Exercising too much control over investment behaviour tends to prove counterproductive
When I was a kid, my dad made me memorise the adapted version of the Serenity Prayer: ‘God, grant me the serenity to accept the things I cannot change, courage to change the things I can and the wisdom to know the difference.’ I memorised it but re-adapted it in various forms, for various situations.
While dealing with investors, there would always be some who insisted that I control or predict things over which I had no influence or power. Conversely, they would not focus on things that they could and should have actually controlled, in terms of their behaviour and habits. My simple prayer then would be — please let them focus only on what they can control, let go of what they cannot and may their wisdom guide them to know the difference.
Let me discuss a few areas with respect to money that many of you tend to focus upon, although you have little control over it.
Focussing on returns
How many of you have bought land, property, investment-linked policies or gold asking how much returns it will give in 5 years? Close to none, I am sure. But, how many of you have bought mutual funds or stocks asking how much returns it will give in 3 or 5 years? Really, why such contradiction in behaviour? Fixed deposits (FDs) can give you predictability because they are fixed return products. Land, gold or equity markets are subject to market vagaries. The irony is that what impacts equities (underlying fundamentals) over the long term is reasonably known (which is why long-term return expectation is not totally off mark) while it is little known with land and gold.
By focussing on returns, you do two things: one, you build goals that may go haywire. Two, if your return expectations do not transpire, you go on a full risk aversion mode, going back to FDs alone.
Should you not focus on returns? You can, but only the long-term averages. This is needed only for the purpose of giving direction to your savings and to know if you are on the path to reaching your goal. If returns from assets go down, the simple, logical thing is to increase your savings or, alongside, revisit your lifestyle costs.
This, once you know you are with the right products. You can’t have an endowment policy and suddenly realise that the returns are terrible. This is where mixing the right products based on your goal becomes vital. If you had a short-term goal, then you need a fixed-income product, not a market-linked product; to provide return predictability.
A friend was sceptical that the markets would improve post elections. But when the Sensex returned 12% in 5 months beginning 2019, she was cursing herself that she stayed out. But, from the June peak, when the Sensex dropped 8.5%, she was elated. I asked her if she was going to invest now. She said, “No, it’s too risky.” All analysts are now predicting a further slowdown. Likely, she will neither invest nor build wealth.
Now, two things happen when you predict markets: one, you lose out on investing early, compounding, and averaging. Two, you make terrible moves driven by the emotions of the market. My friend had two chances. One, start investing at the beginning of the year, continue and simply rebalance her asset allocation, when her equity swells, to some debt.
Or she could have invested at least when she saw the market falling. None of these require market predictions. They just need control over your investing behaviour.
The accompanying graphic will tell you the issues on which most of you tend to focus (markets, returns, taxes), where you have little control and ignore what you have control over.
Controlling your taxes
Yes, you can control your taxes by deploying them right. But, it is more important to invest well to make sure you build healthy coffers. Buying a policy at the nth hour for tax-saving may result in being saddled with a product that may be entirely unsuitable for you. Buying a house merely to save taxes is another classic example.
How much of the EMI is tax deductible? Are you stripping yourself of your ability to save for the next 5-10 years with a high EMI value? What if you had deployed this in other financial savings with lower tax deduction but with superior returns? Should you lock your capital gains into 54EC bonds with low rate of interest just to save on capital gains tax? These are the questions that you will miss when your focus is merely on tax.
Just remember the serenity prayer every time these investment biases crop up.
(The author is a personal finance expert)
Bundled policies come with a melange of interesting options
Under one roof: A bundled home insurance package policy is comprehensive and cost-effective. Getty Images/iStockphotobangkok
Protect home from fire, burglary using single policy
Some policies have sections covering even pedal cycles
Precious jewellery and valuables are also covered
Home insurance package policies bundle a comprehensive, yet cost-effective fire and allied perils insurance with several other interesting options.
They include fire and burglary cover for contents, options to cover specified jewellery and valuables under a special section as also specified domestic appliances against breakdown and specified televisions and desktop computers against loss or damage.
Some policies have sections covering pedal cycles, workmen’s compensation insurance for household staff, hospitalisation insurance for household staff and so on that you can pick and choose from. Each section has a different sum insured (SI) and premium rate and there are volume discounts for choosing multiple sections.
Fire cover for building and contents and burglary cover for contents are the main covers and the options work like this:
If you live in a house you own, you can purchase fire cover for the building and contents plus burglary cover for contents. If you are the owner but not occupier, you are entitled to fire cover only for the structure. If you are only a renter, you can buy fire and burglary cover for only the contents. In any case, the SI for fire and burglary covers for contents should be identical.
We saw the scope of the fire cover for building in the earlier instalment of ‘Cover Note’ and it pretty much applies to contents as well.
The exceptions differ. They include loss of or damage to articles of a consumable nature, loss of or damage to money, securities documents and unset precious stones, jewellery and valuables.
The burglary cover indemnifies the loss of listed contents (except jewellery and valuables) within the premises caused by burglary, housebreaking, larceny and theft.
If anyone in the family of the insured is involved in the burglary, the loss will not be covered. Neither will loss of/or damage to money and so on as listed above.
The list is not exhaustive, you should read the fine print in the policy prospectus for exact details.
Precious jewellery and valuables like watches, curios and works of art are covered under a special section against loss or damage while anywhere in India, caused by accident or misfortune. In the case of damage, repair and restoration expenses are payable.
Breakage of fragile and brittle items is one exclusion, as are mysterious disappearances, unexplainable losses, loss due to misplacement and missing items.
An interesting cover is the breakdown of domestic appliances, the “unforeseen and sudden physical damage, including accidental external damage caused due to mechanical and/or electrical breakdown of domestic appliances” specified in the schedule when they are inside in the insured premises.
The SI is the market value of an item of the same kind and capacity. Repair expenses to restore the item to its former state will be payable. Loss or damage caused by wilful damage or gross negligence is an exclusion among others.
You can insure the loss of or damage to your televisions and desktop computers against fire and allied perils under a special section where the market value of the gadget is the SI and repair expenses will be payable. Exclusions apply, of course.
Listing out the contents of your home is the important part of taking this cover.
(The writer is a business journalist specialising in insurance & corporate history)
What is CPSE ETF?
CPSE ETF, as the name suggests, is an exchange-traded fund (ETF) comprising public sector enterprises (PSEs). The ETF was launched by the government in March 2014 to help divest its stake in select public sector undertakings through the ETF route. The ETF is based on the Nifty CPSE index that comprises 11 PSEs such as ONGC, NTPC, Coal India, Indian Oil Corporation, REC, Power Finance Corporation, Bharat Electronics, Oil India, NBCC (India), NLC India and SJVN. The parameters based on which companies have been made part of the index include a criteria that they have paid at least 10% dividend in the last two consecutive years.
What are the benefits of CPSE ETF?
Investors get to hold stake in the best of public sector enterprises — the so-called Maharatna, Navaratna and the Miniratna — that have a strong dividend-paying track record.
Incidentally, the dividend yield of the CPSE ETF index is around 5%, higher than the other indices.
While investors get an opportunity to diversify their portfolio through a single ETF, it also has the added advantage of an upfront discount that investors get if invested at the time of the further fund offering or fresh fund offering (FFO). Also, the fund has a very low expense ratio, which, in turn, enhances the returns.
The recent Budget has also introduced a tax benefit for investing in ETFs, just like equity-linked savings scheme (ELSS) offers.
The benefit will be part of the overall deduction of ₹1.5 lakh allowed under section 80 C of the Income Tax Act.
How has the response to FFOs been till now?
The new fund offer (NFO) of the CPSE ETF was launched in March 2014 and since then, there have been five rounds of FFOs. The popularity of the ETF can be gauged from the fact that each of the FFOs was oversubscribed, with investors across categories bidding in huge numbers.
Till the sixth FFO in July, the government had raised ₹38,500 crore through the CPSE ETF. The sixth FFO attracted bids worth ₹40,000 crore which is five times the issue size of ₹8,000 crore.
In other words, the last tranche has attracted as much subscription as the five tranches before it put together.
This also assumes significance as the government has set a record divestment target of ₹1.05 lakh crore in the current financial year. The CPSE ETF is managed by Reliance Mutual Fund.
For optimum returns
Q. I have ₹50,000 in hand and wish to multiply this amount in future by investing somewhere. Kindly guide me as to where and how to invest it for optimum returns. I can hold the investment for 5 to 7 years and can do without regular income.
A. Given that you have a 5- to 7-year horizon, don’t require regular payouts and are seeking high returns, you can invest the money in equity-oriented mutual funds. If you can take a lot of volatility in your capital, you could choose a multi-cap equity fund with a good track record to invest in. A multi-cap equity fund invests in a range of large-, mid- and small-sized companies in the stock market.
Alternatively, if you are willing to settle for slightly lower returns but with less volatility, you can consider an aggressive hybrid fund. Such funds invest 65% of their portfolio in stocks and the remaining in bonds. Investing a big sum in an equity or aggressive hybrid fund at one go can expose you to an immediate capital loss if the market falls sharply after your entry. Therefore, it is advisable to spread your investment over the next six months by investing equal sums each month through a six-month Systematic Investment Plan.
Mutual fund SIPs
Q. I am 31 years old and have resigned from work. I had withdrawn my provident fund amount two years ago, which I invested in bank fixed deposits with an interest rate of 8.5% per annum. As the interest rate has now fallen to 7%, I have been wondering if I should invest in mutual fund SIPs. Can you tell me if this is advisable?
A.Mutual funds, even if you go in for debt funds, are market-linked products where there are no guaranteed returns like bank fixed deposits. While the return you earn on a bank fixed deposit may fall due to falling interest rates in the economy, in mutual funds, it is not just your returns which swing, but also your capital which suffers a loss if markets turn adverse.
Therefore, before considering SIPs in a mutual fund, there are three questions you should ask yourself. Are you okay with risking some of your capital to market swings? Can you take volatility in your returns from year to year? Can you do without regular income from this investment? If your answer to any of these questions is a no, you are better off with a fixed deposit product. To improve your returns, you can consider parking 25% of your money in small finance banks which offer 8.5-9% interest, and another 25% in NBFC deposits from highly-rated companies like Sundaram Finance or Mahindra Finance which offer 8-9%.
If you are willing to take on risks to your capital and do not mind volatility in returns, you can consider debt mutual funds. To invest in debt mutual funds, you do not need to do an SIP and can simply invest a lump-sum amount. Be sure to spread out your investments over three Corporate Bond Funds and PSU and Banking Debt Funds, which invest only in higher-rated bonds. With debt funds, it is more tax efficient to invest in the Growth option than the Dividend option (which is highly taxed) and to use a systematic withdrawal plan to receive regular cash flows from the fund.
If you are okay with risk to your capital, do not need the money for five years and are looking for high returns, then you can consider SIPs in three Aggressive Hybrid Funds, which invest 65% in equity and 35% in debt.