Category Archives: Investments

Optimizing returns in lower interest regime due to Demonetization

Proof-of-the-pudding of the statement ‘…the things are not completely rosy as the rate of return on some asset classes is expected to come down as well…‘ mentioned in the previous blog of this series – Impact of Demonetization on Individual’s Financial Goals is that the interest rates on bank deposits are already seeing a downtrend (refer News here)

This reduction in interest rate is going to impact the other market instruments like debt market funds (that shall see a sharp rise in their prices), fixed return instruments (rates shall come down significantly), small saving schemes like PPF/EPF (interest rates shall be lowered as these are market-linked).

The above shall in-turn impact the accumulation of funds for individual financial goals. Before looking at measures to be taken to counter this, let’s look at the impact on accumulation of fund with decreasing rate of return

interest-rate-table

returns-table

Below are some of the measures that one can employ in low interest regime staring in the face of investors.

  • Individuals with investable surplus could park the funds in either company fixed deposits (all of which have or are in the process of lowering their interest rates) or invest in long term debt mutual funds (that are expected to see a drop in yield thereby giving a good capital appreciation)
  • Individuals without investable surplus but with regular monthly flow could opt for Recurring Deposits (refer Protecting future investments against falling interest rates blog for details on how RD can be used as an instrument to lock-in currently available higher rate of return for amount to be invested in future)
  • For individuals with higher risk appetite, equity based mutual fund is expected to become darling of the market – given that there are expected to be very few avenues left for investing in future (for details, refer to next blog in this series – ‘Why Equity market should emerge as top investment destination post Demonetization?’
  • Revisit asset allocation and move to tax efficient avenues to enhance the net returns

As Henry Ford said – ‘If you always do what you’ve always done, you’ll always get what you’ve always got.‘ – it’s thus time to invest differently to tide over the changes in post-demonetization era.

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Impact on individuals with this MODIfied India

9/11 of US changed US (and the world) forever and 9/11 of India shall go down in history as the day that changed India forever.

By now everyone must be aware of the decision of making Rs 500 and Rs 1000 currency notes illegal from 9th Nov, 2016.

This is expected to have an everlasting impact on Indian economy but also impacts individual’s financial goals and planning.

At the onset following is expected

  • Inflation should come down heavily
  • Property prices shall crash
  • Gold prices might crash – though the people holding physical gold would keep it closer to them than earlier
  • Due to liquidity crunch, there shall be all round selling in stock and bond market

There shall however, be good opportunities for tax paying citizens who have enough white money. It is recommended that one keep their cool and look for opportunities to invest.

Stay tuned for a series of blogs related to how you can make the best of this situation and uncertainty and ensure your financial goals are met earlier than expected.

Immediate tip – Invest in stock market and mutual funds on panic selling. 

8 reasons to not miss Sovereign Gold Bonds!!

Of all the precious metals, gold is most popular as an investment and is fancied from times immemorial.

Before delving further let us understand why should one invest in Gold.

  • Investment in gold is considered safest in uncertain times, as long term returns match the inflation rates.
  • Gold is considered as a hedge against vagaries of market – be it equity, crude oil or realty.

Traditionally, Indians have been investing in gold through jewelry. This was not exactly investment – try asking your wife to sell her jewelry when the price rises and you shall know J

With advent of other options like ETF, Gold became a popular investment avenue, however, there are couple of challenges that exist and have been addressed by Sovereign Gold Bond (SGB) scheme launched by Government of India.

This is 4th issue since SGB’s launch in 2015 and there have been major changes like tax exemption, reduction in minimum investment amount etc. that make this issue all the more enticing. The rate being offered is Rs 3,119 per gram for .999 purity gold. An individual shall be allotted the number of units (1 unit = 1 gram) in either a physical certificate format or in dematerialize format.

So what are the benefits

  1. Low minimum investment – One can buy 1gm to 500 gm gold (i.e. minimum investment is Rs 3,119)
  2. No risk and cost of storage – SGB shall be issued as Certificate of Holding or dematerialized form – as per individual’s preference. This saves Locker cost associated with physical gold. Moreover, there is no hassle of safety of physical gold from external factors like theft.
  3. No making charges or purity concerns – Each unit is equivalent to 1 gram or .999 purity gold. The rate that shall be paid on maturity shall be the prevailing rate unlike jewelry that comes with making charges and impurity cut.
  4. Regular return on Investment – Unlike any other form of buying gold, SGB earns an annual interest of 2.75% payable on 6 monthly basis on the initial investment amount. This should not be compared with return on any other investment as the value of gold would still be as per market and this is additional income. This income, however, is taxable.
  5. Liquidity – Maturity of bonds is 8 years. Exit option is provided from 5thyear onwards on date of maturity. Additionally, the bonds shall be traded on Bombay and National Stock exchanges (only if held in dematerialized form) making them highly liquid
  6. Guarantee – Bonds come with Sovereign guarantee – both for principal as well as interest.
  7. Collateral for loan – Bonds can be used as collateral for loans.
  8. Tax benefit – Unlike physical gold and ETF, there is no tax on capital gains if held till maturity. If sold after holding for 3 years, long term capital gain tax is applicable after adjusting for indexation.

Comparison of Physical gold, Gold ETF and Sovereign Gold Bonds

Comparison Chart Phsical Gold vs. Gold ETF vs. SGB

Points Physical Gold Gold ETF Sovereign Gold Bond
Returns Only Capital Appreciation Only Capital Appreciation Regular return at 2.75% fixed rate of interest in addition to Capital Appreciation
Safety Risk of handling physical gold High High
Purity of Gold Purity of Gold always remains a question High as it is in Electronic Form High as it is in Electronic Form
Capital Gain Long term capital gain applicable after 3 year Long term capital gain applicable after 3 year Long term capital gain applicable after 3 year. (No Capital gain tax if held till maturity )
Collateral against Loan Yes No Yes
Tradability / Exit Route Conditional Tradable on Exchange Tradable on Exchange. Redemption- 5th year onwards with GoI
Storage Cost High None None
Lock-in period None None Only till listed on Stock exchange

Based on above, an investment in SGB is highly recommended. The issue is currently open and closes on 22nd July, 2016.

Leave a message in case you have any queries related to SGB. Confused on how to invest?? – drop a mail to fintelligenceindia@gmail.com and we shall contact you shortly.