QR code● Your smartphone will read the code& navigate to the destination
Scan the QR Codefor POINTS YOUSHOULD KEEP INMIND FOR AGOOD ASSETALLOCATIONSTRATEGY
http://www.beswatantra.com/uploads/infographics/uti-beswatantra-asset-allocation-0342489001496730922.pdf
Yours Behaviourally RETURNS FROM DYNAMIC ASSETALLOCATION FUNDS (ALSO
CATEGORIES AS HYBRID ASSETALLOCATION PLANS)
TIMEPERIOD: 1-YEARCATEGORYRETURN: 16.6%RANGE : 23.2-11.2%
TIMEPERIOD: 2-YEAR
CATEGORYRETURN:
11.9%RANGE :
16.7-8.3%
TIME PERIOD: 3-YEARCATEGORY RETURN: 10.1%RANGE : 14.4-7.8%
TIME PERIOD: 5-YEAR
CATEGORY RETURN: 14.3%
RANGE : 18-10.9%
Source: Valueresearch
online.com
90%
70%
50%
30%
10%
82%
53%
35%27%
20%
267%
-10%
-30%
-50%
24%18%
18% 17% 6% 3% 0% 0%
17% 16% 15%
6% 7%
-2%-5%
-15%
1 year
MinimumReturns
MaximumReturns
AverageReturns
3 year 5 year 10 year 15 year 20 year
-47%
15%
In p
erce
ntag
e
Probabilityof Negative
Returns
AverageReturns
Long term investment reduces theprobability of negative returns
S&P BSE Sensex values taken for every FY-Month-endMarch till March 2017 to calculate returns
THE TIMES OF INDIA, MUMBAI TUESDAY, JUNE 13, 2017 23
