How Indians Will Convert Their Black Money Into White Even After Demonetisation

 

• As the poor struggle, black money owners are finding a variety of ways to save their wealth.

           In Pali in Rajasthan, a family couldn't take their ill infant to the hospital because the ambulance wouldn't accept Rs 500 or 1,000 notes. By the time they could get someone to give them Rs 100 notes, the newborn had died. This is one of several such deaths after the government de-legalised Rs 500 and Rs 1000 bank notes.

          All deaths have been of people belonging to middle class and poor families. There have been no reports of black money hoarders committing suicide or dying of heart attacks due to the sudden shock of realising their cash had become worthless paper overnight.

That's because, firstly, people with black money keep very little of it in cash. They find many ways of converting it into white and holding on to it in a variety of assets. The best known of these is real estate, but there's also gold, foreign currency, foreign banks, benami accounts in Indian banks, the stock market and regular commercial enterprise.

An analysis of illegal wealth uncovered by the income tax department shows that at best, only 6% of illegal wealth is stored in the form of black money. Most of them will be able to save even this cash, it seems, given how frantically India is Googling for "How to convert black money into white" and the top searches are from Gujarat. Here are 13 ways in which such people are succeeding:

1. Temple donations. There are reports of people giving their black money to temple 'hundis' or donation boxes. Temple managements will show this money as anonymous donations, exchange it for new currency notes, keep a commission for this service, and return most of it to the owner. The government has already clarified that temple hundis will not be asked questions. ABP news showed a sting operation in which the priest of Govardhan temple in Mathura was willing to convert Rs 50 lakh of black money into white for a 20% commission. There have been such reports from different parts of the country.
2. Back-dated FDs in co-operative banks and credit societies. Since such institutions still do a lot of their work manually, they are reports they have issued fixed deposit receipts in back date. Owners of black money have reportedly been able to get various FDs in such institutions in names of various villagers in back dates, and will receive new currency notes in due course, after paying a cut to those in whose name they deposited the money. Non-banking financial institutions who accept such deposits are also reportedly acting similarly in helping convert black money into white. Such institutions have long been alleged to be indulging in money laundering. The level of regulation of such institutions differs from state to state.

3. Using poor people as money mules. As the poor stand in queues at banks to exchange their currency notes, there are reports of them being used to convert black money into white. This doesn't even need a co-operative bank. Black money are reportedly finding poor people to deposit Rs 2.5 lakh in cash, since the government has said deposits up to that amount won't be questioned. Such people will then ask to withdraw the entire amount soon, keep some to themselves and return most of it. Since this requires trust, black money hoarders are first and foremost using their staff and their relatives.

4. Giving loans to poor people. Funnelling money through poor people whose bank transactions will not arouse suspicion, is giving way to many creative enterprises. There are also people willing to give interest free loans to the poor - which may seem like a good impact of demonetisation but is actually an effort to convert black money into white and defeat the purpose.

5. Finding Jan Dhan account holders. Jan Dhan accounts have started showing high cash deposits since demonetisation and a part of it is suspected to be black money being laundered. The problem with using poor people as money mules is that they may not have bank accounts. With the banking system overloaded, opening new accounts may take a few days. The government keeps boasting about having opened crores of Jan Dhan accounts but most have seen barely any transactions. Jan Dhan accounts can have deposits up to Rs 1 lakh a year but there are also Jan Dhan accounts which have a lower limit of Rs 50,000 if they don't adhere to Know Your Customer norms. While the government says it will monitor unusual activity in Jan Dhan accounts, it will be easy for a poor person to say the small amount was his life saving at home. There have been concerns about the use of Jan Dhan accounts for hawala operations since the scheme was launched in 2014.

6. Approaching the banknote mafia. Overnight, a banknote mafia has emerged. These are people accepting old Rs 500 and 1,000 notes and giving back anywhere from 15% to 80% of the value in Rs 100 notes. The people collecting old notes will be able to earn a profit by converting them into white, new currency through poor people, or through other means.

 

7. Paying advance salaries. Businesses having black money have reportedly used old notes of Rs 500 and 1,000 to pay advance salaries for anywhere between the next 3 to 8 months. The idea is to pay each employee less than Rs 2.5 lakh - the limit above which deposits will be examined. In Gujarat, some businesses are reported to have opened salary accounts and deposit advance salaries, keeping their debit cards with company itself. This way they will be able to deposit old currency notes before 30 December and withdraw new ones easily, without attracting the attention of the income tax department.

8. Booking and cancelling train tickets. Since old notes are being accepted till 14 November to book train tickets, there has been a surge in booking expensive train tickets that people intend to later cancel and get refunds in new notes, with a small cancellation fee. The number of expensive first AC tickets booked per day have increased by many times. As a result, the railways have said refunds won't be in cash. But since these bookings are being made through travel agents, even refunds through electronic transfers mean the travel agent will be able to return large sums in new currency notes.

9. Using professional money laundering firms. Run by chartered accountants, there are money laundering companies, most famously in Kolkata but elsewhere too, which specialise in converting black money into white while evading the taxman. Known as 'jama-kharchi' firms in Kolkata and pad-pedi in Mumbai or, they launder money by using businesses such as highway transport which run completely on cash. These 'cash-in-hand' firms match the needs of companies which need short-term funds with those who have excess black money to park. Showing back-dated transactions in the current fiscal is not difficult for such firms. They are said to be burning the midnight oil till 30 December.

10. Buying gold. Gold prices shot up because many black money hoarders rushed to jewellery shops as soon as prime minister Narendra Modi made the demonetisation announcement on 8 November. Many black money owners made the most of four hours they had and bought gold till midnight. There have also been reports, again, of gold selling in back-dated transactions. Jewellers happily sold gold at a high premium. In some shops the demand was so high there was pandemonium with buyers fighting amongst each other to be able to buy first. The government has asked top jewellers to give details of gold transactions after the demonetisation.
11. Using farmers. Since agricultural income is not taxed, a farmer can easily say he got this much cash from the mandi by selling his produce before demonetisation, and here's the old currency, now please exchange it for new one. In this way, any farmer could help launder money, from old currency notes to new ones, for a cut. An investment advisor told Rediff, "The agricultural income in this country is going to be fabulously high this year, immaterial if the crop is good or poor."
12. Using political parties. Since political parties can collect donations of Rs 20,000 or less without having to reveal who donated the money, let alone their income tax PAN number, they will have the easiest time with demonetisation. A political party can say it collected this amount of cash in old currency donations before demonetisation and demand that it be changed into new currency by 30 December. That also raises the fear that political parties could actually use this method to launder black money of individuals within and without their party.

13. Brazenly putting it in the bank. The finance ministry said those who deposit large sums of cash that don't match their income, may have to pay up to 200% tax. In other words, their money could be confiscated and they may have to pay the same amount as penalty. However, income tax authorities say this may not be legally possible. One can put in a large amount of cash in bank, show it as income from 'other sources' in the current assessment year, and pay 33% income tax on it. To be able to levy income tax penalty on your deposit, the government will have to be able to prove you didn't earn this cash in the current assessment year.

BSE SENSEX grew 50 x in 30 years .Why most missed 500-28K Journey

Sensex, the country's most recognized stock market index alongside the Nifty, completes thirty
 years of existence this year and exchange BSE will obviously want to do
 much to highlight the successful returns the barometer has posted over
the years.

Frequently for the common man, the Sensex, and by extension, stock
markets, are either something to be dabbled in after they have been in
the news thanks to strong recent performances, or -- fresh from yet
another bust -- a gambler's den.

But even as the market has gyrated up and down session after session,
entered into phases of exuberance and pessimism, it has steadily
trundled upward over the long term.

Since 1986, when the Sensex was first published, it stood at roughly 550
 (with a base value of 100 dating back to 1979). Today, it stands at
roughly 28,000, implying a gain of 50 times over 30 years. In compounded
 terms, that is a return of 14 percent, not including roughly 2 percent
dividend .

Those with good financial sense or a CAGR calculator would know those
returns almost always beat or match any investment in Indians' favourite
 asset classes: property or gold.

Still, despite producing vastly superior returns, investments into
equity remain the preferred choice of a few. As of last year, just 2
percent of India's household savings was invested in equity. Foreign
investors owned 70 percent of the shares floating in the market. Efforts
 by the EPF office to allocate some more of its multi-billion-dollar
worth corpus in stocks is met with resistance.

Why investors (mostly) don't make great returns from stocks

By their very nature, making direct purchases of stocks is a tough act.
Still, investors tend to equate the ease with which they can purchase
shares to the ease they hope they will have in making strong returns.

The biggest mistake they make is failing to understand the difference
between speculation and investing.

So stock purchases are made because they have risen a lot or fallen a
lot, because an expert recommended it on TV or because they got a 'tip'
from someone who sounds knowledgeable about the markets but isn't.

A thumb rule -- if you do not understand a business well enough to
forecast its long-term earnings potential, you should not buy its stock
-- would likely filter out a majority of individual investors. Jim
Rogers has a simpler rule. If you haven't read a company's annual
report, don't buy it.

If you don't truly understand a company well, you simply will not make
money in it, except by chance. As Rakesh Jhunjhunwala says when asked
for stock recommendations, "you cannot make money from borrowed wisdom".

Then there is another breed of investors that thinks it is easy to move
in and out of markets or stocks using charts, gut feeling or a
combination of the two.

When asked why they wouldn't want to buy the index and do nothing for
years, they believe they can do better -- without realizing that it is
simply incredibly difficult to beat the market's long-term's return
(about 15 percent), over, well, the long term.

A stock broker once told me that if I invested with him, I could look at
 making 40 percent returns in a year. It was lost upon him that 40
percent annual returns consistently produced over 40 years would turn
him, if he started with Rs 1 lakh, into a Forbes billionnaire.


Finally, there is a genuine confusion about what comprises the long
term. The holding period for the average mutual fund investor was under 2
 years , according to a report last year. For active stock investors, it
 is likely less, possibly in months.

Part of the reason why holding periods are less is because flows into
the stock market tends to be bunched up. Inflows are most when the
markets are at a high and when it could be an inappropriate time to buy.
 Investors flee equities after they've faced a loss, thanks to the
inopportune time of their entry.

The fact that many investors do not have the emotional strength to
stomach strong moves in the stock market flies in the face of long-term
data that suggests that as holding period for a market benchmark such as
 Sensex increases, not only does the possibility of a loss goes down,
the chances of beating inflation steadily rise. (The table below details
 the Sensex value at the start of every year since 1979 and outlines
returns for one year, three years, five years and so on hence.)

So even if you invested in Sensex in 1992 at the height of the Harshad
Mehta scam, when the market had gone up six times in three years but
chose to stay on for 15 years instead of exiting immediately with a
loss, you'd still have come out with a 7.7 percent return, enough to
beat inflation.

Put simply, if investors were as patient with the stock market as they
are with a typical property investment, they are likely better off
investing in the stock market.

How do Mutual Funds Managers pick Stocks ?

Mutual fund managers are like gardeners who use different techniques to
ensure that the money entrusted to them by the investors, grow and
blossom well. Investors may not know what such techniques are, but may
be keen to get an overview of the methods applied to manage mutual
funds.

Let us take a look at two popular investment methods adopted by mutual
fund managers - the top down investing method and the bottom up stock
picking method. Basically these terms are associated with equity
portfolio management and more specifically they are methods applied for
picking up stocks from the market in a bid to maximize returns on
investments.

What is a top down approach?

Mutual fund managers are assigned the job of investing money in the best
 available equity shares. In doing so, they choose to carry out research
 on the available investment prospects in the market.

What do the mutual fund managers following top-down approach, do?

Mutual fund managers start by studying the global and domestic macro
economic scenario before committing their funds. In simple terms this
means that they analyze how the world economy is shaping up and what it
could look like in the near and distant future. Top down managers also
look at the various other factors, which might have an impact on the
economy and this can include the political scenario, government policies
 and general global trends.

Once this macro level analysis has been done, the mutual fund manager
moves to more specific issues. He concentrates on analyzing the
different sectors within the economy and zeros-in on those specific
sectors that are likely to perform well under the prevailing economic
conditions.

How top-down actually works

Here is an example to explain this strategy. If the fund manager feels
that interest rates are likely to come down in the near future then they
 may seek those sectors that are most likely to benefit from this event.
 Automobile and real estate sectors are definitely going to benefit from
 lower interest rates and thus the fund manager could go on to commit
say 15% of his funds to each of these sectors.

Once it has been decided that 30% of the funds are to be invested in the
 two specific sectors – automobile and real estate, the fund manager
will move to the next stage of the top down approach. Then the fund
manager turns his attention to companies. The manager picks three or
four companies in each sector and analyses the fundamentals and merits
and relative valuations of each company individually.

The essence of top-down approach

In essence a top down approach is about analyzing the economy, followed
by the industry and then the company. The dictum that the top down
manager follows is that a company will do well only if the economic
factors are conducive to the growth and prosperity of the industry or
sector in which it operates.

Industries, which are cyclical in nature benefit from the top down
approach as macroeconomic factors have a bearing on the companies within
 these industries.

What is a bottom up approach?

Unlike the top down approach, the bottom up approach is just the
reverse.

Bottom up approach asks the fund manager to start with company and move
up to the industry prospects and ultimately to the economic forecasts.

Here the focus is more pronounced on the fundamentals of the company,
their ability to cope under diverse economic conditions and the
potential to build upon their growth prospects. It is wrong to assume
that the bottom up manager ignores the macro economic factors; rather it
 is his approach that differs while analyzing the market.

Once the company has been selected, the fund manager will do a scenario
analysis to determine how the company will fare under different economic
 conditions like interest rate change, change in tax laws, change in
price of raw material, etc.

The bottom up stock picker zeros in on a particular company that appears
 to have good potential irrespective of the sector it belongs. The fund
manager’s base criteria for adding the stock of a particular company to
his portfolio is the merits of the individual stock and his faith on its
 prospects.

Top Down or Bottom Up?

Let us look at the salient features of the top-down and bottom-up
approach:

Top down will deliver by picking on the right sectors
Bottom up will yield positive results by picking stocks of the right
companies.
Both will yield profit to the investors form the investments made.

Relative approach to each strategy

The bottom up research is more in-depth in nature and fund managers need
 to perform extensive studies of individual companies to find out the
best ones. This strategy is adopted by those fund managers who have
substantial access to on-ground research resources so that the study is
worthwhile and the correct decision can be arrived at.

Global investors like the FIIs’ usually prefer the top down approach.
This helps them to get their country specific allocations in place and
then they can concentrate on specific sectors within the countries that
they want to invest in.

Besides the FIIs’, fund managers who look to cash in on momentum choose
the top down strategy for their investment decisions. Some economists
feel that the top down approach is high risk-high return strategy as
compared to bottom up strategy that is a more cautious approach.

Conclusion

The actual working of the fund manager is based on a judicious mix of
top down and bottom up approach. The fund manager’s decision to go in
for bottom up strategy usually happens when he has sufficient research
resources to back his study.

Why fear is good when it comes to investing

Run Forrest run! is the famous line from the movie- Forrest Gump where he’s told to run away
from trouble and not to be brave. Survival is not of the fittest, but of
 the ones who adapt to change. So, while facing your fears may generally
 be a good idea, in investing, fear isn’t all that bad. Accepting it and
 learning from it is better than just facing it. Embrace your fear and
channelize it to make it work for you. How do you do that?

1.    Fear of the unknown: We are generally scared of things we don’t
know or don’t understand. Do some research before you venture out in the
 world of investing. A map/ guide is useful when you don’t know how to
get to where you’re going. Determine your destination (time horizon) and
 choose a map(do it yourself) or a guide(an advisor) you can trust. Do
all your checks before you choose either of these and also see how
comfortable you are when you approach this. A little discomfort when you
 start a journey is ok as long as you are confident and this settles in
sometime. A word of caution here, take small steps, invest small
amounts, see your experience and then trust some more and invest some
more. You could also dabble in different asset classes via mutual funds
for fairly small amounts and evaluate the experience.

2.    Fear of losing capital: Since the pain of losing a rupee is much
more than gaining one, we tend to focus our energy on avoiding losses
rather than making profits. Nothing wrong with this approach, but this
limits the growth of our investment portfolio since we want our money to
 work harder for us. There are ways to achieve capital protection whilst
 not compromising on growth. Asset allocation and investing according to
 one’s time horizon are two good ways to address this concern.

3.    Fear of volatility: Whilst we like predictability, it comes at a
cost. In your portfolio, ensure there is a mix of stable and growth
assets in a proportion which lets you do two things: Meet your goals and
 lets you sleep peacefully at night. Easier said than done though.

4.    Fear of missing out: When the talk at social gatherings is around
investments- exotic or otherwise and people brag about how they have
bagged an investment which doubled or tripled their invested amount, you
 tend to feel left out because either you are not invested or just not
interested. People more often than not exaggerate their wins and
conveniently avoid mentioning their own losses. So, don’t fall prey to
that and take these conversations with a pinch (or a bucket, according
to your taste) of salt. The normal reaction that follows such
conversations is to search for that particular stock/ option/ asset
class and invest in it. And more often than not, this tends to be a bad
decision because you’re chasing something for its past performance and
not evaluating it based on its future prospects. So, tell yourself this
that while your portfolio may be boring, it is doing its job- it lets
you be interesting and enjoy life.

For generations, we have been investing in FDs and RDs, it made sense
for our previous generations when the options were limited and
information wasn’t as readily available as it is today. Their
expectations from life and from their money were also limited. Today,
with our aspirations, lifestyle and expectations, investments in FDs
simply won’t help us reach where we want to get to. We need better and
smarter solutions for our investments and you should invest some time to
 evaluate who/ how this can be done.

Identifying and working with your fears is the first step to becoming a
smarter, better investor.

While Investing Focus on your Goals than Chasing Returns .

There was one hilarious commercial some time back from an automobile
company which played on the Indian psyche of putting overwhelming
emphasis on the mileage over everything else. “Kitna  deti  hai?”, was
the question that the curious onlooker had asked of an incredulous
protagonist – one was explaining about Rockets, another a luxury Yatch
& yet another about a new generation battle tank!

But, I was not surprised; for I face the same questions from those I
deal with.
Focus on the basics :   What are we trying to achieve in life? Are we
trying to get maximum returns to the exclusion of everything else? If
so, will it solve all the problems?

Most people focus on returns and chase products that offer the best
returns at any point. There is indeed an insistent belief that high
returns are something that we need to constantly strive for, to get
ahead in life.  Hence, we tend to pick up the products which are “hot”
or trending, at any given point.

The predominant majority get it wrong as they join the bandwagon pretty
late – whether it is a stock market rally or a gold / real estate surge.
 In doing so, they typically tend to get in when the rally is well
underway. In such a situation, they tend to purchase at inflated prices
which will cap their upsides or worse still, set them up for potential
downsides when the rally blows over.

Let me take an example. Suppose, Ramesh has bought real estate in 2012
when the markets were doing reasonably well. However, the markets have
turned turtle and are offering low to negative returns since.  If Ramesh
 has bought property, just to ride the wave, a lot of things would have
gone horribly wrong.

Firstly, the objective of fantastic return has not been met. Secondly,
Ramesh has taken some loans which he is servicing and paying a high
interest for an asset, which is not appreciating.   He has not
considered any other parameter while investing – like liquidity,
concentration risk, risk inherent in this asset, tenure, returns etc.
This has been a blind investment into what is essentially an illiquid
product. Ramesh wants to sell & exit – but cannot, as there are no
buyers! He is now badly stuck.  Many would be able to identify with
this.

People get into such transactions based on early successes. They tend to
 feel invincible, if the first few transactions go well. Bets go up
steadily with each transaction – which is where the problem is.
Eventually when the cycle turns, they are left holding their lemons. A
string of successes in the beginning is, however, a wrong teacher!

People advertise their successes while quietly burying their failures in
 investment.  When some talk passionately about their successes, there
are many who get taken in – and the cycle of people trooping in to feed a
 frenzy,  gets underway.

While moving from product to product chasing returns, we fail to
consider important parameters which are equally important – like
liquidity, risk-reward, suitability, tenure etc. Such dalliances hardly
help in progressing towards smooth achievement of the goals.

Focus on goals :  What is important in life is to achieve the
significant goals one may have.  In fact, achieving our goals in the
time frames that we want is what is of paramount importance.

The typical high priority goals are – retirement, children’s education,
acquiring a home etc.  Each goal will have a certain time horizon.
Investments will have to be done so that we may be able to meet the
goals. Hence, the investment should be such that it is consistent with
the need to achieve the goal.

For instance, if Ramesh wants to plan for child’s education, it might be
 a decade away. For this goal, his investments can be in comparatively
aggressive assets like equities.  In this case, near term liquidity is
not a concern area, tenure of the investment can be long & regular
income is not necessary.

Once we decide on the instrument which has the potential for good
returns, we can stay invested and not liquidate it to chase the next
rainbow which appears on the horizon. Many of the assets have their
cycles & those who stay invested for long, get to weather the cycles
 better; also, with longer tenure, the inherent risk reduces & the
return potential improves. Market timing becomes less and less
important, if the tenure is long.

Strategic & Tactical asset allocation :  Normally, client’s assets
are allocated based on their goals, how long the client has till
retirement, their risk tolerance levels & other considerations like
liquidity, risk-reward of the asset, requirement of regular returns
& their frequency etc.

Once the assets have been allocated as per such considerations, it
should be allowed to work. For that, the assets should be allowed to
remain invested for long to show desired results. That is the strategic
asset allocation.

Based on the movements in the markets & based on opportunistic
considerations, one may want to bring in some new assets which are doing
 well then & make certain changes to the portfolio. But these
changes should be such that they tinker around the edges & not
change the core allocation. This is a tactical asset allocation to
potentially take advantage of the unfolding opportunities.  A change in
the portfolio constitution of 10-15% can be fine when it comes to
tactical allocation. If it goes beyond that, it will change the
strategic asset allocation that has been suggested, which is not
desirable.

In summary :  Goal achievement is what is really important.  Hence, it
is important to keep the focus on the life goals, more than what
investment returns one gets at any point. One should invest in a
disciplined manner following the strategic asset allocation suggestions,
 which is what ensures goal achievement. It is not necessary to get all
excited about assets which are doing well at some intermediate point;
it’s more important to stay focused on the goal and stick to a plan than
 running like a hare in all directions. Reviews (of both the plan &
the portfolio ) are to be done regularly, to make any changes in the
allocations.

High returns are wrongly seen as what helps one achieve goals. Also, it
helps to understand that in a diversified portfolio, all components
would not be doing well, always. But, a properly constructed portfolio
would have various components and they need to be kept intact. Worrying
about some component that is not performing is another common fallacy.
What should be seen is whether the portfolio as such is performing well.
 Disciplined investments & sticking to the suggested allocation /
portfolio is what actually helps achieve one’s goals.

We need to wean ourselves away from our near obsession with returns – in
 our best interests. Kitna deti hai fixation can be very costly indeed!

There was one hilarious commercial some time back from an automobile company which played on the Indian psyche of putting overwhelming emphasis on the mileage over everything else. “Kitna deti hai?”, was the question that the curious onlooker had asked of an incredulous protagonist – one was explaining about Rockets, another a luxury Yatch & yet another about a new generation battle tank! But, I was not surprised; for I face the same questions from those I deal with. Focus on the basics : What are we trying to achieve in life? Are we trying to get maximum returns to the exclusion of everything else? If so, will it solve all the problems? Most people focus on returns and chase products that offer the best returns at any point. There is indeed an insistent belief that high returns are something that we need to constantly strive for, to get ahead in life. Hence, we tend to pick up the products which are “hot” or trending, at any given point. The predominant majority get it wrong as they join the bandwagon pretty late – whether it is a stock market rally or a gold / real estate surge. In doing so, they typically tend to get in when the rally is well underway. In such a situation, they tend to purchase at inflated prices which will cap their upsides or worse still, set them up for potential downsides when the rally blows over. Let me take an example. Suppose, Ramesh has bought real estate in 2012 when the markets were doing reasonably well. However, the markets have turned turtle and are offering low to negative returns since. If Ramesh has bought property, just to ride the wave, a lot of things would have gone horribly wrong. Firstly, the objective of fantastic return has not been met. Secondly, Ramesh has taken some loans which he is servicing and paying a high interest for an asset, which is not appreciating. He has not considered any other parameter while investing – like liquidity, concentration risk, risk inherent in this asset, tenure, returns etc. This has been a blind investment into what is essentially an illiquid product. Ramesh wants to sell & exit – but cannot, as there are no buyers! He is now badly stuck. Many would be able to identify with this. People get into such transactions based on early successes. They tend to feel invincible, if the first few transactions go well. Bets go up steadily with each transaction – which is where the problem is. Eventually when the cycle turns, they are left holding their lemons. A string of successes in the beginning is, however, a wrong teacher! People advertise their successes while quietly burying their failures in investment. When some talk passionately about their successes, there are many who get taken in – and the cycle of people trooping in to feed a frenzy, gets underway. While moving from product to product chasing returns, we fail to consider important parameters which are equally important – like liquidity, risk-reward, suitability, tenure etc. Such dalliances hardly help in progressing towards smooth achievement of the goals. Focus on goals : What is important in life is to achieve the significant goals one may have. In fact, achieving our goals in the time frames that we want is what is of paramount importance. The typical high priority goals are – retirement, children’s education, acquiring a home etc. Each goal will have a certain time horizon. Investments will have to be done so that we may be able to meet the goals. Hence, the investment should be such that it is consistent with the need to achieve the goal. For instance, if Ramesh wants to plan for child’s education, it might be a decade away. For this goal, his investments can be in comparatively aggressive assets like equities. In this case, near term liquidity is not a concern area, tenure of the investment can be long & regular income is not necessary. Once we decide on the instrument which has the potential for good returns, we can stay invested and not liquidate it to chase the next rainbow which appears on the horizon. Many of the assets have their cycles & those who stay invested for long, get to weather the cycles better; also, with longer tenure, the inherent risk reduces & the return potential improves. Market timing becomes less and less important, if the tenure is long. Strategic & Tactical asset allocation : Normally, client’s assets are allocated based on their goals, how long the client has till retirement, their risk tolerance levels & other considerations like liquidity, risk-reward of the asset, requirement of regular returns & their frequency etc. Once the assets have been allocated as per such considerations, it should be allowed to work. For that, the assets should be allowed to remain invested for long to show desired results. That is the strategic asset allocation. Based on the movements in the markets & based on opportunistic considerations, one may want to bring in some new assets which are doing well then & make certain changes to the portfolio. But these changes should be such that they tinker around the edges & not change the core allocation. This is a tactical asset allocation to potentially take advantage of the unfolding opportunities. A change in the portfolio constitution of 10-15% can be fine when it comes to tactical allocation. If it goes beyond that, it will change the strategic asset allocation that has been suggested, which is not desirable. In summary : Goal achievement is what is really important. Hence, it is important to keep the focus on the life goals, more than what investment returns one gets at any point. One should invest in a disciplined manner following the strategic asset allocation suggestions, which is what ensures goal achievement. It is not necessary to get all excited about assets which are doing well at some intermediate point; it’s more important to stay focused on the goal and stick to a plan than running like a hare in all directions. Reviews (of both the plan & the portfolio ) are to be done regularly, to make any changes in the allocations. High returns are wrongly seen as what helps one achieve goals. Also, it helps to understand that in a diversified portfolio, all components would not be doing well, always. But, a properly constructed portfolio would have various components and they need to be kept intact. Worrying about some component that is not performing is another common fallacy. What should be seen is whether the portfolio as such is performing well. Disciplined investments & sticking to the suggested allocation / portfolio is what actually helps achieve one’s goals. We need to wean ourselves away from our near obsession with returns – in our best interests. Kitna deti hai fixation can be very costly indeed!

Grow your money, instead of keeping it idle

As a young working professional, chances are you already have a savings account, and if you’ve switched jobs, you probably have much more. According to the RBI report in 2015, a colossal amount of money to the tune of Rs.26 trillion were lying in saving deposits. With an expanding salaried class, the number will only go up further.

One of the major advantages of a savings account is liquidity. People usually keep money in their savings account because it allows them to withdraw amounts at any time. Also, they receive interest on the deposit between 4-6% per annum depending on the bank which is slightly better than keeping it under the mattress.


Therein lies the problem. With the consumer price index at 5.77% in June 2016, your money has not grown, at best it has been on par. At worst, the value of your hard earned buck has lost its sheen.

You require a savings plan with decent interest rates to beat inflation and also liquidity so that in the event of unplanned expenses you do have the option of withdrawing your money. A scheme where you can get daily or weekly dividends which can ideally be reinvested to get higher returns. These can be explored in an open ended scheme with investments in debt funds and money market instruments which have a relatively lower risk.


For those who neither have the time nor the expertise to deal with the myriad of Mutual Fund schemes, Liquid  Funds (An Open-ended Income Scheme) could be a smart option with a minimum initial subscription amount of Rs.₹1000 and has zero entry or exit load. The scheme invests in low-risk Debt Market Securities and Money Market Securities. Now, debt schemes which are held long-term (more than three years) are taxed at around 20% with indexation. If you withdraw your investment within three years, you will be taxed according to the tax slab you fall under. But there is another option. Birla Sun Life Cash Manager allows you to opt for daily or weekly dividends. These dividends are exempt from tax in the hands of the investors.

In India, many people opt for fixed deposits instead, which can be attractive with solid interest rates at 7-7.5% and zero risks. Why zero risk? Because all fixed deposits up to 1 lakh rupees are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI. And if the central bank is unable to secure this, then you have bigger things to worry about.


However, as the name suggests fixed deposits have a fixed tenure and aren’t liquid enough. Sure you can withdraw the amount before term, but prematurely withdrawing your money could lead to lower interest rate and
in some cases a penalty. Not to mention you are taxed on the returns which can be high for those falling in the 20% and above tax bracket. However, Fixed Deposits give guaranteed rate of return.

Whether you are planning for a particular financial goal or looking to build wealth, the maxim is to live by is to “grow your money”.
 
Note-: Past Performance may or may not be sustained in future.  Investment in schemes of  mutual fund carry higher risk, does not guarantee any returns and any investment decision needs to be taken only after consulting the Tax Consultant or Financial Advisor. . In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax advisor.

How to choose ETFs to get better returns

Don’t expect too much from ‘smart-beta’ and other trendy new products

 

Fund investors may feel better about themselves buying exchange-traded funds built to be “smarter,” but they’re making the same dumb mistakes that shareholders have been making for decades.

O’Shaughnessy is a portfolio manager and principal at O’Shaughnessy Asset Management, and author of “Millennial Money: How Young Investors Can Build a Fortune” (Palgrave Macmillan, 2014).
While not alone in his thinking, O’Shaughnessy was virtually alone in his criticism of ETFs — and particularly “smart beta” funds — at the recent Morningstar ETF Invest Conference in Chicago, where the focus was on a slew of new issues and fund types that will keep the ETF revolution rolling.
ETFs are the clear winner in the fund world right now, attracting billions of dollars in assets while traditional funds have been shrinking. With improved trading and tax efficiency, and a lower cost structure than traditional funds, investors are increasingly attracted to ETF options.
Yet that does not mean investors are getting better returns from ETFs.

Shaughnessy says investors are overlooking that “ETFs are just stocks in mutual-fund form.” Originally built on classic indexes, exchange-traded funds — effectively a type of mutual fund that trades like a stock — now can be built around “factors,” pro-actively pursuing a low-volatility strategy, for example, or value investing, and more.
As a result, funds are becoming increasingly active, and so are the investors managing portfolios with ETFs.
John Bogle, the founder of the Vanguard Group who put the world’s first index fund on the market 40 years ago, always has been concerned that ETFs were built to be traded, fearing that investors would take the easy way out of tough times.
That lack of fortitude is the classic bad behavior, where investors buy after a stock or fund has heated up, only to panic and sell when performance is disappointing, generating “buy-high, sell-low” misfortunes.
O’Shaughnessy says this behavior is all too common among ETF investors. “The idea is ‘I want to be a value investor, so I will pick a value ETF and let it work,’” he said in an interview at the Morningstar event. “The flow data shows that doesn’t really happen. People are actively trading these more-active ETF options, treating these ETFs like they used to trade stocks. They buy when it’s the hot dot — when it’s done really well, when it has the best three-to-five year results — and they sell in the opposite conditions.
“Reams of evidence shows that’s the worst thing you can do,” he added, “yet it’s how people continue to behave with ETFs.”
When it comes to newfangled smart-beta funds, O’Shaughnessy believes investors — and fund companies — are fooling themselves about the expected results.
Smart-beta or factor investing is an effort to improve a classic index by changing the construction, or by somehow screening out bad or lesser stocks based on certain financial criteria.
“Big companies launch ETFs that … look very similar to the overall market — sort of a tilted market — and call them ‘smart beta,’ — a great marketing name for what’s a very old strategy [of trying to upgrade an index],” O’Shaughnessy said. “You get a market-like return or exposure with a little twist, and you pay a little more for it.”
O’Shaughnessy recommends a more active approach, at least when it comes to how investment portfolios are put together. He suggests that investors would be better off with small, concentrated portfolios — with closer to 50 stocks instead of the hundreds found in many index options — that don’t resemble or perform like the benchmarks.
This concentration, he suggests, truly isolates factors like quality, stability, value, growing dividend payouts, and more.
Once investors find the right ETFs to address the factors they deem important, O’Shaughnessy advocates for less activity.
At that point, he is less worried about the “smart beta” than with what I call “stupid alpha.”
Alpha is the analytical measure of what a money manager adds to returns, the edge they have — or lack — in trying to beat the market. If you buy “smart” funds but make dumb moves with them, results are short-circuited by your own bad management decisions.
It’s the factor no one at Morningstar ETF Invest except O’Shaughnessy really wanted to discuss, the idea that new funds are power tools, but that the end users often are safer with hand implements. That discussion gets buried under the argument that ETFs are cheaper.

Low costs and better tools are great for consumers, but only if they can deliver the right kind of results.
“We quibble over basis points when we should worry about the percentage points that are lost to investment mistakes,” O’Shaughnessy said. “What most people are doing is making moves that they think are smart but which really aren’t better. You won’t get improved performance out of an ETF unless you put better behavior into owning them first.”

 

What would you do if you had $10 million and 10 years to live ?

Examining the question can be valuable financial planning tool

 

If you suddenly received $10 million dollars (after-tax) and at the same time a diagnosis that you had only 10 years to live, what would you start doing? What would you stop doing?
These are two questions I love to ask groups when I’m conducting financial-planning and financial-literacy workshops for women. My objective is to help them accurately identify their deepest values and most important life goals, independent of financial constraints and the all-too-common excuse that there’s always tomorrow. I particularly like this pair of questions because they force participants to engage with the twin concepts of limited resources and limited time. This in turn forces longstanding internal conflicts (financial, emotional or otherwise) to bubble right up to the surface.
Over the past decade I’ve asked this question of women across a wide range of demographics — age, income, education, career path, religion, ethnicity, etc. Despite the diversity of participants, the answers are remarkably similar.
Start: Most people tell me they would volunteer, be more philanthropic, travel, spend more time with family and/or pursue hobbies.
Stop: Most people also tell me they would stop working (at least full time). They’d stop worrying about money. They’d stop fretting about what other people think.
While my practice is focused on women, these responses are actually widely held across genders, according to the new Life Reimagined survey from AARP.
This begs two questions. 1) If this is what we want, what’s keeping us from having the lives we truly desire? And 2) What lessons can we learn from these remarkably consistent expressions of human hope and desire?
With regard to the first question, the biggest lesson I have taken away from participants’ responses is that it’s shockingly easy to get unintentionally trapped in a certain lifestyle. And our concept of self is painfully difficult to extract ourselves from.
Let me give you an example, from my own experience. Fresh out of college, I had joined one of the traditional investment banking analyst programs at a top firm. Less than a year into it, I realized it wasn’t the career path for me and decided to switch to asset management. I thought my employer would be furious, having invested heavily in my training and having not yet gotten back much meaningful return on its investment. Instead, a number of very senior professionals pulled me aside. Quietly and almost confessionally, they told me how “wise” I was to get out before I had a family and became accustomed to the heady incomes this career path produced. I would then be unable to ever switch gears.
This memory, nearly 24 years old now, is seared in my brain. The urgency and intensity with which this advice was given to me reinforced how very many men and women were living lives of quiet desperation while wearing incredibly expensive sui
ts and otherwise leading “the high life.”
When I ask people today what’s holding them back, the answers more often than not fall into some version of the same — that is, that the web of life is too thick to trim back or alter now. I’d argue what we can learn from this is that while it may be a common feeling, it is flawed logic to think the status quo cannot be adjusted.
Clearly, it’s vital to spend the time and effort discerning what it is you truly want from life.

 

Focus on Our Country ,Our Fundamentals and Our Stocks

over the last 25 years, we have created enough value and if you pick the right stock, you can withstand volatility and end up making more money than most other asset classes in Indian equity market. Edited excerpts



I think we have to differentiate global market vis-a-vis India. In my 15 years' career, I have always read a headline that the best performing hedge fund is predicting a correction. Now even a broken watch gives time correctly twice in a day and this best performing hedge fund or the best performing market guru does not remain constant, it keeps on changing. I have also seen person who is known as predictor of gloom, boom and doom every year talking about Indian markets crashing and correcting. If I had followed his advice in 5 years, I would have probably lost my job 15 times.

Let us separate the doom sayers because it is their job to give extremely wild predictions. If there is 0.01 per cent probability of its coming correct, for life they become hero. Let us focus on our fundamentals. Is the Indian market running little bit ahead of its fundamentals? The answer is yes. If there is a steep correction in Indian market because of some global volatility like it happened in October 2008, I think it will be temporary. It will be short term and markets will bounce back very quickly after that uncertainty or volatility is over. It does not mean that we cannot have correction in this market. Certainly there could be correction, but there would not be deep, they would not be lasting.

Now in that context, let us also understand yesterday's two central bank action or inaction as you called it. The Bank of Japan after providing liquidity, after keeping interest rates in negative for years, ran up debt to the extent of 250% of GDP. After Bank of Japan becoming a significant owner in majority of Japanese stocks, now they are going into a territory where they are saying that will continue to buy government securities in a manner so that the yield curve will be as per our requirement, yield curve will be as per our need. Now these are all uncharted territory. This is where central bank probably gives a put options to the equity market. Where will this end who knows but till such time it is continuing, you have no option but to remain participant in the equity market, otherwise you will end up a significant part of rally.

On the US Fed side also, as child we were always reading that story of tiger coming, tiger coming, tiger coming, in December 2015 while raising US Fed rate after a decade, they indicated four rate hikes in 2016. Now, it will be just about one. So, clearly they also are getting data dependent, they also are trying to give put option to the equity markets to sustain growth. Probably, future of America is what the past of Japan is. So my request to viewers will be do not really go by the wildest predictions, do not really go by the extreme forecast that is unlikely to happen. Let us focus on our country, our fundamentals, our stocks. Over last 25 years, we have created enough value and if you pick up stocks rightly with right temperament and you can withstand volatility which might come on the way, I am sure you will end up making more money than most other asset classes in Indian equity market.

For equities to do well, two things have to be in place - attractive valuations and lot of liquidity. There is lot of liquidity and there will be lot of liquidity. Valuation is where the discomfort is. I mean what you want to buy is not cheap, what you do not want to buy is really cheap. Now you may buy stocks but the stocks may see a lot of time-wise correction because earnings recovery is already in the price.

It is absolutely brilliant observation. What you want to buy is not cheap and what you do not want to buy is probably available cheap. But then every day you do not get a batting pitch to bat upon. That batting pitch was available in February 2016. Now, if you were sleeping on that day, bad luck to you, the market is not going to give you an easy opportunity so that you can make money sitting idly on a beach. It does not work that way. Tendulkar became the greatest batsman by not only batting on the batting pitch but he also took the battle on the balling pitch. He took the balls on his chin, on his helmet, on his bat and that is where he became Tendulkar.

So, please do not expect markets to give you easy opportunity to make money and especially in today's market you have to pick up stocks right correctly, you have to have right temperament to withstand volatility and you have to have long-term investment horizon to make money. Making money is not easy. Who told you that it is easy to become billionaire is wrong, otherwise all of us would have become billionaires.

The common conundrum of late is that we have been hearing rhetoric and I started off our discussion the way that there could be a correction now. I take on board your point that do not get lured by or do not get bothered by a lot of what is happening but we have to admit that growth has not come back in a hurry and there is a remote possibility of a correction that may come in and give an opportunity to buy. My question to you is should people who are not SIP investors but actual stock investors wait for an opportunity right now? Could that come in or do you not foresee a chance of a meaningful correction coming in?

: I think for the stock investors even today in this market there are opportunities to buy stocks now whether they are fully priced or fairly priced. There is value as a stock picker. You can start buying stocks even in today's market. Of course your rate of expected return will be lower than what if markets correct 10-15% but if you are a stock picker you have no option but to pick up stocks depending upon your time horizon.

Now if you are not a stock picker, there is a very simple common sense technique of asset allocation. Today's fair value of market have neutral allocation to equity if your risk profile is not very aggressive. Within that risk profile if there is a correction, you can always increase your allocation to equity. No one says that being a stock investor, you have to put 100% of your net worth in stock market. If there is correction, you can always shift some allocation from debt and other portions into stock market.