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www.wealth.economictimes.com | Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune | February 1-7, 2016 | 32 pages | `7

ALSO INSIDE

10

26

FINANCIAL PLANNING

STOCKS

TECH

Learn and Keep PAGE 14

There is more to tax

planning than ELSS

Will aviation stocks

keep flying?

Apps that help you

make the switch

Family Finance PAGE 16

Most investors need to put

money into both ELSS and
provident fund for effective
tax planning.

Low fuel costs have

brought cheer to the airline sector, but investors
should be watchful.

Moving from Windows to

Mac or vice versa can be
tough. Cross platform apps
make the transition easier.

Q&A PAGE 18

PLUS
The weeks best stocks, mutual funds,
loans and deposits.
NITIN SONAWANE

THESE FINANCIAL STRATEGIES CAN HELP OPTIMISE

THE RETURNS FROM SAFE INVESTMENTS.

Prakriti Ojha from Mumbai

earns well, but prefers to invest in
low-risk bank deposits.

The Economic Times Wealth is available at an invitation price of `7/issue. To book your copy*, contact your newspaper vendor or call 011 - 39898090; Email: crm.delhi@timesgroup.com; SMS ETWS to 58888

02

Cover Story

The Economic Times Wealth, February 1-7, 2016

NITIN SONAWANE

Prakriti Ojha
31 YEARS, MUMBAI
ANNUAL INCOME

INVESTS IN

`13 lakh

PPF, life insurance

policies

REASON FOR RISK AVERSION

After losses from a mis-sold Ulip,

she has stayed away from
market-linked investments.

OUR RECOMMENDATION

Dont shun equities

completely. Test your
risk profile and start
putting small amounts
in a balanced fund.

MONEY TIPS FOR

LOW-RISK
INVESTORS
These financial strategies can help optimise
the returns from safe investments.
NEHA PANDEY DEORAS
any equity funds have
churned out compounded annual returns of over
15% in the past 10 years.
But Money Khanna (see
picture) is more concerned about the
near-zero returns from the three largecap funds she bought 18 months ago. I

have not lost money but my investment

has not moved much. A fixed deposit
would have at least earned some returns, she says. The Mumbai-based executive now invests mainly in the PPF
and bank deposits.
There are many reasons why investors
prefer to be safe than sorry. Some of
them just cant stomach the volatility
that comes with stock investments.

Khanna is one such investor. She is content with low returns from her investments as long as they are assured. Others may have had a bad experience with
stocks, which is why they want to stay
away. Take for instance HR professional
Prakriti Ojha (see picture). She is young,
earns reasonably well and doesnt have
too many liabilities. But after she lost
money in a mis-sold Ulip, she has stayed

Cover Story

The Economic Times Wealth, February 1-7, 2016

03

FACTORS THAT AFFECT YOUR ABILITY TO TAKE RISK

All these factors combine to determine the risk tolerance of the individual. Take the test on Page 6 to know how they work.

AGE

INCOME

LIABILITIES

DEPENDANTS

FIELD OF WORK

Age is the most important factor

of your risk profile. The younger
you are, the higher the capacity
to stomach risk. In a downturn, a
young person can wait till the
investment bounces back. Some
planners say that equity allocation should be 100 minus your
age. But just because a person is
25 years old doesnt mean he
can invest 75% in stocks. Other
factors also play a role.

Lumpy income impacts the risk

profile. Self-employed professionals such as lawyers, architects and consultants dont get
paid on a monthly basis. They
need bigger buffers of liquid
investments to meet emergencies. A salaried individual has a
regular stream of income and
can opt for instruments that
have short-term risks but give
higher returns in the long term.

If you have a home loan or other

liabilities, avoid big risks with
your investments. Ideally, a persons debt repayments should
not be more than 50% of his
income. The rise in interest rates
would impact the finances of
someone with a long-term home
loan. On the other hand, if you
are not repaying any loan, you
are in a better position to invest
in riskier assets.

The dependency level of a person also affects his risk tolerance. If he is the sole breadwinner of an extended family (parents, siblings, spouse, children),
an individual should not take
high risks. On the other hand,
someone with a working spouse
and no dependents can afford to.
People with many dependents
also need more insurance and
build a larger emergency fund.

The industry in which a person

works determines the stability of
the income. Someone working in
a tech start-up should not be as
aggressive an investor as someone working in an FMCG company. Similarly, a higher quantum
of debt investment is also recommended for a self-employed
professional, who ploughs back
a big chunk of his earnings into
his own business.

TAKE TAX INTO CONSIDERATION

The post-tax returns of bank deposits are not very attractive
ASSUMPTIONS

RETURNS

8%

INFLATION

6%

TAX BRACKET

30%

FIXED
DEPOSITS

SHORT-TERM
DEBT FUNDS

Investment

`1,00,000

`1,00,000

Amount after 3 years

`1,25,971

`1,25,971

Not applicable

`1,19,102

Gains

`25,971

`6,869

Tax payable

`8,025

`1,374

`17,946

`24,597

5.65%

7.61%

Indexed cost of purchase

NET GAIN
EFFECTIVE RETURNS

away from equity investments. I paid

higher than his willingness to do so.
`56,000 between 2009 and 2012 and got
Based on the factors that determine the
back only `40,000 when I surrendered the
risk appetite, we have developed a risk tolerpolicy, she says. Ojha then vowed to invest
ance test. Turn to Page 6 to to ascertain how
only in fixed income instruments that gave
much risk you can take. Your score in the
assured returns.
risk tolerance test will determine where you
There could also be valid reasons for inshould invest. If your score puts you in the
vesting in low-risk instruments. Nirbhay
low-risk segment, here are some tips for you
Morzaria (see picture) is young and earns
to optimise your returns.
well. But he has major expenses
Go for tax efficient investments
lined up in the next 2-3 years and
There is more to
Bank deposits are all-time favouris therefore investing mostly in
tax saving than
ite investments for those seeking
debt-based instruments. I am
ELSS funds
low-risk instruments. They are
saving for short-term goals so
Page 8
easy to understand, widely availacant invest in volatile assets, he
ble and anyone with a bank acsays. Only 15% of his portfolio is in
count can open one. With the
stocks.
spread of Netbanking, they also do
This weeks cover story looks at the
not require any paperwork. But bank deposreasons why investors go for low-risk opits are very tax inefficient because the entire
tions and offers tips on how to make the
interest earned is added to your income and
most of these instruments. The risk profile
taxed at the normal rate. Short-term debt
of an individual is determined by a combinafunds can be a better alternative. Although
tion of factors (see graphic). In many cases,
the returns generated from these funds are
the individual makes the wrong investment
similar to the interest you earn on FDs, the
choices because he is not aware of his risk
actual return is higher if you hold them for
tolerance. His ability to take risks may be

04

Cover Story

The Economic Times Wealth, February 1-7, 2016

HOW DEBT OPTIONS STACK UP

The VPF may be the best way to invest in debt in 2016. But the high rate
announced for 2015-16 may not sustain in the coming years.

INTEREST
RATE (%)

POST-TAX YIELD IN
DIFFERENT TAX SLABS (%)
10% SLAB

20% SLAB

30% SLAB

EPF and VPF

8.95

8.95

8.95

8.95

PPF

8.75

8.75

8.75

8.75

Tax-free bonds

7.50

7.50

7.50

7.50

Kisan Vikas Patra

8.70

7.80

6.91

6.01

NSCs

8.50

7.62

6.75

5.87

Bank deposits

8.00

7.18

6.35

5.53

*Ranked on basis of post-tax returns in 30% tax bracket

Shraddha
Dixit
29 YEARS, THANE
ANNUAL INCOME

`5 lakh

INVESTS IN

FDs, life insurance

policies and Ulips

REASON FOR RISK AVERSION

Barely 5-6% in equities. Prefers

FDs because she lacks knowledge
of stock markets and mutual funds.

OUR RECOMMENDATION

Use the existing Ulip to

enhance exposure to
equities. Instead of taxinefficient FDs, opt for
debt mutual funds.

more than 3 years.

There is a widely held misconception
that up to `10,000 earned from bank deposits in a year is tax-free. This is not correct. The exemption under Section
80TTA is only for the interest earned on
the savings bank balance, not on fixed deposits and recurring deposits. Also, even
though five-year FDs are labelled tax-saving deposits, the interest they earn is fully
taxable.
For investors in the 30% tax bracket
(taxable income of over `10 lakh a year),
the returns from a 3-year FD can be as low
as 5.6%. On the other hand, the gains from
a debt fund are taxed at 20% after adjusting for inflation. The net gain is close to
200 basis points higher (see table). Plus,
there are ways the capital gains can be set
off if you invest in a fund. No such options
are available for interest income from
FDs, says Bhuvana Shreeram, Head, Financial Freedom Golden Practices, a
Mumbai-based wealth management fund.
For salaried people, the Voluntary
Provident Fund may be a good option.
The Employees Provident Fund Organisa-

tion (EPFO) has recommended an interest

rate of 8.95% for the current financial year,
which means it will earn equivalent to 12.95%
from a bank deposit or bond for subscribers
in the highest 30% tax bracket. But keep in
mind that the higher rate is for the current
year could change in the coming years. Taxfree bonds, on the other hand, offer assured
returns for the entire term.

Avoid locking up for long-term

Dont put all your money into long-term options. You never know when you may need
it. Some banks levy a penalty on premature
withdrawals from a fixed deposit. Its best to

Nirbhay Morzaria
OUR RECOMMENDATION

Avoid tax-inefficient
FDs and put money in
debt funds if your
investment horizon is
more than 3 years.

28 YEARS, MUMBAI
ANNUAL INCOME

`9 lakh

INVESTS IN

PPF, bank FDs and

equity funds.

REASON FOR RISK AVERSION

Has big-ticket expenses coming up

in next 2-3 years. So, only 15% of
total portfolio allocated to equities.

split the investments and create a ladder of

deposits. If you have `4 lakh to invest, split
the amount in four deposits of `1 lakh each
for one, two, three and four years. When the
1-year deposit matures, reinvest the maturity
proceeds in the 4-year FD. This will ensure liquidity because you have one deposit maturing every year. In case of regular investments, open multiple recurring deposits so
that even if you have to close one due to any
reason, the others can continue.
Debt funds offer higher liquidity than other long-term options such as PPF and VPF.
You can withdraw from the debt fund or reinvest on any day without any restrictions.

NITIN SONAWANE

Cover Story

The Economic Times Wealth, February 1-7, 2016

05

NITIN SONAWANE

Money Khanna
31 YEARS, MUMBAI
ANNUAL INCOME

`4 lakh

INVESTS IN

PPF, FDs and

mutual funds

REASON FOR RISK AVERSION

Equities account for only 7-8% of

her portfolio. She prefers options
that offer assured returns.

Online access has made this even more convenient.

Insurance plans force you to save

For some investors, the lack of flexibility can
be a boon in disguise. Traditional life insurance plans give very low returns but they also
force investors to invest for the long-term. The
premium notice that is sent to the policyholder
every year instils a discipline that mutual
funds cant. Mutual fund SIPs are usually for
1-2 years. In some cases they may extend to
three years. A life insurance plan ensures that
the policyholder keeps investing for 15-20
years. He may get 100-150 basis point lower return but at least he doesnt stop investing,

OUR RECOMMENDATION

Take risk tolerance

test. Start investing in
low-risk MIP funds
that give better returns
than PPF and FDs.

says R.M. Vishakha, Managing Director and

CEO of IndiaFirst Life Insurance Company.
The other good point is that the policyholder
cannot dip into the corpus before maturity.
We have seen clients start investing for their
childs education only to withdraw the money
2-3 years later to go on a holiday. We recommend insurance plans for such investors. They
complain that we are trying to sell them an expensive product but that is not the case. We are
just selling them discipline, says Sanjiv Bajaj,
Managing Director of Bajaj Capital.

Former havens no longer safe

There was a time when gold and real estate
were considered the safest investments. Those

06

Cover Story

The Economic Times Wealth, February 1-7, 2016

Your loan
repayments
account for

Your dependents
include

How soon do you

need the money?

a Parents, siblings,
spouse and children

a Within 6-12 months

a Over 50% of
income
b 30-50%

b Parents, spouse and

children

c 10-30%

c Spouse and children

d Less than 10%

d Only spouse

e No loans

e No dependents

c 3-6 years

a All the time

d 6-10 years

b About 6-7 times

e More than 10 years

c 3-4 times

b Less than 10
c 10-20
d 20-30

e Never

WHAT TYPE OF INVESTOR

ARE YOU?

a Only business/
salary

Use your score to find out which category of investor

you fall in and what should be your asset allocation.

b Business/salary
and rent
c Salary/business,
rent and interest

BELOW 12 POINTS: CONSERVATIVE

You cant take high risks because of precarious finances.
Focus on capital protection, even if it means low returns.
Invest mainly in debt with 5-10% in stocks to beat inflation.

13-20 POINTS: MODERATELY CONSERVATIVE

Your priority is to preserve capital but you can take a slight
risk to be able to earn better returns. Go for MIPs, which
invest 20-25% in stocks and the rest in the safety of debt.

21-28 POINTS: MODERATE

You can take a reasonable risk in exchange for better returns.
This will ensure good capital growth in the longer term.
Allocate 50-60% to debt and 40-50% to equities.

d Salary/business,
rent, interest and
dividends
e Salary/business
of self and
spouse, rent,
interest and
dividends

How much of your

income are you
able to save?
a Less than 5%
b 5-10%
c 10-20%
d 20-30%
e Over 30%

Given your current

financial status, can
you achieve your
financial goals?

Which of these
best describes
your financial
situation?

a Some goals may be

missed

a Very unstable

b Will be a bit of struggle

c On track to reach
achieve all goals

b Needs
improvement
c Average
d Reasonably sound

d Planning for goals

already done

e On a solid footing

e All goals achieved

To calculate your risk quotient, give

yourself points on the following basis:
A

Point

Points

29-36 POINTS: MODERATELY AGGRESSIVE

You can digest an above average risk, which can prove
rewarding. Allocate up to 70% to equities. Stable finances will
help you take the ups and down in equities in your stride.

Points

Points

OVER 36 POINTS: AGGRESSIVE

Points

You are in a position to take high risks. Put up to 80-100% in

equities. This can mean notional losses in the short to
medium term, but the long-term picture could be bountiful.

b May need to change

soon

e Excellent chances of
growth

Many investors are not sure how much risk they can take. This
short test tells you the asset allocation that best suits your profile.

Your total income

comes from

a Not sure if it will last

d Doing well and expect

to rise

d Once or twice

YOUR RISK
APPETITE

a Already retired

How stable is your job/

business/profession?

c Dont foresee any

change

FIND OUT

How many years

are left for you
to retire?

e More than 30

b 1-3 years

How many times have

you borrowed or
rolled over credit
card bills in the past
1-2 years?

TOTAL POINTS

Cover Story
days are long gone. As the returns of the past
three years show, gold is no longer the safe
harbour it used to be. Gold prices leapt up
32% in 2011 and hit `34,000 per 10 grams in
2012. But they have consistently slipped after
that and the metal is now trading at `26,500
per 10 grams, down almost 22% from the
peak. Experts say it is unlikely that gold will
bounce back in 2016. If you still want to invest in gold, a better option would be the
gold bonds issued by the government. These
bonds are linked to the price of gold and give
2.5% extra returns by way of yearly interest.
The same is true for real estate. Property
prices are inflated and home loan interest
rates are still quite high. Investing in property at current levels is risky because even if
the value appreciates by 5-6%, the 9-9.5% interest you will pay on the loan will mean a
loss in real terms. However, the real estate
market is not uniform and there may still be
some pockets that can offer good appreciation.

Dont shun equities altogether

Fixed deposits and PPF may be a safe option
but they wont be able to prevent the eroding
effect of inflation on your savings. Your
money needs to grow at a faster clip than the
inflation rate to sustain your lifestyle for several years. This cant be done by parking the
entire retirement savings in low yield fixed
deposits, says Hemant Rustagi, CEO,
Wiseinvest Advisors.
If you spend `40,000 a month on house-

The Economic Times Wealth, February 1-7, 2016

hold expenses today, even 6% inflation will

push that up to `72,000 a month by 2025. By
2030, the monthly requirement will surge to
`96,000. By 2035, it would be `1.28 lakh a
month.
The only way to beat inflation is to invest
in assets that can grow faster. This is why
even risk-averse investors should not shun
equities completely. You may not have the
stomach for the ups and downs of the stock
market but experts and statistics say that equities are the only asset class that can beat in-

flation in the long term.

For risk-averse investors, monthly income
plans (MIPs) from mutual funds can be a lowrisk entry point to the equity markets. MIP
funds follow a conservative investment strategy, allocating only 10-25% of their corpus to
equities and putting the rest 75-90% in safer
bonds and other debt instruments. This is
why the returns from this category are fairly
attractive when the going is good and relatively stable over the long term. In the past
one year, when the Nifty has dipped by over

EQUITIES TO BEAT INFLATION

The debt-based PPF wont be able to beat inflation. MIP funds put 15-20%
in equities, which helps them outperform the PPF and beat inflation
VALUE OF `5,000 SIP STARTED
3 YEARS AGO

5 YEARS AGO

10 YEARS AGO

Amount invested

`1.8 lakh

`3 lakh

`6 lakh

ICICI Pru Child Care Plan

`2.28 lakh

`4.42 lakh

`11.97 lakh

HDFC Childrens Gift Fund

`2.12 lakh

`3.92 lakh

`10.4 lakh

Birla SL MIP II - Savings 5

`2.08 lakh

`3.84 lakh

`9.93 lakh

SBI Magnum MIP Floater

`2.13 lakh

`3.95 lakh

`9.58 lakh

PPF

`2.06 lakh

`3.74 lakh

`9.41 lakh

07

15%, the average MIP fund has given a return

of more than 4%. MIPs give investors good
returns if stock markets do well and also protect the downside because of the limited exposure to equities, says Vidya Bala, Head of
research, FundsIndia.com. As the table
shows, investments in the top performing
MIP funds have outperformed the PPF in the
past three, five and 10 years.

Please send your feedback to

etwealth@timesgroup.com