Lessons from the CoVID 19 Lockdown

The CoVID19 pandemic and the consequent lockdown has brought in a humbling experience to many of us, including individuals and/or businesses thought to be foolproof of themselves given their indispensable nature of product or services. Barring food and dailies (groceries) none of the presumed basic services needed to mankind have become affected adversely. Alas, none has been spared. The neighborhood barber/salon or the cobbler who mends shoes right up to liquor barons (barring regulatory risk) and would have thought to be proof from any eventuality have faced different levels of threat during this pandemic. India’s service economy which is almost 2/3rd of the GDP has taken a massive hit. At the business and at individual levels, the lessons the current crisis has have been of very basic nature. On the principles of “risk management” most of the lessons that this crisis offers are rudimentary. A quick look at basic lessons from this crisis.
Cash is King
We need to write this title in large and bold font in our minds and actions. Cash if the blood of any business and a key element of an individual’s personal financial wellbeing. Without enough cash businesses freeze or worse, go bankrupt. Without cash, an individual’s household can face immense hardship and probably make or break the family and household. The current crisis has brought out this basic element of money management to the fore. Many businesses (large and small) and individuals all are strapped for cash during these times, however, people who had planned for crisis level reserve for cash would emerge out of this crisis stronger and would be able to grab opportunities crisis’ bring after they pass. So, what is the lesson from this crisis to us all? Keeping reserve or emergency cash/liquidity, always, is as basic as it should be. For a business, 3-4 months of cash burn should be available to tide over during such unforeseen times, and similarly for individuals, 4-6 months cash for expenses should always be kept at call. People who followed this golden rule will find it easier to tide over the current situation without much hassle.
Health is Wealth
This again is as basic as one can understand. Health is not acquired without effort. To remain healthy – physically and mentally, individuals must put effort into eating good food, resting enough, and working out physically. Similarly, for mental health, individuals require attainment of inner peace, sound conscience, and a positive attitude. All the above is easy to attain if the practice of working towards it is regular and not when the crisis is on the horizon. The second aspect of health is a risk. The first part was risk mitigation by doing many things as explained earlier, the second and the most important part is risk transfer. Despite all the care and work on your health, it could be possible that your health is compromised due to reasons beyond your control; risk transfer helps you to cover health failure without any financial damage. The best form of risk transfer is “health insurance”. And to plan for the same when there is time is again a basic thing to do. Individuals should be prepared to pay a small cost to cover himself/herself and family from any health eventuality. The health risk is real. Recognize and prepare for the same without delay.
Multi-tasking is underrated
The CoVID19 crisis has taught this one thing – one more time. Specialists are overrated and generalists are underrated. The crisis has been easy for generalists. Everyone who depended on a specialist for everything from household chores, outsourcings kitchen (and cooking), and technical staff and many more things, have been rendered faced with a big handicap. People who could easily mold and become a self-service oriented person are having a relatively easier life during this crisis. Multi-tasking on the home front or office front should be the way forward. Cooking, housekeeping, fixing the small things, doing office duties with minimal help and above all ability to learn quickly – technical as well as basic stuff is the key to ever remain relevant. The faster one learns this the better prepared he/she is for the current and future crisis.
Upskilling has no age bar
Why is it that suddenly everyone is rushing to get enrolled for the online course? That is because nobody knows what kind of skills the world would demand, in 2021. People are rushing to upskill/upgrade their knowledge for the fear of being left out once the world re-opens. While that might sound a good thing to do, upskilling and staying relevant is a continuous process. It does not start during the crisis and ends when the world is normal. Leaning a new skill does not have an age bar. To stay productive and relevant an individual must repeatedly upskill and upgrade continuously. This way, the person would be the sought-after individual when the normalcy returns. Corporate / businesses are looking at human talent that is ready and easy to plug/play during difficult times. Upskilling/upgrading requires time and an individual should set the same aside regularly and not just when crisis hits the horizon.

NOT a Contagion – Impact of the FT Debt Debacle

Introduction
Last week, Franklin Templeton India funds, in the debt category, went into freeze with investors in 6 of the large schemes locked out of redemptions and any sort of movement till further notice. This has come at a distressing time of CoVID19 crises where incomes of individuals, businesses, and MSME’s have been severely impacted. The investors in these funds are severely impacted due to their dependence on these funds for their immediate or medium-term cash flows and now above all the safety of their monies. In some cases, it could be most of the savings/corpus that has been put to work. The investment rationale for most investors in these funds have been
1. The general safety of such category of funds
2. Getting regular incomes on their investment
3. General faith in the system and/or
4. Established product type.
While this might be the case, in good times or bad the onus of safety of investors’ fund lies with himself and the rule of “Caveat Emptor” or “Buyer Beware” always prevails. This is true for any investment or generally parting of monies from an investor to a third person.
The FT Debt Debacle
The situation with Franklin Templeton funds could have happened with any other AMC given the dislocation in the financial markets and the positioning of the funds in the current market environment.
For starters, Franklin debt funds were positioned to deliver higher returns as compared with competition and thereby were invested into marginally higher risk than the general markets. This strategy works well under most circumstances given that liquidity and funds flows keep investors and borrowers from accessing / rolling over monies quickly.
Secondly, the line between swimming in the middle of the pool to the deep end of the pool is often non-existent (not even blurred). This results in asset managers taking marginally higher risk without any commensurate return benefit. This is obvious in hindsight and might appear rationale during normal times. Both for investors and asset managers. In the case of FT funds, most investments were in risky papers without commensurate returns.
Thirdly, the diversification in asset managers strategy on funds ought to save the day. Unfortunately, the asset manager had not differentiated between its medium-term funds and ultra-short-term funds, using the same strategy across these funds. Clearly, the investor has been taken for a royal ride here, for no fault of his.
Finally, most of us are guilty of being slightly complacent when things are going to get rough. The first indication of the FT issue was evident when in a couple of these funds’ exposure to Vodafone and Yes Bank papers were side pocketed in 2019. Prudence dictates that the troubled ship be abandoned before the stampede begins.

How are we impacted, and are we prepared?
The current CoVID19 pandemic has been mild so far and there are numerous reasons – including on-time assessment and steps taken, higher immunity, sunshine factor, etc. There is much literature on the topic in the public domain. The financial impact is still yet to come to full-blown proportions but can be assessed individually by each one of us. The individual and collective response to the situation is developing in nature and as weeks go by, the complete impact of the same would be evident.
There is a great economic impact on several direct sectors such as tourism and aviation, transportation and logistics, and MSME’s. Stage II of the financial contagion (Risk Aversion) is being felt across businesses and individuals alike. The central bank (RBI) and capital market regulator (The SEBI) has so far responded to the situation like other peers across the globe. Stage III of complete liquidity freeze and volume collapse is unlikely to happen soon in India given the evolving situation and talks about normalcy returning in a phased manner soon. The systemic liquidity so far has been managed; however, the deeper impact could be felt if the situation lasts longer than everyone is prepared for.
Most of the participants are barely prepared for such emergency situations which is all-pervasive and systemic. And yet some sectors/participants are better than those who are severely impacted. Staples, non-durables, and certain services have been relatively smooth, so far. The lessons from the current episode for individuals and institutions should be to be prepared for a war-like situation for 4-6 months during any market cycle. This means putting up safety nets around – Liquidity, business/income continuity, risk management, back-up plan (secondary work-related stuff), and communication. For instance, unscheduled maintenance for industries, skill upgrade for workforce or individuals, and strategic planning for normalcy. All these and more should be a part of any individual or business plan when there is still time.
Conclusion
From an individual perspective, investors who are now stuck into the current frozen FT debt funds; the following things are necessary.
1. Access your liquidity conditions and work on a plan to sort it out. There is a great likelihood that your money would be returned soon
2. Ask questions around your investment methods and know why you ended up in the current situation. If only a small portion of your overall investment is in these funds, you have already done a good job.
3. No, there is NO reason to panic and start pulling out of every conceivable investment, since that way you could be creating a chain reaction and worse you will end up jeopardizing your objective (goals) and your return profile

For those who have no exposure to FT funds frozen or have FT equity funds, it might be a good time to reassess your exposure. While that might be the case, if your liquidity profile, asset allocation and goal planning is mapped, there is little concern for you. There is no point in losing sleep over things in which everyone is in the same boat and you are well prepared than others. Chances are you will come out stronger than most.

FAQs on EMI Moratorium – Most questions answered

The EMI Holiday package announced by RBI on account of CoVID19 has raised many questions with respect to applicability, coverage, eligibility, and impact.   We answer the basic questions through the FAQs that are put together which cover most of the doubts regarding these. 

  • Is moratorium compulsory or optional; what loans are it applicable to?

The moratorium is optional both for the borrower and the financial institution(lender).  ie The lender can choose to offer this option to its clients. The borrower can also choose to avail of the option if it is offered by the lender from whom the loan is taken.  

This is applicable for all kinds of credit facilities such as retail loans, Home Loans, Business Loans, Cards and Farmer Loans, term loans, and working capital loans of any size and duration and applicable both for individuals and businesses.

  • What is meant by moratorium?

A moratorium is temporary postponement of payment of interest/ principal/installments (and is not a waiver) for the period from Mar 01, 2020, to May 31, 2020. Interest will continue to be payable on all amount(s) for which payment is being postponed pursuant to the Moratorium.

  • For what period can the moratorium be granted?

A moratorium may be granted up to a period of three months for all amounts falling due between Mar 01 and May 31, 2020.

  • Is the moratorium on principal or interest or both?

The moratorium can be offered for below payments due during the moratorium period:

  1. Principal and/or interest component
  2. Bullet repayment
  3. Equated Monthly Instalments ( EMIs)
  4. Credit Card dues
  • Will the interest accrue during the moratorium period?

Yes, lenders will charge interest during the moratorium period as per the relevant terms and conditions of the loan agreement between the lender and borrower/s.   

  • How can you opt for the moratorium?

For most PSU lenders, there is blanket access to the moratorium, and it applies to all loans irrespective of size/category/sector. For private lenders, it would be prudent to get in touch with the respective client relationship manager/branch/phone banking/mobile banking/internet banking etc. and communicate your preference since this is NOT a default option and needs to be availed categorically. Failing which, there is a chance that the deduction of EMI would go through on the scheduled date set.

  • What is the interest charging mechanism for retail term loans such as Home Loans, Personal Loans, Consumer Durable Loans, Two-Wheeler Loans, Auto Loans?

The accrued interest would be added to the principal amount which will increase the residual tenure of the loan except in cases where extension of tenure is not possible in which case the EMI amount will increase. Please refer to the terms and conditions in the loan agreement for further details.

Illustration: Mr Ravi availed of a home mortgage on Mar 01, 2020 amounting to Rs one crore with a loan tenure of 240 months at an interest rate of 7.5%. If Mr. Ravi wants to avail of a moratorium of installment of Rs 89,972 which is due on Apr 01, 2020, then the interest for the month of March amounting to Rs 75,000 will be added to the principal amount and the outstanding principal amount on Apr 01, 2020, will become Rs 10,075,000. The interest will be computed on an outstanding principal. Similarly, the interest for the month of April which is payable on May 01, 2020, of Rs 75,562 will be added to the opening principal on May 01, 2020, which will be Rs 10,150,562. The interest will again be computed on the outstanding principal. In this case Mr Ravi’s tenure will increase from 240 months to 250 months considering the unchanged rate of interest and installment amount during this period.  To reduce this, Mr Ravi can choose to prepay part of the loan when normalcy returns to his cash flows, based on the prepayment clauses in his agreement.

  • How will interest be charged and recovered for SME / MSME / Businesses which use cash credit/ overdraft facilities? 

The accrued interest will be due and payable immediately after the end of the moratorium, and interest keeps accruing for this moratorium period.

  • Will there be late payment charges/ default interest/ additional interest for the deferred installments during the moratorium period?

No late payment charges/ default interest/ additional interest shall be levied during the moratorium period has to be charged during this period as specified by RBI.

  • Can the borrower make payments in between the Moratorium period?

This option to defer payments on loans is a relief granted to borrowers due to disruption caused due to the unprecedented outbreak of COVID-19. However, the borrower has the option to continue scheduled payments during this moratorium; or avail of the benefit of the Moratorium.

  • Will the seeking of Moratorium by the borrower have an impact on their credit/bureau score?

The moratorium on payments will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs)/credit bureau by the Bank. Hence, there will be no adverse impact on the credit history of the borrowers. This is specifically for this moratorium period only.

  • If the borrowers have enough balance in the accounts and installment is due, will the lender debit the EMI during this period?

Yes, if you have NOT opted in for the moratorium, then the normal EMI dates would apply and the deduction would occur as per the loan schedule.  It may be noted that some banks are offering moratorium as a default, hence, it is advisable to check with the communication from the bank. However, if one has opted for the moratorium, then the EMI would not be deducted even if there is sufficient balance for the EMI. 

  • Does the borrower need to submit any documents for availing this Moratorium? 

For PSU lenders the default option is the borrowers would get this moratorium irrespective of which category he belongs to. For borrowers of private lenders, the borrowers would get instructions from his/her respective lender on what needs to be done. Currently, the paperwork is limited to communicating the choice of option to the lender via – email /phone banking/internet banking or branch banking.

  • Does it make sense to continue to pay the EMIs rather than availing of the moratorium? 

Yes, if there is NO pressing need or shortage of cash flow then it makes sense to continue to pay as per schedule. This way you save on the additional interest that would be charged on the amount outstanding.

  • What happens to payments due and made or defaulted in March 2020 

If the payment has been made during the 1st March 2020 – 31st March 2020 period, then the borrower will effectively get two months of the moratorium period. If there has been a default due to cash flow issues or any other reason, then you would now get protection against any penalty/charges that might be due or have been deducted. And effectively such borrower would get the 3-month moratorium period. 

  • What happens to loans/credit facility started in March or April 2020?

The borrowers of all classes, old and new are eligible to avail of this moratorium; however, different lenders might have different rules, so it might be good to check with your lender on their policy with respect to the same.

  • If the borrower has multiple borrowing facilities within the same lender of different lenders, can he/she get a blanket moratorium? 

The borrower needs to specifically select and mention every facility that he/she has availed from the lender or in case of multiple lenders, then the borrower will need to communicate/opt with all such lenders.

EMI Loan Calculator and Impact Assessment

STOP – Should you use the EMI Holiday?

RBI Announcement for CoVID19; Impact for borrowers 

A 3-month moratorium for borrowers of all kinds.

  • Lending institutions are “permitted” to grant a moratorium on installments between March 1, 2020, and May 31, 2020.
  • All banks/lending institutions are covered in this scheme and all types are payments are covered – unsecured / Agri loans/retail/ working capital loans include credit cards.
  • This is ONLY a postponement of EMIs/Interest and NOT waiving of EMIs/interest. 
  • Interest would get accumulated for the period and added to the principal outstanding.  This means you need to pay additional interest during the course of the loan. There is no penal interest or adverse impact on credit rating/score.
  • You can check the applicability and procedures with your financial institution.

While the above decision from the RBI has been a welcome relief to people with temporary cash flow issues faced by many borrowers, this article helps you evaluate whether to avail of the moratorium. 

Who is it meant for?

This is meant primarily for individuals and businesses impacted by the economic fallouts from COVID-19.  The lending institution may need to be satisfied that the deferral is necessitated on account of the fallout from COVID-19.  This would be useful for affected businesses and salaried employees working in Aviation, Retail, F&B, Contracting, Travel/Leisure, and other high adverse impact sectors. However, it is not restricted to any sector.  One can opt for this measure if one would like to create a small buffer to tide over what might be a slightly long draw battle for these sectors to get back to normalcy. Those unaffected need not avail of this option since interest continues to be charged during the moratorium period. This will only extend the tenure of your loan.

Use early repayment if possible

A practical approach for you-

  1. Must Avoid: If your interest rate is very high (eg. Credit Card outstanding), one should avoid availing of the deferral of payment.
  2. Those whose salaries/business cash flows are impacted and are extremely stressed on their finances should avail of this benefit in toto. Take this break to put things in order, rack up some liquidity to tide over the current situation; and work out a plan on how you will service these loans from June 2020. The opportunity is God sent for this category and should be availed.
  3. Those who are tight on their finances and uncertain about their business recovery/ salary impact can also avail of this moratorium period. However, they can do two things
    • First, create a buffer of 2-3 months basis this savings in EMI paid out to help tide over the immediate liquidity situation. 
    • Payback part of the whole of deferred installments post the moratorium period, once favorable clarity emerges on the potential impact on one’s finances. 

Impact assessment for borrowers taking this moratorium over the medium term

If you have a current outstanding of Rs 50 lakh, with 10 years remaining on a home loan with an interest rate of 8.75% and you defer the full 3 months of your EMI, the following is the higher payment you would make on the full tenure of the loan based on when you pay back the deferred EMIs to the lending institution:

When repayment of deferred EMI is made Additional payment on loan(Rs) Closure of loan (months)
At end of the loan                                  263,456                                    123 
Repaid in full in 12 months (with interest) 14,169                                    120 
EMI repaid after 3 months 6,398                                    120 

 

In summary

  1. There would be additional interest on interest (since the amount of interest would be effectively added to your principal outstanding on the date of deferment). If you don’t make any prepayment during the tenure of the loan, the impact is significant.
  2. This would, therefore, mean that you should NOT utilize the total EMI holiday unless your cash flow position during the 3 months is stopped or disrupted.
  3. Do try and repay these installments at the earliest possible date to reduce the interest burden on your loan.
  4. Avoid deferring the payment of your credit card outstanding as the interest rates are high.

Further, Read FAQs on EMI Moratorium – Most questions answered

The Ultimate Secret Of FINANCIAL PLANNING

We all knows the game called Kahn Banger Crorepati 

Show Host – Amithab bachan !  

And crorepati cheque has taken by only one women in India I.e Binita Jain

She won final cheque in episode and is planning to utilise the winning amount to set up a dental clinic for her son.

Do You know KBC ?

KBC( Kaun Banega Carorepati)   was launched for the first time in July,2000. It is a  show which provides  healthy entertainment and also helps in enhancing knowledge. 

Every one loves to be their in hot seat and try to ans all the Questions and get the big cheque from the hands of film star

Now let u also know this one more person who withdrawn Rs 2.3Cr   with a small investment like 1 lakh now his bank got 230 times more from what he just invested.


Hey Woman! Take Charge Of Your Finances To Be Truly Independent

Take charge of your finances

Some Facts and Stats

  • Lack of sufficient funds and home responsibilities largely come in the way of women’s aspirations to start their own business/venture as per a study conducted by Nielsen for biscuit major Britannia.
  • A whopping 4% of women do not have a medical cover as per a survey conducted by Economic Times. Many separate studies across Indian states and cities have shown that women are wary of investing in the equity market.
  • On the positive side,
    • The number of Indian women investing in mutual fund schemes and stocks is on a rising trend which is a good sign.
    • 27% of the stock market investors are women.

 

Indian women have come a long way in terms of education, independence and self-identity. But the tendency to leave financial decisions in the hands of the men in their lives – son, husband, father is still quite prevalent. Though this has been changing, it is important that more women take charge of their financial life as there are many indicators that women are good investors – Why?

  • Indian women are historically and culturally well-versed with saving. Women save more and therefore can invest more.
  • Women are more risk-averse as compared to men. Therefore they perform in-depth research before investing their money. They stay away from risky products.
  • Women have more self-control. They are less prone to impulsive trading and over trading. Overtrading usually results in reduced performance portfolio.

 

But on the other hand, there are certain weaknesses that are inherent in women investors –

  • They are very conservative investors and this can lead to reduced overall portfolio returns.
  • On an average, women earn less. They also take breaks in their career. This leads to lesser funds available for investment. Since there is a smaller kitty, they prefer to invest in debt products which are secure but give less returns
  • They are busy with too many responsibilities of family and work that they do not find time to manage their finances.
  • Women are not part of discussions related to financial matters in social realm as some feel they do not know anything. Sometimes they are not included as it is assumed they do not know much. These discussions are sometimes closed men’s clubs or informal networks; which are not easy to get into.
  • Women are hesitant to ask for raises in salaries. They underplay their skills and achievements while negotiating for a pay package.
  • Women let emotions rule and end up helping friends and family financially without considering the dent it would do to their financial portfolio. It is of course good to help others in need but not at the cost of putting yourself in financial peril.

 

Women  have to play to their strengths and overcome their weaknesses and gain financial independence. Here are some steps that you can take to get involved in matters of personal finance –

  1. Get involved in the finances of the household by managing a budget. It is the simple task of tracking income expenses and savings. You will get an idea of how much is the monthly expenditure and if you can cut back on some expenses.
  2. Read up on personal finance. There are many personal finance websites and books that can be referred to.
  3. Start investing small amounts in different financial products with the guidance of an experienced investor or financial planner to understand how investments work, the returns and tax implications and tax saving opportunities.
  4. Set up financial goals and work towards achieving them. You will be really proud of yourself when you achieve it and gain confidence in financial matters.

 

Make your financial resolutions this Women’s Day to be truly independent

Key takeaways:

  • Women need to participate actively in financial matters. 
  • Personal financial freedom should be every woman’s goal.

 

This women’s day, Right Horizons offers a FREE financial planning session for women at Dialogues cafe, JP Nagar on March 9th, 3-5pm. To register, write to us at contactus@righthorizons.in or 9845399780.

The General Elections in India to pave the way forward

Every general elections year is always a volatile year as you get huge moves in Index on both the sides and 2019 is not going to be different, as we step into general elections.

The election result may impact the economy’s road map ahead. In Jan 2018, many experts were cautious because of high valuations in mid and small caps without having earning growth.

The whole matrix has changed in 2019 as stocks have given significant corrections and earnings growth also picked up in 2018. We expect 2019 to be a year of net positive investment for both FII’s and DII’s, unlike 2018 where only DII’s were supporting Indian markets.

This is not the year for light-hearted investors who get worried when they see 10%- 15% down move in the Index. Past data shows that those who stayed invested in these volatile period were the biggest beneficiaries including in years of coalition governments.

If we analyze last 5 general election data, Nifty has never given negative return in an election year. In 1999, 2004, 2009 and 2014 Nifty has given 51%, 18%, 80% and 39% each respectively. Equity markets always ride on fear and hope and this year would be no different.

Everywhere we are hearing that central elections are there and markets will be volatile, but holding on to your investments at these times might reward you significantly. The recently concluded State elections resulted in BJP losing in all 3 major states. Now markets have given big thumbs up to the result and up by more than 5%.

This signifies value buying is emerging and we should be invested at these time irrespective of any party takes control of government with majority mandate.

Historical Calendar Year returns in an election Year

Past data shows that we may have a pre-election rally.

Keeping in mind the above data points, we believe that while markets are likely to be volatile, it would end the year on a positive note.  Subsequently, I expect both economic parameters and markets to gather momentum.

ELSS vs Equity Diversified Mutual Funds

Life is all about competition.  Who is the best? Are you good or is your friend better? There is competition even among personal finance products. While most personal finance products are good, which one would help meet financial goals. This is the call you have to make.

This is a story of a fight between two friends, Satish and Suman. Not a physical fight, but an intense competition. Both of them were in their early thirties and worked in reputed IT Firms. They liked to compete with each other and today the fight was which financial product was better. Was it ELSS or equity diversified mutual funds? Satish says ELSS and Suman says equity diversified funds. Who is right?

For those who don’t know, an equity diversified mutual fund invests in stocks across sectors. If you are an aggressive investor, try equity diversified mutual funds. Money is in stocks and there’s a measure of protection as the investment is spread across sectors like pharma, IT, Oil and Gas, Automobiles and so on, called diversification.

Lets take a look at the opponent, Equity Linked Saving Schemes or ELSS. ELSS is a type of equity diversified mutual fund where most of the investment is in stocks. It has a compulsory 3 year lock-in which means you cannot touch this investment for 3 years. What’s special about ELSS is it’s the only tax saving mutual fund. ELSS enjoys a tax deduction under Section 80C of the income tax act, up to Rs 1.5 Lakhs a year. Does this make ELSS better than equity diversified mutual funds? Let’s find out.

ELSS vs Equity Diversified Mutual Funds

ELSS is a long term investment

ELSS has a 3 year lock-in and forces you to stay invested for this time period. Equity is an excellent investment only if you stay invested for the long term. A bare minimum of 3 years is a must. This is where ELSS scores over equity diversified mutual funds.

Equity diversified mutual funds have no lock-in and allows an exit, whenever you wish. This is bad for you as most investors exit when stock markets crash. The key to make money in stocks is to stay invested in the market for the long term. Invest in ELSS with a time horizon of 7 years.

ELSS Saves Tax

Lets say you invest the same amount in an equity diversified scheme and an ELSS. Both of them give the same returns, but ELSS wins over the diversified fund as it enjoys the Section 80C benefit. ELSS is an excellent investment if you fall in the higher tax brackets.

If you fall in the 30% tax bracket, invest up to Rs 1.5 Lakhs a year in ELSS and save Rs 46,800 a year. ELSS enjoys Section 80C tax deduction and beats equity diversified mutual funds.

ELSS is like killing two birds with one stone. You get good returns and you save tax. Top ELSS schemes have given an average of 16-20% over 5 years. This is higher than equity diversified schemes. Then there’s the tax benefit.

Satish earns Rs 11 Lakhs a year and falls in the 30% tax bracket. He invests Rs 1.5 Lakhs a year in ELSS via SIPs. This helps him save 30% on Rs 1,50,000 which is Rs 45,000 + a cess of 4% which is Rs 1,800. Satish saves Rs 46,800 a year by investing in ELSS.

ELSS is a stepping stone to equity diversified mutual funds

In recent times many first-timers are investing in equity. Novice investors are rushing to equity diversified mutual funds without understanding them, in the hope of quick profits.

Why not first invest in ELSS and then try equity diversified mutual funds? ELSS with a compulsory lock-in, forces you to stay invested for the long term. ELSS handholds you and helps get familiar with equity. You can now invest in equity diversified funds with confidence and make a profit.

Today, stock markets are falling and many first-time investors are heading for the exit in panic. Many of these investors have bought high and sold low, taking home immense losses. If these panic-stricken investors had invested in ELSS, they would not have been able to exit the stock market and in a few years, they would have seen profits.

What do you take home from this article?

  • ELSS sticks to the top 500 Companies and an ELSS comparison must be made with large-cap funds.
  • ELSS generally beats large-cap funds as it enjoys a tax advantage.
  • ELSS enjoys true competition from multi-cap funds, which invest in large-cap, mid-cap and small-cap Companies.
  • ELSS funds have locking, but face lesser redemption pressure on market falls and hence could deliver superior returns in the long term.

Loan Against Mutual Funds

There are times in life when you just have to take loans- for a medical emergency, a marriage or a much-needed holiday. You would most likely avail a personal loan which charges high interest and struggle with EMI repayments. This is exactly what happened to Shankar, a 28 year old man, who took a personal loan to go on a holiday.

Shankar a young man had dreams. He lived in the southern part of India, in a town in Kerala. He was a teacher at a nearby school with a take home salary of Rs 20,000 a month and he wanted more from life. He badly wanted to holiday in the North East. So he availed a personal loan of Rs 2 Lakhs from his bank with a tenure of 3 years at an interest rate of 16% a year.

For those who don’t know, a personal loan is a No Reason Loan. Banks don’t ask reasons for availing the loan.  There’s no collateral. The problem is banks charge interest of 14-21% a year on a personal loan. You might not be able to afford the EMIs and fall in a loan trap.

This is exactly what happened to Shankar. After an enjoyable holiday, it was time to think of the personal loan EMIs. He had to pay nearly Rs 7,100 a month for the next 3 years. This didn’t seem a problem till a medical emergency ate up his savings. Shankar struggled with personal loan EMIs and today is in deep debt.

Ideally, one should not take a loan for your wants.  You could take it for your needs.  We suggest you invest towards your vacation and then take your vacation.  However, if you cannot avoid taking a loan, taking a loan using your mutual funds as security, is one option. Use an overdraft facility in your bank account. This will help if you need is only temporary.  There’s no need to redeem mutual fund units and you can continue with SIPs. During a financial emergency, don’t liquidate mutual funds. Just avail a loan against mutual funds.

You can avail a loan against equity mutual funds, debt funds or hybrid mutual funds by approaching a bank or an NBFC and pledging mutual fund units as collateral. The loan is sanctioned based on the Net Asset Value, NAV of the mutual fund units in the folio and the loan tenure. You get loan against mutual funds at an interest rate of just 10-11% a year and as its secured, interest rates are much lower than the commonly availed personal loan. If you have a good credit score and have been a customer at the bank for a really long time, negotiate for a lower interest rate.

If the mutual fund units are in demat form, several online portals are willing to sanction loans within minutes. If the units are in physical form, you might need a loan agreement with the bank. You have to understand lien on mutual funds before we go further. It’s a document that gives the bank the right to sell the mutual fund units. This comes in handy for the bank if you’re not able to repay the loan. The lien grants the bank ownership of the mutual fund units you own. Approach your mutual fund house and request for a lien on mutual fund units in the name of the bank for a lien transfer to the bank.

How to get loan against mutual funds? Simply log on to your internet banking account and select the equity or debt funds you want to hypothecate. Your application is redirected by banks to CAMS or Karvy which verify the mutual fund holdings. The registrar marks a lien against mutual fund units being pledged with a letter send to the bank and a copy marked to you to confirm the lien. The lien is marked against the mutual fund units, so this means you cannot redeem units, until the loan is repaid. You continue to enjoy dividends and other ownership benefits, but you can’t redeem the pledged units. Equity based funds can fetch a loan as high as 50% of the NAV, while for debt funds its 60-70%. Banks allow you to avail a maximum of Rs 20 Lakhs against equity mutual funds.

Don’t make the mistake of not repaying; or the bank will ask the mutual fund to redeem units and take the money. Banks have a list of mutual fund units against which they lend.

Shankar availed a personal loan at an interest of 16%; while you get a loan for just 11% against mutual funds. This is a sizeable savings in interest. Shankar should have invested in mutual funds via SIPs and then gone on holiday. Loan against mutual funds are great when stock markets fall. If you need money in a hurry, just pledge mutual fund units, instead of redeeming them at a loss.