Sore points the budget must fix

Sore points the budget must fix

Tax-breaks offered to savers must serve the purpose of encouraging long-term savings




In just about six weeks, the Union Budget for 2018-19 will be presented. It will be an interesting exercise, being the first budget after GST as well as the last official budget before the 2019 Lok Sabha elections take place. However, whatever be the budget's impact on the political economy of the country, the time is ripe for a number of simple, basic reforms in the way people make their savings, save on taxes, and make basic choices like insurance.




It is a fact that most salaried Indian--except for the small number in the top bracket--make financial savings and investments only to the extent of getting tax breaks. The tax breaks too can be hard to exploit when you are in the 10 to 20 per cent bracket. While demonetisation has turned the focus on those who are cash-rich but not rich on paper, there are a lot of relatively less well-off taxpayers in India.


These people need more active help from the tax-break rules in order to save more. The bulk of tax-break inspired savings come from section 80C of the income tax act. These investments, totalling up to Rs 1.5 lakh a year, can come from any combination of a wide variety of asset types. These include ELSS equity mutual funds, ULIPs, bank FDs, EPF, NPS, Sukanya Samriddhi, and many others.


Unfortunately, there are also some expenses that are allowed to be part of section 80C. The biggest among these--which a lot of taxpayers appear to use--is children's education fees. Now, I'm not arguing against the fact that school and college fees should be deductible from taxable income, but by lumping them with savings and investments, the government is shortchanging savers. 80C was supposed to be entirely about financial savings, that is, money that you can get back later. By adding an expenditure to it, investments made for the future are reduced in quantum. Education fees should be made separately deductible, and not a part of 80C.


The case of term insurance is similar. The root cause if for our law and policy's inability to distinguish between the savings function of insurance and the life cover function of insurance. One of the (many) unfortunate by-products of this is that savers just do not buy enough term insurance. While IRDA and the insurance industry cry about growth in premium collected, no one talks about what is the actual growth in the life cover (term insurance) that Indians are buying.


One culprit, which is easily fixable, is the way tax-breaks are offered. Term insurance is a highly desirable expense, not a saving. Instead of being lumped with actual savings and other types of insurance products in 80C, term insurance ought to have its own distinct allowance, which is undiluted by anything else. If an insurance product has any element except pure life cover, then it should not be allowed in this allowance. There is perhaps no other way that India's insurance rate--the actual amount of life cover people have-can be boosted. Actually, there's another way, even simpler, in which it can be done.


What we need is a simple rule that prohibits the sale of non-term insurance products unless the customer already has life cover equivalent to ten years' income, as per the last tax return. For those who do not pay income tax, the rule should be a basic amount of term insurance. Nothing else will be required. The entire sales machine of the insurance industry will be focussed on selling real insurance to people. Is this possible? No harm hoping.


Can one hope for such fundamental changes in the tax break rules? It depends on whether the government stops taking a tactical view of tax breaks and thinks of them as the shapers of how people save and invest for their old age. Certainly, lumping of expenses like school fees into 80C is short-sighted and counter-productive. These flaws need to be fixed.




Happy Investing

How to build your mutual fund scheme portfolio

How to build your mutual fund scheme portfolio 



The five model fund portfolios are not customised to individual needs. Some investors may be holding different schemes and earned very good returns. Others may have different views on the mutual funds we have selected.


Here are basic things to keep in mind when constructing a mutual fund portfolio:


Asset allocation desired by investor

 This is critical because it determines the risk profile of the investor. The portfolio should take on more risk than the investor wants. As we said earlier, there is no point in earning high returns if it gives you sleepless nights.


Keep goals in mind

 The portfolio should be designed in a way that it aligns with the goals of the investor. If the goal is just 1-2 years away, even an aggressive investor should go for a 100% debt oriented portfolio.


On the other hand, the choice of funds will be very different when saving for a long-term goal such as retirement. Like Wealth Secure, even a conservative investor will be advised to put at least 20-25% in equities. A pure debt portfolio will not be able to beat inflation.



 Consistency of returns

The funds chosen should have a sound track record. Don’t go by short-term performance alone. Go for a longer term track record. Also, look at the risk parameters of the fund.



 Number of funds

 I have seen people holding close to 15-20 mutual funds. One even had some 40 funds in his portfolio. There is no need to have so many funds. Just 5-6 schemes can give you all the diversification you need.




Taxation and loads

 The taxation of the investment should also be kept in mind when designing the portfolio. Mutual funds enjoy very favourable tax rules, but some fund categories such as Fund of Funds suffer from discriminatory treatment. Avoid these unlucky categories. Also check the exit loads of the funds in your portfolio. Some funds can levy very high exit loads, which eat into the returns.



Happy Investing

5 model mutual fund portfolios for different investor types .... Part 2

5 model mutual fund portfolios for different investor types .... Part 2


Want to invest in mutual funds but don’t know which schemes to buy? Already invested in mutual funds but not sure if they are appropriate? Hold a large number of schemes and want to cut them down to a manageable number?

If these issues are troubling you, Here we have designed five model fund portfolios for investors of different risk profiles and financial situations.

These five portfolios cover almost the entire spectrum of the investing population, ranging from aggressive investors who are willing to live with volatility to conservative investors who want reasonable growth with minimal risk. We also have a portfolio for retirees looking for returns that can beat inflation and provide regular income from the investments. Each of these portfolios have five funds. The funds have been chosen on the basis of their star rating by Value Research. 



I. Wealth Maximiser:


For the young and the restless
Wealth Maximiser portfolio is for aggressive investors who don’t mind taking risks.

This portfolio has been designed for investors who want high returns even if it means taking high risks. It has two mid-cap funds, one small-cap fund and one multi-cap fund. The SBI Small and Midcap Fund has consistently topped the small-cap category in recent years. It has risen 66% in the past one year. The Mirae Asset Emerging Bluechip is another winner, topping the mid-cap category with over 23% returns in the past three years.

But though mid- and small-cap funds have given spectacular returns in the past one year, the road ahead could be quite bumpy. The mid-cap and small-cap stocks are looking overvalued and this is why some funds in this category have stopped accepting new investments and others are taking only SIPs under some conditions.








We have included two multi-cap funds to bring stability to Wealth Maximiser. The multi-cap DSP BlackRock Opportunities Fund and the ELSS scheme Axis Long-term Equity Fund have nearly 70% invested in large-caps. These funds will not be as volatile as the mid- and small-cap schemes.

Volatility is inherent to stocks. It is here that the SIP approach proves beneficial for investors. Even if the market corrects and the funds slip, the investor stands to benefit because he can get more units with the same SIP sum. Still, only investors who have the stomach for volatility should go for this portfolio. They should also be prepared to remain invested for at least 5-7 years to earn good returns from this portfolio.



Wealth Maximiser
Aggressive portfolio with mid and small-cap orientation.










II. Wealth Builder:


 Cautiously optimistic on markets
Wealth Builder suits those who want to invest in stable large-cap stocks.

Small- and mid-cap funds might have zoomed, but even large-cap funds have not done badly. The large-cap category rose 26% in the past one year, though the returns have not been very high in the past 3-5 years. Even so, this portfolio of large-cap equity funds has the potential to churn out decent returns for the long-term investor.

We have chosen funds that score high on consistency and the risk-reward matrix. The Franklin India Flexi cap Fund, for instance, has a standard deviation of less than 12, which makes it among the most consistent performers in its category.
 

The other funds in the portfolio have an equally impressive track record. The Aditya Birla Sun Life Frontline Equity has consistently outperformed both the benchmark and the category average by a wide margin. The Kotak Select Focus is another fund that has delivered consistent returns.






 
Will these large-cap funds be able to generate alpha for the portfolio? The Motilal Oswal MoST Focused Multicap 35 fund is best positioned to do that. This multi-cap fund earned more than 35% in the past one year and has delivered SIP returns of over 23% in the past three years. The ELSS scheme in the portfolio could also chip in here. The Tata Tax Savings Fund has 44% of its corpus invested in mid-cap and small-cap stocks. 

Wealth Builder
Cautiously aggressive portfolio with large-cap orientation.








III. Stable Wealth:


Get the best of both worlds
Stable Wealth is for investors who want a balanced mix of debt and equity.

Even though they might be optimistic, not everyone is willing to bet big on the stock markets. The Stable Wealth portfolio is designed to give investors reasonable growth without too much risk. It has three equity-oriented balanced schemes, one ELSS fund and one short-term debt fund. All three balanced funds have impressive credentials. They have outperformed the category and their benchmarks.


Balanced funds divide their corpus between debt and equity, giving investors the best of both worlds. The equity portion generates returns when markets are doing well, and the debt portion acts as a cushion when equities are headed southwards.







The best part of a balanced fund is that although nearly 40% of the corpus is in debt, it gets the same tax treatment as an equity fund. So, 40% of the corpus in debt effectively earns tax-free returns for the investor.

The ELSS fund in the portfolio, IDFC Tax Advantage, is an equity fund. It has ranked among the top-performing ELSS funds in recent years. The debt fund in Stable Wealth lends stability to the portfolio. The Franklin India Short Term Income Fund has been a consistent performer, generating nearly double-digit SIP returns in the past five years. That makes it a better option than bank deposits and other fixed income instruments.


Stable Wealth
Balanced portfolio with lower exposure to equity.


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IV. Wealth Secure:


When safety is paramount
Wealth Secure is designed for investors who don’t want to risk their money in stocks.

Some investors just can’t stand the prospect of losing money. For them, the Wealth Secure can be an ideal option. The fund has three short-term debt funds, one debtoriented hybrid fund and an ELSS scheme. The equity exposure is only 24% of the corpus, while the rest is in the safety of debt.

 





Another caveat is needed here. Though debt funds are not as volatile as equity schemes, it is a misconception that they can’t lose money. Debt funds are sensitive to interest rate movements and will lose money if interest rates go up. Long-term debt funds have lost 1.5% in the past six months. Their one-year returns are only 2.6%, which is less than what a savings bank account offers.


For the same reason, we have included only short-term debt funds in the portfolio. These funds are less volatile and focus on earning from interest accruals than on capital gains. The Baroda Pioneer Short-term Bond Fund and the Franklin India Low Duration Fund have generated almost 9% returns in the past one year. The hybrid scheme in the portfolio, ICICI Prudential Child Care Plan is a consistent outperformer, while the ELSS fund, Aditya Birla Sun Life Tax Relief 96 provides the necessary tinge of equity to the fund.

Wealth Secure
Conservative allocation with very low exposure to equity.








V. Income Generator:


Regular income in the golden years
Income Generator is for retirees looking for a monthly income from their investments.

Unlike the SIP inflows in other portfolios, income generator starts with a lumpsum investment and withdraws monthly sum for the investor. It has two medium-term income funds, two short-term debt funds and one debt-oriented hybrid fund. Every month, Rs 2,000 is withdrawn from each of the five funds by the investor.
 

Why should an investor go for this arrangement when he can get assured returns from bank deposits? One, bank deposit rates have come down and are likely to fall further. Debt funds yield slightly better returns than fixed deposits.

 




But the real benefit comes from the tax advantage that debt funds have over fixed deposits. The income from bank deposits is fully taxable. In debt funds, the gain is only a thin sliver of the redemption proceeds. A big part of the redemption is the principal amount which is not taxable. It keeps getting better as years go by. 

After three years, gains are treated as long-term capital gains and taxed at a lower rate of 20% after indexation. Retirees should consider parking their retirement corpus in a good debt fund and then start systematic withdrawal plans to get a monthly income. The Income Generator portfolio does exactly this.
 

Income Generator
Meant for investors who are looking for regular income in retirement. 



 



Happy Investing
Source: Economictimes.com