MF Investment Help

SIP (or) Timing the Market

Posted by : vvrk

Dear Ashal,
Can the expenses towards daughter\\`s marriage be treated as a loss?

Thanks,
Raj

SIP (or) Timing the Market

Posted by : ashalanshu

Dear vvrk, In continuation to my prev. reply, i'm sending below a link. Plz. go thru the same as it clearly relates to ur case.

http : //w w w .taxworry(.)com/2008/07/be-ready-to-pay-tax-on-surrender-of.html

Thanks

Ashal

SIP (or) Timing the Market

Posted by : ashalanshu

Dear vvrk, Ur Ins. Agent had fooled u.

1. Premature Withdraw - In case of Premature withdraw of ULPP or Ordinary Pension Plans, The amount received \\`ll be added to ur income from all other sources in the FY of receipt & \\`ll be taxed accordingly.

2. Held till Maturity - If u hold ur ULPP or OPP till maturity, out of total accumulated corpus, u can withdraw only 1/3rd of it tax free, rest u can invest with the same ins. co. or any other which is offering higher return (read pensions) on this corpus for the same parameters. Pension received from pension plans is taxable. Also @ age 60, the cash commuted part (1/3rd of total corpus) is tax free at the time of receipt but wherever u invest it except Eq. & Eq. MFs, be it SCSS, POMIS, Bank FDs, Debt funds the income generated from such taxfree cash commuted part \\`ll also be taxable.

That\\`s why from Taxation angle, Pension Plans r not that much beneficial. So u should also think what i suggested in my prev. post.

Opt either whole life or till age 75 coverage type - 1 ULIP, with minimum possible sum assured. As the inter funds (Pure Eq. to balanced to Pure debt & vise versa) transfer is more Tax efficient in ULIPs, one can use this type of ULIPs as pension plans. After age 60, whenever u \\`ll withdraw a part from ur ULIP, it \\`ll be tax free & at the same time \\`ll be just like receiving a pension to u.

Thanks

Ashal

SIP (or) Timing the Market

Posted by : vvrk

Oflate I have seen messages by boarders regarding reading signals and timing the market. They do not seem to understand why one invests through SIP when instead they can time there investment calls based on signals. There reasoning is simple, when you know the market is going to tank, why continue investing every month, instead wait for the right time. In their view their reasoning is valid. If the timing is right, you make a lot of money. But if the timing is wrong, then you loose a lot more money. If one has the talent and skill to read signals and time the market, then this approach definitely works. With this strategy we are adding the Timing Risk.

There is an another group of boarders who think investments in Mutual Funds is a waste of money. They beleive in hand picking companies to invest in and building a portfolio of 5 to 10 stocks is all you need to make money. They beleive by investing in mutual funds, we are just helping the fund houses get richer but are not actually benefiting. In their view their reasoning is valid. And one definitely makes lot more money by investing in select stocks, provided their selection is correct. If stock selection is wrong, then he could loose a lot more money. With this strategy we are adding the Stock Selection Risk.


There is a third group of boarders like myself. I would like to clarify our line of thinking and why we will not try to time the market. We do not beleive in taking the RISKS associated with Timing the Market and stock Selection. Our reasoning is simple. Not everyone has the skill and the time to research about stocks and also understand the market conditions. And very few have been consistently successful in implementing this strategy. We beleive REDUCING RISK and getting higher risk adjusted returns is the key for long term wealth accumulation. Our goal is not to maximize returns, but to generate superior risk adjusted returns. We beleive DIVERSIFICATION is the best way to reduce risk. We prefer investing in Mutual Funds or Index funds, to reduce the Stock Selection Risk, as we beleive the fund manager and his team are better off at stock selection. We prefer diversifying investments across fund houses to further minimize the Stock Selection Risk associated with a single fund manager team. We beleive in Time Diversification to reduce the Timing Risk(associated with timing the market). We beleive disciplined investing at regular intervals is the best bet to reduce the risk associated with time. We prefers investment through SIP as it instills discipline and also reduces time risk. We also prefer diversifying investments across asset classes like equity and debt.

So when someone suggests us to time the market, we have our shield out and go on the defensive since we are not comfortable with the risk associated with the strategy. We will always stick to the principle of disciplined investing using SIP since it helps us reduce the risk associated with timing the market.

Thanks,
Raj

SIP (or) Timing the Market

Posted by : ashalanshu

Dear vvrk, Ur Ins. Agent had fooled u.

1. Premature Withdraw - In case of Premature withdraw of ULPP or Ordinary Pension Plans, The amount received \\`ll be added to ur income from all other sources in the FY of receipt & \\`ll be taxed accordingly.

2. Held till Maturity - If u hold ur ULPP or OPP till maturity, out of total accumulated corpus, u can withdraw only 1/3rd of it tax free, rest u can invest with the same ins. co. or any other which is offering higher return (read pensions) on this corpus for the same parameters. Pension received from pension plans is taxable. Also @ age 60, the cash commuted part (1/3rd of total corpus) is tax free at the time of receipt but wherever u invest it except Eq. & Eq. MFs, be it SCSS, POMIS, Bank FDs, Debt funds the income generated from such taxfree cash commuted part \\`ll also be taxable.

That\\`s why from Taxation angle, Pension Plans r not that much beneficial. So u should also think what i suggested in my prev. post.

Opt either whole life or till age 75 coverage type - 1 ULIP, with minimum possible sum assured. As the inter funds (Pure Eq. to balanced to Pure debt & vise versa) transfer is more Tax efficient in ULIPs, one can use this type of ULIPs as pension plans. After age 60, whenever u \\`ll withdraw a part from ur ULIP, it \\`ll be tax free & at the same time \\`ll be just like receiving a pension to u.

Thanks

Ashal

SIP (or) Timing the Market

Posted by : vvrk

Dear Ashal,
This is what I have been told by insurance agents regarding pension plans. If one stays invested till maturity, he can withdraw one third of the amount tax free and the rest is taxed. But if you withdraw your whole amount prior to maturity, you do not pay any tax on your returns.

So if the maturity of my plan is in 2035, and if I close the account in 2033, do I still pay taxes? My plan was to withdraw from ULPP prior to maturity so I do not pay any taxes. But my source of such information is from an insurance agent and not everyone in that field is honest. So can you please clarify the tax treatment if I close my pension plan prior to maturity.

Thanks,
Raj

SIP (or) Timing the Market

Posted by : vvrk

Dear Ashal,
This is what I have been told by insurance agents regarding pension plans. If one stays invested till maturity, he can withdraw one third of the amount tax free and the rest is taxed. But if you withdraw your whole amount prior to maturity, you do not pay any tax on your returns.

So if the maturity of my plan is in 2035, and if I close the account in 2033, do I still pay taxes? My plan was to withdraw from ULPP prior to maturity so I do not pay any taxes. But my source of such information is from an insurance agent and not everyone in that field is honest. So can you please clarify the tax treatment if I close my pension plan prior to maturity.

Thanks,
Raj

SIP (or) Timing the Market

Posted by : ashalanshu

Dear vvrk, In case of ULPP (Unit linked Pension Plans), u r right that one should opt pension plan without any ins. component to reduce over all cost. The amount saved against mort. prem. \\`ll be invested to generate returns.

In case of ULPP, again I have some different thoughts. After vesting age is over - the amount received as pension \\`ll be taxable.
Even if a person, opt 35% max. cash commutation, this cash comm. part \\`ll be tax free at the time of receipt, but at the age of 60, when we \\`ll invest this cash comm. part in safe instruments like SCSS, NSC, Bank FDs, POMIS, every where the income generated \\`ll be taxable.

The pension generated from our accumulated corpus is also very pathetic - 4.5-6% max.

Due to taxation & pathetic returns of pension plans, I personally feel a whole life ULIP with minimum ins. cover say 5 times of Regular prem. \\`ll be a better option. How?

Say a person, age 30 took a wholelife ULIP (TYPE -1, WITH SUM AT RISK)with annual prem. of 20k. the ins. cover in this case \\`ll be 1L only. within next 4-5 years, the fund value \\`ll overtake the sum assured. Once the fund value is more than the sum assured, no mort. charges \\`ll be there, so now onwards this policy is equal to no ins. ULPP. But after age 60 (normal retirement age), the real benefit of this policy, \\`ll be available. As the amount withdrew from this policy \\`ll be tax free as per current tax law under section 10(10)(D). Now start withdrawing ur pension from this policy fully tax free year after year & u don\\`t need to look after asset allocation, returns & all other things as all r taken care of in ULIP itself.

I hope u \\`ll get my point.

Thanks

Ashal

SIP (or) Timing the Market

Posted by : vvrk

Dear Sharmaji,
Please do let us know your findings of how ULIP\\`s performed due to value averaging. You are using pure value averaging strategy. I would advise you to try out growth equivalized value averaging as pure VA will not benefit you on the long run.

Pure Value Averaging:
In pure Value Averaging where in your Value Path is increasing by the same amount at a particualr frequency every year. Let us say you want your fund value to increase by 1 Lakh every year. In this case your Value Path is going to be.

Year 1 - Rs.1,00,000
Year 2 - Rs.2,00,000
Year 3 - Rs.3,00,000
Year 4 - Rs.4,00,000
Year 5 - Rs.5,00,000

The value of Rs.1,00,000 keeps decreasing with time due to inflation. So at the end of 10 years one lakh might not have the same value as at the begining. And usually this growth is covered by your investments.

Growth Adjusted Value Averaging:
In Growth Equivalized Value Averaging, we want our investments to grow at a specific rate(higher than inflation) to add the compounding affect. So if I assume 18% growth rate, then the following would be my value path.

Year 1 - Rs.1,00,000
Year 2 - Rs.2,18,000 (Previous Years Fund Value at 18% growth + Rs.1,00,00 )
Year 3 - Rs.3,57,240 (Previous Years Fund Value at 18% growth + Rs.1,00,000)
Year 4 - Rs.5,21,543 (Previous Years Fund Value at 18% growth + Rs.1,00,000)
Year 5 - Rs.7,15,421 (Previous Years Fund Value at 18% growth + Rs.1,00,000)

Per the book, growth equivalized value averaging is better than pure value averaging. The following is the performance of the different strategies from 1926 to 1991 based on the US market.
Pure Dollar Cost Averaging: 11.03%
Pure Value Averaging : 10.80%
Growth Adjusted Value Averaging : 12.56%

Thanks,
Raj

SIP (or) Timing the Market

Posted by : vvrk

Dear Ashal,
There is not much to debate about ULIPS. You and me both agree that Term Insurance is the best insurance.

I think most of us are aware of all the disadvantages of ULIPS. In ULIPS there are certain charges that are deducted on a monthly basis like the Mortality and Admin charges. To cover these charges, units are sold from your account. During a declining market, more units are sold where as during a raising market less units are sold. (In-short this works reverse of rupee cost averaging where we buy more during declining market and buy less during raising market.) If we take this into account, the effect of charges are even higher in ULIPS. So I do not prefer ULIPS for insurance.

But having said this, I think ULIPS can still be used for investment purposes, mainly the pension plans(no insurance component). When one is saving towards thier retirement, asset allocation is very important on the long run. ULIPS are the only product which can help rebalance equity/debt ratio without much tax implications. Having this ability to rebalance equity/debt will help you try out a lot of different asset allocation strategies which I think can generate superior returns.

Btw there are ULIPS which offer more than four free switches a year. For instance the ULIP I have invested in is HDFC Pension Plan. When I took the ULIP, it offered unlimited free switches. But I think the new plan offers 24 free switches a year. That should be more than sufficient for trying out asset allocation strategies. As of now I am still researching about the various asset allocation strategies. I am studying a couple of them, and hopefully I will finalize on one and see how best I can use it.

Thanks,
Raj

(Reposting since my previous post got cut)

SIP (or) Timing the Market

Posted by : ashalanshu

Dear vvrk, regarding inbuilt fature of ULIPs for switching at zero tax liability between debt & eq., I do agree with u that ULIPs score over MFs here. but my dear friend, I'm over all against such switching in between in ULIPs. Also cost is a factor (if switches r more than 4 as normal free switches in most policies, these r chargable), Rs. 50 or 100 switching charge do matter for low prem. ULIPs like 10-15-20k per annum prem.

Although i don't want to start again the great old debate of MMB, ULIPs v/s Term+MFs. But my dear friend, I for one 'll opt second choice.
U r already aware the 2 different types of ULIPs.
Type 1 - sum at risk, where the ins. co. charges mortality charge only on the difference of original sum assured & fund value. In this case over all charges paid to ins. cos. against mort., over the term of policy r very less, but the most disturbing fact is till fund value is less than sum assured, the ins. co. 'll pay only sum assured & 'll pocket all the accumulated fund value over the years.

Type 2 - In this case the ins. co. deduct mort. charges on the fix sum assured & in case of claim, the nominee 'll get both, sum assured as well as fund value. But the cost of ins. in this case is quite high as the mort. charge 'll be deducted on the ongoing age of policy holder every year. So over all return 'll be less in this case.

due to the above fact, I always recommend split Term cover for ins. & MFs for investment & wealth accumulation.

Thanks

Ashal

SIP (or) Timing the Market

Posted by : ashalanshu

Dear vvrk, regarding inbuilt fature of ULIPs for switching at zero tax liability between debt & eq., I do agree with u that ULIPs score over MFs here. but my dear friend, I'm over all against such switching in between in ULIPs. Also cost is a factor (if switches r more than 4 as normal free switches in most policies, these r chargable), Rs. 50 or 100 switching charge do matter for low prem. ULIPs like 10-15-20k per annum prem.

Although i don't want to start again the great old debate of MMB, ULIPs v/s Term+MFs. But my dear friend, I for one 'll opt second choice.
U r already aware the 2 different types of ULIPs.
Type 1 - sum at risk, where the ins. co. charges mortality charge only on the difference of original sum assured & fund value. In this case over all charges paid to ins. cos. against mort., over the term of policy r very less, but the most disturbing fact is till fund value is less than sum assured, the ins. co. 'll pay only sum assured & 'll pocket all the accumulated fund value over the years.

Type 2 - In this case the ins. co. deduct mort. charges on the fix sum assured & in case of claim, the nominee 'll get both, sum assured as well as fund value. But the cost of ins. in this case is quite high as the mort. charge 'll be deducted on the ongoing age of policy holder every year. So over all return 'll be less in this case.

due to the above fact, I always recommend split Term cover for ins. & MFs for investment & wealth accumulation.

Thanks

Ashal

Not the best time to buy gold now: Dhirendra Kumar

Posted by : kentmss

Also, I am against investing ETF. You can invest in them, but it should be very minimal. I would rather invest in Gold Funds like DSPML World Gold Fund and AIG World Gold fund.
Srikanth

SIP (or) Timing the Market

Posted by : vvrk

Dear Ashal,
As you said, asset allocation through switching can be very confusing for a layman. That is why I think Value Averaging is more suitable to ULIPS rather than MF's since switching without taxes and transaction costs is a inbuilt feature of ULIPS.

Regarding the growth rate,I definitely do not wish to follow anything blindly. But I do know the growth rate taken definitely affects net returns. So I am still working on how best to determine the ideal growth rate. I am hoping others here will add there ideas on determining what the growth rate should be.

Thanks,
Raj