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Last Updated : | Source: CNBC-TV18

Why financial planning and tax saving go hand in hand

On CNBC-TV18's special show 'The Informed Investor', Sanjay Sinha, founder, Citrus Advisors and Gaurav Mashruwala, Financial Planner answer investors' queries and share new investment strategies for the coming year.

On CNBC-TV18's special show 'The Informed Investor', Sanjay Sinha, founder, Citrus Advisors and Gaurav Mashruwala, Financial Planner answer investors' queries and share new investment strategies for the coming year.

Below is the edited transcript of the interview

Q: In theory it is all very well to advice people that buy on dips, don’t try and time the market, research your company, research your sector, but once a person has done all that he may not find an entry. What does he do then with the surplus that he is sitting on waiting to invest? Should he keep that money locked in his demat or should he perhaps explore other ideas?

Sinha: The answer to that primarily lies as to area you investing for the extremely short term or are you investing for the long term. If the horizon of investment is three or five years then those dips in the market may not matter so much to you because whenever you see a dip, today we are at about 19,500 points and a 500 point correction in the market would be just about two and a half percent retracement, which is not very significant because the expectations from equity returns is substantially higher.

If you are too focused on the extremely short term then those dips may matter to you. If you have spent so much of time and effort in terms of conducting a research and identifying a security or a stock for yourself, I am sure you would have also identified a fair value at which you would have wanted to buy.

If the market price of that stock is somewhere close to that fair value then this two or three percent move may not matter so much. If it is significantly away from the price that you are comfortable or what you think is the fair value then you should wait for a dip in the price to come close to where you are comfortable to invest.

Q: The other big problem is tax planning. We are heading now towards that time of the year when everybody is going to be sitting with their calculators. So, any new fabulous strategies that you want to tell them?

Mashruwala: People only look at tax saving in the month of January-February. In fact we jokingly say that most Indians die in the month of February and March because that’s when most life insurance polices are sold. But the Income Tax Act has been enacted in such a beautiful manner that if you focus on your financial goals your tax saving will happen automatically.

For example, to start with basic health, if you take health insurance there is tax benefit. If you have dependence or yourself where you have critical illness or disability and you spend money there is tax benefit. Then look at housing, if you are paying rent there is tax benefit. If you are taking housing loan there is tax benefit. Life insurance obviously is tax benefit. So, your basic needs of housing, healthcare is taken care of.

If you have kids who are going to school and you are paying tuition fees there is tax benefit. If you have taken education loan and you are paying interest there is tax benefit. So, education is taken care of. You are planning for retirement, there are various retirement savings instruments where you are saving money you are getting tax benefit and even if you retire and you want money to come back to you – Senior Citizen Savings Scheme, there is tax benefit.

Apart from that if you have a long term goals and you want to put into equity, then you have equity linked savings schemes now. We have Rajiv Gandhi Scheme coming up. If you have near term goals and you want debt based instruments, then there are variety of debt based instruments.

So, if you focus on your financial goals and if you keep saving money for that throughout the year, your tax planning will happen automatically. Unfortunately, people have not looked at their financial goals and

Suddenly, they will run in January, February and March and they end up picking up tax saving instruments which at times become a hurdle. So, focus on your goals, tax saving will happen automatically.

Q: There are lots of IPOs lined from December. Government is also selling stake in big PSU companies. Do you think 2007-06 story will repeat from the IPO perspective or is it still the secondary market which as a retail investor I should look at?

Sinha: The choice of either the primary market or the secondary market is just a route to pick up a security that you want to buy. The second important consideration that you have when you want to buy a stock is the price at which you want to buy.

Normally, public issues when they come, the issuer tries to either price it very aggressively or it is priced very attractively including the government. So, the price should be of your comfort. If you find that the price of a particular issue in the primary market is something which is attractive to you then you should participate through the primary market.

If you feel that, that price is not comfortable then you should wait for that same security to come into the secondary market and then pick it up. In either of the choices, the two things which are your simple factors to consider, one is whether you like that company and secondly whether you like the price at which it is being offered. If the answer to both of them is yes, then pick it up from the primary market otherwise please pick it up from the secondary market.


Q: Between Bharti Infratel and CARE how would you rate the pricing?

Sinha: Both the issues are reasonably, attractively priced. The markets have still not come to a very frenzied state. Even though we may be at the threshold of 19,500 points, in the next 12-24 months the markets will go up even higher.

The public issues that you see today are just the beginning. When the secondary market becomes active, the primary markets also start rising from its slumber and start coming out with issues.

When you participate in a primary issue the number of shares that you apply for get allotted to you. Maybe widely different and till the time the actual allotment gets decide, some of your money may be blocked. So the opportunity cost of not having access to your money, while the allotment, process is not completed.

Q: I am in the business of manufacturing chemicals, which has been a family business for the past 30 years. I heard, the best investment is to reinvest the money back in business. Is the second asset class real estate, third gold and fourth insurance? In 2012, do I really need to change this and are there any new opportunities which I could look at?

Mashruwala: I also belong to a business family and it is very obvious for a business family to think that we should deploy our money back into the business because you have lot of confidence, control and there are much better returns coming. There are better returns coming in this case because you are playing a very high risk game, the human capital as well as the entire financial capital is there.

What will happen if there is an illness or a death? Will somebody else in the family be able to extract the exact financial value out of the money? If you want to put back money into your business then you should not do three things; you should not fall ill, you should not retire, you should not die. While the business is growing and you require money, you should plough it back into the business. But at some point of time start creating money out of it and create a financial wealth, which will help you in your retirement, illness and even passing it out to the next generation. So, just to keep investing it back in the business is not a great idea beyond a point.

In terms of real estate, gold and insurance; insurance is not an asset class. It is a vehicle which will help you invest. So you cannot invest into insurance, you can invest through insurance. Insurance itself is expensive like a vehicle. The amount of brokerage that gets charged is very high. Hence if you either want to put into debt based instruments, insurance predominantly will get into government securities and bonds and we also have ULIP which gets into equity.

If you want to get into asset class, there are other vehicles which will cost you lesser. Between real estate and gold, first look at your financial goals. What will be your money requirement, what will be the liquidity need because real estate is cumbersome to enter, cumbersome to maintain and cumbersome to get out but that doesn’t mean you do not get into it. You do get high returns but your portfolio gets skewed and if you want half the asset out you cannot do other things. So when it comes to real estate and gold, look at your financial goals and then pick it up.

Q: All of us invest in gold through the traditional route but that route is also a little risky. We are not too sure about the quality of gold and then this gold Exchange Traded Funds (ETF) option is there. How safe are these gold ETFs and how to you differentiate between various schemes which are in market today?

Sinha: The choice of whether you should invest in gold ETF or in physical gold; if you want to invest from your heart then you should invest in physical gold because our emotions and everything else gets linked to the physical possession of gold. If you want to invest through your mind then you should invest in gold ETF because it scores over physical gold in several ways.

Firstly, the tax implication for holding gold ETF is much superior to physical gold. Secondly, suppose you want to transact, buy and sell then you get the advantages which are available to a mutual fund when you invest in gold ETF and since this is a listed ETF you get the advantages of long term, short term capital gains as what you get for an equity.

Thirdly, the sheer cost of secure store keeping of gold is much better in the case of gold ETF than in the case of physical gold. Amongst the available gold ETFs, how do you select? You can do two things; one, see whether the point to point return of all these gold ETFs is aligned in the same way. Logically the returns of all gold ETFs should be equal. The next thing is to look at the expense ratio that is charged for each of the gold ETFs that are available in the market. You should choose the one with the lowest expense ratio.
Mashruwala: Expense ratio is an ideal way to find out the right ETF. If you are struggling with that then look at the buying and selling price of each of these gold ETFs. You will always get two prices. Larger the gap, better it is for the broker. Lesser the gap between buying and selling price of the ETF, it is in your interest. So, you may pick up the one which has least gap.


Q: Is E-Gold also a viable option for small investors?

Mashruwala: In terms of storage costs of buying as in commodity and storing it, year on year recurring expense on E-Gold is little more compared to gold ETF. If you buy E-Gold you can get physical gold back, while now for gold ETF also, there are some regulations coming in where you can get physical gold back which is right now not possible. To that extent yes, but otherwise if it’s purely from investment perspective gold ETF under current situation,   looking at the tax implications, looking at the ease of buying and storing scores over it.

Q: As an equity investor do you think the markets are at the frothiest best because when you look back at the economy and the rest of the world, nothing seems to be working right. So, as an equity investor do I wait for the markets to correct or do I invest now?

Sinha: Everybody has been taken by surprise by the steep rally that we have seen in the market in the calendar year and more particularly in the last three months. What you also need to appreciate is that while we do recognise the fact that the economy has slowed down from 9.5 percent to now expectedly 5.5 percent, but you look at the earnings per share (EPS) of the market.

The EPS of the market between 2010-2012 has actually gone up much more than your Gross domestic product (GDP). It has gone up by 13-14 percent. Next year if you take the analyst estimates of the companies performances it is likely to go up by an equal measure once again. While we have not noticed the growth of the companies, may be they’ve not grown as expected but there has been some growth.

There is some fundamental merit in the elevated levels of the market. The market does not look at the present but future. If you see the outlook on the economy, it is surely much brighter than what it was a few months back. Aadhar may be a game changer for the entire Indian economy, because we are an economy where a substantial part goes into subsidies which do not reach the recipient completely. If the leakages are out of the system, it will be a game changer for the economy.

Q: We have a lot of information on website, newspapers and when I am investing in a particular stock over a long-term period and I see a lot of contradictory and confusing opinions running across everywhere, I am pretty confused as to what to do? Whether I should stick to a particular stock or not, what exactly should I do? Where can I find reliable information?

Sinha: There are places where you will get your facts right and for that thanks to information technology boom. You can get access to the annual reports of every company online, so that is where you will get your facts right. Other than that, quarterly performances of the company get published in newspapers and you will get the facts there. The problem comes with the opinions.

The very fact that we have a market where stocks get bought in and sold, itself represents that there are two opinions for every particular stock otherwise there would be no buyers and no sellers. There would be either only sellers or only buyers. It is upto you to decide which side of the opinion you chose to tilt over. If you have your own competence in doing a research and arriving at a conclusion with the help of the facts which are available it is well and good. The other way is to choose an analyst whose opinion you feel is much more reliable, much more dependable than the others and then you depend on his opinion.

Q: If we were to make an investment decision between equity and real estate with a horizon of five to seven years and were willing to handle the cumbersome part of managing the real estate; which one would be the best option from an investment perspective?

Mashruwala: For me it will be financial gold based and it will not be random because while both are growth oriented asset classes, the behaviour is completely different. Yes, you are willing to manage the cumbersome part of real estate but that is not the only issue. One, it will attract wealth tax. Two, it is illiquid and indivisible.

One should look at their portfolio and find out how much is the allocation to real estate. I am assuming you already have a house to live in, if you are a business person that you already have an office otherwise you are working somewhere. What portion of your overall assets is into real estate after you acquire a new real estate and then the liquidly needs as well. If somebody purely wants to ask me, whether equity will run fast or real estate, future will tell.

Real estates have been doing phenomenally well. Even last year was slightly different where equity did well and real estate didn’t. Four to five years time purely from returns perspective, little difficult to say which will be the winning horse but a lot of other factors get into it and real estate becomes difficult because its indivisibility and illiquidity.

Q: I had invested in Infosys and TCS some years back and had very good returns. I am still invested, but what is your take on IT sector? Should I be still invested or should I sell off my stock now?

Sinha: In 2013, IT may not be a market outperformer. There will be other sectors which will outperform the market by a wider margin. This is because there was a time when IT sectors were ruling the market but then their earning growth was 30 to 35 percent year-on-year. Today, Nasscom has projected the earnings to grow at a rate of 11 to 14 percent. So, it is a big climb down from those glory days.

Secondly, if rupee begins to appreciate as we all expect it should in 2013, then that will also be another headwind for the IT sector. Given these two factors, in 2013 if you move a part of your investments to rate sensitive sectors which have not performed till now like banking, infrastructure related sectors, you might be able to get a better performance from your investment than what you have seen in the recent past.

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First Published on Dec 15, 2012 11:23 am
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