Delays are costly in retirement planning

People exceedingly depend on provident funds and fixed deposits to provide for their requirements post retirement.

Whether or not you make other New Year resolutions, here is one you should make. Don't postpone savings or investments.

The new urban lifestyle has made people more prone to spending than to saving or investing.

With India Inc prospering and young professionals getting handsome packages, people today are financially independent at a younger age. As a result, most of them become complacent about their long-term finances.

While everyone is aware of their financial needs and aspirations, only a few assess their ability to meet critical long term goals - saving for retirement and saving for child's education, to name two key ones.

Yet, procrastination and delay in formulating and implementing a proper financial plan can have serious repercussions on future financial goals. Postponement in planning can result in a higher financial burden in the later stages of life, and one may not be able to save enough for long term goals.

Let us understand the cost that the delay can cause with the help of an example. Keeping in mind the current inflation rates, it is estimated that an MBA degree that costs Rs 4,00,000 today will cost Rs 20,00,000 in 15 years time.

How many parents will be financially ready to bear this cost when required for their child without dipping into retirement funds? According to Aviva Young Scholar Insights, a recent survey conducted across 12 cities in India, it was found that investment for a child's education is the topmost priority for 72 per cent of Indian parents.

But 81 per cent of parents also admitted that they have no clue on how to go about meeting the cost of their child's education. It then becomes even more important for young parents to start saving early so that the expense for their child's education doesn't become a burden later.

Apart from saving through conventional methods like a savings bank account, parents can choose insurance policies to protect their children's future.

Insurance ensures that the child's education is unhindered, in case the parents are no longer around. There are also child plans from other investment options like mutual funds which aim at creating a corpus.

Retirement blues

Similarly, due to lack of a formal social security system in India, retirement is another top area of concern for 45 per cent of the people in India.

People exceedingly depend on provident funds and fixed deposits to provide for their requirements post retirement. But keeping in view the current rate of inflation, the steep rise in the cost of real estate and the substantial rise in the overall cost of living in India, these savings alone will not suffice.

For a comfortable lifestyle post retirement, in absence of a regular stream of income, one needs to start planning for it right away.

Here again, it is easy to save for retirement in the initial years of one's career, as there is no pressure to support a growing family and you don't have high medical expenses. However, if you delay investing even by a year, then there is a ‘cost of delay'.

Take a typical pension plan offered by insurers. A 30-year-old man with a target retirement fund of Rs 25 lakh wishing to retire at 58, has to start investing close to 24,000 an annum by way of premium.

However, if he delays this by five years and starts investing at the age of 35, he will have to pay close to Rs 38,000 an annum for same accumulated amount of Rs 25 lakh, an increase of 58 per cent. This is based on an assumed net investment return of 8 per cent an annum.

Nowadays, people can look at several options for saving for retirement like pension and retirement plans by insurance companies, mutual fund schemes.

These, when combined with PPF and fixed deposits can give an individual a balanced financial portfolio to attain the retirement goals.

Thus, judicious and proactive financial planning will make sure that you have enough resources with you in the future, to fulfil your child's aspirations and take care of your retirement needs. Start planning for future financial needs without any further delay.

Remember, while the key to successful planning is to start early, at the same time, it is never too late to get started.

Source: http://www.thehindubusinessline.com/features/investment-world/article2763836.ece?ref=wl_features

If you want to enter equity, do so with a 3-5 year perspective: Saurabh Nanavati, Religare Mutual Fund

Global chaos is likely to continue for another 2-3 months and India needs to be proactive if it wants to ensure growth, Nanavati tells Sanket Dhanorkar. He also talked about the future of the market and the investment strategy that a retail investor should adopt in the prevailing uncertainty.

When do you expect a turnaround in investor interest?

The mutual fund figures for the past two years have been very poor. We have lost retail investors instead of gaining them, which is not a good sign when India is touted to be a growth economy.

A de-growing industry within a growing economy reflects a mismatch. Now, however, steps are being taken to educate the investor, explaining why one should invest in mutual funds for the long term. If you sell funds for the right reasons, it will be better for the future. The industry would rather have three clients coming in for the right reasons rather than 10 coming in for the wrong ones and then redeeming in the short term and affecting the fund performance.

Another key aspect for the future inflow will be interest rates. Inflows will happen only when interest rates come down. If your bank fixed deposit is offering 10%, a lot of people wouldn't want to take the additional risk of equity markets. The day the FD rates start coming down, you could see an incremental shift to equities as an asset class.

How will the European crisis play out?

The ramifications of the Eurozone collapse are significant. There could be absolute chaos in the global markets for 2-3 months, even more. The chances are fairly high because the math just doesn't add up. The kind of debt that European countries have is far beyond their GDPs.

Even the Indian companies with high debt on their books are being punished severely. There is a fair chance that there could be one or two sovereign collapses in the global economy. It will pan out in the next six months. As soon as the Eurozone problems are over, the focus will again shift to the US debt, which remains the biggest worry, and as yet, unresolved. The global and local markets will remain volatile for another 12 months at least.

When will the foreign investors return to the emerging markets?

Prior to 2008, if you were a foreign investor, you could invest billions of dollars across equities in the US, Europe and emerging markets, as well as in debt, in all these regions. At this point of time, though, it is more a question of what is left to invest.

Today, global institutions can't invest in European debt or equities and possibly even the US markets, but they are sitting on cash. So, from time to time, they keep coming back to the emerging markets for short periods of time because they feel these are relatively safe. The emerging markets move 10% up or down on small amount of flows. So these are purely liquidity-driven rallies/corrections and have nothing to do with the fundamentals.

On the domestic front, what will improve the investor sentiment?

We need to get back to the basics and focus on our own economy. One can't just say that India will grow at 8% and it will magically work out. One needs action to make it happen.

We need to look at all the pending issues and resolve them one by one. Since policymaking has come to a grinding halt, one of the solutions is to set up an empowered committee of leaders to remove the logjams and progress with the projects. Breaking the logjam should be at the top of the government's agenda in the next six months. Only then will the economy move and improve investor sentiment.

Can the economy revert to the high growth trajectory seen earlier?

There have been two distinct periods in the last decade. The period between 1998 and 2003 saw the economy grow by a mere 5%, while 2004-8 saw it clocking almost 9% growth. What is an achievable growth rate without fanning inflation now? Going by the past 20 years, it should be around 6-7%. If we act and work on it cohesively, it can be 8%. In the absence of action, 7% can easily become 5-6%. We would miss a great opportunity. If we get 8%, we will stand out as an economy in the global environment.

Source: http://economictimes.indiatimes.com/opinion/interviews/if-you-want-to-enter-equity-do-so-with-a-3-5-year-perspective-saurabh-nanavati-religare-mutual-fund/articleshow/11314786.cms

Debashis Basu: Signs of premature ageing?

Sometime in March 2008, two very smart and wealthy investors were explaining to me the reason behind their large stakes in two listed financial services businesses: rising prosperity and swelling savings are bound to create long-term growth for financial services companies. Both the stocks are down 80 per cent over the almost four years since. This is not a comment on their stock-picking prowess, but the flawed assumption that, since people are earning and spending a lot, they would also willingly write cheques for lakhs of rupees if the bank relationship manager pushes the next “child plan” or a Nifty-linked debenture. That they will lap up the stock tips they get on their cellphones from their stockbrokers — or from the media.

The financial services sector is one of the most visible, offering high salaries and employing large numbers. Lakhs more are in the queue to join it from business schools and different financial courses. At any time you can be bombarded with hundreds of insurance products (life, medical, car, travel and others), over 3,000 actively traded stocks, more than 1,000 mutual schemes, portfolio management schemes and loan products, from home loans to car loans to credit cards. These are pushed by over 600 brokers, 1,000 financial planners, 20,000 active independent financial analysts, over 3 million insurance agents, 25 to 30 banks and their “relationship managers”, half-a-dozen websites for comparison and purchase online, dozens of print publications and six to eight TV channels bombarding retail consumers with advice, advertisements and tips.

And here are the ground realities: 

Half the life insurers are in the red, despite more than a decade in business. The other half are fudging their numbers, says the CEO of a mutual fund.

It is getting worse. The first-year new-business premium of life insurance companies declined on an average by 40 per cent in the last seven months. 

Every general insurer is making losses in its retail portfolio. Claim payouts in health insurance are 120 per cent-plus. 

In five of the first nine months of the year, fund companies suffered outflows in equity funds. They had a terrible 2010 as well.

Interestingly, Indian credit-card issuers like HDFC Bank and Axis Bank are expanding rapidly. Why aren’t Indian savers making the excellent rational choice to insure their lives, their homes and their health? Why aren’t they flocking to financial planners and, after spending tens of thousands on sound advice, pouring money into equity mutual funds and bond funds in the proportion that their “risk profile “ would dictate?

It is the stock market, goes the argument. When the market recovers, all will be fine. (If it is, the industry is in bigger trouble. But that’s a different issue.) Indeed, private mutual funds have been around for 17 years, insurance companies for 15 years, and stockbrokers for decades. If the business model now is to wait for a market rally for the business to survive, there is something fundamentally wrong. Will a 25 per cent market rally in 2012 bring in enough customers to convert loss-making businesses into profitable ones? Why have prosperous Indians not felt the “need” to actually “consume” financial services? The blame lies squarely with financial services companies and the regulators.

Regulators: this is not the place to discuss how regulators have systematically messed up over the last five years, but here are some pointers. The securities regulator, the Securities and Exchange Board of India (Sebi), wanted distributors to earn commissions directly from investors. A good idea, perhaps, but the way it was handled showed Sebi knows nothing about the fundamental difference between financial services and consumer products (a point elaborated on in my previous column). This killed the mutual fund business. It then embarked on further regulations – such as that distributors should disclose their fees on websites – and now wants to get into whether to ban the payment of upfront commissions. The know-your-customer norms remain a nightmare. The effect of all this is to throw a spanner in the business model itself.

The insurance regulator has not been far behind, allowing unit-linked insurance plans, or ULIPs, in early 2000 that destroy wealth — and then regulating them in 2010. It wants to tighten the screws on agents and wants banks to sell more insurance. Except that insurance company CEOs tell me that bank mangers neither know the products nor are interested in selling insurance.

Companies: currently, financial-services companies have a flawed model. They have too many products, which impede understanding, communication and transaction. They design products that are complex and may not deliver. They surround themselves with impenetrable call centres. They are run by executives who have may have been pushing credit cards yesterday but are selling mutual funds or insurance today.

Finally, while companies and regulators are messing about in one corner of the market, at another corner are millions of prospective customers. The two are miles apart. The real worry should not be whether the markets will rally in 2012. The worry should be that – from products, to the number of players, to regulators, to the millions of prospective customers – all the elements of growth are in place, and yet the sector is not growing. Call that premature ageing.

Source: http://business-standard.com/india/news/debashis-basu-signspremature-ageing/460377/

How to select mutual funds

How does one select a mutual fund? The Indian mutual fund industry has come a long way, with the assets under management (AUM) growing at an annualised rate of 20% between September 2006 and September 2009. It has moved from offering traditional equity and debt schemes to specialised products, such as funds of funds, arbitrage funds, asset allocation funds and exchange traded funds (ETF). All these make it difficult for investors to select the scheme that suits their needs.

Let us look at some of the parameters that should be considered while selecting funds.

Investment objective & risk profile: The investment goal of the fund must coincide with that of the investor. The objectives can be defined in terms of tax planning, regular income, high returns, long-term planning, etc. Equity funds are more tax-efficient compared with debt funds, short-term debt funds aim at regular income, whereas closed-ended equity funds aim at long-term capital appreciation.

The fund should be chosen according to the investor's risk tolerance. The objective of high returns is generally associated with high risk. The Association of Mutual Funds in India (Amfi) defines three types of risk tolerance levels: low risk or cautious, moderate risk or cautiously aggressive, and high risk or aggressive.

Low-risk investors should consider debt funds, which invest in government securities or high rated debt papers. Moderate-risk investors should consider index funds, balanced funds and asset allocation funds. High-risk investors should look for equity funds (diversified and specialised), offshore funds and mid-cap funds.

Fund performance & management: Though the past performance of a fund does not define its future performance, it is important to consider how it has performed with respect to its benchmark or other similar funds. A fund should be compared with the same category of funds. So, the performance of a mid-cap fund cannot be compared with that of a large-cap fund as the former is more volatile compared with the latter.

Past performance also helps in assessing the quality of fund management, the skills of the fund manager and his team. The stock picking and market timing abilities of the manager can be judged by comparing the fund performance with its benchmark.

The funds that perform better than their benchmarks are considered outperformers, whereas the funds that yield less than their benchmarks are underperformers.

Fund size: The size is important because a very large fund often faces difficulties in the optimum deployment of its corpus, which, in turn, negatively impacts its performance. On the other hand, a very small-sized fund is constrained with the problems of high costs. Therefore, one should go for a mid-sized fund as it ideally balances the investment flexibility and costs.

Fund costs: These involve the operating costs of running a fund and include marketing and selling expenses, audit fees, custodian fees, etc. These costs can be gauged by looking at the fund's expense ratio, which is reported in its annual report. The expense ratio should be compared with similar funds as those with high ratios significantly impact the long-term investors due to the effect of compounding.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/how-to-select-mutual-funds/articleshow/11315080.cms

Economic turbulence to continue in 2012

Combating the economic slowdown and arresting the rupee's fall will remain the main priorities for the government and the Reserve Bank in the New Year, though inflation, which remained a major problem throughout 2011, may cease to be an important issue in the months ahead.

As the economic woes, driven mainly by global factors, spill over to 2012, the government will also have to deal with the spectre of policy paralysis by promoting economic reforms and boosting the investor sentiment.

Although 2011 began on a positive note, with the economy recording a growth of 7.8 per cent in the quarter ending March, 2011, and the Economic Survey (February, 2011) projecting an acceleration in growth to about 9 per cent in 2011-12, the euphoria was short-lived.

The growth rate slipped to 7.7 per cent in the quarter ending June, 2011, and 6.9 per cent during July-September from 8.8 per cent and 8.4 per cent, respectively, in the corresponding periods last fiscal. The figures for the October-December quarter are not yet out, but indications are that they would be no better.

Worried over slowing growth, a group of industry leaders, including HDFC Chairman Deepak Parekh, wrote open letters to the government expressing concern over a "policy paralysis" and underlined the need for firm action to deal with the situation.

Their repeated outbursts, however, evoked a sharp reaction from Prime Minister Manmohan Singh, who blamed industry head honchos for spreading despondency by criticising the government.

However, the fact of the matter was that both the Finance Ministry and RBI lowered the growth projection for the current fiscal to around 7.5 per cent from 8.5 per cent in 2010-11.

While the RBI had earlier projected a growth rate of 8 per cent, the Finance Ministry in its Economic Survey had pegged growth at around 9 per cent.

Industrial growth, as measured by the Index of Industrial Production (IIP), turned negative in October, experienced a decline of over 5 per cent. These signals do not augur well for economic growth in the coming months.

The Finance Ministry had attributed the slowdown to "global factors like the slowdown in the world economy, exacerbation of the euro zone crisis, hardening of crude oil prices in the international market, as well as domestic factors such as the decision to battle inflation by tightening monetary policy and cutting back fiscal stimulus".

With regard to the global factors, the sovereign debt crisis in euro zone countries continues to pose a threat to the global recovery, which has been described by several experts as being in a fragile state.

Despite the efforts of the G-20 to contain the crisis, it has spilt over into 2012 and there will be no respite for global leaders grappling to find a workable solution to the sovereign debt problems of euro zone nations.

Source: http://www.tribuneindia.com/2012/20120102/biz.htm#1