A defensive investment guide for wives of defense officers

In an initiative to educate masses and create investment awareness, CNBC-TV18 in association with the National Stock Exchange (NSE) brings you Informed Investor.

A series where the best financial minds clear doubts about investment, solve queries and educate the masses to understand finance better. In this session we will see how wives of defense officers can maximize their wallet and make best investments.
PN Vijay an expert investment planner and Subhash Lakhotia a tax guru will thelp these woman to improve their financial standing with ideas of better investment avenues. Below is the edited transcript of the interview on CNBC-TV18. Q: What factors are required to be considered before making risky investment and what are the advantages? PN Vijay: One will only make risky investments if returns are high. The key is to understand, what is the risk associated with an investment? For example, bank deposit has no risk. A debt mutual fund, has minimum risk and equity mutual fund is less like a stock. It has all the risks of a stock.
Debt mutual funds are like bank deposits. Equity mutual funds are like stocks. Broadly speaking, bank deposits, fixed return schemes of mutual funds, debt schemes are safe, but they provide less return. In India inflation is at 8%. Stocks, equity mutual funds and real estate gives a return of 20-25%. But, the risk is higher. In this way investment should be measured. Q: I have a small start-up business. How do I handle my accounts? I have a two-year old girl in next 15-16 years she will need higher education. So where do I invest for the best benefits at that point? Lakhotia: There is a provision in Income Tax Act, that business whether new or old having a turnover of less than Rs 1 crore, then there is no strict provision for maintaining the accounts. Income tax has to be paid if we show 8% income of the turnover. For a girl child, it is important to have a 100% Specific Beneficiary Trust and start filing income tax return right from the start. PN Vijay: Yes, Beneficial trust is an excellent idea. You could buy an insurance type of plan which has a growth aspect and matures in 15 years. So it will grow nicely. It is quite safe and you can invest some surplus every year.
Many people in the US do that when they know there is going to be a major event and they have some idea when that event is going to take place in the future. So you build up something and it is tax free return.
 
Q: FD provides interest of 9.25%-10% and what if I come in 35-40% tax bracket? Where do I save, with 10-15% inflation every year? PN Vijay: You have to judge what is more important for you. Risk or return? Investing in a high inflation scenario like today in India, With 8-9% inflation one do not make real returns. Real returns is a nominal return, the interest you get minus inflation. Since last two years one is not getting real return in this country.
These are risky and trouble times, you may like to play it safe so that the capital returns. So you make some introspection about yourself, what is my risk profile? Can I keep this money for five years? If the answer is yes, then you can enter into stocks or real estate and expect positive returns. Lakhotia: The maximum slab for income tax is 30%. Q: If I want to start investing, what avenues should I look at? What are the factors and for how long should I invest? PN Vijay: Let us see the cardinal principles. How risky is the investment? where risky means the time till I get my money back.
Second, how liquid is this investment? An investment maybe fantastic, but it may not be liquid. Let's say, a farm land 100 miles from Delhi, it might appreciate in three-four years, but when you want to sell it there maybe only two buyers. So, liquidity means the ability to get money back for a rainy day or an emergency day. Third, return. More risk, more the return. Less risk; less return. All the three factors are interrelated. And alos look at the tax aspect. Lakhotia: For a young individual the best is to invest in land, if you invest in land in an upcoming area so by the time your husband retires you will get a minimum a double of retirement benefits.
It is to be noted that under the Income Tax Act, whatever gift you receive from your husband via direct or indirect transfer in your name by the husband is clubbed to your income. It will be treated as a loan from your husband. It is a ideal to buy a property jointly so that both can enjoy income tax benefit with regard to interest on the housing loan. Q: I invested Rs 50,000 in 1994 and waited for 15 years and now I am getting an income of Rs 20,000 a year. Do insurance policy works as Rs 20,000 a year is a minimum return? PN Vijay: In 1994, Rs 50,000 was big money. In India where there is so much inflation, this is the argument against any long-term investment except land because it moves with inflation that when you actually get the payoff it doesn't mean much. You probably must have invested in a very simple plan which did not put money in stocks or some other form of investment.
There are growth plans etc. In 1994, you must have been a lot younger. It didn't make sense for you to take a simple term plan where you just get it back and you got hit by inflation. So I would suggest that if you are young and want to get a big amount later, you go for a plan which has a capital appreciation component to it, not just an interest.
So there are many plans and for younger people I will recommend something where the particular insurer would keep investing in something related to growth, so that you are not hit by inflation. Our experts have gone through your portfolios and they are now going to tell you where things are going wrong and how they can be rectified. Do you want to begin by telling us what the big trends you noticed largely are? PN Vijay: I am very happy to see that almost everybody has chosen a mix of investments except one or two people. Interesting, almost everybody has chosen gold Lakhotia: Of all the investment avenues discussed, one avenue which is missing is zero coupon bond which is issued by public sector organisations. If you have a child of 12-14 years then it is a very safe and secure investment bet. PN Vijay: Pin Swoyn after paying her property loan has a surplus of Rs 20,000. She invests Rs 3,500 in shares, Rs 3,500 in LIC policy, SIP of Rs 2,000, Rs 1000 in bank fixed deposit, Rs 1000 in recurring deposit, Rs 1000 in Public Provident Fund and Rs 1000 in gold. You have spoken about where things are going wrong. How can they then be put right? What’s an ideal allocation then for an age group like this? PN Vijay: For this age group, it should be betweeen 50-50 risk free and risky. On the risk free investment I expect you to get 8% return, and 20% return on the risky investments. So on an average you get a return of 14%, assuming inflation to be at an average of 7% in next five years. Of that 50%, I would recommend you to invest in zero coupon or bank deposit. Bank deposits should not be more than 10%.
Rest, debt instruments which is 40%; and in the balance 50% I suggest you keep 20% in shares and 30% in land or property. One needs to chunky investments in property, you can buy gold shares. So you can get the same return by putting a slightly lesser amount in stocks. The amount of return you get in a stock doesn't depend on amount you invest, but in land or property unless you invest a decent sum you will not get a decent property.
You can invest 30% in real estate understanding that stocks and real estate have about the same type of risk and return over long periods. Not more than 10% in bank deposits, rest in debt which gives you a return of 10-11%. Q: My husband is retiring from the Navy very shortly. Would you help me out as to how to go about with the investment plans once you have the cash in hand? He is taking a pre-voluntary retirement? PN Vijay: Let's say he is retiring in mid-40s. It is important to know how much cash you have available. Every month you have expenses and income. You have to gauge the amount of surplus available. Only 70-80% of the surplus can be invested.
Don't invest money which you require essentially today for running your household, for paying your policies, for paying your house loan repayments, for probably something longer like sending your son abroad for a higher education, getting your daughter married.
Don't invest that money. That is sacred money. Whatever is surplus he can invest it into a mixture of safe investments like banks, bank deposits etc. or some of it he can put in a risky investment like stocks or real estate. A mixture of both I would advise considering he is taking early retirement.