Permanent Portfolio

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A permanent portfolio allocates 25% each to equity, debt, gold and cash. Our 15-year study shows that it delivers returns comparable with equities and is best suited for passive investors.

It is generally accepted that asset allocation should be based on several factors–investor’s age, risk appetite, risk taking ability, time period and importance of goals. It is difficult for retail investors to arrive at the correct asset allocation without professional help, because they have to take into account all these factors. While a 25 year old who gets financial support from family can have an aggressive asset allocation, another who has to support his family has to be conservative. There are also experts who suggest that you need to change your asset allocations based on broader market valuations¬≠ increase equity allocation when market valuations are down and reduce it when valuations go up. Since markets, Indian market in particular, are highly volatile, it becomes difficult for investors to change their asset allocations on a regular basis.

To solve the problem of retail investors not keen on seeking expert guidance to manage their portfolio, investment analyst Harry Browne, in his book Fail Safe Investing, came up with the idea of a `permanent portfolio’. A permanent portfolio comprises equities, debt, cash and gold. While portfolio diversification is common knowledge, what differentiates a permanent portfolio is its simplicity. Instead of deciding how much to invest into each of these four asset classes, a permanent portfolio invests equal sums, 25% each, in all of these.

A permanent portfolio comprises the mentioned asset classes because they be have differently during market cycles. So, while some may outperform in a particular cycle, others may under perform. The diversification thus tends to offset volatility in portfolio returns. For example, equities will gain during an economic boom and crash during a recession. Similarly, long-term debt will generate decent returns during recession and will generate fabulous capital gains when rates start falling. Cash or liquid funds will generate reasonable returns across time period, but may generate better return during periods of tight monetary policy and also when short-term rates move up. While gold offers protection against inflation in the developed markets, it acts as a protection against currency depreciation in the developing economies such as India.

Brown’s book, which came out in 1999, has generated substantial investor interest and several studies in the Western markets have concluded that a permanent portfolio may be enough for most retail investors. But, will the concept work in Indian markets? Experts are not very gung-ho about it. Equal weight to all asset classes reduces weight-to-growth assets like equities. From the asset allocation perspective, 25% equity allocation will work only for conservative investors. Gold allocation shouldn’t be more than 10%, and that too for long-term portfolios.

Even as experts have been critical of the idea, we decided to do some empirical research to test the permanent portfolio’s value in Indian markets.

Back testing

In our study, the Sensex was used as a proxy to represent equities. Dividend yield was not considered as investors opting for mutual funds incur expense ratio which nullifies the small dividend yield. Long term gilt funds were used as proxy for long term debt. We selected the top three schemes, which have been in operation for at least 15 years, in terms of their assets under management. The gilt portfolio return was arrived at by assuming that the investor has put an equal sum in all three gilt funds. We selected liquid funds and calculated the returns for the liquid portfolio in a similar way. However, all three liquid funds have moved in tandem and generated almost the same returns. The next step was to use a proxy for gold. Gold funds and gold bonds are the best alternatives for this, but neither have a 15-year track record. While there is a small expense ratio for gold funds and actual return will be less than gold price gain, gold bonds generate a small interest and actual return will be more than the gold price gain. So, we have considered absolute gold prices for this study–no reduction for expenses or addition for interest income.

Our back testing confirmed most theoretical assumptions. Long-term gilt funds, for instance, countered the impact of massive equity correction phase of 2008-09.For example, ICICI Pru Long Term Gilt Fund (G) generated a return of 23.36% during the 2008-9, when the Sensex generated a negative return of 37.94%.

Similarly, gold too saw a massive rally and generated a return of 24.58% during the same period. Traditional Indian investors still swear by gold as a long-term asset and they have a valid reason to do so. Gold has seen a compound annual growth rate (CAGR) of 13.66% in the last 15 years, only slightly lower than the Sensex return of 13.97%. More importantly, this comparable gold return came at a significantly low volatility–gold’s standard deviation was only 16.62 compared with 24.35 of the Sensex. However, gold may not generate this kind of return in the coming years. This is because the rally in international market is almost over, and gold’s future return will be more linked to rupee depreciation.

Permanent portfolio types

The permanent portfolio can be of two types. In the first one, you invest fixed pro portions, 25% each in the four asset classes, and stay invested in them for a very long time. You can also make use of SIPs for such an investment. In the second case, you re-balance the portfolio on a regular basis. When should one do the re-balancing? Annual re-balancing is enough for most portfolios, but if the investor wants to be aggressive, he can go for a six month re-balancing. While annual re-balancing is the norm, you can also re-balance every three years, if the investment horizon is very long (say, 30 years.

For this study, we have calculated the return and risk for both types of portfolios. For the re-balanced permanent portfolio, we have gone for annual rebalancing–on the last trading day of every financial year.A rebalanced portfolio has generated better returns: a CAGR of 12.08% compared to non-rebalanced portfolio with a CAGR of 11.48%. Additionally, a rebalanced portfolio also drastically reduced volatility in returns. For instance, the annualised standard deviation of rebalanced portfolio was only 7.48, compared to 9.54 for the non rebalanced portfolio.

Annually balanced permanent portfolio has done well during the last 15 years, so it should serve the needs of most retail investors. Its CAGR of 12.08% may be slightly lower than that of the Sensex’s CAGR of 13.97%. However, a permanent portfolio will be the winner if you consider the risk-adjusted returns of both. This is because at 7.48, the standard deviation of a permanent portfolio is very low compared with that of the Sensex–24.35.

Finally, while the option of a permanent portfolio provides ease of investing, you cannot be reckless. Investors need to pay attention to the choice of product under each asset class, else rebalancing will become difficult. For example, investing into illiquid stocks or equity funds with withdrawal restrictions–ELSS, child plans, etc.–can make the rebalancing impossible. Similarly, on the debt side, one needs to avoid products such as EPF, PPF, etc. that come with restrictive clauses.

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Investment Needs Hierarchy

All investments are not equally important. You need to fulfil the basic investment needs first before moving on to the others

We know how investing is different from just saving. If we put our saved money somewhere where it will grow, then that’s investing. However, there are a number of possibilities available when we want to invest, and it isn’t possible to make sensible choices without having a way to classify things.

However, let’s not jump into classifying investments right away. Before we do that, we need to classify our need for making an investment. Investments can be made for a huge variety of needs. You could be saving for emergency medical funds which are usually required at a moment’s notice. Or you could be saving for your retirement which is a few decades away, or anything in between.

At Value Research, we have created a useful framework for thinking about these investment needs. We divide investment needs into four levels. Each level is more fundamental than the ones that come after it. You should satisfy the need at each level before going on to the next one.

Those who know a bit about psychology may recognise this system as being based on the ‘Hierarchy of Needs’, a concept proposed by psychologist Abraham Maslow. Maslow’s hierarchy dealt with basic human needs like food, shelter, etc. Basically, human beings deal with their higher needs after the simpler ones are satisfied.

So here’s Value Research’s Hierarchy of Investing Needs:

LEVEL 1: Basic contingency funds
This is the money that you may need to handle a personal emergency. It should be available instantly, partly as physical cash and partly as funds that can be immediately be withdrawn from a bank. Online banking and ATMs make it relatively simple to get this organised.

LEVEL 2: Term Insurance
Calculate a realistic amount which allows your dependents to finance at least short and medium-term life goals if you were to drop dead or be struck with a debilitating injury or disease. You should have an adequate term insurance before you think of any savings.

LEVEL 3: Savings for foreseeable short-term goals
This is the money needed for expenses that you plan to make within the next two to three years. Almost all of this should be in minimal risk, deposit-type savings avenues.

LEVEL 4: Savings for long-term foreseeable goals
Same as level 3, except the planned expenses are more than three to five years away. This level should be invested in equity and equity backed investments like equity mutual funds.

One could think of many levels beyond this and really, the details matter much less than the concept. Depending on one’s circumstances, any of the levels may have to be modified. For example, you may have enough income-producing assets to make insurance relatively less important.

However, this doesn’t decide how much to invest in each need. This system aims at preventing you from going to higher level unless the lower one is fulfilled. If you haven’t put emergency cash in a savings account, then don’t buy term insurance. If you don’t have term insurance yet, then don’t start putting away money for your daughter’s college education, and so on.

Invest Rs 1,50,000 and Save Tax up to Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds. Save Tax Get Rich

Top 10 Tax Saver Mutual Funds for 2017 – 2018

Best 10 ELSS Mutual Funds to Invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Tata India Tax Savings Fund

3. Birla Sun Life Tax Relief 96

4. ICICI Prudential Long Term Equity Fund

5. Invesco India Tax Plan

6. Franklin India TaxShield

7. Reliance Tax Saver (ELSS) Fund

8. BNP Paribas Long Term Equity Fund

9. Axis Tax Saver Fund

10. Sundaram Diversified Equity Fund

Invest in Best Performing 2017 Tax Saver Mutual Funds Online

Invest Best Tax Saver Mutual Funds Online

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Advantages of ELSS funds

ELSS funds are an advantageous way to use the Rs 1.5 lakh limit for tax saving investments under Section 80C

The Many Advantages of ELSS Funds
Under Indian tax laws, savers have a complete range of tax saving instruments available to them. And yet, individuals often take sub-optimal investment decisions with their tax-saving investments. Deposits with long lock-ins that hardly pay anything more than inflation; insurance schemes that eat away a lot of the gains in agent commissions; Equity linked Savings Schemes (ELSS) of mutual funds chosen with scant regard to performance track-records–all these (and more) are often seen when it comes to tax-saving investments.

Why does this happen? One common reason is that there is a confusion of goals between saving tax and making investments. The typical investor makes this decision either in late March under the duress of having the deadline slip by, or under intense pressure by a salesman who drives home the fact that time is running out. At the end of the day, we make suboptimal investment decisions and when they ever realise it, they console themselves by saying that that at least they got tax benefits for the investments.

This duality of concern–tax as well as investments–prevents clear-headed thinking about just exactly what one is getting out of an investment and whether the quantum of any disadvantages are actually worth the quantum of tax benefits that are being obtained. Investors should work on eliminating both these sources of poor decision-making–time pressure as well as not thinking about these investments as investments.

Eliminating time pressure is simple–just plan these investments as early in the year as possible–if you haven’t done so, then this is the right time to do so. And once you start in time, there’s no need to stop for next year. Since the best way to invest regularly in a fund is through an SIP, you should just start an SIP in a carefully-chosen ELSS fund and let it run for a long duration.

These investments are investments and should not be made if you would not make them otherwise. For example, if you otherwise do not need to make a fixed deposit but would rather invest in equity, then do so in your tax-saving investments as well. Any investment has to first make sense as an investment, and only incidentally be a tax-saver.

Within this framework, ELSS funds are an advantageous way to use the R1.5 lakh limit that is there for tax saving investments under Section 80C. This limit has been sharply enhanced in FY 14-15 than it was earlier, but, for many people, a good part of it gets consumed by statutory deductions.

Unfortunately, all the statutory deductions are invested into fixed income instruments Now, the Government has even placed some tax deductible expenses under Section 80C.

Within this limit, ELSS is the better way to get the advantages of equity investing.

Invest Rs 1,50,000 and Save Tax up to Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds. Save Tax Get Rich

Top 10 Tax Saver Mutual Funds for 2017 – 2018

Best 10 ELSS Mutual Funds to Invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Tata India Tax Savings Fund

3. Birla Sun Life Tax Relief 96

4. ICICI Prudential Long Term Equity Fund

5. Invesco India Tax Plan

6. Franklin India TaxShield

7. Reliance Tax Saver (ELSS) Fund

8. BNP Paribas Long Term Equity Fund

9. Axis Tax Saver Fund

10. Sundaram Diversified Equity Fund

Invest in Best Performing 2017 Tax Saver Mutual Funds Online

Invest Best Tax Saver Mutual Funds Online

Download Top Tax Saver Mutual Funds Application Forms

For further information contact SaveTaxGetRich on 94 8300 8300

OR

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Capital Gains Tax for Debt Mutual Fund Returns

Debt funds Capital gains tax

Short-term capital gains (if exit is within 3 years) on debt funds will be added to your income and taxed as per your applicable tax slab

f you sell them within 3 years, capital gains on debt funds are treated as short term. It will be added to your income and taxed as per your applicable tax slab. Long term capital gains (if exit is after 3 years) are taxed at 20 per cent with an indexation benefit on your cost.

Investment holding period Taxation
Short Term Capital Gain 36 months or lesser added to income and taxed as per applicable slab rate
Long Term Capital Gain more than 36 months 20% with indexation or 10% without indexation

Let us take an example, Since we do not have the Cost Inflation Index for future years, we will take an example of past. Say you invested R10 lakhs in 2010-2011. Assuming the fund returned 9 percent a year, and you redeem it for R15,38,624 in 2016-17, your long term capital gain would be R5,38,624.

However, if you index the cost with the Cost Inflation Index (provided by the IT department) for 2010-11 and 2015-16, then the cost would be R1,52,0393 (R10 Lakh * 1081/711). Then the long term capital gain would be R18231 (1538624-1520393). A 20 percent tax on this would be R3646.

So, as per this example, your capital gains tax for this financial year will be R3646.

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Principal Emerging Bluechip Fund

Invest Principal Emerging Bluechip Fund Online
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  • Achieve long term capital appreciation by investing in equity of Mid and Small Cap companies
  • Stock selection focused on stocks of higher growth companies at attractive valuations
  • Performance History of more than 7 years
  • Actively managed yet benchmark aware portfolio management

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ELSS Investment or ULIP Investment

ELSS or ULIP

Savers sometimes think of ELSS funds and ULIPs as alternatives. This is a mistake

Functionally, there is nothing common between ELSS funds and ULIPs. It’s a basic rule of saving to not mix up insurance and investments. ELSS and ULIPs are two different products that serve different purposes. While ULIP is a mix of life insurance and investment offered by life insurance companies, ELSS is an equity fund. Both are eligible tax-saving investments but there the similarity ends.

ELSS have predictable cost, and easily understandable returns and are transparent about how the fund operates and what it invests in. Not so with ULIPs. From the premium paid, the insurer deducts charges towards life insurance (mortality charges), administration expenses and fund management fees. So only the balance amount is invested. ULIPs have high first year charges towards acquisition (including agents commissions). In order to evaluate the return generated by a ULIP and thus compare it with another investment, you need to take into consideration only that portion of the premium that is invested in a fund. This information is not easy to come by.

In a ULIP, the mix of investment and insurance prevents savers from having a clear cost-vs-benefit understanding of either of the two components.

Also, with a ULIP, you have to block your money for long periods of time. So you sacrifice on transparency and liquidity. In theory, ULIPs have a five year lock-in, but since terminating the policy early returns adversely, in effect is a ten to fifteen years commitment.

All the charges, which could be as high as 60 per cent in the first year, begin to taper from the fourth year onwards. So you will have to stick on for at least 10 – 15 years to make sure you get a decent overall return on the investment you have made.

The high costs, difficulty in evaluation, lack of transparency and low liquidity don’t make a ULIP a suitable avenue to put one’s money. It is the agents who benefit most since commissions can go up to 25 per cent. Insurance should never be an investment.

Invest Rs 1,50,000 and Save Tax up to Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds. Save Tax Get Rich

Top 10 Tax Saver Mutual Funds for 2017 – 2018

Best 10 ELSS Mutual Funds to Invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Tata India Tax Savings Fund

3. Birla Sun Life Tax Relief 96

4. ICICI Prudential Long Term Equity Fund

5. Invesco India Tax Plan

6. Franklin India TaxShield

7. Reliance Tax Saver (ELSS) Fund

8. BNP Paribas Long Term Equity Fund

9. Axis Tax Saver Fund

10. Sundaram Diversified Equity Fund

Invest in Best Performing 2017 Tax Saver Mutual Funds Online

Invest Best Tax Saver Mutual Funds Online

Download Top Tax Saver Mutual Funds Application Forms

For further information contact SaveTaxGetRich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

OR

Call us on 94 8300 8300

ICICI PRUDENTIAL SELECT LARGE CAP

Invest Online ICICI PRU SELECT LARGE CAP

This large-cap fund stands out because of its highly focused approach to stock selection. It runs a compact portfolio of just 14 stocks, while remaining true to its label with its strict large-cap focus. Unlike peers, it has an aggressive approach to outperforming the benchmark.

Over the years, the fund has built a healthy track record of outperforming peers. A trigger-based fund in its earlier avatar, it continues to allow investors a trigger-based automatic rebalancing tool into one of the pre-selected schemes as a profit-booking mechanism. Those comfortable with a focused strategy in the large-cap space may consider this fund, others may prefer its sister fund ICICI Pru Focused Bluechip which has a more diversified approach and a better risk-return profile.

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Mirae Asset Great Consumer Fund

Invest Mirae Asset Great Consumer Fund Online

For retail investors, investing in the current market scenario seems to be a tricky exercise. One theme that works not only in the short term but also in the long term is consumption. Among schemes which have sharp focus on consumption theme, Mirae Asset Great Consumer Fund has consistently delivered good returns.

At present, close to 25% of the scheme’s portfolio is exposed to banking and financials. One of the chief reasons for this is that these sectors serve as the backbone of the economy by funding growth. The scheme also has reasonably good exposure to other themes under the broad consumption category. One such theme is automobiles. The scheme’s fund managers Neelesh Surana, Bharti Sawant and Sumil Agrawal have consistently stuck to the fund house’s philosophy of refraining from buying overvalued stocks and buying those firms which have high cash flows and good investment ratios.

Due to this, the scheme has beaten its peers by a wide margin and benchmark indices BSE 200 (65%) and S&P Asia Pacific Emerging BMI Index (35%). The only concern about the scheme is its assets under management at `42 crore. But considering the performance of Mirae Asset as a fund house, the performance of this scheme is expected to sustain given its investment philosophy.

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Invest every month for years – MF SIPs

As you invest every month for years, look for a healthy rate of return

Most people want to be a crorepati because they want to spend like a crorepati. But, if you did so, you would never become a crorepati in the first place. The first principle of becoming wealthy is to have patience to see your money grow. Most wealthy people around you accumulated the wealth over a long period of time. There would always be a small percentage of people who became wealthy overnight, but they are the exceptions.

It is the drops that make an ocean.This adage holds good for creating wealth too. Small investments done periodically over a long period of time accumulate to become a large sum of money. What you then need is a healthy rate at which your periodic investments are compounding.

SIPs in equity funds provide you both, the discipline to invest regularly and a healthy rate of growth. In India, in the last 20 years, the sensex has generated a return of more than 15%. If one invested even Rs 5,000 per month for 25 years, at 12% average annual rate, it would grow to around Rs 1 crore. However, if the return was 15%, the corpus would be 1.5 times more.

You can follow a few more techniques.

Always remain invest ed in equity funds. Do not time the markets.

Increase the SIP amount annually.

Monitor the health of the funds vis-à-vis the index. Do separate SIPs for each goal. Pick up 4-5 funds so that your portfolio has enough diversification.

Start MF SIP Online

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For further information contact SaveTaxGetRich on 94 8300 8300

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You can write to us at

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Call us on 94 8300 8300