Skip to main content

Wealth Creation vs Wealth Preservation

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

While equity and real estate help in wealth creation, bonds and gold aid preservation



The first step of a financial planning exercise is to evaluate objectives and risk tolerance. Generally, investors start with products and tailor a plan around them – a case of the tail wagging the dog. Products should serve your objectives, not the other way round. Today’s financial products cover real estate, equity, bonds, insurance, gold, commodities and other alternatives.

 

These asset classes need to be classified into two primary categories: wealth creating and wealth preserving. This distinction is important as the different objectives often get mixed up mostly due to clever product packaging. Of the choices available in India, only real state and equity qualify as wealth creators. Gold, bonds and alternatives must be employed to preserve wealth.

 

Real way to look at real estate

 

Real estate can create wealth if done as an investment. On the other hand self occupation shifts real estate from creating wealth to preserving it. Selfoccupied real estate can take up a lion’s share of savings of a common man. This is a real risk as self- occupation produces income only equivalent to savings on rent. In most of urban India, rental yields do not exceed three per cent.

 

Buying expensive property for self occupation is equivalent to investing a major chunk of your savings at three per cent. Capital appreciation is not applicable in this case as the intention is not to sell it, but to reside in it. This is one of the most popular forms of misallocation of capital. It results in great property and a stretched financial condition for the owner, with grave consequences to other equally important goals such as a child’s education and a decent retirement kitty.

 

The worst part of self- occupied real estate is that, with each passing day, as property values rise, it becomes increasingly difficult to divest it. A better solution is to purchase property as an investment with aclear time line to divest, or to buy a smaller place than you live in at present so that as little capital as possible is blocked. More capital could then be freed up for more productive uses. As a rule of thumb, a place for self- occupation should be purchased with as much equity as possible to guard against the vagaries of the economic cycles, with sufficient capital left to meet other objectives.

 

Equities are better, if done right

 

Benefits of compounding to beat inflation over long periods of time and long- term capital gains make equity the best wealth creator in its class. However, caution must be exercised in selecting the right stocks and tracking them diligently.

 

If selecting and tracking stocks seems a challenge, as many investors have discovered in the past five years, investing in any benchmark (NIFTY)- indexed fund should serve to beat inflation when investing in equity. The indices have a survivorship bias, helping them weed out duds from time to time.

 

Bonds and gold help preservation

 

Gold is another popular investment choice for many Indians.

 

Widely perceived as a wealth creator by a vast majority of Indians, it is at best a wealth preserver. A large part of the gains in gold prices that Indians experienced for 30 years ( 1980 to 2009) was due to the depreciation of the rupee against the US dollar, not because of any real appreciation in its value.

 

Besides, buying gold for jewellery leads to a 15- 17 per cent drop in value due to making charges and government duties. This is difficult to recover in a resale. Gold should ideally be viewed as portfolio insurance and allocations restricted to less than 10 per cent.

 

Similarly, over time and if properly employed bonds and alternatives can act as wealth preservers. However, investors must be wary of trying to time bond markets too often to derive capital gains. This is no less treacherous than trying to time equity markets as many investors discovered a few months ago when the consensus bond trade went hopelessly wrong. Investing in fixedmaturity plans ( FMP) might be abetter idea to meet the objectives of asset allocation, though some deployment in short- term liquid funds is worth implementing.

 

While bonds are more taxefficient than bank FDs, investors must be aware of the interest rate risk and default risk in bonds. The interest rate risk can be mitigated by holding the bonds to maturity; and, investors must be aware of the default risk inherent a high yield bond.

 

Similarly, tax- planning instruments such as insurance should not be viewed as a proxy for financial plans. Tax planning should not dictate financial planning because the objective of tax planning is to minimize tax outgo, while a good financial plan aims at maximizing post- tax income.

 

Alternatives ( mostly hybrid structures involving multiple asset classes) on the other hand, while originally designed for wealth preservation in uncertain and volatile times, have been distorted to give the impression of the great new “ risk- free” invention of modern finance. Often, the risk in these structures is never discussed.

 

But the decision to invest in them should be done after a scenario analysis and an understanding of the risk in such structures along with their utility and impact on financial plans, instead of projected returns.

 

A financial plan should include three or four asset classes as the long- term objective is to secure consistent and risk- adjusted returns. In this regard the past performance of an asset class should not blind one to risk. Often, the best- performing asset classes constitute an extraordinarily large share in a portfolio. Such a strategy, more often than not, backfires with painful consequences.

 

 

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief ‘96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...
Read more

Zero Coupon Bonds or discount bond or deep discount bond

A ZERO-COUPON bond (also called a discount bond or deep discount bond ) is a bond bought at a price lower than its face value with the face value repaid at the time of maturity.   There is no coupon or interim payments, hence the term zero-coupon bond. Investors earn return from the compounded interest all paid at maturity plus the difference between the discounted price of the bond and its par (or redemption) value. In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures. Zero-coupon bonds may be long or short-term investments.   Long term zero coupon maturity dates typically start at 10 years. The bonds can be held until maturity or sold on secondary bond markets.
Read more

Mutual Fund Review: SBI Bluechip Fund

Given SBI Bluechip Fund's past performance and shrinking asset base, the fund has neither been able to hold back its investors nor enthuse new ones   LAUNCHED at the peak of the bull-run in January 2006, SBI Bluechip was able to attract many investors given the fact that it hails from the well-known fund house. However, the fund so far has not been able to live up to the expectation of investors. This was quite evident by its shrinking asset under management. The scheme is today left with only a third of its original asset size of Rs 3,000 crore. PERFORMANCE: The fund has plunged in ET Quarterly MF rating as well. From its earlier spot in the silver category in June 2009 quarter, the fund now stands in the last cadre, Lead.    Benchmarked to the BSE 100, the fund has outperformed neither the benchmark nor the major market indices including the Sensex and the Nifty. In its first year, the fund posted 17% return, which appears meager when compared with the 40% gain in the BSE 1...
Read more

Principal Emerging Bluechip

In its near ten year history, this fund has managed to consistently beat its benchmark by huge margins The primary aim of Principal Emerging Bluechip fund is to achieve long term capital appreciation by investing in equity and related instruments of mid and small-cap companies. In its near ten year history, this fund has managed to consistently beat its benchmark by huge margins. This fund defined the mid-cap universe as stocks with the market capitalisation that falls within the range of the Nifty Midcap Index. But, it can pick stocks from outside this index and also into IPOs where the market capitalisation falls into this range. Principal Emerging Bluechip fund's portfolio is well diversified in up to 70 stocks, which has aided in its performance over different market cycles. On analysing its portfolio, the investments are in quality companies that meet its investment criteria with a growth-style approach. Not a very big-sized fund, it has all the necessary traits to invest with...
Read more

Mutual Fund MIPs can give better returns than Post Office MIS

Post Office MIS vs  Mutual Fund MIPs   Post office Monthly Income Scheme has for long been a favourite with investors who want regular monthly income from their investments. They offer risk free 8.5% returns and are especially preferred by conservative investors, like retirees who need regular monthly income from their investments. However, top performing mutual fund monthly income plans (MIPs) have beaten Post Office Monthly Income Scheme (MIS), in terms of annualized returns over the last 5 years, by investing a small part of the corpus in equities which can give higher returns than fixed income investments. The value proposition of the mutual fund aggressive MIPs is that, the interest from debt investment is supplemented by an additional boost to equity returns. Please see the chart below for five year annualized returns from Post office MIS and top performing mutual fund MIPs, monthly d...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now