Month: July 2012

Tax Free Bonds – Mid Year Update

This post is written by Shiv Kukreja.

The first quarter of calendar Yyear 2012 saw a big number of public sector undertakings (PSUs) issuing tax-free bonds. NHAI, PFC, IRFC, HUDCO and REC – they all came within a span of 70-75 days and took away approximately Rs. 28,000 Crores from the markets.

These bonds were quite attractive and offered very good tax-free returns of over 8%. mutual funds, insurance companies, other financial institutions, corporates, FIIs, NRIs, trusts etc. – all participated in these issues and many of these issues got oversubscribed on the first day itself.

Retail investors were slow to begin with but they also participated in these issues but in a wrong manner and at a wrong time. Over a period of last 30-45 days, I’ve observed their attractiveness increasing and a large number of my clients asking me more details about these bonds and investing in them.

NHAI was the first one to offer an attractive rate of tax-free return of 8.30%. I still remember I sent quite a good number of emails to all my clients and personally made calls to a few clients in an effort to make them understand the terms of the NHAI bonds issue and why it made sense to invest in these bonds at the time of its public offering itself.

But as always, clients took their own time to understand its benefits and when these bonds actually listed at a premium of 4% on the exchanges, they remained quiet because they had nobody to blame for this notional loss or opportunity lost but themselves. If I had made no efforts in informing them then they would have caught me for not putting proactive efforts. 🙂

NHAI bonds came into the limelight when Indian Railways Finance Corporation (IRFC) came out with its bond issue and due to a rosy picture shown to the investors by the broker community, investors flocked to apply for IRFC bonds. Brokers even provided funding to their clients to apply in this issue. But I knew IRFC bonds were not as attractive as the NHAI bonds were because of its “step-down interest” feature i.e. the rate of interest gets reduced to 8.10% if a buyer purchases these bonds from the original allottee in the secondary markets.

During the subscription period, IRFC bonds issue got a huge response in an expectation of a bumper listing like the NHAI issue had. But that did not materialize and IRFC bonds gave only 1-1.5% listing gains and that too were taken away by the brokers who funded the investment. HUDCO tax free bonds issue also opened for subscription on the same date i.e. January 27th but due to its lower rating of AA+ and not so heard of name, it could not be fully subscribed and listed at a significant discount of 4-5%.

REC was the last to come up with its AAA-rated tax-free bond issue in the first week of March and got a reasonable response also. But again its listing was poor with 2-3% discount due to a huge number of sellers and a very few investors showing any interest to buy. There has been no such issue hitting the street since then, despite of the fact that Finance Minister has doubled the quota for these bonds to Rs. 60,000 crore in this year’s budget.

What makes these bonds attractive?

Higher effective after-tax returns: Suppose you fall in 30% tax bracket and have invested Rs. 5,00,000 in a fixed deposit with HDFC Bank for 5 Years earning 9.25% p.a. interest. The after-tax effective rate of interest on this FD would be 6.39% (9.25%*(1-0.309)). You can also look at it as tax-free equivalent rate of interest. On the other hand, these tax-free bonds offer you 8.30% interest, which is equivalent to 12.01% effective before-tax rate of interest. So, you can either compare 9.25% with 12.01% or 6.39% with 8.30%. This comparison makes tax-free bonds a clear winner as far as the rate of interest is concerned. In actual terms, you’ll end up having Rs. 31959 as the interest with your FD after one year as compared to Rs. 41500 with tax-free bonds, a difference of Rs. 9541 every year.

Scope of capital appreciation: Then comes the capital appreciation factor. We all know India is struggling with a high inflation rate and the interest rates are ruling on a higher side. But there is a strong possibility that one or two years down the line both the inflation as well as the interest rates might cool down. Also, whenever the interest rates come down, bond prices go up. In that scenario, there is no scope for FDs to result in any capital appreciation because your FDs are not trade-able and you cannot transfer the title of these FDs in the market. At the same time, capital appreciation is possible with tax-free bonds as and when the inflation and interest rates cool down. These bonds are tradeable and freely transferable to any of the interested prospective buyer on the exchanges where these bonds are listed.

Liquidity: One more attractive feature of these bonds is their liquidity. When you break your FD before the tenure gets completed, the bank either levies a premature withdrawal penalty or gives the applicable rate of interest for the period you hold the FD for. Tax-Free Bonds score over FDs in this department also. You can sell these bonds in the secondary market whenever you want, given there is a buyer for these bonds. Till date the liquidity has not been a big negative factor for all of these issues, though at times the buyers have benefited quite a lot due to a huge number of sellers selling around listing time without thinking that they were selling these bonds at unreasonable prices.

TDS on FDs: Fourth factor which goes against FDs is that your FDs allow the banks to cut tax whenever they pay you more than Rs. 10,000 interest in a year. Needless to say tax-free bonds attract no tax so no scope of any TDS.

So after the first six months of this calendar year are gone, what is the current state of these bonds? – This table will tell you: (click to enlarge)

Since listing, some wise investors have bought in these bonds citing an opportunity due to weaker hands (retail investors) selling to encash their investments. These investors have made some decent returns since then. You can observe two kind of returns from the table – one is “Returns Over Issue Price” which shows the returns earned if somebody had applied for these bonds during the initial offer period. The other one is “Returns Since Listing” which shows the returns earned if somebody had bought these bonds from the secondary markets (stock exchanges where these bonds are listed like NSE or BSE).

HUDCO bonds have given 11.17% returns since listing in less than 4 months i.e. an annualized return of over 34%. Similarly, REC bonds have given 8.88% returns in just over 3 months i.e. an annualized return of over 30%. But, it would be highly unfair to expect a similar performance from these issues going forward. I would say it would be great if these bonds deliver some 10-12% returns over next one to two years, if interest rates come down.

What investors should do now?

It depends on what kind of investor you are, the reasons for which you want to invest in these bonds and the overall interest rate and inflation scenario in the country going forward. If you are in a 30% or 20% tax bracket, want to invest in these bonds from a long-term point of view i.e. more than one year, and believe that the inflation as well as the interest rates are headed lower, then you should definitely go for these bonds. You need to focus on their “Coupons” (interest rates on these issues) as well as the “Yield to Maturity” (or YTM). Coupon is the interest payment you are going to get every year on the “Interest Payment Date” over the issue price.

If you want to invest in these bonds for a very long period of time, say till maturity, then you need to focus only on the YTMs because you are going to get precisely this much yield on an annual basis till maturity considering the price you are paying over the issue price (premium in all these cases) and the remaining coupon payments.

If you want to invest in these bonds from a short-term point of view i.e. less than a year, then your returns will depend on the inflation and the interest rates over that period of time. If the interest rates fall more than expected, then your returns will be higher than the YTM and vice-versa.

I think people in the 10% tax bracket can also consider investing in these bonds considering there is no scope to have any capital appreciation in fixed deposits or post office schemes etc. but at the same time these bonds yield less to these investors or to those who need not pay any tax at all.

Given the stickiness of inflation and interest rates, the returns given by these bonds are not bad from any angle. How these bonds perform over the next year or two will depend on the inflation numbers, our fiscal deficit, current account deficit, interest rates scenario and most importantly how these companies themselves perform. I hope to see more such opportunities striking our doors in the next 8-9 odd months.

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Tata Steel Perpetual Bonds Details

Tata Steel Perpetual Bonds are currently open for subscription; the offer will close on 18th July 2012, and at a minimum investment size of Rs. 11.42 lakhs, this will be out of reach for most people, but it is an interesting product and there aren’t that many perpetual bonds that are out in the market right now, so it might be a good idea to just learn about this for when another product comes in that’s within your range.

Perpetual bonds don’t have a maturity date which means that the issuer is not obligated to pay back the principal on the bond at a given date (like other bonds) as long as they continue to pay the interest on the bonds. This doesn’t mean that your principal is locked in forever because the bonds do trade on the stock exchange and you can sell them there. But this market is not liquid as far as I know and I wouldn’t feel very comfortable depending on that option if I foresaw the need for this principal ever. I’m explicitly making this point because of a comment that appeared in the Suggest a Topic section related to this.

Here is the comment.

AJIT KULKARNI July 15, 2012 at 7:29 pm [edit]

I am aged 52 year old & had invested in different Insurance policies and deposits over a period of 10-12 years from my salary savings & reinvesting the same money on maturity is now approx amounting to 12 lacs when I surrender & with draw deposits from sweep in HDFC. Now I feel its to invest in a secured place where to invest at one place so as to get a benifit and Return on my investment for the total amout of rs 12 lacs.
M/S TATA STEEL Perpetual Bonds was suggested by my advisor at face value of 11.40 lacs on line through demat shall fetch Rs. 1,20,000 PER ANNUAM payable in Sept & March every on the same date & interest paid is taxable. Is it safe & OK please advise.

I think in this situation you are locking in a large part of your savings in just one instrument which doesn’t even have a maturity date and I don’t feel comfortable about that. That doesn’t mean it’s wrong, but you need to really understand that this investment may not liquidate that easily, and all your eggs are in one basket. Does the additional interest and it is not that much to begin with justify this?

The coupon on these bonds is 11.80% and the interest will be paid semi – annually, once on 18th March and then on 18th September. The yield however is lower than 11.80% at 10.25% because the face value of a bond is Rs. 10 lakhs whereas it is being sold at Rs. 11.42 lakhs in this offer.

While this yield is higher than what most bank fixed deposits give right now, it is not higher by a lot. There is a clause on the bonds that say if Tata Steel doesn’t redeem these bonds on 18 March 2021, then the coupon rate will be bumped up to 14.80% and that’s pretty significant, at least by today’s standards so they may just end up redeeming them in 2021.

The bonds are rated AA by CARE and AA by Brickworks so they are rated as quite safe assets. Like the NABARD bonds, I think there is limited utility in this but a good product to know about.

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NABARD Zero Coupon Bond Issue Details

NABARD Zero Coupon Bonds are available for subscription right now (the offer will close on 18th July), and I think this is the first time I’m ever writing about any zero coupon bonds on offer for sale.

Zero coupon bonds have no interest payments and instead they are issued at a discount to the face value so when you redeem them at face value during maturity, you get your returns during that time.

NABARD ZCB have a face value of Rs. 20,000 and will be issued to the subscribers as part of this offer at Rs. 11,980. When you redeem them, you will get Rs. 20,000 for every bond, and the maturity date is 1st January 2019.

The NABARD brochure says that the return on this bond is 8.25% but I’m getting a slightly lower return of 8.22%.

If you invested Rs. 11,980 for 6.5 years at 8.22% you would get Rs. 20,000 back which is what the return should be in my opinion. If anyone can let me know how they are arriving at 8.25%, I’d much appreciate that. In any case, the difference is not much at 0.03%.

Even though the face value of one bond is Rs. 20,000 – the minimum investment on this issue is Rs. 6 lakhs, and that makes it out of reach for most people.

The two big benefits of this kind of offer is lack of reinvestment risk and tax advantage. When the tax free bonds were issued, a lot of people had pointed out that since these bonds pay interest every year, it’s up to you to invest that interest and find an instrument that matches the return on that instrument or else the overall return will come down. This type of instrument eliminates that reinvestment risk since the return you get are compounded.

Second benefit is tax advantage because the bonds will be taxed using the formula for long term capital gains, either indexed or not indexed and that is usually lower than the tax rate on interest income.

To that extent, this is an interesting product for someone in the higher tax bracket who wants to lock in some investments only to use them after a certain period of time.

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Which is best listed tax free bond?

4 companies issued tax free bonds earlier this year, and all of these listed in the market. These bonds are great for people who are in the 30% tax bracket because their post tax yield is quite high, and since all of these bonds are listed in the market, you can buy them directly from there even if you weren’t able to subscribe to them the first time around.

The only drawback of buying them from the secondary market is that some of them had the step down feature which meant that when you buy them from the market, you get a slightly lower rate of interest than the primary subscriber. NHAI and PFC didn’t have the step down feature whereas the rest did.

I consider all these bonds quite safe in nature, and it is unlikely that any of these companies will default on their bonds.

So, if they are all alike in terms of safety then how do you decide which is the best tax free bond among them? The price, yield to maturity and term can help decide which is the best bond for you and I’ve created a list of all of them below.

Issuer Series Tenor Original Coupon
 Date Credit Rating  Market Price on July 14 2012
 YTM
REC 1 10 years  8.13% March 06 2012 – March 12 2012 CRISIL AAA CARE AAA FITCH AAA Rs. 1,050.00  7.20%
REC 2 15 years  8.32% March 06 2012 – March 12 2012 CRISIL AAA CARE AAA Fitch AAA Rs. 1,038.56  7.67%
Indian Railways 1  10 years  8.15% Jan 27 2012 – Feb 10 2012 CRISIL AAA CARE AAA  Rs. 1,049.83  7.26%
Indian Railways 2 15 years  8.30% Jan 27 2012 – Feb 10 2012  CRISIL AAA CARE AAA  Rs. 1061.90  7.39%
HUDCO  1  10 years  8.22%  Jan 27 2012 – Feb 10 2012 Fitch AA+ CARE AA+  Rs. 1,039.85  7.50%
HUDCO  2  15 years  8.35%  Jan 27 2012 – Feb 10 2012 Fitch AA+CARE AA+  Rs. 1,050.98  7.61%
NHAI 1 10 years  8.20% Dec 28th2011 -  Jan 11th 2012 CRISIL AAACARE AAA  Rs. 1,076.50  7.07%
NHAI 2 15 years  8.30% Dec 28th2011 -  Jan 11th 2012 CRISIL AAACARE AAA  Rs. 1,092.00  7.26%
PFC 1 10 years  8.20% Dec 30th2011 – Jan 16th 2012 CRISIL AAA ICRA AAA Rs. 1,069.93  7.16%
PFC 2 15 years  8.30% Dec 30th2011 – Jan 16th 2012 CRISIL AAA ICRA AAA  Rs. 1,080.47  7.38%

Based on this you can see that the yields for all of these bonds are very similar and I would say it is hard to pick one over the other and say that one is better than the other based on the data that we see here. Although you see some yields higher than the other I am not sure if this is always the case or it is just the day that I took the data for.

Perhaps the best strategy is to buy a combination of these bonds for differing maturities and thus even diversifying your bond portfolio as well.

This post is from the Suggest a Topic page.

Update: Corrected the error where I said all bonds have the step down feature.

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Difference between financial products and financial solutions

Last week, Kiran Telang wrote a very comprehensive review of ICICI Prudential’s SmartKid Child Plan over at The Financial Literates. I’ve heard about this plan earlier but didn’t bother to go into details because usually these type of plans don’t have a very high rate of return and they sell more on their emotional appeal rather than their financial return.

Kiran’s analysis shows that this is true for this particular plan as well, as the IRR for the product comes out between 3.35% – 6.3%. The article and the comments on it reminded me of a conversation that I had with Santosh Navlani of MoneySights a few months ago on Twitter.

He made the excellent point then that a lot of these plans are packaged as solutions for children’s education or something else like that and come with a long lock-in period, and a lot of people get swayed by the indicative rates that are shown by illustrations on these product. I think a lot of people who buy these products later find out that it’s not what they thought it to be. Bemoneyaware documented the whole thing and has a great post here.

Since Santosh made that point, I’ve been a lot more aware of these type of questions and products, and the big lesson here is that there really are no financial solutions that can be bought right now.

Your best bet is to not get swayed by advertising and focus on just the numbers (easier said than done) and you will always be able to create solutions yourself without needing any products to do that for you, and in any case, there aren’t many decent solutions (if any?) that exist today so the time spent looking for products that fit your need is better spent defining your needs and then combining a mix of simple, easy to understand products that give you what you want and don’t surprise you later on.

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Early social media wonderachiever meddling with special situations investing

Before we start this week’s links, there is a small change that I’m going to experiment with over the next few weeks. Everything that I share on the weekend links has already been shared by me on my Twitter feed and in a lot of cases, I discover these articles on Twitter as well. I’m going to credit links by linking back to the Twitter profiles of the people who shared these articles and if you were so inclined, you could follow these people.

That said, let’s start this week with Ajay Shah’s post on the Pew Global Attitudes Project which has some interesting takes on how Indians think about the current economic environment and how it compares with other countries. This is a very good post which is a quick read and is well worth your time.

The third most interesting thing for me was that 92% of Indians blame the government for our ills (perhaps the remaining 8% surveyed were politicians) and there is just one country with a higher percentage blaming its government, which is Pakistan with 95% of its population blaming the government for their situation.

The second most interesting thing was that 61% Indians support market economy and there are only 4 countries above us. I would have guessed this number to be much lower but it looks like the better living standards of the last two decades have convinced people that free markets are much better than government run institutions.

The most interesting thing was that 74% Chinese favor market economy! This is only lower than 75% for Brazil and even higher than the US.

Next up, this fascinating article on what pieces of customer information big retailers are interested in and how they go after it. A quote: “If we wanted to figure out if a customer is pregnant, even if she didn’t want us to know, can you do that? ”

The RBI Governor, Dr. Subbarao expressed concern that the government makes the financial institutions it has stake in take ad- hoc and detrimental investing decisions.

The Economist has a fascinating piece on Mr. Seth Klarman who is the boss of the 9th biggest hedge fund in the world – Baupost Group, which has an incredible track record over 3 decades that includes just 2 negative years since this fund started in 1982.

Digg, which is one of the earliest social media sites sold for what is a paltry sum of $500,000 last week, and the WSJ has an interesting interview with its founder. (via @Liz Heron)

I used to be a heavy Digg user but was never able to successfully promote OneMint on Digg. At that time I mainly attributed that to the fact that I don’t write things that are viral in nature, and my writing style doesn’t help either.

Since it felt so difficult to share links on Digg, I finally gave up altogether. This is a point that comes up in this article also when comparing it with how easy it is to share something on Twitter or Facebook versus how hard it was to do it on Digg.

This has been really true with my own experience where the traffic that OneMint gets from Twitter is so tiny that spending more than a few seconds sharing the link there would be a waste of time, but the service is so good that it just takes a few seconds to share the link there.

Kiran writes about Coromandel International’s bonus debenture issue which was a special situation investing opportunity, and while that opportunity doesn’t exist any longer, I think is an excellent post to learn how to track such situations and then track them in real time. (via @Kiran D)

Finally, you may or may not have liked to hear who the under-achiever is, but there is no doubt who the Wonderachiever is. (via @Sunil Srinivasan)

Enjoy your weekend!

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Why does the government run a three wheeler company?

The Financial Express has a story today about a possible diesel price hike after the presidential poll and as ridiculous as this is, unfortunately, it is a common thing, and shouldn’t surprise anyone. To be clear, the price hike is not ridiculous, the heavy burden that under recovery of diesel prices puts on the India’s finances leaves no option but to increase prices and pass that on to the consumer, but the timing is crazy.

What does a presidential poll have to do with diesel prices?

As long as you have the government involved in diesel pricing, this politicking will continue and there is simply no way out of it. As crazy as this may sound, it is nothing compared to the other things that the government is engaged in.

Air India has been bleeding money for ages and somehow the government and even a large group of ordinary folks who will never set foot on an Air India plane think that it will somehow hurt national pride (whatever that is) if the government got out of the airline business and left it to private hands. What rationale does the government have to run an airline, specially when it does such a terrible job of it?

This however, is not as ludicrous as the government running a three wheeler company! Scooters India Limited is the “future of three wheelers to come” according to the much fashionable flash intro on their website which fails to mention that it is also a sick PSU which the government has been unable to divest and as a result continues to run it at a loss.

What sense does this make?

The experience of the post liberalization era has shown the the private sector is able to compete with foreign firms and is able to provide a lot better services than the the government when it is allowed to.

Indians of this generation have not been smarter or more hard working than their parents, yet they enjoy a much better material life. Why is that? It’s because they were lucky to have a better system around them.

Far too many of us assume that it is India’s destiny to keep growing and improving the standard of living of millions, and I’m sure everyone thinks that India 20 years from now will be a lot better than India today, but that’s a misguided assumption because without the drive to free markets and further liberalization, there is now way to keep forging ahead.

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Dematerialization Process – Special Situations

This post is written by Shiv Kukreja

“Converting my physical share certificates and mutual fund investments into a dematerialised form has been a huge pain”. This is the experience which many of my clients have shared with me. The reasons are many – lack of knowledge with the clients about how, where and whom to approach, complicated procedures to do it, very little knowledge with the people who work for broking companies or DPs and most importantly very little interest shown by the sales-driven broking industry. We are giving it a shot to simplify the process a bit for you.

How to dematerialise your physical asset holdings

Dematerialisation is the process by which physical certificates of one’s financial investments like shares or mutual funds can be converted into an electronic form. An investor, who wants to get the securities dematerialised, needs to have a demat account with any of the depository participant (DP) like HDFC Securities, ICICI Securities, India Infoline etc.

The investor needs to surrender the certificate(s) to the DP along with the duly filled Dematerialisation Request Form (DRF), who then sends the securities to the concerned Registrar & Transfer (R&T) agent. To avoid any misuse of the share certificates, the investor must ensure that they are defaced by marking “Surrendered for Dematerialisation” on the face of the certificates. After receiving the certificates, R&T agent registers either NSDL or CDSL as the holder and the  client as the beneficial owner of these securities, if the certificates are found to be in order.

On receiving intimation from the R&T agent, NSDL or CDSL credit the securities in the depository account of the client with the DP and inform the client accordingly. It should not take more than 30 days from the date of submission of a demat request to get the holdings dematerialised.

Dematerialisation request is subject to a DP scrutiny and can be rejected in case:

* A single DRF is used to dematerialise securities of more than one company.
* A single DRF is used to dematerialise securities having different ISINs of the same company.
* If the material information on the security certificates is not readable.
* Part of the certificates pertaining to a DRF are either “locked-in” or “partly paid-up”.

Here are some of the common situations I’ve seen over the years.

Transfer cum Demat Form – Transfer of physical securities certificate from one name to another requires the investor to forward the certificate along with the duly stamped and executed “Transfer Deed” and “Transfer cum Dematerialisation” form. While sending the certificates for transfer, the investor must ensure that the transfer duty has been paid, the stamps are cancelled and the transfer deed is complete in all respects like the transferor’s signature, broker’s stamp, SEBI registration/code no., full address of the transferee, everything is there.

Death of a joint holder – Transmission cum Demat Form – In the event of death of a joint holder(s), the other joint holder(s) can get the name of the deceased joint holder(s) deleted from the physical certificate and simultaneously get the securities dematerialised by using the “Transmission cum Demat” form.

Death of a single holder/investor – Transmission in case of nomination – In the event of death of a single beneficial owner (or investor/client), the nominee(s) can get the securities dematerialised by using the “Transmission cum Demat” form along with a notarised copy of the death certificate. These securities will then automatically be transferred in the name(s) of the nominee(s).

Death of a single holder/investor – Transmission in case there is no nomination – In the event of death of a single beneficial owner without a nomination, the legal heir(s) or legal representative(s) can get the securities dematerialised by using the “Transmission cum Demat” form, a notarised copy of the death certificate and any of the following notarised documents – succession certificate or copy of probated will or letter of administration.

Difference in the sequence of holding – Transposition cum Demat Form – The names of the holders on a certificate should exactly match with the names in the demat account and in the same sequence. If the sequence of names on a certificate is different than the sequence in the demat account, then the securities can be dematerialised by using “Transposition cum Dematerialisation” form. e.g., If A and B have a joint demat account in the same sequence and some share certificates are held in the sequence of B and A, then the shares can be dematerialised in the same demat account using the “Transposition cum Demat” form.

Theft/Loss of a certificate – A complaint needs to be lodged with the local police station and a copy of the FIR should be obtained and the event should immediately be reported to the R&T agent along with the certificate no./folio no./distinctive nos. to “Stop Transfer” of such certificate(s). The client should then request for a fresh issue of duplicate certificate by sending both these documents physically to the R&T agent.

Change in the name consequent upon marriage/divorce – The securities certificate along with a copy of marriage certificate/decree of divorce and fresh specimen signature, duly attested by the competent authorities should be forwarded to the R&T agent. The client is also required to open a new demat account with the changed name and then send the new certificate for dematerialisation.

These are some of the most common situations that the clients face. If you’ve any personal special situation/experience regarding dematerialisation of your physical holdings, then please do share with us.

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What planning for my wedding taught me about derisking my portfolio

De-risking a portfolio is a process where you get rid of your risky equity investments and replace them with safer fixed income investments when a goal is nearing or when you feel you will need money in the short term.

The question of how long in advance should you prepare to de-risk your portfolio appeared a few days ago in the Suggest a Topic section, and I have done this once myself so I’m sharing what I did and my rationale behind it.

I have invested in stocks since I was 17 or 18 and all my money has always been (still is) invested in equities (not recommended to others) except for one stretch of about a year when I had to de-risk my portfolio.

That was one when I was getting married. I got married in the January of 2010, and like most people, that was a significant expense for me.

I remember the broad details from my plan at the time, and I downloaded my brokerage statement which has the date wise transactions to refresh my memory on what was going on at the time.

Stopped buying shares 9 months before the wedding

The last big buy transaction on my statement was in April 2009, which was about 9 months prior to my wedding. So, at that point I decided to not buy any more shares and save that money for the upcoming expense. Now remember, this was quite soon after the big bad crash of 2008, and anyone who witnessed that crash or the one before that knows that markets come down very violently very quickly, and there is just no way to get out of the market during such crashes. So, keeping that in mind, about 9 months prior to the wedding, I stopped investing in risky equity and saved that money.

That was the first step to de-risk my portfolio – to stop my equity investments and reduce my exposure that way. For most people, you won’t need to stop all your equity investments altogether because you will have other safer investments also, and not everything you have will be invested in risky stocks.

I would imagine that moderating your ongoing investments before a big upcoming expense about a year in advance is worth a thought for everyone though.

I would love to say that I started a RD or some other investment with this money, but that won’t be true, the money that didn’t go into stocks just stayed idle in a savings bank account. Everyone else should however think of using up this money more wisely and putting it into a safe instrument that can be liquidated easily.

Started selling 3 months in advance

Stopping equity investments only saves you that much money, and the bulk of the money was raised by selling stocks in two periods of time.

I sold the first big chunk in October which was about 2 – 3 months before the wedding, and the dual reason was that you need some money a few months in advance and that I wanted to lock in some gains that the great year of 2009 brought for most investors. I think leaving the selling to just 2 – 3 months before the wedding was cutting it close but I was able to do that simply because I was sitting on gains and it was quite clear to me that it would take something very dramatic to put me in a position where I come up short for money.

Interestingly, the second big sale was on the 21st January, which was just two days before the wedding on the 23rd, and even I feel quite incredulous that I waited that long to make the sale – again the only reason I could wait for so long was that the market was doing well and I didn’t feel pressed for cash.

I don’t think it is advisable to wait just 4 or 5 days before you actually need the money, and I think you should have all the money you will possibly need at least 2 – 3 months in advance safely in the bank.

My goal of derisking

As I think about my decisions at that point in time, my first goal was to not sell at a big loss. This was a big concern for me because I didn’t have any other investments to fall back upon if the market fell. I would have been forced to sell my shares at a loss to raise the cash.

Stopping my equity investments and locking the gains in my portfolio gave me the comfort to know that I won’t need to sell a lot at a loss if a 2008 like situation resurfaced.

The second goal was to maximize the return, which is always a goal for everyone, and although I wasn’t hurt by what I did – I think that was not the prudent thing to do and if a 2008 like situation would have emerged, I would have felt a bit of discomfort. I think getting money in hand two or three months before the actual expense is due is a wise thing to do and everyone should plan for that.

My approach was anchored on not selling at a loss and was suited to my financial situation at the time, this will be different for everyone but I do think a common sense approach of planning for a big expense, a year or so in advance is sufficient to keep you in a comfortable state provided it fits within your longer term goals and plans.

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How to generate retirement income for parents?

This is a guest post written by Manikaran Singal who is a certified financial planner and runs a personal finance blog - Good Moneying.

This is a very common question these days among so called “Sandwich Generation” who’s juggling between the different priorities like “to manage between their child’s future and own retirement” and also taking care of the needs of their parents.

Being responsible children everyone wants to support the parents. They have sacrificed their desires, hobbies etc. to give us a secure future, so now is our time to pay back. Even though the topic is all about income generation, since I am a financial planner, I could not stop myself to add on some financial planning touch into it.

There can be 2 situations where the approach can vary while working on this aspect.

1)     When your parents are financially dependent.

2)     Where the parents are financially independent.

You have to follow 3 step approaches to work on this:

  1. Understanding: Making arrangements may not be enough unless that arrangement actually serves the purpose. You have to understand your parents’ requirements. You need to talk to them. Proper communication is very much required for proper planning. I know that subject of money has always been a taboo in our Indian society but this is where the challenge lies. Discuss with them their wishes, hobbies, pending desires, their monthly expenditure etc. If you are staying with them then it may be easy for you to understand the situation but if not then better to improve the communication. Don’t give solutions to them just listen. Listening is the key to proper understanding.

Also this step applies to both the situations mentioned above.

2.     Check out your cash flow situation:

As it is you who have to arrange income for them, so you need to have thorough understanding of your financials. This will help you in figuring out the grey areas where you can make some adjustment for betterment of your parents. You have to dig deep into your cash flows.

A)     Note down each and every expense, your discretionary / Non-discretionary spending.

B)     Family expenses, expenses on self, on child etc.

C)     What expense you are making on your desires and what on your needs.

D)    Insurance premiums of not required policies you are paying just because you don’t want to book the loss or your. So called friend or your banker would feel offended if you discontinue that.

3.     Making arrangements:

When you have figured out the requirement, needs and desires of your parents and also have given financial shape to those, now is the time to make arrangements for your targeted goal. This is because the arrangements required to be made for them has to be from the surplus generated out of your cash flows. At this step we have to consider the two situations mentioned above

a)     When parents are financially dependent.

This situation can be managed partially when you are living along with parents, as most of their basic expenses will get managed within the family expenses. But you have to take care of your parent’s desires and independence also. Along with you have to take care that they should not feel like a burden on you. So adjust your cash flow accordingly and start giving some monthly amount to them. Better to include this “monthly payments to parents” in your non-discretionary expenses option, so your surplus gets accordingly adjusted for your other goals. If the house is in your parent’s name then you may start giving them the monthly rent, this way you may get some tax benefit also. If you have some already accumulated corpus, then you may invest that in post office monthly income scheme, senior citizen saving scheme or bank fixed deposits to generate comfortable, safe and secure monthly income.  You may also buy the immediate annuity plan. Also if at all required you can use products like “Reverse Mortgage” to generate comfortable income for them. Don’t forget to get them adequately insured of health, as this will indirectly help you in saving your savings.

 

b)     When the Parents are not dependent.

If Parents are independent, getting a decent pension along with interest income, are adequately insured under government sponsored schemes and has no liability as such, then also it does not absolve you from your responsibility. Many times it has been seen that pension may not be enough or may only be enough for the basic expenses. So in this scenario you have to support your parents.

 

Where parents are independent, many times it has been seen that they are in a habit of distributing the surplus they have in the form of gifts, like giving down payment for car or house, or buying insurance policies in the name of grandchildren etc. Though one should not allow them to do this but all this should be handled tactfully as it should not even hurt there ego. In other words don’t allow them to part with their savings. You may gift them some things of necessity time by time and share with them there responsibility of gifting things to relatives on various occasions like marriage, child Birth, festival etc. Please note that you should not intrude in their privacy and dignity. Start a parent’s welfare fund kitty and keep on putting some amount every month for parent’s welfare and responsibility. Adjust your cash flows accordingly. This fund will help you to manage emergencies in a better manner. You may also gift them a vacation every year.

Please understand that in any financial arrangement, Intention matters more than resources. There are some more aspects to support parents besides generating regular income for them like making bank accounts joint, reviewing of Nominees, being in touch with doctors, getting regular health check-up, arranging a caretaker, a driver , streamlining the financials etc. which is very much required when we are involved in financial planning for parents. But to start with “work on to improving the communication” which is the most important among all.

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