have you considered investing start sips, rejig some investments … · 2018. 5. 31. · savings of...
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S Saravanan replies
Your future goals arenot clearly defined attoday’s cost. So we
have made some assump-tions like (a) your currentliving expenses are Rs30,000 per month, (b) Thecar that you want to buy isworth Rs 7.5 lakh today and(c) The house that you wishto acquire is worth Rs 50lakh now. With the aboveassumptions, a monthlysavings of Rs 47,000 in mu-tual funds each month, giv-ing you an expected returnof 12% will take care of allyour goals, factoring in in-flation between 6% and 8%.
Additionally, you wouldrequire to set aside a sumof Rs 25,000 every month tomeet the cost of your annu-al foreign trip (inflation ad-justed).
It is possible that bothyou and your spouse arealso contributing in theEPF. Being a young couple,we suggest that the accu-
mulation through EPF isassigned for retirementplanning goal and yourcurrent PPF contributionof Rs 1.5 lakh each be di-rected towards equity mu-tual fund (both as ELSS tothe extent of section 80Crequirement and balanceinto diversified funds).
Your current health in-surance is good enough.You may complement itwith a critical care insur-ance, if you or your spousehave a family history ofspecified critical illness.
Your life insurance is in-adequate and sub optimal(3~5%) in returns. We sug-gest that both you and yourspouse be covered with aterm life insurance for asum assured of at least Rs1.2 crore each (20 timesyour monthly salary as athumb rule).
We also suggest that bothyou and your spouse initi-ate a personal accident in-surance for a Sum Insuredof Rs 50 lakh each to pro-
tect loss of income due toaccident-led disability.
The residual savings andfuture fortunes after meet-ing the above recommenda-tions can be directed to-wards building an emer-gency corpus equalling atleast six times your monthlyexpenses, and the same canbe accumulated eitherthrough a systematic invest-ment plan or one-time in-vestment in a liquid / ultrashort term mutual fund.
However, it is financiallyprudent to prioritize theemergency corpus accumu-lation over all other goals.
We would request you tokindly contact your finan-cial advisor for specificrecommendations of prod-ucts in line with your riskprofile.
Saravanan S is a financialplanner with Purplepond
Investment Advisory, Chennai
This article has beenexclusively created for
UTI SWATANTRA
TIMES NEWS NETWORK
R ecently at apresentation onpassive funds and the
ensuing debate on passiveinvesting versus active fundmanagement, a senior fundindustry professional madean interesting observation.His take on the debate wasthis: Suppose you are drivingon the road and have yourdestination in your mind.You have two options. Firstly,you could be one of thedisciplined drivers, go withthe flow, maintain lanediscipline and not push thecar too much. The otheroption is to travel at a higherspeed than the average speedof the other cars on the road,shift lanes and gears, andmay be you would reachyour destination a bit ahead
of others.Investing in passive funds
is like the first driver whogoes with the flow. In this typeof investing the fundmanager follows a pre-setbenchmark index andmirrors his fund exactly likethe structure of thebenchmark. He/she has verylittle leeway to deviate frommirroring the index’sstructure.
In contrast, active fundmanagement style is like thesecond driver where the fundmanager has the freedom toconstruct his/her ownportfolio and manage it as perhis/her discretion and try tobeat the benchmark index.
In case of passive style offund management, theinvestor takes the fundmanager-risk out. Thismeans since the fund
is almost perfectly mirroringits benchmark index and thefund manager doesn’t haveany discretion with theportfolio, the investor’sinvestments in the fund isdependent only on how theindex performs. And almostnothing to do with the fundmanager.
In contrast, in an activelymanaged fund, the fundmanager has substantialdiscretion to construct andmanage the portfolio.
According to industryprofessionals, another greatadvantage that passive fundsenjoy over activelymanaged funds is the lowexpense ratio, that islower fund
management cost. Since thiscost is borne by the investor, alower cost adds up to theamount of money that isthere for the investor toinvest. “In passive funds,given the low cost structure,more amount goes into themarket and participates inthe market. With thecompounding effect, the finalpositive impact of theoutcome in the long run couldbe substantial,” said a topfund industry official.
In India, when the fundmanagement costs arecompared in regular plans,
for passive funds itcould be one-third ofwhat an investorwould pay foractive funds, thatis about 33% of
costs an
investor would pay for activefund management. And incase of direct plans, the costsadvantage could be evenwider: The investor in apassive fund would pay about20%-25% of the costs in activefunds.
According to fundmanagers and mutual fundindustry officials, everyinvestor should have somepart of his portfolio investedin passive funds. Whileselecting a passive fund, oneof the factors that aninvestor should keep in mindis the nature of the index thatthe fund is benchmarked to.The index should be a stableone and a well thought out,they say.
This article has beenexclusively created for
UTI SWATANTRA
DEMYSTIFIER
Of late there has been a rush by companies to tap themarket to raise money through non-convertible debentures (NCDs). These area form of company bonds, a fixed incomeinstrument, with a pre-fixed tenure issuedby companies to meet their funding needs.In most NCDs the rate of interest is also fixed,although there are some in which interest rate islinked to some other rates like rate of inflation,central bank rates etc. NCDs are redeemedwhen the tenure ends and can not beconverted into equity shares of the issuingcompany, unlike convertible bonds.
WHAT ARE NCDs?
These funds come with lower management costs and almost nil fund manager-risk
This article has been exclusively created for UTI SWATANTRA
MAY I KNOW SOMETHING IN DETAILABOUT SYSTEMATIC WITHDRAWALPLAN (SWP) AND HOW IT STANDS TOPAY LOWER TAX COMPARED BANKFIXED DEPOSITS?
A K VermaRajnish Kumar Gupta replies
Asystematicwithdrawal plan(SWP) is like a
regular income planfrom your mutual fundcorpus. You canwithdraw a pre-fixedamount every month,quarter or every year.An SWP could be setup in equity and debt
funds. But it should be under the growthoption only and not under dividend optionsince the latter doesn’t make any sense.
In case of an SWP in an equity plan, thetaxation could be either on short term orlong term capital gains. Usually SWP is setby people after investing in equity funds forseveral years. In such a case, they pay a taxat the rate of 10% on the capital gains that ismore than Rs 1 lakh per annum and this rateis imposed without indexation benefits. Incase of debt funds, the long term capitalgain is calculated after three years ofinvestment at 20% after indexation. The taxrate for short term capital gains is 15% plus
surcharges and cess. SWP is alsodifferentfromdividendoption intwoaspects:SWP is atthe choiceof the
investor whiledividend is at the
discretion of the fundhouse. Also for paying
dividend, a fund house hasto pay dividend distribution tax that ismuch higher than what an individualwould pay even as a short term capitalgains tax.
In case of band FDs, the individual paysthe tax at the slab rate, that is 0%, 10%,20% or 30% (plus other surcharges andcess). Also in case of FDs, tax has to bepaid every year ever if the money is notwithdrawn. However, in case of SWP inmutual funds, tax is paid only when themoney is redeemed and not every year.
Rajnish Kumar Guptais an IFA based in Rewa, MP
This article has been exclusivelycreated for UTI SWATANTRA
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CASE STUDY
Start SIPs, rejig some investmentsMy wife and I are assistant professors. Our family income is about Rs 1.2 lakh permonth. I am 36, my wife is 35 years old and we have a nine-month old daughter. Both ofus have separately taken money-back life insurance policies of premium of Rs 78,000annually. I have a family-floater medical insurance of Rs 5 lakh cover. My saving isthrough PPF and we are planning to save around Rs 1.5 lakh annually. Our future goalsare our daughter's education and her career-related needs, an emergency fund, aroundRs 2.5 lakh every year for a foreign trip, a decent car after 1-2 years, a house and adecent retirement corpus. We require an investment plan that could meet our goals.
- Pawan Kumar
NEXT EDITIONIn our next edition we would discuss about the international experiencerelating to passive investing.
Have you considered investingin passively managed funds?
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INVESTOR QUERY
Goal (Year of Present Inflation Resource Expected Additional SIP to achievement) cost (Rs) available return reach goal (Rs)Retirement 30,000 6% Rs 3 lakh 12% 3574(2041) /month contribution
to PPFDaughter's education 10 lakh 8% Nil 12% 9028UG (2034)Daughter's education 5 lakh 8% Nil 12% 6277PG (2038)Car (2020) 7.5 lakh 6% Nil 9% 9582House (2023) 50 lakh 7% Nil 12% 24952
➋The savingsfrom lower
costs isinvested inthe market
➎You take onlythe market-linked risks
THE ADVANTAGES OFINVESTING THROUGHPASSIVE FUNDS
➌This
compounds toa substantialamount overthe long run
In passive funds,given the low coststructure, moreamount goes intothe market andparticipates in themarket
➊You pay
lower fundmanagement
cost ➍There are
almost nil fundmanage-related
risks
Scan this QR Code to know more aboutabout Passive Investing
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THE TIMES OF INDIA, MUMBAI TUESDAY, MAY 29, 2018 19
CCI NG 3.7 Product: TOIMumbaiBS PubDate: 29-05-2018 Zone: MumbaiCity Edition: 1 Page: TOIMSPO2 User: sanjay.dighe Time: 05-28-2018 22:15 Color: CMYK