Can NRIs invest in Indian Mutual Funds & should they?

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NRIs are generally known to invest in Real estate in India.

Now, after Real estate Bill, demonetisation of high value currency notes, Govt’s fight on Black money, IT department’s raid on many realtors, going forward Real estate might not deliver returns like in the past.

Personally I believe that land is for agriculture and for living but not for investment purpose. We buy land, land, land and only land and pump up land prices like hell and now for a middle class person to buy land / flat, he/she has to pay EMIs throughout their life. Its not a good situation. Agricultural lands are being converted to residential plots and being sold as investment. It is increasing land prices beyond limit and since agricultural lands are reducing, prices of food articles are also increasing. Double impact, both bad. I don’t want to talk about black money component in real estate transactions, which everyone is aware of.

In this backdrop, I would like to present an interesting & attractive investment option – Mutual funds. Mutual Funds have given good returns consistently in the past 22 years and the returns are not taxable, which is another advantage.

Returns delivered by some Mutual Fund schemes:

Scheme name

Average return p.a in last 3 years

Average return p.a in last 5 years

Average return p.a in last 10 years

Average return p.a since launch of scheme

ICICI Prudential Value Discovery Fund

31%

24% 17%

23% (Aug-04)

Invesco India Mid N Small Cap fund

33%

24%

17.5% (Mar-08)

Birla Sun Life MNC Fund

33%

24% 18%

18% (Apr-94)

UTI Midcap Fund

40%

25% 16%

20% (Apr-04)

Birla Sun Life Equity Fund

30%

21% 14%

25% (Aug-98)

One can observe from above table that mutual fund schemes have delivered very good returns over long-term and also the returns are completely tax-free.

The investment procedure for NRIs is very simple and is almost similar to that of Resident Indians.

Following documents would be required:

  1. 1 Passport size photo
  2. PAN copy self-attested
  3. Passport copy self-attested
  4. Overseas address proof (any utility bill)
  5. NRE / NRO bank account cheques
  6. Tax identification no. or functional equivalent in the country of Tax residency

 What are Mutual Funds?

Mutual Funds are called Asset Management Companies. They collect money from retail investors and invest in a set of 40 to 50 Stocks (Shares of companies), which are selected through thorough research by Fund manager and research team based on various fundamental parameters such as Profit margin, profit growth, revenue growth, Return on Equity, Return on Capital Employed, Management’s credibility, future growth prospects, future prospects for the sector etc. and the list will go on. They continuously monitor the companies’ performance and will be on continuous search for new companies with good fundamentals and future prospects to invest. They invest with long-term horizon and are business focussed.

In mutual funds, investment can be done in 2 ways:

  • Lumpsum / One-time investment
  • SIP: SIP stands for Systematic Investment Plan. Through SIP, one can invest fixed amount of money every month in different mutual fund schemes.

Advantages of SIP:

  1. SIP inculcates discipline in investing. We get income every month, we spend every month; through SIP we can also invest every month
  2. With small investments in SIP mode, huge wealth can be created in long-term

I will be glad to assist NRIs who are interested in investing in mutual funds. Please share this article/mail with your friends/relatives/colleagues who are NRIs, if you think it would be useful to them.

Email: laxman.vinay77@gmail.com

Mobile: 91-9538539049

Efficient Solution for Regular Income post-retirement

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This article is important for persons who have retired or would be retiring soon. Please share this article with your friends/colleagues/relatives, if you think this article is relevant to any of them.

Post-retirement years are believed to be the golden period in life.

Everyone retires some day and has to live post-retirement life in peace pursuing one’s hobbies, passions, playing with grand children, meeting old friends etc.

Post-retirement we don’t get salary. We need to convert our assets to financial assets, which can generate regular income.

Various options to get regular income post-retirement are:

  1. Buying pension plans
  2. Depositing money in Fixed deposit and using the interest for monthly expenses
  3. Buying a property and using the rent from the property for monthly expenses
  4. Investing in a Balanced Mutual Fund and withdrawing fixed amount every month through SWP option

I will explain the 4th option in this mail and will explain why it is more efficient than other options.

SWP stands for Systematic Withdrawal Plan. Through this plan, you can invest a lumpsum amount in a mutual fund scheme and withdraw fixed amount (which is decided by you as per your requirement) every month.

Lumpsum amount can be invested in a Balanced Mutual Fund scheme as these schemes are less volatile than equity mutual funds and gives better returns than Fixed deposits or pension plans or rental yield (Rent p.a is approx. 3 – 4% of property value). These schemes are not taxable, which is another big advantage.

Lets consider an example with ICICI Prudential Balanced Advantage Fund.

This scheme has delivered the following returns in the past.

Scheme name Average return p.a in

last 3 years

Average return p.a in

last 5 years

ICICI Prudential Balanced Advantage Fund 18% 16.85%

I will assume that the expected rate of return from the above scheme is 12% p.a conservatively.

Now, let us look at different scenarios by investing different lumpsum amounts and withdrawing different amounts p.m.

  1. Initial investment: Rs. 50 Lakh; SWP amount: Rs. 30000 (withdrawal amount p.m)
Initial investment Rs. 50,00,000
Expected rate of return p.a 12%
Amount withdrawn p.m for expenses Rs. 30,000
No. of yrs 20
Value of initial investment after 20 yrs Rs. 2,44,88,331
Total amount withdrawn in 20 yrs Rs. 72,00,000

2. Initial investment: Rs. 40 Lakh; SWP amount: Rs. 25000 (withdrawal amount p.m)

Initial investment Rs. 40,00,000
Expected rate of return p.a 12%
Amount withdrawn p.m for expenses Rs. 25,000
No. of yrs 20
Value of initial investment after 20 yrs Rs. 1,85,91,517
Total amount withdrawn in 20 yrs Rs. 60,00,000

   3. Initial investment: Rs. 30 Lakh; SWP amount: Rs. 20000 (withdrawal amount p.m)

Initial investment Rs. 30,00,000
Expected rate of return p.a 12%
Amount withdrawn p.m for expenses Rs. 20,000
No. of yrs 20
Value of initial investment after 20 yrs Rs. 1,26,94,703
Total amount withdrawn in 20 yrs Rs. 48,00,000

    4. Initial investment: Rs. 25 Lakh; SWP amount: Rs. 20000 (withdrawal amount p.m)

Initial investment Rs. 25,00,000
Expected rate of return p.a 12%
Amount withdrawn p.m for expenses Rs. 20,000
No. of yrs 20
Value of initial investment after 20 yrs Rs. 72,48,426
Total amount withdrawn in 20 yrs Rs. 48,00,000

By investing in Balanced Mutual Fund and starting SWP, one can get regular income as well as appreciation in the invested amount as Balanced mutual funds deliver 4 – 5% more than an FD with less volatility than an Equity Mutual Fund. Interest on FD is taxable whereas profit / appreciation made in Balanced mutual fund is not taxable. Hence, dual advantage of more returns + NO TAX

Is it a good idea to buy a Flat on Loan at young age?

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Generally, we are advised by our well-wishers to buy a flat at young age through a home loan.

Now-a-days, many builders have tie-ups with Banks, which offer home loans. I just want to discuss the positives & negatives of buying a flat with a home loan @ young age. And these are my own views based on certain facts, figures and experiences and if it helps you in making your decisions in future, I would be glad.

Let me first start with the positives.

  1. You will have your own home. Its an emotional comfort and a status in society to have our own house/flat
  2. You will get tax advantages u/s 80(C) for principal & u/s 24 for Interest paid on the loan
  3. In future, even if you lose your job in the worst case or if your finances go for a toss, still you will have a roof over your head (but still the outstanding loan has to be paid)
  4. Its a physical asset (Tangible asset), which can be seen/felt.
  5. You can save on rent

Now let me get to the disadvantages of taking a home loan @ young age:

  1. You can save on rent. But rental yields are very low. Rental yield is Rent p.a / Total flat value. It is around 3-4% in Indian cities. The loan interest rate will be around 10.5% (this is the average loan interest rate, actual rate will keep changing as per the market interest rate scenario) over the full tenure of the loan. So, to save rent of 3-4% of the property value, we are buying the flat and paying EMI @ 10.5%. Is it wise?
  2. You need to pay property Tax every year.
  3. You have to spend money on flat maintenance frequently
  4. Maintenance charges to be paid to Apartment society
  5. Registration charges & Stamp duty have to be paid while buying & selling the flat
  6. Capital gains tax of 10% has to be paid on the profit while selling the flat
  7. While selling, chances of getting full money in white is very low. The amount received in Black cannot be accounted on your PAN, which means you can never use it legally. Either you have to spend it off (for example on your son’s or daughter’s marriage) or invest in another real estate property and pay it as Black component.
  8. Generally, EMIs are 50 – 60% of take home salaries of people. It makes the financial situation very tight. Your financial freedom is mortgaged to bank for the loan tenure (approx 20 yrs), which means most of your work life is dedicated to paying Bank EMIs, making the bank richer.
  9. Its difficult to make any other investment and will hinder & delay wealth creation
  10. You cannot invest for important goals such as Children’s marriage, higher education, retirement, foreign tour etc.
  11. You can’t leave your job, if you want to start your own business or to go for higher studies
  12. You will not have the flexibility to shift to a new location within same city to move near your company location
  13. Its a big decision, which impacts your financial freedom for a lifetime and this decision cannot be reversed easily
  14. If you shift to some other city due to your job requirement, then the flat has to be given on rent. Its difficult to maintain the flat from some other city, which will force you to travel frequently

Now, coming to figures: Please see below tables

Home loan interest rate 9.7%
Loan tenure 20 yrs / 240 months
Flat value Rs. 5000000
Down-payment Rs. 1000000
Loan value Rs. 4000000
EMI Rs. 37809

 

Flat cost Rs. 5000000  
Construction component Rs. 3000000 Construction component of flat value will not appreciate. It will only depreciate as flat becomes older. May be after 30 yrs, you may not find a buyer for the flat as its too old and people would like to buy new flat instead of a 30 yr old one
Land component Rs. 2000000 For example, if an apartment has 30 flats, then what you will receive is 1/30th of the total land area whenever the apartment is destroyed / collapsed after 30-40 yrs. So, what you will get eventually is only your share of the land. And land appreciates in value over time.

 Your flat value is 50 lakh and only 40% (20 lakh) of the flat value (which is the land) is appreciating over time. Land appreciates @ ~ 13.5% p.a, as the historical data shows. But you have to pay Capital Gains Tax of 10% on the profit you make while selling the land, which will bring down the returns further and if you consider the property tax, maintenance charges, registration charges, stamp duty, broker commission etc., the returns will further come down.

Land cost now Rs. 2000000
Land appreciation rate 13.5%
Land value after 30 yrs Rs. 8,93,11,183
Capital Gains / Profit Rs. 8,73,11,183
Capital Gains Tax (10%) Rs.    87,31,118
Land value (post-tax) Rs. 8,05,80,065

 So, the EMI of Rs. 37809 for 20 yrs will result in a wealth creation of Rs. 8,05,80,065 after 30 yrs.

Now, if the same EMI amount is used to start an SIP of Rs. 37809 p.m. in a mutual fund. But, rent has to be subtracted from the EMI amount. Lets assume rent is 3% of the flat value. So, rent p.m is Rs. 12500. Net amount that can be invested post-rent is Rs. 25309 p.m. SIP amount p.m = Rs. 25309.

Historical returns from mutual funds has been in the range of 15 – 23%. Lets assume an average return of 17% p.a from SIP in mutual funds. Then the wealth created in mutual funds in 30 yrs is as follows:

SIP amount p.m Rs. 25309
Initial lumpsum / one-time investment Rs. 10,00,000 (which is equal to downpayment in flat)
No. of yrs 30
Rate of return 17% p.a
Wealth created in 30 yrs Rs. 47,91,38,643

 With the wealth created through Mutual funds, you can build your own house in a peaceful area, in some hill station and migrate there post-retirement, once you get clarity on where you want to settle down.

I believe staying on rent + doing SIPs in mutual funds is a better option in the long-term than buying a flat on EMI @ young age and mortgaging your financial freedom to a Bank.

Flat is not an investment because you are never going to sell it, its only an emotional comfort.

Should we plan for our Children’s future?

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Hope you all had a nice weekend.

In this article, I would like to talk about how to plan & be prepared for your Children’s future.

Kindly read till the end as it will present some alarming figures….alarming to me as well.

There are 2 major goals important from the perspective of our children. First one is their education & second their marriage.

When I was a kid, my father used to pay Rs. 200 per month or Rs. 2400 per annum as my school fees for 2nd Standard (Class) in 1991. Now, the school fee is around Rs. 1 to 1.5 Lakh p.a or even more depending on the school. Hefty donations have to be paid to get admission in some schools. From Rs. 2400 p.a in 1991 to Rs. 100000 in 2016, its an increase of 16% p.a. Education cost is increasing @ 16% p.a on an average. Money that is deposited in Fixed deposits, Recurring Deposits, LIC policies, NSC, NPS, PPF, EPF, Sukanya Samriddhi Yojana is growing @ ~ 8.5% p.a. So, the question arises – Should we save for child’s education whose cost is rising @ 16% p.a in financial products whose rate of return is only 8.5% p.a?

Way back in 2003, cost of MBA education in IIM was Rs. 3 Lakh. Now it is around Rs. 25 Lakh. An increase of 18% p.a. Our investments in above popular financial products are not growing anywhere closer to this rate. So, the same question comes back to my mind.

Let me take my own example. I have a kid who is 1 year now. He may go for MBA or MBBS or equivalent degree at the age of 21. I have 20 yrs to save for his higher education.

Current cost of MBA in a premier institute is ~ Rs. 25 Lakh. After 20 yrs, it will cost me        ~ Rs. 4.86 Crore (if cost increases @ 16% p.a as is the case in the past).

Now at different rates of return, how much do I need to invest every year to accumulate   4.86 Cr in 20 yrs? See below table.

Rate of return from investment

Investment p.a required

Investment p.m required

8.5% p.a

9.26 Lakh

77,241

12% p.a

6.02 Lakh

50,240

15% p.a

4.12 Lakh

34,414

18% p.a

2.81 Lakh

23,432

20% p.a

2.17 Lakh

18,097

One can observe from the above table that, the higher the rate of return from your investment, the lower the amount to be invested per annum or per month to accumulate the required amount (4.86 Cr in my case).

Education cost is only going to shoot up beyond our imagination in the future. Inorder to provide good education to our children, its wise to invest from today onwards in good Financial products which will give better returns than the traditional products stated above which offer 8.5% p.a which is not good enough to reach the goal.

There are some good Children Gift schemes available which have given good returns. HDFC Children’s gift fund has given annualised returns of 17.11% p.a in the last 15 yrs.

Axis mutual fund has also launched Axis Children’s gift fund recently in Dec-2015. I believe these are better products to save for children’s education as their returns are superior compared to traditional products, which also means much smaller amount has to be invested every month / year to achieve the same corpus for higher education.

Now, coming to the next important goal – Children’s marriage.

Marriage expenses are also increasing at a double-digit rate. Inflation in marriage expenses is ~ 14% p.a. For example, if the cost of marriage is 25 Lakh today. Same would cost you 6.61 Crore after 25 yrs. Is it possible to achieve this corpus by investing in traditional investments which give 8.5% p.a?

The only way to achieve the required corpus for Children’s education & Marriage (both of which are long-term goals) is by investing in products which gives returns of ~ 15% p.a and by starting your investments from today and by staying invested for long-term.

Conclusion:

  1. Start SIPs in Children’s Gift Funds from any Asset Management Company for your Children’s future.
  2. Evaluate all the existing investments that you are doing for your Children’s future and check if they are giving required returns.

Good times ahead!! Just wait & watch

What are these good times & why should we wait?

First let us understand why we should wait?

“Law of farm – you can’t sow today and reap tomorrow”

In agriculture, you sow seeds, water it and wait for long time to get the crop. Isn’t it? Its the law of farm. The same principle is applicable to investment too. One can’t expect wind-fall gains in 1 day or 1 month or 6 months or 1 year or 2 years.

Now to the first question…What are the good times ahead?

Is it a good time to invest, when the Stock market (Sensex / Nifty) has crashed by 40%?

Or

Is it a good time to invest when the Stock market (Sensex / Nifty) has gone up by 50%?

Generally, we think that when the Stock market has gone up by 50%, the economy & Companies are doing well and it is a very good time to invest.

But, exactly the opposite is true. If you invest when the Stock market has gone up by 50%, there are more chances for the Stock Market to go down rather than to further go up and it has happened frequently in the past.

Sensex graph from 2000

Refer the above Sensex graph from 2000 to 2016. When the Stock market crashed by 40% in early 2008, everyone exited the Stock market and it appeared to be a horrible time for the Stock market. But the reality is that all the Stocks are available at dirt cheap prices. When good companies are available at cheap prices, should we invest or stay away? Staying away is the action taken by most of the investors during 2008 period. But the Stock markets recovered swiftly within 15 months and has gone up by 100%.

The conclusion is you should invest when the Stock market is bad / worst and you should sell and exit when the Stock market has already done well and gone up by 40 – 50%.

“Buy when everyone is fearful and sell when everyone is greedy.”

If you observe the last 1 year period….you will find an opportunity:

In Feb-2015, Sensex was @ 30000 level. Sensex fell to 23000 level in Feb-2016. It means Sensex has fallen by 24% in one year time.

Now the Stock market is not in good condition and the economy (both Indian and global viz. China, US, Japan, UK etc.) is not good and the Companies are not doing good. So is it a good time to invest now?

And Stock Market keeps falling down frequently and gives opportunities for Investors to invest their money at reasonable prices. Markets going down should be looked at as opportunities to invest rather than to stay sidelined.

In the period: 2000 to 2003, Stock market had gone through a bad phase, economy was bad, Companies’ profits were just not growing. In the year 2003 sensex was at 3000 level. Economy started improving from 2004 onwards and Companies’ profits started increasing and the Sensex started going up. Sensex went up from 3000 level in 2003 to 21000 level in 2008. So what would have happened to the investors who have waited patiently during the tough times? They would have got splendid returns virtue of their patience.

In Jan-2008, Sensex reached a peak of 21000 and in Feb-2016, sensex is @ 23000, which means it barely grew by 9.5% over 8 yrs. Currently, we are in 2003 kind of situation. It also means that there is huge growth ahead of us and we need to invest and continue investing and wait patiently to get stellar returns in the coming 3 – 5 yrs.

There is a famous dialogue in a Telugu movie “Khaleja”:

“Nobody realises when a miracle is happening and there is no need to realise after it has happened”

Many investors didn’t invest their money in 2003 – 2007 period when the sensex was @ 3000 thinking that the Market was bad. Everyone started investing when the Sensex has reached 21000 level in Jan-08 and the Stock market crashed and nose-dived to 9000 level.

Conclusion:

Patience pays.

Invest during bad times and patiently wait for ‘Good times ahead’ to get good returns.

Mutual Fund SIP is the best way to invest in Stock Market as SIP takes care of Market fluctuations and does rupee cost-averaging.

Do we need to maintain an Emergency Fund?

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‘Emergency fund’ – the name itself suggests it is the Fund / Money kept aside to meet money requirement during emergency situations.

What are the emergencies?

A sudden loss of job / layoff, accident causing severe injury forcing you to be on bed for long time, change in Financial situation due to certain unforeseen incidents, ill health of elders resulting in requirement of more Funds than expected etc.,

Some of us have huge EMIs going on, which will be difficult to manage incase of any of the situations stated above.

Hence, it is prudent to maintain atleast 4 to 6 months expenses incl. EMIs as an emergency fund to safe guard against unforeseen incidents.

Now, where should we save / put this emergency fund / money. One option is to maintain it in the Savings Bank Account. But the interest rate is only 4% and there are chances that we will use it for some other purpose other than the intended emergency fund purpose since it is easily accessible.

One good option to manage emergency fund money is to invest it in a Liquid Fund offered by Mutual Funds. Liquid Funds offer interest rate of ~ 7 – 8%, which is higher than that of Savings Bank Account. Money can be withdrawn from a Liquid Fund in just 1 day. We will not touch the money invested in a Liquid Fund since it is a different investment and not available for ready usage unless sold deliberately.

Conclusion:

Try to accumulate atleast 4 to 6 months expenses (incl. EMIs) in a Liquid Fund over a period of time to safeguard against Emergency situations.

The money invested in a Liquid Fund gives interest @ 7 – 8%. The interest component can be withdrawn as required or left in the Liquid Fund.

Interest will also earn interest….principle of compounding.

Do we need to maintain an Emergency Fund?

emergency-fund-1940x900_36282

‘Emergency fund’ – the name itself suggests it is the Fund / Money kept aside to meet money requirement during emergency situations.

What are the emergencies?

A sudden loss of job / layoff, accident causing severe injury forcing you to be on bed for long time, change in Financial situation due to certain unforeseen incidents, ill health of elders resulting in requirement of more Funds than expected etc.,

Some of us have huge EMIs going on, which will be difficult to manage incase of any of the situations stated above.

Hence, it is prudent to maintain atleast 4 to 6 months expenses incl. EMIs as an emergency fund to safe guard against unforeseen incidents.

Now, where should we save / put this emergency fund / money. One option is to maintain it in the Savings Bank Account. But the interest rate is only 4% and there are chances that we will use it for some other purpose other than the intended emergency fund purpose since it is easily accessible.

One good option to manage emergency fund money is to invest it in a Liquid Fund offered by Mutual Funds. Liquid Funds offer interest rate of ~ 7 – 8%, which is higher than that of Savings Bank Account. Money can be withdrawn from a Liquid Fund in just 1 day. We will not touch the money invested in a Liquid Fund since it is a different investment and not available for ready usage unless sold deliberately.

Conclusion:

Try to accumulate atleast 4 to 6 months expenses (incl. EMIs) in a Liquid Fund over a period of time to safeguard against Emergency situations.

The money invested in a Liquid Fund gives interest @ 7 – 8%. The interest component can be withdrawn as required or left in the Liquid Fund.

Interest will also earn interest….principle of compounding.