Gold Monetisation Scheme - Make the Idle Gold an Earning Member

As working professionals, all of us come across some contradiction or should I say some mis-matches between our personal and professional lives. As a Wealth Manager I come across so many clients who are always bullish on Gold irrespective of its price and global scenario , while as an investor myself I have never considered Gold as an asset class worth investing.  Anyways lets not digress from the topic of this article i.e. Gold Monetisation Scheme recently launched by the government.

Gold has proved to be an all weather love for Indians. Thanks to the fact that it forms a part in many religious rituals, it has attained a sort of cult following among Indians. Hence all the hype surrounding the Gold Schemes of the govt. Let’s have a look at Gold Monetisation Scheme recently launched by the government.

Objective -

To mobilise gold held by domestic households, individuals and institutes for jewellery industry with banks working as intermediary.

Who can invest -

Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds)

How does it work -

• Individuals/Institutes deposit gold lying with them to designated banks and agency
• Banks issue deposit certificate against the deposited gold.
• Depositor gets 2.5% annual interest on the value of the gold deposited.
• Banks sell the gold mobilised to the jewellery and other industries that use gold as an input.

Documents and Formalities -

Same as KYC norms applicable for banks fixed deposit i.e ID proof, address proof and PAN or Form 60 alongwith photograph.

Tenure of the scheme -

Banks can accept gold for the tenure of 1-3 years, 5-7 years or 12-15 years.

Liquidity -

Individual banks will decide the conditions for pre-mature withdrawal (i.e withdrawal before the end of the tenure for which gold was deposited initially )

Condition of Gold -

• 995 Finenes gold.
• Minimum 30 gms, no maximum limit  
• In the form of bars, coins and jewellery
• All the gold collected will be converted to tradable form of bars

Interest Payout -

Interest at an annual rate of 2.5% of the value of deposited gold will be paid at pro-rata basis.

Pros -

• An assured and regular interest on an asset that gives returns in the form of capital appreciation (i.e appreciation in its value) only
• Better Physical security of the gold as it is in the possession of the banks

Cons -

• Gold will be converted in the form of bars , so in case of jewellery, loss of making charges
• Liquidity suffer as gold is deposited to banks and banks may have a minimum lock in period (will vary from bank to bank as RBI has mandated banks to frame their own rules)

In total this is a good scheme for those investors who already have exposure to gold as an investment asset in the form of bars, coins etc, with the probable downside being the loss of liquidity only. For those investors who want to earn interest on their regular use gold i.e jewellery etc. , it can be a good option only in situations when jewellery no longer has utility for ornamental purpose.

Click Here to learn about Debt Funds. If you want to learn how Debt Mutual funds minimise your tax outgo, Click Here .

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NPS V/S PPF - A Comparative Analysis

One of the legacies that we inherit from our parents - as far as Investments and Tax Savings are concerned - is Public Provident Fund. One of the most prolific tool of investments in India, it’s returns has been more or less stable in the range of 8-9.5%. But as Shri Krishna said in Gita- Only things constant is Change, similarly with the changing times and economic conditions, government plans to provide alternate to this avenue in the form of National Pension Scheme i.e. NPS. Government is pushing it in big way due to following reasons -

1. To mobilise small investors’ money to equity market
2. To mobilise money to Corporate Bonds.
3. To promote non- guaranteed pension culture

So let’s compare them from a small investor's point of view.

(Its recommended to go through this article on National Pension Scheme to get a better idea about the same)

1. Risk and Returns -
1. Returns in NPS may wary from 10-14% depending on your exposure across different categories available under NPS. Similarly risk level also depends on your relative exposure.
2. PPF - Returns vary from 8-9.5%. Almost risk free as guaranteed by government.
2. Liquidity -
1. NPS - Investments are practically blocked till investor attains 60 years of age, even after that you can withdraw only 40% of the money as rest of money has to used to buy some pension plan. If you want to withdraw before 60 years of age , you can withdraw only upto 20% of the money.
2. PPF - Money can be withdrawn 15 years after the start of PPF fund.
3. Taxation -
1. Lumpsum investments upto 2 lakhs are eligible for Tax Rebate (i.e amount invested is deductible from income for calculating taxable income) Salaried people can also avail some further deduction by investing 10% of their Basic and DA into NPS.All the appreciation earned on the investments is taxable, unlike PPF where appreciation i.e. interest is tax free
2. Investments upto 1.5 lakhs under PPF are eligible for Tax Rebate.
4. Investment Size -
1. While NPS don’t have any upper limit on investments , PPF don't allow more than 1.5 lakh investments in one financial year.

Hence whether NPS will prove to be a strong alternative to PPF or not will depend on whether small investors are ready to sacrifice the relative pros of PPF for pros and cons of NPS.

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How to avoid "Greece Crisis" with your personal money

Recently while going through newspaper , my dad turned to me and said in his typical “we know it all , when it comes to money management” tone - See how Greece Crisis once again proves the importance of diligent money management.

Parents!!!!

One of the most common trait of successful people and organisations is that they treat crisis as an opportunity to learn lessons on how to avoid them. In the same manner Greece Crisis , though at the country level, provides an excellent opportunity to revisit how we should manage inflows and outflows of our personal money.

So lets go have a look at how to avoid debt i.e. loan crisis -

1. Never live beyond your means - Typically pensions range from 40% to 50% of last drawn salary, but in Greece it may go upto 96%, which is simply not sustainable. Similarly spending beyond your income will eventually lead you to what is called in banking terminology - Debt trap.

2. Never go for Easy Debt - Being a part of European Union, Greece could avail of debt at a very low rate and without much of diligence on part of creditors. This easy availability of debt makes one vulnerable towards availing “non-required debt”. This generally happens in case of Credit Cards  where ready availability of debt sometimes simulates one to subscribe debt. Never EVER spend on Credit Card just because you have credit limit available. Spend only if you are spending on something worth utility to you.

3. Timely Service of Debt - Another reason that pushed Greece to the extreme was delayed service of their loan outstandings. Despite all the planning and management loans are many a times unavoidable or even suggestible to avail. But timely service i.e paying your EMIs on time and pre-closing your loans whenever possible is very critical to ensure that you are not made to pay penalties or there is no increase in your liabilities.

4. Aware about Terms and Conditions - Be always inquisitive about the terms and conditions related to any loan which you intend to avail. Devil lies in details , similarly in case of loans , devil lies in fineprint of the agreement. Always go through it as much as possible.

5. Loans within limits - Thumb rule says that sum of your EMIs should not exceed 50% of your monthly income. So always ensure that your EMI liability is lower of this limit and what is left net of expenses in your income.

If you want to learn what money mistakes you should avoid in your 20’s , Click Here .

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Equity Mutual Funds - An Orientation

Watching “ Pursuit of Happyness “ on Father’s Day is bound to bring all the memories of all the sacrifices that your father made in order to ensure best future for you. But to me in addition to that , it has a very strong but somewhat hidden lesson - One need to challenge his comfort zone/s in life to achieve his full potential. Beyond all the arguments cited by a large section of people against Mutual Fund, deep down is inertia, inertia not to explore something beyond their comfort or lets say awareness zone.

So lets make a beginning and try to understand what Mutual Funds means and their types.

A Mutual Fund in the crudest form has chiefly three components -

1. Retail Investor - Like me and you , who contribute money into a common corpus.
2. Mutual Fund Company - Is responsible for proper management and upkeep of the corpus. Hires a fund manager and is responsible for the operational , marketing , legal and other issues pertaining to the fund.
3. Fund Manager - who invests money on “behalf of the Retail Investors” as per the objective and strategy of the fund.

Mutual Funds at the most basic level are of two types, based on the kind of assets that they invest in -

1. Equity Mutual Fund
2. Debt Mutual Fund. Click Here to learn about them. If you want to learn how Debt Mutual funds minimise your tax outgo, Click Here .

Equity Mutual Funds invests in equity i.e. shares and related instruments. Here is a brief go through the different types of Mutual Funds -

1. Large Cap Funds - They typically invests in the companies that occupies the top positions on the stock exchange as per cumulative value of all their shares being traded (known as Market Capitalisation).These companies are also known as Bluechip Companies. Common examples will be - Hindustan Unilever, Larsen & Turbo etc. Being market leaders of their respective domain , they command high value in stock exchange and are also the least volatile in their valuations. Hence Large Cap Mutual Funds are supposed to be the safest category among all Equity Mutual Fund categories.
2. Mid Cap Funds - They occupy the middle order in the Market Capitalisation deck. They are more volatile than Large Cap Funds but also have more potential of growth.
3. Small Cap Funds - They invest in the novice companies who have got low market share or low market penetration or who operate in a product or service category which have very low market potential. Being very small in revenue and profits , they have a high potential for growth in their valuations. But they also are quite risky as such companies can neither be analysed properly nor have strong promoters.
4. Diversified / Multi Cap Fund - They invest across companies irrespective of their Market Capitalisation. The idea is to provide “Diversification” and hence minimise volatility with a higher return than Large Cap Funds.
5. Sector/Thematic Fund - They invest in companies of a particular sector and hence are highly correlated with the performance of that sector.
6. Tax Saving Fund - They are alternate of traditional Tax Saving instruments like PPF, NSC etc. having lock in period of three years. Click Here to learn how they minimise your tax obligations.
7. Equity Oriented Hybrid Funds - They have major part but not all of the investments into equity. They also invest in asset class like Debt etc.

So now that you have learnt quite a bit about Equity Mutual funds, why don't you go out and put some money into them. Because doing is the best tool of learning.

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Debt Funds - The Secure Mutual Funds

Money forms the basis of all economic activities. It is both means and end behind all economic activities. Hence, different entities raise money in different forms regularly for the smooth conduct of such economic activities. Even governments raise money from time to time for their monetary needs in the form of G-Sec or gilts. Similarly RBI issues T-bills for the short term monetary needs of the government. Such instruments being backed by Government are highly credit worthy. Comparatively debt instruments issued by private bodies like corporate have lower credit worthiness.  

Mutual funds that invest in these fixed income securities like Glit or G-Sec , corporate bonds, treasury bills, debentures and company fixed deposits are included in debt funds. Debt funds are comparably less volatile than equity based funds hence suggested for those investors who want steady income flow.

Major parameters to analyse a Debt Fund are –

1  Average Yield – It is the weighted average yield of all the debt instruments that constitute a debt fund.

2  Average Maturity – It is the weighted average maturity period of the debt fund constituents.

3 Modified Duration – It is the multiple by which debt fund returns are affected by the increase or decrease in the market interest rates. Every time RBi increases or decreases different bank rates like Repo Rate, Reverse Repo Rate, SLR etc., this parameters comes into play.  Debt Fund returns have inverse relationship with market interest rates. So Debt funds appreciate in a falling interest rate scenario and depreciate in a rising interest rate scenario.  Higher is the maturity period of the debt instrument, higher is its Modified Duration.

4  Credit Ratings – All debt papers are provided ratings by independent third parties like CRISIL etc based on credit worthiness of the issuing institute.

Sources of Risk in Debt Funds –

Risk is an integral part of even Debt Funds. Risk arises in Debt funds from two potential phenomenons –

1. Credit Default – the risk of the debtor not honouring his commitment to payback forms the credit default risk. It can be minimised by ascribing to debt instruments of higher credit ratings

2.   Interest Rate Volatility – Debt funds having higher value of Modified Duration are prone to vagaries of interest rate ups and downs. It is always suggestible to buy Debt funds with higher modified duration in interest rate falling scenario and vice versa to make best use of both scenarios.  But it is always very tricky to predict direction of interest rates as they are a function of lot many parameters like inflation, growth rate, liquidity and as in Indian context even Monsoon.

Types of Debt Funds

1.  Gilt Funds invest only in treasury bills and government securities which practically do not have any credit risk. But G-Secs generally are of very high durations; hence have very high modified duration.

2.  Diversified Debt Funds invest in a mix of government and non-government debt securities.

3. Fixed Maturity Plans are the close-ended schemes in which fund manager has an ongoing role for deciding the investment options .The maturity of scheme is closely aligned to investment portfolio. These plans also help investor to compare the returns of schemes with other plans in advance.

4. Junk Bonds Schemes are high yield bond schemes which invest in companies having poor credit quality so the losses arising out of few defaulting companies can give attractive returns.

5.  Floating Rate funds invests in those financial instruments in which the interest rate floats or varies in line with the underlining level of fixed rate coupons. The best time to invest in these funds is when the interest rates are rising so there will be low degree of sensitivity.

6.  Liquid Schemes are debt schemes that invest for very short period of time within 61 days and give high returns at lower risks due to its short duration. They are the least volatile of all debt funds as they have the shortest maturity papers.

A balanced portfolio always has a component of Debt Funds to provide it stability. The relative allocation of this fund class depends on the overall profile of the investor.

Click here  to understand how Debt Funds score over assured returns of Fixed Deposits. Visit our Facebook Page to keep yourself updated about everything and anything that concerns your investments and finances. 

9 Money Mistakes to Avoid in Your 20's

20’s bring the most radical transformations in our lives. College gives way to jobs, pocket money gives way to salary, college restrictions give way to freedom and for some, affairs give way to marriage. But significantly we also experience transformation from spendthrift days of college to financial freedom of job. But alas this freedom sometimes wreaks havoc to our financials. So here is a ready list of 9 mistakes to avoid in our 20’s.

1. Over Indulgence on Credit Card 
   
   While over indulgence is anyhow a blunder to your money management, committing it with your credit card is blasphemous. Apart from atrocious interst rates (3-4% monthly) , a credit card default may mar your ability to borrow money in future as it gets recorded by banks in your financial prudence record known as SIBEL score.
2. Absence of Financial Management 
   
   A scientific Financial Management can not only eliminate reckless spending, but also brings more financial stability and peace of mind.
3. Paying too much Income Tax
   
   While it is hard not to pay any income tax, but it can be easily brought under limits by certain actions. (Click Here to know how can Income Tax be minimised)
4. Investing all money in ‘Safe’ Instruments
   
   In 20’s one can easily afford to invest in avenues which have longer gestation horizon like stocks etc. Even if one want to invest in ‘safe’ avenues, Debt Funds provides returns which are more tax efficient than Fixed Deposits, still almost as much safe.
5. Investing in LIC Policies for saving tax
   
   One of the biggest blunder is to invest your 100 Rs in a bad investment like LIC policies to save 20 Rs on Income Tax. Try to explore ELSS or NPS which give higher returns in long term.
6. Not Buying Enough Life Insurance
   
   Life Insurance ensures continuity in life for the family in the event of unforeseen death of the earning member of the member. (Click here to know about different kinds of Life Insurance products available and Click Here to calculate how much life insurance you need.
7. Retirement Planning Delay
   
   If you wonder how come retirement should be planned so early, click here to understand how hundreds are converted to thousands and thousands to millions, if you start early. Latest in the domain of retirement planning is the product known as Annuity.
8. Not buying Health Insurance
   
   An unforeseen hospitalisation can have catastrophic effect on your life’s savings. Buying an adequate health insurance covers you against such events.
9. Not Planning Enough Liquidity
   
   Unforeseen events can through very big challenges on liquidity front ,in case you have not planned for it. So invest in a manner that ensures proper liquidity.

Still have query on any of the above topics? Drop an e-mail to healthynivesh@gmail.com. Subscribe to our Facebook Page Healthy Nivesh to keep getting Moneywise.