|Wish you all a very Happy and Prosperous New Year 2019.
2018 has been a very interesting year, surprising and shocking us in equal measure. Unforeseen events – both domestic and global, political and financial helped create opportunities in the market and at the same time threw up challenges for the market and its intermediaries.
As investment managers, we believe that we managed expectations and performance such that it was most beneficial to you. As we step into the new year, our endeavour is to continue exploring opportunities in the market and help create wealth for you.
Keeping this in mind, we would like to present to you “MARKET OUTLOOK 2019” – the yearly document that features our views on the markets for the year ahead and our thoughts on how best to navigate its twists and turns.
Source: The Desk of B.P. <firstname.lastname@example.org>
“I don’t need to make a million bucks in the markets…
…but I WOULD like to know how to win MORE and lose LESS.
Can you show me how to do that?”
Well, that simple question caused me to hole up in my “trading lab” for a couple of days and prepare a special step-by-step “action guide” that teaches you:
While there are an infinite number of ways to trade the markets, I’ve found that the world’s best traders all follow some of the same core principles, regardless of their method.
And I reveal the top 3 principles, or “tricks”, that they use in this simple, no-fluff guide that I’m pretty sure you’re going to LOVE.
CAUTION: This is for regular people, NOT for “know-it-alls”, so if you can look at this with an open mind, you’ll probably learn at least 1 new idea that could be the changing point for you, financially.
The plan is to eventually charge a small fee for this guide, but as part of a little experiment, I’m giving it away as a gift for a limited time.
Co-Founder, Profits Run
p.s. Even if you’re experienced, I’ll bet you’re not using all 3 of these deceptively simple trading tricks.
The business of banking falls under priority services and all banks whether public or private in India need to comply with stringent guidelines by the RBI. While NPAs (nonperforming assets) are part of their businesses, there is a limit set by RBI as part of good governance. New banks are allowed to float only after they demonstrate they are here for a long run.
While steel plants and the business of jewelry should also be relevant for years and decades to come, there is a difference: banks finance all kinds of businesses from small retailers to large corporates and government projects. In other words by investing in bank stocks, one gets an exposure to growth of economy as a whole. It is said that banking closely mirrors the economy.
There are many businesses (like a firm producing accounting software) which did not exist a few decades back and one cannot be sure what lies ahead in few years time with rapidly changing distribution channel/consumer taste/change in technology. For such stocks, it is difficult to spot right time to exit and passive shareholders who are taught to invest for long term often lose a significant part of the portfolio.
Government-owned banks (PSUs) are also a vehicle that keeps the government running by generating income through dividends. Most of these banks in good times declare rich dividends ensuring that you also earn decent yearly income in case you stay invested. There are also a couple of more advantages in dividend play including dividend income not taxable (like in India) and dividend stripping.
You can of course spread risk by investing in a number of public and private sector banks as under exceptional circumstance a bank too can go bust as evident in the Global Trust Bank fiasco (2004). This also helps optimize returns from dividends, and a way to optimize the same can be through investing in mutual funds focused on bank stocks like Reliance Banking Fund, Religare Banking Fund, and UTI Banking. These mutual funds, in addition to bank stocks, may also invest in companies engaged in financial service activities (UTI Banking Sector Fund) or companies engaged in allied activities related to the banking sector (Reliance Banking Fund).
Of late, there is a flux of new so-called payment banks that leverage online payment gateway technologies pioneered by the likes of Paytm, and it would be interesting to see how they do in the equity market going forward.
All being said, here is a study by GAM Investments worth mentioning: ” Dividend-paying stocks are attractive in a world of near-zero interest on bond investments. However, only picking the highest payers is too simple an approach and may risk ending with a dangerously unbalanced portfolio, in our view. And it might not even deliver what it was supposed to do in the first place.” The study warns that dividend yields alone do not work as a primary stock selection tool.
To conclude, dividend is not a guaranteed income. Even if a company is recording big profit, it may decide to cut dividends because of its decision to invest in the growth of the company rather than distributing the profit to the shareholders. While in the context of public sector units it is true that there will be an inclination to declare comparatively higher dividends as government is its biggest beneficiary and tries to meet its day to day costs with the profit accrued from the public sector units which in turn means individuals and fund houses invested in the public sector stocks also earn dividends, what if the public sector units start making losses? In the context of India, check this story by Economic Times dated June 23, 2018 (Bank dividends dry up further: Only two of 21 PSU banks pay it) which reports “dividend payouts for FY18 would be the worst by Indian state-run banks since FY09, when the economy was seeking to clamber out of the subprime sinkhole. The payouts have fallen progressively since FY15, when banks led by the State Bank of India had paid the government Rs 6,940 crore in dividends.”
Life insurance products are designed for lifestyle protection, children and retirement fund planning, while income tax rebate induces individuals to buy insurance policies. From an operations research (OR) perspective, there is a given insurance cover for which tax savings, sum assured (survival benefit or death benefit), return on investment is maximized given your age, current and projected yearly income and expenditure, and no. of dependents.
Case study: A is a 40-year-old sales professional working in a private firm as sales manager drawing a salary of Rs 6 lacs per annum. A’s family includes retired parents, spouse who is a housewife, and a four-year-old child. The approximate monthly expense for the family is Rs 30,000, i.e., Rs 3.6 lacs yearly. Being responsible means A should ensure that if something happens to him, there should be enough money to protect the current lifestyle of the family.
Suppose rate of interest on fixed deposit in bank is 8%. A needs to have Rs 100 as fixed deposit to earn Rs 8 yearly. So, in order to have Rs 3.6 lacs yearly, A needs 100/8 x 360000 = Rs 45 lacs of investment as fixed deposit. Now, add to Rs 45 lacs A’s outstanding loans (housing loans, personal loans, credit card) and medical contingency for the family which works out to be Rs 5 lacs. So, A needs to ensure that Rs 50 lacs is available for his family in case of his unfortunate demise.
A has investments in the form of fixed deposits, recurring deposits, provident fund, mutual fund, and shares of Rs 15 lacs. The value of A’s home and jewelry items is not included as our purpose is to maintain existing lifestyle of A’s family even in the case of his absence (valuation of another home if A own’s two flats, gold bars can be included as they are investments).
Insurance was always in the mind of A ever since he attended an insurance awareness campaign and took a term policy when he was 30 years old. Term plans such as LIC’s Anmol Jeevan provides financial protection to the insured’s family in case of policy holder’s unfortunate demise. On survival to the end of the policy term, nothing shall be payable.
On the opposite side of the spectrum is pure endowment plan in which the life insurance company promises to pay the life insured a specified amount (sum insured) only if he or she survives the term of the plan. If the policy holder dies during the tenure of the plan, nothing shall be payable by the insurance company. This product is advisable for a single person without a family. An important feature of term plan and pure endowment plan is there are two odds. Odd 1: policy holder receives full sum assured (death benefit in case of term insurance and survival benefit in case of pure endowment insurance) which is a loss to insurance company; Odd 2: policy holder receives nothing or zero sum assured (policy holder survives policy term in case of term plan insurance and dies while policy in force in pure endowment plan) which is 100 percent loss to policy holder as the premium paid yields zero return.
A has two life insurance policies that have sum assured of Rs 30 lacs as death benefit. Both are term plans from LIC (Anmol Jeevan). As mentioned above, first policy that A took was when he was 30 years old under which he pays a yearly premium of Rs 3,855. There is death benefit of Rs 15 lacs during the tenure of 20 years policy terms. A purchased another term plan, also Anmol Jeevan, when he was 35 years old. This policy is of 15 years term, yearly premium Rs 4,410, death benefit Rs 15 lacs.
So, A pays a yearly premium of Rs 8,265 (3855 + 4410) giving his family an insurance cover of Rs 30 lacs (in case of his unfortunate demise) till he is 50 when insurance policies cease to operate. This premium of Rs 8,265 is tax free under section 80C of the Income Tax Act 1961. The amount received as death benefit is also tax free under section 10(10D) of the same act.
Tax liability for 2014-15 can be computed using interactive online tools like Income Tax Calculator. For someone who is a resident Indian aged 40 with yearly income of Rs 6 lacs (we are not considering other source of income like fixed deposits and shares), his/her tax liability stands at Rs 51,500. When we deduct premium of Rs 8,265 from A’s annual salary, his taxable income stands at Rs 5,91,635 and tax liability reduced from Rs 51,500 to Rs 49,777 (use Income Tax Calculator to examine different scenarios). It is to be noted that for assessment year 2014-15 under income tax regulations, the aggregate amount of deduction under u/s 80C, 80CCC & 80CCD(1) shall not in any case exceed Rs 1 lac. (update December 2017: (Section 80CCE) The aggregate amount of deduction under sections 80C, 80CCC and sub section (1) of Section 80CCD shall not exceed Rs.1,50,000/-). Also, there is a condition of yearly premium paid being at least 5 times the capital sum assured for income tax exemption: Life Insurance premia paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in the case of HUF, premium paid on the life of any member thereof under an insurance policy, (other than a contract for a deferred annuity,) issued on or before the 31st day of March 2012 shall be eligible for deduction only to the extent of 20% of the actual capital sum assured.
In the case of term plan sum assured is death benefit and premium paid is 1500000/3855 = 389.1 times the sum assured for the first term plan by A under discussion. This is an important criterion differentiating pure insurance products like term plan from insurance products with element of investment like money back plans, monthly income plans, and endowment savings plans in which number of times premium paid to sum assured should start falling steeply. In the PNB MetLife Monthly Income Plan discussed below, premium paid is Rs 47,270 and sum assured Rs 5,04,385 making the multiple 10.67 times (504385/47270).
So, right now, A’s family can access Rs 30 lacs (insurance cover) from insurance policies plus Rs 15 lacs as investments which makes it equal to Rs 45 lacs in case of sudden demise of A. There is a shortfall of Rs 5 lacs for which A is considering to take an insurance which would also help reduce his tax liability. By paying premium of Rs 3,015, A can buy another term plan from LIC (Anmol Jeevan) that would give his family a coverage of Rs 5 lacs for the next 20 years. This term plan is not advised by A’s financial advisor keeping in mind that A also needs to focus on children and retirement fund planning. Also, the plan would only reduce his tax liability for the assessment year 2014-15 by Rs 622 from Rs 49,777 to Rs 49,155.
This time, instead of term plan, A is advised by his financial advisor to opt for savings plans like PNB Metlife’s Met Endowment Savings Plan, Monthly Income Plan, Money Back Plan. What happens in term plan is kind of a lottery where insurance company collects small premium from many policies and pays to only those where death actually happens during policy term. Savings plans by life insurance companies are designed keeping in mind rules of investment products like fixed deposits and bonds while also including probability of death, core variable of term plan and pure insurance. Term plan from LIC (Anmol Jeevan) gives A significant insurance cover of Rs 30 lacs by paying a small premium of Rs 8365. However, if A survives 50, premium paid throughout the policy term will be loss for him except for tax savings he would be making while filing annual income tax returns. Met Monthly Income Plan is kind of an investment for A with an insurance cover. It is unfair, however, to compare term plan with savings products as both have different objectives and complement rather than compete as evident in A’s final life insurance portfolio of two term plans and one monthly income plan.
A chooses PNB Metlife’s Met Monthly Income Plan. A pays premium of Rs 47,270 for 10 years to get guaranteed tax free monthly regular income of Rs 3,000 from the 11th to 25th year. There is accrued bonus at the time of maturity and flexibility to provide regular monthly income to his family in case of his death during the policy term. On survival to the maturity date, A will receive the chosen monthly income for the next 15 years. The first monthly income payout starts on the expiry of one month after the maturity date.
The advantage of Met Monthly Income Plan to A is financial protection of Rs 5,04,385 for the family in case of his demise (thereby meeting objective of additional Rs 5 lacs needed to build corpus of Rs 50 lacs that would take care of expense of Rs 3.6 lacs per annum necessary to maintain current lifestyle of the family in case of his absence), assured monthly income of Rs 3,000 from year 11th to 25th year helping in children fund planning and retirement planning, and reducing tax liability: A for the assessment year 2014-15 had tax liability of Rs 49,777 with yearly income of Rs 6 lacs and premium payment Rs 8,365. After buying Met Monthly Income Plan, A pays total premium of Rs 55,635 (47270+8365 for two term policies) and his tax liability reduced to Rs 40,039. Money saved is money earned. Tax saving of Rs 9,738 (49777-40039) should be taken into account while calculating net return from the policy and induced A to select Met Monthly Income Plan over third term plan from LIC where additional tax saving was only Rs 622 (49777-49155).