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

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...
Read more

TDS Rate and Personal Account Number(PAN)

    The TDS rate doubles to 20% from 10% if you fail to mention your Personal Account Number   IF you run a glance through your pay slip, you will come across something called TDS, which is tax deduction at source. In most cases, the employer deducts this amount at the time of payment of salary itself and pays the total tax amount to the government on behalf of all the employees. If you are a self- employed or practicing professional s, you have to pay this amount yourself.    Tax deducted at source is one of the modes of income tax collection by the government. Under the income-tax laws, income tax at specified rates is required to be deducted while making certain payments.    The rate of deduction of tax at source on interest and rent payment is 10%. For salary payments, the employers deduct income tax at source on a monthly basis after computing income tax liability on estimated annual taxable income of the employee. Tax benefits on housing loan, investments, etc are consid...
Read more

L&T Tax Advantage

Best SIP Funds to Invest Online   The fund follows a growth approach to investing in quality stocks that have a large-cap tilt This large-cap tilted ELSS has fared consistently and fared better than its benchmark by posting a higher margin of outperformance. The fund follows a growth approach to investing in quality stocks that have a large-cap tilt, which is evident in its portfolio. The portfolio is further well diversified across market capitalisation and sectors with over 60 stocks finding a place in it. The upside with this fund is the fact that it has witnessed both down and up cycles of the market to come across as a winner in the long run. Do not doubt the fund based on its size and a few mediocre years of performance, because when analysing its rolling three year returns, the fund's performance stands out to qualify as a must have ELSS in one's portfolio. Stay invested through the lock-in and there are chances of benefiting from returns as well as tax savings will prov...
Read more

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Read more

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...
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