Is NPS good for tax saving?

In addition to Rs.1.50 lakhs investments where one can claim tax exemption, one can also opt for an additional Rs.50,000 exemption by investing in NPS.Should this investment be made to take the tax exemption? Is it worth investing?

This 50K additional investment will save a person (in the 30% slab of taxes) Rs.15000 plus cess, which amounts to Rs.15,400 of tax savings. NPS returns in Tier I in the last year was a little less than 8%, in the same period SENSEX returns was 19.50% & well managed Mutual Funds made an average return of 24%.

Management fee in NPS is low at 0.01%, which many in the media talk as a positive. Where a mutual fund charges about 2% for fund management. Just to save management fee, if NPS is taken, the returns that gets foregone is more than 3 times.

This is a product that is taken for long term, it is a locked product too, where up to the age of 60, one cannot withdraw any funds from the investment. At 60, only 60% is available for drawing & the balance gets moved to annuity which is paid at 8.25%.

Instead of investing in NPS, if the amount is set aside after paying taxes, which is Rs.35K per year. For a 30 year old person, investing for 30 years will generate Rs.2.07 crores of wealth. While the same if invested in NPS will generate only Rs.61.84 lakhs.

The only requirement to have this amazing wealth accumulation is the discipline. Pay15K taxes and set aside a SIP of 3000 in a well-managed diversified fund. Need not worry about management fees, fund managers provide a huge value add for the fee they charge.

Equity exposure in NPS is likely to be raised to 75%, yet without active management, there is less potential for a great value add. And since the investment is made for a longer period, need not worry about risk, you are investing into the economy and so long you believe that India will be growing, your investment too will be growing.

Equity Investors Beware

After the 11300 Crores fraud reported by PNB, where irresponsible employees were reason for the fraud to escalate to such a high level, where it is now called the biggest bank fraud ever. Soon after the news came out we are getting several such news of frauds hitting the media. Rotomac pens have defrauded the banks to the tune of 800 Crores, which in a couple days went on to become a 3200 Crore fraud. In between this news, there was news that City Union Banks LOU’s have got compromised by many foreign banks.

As enquiries with the employees of the bank and raids recovering assets from defaulted persons were being done. Nirav Modi, the prime accused in the PNB case sends a letter to the bank stating, “In the anxiety to recover your dues immediately, despite my offer, your actions have destroyed my brand and the business and have now restricted your ability to recover all the dues leaving a trail of unpaid debts.” He says that, he would have listed his company and collected money from the markets, which would have helped him clear the bank dues. This was shocking, in a period where start-ups are eyeing the markets to help them make good of their investments in many of the loss making entities that they are funding. Even entrepreneurs are looking to take money from the markets to fund their losses.

The lessons here could be – investors will easily be fooled; at least that is what many business people are thinking. Equity investors need to be very careful on which companies they invest their money in, because one can easily get carried away by the ads and promotions some bad companies will do to get their attention. Once in, getting out will be a bigger challenge.

Gitanjali, the listed company which is also in this scam was out of favour of professional investors since 2013, when the company’s balance sheet  had discrepancies showing up. Today, there are very few fund managers invested in this stock. Even the promoters have pledged more than 80% of their shares in the company. Retail investors who own major part of the company are the biggest losers.

Among other considerable losers are LIC and a few Foreign Portfolio Investors. All these developments bring the understanding that, giving the money to be managed by professional managers is a best choice than doing it on their own. Off late, SMS tips on stocks have also become high and it is found that most of the companies that were referred in those SMS tips were big losers in the current fall.

Stay away from tips and if you don’t have the time and knowledge to learn about the markets before investing, it is good to invest into Mutual Funds or take help of professionals on both managing and advising on investments.

SBI reporting Loss & the Message it Sends…

SBI reporting loss in its December 2017 results after 17 years of profits was a shock to the markets. At a time when the markets are giving off gains made in the previous year, worries arise in the minds of investors when big names bring shocks.

Indian stock market had a great run last year supported by all the external factors like Geopolitics, environment, climate, Government spending, etc. The only non-support area was companies yet to show profit growth in their Balance Sheets.

In this condition, loss reporting by SBI, brings uncertainty on the profit growth of India’s businesses. Is the low or negative growth only in one company, sector or is it in the whole economy? Knowing this will help us take decisions on whether to be invested into the markets, add more or stay away.

2229 companies have reported Dec 17 results so far. Among them sales has grown by 5.24% & profit growth was 12.31%. Clearly showing that the economy as a whole is not growing. They have been managing to get higher profits by cutting down expenses. In one way it is good because, when business grow from here, they will have higher profit margins.

If suppose, sales takes time to grow, cutting expenses further will lead to lower salaries and people will have less to spend. Economy will become flat.

There is an immediate need for the consumption to pick up. If everyone is saying no sales, thought comes as to, why sales are not happening? Are people not spending money?

It is said that, inflation is low, blue collar salaries are increasing, economy is growing. Then where is the money going? Is the whole population saving without spending? If that is truth, there is a new challenge to deal with.

We have Japan as an example. They saved so much that, now if they keep money in their bank, bank is charging them a fee. There are no borrowers, only deposits. Instead of lending money and earning an income, banks have now become safe keepers for people’s money.

This is the reason that Japan is now financing projects outside their country at ridiculously lower rates. Our bullet train project in Gujarat is financed by Japan. 80K crores finance with technology which we will start repaying only after 15 years and can take 35 years to payback. The interest is 0.10%. It is an advantage for India as we need not worry about the cost of this loan.

When more and more money goes into the affluent people’s hands, only savings get increased. Hence the government’s push to concentrate on increasing income for Blue collar jobs, who will spend and bring consumption.

Does this mean, opportunities for investors have come down?

There are businesses which have been growing, only that investors have the responsibility to identify them and invest. One cannot invest into any other stock & expect returns from his investment. So, be selective when selecting your stocks for investment.

As we are publishing this article, almost all other public sector banks have reported huge loss on their Dec 17 results. Upon this is the RBI directive to move about 2 lakh crores of bad loans to Bankruptcy Court. More pain coming to PSB’s which is bringing out their real worth.

Rs.10 lakhs to Rs.4.40 crores in 20 years

In the last 5 years, the dynamics of the Indian stock markets changed rapidly. Generally, we have one great year in a 5 year rolling period along with one big fall and the other 3 years have around average returns. When we consider the 5 year returns, it stays mostly positive with about 16 plus percentage growth.

A well-managed portfolio has had only one negative year in the last 5 years, and that too was a marginal loser, 2 below average return years and 2 super star years. This stellar performance moved the average return to above 25%. For the next couple of decades, India is likely to have this kind of high growth potential.

Being invested in such high return assets will help the investors have a very large corpus of funds, which will help them have a high standard lifestyle throughout their life. Knowing that there is a potential, mind will immediately get curious to know how much can be the corpus if he or she invests X amount now.

If someone invests 10 lakhs into the market and stays invested for 20 years and the market grows at 20% plus, his final corpus will be 4.40 Crores. Investing the same corpus to generate monthly returns, even if we draw 1% of the capital, your monthly income will be 4.40 lakhs. Think of the lifestyle you can live, throughout your living period on this planet.

10 Lakh Crores of Investor wealth lost after the Budget 2018. Really??

After the 2018 budget, the rising stock market went into correction mode. This long-awaited correction was triggered by the budget proposal to re-introduce Long-Term Capital Gains tax.

Media frenzy created fear and confusion in the minds of retail investors, resulting in panic selling. In parallel, global events like the Russian elections and Saudi Aramco IPO, the world’s largest IPO, supported the fall. Now crude oil prices need to stay at high levels for both these events to sail through. This worry took the markets further down, so more sell-off is likely.

Now the media says 10 lakh crores of investor wealth is lost in 5 days. This fuels the fears of the already confused investors. Is it true that so much wealth was actually lost? If so, who made the gains?

In the stock markets, when there is a higher value on a company’s stocks or the index, it is true that the whole asset is valued at that price. If all the owners offer to sell at the highest price, there is zero possibility that everyone will get that price. As sell offers pour in, supply increases and price declines. Price decline continues till the supply slows down and demand increases. Then the price starts to move up again. If the sentiment becomes stronger and builds more confidence, then the market moves past the previous high leading to an even higher value for the total asset.

Wealth gets created because of the confidence people have in the company or the economy. Wealth gets eroded when many of them conclude that their expectations are met and begin to move out.

So, only if we sell and move out of the investment can we lock the high price. If a person is waiting without participating in selling and realizing the gains, it means his confidence level is high, and he wants to achieve an even higher price.

Just calling out the highest level reached, not taking the action to exit and saying wealth is lost when prices move down does not have a meaning. The reason why you did not sell was that your confidence in the company or economy continues to be strong. If it remains strong, be invested to exit at a higher price.

The other approach is flawed wherein you stay invested when the market is moving up and when prices decline due to selling by others, you get worried and take a decision to sell at the available price. At this stage complaining that you lost your wealth is not the right way to approach this asset.

If you are participating in the stock market with commitment and confidence, hold on till suitable conditions prevail. If the situation changes and shakes your confidence, then take a stand to move out either with available profits or even at a loss. Again, you need to understand the conditions and take action.

In reality, wealth is not lost. It was only a notional value. When a group of investors decides to move out, the prices drop bringing down the notional value. At all times we will have some set of investors wanting to exit for various reasons and that is market dynamics.

Be invested as long as your confidence in the stock or the market is intact. Exit when your goal is reached, or the conditions change, altering your view and confidence levels. Once we are investing with this clarity, ups and downs in the market will not disturb us or make us take a decision midway to exit.

So, when markets come down in value, no one loses any physical money, it is only the notional value that comes down. Stay invested with your confidence and objective and you will get rewarded adequately.

Are ULIP’s better than Equity to save LTCG?

After the introduction of Long Term Capital Gains (LTCG) tax on equity income, there is news floating around that, investing in ULIP’s will help investors save the tax. It is just a 10% tax on an income which is far higher than any other asset. To escape that, the effort that people have been taking is showing clearly the reason why retail investors have not made money in stocks.

The returns that ULIP’s have given in the last 5 years is 9.21% for large cap and 18.31% for a small cap. As against the average returns that mutual funds have given in the same period at 14.73% for large cap and 26% for Small cap. Even if capital gains are paid, the net returns will be far higher than what ULIP’s will make for its investors.

Products 5 years CAGR Taxes Nett
Mutual Funds 14.73 1.473Lakhs 13.26
ULIPS 9.21 0 9.21

Over a longer period, compounding will create big magic to the Mutual Fund returns which the ULIP investors will lose. Once the age is passed & opportunity is lost, one has to live with mediocre life, just because of these kinds of hasty decisions. Instead of worrying about the 10% tax, just continuing to be invested will give them far higher returns than taking action to sell their investments and moving them to ULIP’s to save the 10% tax, eventually they will be losing near 200% of opportunity.

1 Lakh Investment after 20 Years
Mutual Funds 14.15 Lakhs
ULIPS 5.82 Lakhs

1 lakhs invested at 9.21% for 20 years will generate a corpus of 5.82 lakhs. The same 1 lakh in Mutual Funds even after paying 10% capital gains tax will be 14.15 lakhs. Be prudent, don’t panic for paying 10% tax and move your investments, in the bargain the brokers and government are the beneficiaries.

LTCG Brings Selling Pressure To The Markets

Our markets have been waiting for a correction since long. The market is scaling peaks since April 2017 on the back of two truths –

  1. The strong flow of retail money coming into the markets
  2. Government intervention in every possible way to keep the positive mood in the market.

Now the much awaited Long-Term Capital Gains Tax (LTCG) coming back at 10% has triggered the sell buttons. In one way it is a sign of relief. Investors were haunted by fears that a correction will take away weak hands in the market and move out weaker stocks from managed portfolios. It is required once in a while to cleanse portfolios too. Like servicing our vehicles after periods of use, a review and cleaning help to put things in a condition to move on further.

The reaction to the LTCG tax is disturbing. The proposal to grandfather gains made till 31st Jan 2017 and tax the income from there off has driven many to think of immediately selling their long-term holdings before 31st March 2018 to claim tax exemption and then re-invest. These are actions that mature fund managers or fund houses would not take because they know that there is no benefit, and only adds more accounting effort.

Retail investors, thinking that they are smart, are going ahead with selling their holdings. Most of the times, after they sell, prices will drop further, and they will get comfortable with their decision, deciding to wait and get in at a better price later. Why they want to buy again? The stocks they hold are good ones, so they want to be invested. Only that, they do not want to pay tax on the gains.

The savings will be 10% of whatever gains they have made so far. While what will happen later is that, in the bargain to time the market, they will miss the next move and probably not buy again or take entry at higher levels. In both ways, they will only end up losing more, leaving the government and brokers with more income. And all these efforts are only possible for the next two months, after that, markets are going to be there, and there will be profits to be made, on which taxes must be paid.

Such kind of immature moves are the reasons why retail investors are always losers and professionals are consistently gainers.

Decoding Budget 2018

Farmers benefit, World’s largest Health Care scheme, Re-introduction of long-term capital gains (LTCG) & Reduction of Corporate Taxes.