Thursday, March 20, 2014

SEBI's Mutual Fund Colour Code and How Risk Assessment

A Riot of Colours  is what is going to be followed here, and with a different perspective.

Most of us have gone through the Holi Celebrations in some way or other, especially when it was a long weekend. HAPPY HOLI TO ALL,YEH I KNOW BELATED.

Most of us must have also gone through the colour codes introduced by SEBI ( Securities and Exchange Board of India) via circular dated 18th March,2013. (Read this for detailed circular- http://www.sebi.gov.in/cms/sebi_data/attachdocs/1363665768253.pdf)

But what does all this colour coding mean to a regular investor and how one must understand, decode, and apply to his / her investment portfolio? SEBI is very right in this colour coding decision, but how does this help investor’s to take INFORMED DECISSION?

OK. Here I try and make this colour code Jargon Simple and also explain all about it in a simplistic manner in a much larger perspective. First read below to have brief idea of SEBI’s colour code model-




MEANS PRINCIPAL AT LOW RISK   i.e. Investor understands that their principal is at low risk



    MEANS PRINCIPAL AT MEDIUM RISK i.e. Investor understands that their principal will be at medium risk





  MEANS PRINCIPAL AT HIGH RISK i.e. Investor understands that their principal will be at high risk 




Above are not my wordings, but those are used in SEBI Circular. Now tell me when the Mutual Fund house is collecting money from investors, how can the investor know the amount of Risk involved in the scheme and with the portfolio assigned in the particular scheme, in conjunction with individual investors needs and different time perspective and motive.

EVEN a Hybrid scheme ( i.e. certain portion of portfolio is assigned to Equity investments) is shown in BROWN Colour code.A MID and SMALL cap Mutual Fund scheme, a SECTORAL Mutual Fund Scheme ( like Banking fund or infra fund or Media or FMCG or IT fund are all examples of Sectoral schemes)  and Top 100, Top 200, or Large Cap fund or Multicap funds , or Focused Bluechip-are also allotted BROWN Colour code.

A Short term Bond Fund, a Long term Duration Fund, a Gilt Fund-Short , medium or long , Ultra short term fund, Liquid funds, Money Market or Call funds maximum all in same category as to BLUE Colour code.?

A MIP with longterm Debt portfolio or short term Debt portfolio and with either low or relatively higher Equity Exposure all fall in same category of YELLOW Colour code.?

 How can an Investor understand Different levels of Risk associated to all this schemes and all this different categories do have different risk levels and plus there is also Risk Associated at Fund Manager level or Technology level.Who will assess all this different kinds of Risks?

I am sure even a non-regular or occassional investor if reads this article will know that there is a huge difference in product composition, term of investment and risk profile even within these three colour category. While SEBI has done good to atleast start and initiate this process, but actually this has to be all individualistic approach.

For Example, if two different  investors  invests in same category fund i.e. BROWN Colour coded , say for eg. HDFC Top 200 fund and if markets or it’s NAV (Net Asset Value or Price of one unit of HDFC Top 200 Mutual Fund of that option) goes down by say 10% after exactly a year, one of the investor may like to add more and another may book loss and exit. So where is the risk differentiation? Why one investor has added and another has exited the same fund, within same holding period, bearing same percentage of loss?

So why I say Risk has to be a very individualistic assessment or approach, as I have experienced that Risk means differently for different individuals and family’s and is always a combination of few of the following components-

AGE
Family Members
Number of Dependents
Income Level and Number of Earning members in Family
Expense Level
Surplus available
Investment Perspective of Individual and Family as a whole 
Family History
Recent Investment past experience
Future Expectation Behaviour
Sourroundings and Environment
Circumstances / Events
Goals, Dreams and Aspirations of Individual & Family
Family members and the whole family in total
Standard of Living
Joint Risk Profile of Family
Motive of Investment
Overall Portfolio components
Market Conditions-individual as well as overall
Individual Risk Apetite
Family Risk Apetite
Etc……..Many More…..

So now tell me how can S.E.B.I. help an individual Investor or a family take informed Investing Decissions upon above listed criteria’s by their colour coding method or model with so many options of investing available to informed Investor?

Coming back to the above example, one of the above investor who intends to invest in the same fund even when his investment is down by 10% in a year may have researched the fund and may be investing for longterm only, with a target in mind while the other investor may have studied the past record and thought to invest for 1 yr. only and get the positive returns and move out, but he decides to exit as there is a loss instead of profit.


In my way of Financial Plan writing I study Individual Family earning members or Partner’s behavior visa vis his / her risk behaviour and measure Risk of the Family from above all possible angles and that is also reviewed every now and then (as per time or major event) and then accordingly as per the goal duration a Portfolio is designed, which is a very individualistic approach and more nearer to the exact risk assessment and measurement.


I have always believed, no third party can define risk for you other than self, unless it is measured in a very structured and individualistic manner.



Saturday, March 08, 2014

Smart Women’s Money Basics- ( DEDICATED TO WOMEN OF TODAY )....A MUST READ,



Do you know where and how many Bank Accounts your Father or Husband is having? What are the Bank account numbers? Where and how many Bank locker’s does the family have and that what are the contents in there? What is Locker A/c no. and Secret code or Password of that locker? Where is father or husband putting hard earned money? What all investments are held, and by whom? Are those bank A/c’s single or jointly held or nominated? What is monthly family expense?


In Short does a women within the family know where, assets, investments, liabilities, expenses etc are and how they are held? Is anything written on paper or somewhere?Does anybody know about them ??

THESE ARE QUESTIONS ESPECIALLY ASKED BY ME TO WOMEN WITHIN MY EXTENDED FAMILY WHO HAVE ENROLLED FOR FINANCIAL CONSULTANCY, AND TODAY I AM RAISING THESE QUESTIONS AND GUIDELINE's TO ALL YOU READERS AS WELL since TODAY IS “INTERNATIONAL WOMEN's DAY” ( I hope male friends have not forgotten this, please wish your wife, mummy, sister, aunty, daughter, friends and relatives as well - TODAY IS 8TH MARCH ). This article is a tribute to today’s modern, multi-talented women- WHO IS A HOMEMAKER AS WELL AS DOES WORK AT OFFICE AND TAKES CARE OF ENTIRE FAMILY ALSO.

This is nothing to change the system, but is in conjunction with one of my previous article on “FINANCES and SMOOTHER MARRIED LIFE” ( Click here to read this- http://bit.ly/FincsnSmothrMriedLife), where also I have written about personal traits and handling family finances.

Please read carefully below listed REQUESTS especially for Women's to be followed, irrespective of what is your personal financial trait and who is currently handling finances-

SINGLE WOMEN-

( Currently you may be free from having financial commitments towards family’s needs and expenses, so you can start sowing seeds for a money tree )

-        -:)  Please start investing money (and not only save), by whatever amount you can for future-ground rule says save at least 20% of what you are earning, irrespective of your age or the income.
-         -:) May be you can take calculated risks, and can invest where growth is offered
-          -:) Sit with family when family budget is prepared and
-          -:) Let the family have it’s budget, but you can work on your own budget and can have occasional trips and shoppings within the budget perview.
-          -:) Keep yourself informed of Basic finances and also of Family Finances, make a schedule and discuss family finances on some regular intervals
-          -:) Know where all family documents are kept and know all of them, what is what
-          -:) Know what is family income and expenses and what is a family plan all about, and be in sync with the family.

MARRIED WOMEN-

( So your responsibilities are there, depending upon years of marriage, family size, family financial goals, etc. at the same time earning or income is also there from different sources, i.e.business or salary or investments etc. )

-          -:) Prepare goals list, which are shared goals and individual goals ( it will give vision ) and keep track of it ( it will help you be on track to achieve those goals ). Women’s please enlist your personal goals when a financial plan is being prepared alongwith family’s financial goals
-          -:) Maintain a separate savings account apart from joint account
-          -:) Very Important, keep all family documents including investments, property, bank accounts, loan statements etc at a known place, and keep track of the same as well
-          -:) Know well family liabilities as well
-          -:) Also keep records of all and know ,if all is jointly held, singly held or a nomination is done or not
-          -:) Track money flows
-          -:) I always feel that women in family should also actively participate when a meeting is held with Financial Consultant, because goals and vision is always of the family and not only male or few people
-         -:) Please also know where all medical papers are kept, especially related to mediclaim policies and know it’s procedures in case of emergencies. ( biggest problem, when a male in the family has any medical emergencies, the female has to handle immediately with the hospital authorities, and so all related documents and procedures should be known to female as well )
-         -:)  Please take care of your credit card payments and passwords and also regularly track and maintain your individual credit history as well
-          -:) Also contribute in whatever way the family needs you, in income generation or expense reduction, which will only happen once you know family finances

SINGLE, BUT DIVORCED or WIDOWED WOMEN-

( Recoup from the set backs, and start afresh, you have to stand tall by yourself and start investing for future for you and may be rest of the family. May be you have time and / or some past investments in hand)

-          -:) Check all bank accounts, collect all investment records, all assets papers, all liabilities papers ( you may get it at once from financial plan and /or financial planner and / or will, as the case may be ), and update and complete procedures of up-dation wherever necessary. Put claims wherever it has to be put
-          -:) Update records as well wherever investments are to be continued, as to joint holding and / or nominations and best update your Financial Plan and / or Financial Consultant and / or WILL
-          -:) See that all legal as well as financial procedures are completed and you are to date with records as per your wish and need
-          -:) Start making investments as per your goals and vision
-          -:) Start planning for retirement

RETIRED WOMEN-

 ( So you are retired, in your golden years and with or without your immediate family members, probably left with some investments and assets )

-          -:) Again collate all and keep record of all
-          -:) Keep all documents at proper easily accessible place and to date
-          -:) Keep all bank records updated and use ECS facility to it’s utmost
-          -:) Keep all passwords and PINs safe
-         -:)  Evaluate your needs and resources at regular intervals with financial planner / Financial Consultant
-          -:) Of course enjoy golden years, have world tours in sync with your finances
-          -:) Prepare a WILL, a Power of Attorney etc as the case may be, as per requirement
-         -:)  Please be aware that International as well as Indian studies show that women’s have higher life expectancy then men and so needs and wants will be there for longer then there male family members or partner
-          -:) Plan for more than financial aspects of life



VERY COMMON, BUT VERY MUCH IN THING AND FEW OF THE BIGGEST PROBLEMS IN TODAY’s WOMEN’S LIFE IS THAT –( it's the closed for knowing finances approach, that put's women's into trouble in most cases rather then money)

·        *  In today’s internet and technology world everything is on passwords and pins and that they are not even shared with spouses or immediate family members,so please know and share them or put them somewhere
·         * Moreover Know taxes for women’s on each aspect of money and assets and investments transfer
·         * Be to date and involved in family finances
·        *  Know what and where risks are in investments and do not shy away from taking risks. Women’s generally tend to invest in safer avenues, which outlasts their needs and may give negative return’s and hence may not suffice there family or personal needs and goals
·         * Preparing Family Budget is very important activity, be part of it when financial planner is noting it down
·         * Do not undervalue yourself in job arena, just because you are women, remember it’s your Professinalism and Commitment towards work that counts and not the gender.
·        * Take expert advice, but don’t trust blindly
      * Help Family in daily chores of Banking and Finances, like filling and submitting cheques to banks, or paying of dues or paying bills , or paying Financial Advisor etc.and also help maintain budgets and records
     * Know legal aspects of finances and money, at least basics of Hindu Succession Act 2005, Womens's Empowerment Act, Maternity Benefits, Equal Rights Act, Special Marriages Act 1954( for inter-caste marriages if registered under this), The Indian Succession Act 1925, The Minimum Wages Act , The Muslim Personal Law (Shariat) Application Act 1937, (incase of Muslims), The Christain's Marriage Act 1872 (incase of Christain marriage), The Foreign Marriage Act 1969 (incase Foreign Marriage is applicable), The Indian Divorce Act 1969, The Equal Remunaration Act 1976, etc. A basic knowledge of this will empower today's women more.
      * Raise your voice and concerns and be heard


    WISH YOU ALL, ESPECIALLY women's, HAPPY WOMEN's DAY and A VERY SUCCESSFUL LIFE AHEAD 
        
I Sincerely hope that you women's will accept my wishes with this knowledge sharing gift, one of the best of me. (:-)) 


( THIS WAS SPECIALLY PUBLISHED ON 8TH MARCH,2014, ON INTERNATIONAL WOMEN's DAY AND DEDICATED TO WOMEN's, BUT IT WON'T MEAN THAT MALE's SHOULD NOT READ THIS OR SHOULD NOT KNOW THIS AND HENCE,I REQUEST ALL MALE FRIEND'S OF MINE TO ALSO READ AS EVEN SOME WOMEN's MAY NOT ACT UPON THIS SO IT WOULD BE MALES DUTY TO HELP THEIR FEMALE PARTNER OR FAMILY MEMBER TO KEEP THEM INFORMED ABOUT THEIR FAMILY FINANCES AND ABOVE TOPIC CONTENTS,WHICH IS MORE THEN MONEY AND INVESTMENTS )


Monday, March 03, 2014

Sure you are getting “GOOD RETURNS” on your investments ? - MYTH BUSTED

Is 8% Return a very good return or is 10% a good return or for that matter, what good return on investment actually means for you? Ask yourself and you will get some kind of answer within and each individual will have different thoughts and different percentages in mind, as to good returns.

One of my friends younger brother invests all his savings in Insurance Plans and says “ Savings bhi, Returns bhi and Insurance bhi”- I don’t deny, yeh it is all true, but are this good returns? Again each might have different answers.

One other client of mine who is about to retire in around 3 years with falling under highest income tax bracket, was parking all his money in Bank Fixed Deposits. He said, “I am getting 9% returns in FDs and are safe and sure, so why not?”- Again each may have different answer-Right?

So going through with different kinds of members, prospects and family’s and understanding their different stages of life, Tax Brackets, Risk Profile, Market conditions, Inflation etc I strongly thought to clear doubts of all who are reading this, once for all.

JUST GO THROUGH THE BELOW LISTED CHART –
Read this chart carefully before going ahead. 


(* & ** Please Refer to Disclaimer below for more in depth details)

UNDERSTOOD ALL WITH CLARITY?

Ok I will take you through each row and try and make it simple in brief-

= all general investment vehicles / options are listed in 1st row,
= then next row talks about Gross Assumed return in those investments,
= next row shows Avg. long term inflation, which clarifies that my expenses per annum are increasing by average 7% p.a.(taken on Long term basis, I know short term currently is too high than taken here)
= next row shows the net after inflation returns from my Investments. This one needs to be considered since my cost of an article is say Rs.100 today and next year for the same article I have to pay Rs.107, so if my investment is not growing by more than or at least equal to this, then I am actually loosing on my investments rather than gaining.
= next three rows shows Tax Payable on gross returns as per different tax slabs in India on Net @10% or @20% or may be @30%,as the case may be.
= next three rows shows Actual After Tax, After Inflation Returns, i.e. Real Returns on Investment Earned. This is what actually one should check before taking any investment decision.

DISCLAIMER-
Above, Assumptions are taken at two levels-
@- rate of return is taken for calculation purpose only and does not signify or guarantee any return
and
@- current Indian Tax Laws are assumed on each Investment vehicle.
where,
*Gold MF and Debt MF is taxed @ 10% when sold after 365 days,(as per leading Mutual Fund AMCs Site)(Debt mutual funds profits, if any, can also be calculated as per Indexation and Taxed Accordingly)
Int. on FDs are taxed as per tax slab (assuming it is more than Rs.10000 p.a.),
Shares and Equity MFs are not taxed if sold after than 365 days,
**Real Estate Return is considered on sale after 3 completed yrs. @ 20%, withholding tax, (Many also Argue-“ I don’t pay tax I invest into 54 EC Bonds” -so that is at today’s around gross investment rate is @ 6% p.a., Which you now know what it actually yields ) (and of course there is also indexation option)
Maturity Proceeds on Traditional Life Insurance Policy is not taxable. And that Assumed returns on Traditional Life Insurance my range from 2% to 8% p.a. as per company, plan, age and term.
Above Figures are for representational purpose only ,and may not actually match the reality, eg Tax I have taken @ 10% is not actually @10%,bot other taxes are also aded etc.

The above chart must have shocked many and must have given clarity to lot of my dear friends, colleagues and kith n kin.

To make it clearer, I present following chart which would show same calculations based on same concept, but in Rupee Terms-


So, now one can see that a nominal rate of 9% FD return for a person who is in 30% Tax Bracket is actually a Negative Real Return Investment by 0.7% or actually the person is loosing Rs.700 on his investment
OR
For that matter, why investment in shares or equity mutual funds is better then other investments ( of course need to say after considering other factors for different individual needs etc.)
OR
Why for that matter Equity investment is better than Real Estate Investment.(after considering other factors)
OR
Why Traditional Life Insurance policies are a hole in ones pocket (after considering  all other factors as per individual family's needs)
OR
Why Real Estate investment is better than FD investment for a person who is in 30% Tax slab( after considering all other factors, it can be judged aptly)

(Please note-All above 5 statements are generalised statements,and may or may not be true to few, as such decisions are not only on returns basis but are very much individualistic in nature)

Now I am sure lot of regular investors would know what Good Returns they are getting till now and how Good Actually their Investment is.So now you have also been knowledgeable enough to understand that there's a huge difference in Nominal Rate of Return (basic Return or Interest) and Real Rate of Return (i.e. return after Inflation) and Real Rate of Return after Tax,RIGHT?and that Real Rate of Return after all expenses incurred in that investment including tax,is what is actually comming in one's pocket. (SHOCKED TO REALISE THIS TRUTH?)

I have defined here what “ Good Returns “ actually means and that investment decision should not only depend on what Rate of Interest the Investment is offering, but what would be your Real Rate of Return on the investment, which is quiet subjective and individualistic.This is where a Financial Plan and Financial Advisor helps and whole family plan is based on " Real Rate of Return,after expenses " basis.


(NOTE- I have put above charts only for understanding and simplicity to emphasize that higher real rate of return is actually good return, but the actual scenario is more subjective, complicated and individualistic in nature and calculations in real terms)