To get anywhere, you need a plan and the same goes for your financial future. Unfortunately. a financial plan appears, to most of us, like a visit to the dentist – something to postpone until you wake up screaming in the middle of the night.

So we came up with a financial plan that’s more like a visit to your favourite coffee shop. It involves forming simple habits and takes less than an hour to start implementing.

Investing, tax planning

Maximise your Employee Provident Fund (EPF) contribution. If your total contribution (including your employer’s) to EPF is less than Rs 1.5 lakh, invest the difference in Tax Saving (ELSS) funds. Your tax planning is done.
Invest 30% of your take home salary in diversified equity mutual funds. Never invest directly in stocks. Schedule a SIP to automate this habit.
Got your annual bonus? Invest 50% of it in a 5 year auto-renewing bank FD. This is your emergency fund.
Invest the remaining bonus in yourself – take a course, travel, do fun stuff.
If you have a home loan, split the bonus 3 ways – one third to prepay the loan.
Insurance

If you have people who depend on your income, then buy a 40 year term life insurance plan at 25, then a 30 year plan at 35 and a 20 year plan at 45. Every time make sure the total sum insured is 30x your then salary. There is no need to buy a life insurance policy unless you have dependents.
Buy health insurance for every member of your family. Even if you’re covered by your employer.
Buy insurance for your car, your house and its contents.
Renew your insurance every year 1 month in advance.
Please note that I said “buy” not invest. Insurance is not an investment.

Loans

Only ever take a loan to buy a home. Never more than 75% and never longer than 15 years. Pay it off within 7 years. Yes, it’s possible.

A question we get asked very often is, “Is this really a good time to invest in equity or equity mutual funds?”

A question we get asked very often is, “Is this really a good time to invest in equity or equity mutual funds?”

The reasons are obvious. There is a feeling that equities haven’t gone anywhere in the last few years and the stock market has been quite volatile. Interestingly, the same question is also asked when the markets have run up. At that time the fear is of investing at the top.

A good answer would be a quote attributed to the investor John Templeton, “The best time to invest is when you have the money.” There is a lot of wisdom and science behind that simplistic quip. An investor who is investing for the long term should not concern himself with daily or weekly movements in stock prices or market benchmarks.

Our research of historical market data has shown that an investor who stays invested for about 7 years has a high probability (67%) of achieving a return greater than 15% and even higher probability (75%) of achieving a return greater than 12%. This analysis was done on monthly Sensex values, so the return expectation is for an investor investing at any random point in the last 30 years and holding for 7 years.

However, for a three-year holding period that probability drops to 50%. So clearly Equity investing is not for the short term.

A decision to invest in equity must always be made with realistic expectations. Over a thirty-year period equity in India has delivered a 16% annualised return – multiplying an investment more than 100 times. This is the best performance amongst all investment options, beating Gold (17 times), FDs (18 times) and Silver (21 times). The point to note is that the number is 16% and not 50% or 100% per annum. And there were significant variations from that average in the journey.

Analysis of Union Budget's Impact on the Markets

The first full year budget of the new government has attempted to carry forward the positive sentiments surrounding the Indian economy by providing a roadmap for the future. The broad measures/allocations announced, including the various social and welfare allocations, can provide for benefits in the long term as opposed to any significant changes in the immediate timeframe.

While recognising the various challenges faced, the budget has rightly focussed on 4 key areas – agriculture, infrastructure, manufacture and fiscal discipline, to realise its vision and trajectory for the country’s economy. The thrust laid on the infrastructure sector, the measures announced to stimulate the “Make in India” programme and the facilitation of “Ease of Doing Business” sets the tone for revival of the economy.

Macro Highlights:

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	Fiscal deficit target at 3.9% of GDP for FY16, 3.5% in FY17 and 3.0% in FY18. Current account deficit below 1.3% of GDP.
	Nominal GDP is projected to grow by 11.5% year-on-year (YoY) in FY16 over advance estimates of FY15.
	Planned expenditure is budgeted at Rs. 4.65 lakh crore, a decline of 0.6% YoY over FY15
	Gross tax revenues are budgeted to grow 15.8% YoY in FY16.
	Gross borrowings pegged at Rs. 6 lakh crore, while net borrowing is flat at Rs. 4.6 lakh crore.
	Divestment targeted at Rs. 69,500 crore.

Key Changes in Direct Tax

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Resident Individual Tax:

	Base income-tax brackets for the financial year 2015-16 on personal income remains unchanged, however an individual tax payer can get tax benefit of Rs.4,44,200.
	Surcharge has been increased from 10% to 12% on Income Tax for income exceeding Rs.1 crore, thereby increasing the effective maximum rate of tax to 34.61% from 33.99%, an incremental impact of 0.62%. The additional 2% surcharge is in lieu of the Wealth Tax which has been abolished.
	Transport allowance exemption is being increased from Rs.800 per month to Rs.1,600 per month
	Health Insurance Premium:
	Limit of deduction of health insurance premium increased from Rs.15,000 to Rs.25,000, for senior citizens limit increased from Rs.20,000 to Rs.30,000. Senior citizens above the age of 80 years, who are not covered by health insurance, to be allowed deduction of Rs.30,000 towards medical expenditures.
	Limit on deduction on account of contribution to a pension fund and the new pension scheme increased from Rs.1 lakh to Rs.1.5 lakh.
	Additional deduction of Rs.50,000 for contribution to the new pension scheme u/s 80CCD.
	Investment made towards Sukanya Samriddhi Scheme, relating to education of girl child shall be eligible for 100% deduction under Section 80C.

60 percent investors choose schemes regardless of AMC name or size

A Neilsen study on mutual funds shows that majority of investors choose schemes that suit their investments requirements, irrespective of brand name and AMC size.

Investors are not brand conscious when it comes to investing in mutual funds.

Contrary to the popular belief that investors prefer to invest in schemes of well-known and large fund houses, a Nielsen survey released recently reveals that six out of ten investors choose schemes regardless of the brand name and size of a fund house.

The study ‘Building the mutual fund market in India: the need for financial literacy’ shows that 59% investors choose schemes that suit their goals regardless of the AMC’s brand name.

“Increased awareness has changed investment patterns. Consumers no longer make their choice on the basis of brand name. They are becoming more discerning about the products and their suitability to their own investment needs. IFAs and regional managers, the points of contact for the consumers, would benefit from increased training to enable them to better address these needs. Also, highlighting fund performance has created a positive perception among investors,” says the report.

Aashish Somaiyaa, Managing Director & CEO, Motilal Oswal Mutual Fund believes that investors consider fund suitability, philosophy and performance while choosing a scheme. “Why should brand be a criteria for buying mutual funds? A mutual fund scheme is completely different from buying any other product and investors have understood it.”

Suresh Sadagopan of Ladder7 Financial Advisories attributes this trend to increasing awareness about fund performances through scheme rating sites, media and advisors unbiased recommendation. “The information provided by media and performance rating websites has helped investors increase their understanding about mutual funds. Also, many advisors don’t have a bias for big brands. They usually recommend products based on performance of the fund irrespective of the brand and size.”

Distributors say that factors like increased awareness among people about mutual funds and good performance of few schemes from emerging fund houses have led to investors looking beyond brands. It remains to be seen whether this trend picks up momentum.

Sir John Templeton's Success Rules

Sir John Templeton, founder of the Templeton Group, has distilled his years of experience and expertise into the 16 Rules for Investment Success. Although Sir John Templeton has retired and is no longer affiliated with Franklin Templeton Investments, his enduring principles for investment management continue to guide the Franklin Templeton Funds.

The Templeton approach, although clear and simple, requires skill, dedication and astute judgement.

1. If you begin with a prayer, you can think more clearly and make fewer mistakes.

2. Outperforming the market is a difficult task. The challenge is not simply making better investment decisions than the average investor. The real challenge is making investment decisions that are better than those of the professionals who manage the big institutions.

3. Invest—don’t trade or speculate. The stock market is not a casino, but if you move in or out of stocks every time they move a point or two, the market will be your casino. And you may lose eventually—or frequently.

4. Buy value, not market trends or the economic outlook. Ultimately, it is the individual stocks that determine the market, not vice-versa. Individual stocks can rise in a bear market and fall in a bull market. So buy individual stocks, not the market trend or economic outlook.

5. When buying stocks, search for bargains among quality stocks. Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.

6. Buy low. So simple in concept. So difficult in execution. When prices are high, a lot of investors are buying a lot of stocks. Prices are low when demand is low. Investors have pulled back, people are discouraged and pessimistic. But, if you buy the same securities everyone else is buying, you will have the same results as every one else. By definition, you can’t outperform the market.

7. There’s no free lunch. Never invest on sentiment. Never invest solely on a tip. You would be surprised how many investors do exactly this. Unfortunately there is something compelling about a tip. Its very nature suggests inside information, a way to turn a fast profit.

8. Do your homework or hire wise experts to help you. People will tell you: Investigate before you invest. Listen to them. Study companies to learn what makes them successful.

9. Diversify—by company, by industry. In stocks and bonds, there is safety in numbers. No matter how careful you are, you can neither predict nor control the future. So you must diversify.

10. Invest for maximum total real return. This means the return after taxes and inflation. This is the only rational objective for most long-term investors.

11. Learn from your mistakes. The only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors and certainly do not try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience.

12. Aggressively monitor your investments. Remember, no investment is forever. Expect and react to change. And there are no stocks that you can buy and forget. Being relaxed doesn’t mean being complacent.

13. An investor who has all the answers doesn’t even understand all the questions. A cocksure approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. The wise investor recognises that success is a process of continually seeking answers to new questions.

14. Remain flexible and open-minded about types of investment. There are times to buy blue-chip stocks, cyclical stocks, convertible bonds, and there are times to sit on cash. The fact is there is no one kind of investment that is always best.

15. Don’t panic. Sometimes you won’t have sold when everyone else is buying, and you will be caught in a market crash. Don’t rush to sell the next day. Instead, study your portfolio. If you can’t find more attractive stocks, hold on to what you have.

16. Don’t be fearful or negative too often. There will, of course, be corrections, perhaps even crashes. But over time our studies indicate, stocks do go up…and up…and up. In this century or the next, it’s still "Buy low, sell high."

History of Mutual Funds

Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64
In the year 1987 Public Sector banks like State Bank of India, Punjab National Bank, Indian Bank, Bank of India, and Bank of Baroda have set up mutual funds.
Apart from these above mentioned banks Life Insurance Corporation [LIC] and General Insurance Corporation [GIC] too have set up mutual funds
With the entry of Private Sector Funds a new era has started in Mutual Fund Industry [ex:- Reliance Mutual Fund, Deutsche Mutual Fund, ICICI Mutual Fund, HDFC Mutual Fund etc]
Which are the other institutions that have floated Mutual Funds in India?
Currently public sector banks like SBI, Canara Bank, ICICI, HDFC, institutions like IDBI, LIC Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch, Sundaram, Kotak Mahindra etc. have floated their own mutual funds
How many Mutual Funds are there in India currently?
Presently there are 38 Mutual Funds in India and close to 400 mutual fund schemes.
Why has the concept of mutual funds taken so long to pick up in India?
Even in the US the concept of mutual funds has started picking up only in the last decade. This whole process of investor education and investor awareness takes a lot of time. But Indian investors are now beginning to understand the benefits of investing through the mutual funds route and hence the collections are beginning to pick up
What is the total size of the mutual fund sector in India?
Currently the total funds under mutual fund management in India are a little over Rs. 2, 65,805 crores as on June 2006*. Out of this UTI accounts for nearly 70 percent while the private funds account for around 22 percent. The balance 8 percent is managed by mutual funds floated by public sector banks and financial institutions.

EQUITY MARKET

These schemes also allow investors to take equity exposure at low risk

A little over two months remain in the current financial year for you to invest in those financial products that allow you to reduce your tax burden. In the Budget for the current fiscal year, the government has allowed investors to save Rs 50,000 more in a select list of financial products that will cut your total tax burden. Of all the products that are available for saving taxes, financial planners and advisers say that Equity-Linked Saving Schemes (ELSS) from mutual fund houses are one of the best that investors should consider, provided their risk profile matches the risks associated with these products.As the name suggests, an ELSS is a mutual fund scheme which invests at least 65% of its corpus in equity and equitylinked products to avail of tax benefits for investors. The minimum 65% investment is mandatory for the fund to avail of exemptions under the long-term capital gains tax rules of the Income Tax Act.
As an individual investor, you can invest up to Rs 1.5 lakh each year via the ELSS route to avail of tax benefits under section 80CC of the Income Tax Act. For this, you should also stay invested for at least three years, which is called the lock-in period for these schemes. If you want to withdraw your investments within three years of making the investment, you have to forgo the tax conces sions that you had availed of.
According to mutual fund industry officials, an ELSS is one of those instruments that are open-ended in structure and, at least for three years, the investment horizon of the investor matches with that of the fund manager. “In these schemes, the fund manager is less concerned about the outflow from his fund midway through the investment cycle than in other open-ended schemes from which investors can exit at any point of time,” says a top official at a domestic fund house. This character of ELSS funds also allows the fund managers to perform better, say industry officials.
According to Value Research data, while funds from several other mutual fund categories have given higher returns than the ELSS over a fiveyear period, they carry higher risks. Data shows FMCG funds have given a return of 26.3%, compounded annually, and pharma funds nearly 24%, while ELSS schemes have given a compounded annual return of 13.6%. In comparison, low-risk funds like large-caps have given an average return of 11.1%.
Another advantage of these tax-planning funds is that the returns you get are fully tax-free in your hand.
Financial planners and advisers pointed out that among the tax-saving instruments notified by the government, ELSS has the shortest lock-in period. Compared to PPF where the lockin is for seven years and notified tax-saving bank FDs are locked in for five years, the lock-in for ELSS is just three years.
In ELSS, you can invest through growth as well as dividend options. However, earlier this month, due to various technical issues related to taxation, the dividend re-investment option has been withdrawn for these funds.
Industry officials and financial planners also point out that since it is preferable to plan your tax-related investments for the full year rather than just for the last three months of the financial year (January-FebruaryMarch, or JFM months in market parlance), it is always better to invest in these schemes through the systematic invest ment route, commonly known as the SIP route.
There are some risks too.
Since these funds are equityheavy, in case the stock market goes down or is sluggish, the returns on your investments in these funds could also suffer, according to financial planners.
NEXT WEEK
In our next edition, there will be a collage of case studies on successful investing using the mutual fund route.