Monday, September 10, 2018

Do You Need An Investment Advisor? Ask Yourself These 5 Questions

Do You Need An Investment Advisor? Ask Yourself These 5 Questions.


So you have money to invest, and are wondering if you need an investment advisor or can you do it yourself. The answer varies greatly on who you ask. If you ask an investment advisor, more than likely they will say you need an investment advisor (shocking I know). If you ask your DIY friend who plays the market and has doubled his money in 2 years (according to him), he'll say avoid the fees and do it yourself. As a Chartered Wealth Manager, I have the full authority to give you the absolute correct answer. You ready? The answer is this: It depends. You're welcome.

Ok, if you're looking for a little more clarification, let's start with defining your options:
Hire an investment advisor to manage your money: This is a financial professional who is paid to provide investment advice and management to their clients at a flat fee or % of assets they manage. 

Pros: Expert management of your portfolio, taking into account goals and cash needs. A partner to help you navigate complex financial situations, answer questions as they come up and may provide continuous comprehensive financial planning. Peace of mind knowing a professional is monitoring the market and your portfolio, and making needed changes. 
Cons: They charge a fee, which varies but 1% is a good estimate. And while most are ethical and skilled at what they do, you run the risk of hiring a substandard advisor. *Note: Throughout this article, I use both terms 'financial planner' and 'investment advisor'. There can be differences, but I am referring to an advisor who provides comprehensive financial and investment advice (Not confused enough? See the SEBI guidelines for more). 

Manage your own money: More and more people are doing this because of easy access to financial information, online brokers and low fee market index funds.
Pros: Save on investment advisor fees. Enjoyment of managing money and learning about finance (if you like that sort of thing). Freedom to make your own decisions. 
Cons: More than likely your portfolio will not beat that of a professional.  You may not allocate appropriately, meaning your portfolio isn't prepared for market fluctuations. Or worse, you could make very expensive mistakes, such as pay high hidden fees elsewhere, miss tax savings or make poor investment choices.
Hourly consultation: Meet with a financial planner who charges by the hour, and get a financial plan that includes investment recommendations. You pay them a fee and implement the recommendations. Meet with them once a year to evaluate the portfolio and address any needed changes. 

Pros:Professional advice, with lower fees. 
Cons: You are still responsible for 'managing' your money and making financial decisions in between checkups.

Determining which of these options are best for you depends on your goals, needs, knowledge and current financial situation. I am a Chartered Wealth Manager, so I lean towards comprehensive financial management. But there are certainly people who are well suited to manage their own money. To decide which is right for you, ask yourself these five questions:

1-How complicated are your finances? 
Are you young, single and simply looking for straightforward investment advice for your Investment? Or are you dealing with more complex matters such as inherited stock, Mutual Fund Scheme Selection and retirement distribution strategies? Do you expect your situation to get more complicated with the birth of a child, divorce or illness? The more complex, the more need for a professional investment advisor.

2-How much money do you have to invest? 
With more wealth comes more investment options and complexity, and a greater need for an investment advisor. If you have a small portfolio, you won't want to spread it too thin across multiple assets, and probably won't want to allocate a % to fees; you may be a prime candidate for index fund investing, on your own or with the help of an financial planner.

3-Do you need comprehensive financial Management?  
Need someone you can call from the dealership to talk you out of buying the Range Rover instead of the agreed upon Hyundai? 
Want advice on what type of life insurance you need, or if you should deposit your bonus into your Fixed Deposits or Mutual Funds? 
What about if the market crashes? Can you fight the urge to panic and sell everything if your portfolio lost half it's value? 
This is when a professional is a huge asset. If you need a financial partner who will provide comprehensive financial assistance in all areas and at all times, then the fee is absolutely worth it. If you all you want is to invest a little cash in the Equity and see what happens, then go try it yourself.

4-What are your expectations? 
If an investment advisor tells you they have the secret to beating the market, you will probably be disappointed. The efficient market hypothesis (EMH) is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. Few investors, professional or amateur, can consistently outperform the stock market averages. That being said, a good advisor will more than likely get better returns over time than an amateur. Just don't expect your money to double overnight.

5-What's your level of sophistication and interest? 
You have to have a basic understanding of finances and the market to be your own money manager (or be willing to learn). It's also important that you enjoy it, because you will have to spend a lot of time on your portfolio. So be realistic here.

I am an independent investment manager earning fees thru trail from mutual fund Company and Brokerage from Investment Products and Insurance. I am a Chartered Wealth Manager specializing in Investment Management for families. I decided to go into Investment advisory since 1989, In addition to my CWM(R), all of my family Members are committed to Investment management business since 1980. 

Our family's proprietary firm, Tejas Consultancy, has been providing money management and Investment advice since-1980. Our mission as an independent investment manager is to deliver objective and honest advice to our clients and serve as their Family Wealth Guardians. As a financial caretaker, we foster interaction and engagement with our entire client and their family members who seek to secure their wealth for generations. We strive to be recognised by our clients, employee and the communities we serve as a best-in-class investment manager.

Tuesday, June 5, 2018

Understanding SEBI’s new fund categories

In a move to make choices for investors simpler, SEBI came out with categories with defined criteria. This means that funds within a category will henceforth be mandated to stick to basic tenets of the category. Earlier funds had the freedom to move around categories when it saw the opportunity. Funds will now be more predictable in terms of their strategy and investors will stay more informed about where they are investing. So how do you, as an investor, keep up with this change?
With some categories being renamed and new category names being added, some of you may be confused as to how to match your requirements with the new categories. This article will take you through the changes and where different categories stand relative to each other, in terms of risk and holding period.

Equity

The new categories in equity are either based on market-cap segment or strategy. And that, in turn, determines the risk level of the category.
Major categories under equity have remained the same. The diagram below lists the categories in decreasing level of risk (red signifying higher risk and green signifying lower risk). Sector and thematic funds are the most risky because of their concentrated exposure to a sector which requires tactical calls by an investor. Index funds are the least risky as they merely track the broad market indices and are less risky compared to actively managed funds which tend to be more volatile.

As the average market cap of the category goes up, the funds in the category become less risky. Therefore small cap funds with lower average market cap will hold higher risk than a mid or a multicap fund. SEBI has introduced another category in this hierarchy, called ‘large and midcap’ category where a fund should hold at least 35% in large cap and mid cap each. This can result in funds which hold predominantly large cap ( upto 65%) and a relatively smaller portion in midcap (at least 35%) or predominantly midcap (upto 65%) and a relatively smaller portion in large cap (at least 35%) falling under this category. Since the category comprises both of the above, the risk level of the category is more or less the same as multicap. It is essentially above pure large cap and below pure midcap funds.  However, some of them may be closer to midcap while others closer to large-cap.
There are additions of other new categories based on the strategy which funds follow. Categories such as focused funds, dividend yield funds, value funds, and contra funds define the strategy that a fund manager needs to follow for funds within the category. Since these funds do not have a market cap restriction, they will behave like a multi-cap fund going into different market cap segments based on the strategy it follows. The risk level of these funds also stand same as multicap funds.
Categories under equity should be looked at only for your long term needs. A period of at least 5 years is required for equity funds to give you optimal returns. In terms of holding period, categories within equity do not differ much. But high risk funds tend to be more volatile and may require a longer time to recover in the event of a market fall and therefore require a slightly longer time frame.

Debt

SEBI has classified debt funds based on two criteria – duration and strategy.
Based on the average Macaulay duration of the underlying instruments, funds have to be bucketed into categories  such as, low duration, medium duration, etc. The Macaulay duration calculates the weighted average time before a bond holder would receive the bond’s cash flows. Macaulay duration is slightly lower than the bond’s maturity.
The second way of classification is to classify based on their strategy. For example, funds using low credit rated papers to generate returns will fall under credit risk funds; funds sticking to high credit profile to generate returns will fall under corporate bond and so on.
But for investors to align their requirements, we have bucketed the categories in terms of the time frame required for each category. The below diagram classifies the entire universe of debt funds into long term, short term, ultra short term and liquid funds.

Long term debt funds include categories with high average maturity such as long and medium duration funds as well as categories with strategies that require a longer term to play out such as credit risk and dynamic bond. This category requires a holding period of at least three years. These funds should be used  only as part of your long term portfolios. They can well witness volatility and even negative returns in the short term.
Short term debt funds include categories which have a Macaulay duration of 1 year or above. These funds should be used when you have a holding period of above 1 year. This time frame requires low risk funds which can provide stable returns.
Ultra short term debt funds include low duration and ultra short term funds which are suitable for holding periods between 6 months to 1 year. These are low volatile funds with shorter maturity. These funds can be used to park money which you will need in the very near future.
Liquid funds are for parking money for really short term requirements such as a few days up to 6 months. These funds have maturity up to 91 days and least volatile. Overnight and liquid funds fall under this category.

Hybrid

Funds which hold instruments from more than one asset classes will fall under hybrid category. The two most popular categories under hybrid are Balanced funds and Monthly Income Plans (MIPs). These two categories have retained their characteristics with a change in their names. Balanced funds which invest predominantly in equity (at least 65%) and the rest in debt will now be called Aggressive Hybrid funds. MIPs which invest predominantly in debt (at least 75%) and the rest in equity will now be called Conservative Hybrid funds.

Between these two ends of the spectrum fall other categories such as Dynamic/Multi Asset Allocation, Equity Savings and Balanced Hybrid funds.
Dynamic Asset Allocation and Multi Asset Allocation are similar in the sense that asset allocation in these funds are managed dynamically based on market conditions and they do not have to have specified allocation in a particular asset class at all times. Dynamic Asset Allocation manages between equity and debt whereas Multi Asset Allocation will include a third asset class, like gold, commodities,etc.
Equity savings funds have a minimum of 65% in equity and the rest in debt but a portion of their equity will be hedged making it less riskier than aggressive hybrid funds.
Balanced Hybrid funds will have about half their investments in equity and half in debt. This cushion of debt portion brings it in the bottom end of the risk spectrum after Conservative Hybrid funds.
Arbitrage funds continue to fall under equity category for tax purposes. However, the rules now clearly state that they need to hold at least 65% in equity. These funds typically hedge their entire equity position and take some exposure to money market as well. This can be considered the least risky in the hybrid category but with returns that are capped, given their hedged portfolio
Ritesh.Sheth CWM®
CHARTERED WEALTH MANAGER

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Source: Fundsindia

Friday, May 18, 2018

Checklist for children turning into majors.

Checklist for children turning into majors.

It is a Big Milestone in our lives when our children reach majority. At 18 years, the person is recognized as an adult eligible to cast their vote in  elections, have assets in their name without any mention of guardian and also can have their own driving licenses.
Many parents make investments in the name of their minor children for various reasons – from earmarking investments separately for children to saving taxes. However when the child reaches majority, the financial assets must have a re-look.
There are various processes which require submission of many documents to convert an account from minor to major. The two important steps to start the process is
  1. Correction or reissue of PAN Card with signature and photograph/ Application of new PAN in the name of major, if not already done.
  2. Obtain an Id proof like passport, Driving Licenses etc. with recent photo, signature and address updated.
  1. Request for new PAN Card

Since copy of PAN card is mandatory for most of the financial transactions, it is important to apply for a new PAN Card with photo and signature of the child included and address change, if any. This is important as copy of PAN is mandatory for most financial assets and it also serves as a proof of identity. However, the PAN number of the child remains the same.
Please refer the below link for more details:
https://www.tin-nsdl.com/
  1. Conversion of bank accounts from minor account to major/regular account
All banks have certain rules and regulations for minor account holder. Many banks even have certain accounts specifically designed for minors such as ICICI Young Star Account, HDFC Kids Advantage Account etc.  These type of accounts provide few privileges to minor account holder – with withdrawal and deposit allowed after 10 years of age, and debit card also issued after 10 years of age. They could also do the transactions and use the internet banking facility, kid friendly freebies and preferential rates of interest for some minor account holders.
However when a child turns major, these accounts have to be mandatorily converted to major accounts. It depends on the rules and regulations of the bank on how they convert a minor account to a major one. Some banks upgrade the bank account to a regular saving account using the same account number. Some banks request a new regular account to be opened and transfer the balance to this account and close the minor account. On having a regular savings account, the child will be issued a cheque book and debit card with her/his name on it. The guardian name given earlier will be removed.
The document required for conversion/upgradation from minor to major bank account are as below:
  1. Copy of PAN Card self-attested
  2. Age Proof like School Leaving Certificates of State Boards, ICSE, CBSE etc., Birth Certificate, Passport etc.
  3. Address Proof – Passport, Electricity Bill, Voter Id etc.
  4. Id proof such as Passport/Driving License/Aadhar etc.
Having a regular bank account for the child is highly important as this is required to change the status of Mutual Funds, Demat Accounts etc.
  1. Conversion/Transfer of assets such as FDs, RDs etc. in banks
The transfer/conversion of assets such as FDs/RDs in banks from minor to major is typically done after the bank account is converted to a major account. The process for change is similar to that of savings account. However, the linked savings account to which the maturity amount is to be credited has to be updated.
  1. Changing Status of Mutual Funds from minor to major
The most important step before change of status from minor to major is to get KYC done for the child. The required documents for individual KYC are:
  1. Updated KYC Form
  2. Copy of PAN attested with signature
  3. Address Proof(Passport, Electricity Bill, Voter Id, Driving License etc.)
Once the KYC gets done, to change the status of the Mutual Funds from major to minor, the following document are required:
  1. PAN Card copy with self-attestation
  2. Address Proof (Passport Copy, etc.) with self-attestation
  3. KYC proof
  4. Birth Certificate as a proof
  5. Bank Details showing change from Minor to Major account along with cancelled cheque with name printed on the same and should be self-attested.
A sample online form can be seen on clicking the link below:
  1. Shares and corresponding Demat Account
A Demat account can be opened and shares can be traded/held in a child’s name through a guardian. When the child turns major, the change/conversion to a major or regular account depends on the regulations of the brokerage firm.
Some firms request for a new account to be opened in the name of the major child and transfer the existing holding to the new account. The minor account is then closed.
Some firms allow the same minor account to continue but the child has to complete all the formalities required for opening a new demat account. The child also has to sign a new agreement with the Delivery Participant (DP) like NSDL or CDSL. The guardian details entered earlier will be deleted.
  1. Converting minor PPF account into major
PPF account can be opened for a minor by any of the parents or guardians. There are two options possible when the PPF account matures:
  1. When PPF account of minor matures before he turns major
In this case, the guardian can withdraw the maturity amount or choose to extend the tenure by any number of years If the tenure is extended, then by the end of the first extension tenure, the child would have turned major. The child has to submit photo, birth certificate, cancelled cheque with name included and address proof to change the status to major for a PPF account.
  1. When PPF account matures after the child turns major.
The child has to submit copy of PAN card, birth certificate, cancelled cheque with name included and address proof to change the status to major for a PPF account. The maturity amount in this case is tax free in  the child’s name.
  1. Post Office Monthly Income Schemes(POMIS) – changing status from minor to major
POMIS accounts can be opened in the name of a minor if the child is 10 years of age and above. There is a separate limit of Rs.3,00,000 for the minor apart from the limit of the guardian. On turning major, the child has to apply for conversion of minor account to major along with birth certificate, copy of PAN Card and cancelled cheque of the child’s bank account. After the conversion, all income arising from this account will be considered as income of the child only. http://www.indiapost.gov.in/mis.aspx
  1. Insurance Policies:
For insurance policies, many situations can arise for a minor depending on the policy, the policyholder and the nominee.
  1. When the nominee of an insurance policy is a minor
The policyholder is supposed to specify an appointee if the nominee of the policy is a minor. The appointee is entitled to withdraw the policy amount on behalf of the minor. In case no appointee has been mentioned, the minor has to wait till majority to claim the amount. On turning 18 years of age, the child has to submit age proof like School leaving certificate and birth certificate, bank account details with cancelled cheque and policy document mentioned.
  1. When a minor is the policyholder and life insured (in case of child policy)
When a policy is in the name of a minor and the policy benefits will be paid according to the payout terms in the policy. If the policy payouts are scheduled after the child turns major, the policy amount will be paid to the child’s bank account. To claim the amount, the child has to submit the age proof and cancelled cheque of own bank account along with a copy of the policy document to the insurer.However depending on features of the policies, some policies do make the pay outs to parents/guardians of the child to utilize for expenses related to the child.
  1. When the policy is a child plan with life of parent insured and nominee is the child
In such policies, the regular payouts if any are made to the parent to meet the regular expenses of their children. However on the death of a parent before the child turns major,  the proceeds will be paid to the children or the legal guardian or the appointee of the policy as the situation arises. The child will receive the benefits on turning major.
It is important to note that only child policies are issued in case of minors. These may or may not include life cover for the children. Also, the maturity benefits and regular pay outs if any,  for child policies are mostly paid after the child turns 18 years of age when the child enters college. Since there are a wide variety of child policies available with different features and policy terms, the procedures to change the status from minor to major is different for different policies or it may not be required at all.
As listed above, the procedure for changing the status from minor to major varies for different assets. However the most important prerequisites for all procedures is to have a PAN card with photo and signature of the child and a regular bank account in the name of the child who has attained majority.
It is also important to note that once the status of the assets are changed from a minor child’s to a major’s name, the parents/guardians would lose all rights on it. The child has every right to use, withdraw, redeem or close the accounts according to their  wish. Also if the assets in the child’s name generate any income which are taxable, the taxes have to be paid in the name of the child and will not  be clubbed with the parents’ income, unlike when child was a minor. Also, the parents cannot enjoy the benefit of tax-free income of Rs.1500 per year per minor child up to a maximum of two minor children