Personal Finance

Discipline in financial planning can help battle economic instability

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A goal without an action plan is a wish. We all have goals and aspirations for various aspects of our life. While the possibility of us achieving our goals is a function of many factors, the likelihood of getting closer to it increases with planning. And planning is an intricate process. The effectiveness of these plans depends on our deep-rooted beliefs that tie back into our experiences in life.
The makers of the famed ship, Titanic, had never accounted for the ship to ever hit a big iceberg – as such an instance had never taken place at that scale. Often, the quest for a good future, makes us overlook certain risks which the process and the discipline of “planning” will assist us in.
Insuring an aspirational class
Globalisation’s impact has transformed not only our economy, but also our lifestyles. Today propelling the consumer-driven economy, millennials are the economy’s chief earners and spenders, allocating as high as 65% of incremental income on entertainment, eating out, apparel, accessories and electronics.
In such a scenario, to battle the possibility of economic instability, life insurance is the one of the viable ways of building financial certainty. It can protect households from the possibility of the passing away of the primary breadwinner and, enabling millennials and next-generation earners to transition to adulthood without disruption in their lifestyles.
Diverse offerings
Like all financial products today, insurance also can be purchased in diverse forms tailor-made for customer requirements, instead of a one-size-fits-all. These can operate simultaneously and offer a spectrum of benefits designed to meet various needs of the nominees.
i. Term insurance plans – Essential to every household to continue functioning and replace the primary breadwinner’s income, the term plan is a fundamental tool of financial protection. It promises to pay the nominee a fixed lump sum assistance as chosen at its inception, in the case of the death of the primary breadwinner. Modern term plans also include the option of riders that offer additional benefits to the policyholder (on payment of additional premium), room for customisation and modernisation. Riders enable insurance coverage at an additional cost covering specific and unique needs of an individual. Some riders are death benefit, critical illness, waiver of premium, family income benefit, etc.
ii. Health insurance and critical illness plans – An important element of any financial plan is health; that is, to account for the cost of the insured’s medical and surgical expenses and offer cover against life threatening diseases. Health insurance plans purchased from a life insurer come with benefits of affordable premium amounts, simple documentation and claims process and the absence of a co-payment criteria.
iii. Child insurance plans – Child plans are specially customised to address a child’s future financial needs, for their higher educational aspirations and ambitions even in the absence of the primary breadwinner. It combines insurance and disciplined savings to ensure that parents are able to give their children a bright future. It can be customised to offer a lump sum payment at the end of policy term. A child plan can provision to meet financial needs of important educational milestones with flexible payouts.
iv. Retirement plans – Culturally we are attuned to putting our needs last in order of priority. However, in the changing social scenario, where nuclear families are almost becoming a norm, it is important to create a financial plan for our own retirement years. We need to create a corpus that will make those lonely retirement years the truly golden years. The best way to start saving for a nest egg is to begin early by starting to save strategically from a young age. Retirement plans provide protection against the breadwinner’s death, during the years when he is saving for the retirement corpus. Thus they ensure that death in no way negatively impacts retirement planning for the spouse.

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FINANCIAL PLANNING: Learn to manage money stressors

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It’s been five years of being a financial educator and teaching people how they can manage money better. While it has been great to have impacted thousands of educated people in India, I find the level of financial literacy among the educated to be actually deteriorating. Knowledge levels on money management continue to be low and an investment bias towards traditional investments, which do not beat inflation, continues to exist.

Further, lifestyle and consumption-based spending and the feeling that as long as one can see the money, one will have enough for the future is stopping people from planning for their future. This attitude is prevalent in people up to their early forties. It is only when the big financial goals (like children’s higher education) are four to five years away, do people start thinking of doing something about their finances. This is a sure shot recipe for disaster.

If you do want to have a better financial life, you would need to start by attacking the five main money stressors.

Not being able to save – Are you sticking to your budget? Are you saving and investing at least 30% of your take home? If not, you need to keep an expense tracker and figure out where you can cut expenses. Stop using credit cards for a while and only spend on debit card. Keep a limit on how much you can spend on the debit card in a month.

Too many loans – How much of your income is going towards EMI? Do you have a plan for paying off debt? If not, make a list of all outstanding loans and start by paying off the most expensive one first. Set milestones for yourself and have a single-minded focus to pay off loans (except home loan) at the earliest.

No money for emergencies – So often I hear that at times of emergency, people use their credit cards and do not have access to their money. This is because of the tendency to tie up money in real estate and insurance policies, thus being left with very little liquidity. You need to have six months of expenses kept aside as a contingency fund. This could be in a liquid fund or a fixed deposit for those in lower tax bracket.

Not enough funds for financial goals – people sometimes give up on financial planning because they feel that they will not be able to build up the required corpus for financial goals simply because they don’t earn enough. Well, something is better than nothing. There are no loans for retirement and if you start saving for retirement early, you would still be good. Building up knowledge on investment products is important, as you need to invest in products, which beat inflation, compound and give tax efficient returns.

Too taxing to manage everything – help is available. But you need to pay for it. Just like you pay for every service you use elsewhere, you need to pay for financial advise. Find a fee only financial planner who can help you with creating a financial plan around your needs and your life plan. A financial advisor can also help navigate through the myriad of investment options especially, mutual funds.

Finally come up with your own money mantra that will motivate you to manage money better. Mine is “being debt free and using my money to create more time for myself to pursue my interests”.

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Stress levels among Indians higher than other countries

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Stress levels in India remain very high compared to other countries. Almost 82% of India’s population are suffering from stress and those in the sandwich generation (aged 35-49) are most affected with around 89% reporting some level of stress. These were the findings of the 2019 Cigna 360 Well-Being Survey-Well and Beyond, a survey conducted by Cigna TTK Health Insurance.

The survey cited work, health, and finance related issues as major causes of stress in the country today.

The Cigna 360 Well-Being Survey, now on its fifth year, aims to examine people’s perceptions of well-being across five key indexes – physical, family, social, financial and work. The addition of numerous health-related topics makes this Cigna’s most comprehensive survey to date. This year’s survey shines the spotlight on India’s workplace wellness programs, which are more widespread and have higher participation rates than most other markets.

India fared better than the global average when it came to awareness about heart health. Among those surveyed 61% Indians knew their Body Mass Index (compared to 51% globally) and 76% Indians knew their blood pressure (compared to 66% globally).

However, one in three people don’t think high blood pressure is curable with lifestyle change, suggesting a gap in heart health education. While only 38% of respondents use wearables to track and manage heart health.

Compared to other generations, the Indian sandwich generation reported the lowest scores across the overall index and are particularly concerned about their physical, finance and work wellness, underscoring the need to address the stress levels and pressures of this generation, the core workforce in the coming years, the survey said.

“Less than half think they are doing well financially. They question their financial ability to meet their parents’ medical needs. Only 51% feel confident about their ability compared to 58% of millennials and 62% of those 50+,” the report said about the sandwich generation.

Another finding in the survey was that 66% of Indian employees feel they have a workplace wellness programme, against 36% globally. However, 71% of those surveyed feel that these programmes concentrate on physical health at the expense of mental well-being.

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INVESTMENT: Smart options to park short-term money

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Investors meticulously plan their medium- and long-term investments, but short-term investments do not get the attention they deserve. This gets corroborated by the fact that savings bank account and short-term FDs remain the preferred options to park short-term money. Most investors do it to avoid any volatility and maintain liquidity at all times. While the reasons are perfectly valid, investors must realise that there are options with the potential to offer higher returns and that without compromising much on these important parameters.

To begin with, there are liquid funds, ultra-short duration and low duration debt funds that are ideal for a time horizon of up to three, six and 12 months respectively. For a slightly longer time horizon, there are short-term income funds. One has to contend with some amount of volatility and certain risks like interest rate, default and liquidity risks. However, a careful selection of funds can mitigate risks to a large extent.

Arbitrage funds, too, haven’t caught the attention of investors, despite being an effective and tax-efficient option. An arbitrage fund is an equity-oriented scheme which seeks to generate income through arbitrage opportunities emerging out of mis-pricing between the cash market and the derivates market.

For example, a fund manager of an arbitrage fund may buy a stock ‘A’ at Rs 100 and sell its future at Rs 105. As a result he would lock a return of Rs 5 at the time of initiation of the trade. By the end of the expiry, their prices would generally converge to Rs 110. On unwinding the position, that is, by selling stock and buying future, the profit earned on the stock would be Rs 10, whereas the loss from the future market would be Rs 5. Therefore, the net profit from the transaction would be Rs 5.

As is evident, the fund manager is usually able to make money for investors regardless of the market movements. However, the ability of these funds to generate higher returns depends on the volatility in equity markets. While arbitrage funds have the potential to provide healthy returns, there are pitfalls too. A depressed stock market may not provide enough opportunities for an arbitrage fund. Besides, it is not necessary that on the day of expiry the price of the stock and its future contract will coincide.

Although arbitrage funds fall in the category of equity funds, the risk associated with equities gets eliminated as the fund manager invests in stocks and their futures simultaneously. Moreover, arbitrage funds score over income funds and traditional options in terms of tax efficiency. Any capital gains arising out of sale of units after one year are taxed at 10%. Short-term capital gains on units sold within one year are taxed at a flat rate of 15%. In comparison, for debt funds, the period for STCG is three years and gains are taxed at one’s applicable tax rate. In addition, the applicable dividend distribution tax (DDT) for arbitrage funds is 10%, as against 25% for income funds.

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Investment: Do you need to invest in bank FDs

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Bank fixed deposit is one of the most popular investment product. It is liked by many, especially the conservative investor. Reasons being high liquidity and lower risk along with a fixed return. But have you ever thought about the fact that a higher exposure to FD eats into your returns big time because, one- it is not tax free and two- it cannot beat inflation.

Indians conventionally have been parking their money majorly in bank deposits or even postal deposit schemes. Due to the lack of awareness about equity and for a desire to protect their principal investment and returns, deposits are considered safer options.

In the past, it may have been fine to invest in FDs. But given the upgrade in lifestyles, it has become tough for people to manage expenses by continuing investments in the same old-fashioned low returns bearing financial products. That too needs an overhaul. Investor fail to realise that their returns are being compromised on account of their fear or need of safety. This does not allow their money to grow at a faster rate.

The first big dent that FD returns do to you is the tax you pay on it. Investors often look at the gross rate of FD return, rather than the net post-tax returns. So, even if a bank FD is offering say 7.50% returns and if your total income is already more than Rs 10 lakh in a financial year, then you would end paying 30% tax (excluding cess) on this return. So, your net returns would be only 5.25% (that is, 7.50% – 30% tax). This happens because your FD is subject to your normal slab of tax rate. This single disadvantage should keep you away from investing in FDs. Rather, you should focus tax planning which can help you save the tax on FDs. The same can then be invested elsewhere to earn better returns.

The second big turn off is the inflation rate. Your FD returns will only be able to match or hover around the inflation rate. In fact, it is already established that FDs returns cannot beat inflation. The typical inflation rate may range from say 6 to 7%, but that does not take in to account your lifestyle inflation that is, the change in your standard of living, emergent or sudden expenses, things you spend your money on such as, foreign travel, gadgets, apparels, etc, which were not there earlier or were nominal. Given the lifestyle and other higher expenses on education, medical, etc, your money has to work harder than you think and beating inflation is no longer a choice but a necessity.

Given that there is a growing concern about banks going bankrupt, due to issues like bank scams and rising non-performing assets, even the safety part of FDs is no longer valid. In fact, you be aware that only Rs 1 lakh of your FD investment is insured by the government.

The most important thing is to do a comprehensive financial planning to meet your financial goals. This will help you figure which goal requires which combination of financial products to invest in. So, focus on investing in a good mix of products offering higher returns, more tax efficiency and the capacity to beat the inflation evil. Invest in FDs only if you are in a stage of your life when you seek very safe return, say post retirement. But a young investor can take higher risk and invest more in other assets such as mutual funds or stocks that offer higher returns.

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How to read your mutual fund statement

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In recent years India’s mutual fund industry has grown at an annualised rate of 12.5%. MFs are a part of every individual’s portfolio. Due to digitisation in the industry, it has now become easier to access to the investments made by the investor. This information comes in form of an MF statement. Let us see how to read one.

An MF statement is like our bank account statement, which gives you a complete summary of your investments.It includes the following:

Personal details – An MF statement will have your personal details such as name, address, PAN, email ID, mobile number and nominee/investor details. If there is an additional MF account holder it will show all details of the other holders as well.

Investment details – In this statement you will find the name of the investment scheme, the category whether a growth or dividend plan, number of units you hold, NAV, current value, cost of investment and dividend earned.

NAV – Net Asset Value (NAV) denotes the performance of a particular scheme of a MF. NAV is the market value of the securities held by the scheme.

Bank account and broker details – The statement will also have your bank account details. This is the account in which the money will go on redemption of the mutual fund. It will also have details of the broker or advisor from whom you have purchased the MF.

Consolidated Account Statement

Consolidated Account Statement (CAS) is a single/combined account statement which gives details of financial transactions made by an investor during a month across all MFs and also other securities held in dematerialised (demat) mode. CAS is generated on a monthly basis in respect of the PANs common to the RTAs and depositories.

It carries information of your sales, purchases and other transactions in mutual funds. This also allows you to track the MF performance without hunting on your old files.

How is CAS created/ calculated?

Depositories like NSDL or CDSL dispatche or generate CAS to investors, in respect of the PANs that are common across RTAs and depositories. The AMCs compute CAS on the basis of transactions and holdings of an investor’s demat account held by NSDL and CDSL. A demat account holds all the shares that you buy in dematerialised or electronic form. Just like your bank account holds cash, a demat account holds the certificates of your financial instruments such as shares, bonds, government securities, mutual funds and exchange traded funds (ETFs).

In respect of MF folios where there is no common PAN between the RTAs and the depositories, the CAS only contains mutual fund transactions.

Contents of a MF statement

A CAS includes following information about an MF and AMCs:

Purchases made by you and transaction-related information like merging or switching of funds, payment of bonus and dividends. Information regarding reinvestment options or New Fund Offer (NFO)Kinds of investment – whether lump sum or a Systematic Investment Plan, Systematic Withdrawal Plan or Systematic Transfer PlanClosing and opening share unit portfolio balanceMode of holding unitsISIN and UCC for each scheme and portfolio

The (ISIN) International Securities Identification Number is a 12-character alphanumeric code used for trading and settlement purpose. It also identifies equity, debt or other securities.Importance of CAS

  • a. It helps to understand the ‘health’ of the company
  • b. Reduces additional paperwork
  • c. Keeps investors informed

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Misleading information, lack of understanding keep investors away from stocks

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News, these days, is rife with discussions about the state of the Indian economy and its growth prospect. Every other day, a domestic or an international research report is released, predicting the possible economic growth rate of India. Analysis of such reports invariably leads to one clear takeaway – it is the right time for retail investors to be a part of this growth story. If you find yourself wondering what does this mean and how can you accomplish it, here are some tips.

Equity is best investment option

The historical market data shows that when compared with other asset classes, equities have reported higher returns over a long term. From 1979 to 2018, when average inflation stood at 8.1%, FDs offered an average return of 9%, gold offered a return of around 10%, real estate investments offered approximately 13%, while equities offered 16% returns in the same duration, thereby, beating inflation significantly.

The quality of equity to give inflation-adjusted returns has made it an integral part of every financial plan. Be it planning for retirement, an international trip, children’s education or other long-term goals, a healthy dose of equity in the investment portfolio is regarded as a must. The value appreciation in investments provide by equity is unmatched and builds a strong case to include this asset-class in your financial plans.

In spite of going through a number of recessionary phases time and again, global equities have given more than double the returns on an average per year. The domestic index, Sensex, has multiplied by more than 360 times since its inception in 1979, giving a CAGR of approximately 16%, even after periodic market corrections.

How to invest in equities

Though equity investment makes sense in the light of its merits, many investors still shy away from taking the plunge. Misleading information and lack of understanding tend to keep investors away from stock markets. However, investment in equity is not as complicated as it is made out to be. Below are a few simple steps you can take to harness the potential of this market:

Research – Making investments in the equity markets is not rocket science. Once you have gained clarity on markets, it is easy to make your money work for you. Do basic research on how markets work and various concepts of equity investing. Rely on credible online resources and financial gurus to gain requisite insights. Do not make any decision on hearsay. Do proper homework- ask questions and seek answers to make an informed decision.

Observe and learn – Observe what is in demand and moving fast. For instance, a weekend trip to a local mall can show you the wide range and variety of snacks on the shelf under the brand of few giants in the retail sector. While driving to the mall, you notice the traffic which indicates growing two-wheeler and car sales. Once you have identified the products that are in demand and likely to be sought after, in the future, all you need to do is identify the companies that make them and invest in those companies.

Identify good stocks – Based on your research, identify companies that have business opportunities available in the sectors you identified. Ensure that they are managed by capable and visionary management. Check the track record of business to withstand challenges. This will serve as an indicator of their business and management capabilities which are crucial factors for success.

Take a long-term horizon – Economic and business cycles are generally believed to last for five-seven years. It would be futile to get perturbed and create panic due to short-term market movements. In fact, regard these corrections as an opportunity to accumulate quality stocks. If you have invested after conducting thorough research, be rest assured that you will accumulate inflation-beating returns over the long-term.

Seek expert help, if need be – If you feel overwhelmed with the process seek out professional help from a stockbroker. With their market understanding, they can guide you in achieving an efficient allocation of your limited resources to reap maximum benefits. Just like you go to a specialist and pay a consultation fee for curing specific ailments, visiting a brokerage house can cure your portfolio of stagnation and less than optimal returns to improve your financial health.

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How to fulfil your dream of own home

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For most Indians, purchasing a house is a big deal and tops the priority list. With the rise in income of working class and growing accessibility of home loan applications, today one can easily make an attempt of making their dream come true – buying a home. However, the most important part of buying a home is getting the right loan with a manageable interest rate through banks and other financial institutions.

Before applying for a home loan, it is advisable to keep a track of financial institutions’ rate card. Do your research by checking with your friends and family for their feedback and opinions about interest rates and services. Different banks and financial institutions offer home loans at different interest rates but interest rates alone should not be your sole criteria for selecting a lender.

Once you apply for a home loan, the lender checks your credit history before deciding to lend you money. Credit history provided by the Credit Information Company or Credit Bureau helps the lender assess risk as a borrower and accordingly decide on your loan application. Financial institutions have varied set of interest rates for different types of loans. But if the applicant has a good credit score and his credit worthiness is high, then it would be safer for banks to lend money.

To build a credible credit footprint it is important to consider these five steps that will help your dream of buying a home come true.

Timely payments: First and foremost step to build a credit history is timely payments of your bills and other Equated Monthly Instalments. If you don’t pay the minimum amount of your bills on time, it can have a negative impact on your credit score.

Be prudent and avoid defaults: The new lender can see all your previous defaults in your credit report. Hence, it is advisable to avoid default payments on a credit card or a loan instalment. The credit report also reflects details about the settlement of default payments with your previous bank.

Be smart while spending: Be wise by not going overboard with spending and shopping. You need to weigh the offers judiciously keeping in mind your income and ability to pay. Maxing out the credit card limit will have an adverse impact too.

Limit unnecessary inquiries: It is advisable to limit your inquiries for loans or credit cards as it may have minor impact on your credit score. Each credit application inquiry becomes part of your credit report and can potentially drop your credit score.

Check your credit report regularly: Start making a habit of checking your credit report regularly and thoroughly. You can access your credit reports from the credit bureaus through their websites. If you find any discrepancies in the report, immediately contact the respective credit bureau to have clarity. Checking your credit report works as an early-warning before the rejection of your loan. Also, only apply for credit that you can afford to pay back.

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PERSONAL TAX: Cash in locker may have to be explained

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A search operation was carried out by the Income Tax department in the business premises of a taxpayer, who was working as a liaison officer with a builder. The search revealed cash of Rs 925,000 in a bank locker in the name of the taxpayer and his wife.

During the course of assessment, the tax officer asked the taxpayer to explain the source of the cash found in the bank locker. The taxpayer submitted vide a written reply that the cash found was his and his wife’s savings, that was retained for their daughters marriage. He further submitted that these amounts were deposited in the locker out of their savings over a period of more than five years. This explanation was not acceptable to the tax officer as the cash found in the locker was not reconciled with the cash as per the books of accounts. The officer was of the view that if there would have been cash balance in the cash book, the taxpayer could have explained the same at the time of the search itself. Accordingly, the tax officer was of the view that the explanation offered by the taxpayer was an afterthought and accordingly assessed the entire income of Rs 9,25,000 as unexplained cash.

The first appellate authority observed that the explanation given by the taxpayer was not convincing. It seemed absurd that a person would operate the bank locker and keep cash there from time to time, instead of depositing it in a savings bank account or fixed deposit, since that would earn interest too. In view of the same, the appellate authority agreed with the tax officer’s view.

Before the second appellate authority, the taxpayer argued that both he and his wife were working and have been regularly filing their tax return. The amount of cash found in the locker represent their past savings and was commensurate as per tax returns filed in the past years. The taxpayer submitted that the tax officer without considering the taxpayer’s explanation made an addition as unexplained cash. The taxpayer further submitted that it is for him to decide whether to keep the money in the locker or whether it should be deposited in the bank. The taxpayer chose to deposit the cash in the locker with which he performed his daughter’s marriage and therefore it is not correct to make the addition on the basis of the tax officer’s personal presumptions and assumptions.

The honourable tax tribunal observed that the assessee and his wife have filed their returns of income and the same have been duly accepted by the tax officer. The taxpayer has been clear that the cash in the locker has been deposited out of the savings from the past years’ income. The tribunal was of the opinion that the taxpayer has fully explained the sources and accordingly discharged the burden cast upon him. The tax officer without giving any reasons has rejected the explanation offered by the taxpayer, which in the tribunal’s opinion is not correct. Further the tribunal agreed with the taxpayer’s plea that it is his prerogative to decide whether to keep the money in the locker or deposit it in the bank to earn interest. In the present case he chose to keep the money in the locker for the purpose of his daughter’s marriage which cannot be challenged. The tribunal accordingly decided the case in favour of the taxpayer and ordered for deletion of the addition on account of unexplained cash deposits.

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INVESTMENT: Smart options to park short-term money

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Investors meticulously plan their medium- and long-term investments, but short-term investments do not get the attention they deserve. This gets corroborated by the fact that savings bank account and short-term FDs remain the preferred options to park short-term money. Most investors do it to avoid any volatility and maintain liquidity at all times. While the reasons are perfectly valid, investors must realise that there are options with the potential to offer higher returns and that without compromising much on these important parameters.
To begin with, there are liquid funds, ultra-short duration and low duration debt funds that are ideal for a time horizon of up to three, six and 12 months respectively. For a slightly longer time horizon, there are short-term income funds. One has to contend with some amount of volatility and certain risks like interest rate, default and liquidity risks. However, a careful selection of funds can mitigate risks to a large extent.
Arbitrage funds, too, haven’t caught the attention of investors, despite being an effective and tax-efficient option. An arbitrage fund is an equity-oriented scheme which seeks to generate income through arbitrage opportunities emerging out of mis-pricing between the cash market and the derivates market.
For example, a fund manager of an arbitrage fund may buy a stock ‘A’ at Rs 100 and sell its future at Rs 105. As a result he would lock a return of Rs 5 at the time of initiation of the trade. By the end of the expiry, their prices would generally converge to Rs 110. On unwinding the position, that is, by selling stock and buying future, the profit earned on the stock would be Rs 10, whereas the loss from the future market would be Rs 5. Therefore, the net profit from the transaction would be Rs 5.
As is evident, the fund manager is usually able to make money for investors regardless of the market movements. However, the ability of these funds to generate higher returns depends on the volatility in equity markets. While arbitrage funds have the potential to provide healthy returns, there are pitfalls too. A depressed stock market may not provide enough opportunities for an arbitrage fund. Besides, it is not necessary that on the day of expiry the price of the stock and its future contract will coincide.
Although arbitrage funds fall in the category of equity funds, the risk associated with equities gets eliminated as the fund manager invests in stocks and their futures simultaneously. Moreover, arbitrage funds score over income funds and traditional options in terms of tax efficiency. Any capital gains arising out of sale of units after one year are taxed at 10%. Short-term capital gains on units sold within one year are taxed at a flat rate of 15%. In comparison, for debt funds, the period for STCG is three years and gains are taxed at one’s applicable tax rate. In addition, the applicable dividend distribution tax (DDT) for arbitrage funds is 10%, as against 25% for income funds.

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INVESTMENT: Robo-advisor better for younger investors

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I believe, as most of you would agree, that each one of us needs an advisor to help us take the right financial decisions. Now with technological advancements, the shape, size and form of a financial advisor has undergone a change and what we call the robo-advisor is gaining lot of momentum.

This will make you think whether to use your old known trusted financial advisor or go for a robo-advisor? But to answer this question you need to first assess your situation and financial goals, because each has its own pros and cons and it works both positively and negatively under different circumstances. It is also driven by an individual’s behaviour plus investment pattern.

The job of a robo-advisor is to use algos in doing your investment planning and to come out with the best asset allocation suiting an individual’s risk profile. It works on the foundation which is passive in nature but the same will change with constant machine learning. Whereas your financial advisor’s job is to look at your investments in depth and arrive at timely calls for generating greater returns and always aim to outperform.

The main factor we need to consider in this entire debate is the level of wisdom as against the algos. The robo-advisor will work on algorithms and does complicated calculations to dish out various analytical solutions and patterns, but it only works on the basis of the inputs that are fed into the system. What this input needs to be requires wisdom, and that can come from experience. This is not to say that robo-advisor will not learn or evolve. In fact, that is called machine learning and with time these algos will learn and become more robust.

What the robo-advisor lacks is tackling emotions that drive an investor. This is one of the critical roles for an advisor, because investing has to do more with behavior than science. For instance, what would a person do if they win a lottery or get a salary bonus? More often than not many of us would go on splurging this sudden cash than making additional investments.

Robo-advisory will work well when your financial goals and the priorities are clearly laid out as against the customised planning when you should seek the help of a financial advisor.

Ideally, robo-advisors will suit young investors because they are new to the investing world. The lower cost of this model too will suite them better. They will also be more at ease using this model. So, while starting your journey towards investing, robo-advisor will work best and the moment your investment needs more customised handling, a financial advisor will work better. An advisor who brings the required expertise and experience in helping you achieve your desired goals. The best part is you can make them accountable for their work and secure your financial future.

With time, robo-advisors will also establish the required credibility and will also carry the inherent knowledge as required to give you customised advice. But until then just be aware about the pros and cons of both the options. After all, it’s your hard earned money, so stay smart, stay careful when it comes to deciding which one to choose.

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