How to manage your finances better in uncertain times

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty?

In a chat with CNBC-TV18's Sonia Shenoy and Latha Venkatesh, certified financial planner Gaurav Mashruwala, answered all of the common personal finance queries and gave tips on how to better manage finances in uncertain times.

Below is a verbatim transcript of the interview. Also watch the video.

Shenoy: Exchange Trade Funds (ETFs) in our markets have not gained too much popularity. However, there is a lot of talk about gold ETFs of late. A lot of our asset management companies (AMCs) like Kotak, Reliance, etc have come out with some new ETFs as well. How good or how lucrative is this particular concept according to you and would you advise it?

Mashruwala: Let me clarify: one is we have gold ETF and the two AMCs, that you mentioned, have come out of the situation whereby they are open-ended fund, which invest into gold ETFs. There is slight distinction. When you mentioned about these two, it is not that you only go to stock exchange and buy. You can buy it there otherwise you go to your mutual fund distributer and pick it up.

Now I will tell you the problem that is happening with ETFs. When we were recommending ETFs to clients, they had to call up stockbroker and invest it. Now sometimes stockbrokers were not too keen if the amounts were small. Secondly, whenever we are telling our client to do it in a systematic manner, month-on-month, they were not flowing the discipline regime. With these kind of products, which you mentioned coming in, what will happen is that a) you can start with a smaller amount and b) SIP execution becomes easier.

So while slightly expensive, I welcome these products. Instead of clients not doing at all, or individuals not doing at all, at least with this, by paying little bit more, they are going to do it.

Caller: I want to invest Rs 3 lakh in mutual funds. I want to invest it either through SIP or lump sum also. And one more question is I would like to have one index fund and one gold ETF. Can you just suggest me the best portfolio? My investment horizon is minimum five years.

Mashruwala: Why do you want to invest only for five years? What is going to happen after five years?

Caller: That is my minimum. I can continue for 10 years also.

Mashruwala: So the first most important thing is: whenever you want to invest be clear for what responsibilities and dreams you want to do it. The moment you say five years, I would recommend a particular allocation. The moment you say 10 years, I would drastically change it. So unless you are not clear, you will not get an appropriate advice either from me or from media or from advisors.

If you already have lump sum, doing systematic investment plan does not help because you already have money lying. Systematic investment plan is good when you have some inflow; either salary or something every month and then you are investing. The moment you have lump sum, the strategy should be there is something called as transfer plan, which works on same principal but you park in a particular debt fund and then tell that mutual fund to systematically transfer.

Now because you are saying your goal is 10 years, what you want to do is: you already mentioned index fund, so pick up an index fund. When you choose an index fund, what you want to find out is: which is the fund which has least cost. In Index fund, fund measure does not use his intelligence. He just replicates a index. So there is no need for you to pay an extra cost. So, pick up an index fund which is least cost, and then do systematic transfer and then balance could go into gold.

Now as far as gold is concerned, just now Sonia asked me about two of the AMCs talking about situation where they have launched a fund of fund. So if they have a systematic transfer plan option there, then use those funds. So let about 70-80% of your portfolio go into index and let balance go into gold.

SMS query: Should I put my money in bank fixed deposits instead of mutual funds?

Mashruwala: One thing people need to realize is you don't invest into mutual funds. You invest through mutual funds. There are two separate distinctions. So through mutual funds I can't put into debt - bonds, debentures, government securities. Through mutual funds I can choose equity and through mutual funds I can choose gold. So mutual fund is a vehicle and not an asset class.

Now, between fixed deposit and if investor is saying debt mutual funds, which basically is the same asset class, if you are in a lower tax bracket, choose fixed deposits, if you are in a higher tax bracket, choose debt-based mutual funds because they are more tax benefits. So dividend in your hand is tax-free and if you cross a year, then the long-term capital gains tax rate is lesser and depending on your tax slab choose one.

Sonia: I think the query would be a little more relevant because of how skeptical the people were at the start of the year. The kind of returns that a FD would give you versus what mutual funds were projected to give for 2011 was a little more tilted towards higher returns for FDs at about 10% or so. Would that be relevant at this point?

Mashruwala: What will happen is if we are on a higher tax bracket, let us assume your FD is giving you 10% return, and you are earning 10% interest from that. Now, if you are on a higher tax bracket, if you are going to pay 30% tax on it, your post tax return is only 7%. While your debt mutual fund will generate slightly higher returns compared to that. So if you are in a higher tax bracket, debt mutual fund will work out better because the dividend that you get from that is tax-free in your hands. If you are in a lower tax bracket, pick up FD because then the interest is not taxable to you.

Yes, FD rates are lucrative, but the interest is also taxable.