Et Article 1.feb

THE ECONOMIC TIMES

wealth

www.wealth.economictimes.com | Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune | February 1-7, 2016 | 32 pages | `7

ALSO INSIDE

8

10

26

FINANCIAL PLANNING

STOCKS

TECH

Learn and Keep PAGE 14

There is more to tax planning than ELSS

Will aviation stocks keep flying?

Apps that help you make the switch

Family Finance PAGE 16

Most investors need to put money into both ELSS and provident fund for effective tax planning.

Low fuel costs have brought cheer to the airline sector, but investors should be watchful.

Moving from Windows to Mac or vice versa can be tough. Cross platform apps make the transition easier.

Q&A PAGE 18

PLUS The week’s best stocks, mutual funds, loans and deposits. NITIN SONAWANE

THESE FINANCIAL STRATEGIES CAN HELP OPTIMISE THE RETURNS FROM SAFE INVESTMENTS.

Prakriti Ojha from Mumbai earns well, but prefers to invest in low-risk bank deposits.

The Economic Times Wealth is available at an invitation price of `7/issue. To book your copy*, contact your newspaper vendor or call 011 - 39898090; Email: [email protected]; SMS ETWS to 58888

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Cover Story

The Economic Times Wealth, February 1-7, 2016

NITIN SONAWANE

Prakriti Ojha 31 YEARS, MUMBAI ANNUAL INCOME

INVESTS IN

`13 lakh

PPF, life insurance policies

REASON FOR RISK AVERSION

After losses from a mis-sold Ulip, she has stayed away from market-linked investments.

OUR RECOMMENDATION

Don’t shun equities completely. Test your risk profile and start putting small amounts in a balanced fund.

MONEY TIPS FOR

LOW-RISK INVESTORS These financial strategies can help optimise the returns from safe investments. NEHA PANDEY DEORAS any equity funds have churned out compounded annual returns of over 15% in the past 10 years. But Money Khanna (see picture) is more concerned about the near-zero returns from the three largecap funds she bought 18 months ago. “I

M

have not lost money but my investment has not moved much. A fixed deposit would have at least earned some returns,” she says. The Mumbai-based executive now invests mainly in the PPF and bank deposits. There are many reasons why investors prefer to be safe than sorry. Some of them just can’t stomach the volatility that comes with stock investments.

Khanna is one such investor. She is content with low returns from her investments as long as they are assured. Others may have had a bad experience with stocks, which is why they want to stay away. Take for instance HR professional Prakriti Ojha (see picture). She is young, earns reasonably well and doesn’t have too many liabilities. But after she lost money in a mis-sold Ulip, she has stayed

Cover Story

The Economic Times Wealth, February 1-7, 2016

03

FACTORS THAT AFFECT YOUR ABILITY TO TAKE RISK All these factors combine to determine the risk tolerance of the individual. Take the test on Page 6 to know how they work.

AGE

INCOME

LIABILITIES

DEPENDANTS

FIELD OF WORK

Age is the most important factor of your risk profile. The younger you are, the higher the capacity to stomach risk. In a downturn, a young person can wait till the investment bounces back. Some planners say that equity allocation should be 100 minus your age. But just because a person is 25 years old doesn’t mean he can invest 75% in stocks. Other factors also play a role.

Lumpy income impacts the risk profile. Self-employed professionals such as lawyers, architects and consultants don’t get paid on a monthly basis. They need bigger buffers of liquid investments to meet emergencies. A salaried individual has a regular stream of income and can opt for instruments that have short-term risks but give higher returns in the long term.

If you have a home loan or other liabilities, avoid big risks with your investments. Ideally, a person’s debt repayments should not be more than 50% of his income. The rise in interest rates would impact the finances of someone with a long-term home loan. On the other hand, if you are not repaying any loan, you are in a better position to invest in riskier assets.

The dependency level of a person also affects his risk tolerance. If he is the sole breadwinner of an extended family (parents, siblings, spouse, children), an individual should not take high risks. On the other hand, someone with a working spouse and no dependents can afford to. People with many dependents also need more insurance and build a larger emergency fund.

The industry in which a person works determines the stability of the income. Someone working in a tech start-up should not be as aggressive an investor as someone working in an FMCG company. Similarly, a higher quantum of debt investment is also recommended for a self-employed professional, who ploughs back a big chunk of his earnings into his own business.

TAKE TAX INTO CONSIDERATION The post-tax returns of bank deposits are not very attractive ASSUMPTIONS

RETURNS

8%

INFLATION

6%

TAX BRACKET

30%

FIXED DEPOSITS

SHORT-TERM DEBT FUNDS

Investment

`1,00,000

`1,00,000

Amount after 3 years

`1,25,971

`1,25,971

Not applicable

`1,19,102

Gains

`25,971

`6,869

Tax payable

`8,025

`1,374

`17,946

`24,597

5.65%

7.61%

Indexed cost of purchase

NET GAIN EFFECTIVE RETURNS

away from equity investments. “I paid higher than his willingness to do so. `56,000 between 2009 and 2012 and got Based on the factors that determine the back only `40,000 when I surrendered the risk appetite, we have developed a risk tolerpolicy,” she says. Ojha then vowed to invest ance test. Turn to Page 6 to to ascertain how only in fixed income instruments that gave much risk you can take. Your score in the assured returns. risk tolerance test will determine where you There could also be valid reasons for inshould invest. If your score puts you in the vesting in low-risk instruments. Nirbhay low-risk segment, here are some tips for you Morzaria (see picture) is young and earns to optimise your returns. well. But he has major expenses Go for tax efficient investments lined up in the next 2-3 years and There is more to Bank deposits are all-time favouris therefore investing mostly in tax saving than ite investments for those seeking debt-based instruments. “I am ELSS funds low-risk instruments. They are saving for short-term goals so Page 8 easy to understand, widely availacan’t invest in volatile assets,” he ble and anyone with a bank acsays. Only 15% of his portfolio is in count can open one. With the stocks. spread of Netbanking, they also do This week’s cover story looks at the not require any paperwork. But bank deposreasons why investors go for low-risk opits are very tax inefficient because the entire tions and offers tips on how to make the interest earned is added to your income and most of these instruments. The risk profile taxed at the normal rate. Short-term debt of an individual is determined by a combinafunds can be a better alternative. Although tion of factors (see graphic). In many cases, the returns generated from these funds are the individual makes the wrong investment similar to the interest you earn on FDs, the choices because he is not aware of his risk actual return is higher if you hold them for tolerance. His ability to take risks may be

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Cover Story

The Economic Times Wealth, February 1-7, 2016

HOW DEBT OPTIONS STACK UP The VPF may be the best way to invest in debt in 2016. But the high rate announced for 2015-16 may not sustain in the coming years.

INTEREST RATE (%)

POST-TAX YIELD IN DIFFERENT TAX SLABS (%) 10% SLAB

20% SLAB

30% SLAB

EPF and VPF

8.95

8.95

8.95

8.95

PPF

8.75

8.75

8.75

8.75

Tax-free bonds

7.50

7.50

7.50

7.50

Kisan Vikas Patra

8.70

7.80

6.91

6.01

NSCs

8.50

7.62

6.75

5.87

Bank deposits

8.00

7.18

6.35

5.53

*Ranked on basis of post-tax returns in 30% tax bracket

Shraddha Dixit 29 YEARS, THANE ANNUAL INCOME

`5 lakh

INVESTS IN

FDs, life insurance policies and Ulips

REASON FOR RISK AVERSION

Barely 5-6% in equities. Prefers FDs because she lacks knowledge of stock markets and mutual funds.

OUR RECOMMENDATION

Use the existing Ulip to enhance exposure to equities. Instead of taxinefficient FDs, opt for debt mutual funds.

more than 3 years. There is a widely held misconception that up to `10,000 earned from bank deposits in a year is tax-free. This is not correct. The exemption under Section 80TTA is only for the interest earned on the savings bank balance, not on fixed deposits and recurring deposits. Also, even though five-year FDs are labelled tax-saving deposits, the interest they earn is fully taxable. For investors in the 30% tax bracket (taxable income of over `10 lakh a year), the returns from a 3-year FD can be as low as 5.6%. On the other hand, the gains from a debt fund are taxed at 20% after adjusting for inflation. The net gain is close to 200 basis points higher (see table). “Plus, there are ways the capital gains can be set off if you invest in a fund. No such options are available for interest income from FDs,” says Bhuvana Shreeram, Head, Financial Freedom Golden Practices, a Mumbai-based wealth management fund. For salaried people, the Voluntary Provident Fund may be a good option. The Employees Provident Fund Organisa-

tion (EPFO) has recommended an interest rate of 8.95% for the current financial year, which means it will earn equivalent to 12.95% from a bank deposit or bond for subscribers in the highest 30% tax bracket. But keep in mind that the higher rate is for the current year could change in the coming years. Taxfree bonds, on the other hand, offer assured returns for the entire term.

Avoid locking up for long-term Don’t put all your money into long-term options. You never know when you may need it. Some banks levy a penalty on premature withdrawals from a fixed deposit. It’s best to

Nirbhay Morzaria OUR RECOMMENDATION

Avoid tax-inefficient FDs and put money in debt funds if your investment horizon is more than 3 years.

28 YEARS, MUMBAI ANNUAL INCOME

`9 lakh

INVESTS IN

PPF, bank FDs and equity funds.

REASON FOR RISK AVERSION

Has big-ticket expenses coming up in next 2-3 years. So, only 15% of total portfolio allocated to equities.

split the investments and create a ladder of deposits. If you have `4 lakh to invest, split the amount in four deposits of `1 lakh each for one, two, three and four years. When the 1-year deposit matures, reinvest the maturity proceeds in the 4-year FD. This will ensure liquidity because you have one deposit maturing every year. In case of regular investments, open multiple recurring deposits so that even if you have to close one due to any reason, the others can continue. Debt funds offer higher liquidity than other long-term options such as PPF and VPF. You can withdraw from the debt fund or reinvest on any day without any restrictions.

NITIN SONAWANE

Cover Story

The Economic Times Wealth, February 1-7, 2016

05

NITIN SONAWANE

Money Khanna 31 YEARS, MUMBAI ANNUAL INCOME

`4 lakh

INVESTS IN

PPF, FDs and mutual funds

REASON FOR RISK AVERSION

Equities account for only 7-8% of her portfolio. She prefers options that offer assured returns.

Online access has made this even more convenient.

Insurance plans force you to save For some investors, the lack of flexibility can be a boon in disguise. Traditional life insurance plans give very low returns but they also force investors to invest for the long-term. The premium notice that is sent to the policyholder every year instils a discipline that mutual funds can’t. “Mutual fund SIPs are usually for 1-2 years. In some cases they may extend to three years. A life insurance plan ensures that the policyholder keeps investing for 15-20 years. He may get 100-150 basis point lower return but at least he doesn’t stop investing,”

OUR RECOMMENDATION

Take risk tolerance test. Start investing in low-risk MIP funds that give better returns than PPF and FDs.

says R.M. Vishakha, Managing Director and CEO of IndiaFirst Life Insurance Company. The other good point is that the policyholder cannot dip into the corpus before maturity. “We have seen clients start investing for their child’s education only to withdraw the money 2-3 years later to go on a holiday. We recommend insurance plans for such investors. They complain that we are trying to sell them an expensive product but that is not the case. We are just selling them discipline,” says Sanjiv Bajaj, Managing Director of Bajaj Capital.

Former havens no longer safe There was a time when gold and real estate were considered the safest investments. Those

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Cover Story

The Economic Times Wealth, February 1-7, 2016

Your loan repayments account for

Your dependents include

How soon do you need the money?

a Parents, siblings, spouse and children

a Within 6-12 months

a Over 50% of income b 30-50%

b Parents, spouse and children

c 10-30%

c Spouse and children

d Less than 10%

d Only spouse

e No loans

e No dependents

c 3-6 years

a All the time

d 6-10 years

b About 6-7 times

e More than 10 years

c 3-4 times

b Less than 10 c 10-20 d 20-30

e Never

WHAT TYPE OF INVESTOR ARE YOU?

a Only business/ salary

Use your score to find out which category of investor you fall in and what should be your asset allocation.

b Business/salary and rent c Salary/business, rent and interest

BELOW 12 POINTS: CONSERVATIVE You can’t take high risks because of precarious finances. Focus on capital protection, even if it means low returns. Invest mainly in debt with 5-10% in stocks to beat inflation.

13-20 POINTS: MODERATELY CONSERVATIVE Your priority is to preserve capital but you can take a slight risk to be able to earn better returns. Go for MIPs, which invest 20-25% in stocks and the rest in the safety of debt.

21-28 POINTS: MODERATE You can take a reasonable risk in exchange for better returns. This will ensure good capital growth in the longer term. Allocate 50-60% to debt and 40-50% to equities.

d Salary/business, rent, interest and dividends e Salary/business of self and spouse, rent, interest and dividends

How much of your income are you able to save? a Less than 5% b 5-10% c 10-20% d 20-30% e Over 30%

Given your current financial status, can you achieve your financial goals?

Which of these best describes your financial situation?

a Some goals may be missed

a Very unstable

b Will be a bit of struggle c On track to reach achieve all goals

b Needs improvement c Average d Reasonably sound

d Planning for goals already done

e On a solid footing

e All goals achieved

To calculate your risk quotient, give yourself points on the following basis: A

Point

B

Points

29-36 POINTS: MODERATELY AGGRESSIVE You can digest an above average risk, which can prove rewarding. Allocate up to 70% to equities. Stable finances will help you take the ups and down in equities in your stride.

C

Points

D

Points

OVER 36 POINTS: AGGRESSIVE

E

Points

You are in a position to take high risks. Put up to 80-100% in equities. This can mean notional losses in the short to medium term, but the long-term picture could be bountiful.

b May need to change soon

e Excellent chances of growth

Many investors are not sure how much risk they can take. This short test tells you the asset allocation that best suits your profile.

Your total income comes from

a Not sure if it will last

d Doing well and expect to rise

d Once or twice

YOUR RISK APPETITE

a Already retired

How stable is your job/ business/profession?

c Don’t foresee any change

FIND OUT

How many years are left for you to retire?

e More than 30

b 1-3 years

How many times have you borrowed or rolled over credit card bills in the past 1-2 years?

TOTAL POINTS

Cover Story days are long gone. As the returns of the past three years show, gold is no longer the safe harbour it used to be. Gold prices leapt up 32% in 2011 and hit `34,000 per 10 grams in 2012. But they have consistently slipped after that and the metal is now trading at `26,500 per 10 grams, down almost 22% from the peak. Experts say it is unlikely that gold will bounce back in 2016. If you still want to invest in gold, a better option would be the gold bonds issued by the government. These bonds are linked to the price of gold and give 2.5% extra returns by way of yearly interest. The same is true for real estate. Property prices are inflated and home loan interest rates are still quite high. Investing in property at current levels is risky because even if the value appreciates by 5-6%, the 9-9.5% interest you will pay on the loan will mean a loss in real terms. However, the real estate market is not uniform and there may still be some pockets that can offer good appreciation.

Don’t shun equities altogether Fixed deposits and PPF may be a safe option but they won’t be able to prevent the eroding effect of inflation on your savings. “Your money needs to grow at a faster clip than the inflation rate to sustain your lifestyle for several years. This can’t be done by parking the entire retirement savings in low yield fixed deposits,” says Hemant Rustagi, CEO, Wiseinvest Advisors. If you spend `40,000 a month on house-

The Economic Times Wealth, February 1-7, 2016

hold expenses today, even 6% inflation will push that up to `72,000 a month by 2025. By 2030, the monthly requirement will surge to `96,000. By 2035, it would be `1.28 lakh a month. The only way to beat inflation is to invest in assets that can grow faster. This is why even risk-averse investors should not shun equities completely. You may not have the stomach for the ups and downs of the stock market but experts and statistics say that equities are the only asset class that can beat in-

flation in the long term. For risk-averse investors, monthly income plans (MIPs) from mutual funds can be a lowrisk entry point to the equity markets. MIP funds follow a conservative investment strategy, allocating only 10-25% of their corpus to equities and putting the rest 75-90% in safer bonds and other debt instruments. This is why the returns from this category are fairly attractive when the going is good and relatively stable over the long term. In the past one year, when the Nifty has dipped by over

EQUITIES TO BEAT INFLATION The debt-based PPF won’t be able to beat inflation. MIP funds put 15-20% in equities, which helps them outperform the PPF and beat inflation VALUE OF `5,000 SIP STARTED 3 YEARS AGO

5 YEARS AGO

10 YEARS AGO

Amount invested

`1.8 lakh

`3 lakh

`6 lakh

ICICI Pru Child Care Plan

`2.28 lakh

`4.42 lakh

`11.97 lakh

HDFC Childrens Gift Fund

`2.12 lakh

`3.92 lakh

`10.4 lakh

Birla SL MIP II - Savings 5

`2.08 lakh

`3.84 lakh

`9.93 lakh

SBI Magnum MIP Floater

`2.13 lakh

`3.95 lakh

`9.58 lakh

PPF

`2.06 lakh

`3.74 lakh

`9.41 lakh

07

15%, the average MIP fund has given a return of more than 4%. “MIPs give investors good returns if stock markets do well and also protect the downside because of the limited exposure to equities,” says Vidya Bala, Head of research, FundsIndia.com. As the table shows, investments in the top performing MIP funds have outperformed the PPF in the past three, five and 10 years.

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