Hassle free Debt Investment

When we were school kids we used to lend and borrow pencil, eraser etc.. This practice of loan which started in our school days continued as borrowing milk and coffee powder which later developed as Housing Loan and Bank deposits.

Institutions receive money from us in two ways. In the first category we buy shares giving our money and become shareholders. If the company earns profit, we may get interest. The prices of shares will fluctuate, as we have seen. As there is no fixed income for our investment and the price of shares fluctuate, a lot of people never enter this zone. What do they do with the money they earn?

Depending on our income, we can lend money to companies in another method. We can finalize the rate of interest and lend money to companies/banks. This is the investment based on debt instruments. Some people may think, "Bank is for getting loans only, what is this new story?" The deposits we make in banks are equal to loans we give to banks. Giving money to individuals, banks or even government and receiving interest from them is an investment based on loan.

This path of investment is also not a four lane trunk road strewn with roses. There may be thorns and rough stones. If we travel with care, it is worry free investment. Let us see how to remove the thorns in our path.

FIRST THORN TO BE REMOVED - CREDIT RISK 
The repayment capacity for paying interest and the principal is called ‘Credit risk’. There is a measuring scale for this. The symbols for credit risk are “AAA, AA+, AA- and A. “AAA” means the least risk. Single A means heavy risk. This symbol is given for debentures, and fixed deposits. The institutions which examine the individual companies and allot these symbols for Credit risk are “CRISIL, CARE and ICRA”. Principal and interest will be returned by government without any doubt and so it is called “Sovereign”. So credit risk should be understood and loan may be given where the risk is less.

NEXT THORN – CHANGES IN INTEREST RATES 
Some people may remember that before 20 to 30 years bank deposits earned 14% to 13% interest. Now getting 7% to 8% is very difficult. The interest rates may slightly differ from institution to institution. If the credit risk is less, the interest rate we receive will also be less. In a AAA rated company the interest rate will be less. The interest rate of ‘A’ rated concern will be slightly higher. This will change from country to country. The Bank deposit interest rate in India is about 7% to 8%. But in America the bank deposit interest rate is from 0.25% to 1% only. This is because the central banks of the nations maintain their financial position by reducing or increasing the interest rate see Figure-1. Our Reserve Bank of India has reduced the interest rate in the last year. It is expected that the rate may be reduced further. The impact makes the depositors of bank fixed deposits to do receive less interest. But the borrowers who availed housing loans have to pay lesser interest. At the same time, instead of bank fixed deposits, if money is invested in Mutual Funds, even if the RBI rate of interest is reduced, the depositor will earn more interest.

We found out about the thorns in debt instruments. Now let us see how many paths are there.. Which path has lesser thorns? Where there are no thorns at all? We can verify and select.

Here are some of the paths:
1. Individual Loans.
2. All types of Bank Deposits including Fixed Deposits, Monthly Recurring deposits.
3. All types of Deposits in Financial Institutions.
4. All types of deposits in Post Offices Fixed, Monthly, etc.
5. Public Provident Fund.
6. Government Bonds.

Please see Table – 1

Types of Debt Instruments	Credit Risk	Interest Rate Risk	Remarks
Personal Loans given to individuals by individuals	High	Low	Return is Usually high - credit risk  varies from person to person depending upon their repayment capacity and intent
All type of Bank deposits	Low	Low	Interest rate is  mostly fixed - varies from bank to bank
Deposits with corporates	High	Low	Return is usually high than the bank deposits  - mostly fixed interest rate - varies with corporates based on their ratings
All type of Post office  deposits	Sovereign	low	Moderate
PPF	Sovereign	Average	Rates changes every quarter
Government Bonds	Sovereign	high	when we buy this bond in market, yield will change based on our purchase price

Now you would have understood the risks and returns. The Risk Vs Returns will apply to Debt Instruments like shares. If we manage the thorns of risks we can get some more income above the Bank deposits in Mutual Funds on Debt related instruments. Please see Figure 2 . Tax payers can earn around 2.87%

if they invest in Mutual Funds on Debt instruments instead of Bank deposits. This analysis is arrived by comparing the yields of Reliance Regular Savings Funds Vs Bank deposits.

Finally we can see that Investments based on Debt instruments have less fluctuations and fixed interest rate is available. If we invest in Mutual Funds base on Debt Instruments we can get more gains than investing in Bank deposits.

Equity Investing

Let us examine the investments on shares and equity. In the current year, (2016) when the share market is on a downtrend, an essay on shares may not be right, many may wonder. But that’s a wrong perception. Hence, this article! Primary lesson is, investment in equity should be done when downtrend is witnessed too.

How does an individual start an investment in shares? This is how it goes. A neighbor or office colleague, say ‘Ram’ for example, would have purchased shares at Rs.50 each and earned some profit by selling them at the price of Rs. 80. With some jealousy to reap more benefits than him,  we buy the same shares at Rs 85 each and after losing patience after a while, we sell at loss for Rs.60 each. Because of such experiences when we hear about share trading I’m sure most of them don’t have the positive mind set to earn profit, but the negative mind set to run away dominates as they ended up with loss. If we try to understand why they incurred loss, we can avoid that problematic way and travel in some other route to make profit.
Equity related investments will yield more possibilities for growing more profit than immovable property assets. But its not an easy task, careful attention is needed. Equity and equity related investment is more risky. There is no difference of opinion. We often use a maxim in share trading. “Risk is more, Return is more”. The upward and downward trends in share market are like lovers quarrels and they compromises with pleasure. We cannot determine correctly when they will come or go. This table-1 may give us the idea.
Table / Image 1

Sensex is the index of Bombay Stock Exchange. If this rises Bombay share market is in upward trend, if it falls the market is in downward trend. Many researches on reducing risk in shares indicate that possibilities for profit are prevalent in long term investment in shares. How many days or how many years constitute long term? Here the outlooks differ. The researches point out that loss may result in the end of one year. If it is 3 or 5 years the loss comes down and sure profit is available in 15 years. This may be seen in picture A. So Time in the Market is important than Timing the Market.

GROWTH INVESTING 
 Selecting the proper shares and purchasing them is an art. There are two kinds in it. The first is “Growth Investing”. Investing in the shares with upward trend for short term in companies that are growing in a fast pace is called ‘growth investing’. As we have seen earlier, remember that short term means more risk

VALUE INVESTING 
The other pattern is “Value Investing”. Value Investing means a good bargain for your portfolio. As the saying goes, “Patient people will inherit the earth”. The financial status of a company should be analyzed well. Purchasing the shares of strong concerns at a discounted price also comes under this category. The risk in this is less and we should wait for getting gains.

The successful share traders who reached the top level in the world of share marketing mostly selected the path of value investing.
1. Care should be taken when purchasing the low  priced shares. All low priced shares may not be of good companies. The shares of financially sound companies only should be purchased at a discounted price.
2. The current price of the share and the present status of the company need not be seen as the proper indicators. We should estimate the future value of the company and if it is positive such shares should be bought.
3. Generally we never take into account the capacity of the promoters or management. It is very important. The capacity of the Board of Management may be known from the Financial Reports. Next indicator is the way they treat the share holders. Purchase only the shares of companies managed by capable management.
4. When the index of the stock exchange goes down, don’t worry. That is the correct period to purchase shares.
5. As already seen, purchasing shares on long term basis does not mean that forgetting the shares after keeping them in demit account. The status of the shares should be examined often and if the management of the company is capable, don’t sell the shares in the downtrend. Keep them for long and obtain hefty profits later.
6. On the long term basis, shares of first class companies yield more profit than gold.
7. The Commodity Trade fluctuates and goes up for a few years and then lowers for a few years. Presently gold and raw oil are in the downward trend.
8. Finally, we don’t purchase just shares. We become investing partners in the trade of the company. Many don’t understand this philosophy. We take purchase and sale of shares as a gambling. This is not good. This will not be fruitful. It is important to note in which industry or trade we become an investor.

The Value Investing and Growth Investing is one type of classification. Another type is “Market Capitalization”. The methods are Large cap, Mid cap and Small cap. To understand this we must be aware of Market Capitalization. Market Capitalization is the product obtained by multiplying the total number of the company’s shares with the Market price of its share.

Market capitalization = Number of equity shares x Market price of the share.

If the shares of a company are more and the market price of its level is high the market capitalization will be large. The company will be an important one. This is called large cap. (Reliance Industries, Tata Steel, ONGC).  If the numbers of shares of a company are small the Market Capitalization will be less. This company will be a small concern. (INOX) This is called small cap. The companies and shares in between the two levels are called Mid Cap. (BEML) New entrants to the share market may purchase Large cap shares. People who prefer to take more risk and try for more gain may purchase Small cap and Mid cap at the correct point of time.

BLUE CHIPS 
The shares of companies with strong financial base, widely recognized by many and large level companies are called Blue Chips. The special features of them are
1. Better Management.
2. Research oriented Business Practices.
3. Good Background.

Equity related investments in MUTUAL FUNDS 
Many times it has been emphasized that investing in share related Mutual Funds is more beneficial than purchasing shares directly. Once again I repeat that investment in Mutual Funds is better than purchasing shares directly.
The reasons are:-
1. Expert managers of shares, with the backing of research teams will select the correct shares for investment.
2. With long term outlook, Blue Chip Funds invest in companies with potential of long term growth.
3. Instead of focusing on individual company shares, they invest in diversified equity portfolio.

The Table 2 indicates the profits yielded by equity related Mutual Funds after ten years. Many surveys indicate that most individual share traders enter the share market when it is in Bull Trend – Upward moving-and become afraid when share market faces Bear trend – Lower movement and come out in fear with loss. Instead of that method, purchasing shares individually may be avoided and investment in Mutual Funds may be followed to reap the goings of share market.
Table 2

Multi cap fund returns as on Diwali day 2016	Launch	Since Launch Return %
Birla Sun Life Equity Fund	Aug-98	25.18
ICICI Prudential Dynamic Fund	Oct-02	24.21
ICICI Prudential Value Discovery Fund	Aug-04	23.03
Birla Sun Life Dividend Yield Plus Fund	Feb-03	21.9
DSP BlackRock Equity Fund	Apr-97	20.84
Kotak Opportunities Regular Plan	Sep-04	20.38

Also you can get the latest return details of this Multi cap equity funds return details from value research by clicking here

We have understood some of the successful techniques of share trade. Apart from understanding these features we can invest in equity related Mutual Funds.

Safeguarding investments through maintenance of non-financial Details (Documentation)

We looked at tax savings, gold deposits, small savings and spreading investments in the previous articles. Some of you might have invested in those schemes. My best wishes to you for growth of investments!! Some may like to invest afresh. Public who invested already may know that we have to make some efforts to create investments.

Financial investments are not easy like purchasing groceries from a supermarket. Even if the price of lentils sky rocket, they will sell it to you if you give the higher price. At present they don’t demand PAN number for purchase of lentils. In the ongoing trends PAN is likely to be demanded. But for financial investments PAN number and many other details are highly mandatory. PAN number details are mostly familiar to many. For others, PAN is Permanent Account Number. Income tax department issues it. One person should have one PAN number only.

Alright, PAN number has been obtained. Don’t think that one can make financial investments in financial institution. The reasons are black money, Hawala which is covert transaction in foreign exchange, financing terrorist acts. The central government has made many legal procedures to stop those irregular financial transactions.

The most important procedure is KYC- Know Your Customer. This must be followed by each and every investor. This should be done before making investments. It has to be done only once. For this one needs PAN number, colour photograph and correct address proof. I repeat, one needs a correct address proof (Many face difficulties here). Without KYC no one can make financial investments. KYC is demanded in the beginning of investments in mutual funds, share market, gold bonds of government, small savings schemes and demat account.

If you have not made KYC so far register KYC for monetary investments. Even the investors, who deposited in the above schemes few years ago without KYC, should compulsorily do KYC now. Investors who made KYC and invested few years ago also should verify their KYC whether it is suitable for present rules. You can visit the website address (http:// www.cvlkra.com/) to known your KYC status. The PAN number must be used to known your KYC status. If the KYC status is not correct you can amend and correct it. The form for KYC may be filled up and registered for making the correction. This is called non-financial transaction. One should not be negligent but with alertness should correct KYC. This will make further transaction easy. Otherwise subsequent transactions may get bogged down.

Ok, essential KYC has been done. PAN number is available. Correct address is maintained. If you ask me "Is that all"? I would say Yes, but to an extent. Though not compulsory, there are certain needful things which should be done in addition. Let us see what they are.

Mobile Number - Now everybody has a cell phone. People who do not have cell phones are treated as Stone Age barbarians. This cell phone number should be registered with your financial institution. One of the benefits available for such registration is the facility of SMS message sent by banks if a monetary transaction takes place above a certain amount (e.g. Rs 5,000/-). Now days we can get many services through cell phones. Bank and mutual fund transaction, current balance in mutual fund, value may be obtained through cell phones.

E-mail address - This is not so wide spread as cell phones. But it is familiar to all. If you do not have an e-mail address, obtain one immediately and register your e-mail address in all your financial institutions. From any town in any country, without the necessity to go directly or taking the torture of calling the organization’s customer service outlet, we can know the transaction details, balance and value through mail back service.

Before looking after another write up, a few words about the present social systems. As far as I know the details of financial positions is not informed by husband to wife or wife to husband or father to son. So far, in many families they do not discuss financial position with one another. There may be thousands of reasons for everyone for such aloofness. The net effect is, the deposit or asset would not reach the proper heirs and there are numerous problems in receiving the asset by the proper heirs. This is the actual truth. To avoid such difficulties, you can open a joint account operated by two, on the account opening day itself. Moreover one can register to whom and at which proportion the asset should go to heirs or nominated persons after the demise of the investor. This is the process called ‘Nomination’.

For mutual fund, share market, government gold bonds, small savings and demand account, for all these assets, register your ‘Nomination’ right now without any further delays. Many do not register ‘Nomination’. But it is highly essential. For some persons, this may present few difficulties. We nominate our relatives who are liked much by us. But after a couple of years we may develop a distance with them. This is human tendency. In such events, we can change ‘nomination’. During your life time you can change nomination any number of times. Nomination has been registered. Alright, is the work entirely over? Not at all! Why? Consider the matter deeply for some time.

Let us see regarding that in detail. We normally come across few talented clever men. They would have registered all the above details correctly. But they would have forgotten or avoided to convey the nomination details to their family purposefully. This will not give the expected effect. The asset will not go to the correct person. Did you find out why? These are well known family quarrels. If wife is nominated, daughter in law will start the fight asking why their son was not nominated. If the son is nominated, the mother’s condition will become pathetic after his father's demise. Because of these problems father does not inform the details of assets or investments to wife or children. The result is the net effect I told earlier. The legal heirs do not know the details of investments. So the investments do not go to them generally.

Simply registering the ‘nomination’ is not sufficient. The details of investments and details of nomination should be known to the heirs. For example, when head of the family / investor  nominates his son, he should keep him near and inform how much money in which scheme is deposited. He can approach the particular mutual fund and receive the money by filling the requisite forms after the investor’s life. 

To summarize, 

1) First level is investing money properly and earning gains 

2) Second level is ensuring proper documentation, registration and maintenance of details and ensuring the receipt of funds by proper nominated heir later. 

This second part is not done by many. This essay is mainly for such people. The readers of this essay should verify the registration of PAN number, KYC, cell phones number, email address, correct postal address, and nomination in financial institutions and banks. If anything is missed, you should correct them immediately register them and get your benefits.

A model form of UTI mutual fund is given here. This account has no proper details. If your mutual fund form is printed like this you should supply the information wanted in the places where “please provide” is mentioned. KYC status must be ‘YES’ or ‘OK’.

The email address and postal address change in course of time. If they are changed, register the changes. I wish to give a tip to you. If you have invested in more than one mutual funds, you need not change the cell phone, email or postal address in each and every mutual fund. Instead, if you use the “change KYC form”, all the mutual funds will receive the details of change. So, we can register all the non financial data as above, receive proper benefits.

For any queries or assistance, you can reach me to make your investment documentation up to date, to derive the benefits outlined in this article.

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General Article Index

Find the below list of general articles to take your mind off Mutual funds for a short file and indulge your thoughts into other general topics. 

General Article Index: 

1. பொறியியலும் பெற்றோரும் - Engineering Vs Parents

2. கம்பனில் காணத் தகுந்த இயற்கையும் காண இயலா இயற்கையும்

3. பாமரனின்பார்வையில் செட்டிநாட்டு செந்தமிழ் கம்ப விழா

பரஸ்பர நிதிகள் அட்டவணை - Mutual Fund Tamil Index

There are reams of materials available in English for Mutual fund investors. Here is an opportunity to learn mutual funds in Tamil language. Explore and invest for a bright future!!

Tamil article index: (These articles will be available in English shortly..)

1. பரஸ்பர நிதிகள் ஒரு முன்னோட்டம் - Introduction to Mutual funds 

2. சிறுக சிறுக சேமிக்கலாம் (Systematic Investment Plan - SIP)

3. தணியுமா தங்கத் தாகம் (Gold Investment : A review)

4. பரந்து விரிந்த முதலீடு  (Asset Allocation)

5. நிதி  பராமாரிப்பில் நிதியில்லா விபர பராமாரிப்பு (Documentation)

6. பங்குகளை பகுத்து அறிவோம்  (Equity Investing)

7. கடன் பத்திரங்கள், கவலையில்லா முதலீடு (Debt Investing)

8. கலப்பின திட்டங்களில் கலந்துகொள்ளவோமே (Hybrid Funds)

9. பணமும் காலம்மும் (Time Value of Money)

10. முதலீட்டின் மதிப்பீடு (Performance of Investments)

11. முதலீட்டுத் தெளிவு (Selection of Investments)

12. விரல் நுனியில் தகவல்கள் (Technology: One touch away)

13. விருப்பங்கள் பலவிதம் , தேர்ந்தெடுப்பது எவ்விதம்   (Selection of scheme options in MF)

14. சந்தை மதிப்புக்கேற்ப முதலீடு (PE STP)

15. பணமில்லா சமூகத்தை நோக்கி (Towards cashless society)

16. 7 வழிகளில் பணமில்லாப் பரிவர்த்தனை (Cashless transaction)

17. காலத்திற்கேற்ற முதலீடு (Dynamic Investing)

18. நான்கு வழிமுறைகள், வட்டி விகித சரிவிலிருந்து மீள (4 ways to beat interest rate blues)

19. குறிக்கோளுடன் கூடிய முதலீடுகள் (Goal Based investments)

20. எஸ்.ஐ.பி யில் லாபத்தை அதிகரிக்கும் 6 வழிமுறைகள் (SIP – Let us know it better)

21. மியூச்சுவல் ஃபண்ட் முதலீடு - சந்தேகங்களும் தீர்வுகளும் (Mutual Fund Myth Buster)

Tax Saving - Part 1

Read/download Tamil Tax savings-1 in magazine/pdf format
Read/download Tamil Tax savings-2 in magazine/pdf format

Read Tax savings-2 in English

All of us are paying tax either directly or indirectly.  I am sure it is a high priority headache. Some have the feeling that most of our earnings is gone by paying taxes. There is a saying, “Tax is a necessary evil”. It is clear that we cannot get rid of tax, but at the same time we can plan and save tax when our understanding about taxation is clear and when we use the tax saving options judiciously. This article helps us understand how we can save tax within the legal frame work.    

How we can save tax? It is a big question mark before us! What are the options available for us with regards to tax savings.  By investing in some of the popular tax saving investments, the tax may get reduced, but will the investments grow as desired? Continue reading to figure out solutions to these commonly asked queries. In this back drop, lets explore various type of tax savings investments and their likely returns. 

I can recall an incident which happened when I was working earlier, I remember his name to be Senthil. In the month of December, Senthil normally gets into an urgency mode to save tax and submit necessary documentation to the finance department. He chit chats with his friend Raja in the cafeteria and invests as per Raja's suggestions without giving much thought about it. Ultimate aim for him is to just save tax. Generally, he is not bothered about the developments around his investments and he will think about it only in the next December during tax saving or during other related Investments. If Raja is not available, Senthil will check with Michael and invest in the schemes suggested by Michael. One important thing Senthil often forgets is, checking with different persons and taking a call on investments does not yield expected results, and his investments will not be suitable to his needs and eventually desirable results for him are not achieved. The suggestion given by Raja and Michael maybe suitable for them in their angle, but they may not be suitable for Senthil.  

As an alternative option, instead of waiting till December every year, as soon as financial year starts, if Senthil initiates this tax saving process in April after giving ample thoughts about his investments and choose the correct one which suits his requirements and invest in them periodically, say every month like SIP for next 3 to 5 years, it will turn out to be a better option  than the earlier ad hoc option. If Senthil plans and starts SIP/Investments in April or earlier than December, there's no need of any rush or urgency in December for him. At the same time if he has taken up a decision in advance and invested in tax savings investments in earlier date,  documentation for submitting  to his company especially in the month of December for calculation of the tax is readily available and he can do it with ease. 

From this example, I hope now it is clear that tax saving has to be done in advance instead of waiting till December or March and has to be planned in a proper way. Now let us get into some details. To reduce tax, there are few options available.   

Option 1:  

As per Income Tax Act Section 80c, we can avail tax exemption up to 1.5 Lakh.  We can invest in tax saving schemes and get tax exemption. Most of us are aware about this section 80c, but not clear of various Sec 80c exemptions and  choices available for investments, which one is beneficial to them and all. Investment options available for tax exemption are    

1. NSC - National saving certificate   

2. Life Insurance  

3. Tax saving fixed deposits  

4. ELSS – “Equity linked savings scheme”  

  

For most of the Instruments mentioned above, the minimum period of investment is 5 years or more. At the same time, one tax saving option called equity linked savings scheme is available in mutual funds. It is stable and the lock in period is only 3 years. This is the instrument which has the lowest lock in period. Most of us are not aware about this Mutual Funds tax saving schemes, which have minimum period of lock in and possibility of getting higher returns.  

Option 2:  

Secondly, after you have reached Rs 1.5 lakh limit under section 80c, you can invest up to rupees Rs 50,000 in Rajiv Gandhi Equity savings scheme. As per this scheme, for first time equity investors investing in the market under direct equity and in specified securities, or purchasing securities through Demat option, can claim tax exemption for initial investment of 50000 per year for three years.  If you are afraid of the ups and down in stock markets , instead of investing in market directly, you can choose to invest in mutual funds classified under Rajiv Gandhi Equity Savings Scheme and avail the benefit of your money being managed by professional fund managers. This option is better than direct investing in specified securities. These fund purchases have to be done through your new demat accounts.  

Option 3: 

By investing under National pension scheme NPS, you can get additional benefit of Rs 50,000 tax exemption. This was introduced by our finance ministry in the budget last year.    

To sum it up, by investing in all these 3 options you can totally get personal exemption up to 2.5 lacs ( 1.5 + 0.5 +0.5 ). From the table given below  you can understand what are the options available for tax saving investments and their lock in periods and their likely returns. This table will help you to decide on tax saving options. 

Investment option	Lock in period	Return	Tax status	Remarks on return
PPF	15	8.10%	Tax Free	Varies on fixed interval
NSC	5	8.10%	Taxable	Fixed for tenure
Bank tax saving deposits	5	7.00%	Taxable	Varies from bank to bank but fixed on tenure
ELSS	3	12.37%	Tax Free	Returns are market linked

Notes

ELSS one year return is as on 21/10/2016 from value research

Sbi tax saver FD int rate ( for other banks it varies from 7 to 7.5%)

PPF and NSC data as on 30/6/2016

Return cagr per annum

Lock in period in years

Tax status represents - return tax status

Those who wish to  know more about tax savings and tax savings investments can get in touch with me. Please provide your contact details in the comments, so that i can reach out to you