Thursday, August 1, 2013

Is Your Chartered Account are Your Financial Planner?

As we interact with a lot of investors, we find that some investors,  have this habit of referring their Chartered Accountants (CA) for every financial decision including investments. We are not saying that this is completely a wrong practice, but one must also check that, is your Chartered Accountant so efficient that he can advice you on your investments or financial planning matters? By efficiency we are in no way referring to his qualification, but yes we are referring to his area of expertise.

We have seen that Chartered Accountants being given god-status in some households. 

Once I was with an aged investor and he was looking for tax efficient returns without any exposure to equity as this was an investment for around 6 months. The investor was into highest slab bracket hence I recommended him Fixed Maturity Plan from a reputed mutual fund house. But investor insisted that I should explain the product to his Chartered Accountant. Reluctantly (because of my past experiences) I agreed.The first question that was asked by the CA was pretty basic- “is this an open-ended product or a close-ended product”. If an expert asks a question like this we all know the fate. He insisted investor to go for a Bank FD saying that the mutual funds are not safe and banks are. So invest in a PSU bank. And then he went for the final kill and suggested that since equity market is in bull phase, you should take 2-3 large cap stocks and sit tight. You will make the same money in one month that this FMP would give.
Although this Chartered Accountant had no vested interest and was working in favor of his client but his knowledge limitations ruined investors portfolio.
Chartered Accountant (CA) is not a Financial Advisor

Consider these following points before you refer to your Chartered Accountant (CA) for any of your investments decision or Financial Planning:
§  CA is an expert in accounting and tax practices. He is not an expert on assets like Equity and Debt. Also he is not an expert on tracking or researching factors which are must for any investment decisions you take. These factors can be macro like European Crisis or micro like inflation. He may have view on these as a spectator but he is in no way qualified to analyze these facts to form an investment advice.

§  In case of individual investor, a CAs job ceases after he calculates the amount of tax that investor needs to pay. Investments to save this tax fall under the purview of your Investment Advisor or your Financial Planner. He will help you invest a suitable tax saving instrument taking care of your overall portfolio, asset allocation and other needs.

§  CA has no role in Financial Planning. He is not equipped to assist you in your goal planning or risk assessment. Also since he is not an asset expert he cannot help you in assessing your future finances and portfolio. CAs engaged into advising on investment just does it for the sake of not losing their clients or for some monetary gains. Beware as his advice will never be comprehensive.

§  Your Financial Planner is expected to have detailed knowledge about economy and individual assets. He can also deal with tax related matters if you don’t have too complicated financial life. Also as he is associated with you since the early stages of investments, he has a broad picture of your individual requirements. He is aware of your family needs and you get personalized service.

§  In some cases CAs act like product sellers for your insurance needs or tax savings bonds. This is not a correct practice in fact the Chartered Accountants are prohibited by their practice guidelines to act as commission agents. It is prudent that you take service of professional who is suited for the job. For all financial planning related aspects, your Financial Planner is most suited.
Roles of different Financial Professionals

If we look at the roles or the expertise, Chartered Accountants are not Financial Planners or even Financial Advisors.
§  Chartered Accountants (CA) work in fields of business and finance, including audit, taxation, financial and general management. (Refer Diagram)

§  Financial Advisor is a professional who renders financial services including investment advice, which may include pension planning, advice on life insurance and other insurances such as income protection insurance, critical illness insurance etc., and advice on mortgages.

§  Certified Financial Planner (CFP) is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes: cash flow management, education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and business succession planning (for business owners).
So next time if you suffer prolonged common cold it is better to show this to a Doctor who is expert in Internal Medicine and not to a Cardiologist, even though the cardiologist is your friend and provides free advice over telephone. For god sake stop worshiping the wrong deity.
Must share your experience with Chartered Accountants for financial advice.
Vcare Investment Services Pvt ltd
201 Sai Sadan 76/78 Modi Street, 
Fort, Mumbai 400001

Wht Debt Fund?

Wht Debt Fund?

Even today a conservative Indian investor continues to confuse mutual funds with equity. It is precisely because of this lack of understanding that they miss on the superior risk adjusted returns, easy liquidity and tax benefits that fixed income funds have to offer. Today 72% of the aggregate AUM of the mutual fund industry in India is invested in debt funds, thus marking the prominent position that fixed income funds hold in the asset management space.

While most retail investors do have a fair idea of the conventional financial instruments such as Bank FD’s, G-Sec, company NCD’s, they seem to be unaware of the fact that fixed income funds in India in fact invest in various combinations of these instruments only. 

The portfolio exposure(as of Nov’12) at the industry level shows that of the entire fixed income AUM ~10% is invested in G-sec, 53% is exposed to corporate securities and ~36% is invested in Bank FD’s. It is thus, important to understand that fixed income funds are nothing but a conduit to invest in such securities, only in a more efficient manner. Not only that, the investor through these funds gets the opportunity to choose from various schemes depending on his risk appetite and the desired tenor. He can custom make for himself a healthy salad by choosing from liquid fund, liquid plus funds, Short term income funds, GILT funds, income funds etc.

But is variety a good enough reason to shed the conventional thrift habits and shift to savvy fixed income funds? Certainly not, but who says that’s all. Fixed income funds have much more to their merit.

Sound investment philosophy germinates from prudent portfolio diversification, and that is exactly what debt funds do. The idea is to invest in the right securities at the right time and in the right proportion to garner the highest return every time. Such a task requires expertise and skill which a retail investor may not possess due to his distance from the intricacies of the market.

While a typical Indian retail investor is always more keen to invest in bank FD’s, what usually skips his mind is the threat posed by volatility in the inflation trajectory, which is inevitable in a developing economy. So when you lock in your money for a fixed tenure at a certain rate with a set anticipated trajectory of inflation that allows you to earn positive real return on an FD, the math completely falls apart if inflation starts to misbehave and eats into your returns. It is here that the flexibility and agility of the fixed income funds play a pivotal role in securing better real returns through prompt portfolio allocation.

Very often investors start comparing pre-tax current return on FD’s with the past performance of various debt schemes and jump to the conclusion that FD’s are better. But that’s incorrect. What they should technically compare is the post tax return on FD in the same time span for which they are looking at the return on debt schemes. And once they do start comparing apples with apples, they’ll see how tax adjusted returns from debt funds are superior to those offered by bank FD’s.

Apart from these, the ease of liquidity that fixed income funds offer vis-à-vis bank FD’s and the like cannot be over looked. If you withdraw your money before maturity from an FD, you are liable to a monetary penalty, but, if you have invested with a debt fund you can redeem your units anytime you like without losing the gain accrued to you till that date! The same applies in case of pumping in small savings. Imagine opening an FD for Rs 2000-3000 every month!!

It is then difficult to justify as to why the retail investor participation in fixed income funds in India so low, even when the institutional investors are in fact making good returns from the same. The usual answer is the fee that they are charged. But is that a reasonable justification? You are ready to pay a doctor his fee for your diagnosis, even when you have the option if using the tried and tested nani maa ke nuskhe, then why this discrimination in case of financial services? The most nominal fee that the fund houses charge is for the expert guidance that they provide as the care taker of your money while bearing the huge onus of delivering superior returns time and again.

I think it’s time the retail investors, for their very own benefit ,move on to fixed income funds and take advantage of professional fund management expertise at low costs, which is already benefitting their institutional counterparts.

Vcare Investment Services Pvt ltd
201 Sai Sadan 76/78 Modi Street, 
Fort, Mumbai 400001

Retire With Ease Even if....

                                                  Retire With Ease Even if....

.... Your income is low
Chinese philosopher Lao-tzu said the journey of thousand miles begins with a single step. start investing Rs 5,000 per month and increase the amount by 10 per cent every year. If your investment earns 12 percent annually, in 32 years you will have Rs 5.15 Crore.

.....You can’t  find time
Automate your investments. Give the mandate for an ECS to invest in mutual fund or other saving instrument. No need to write cheques or fill up forms every time you want to invest. This will ensure you continue to save and your retirement fund continue to grow.

......You need a big sum
Don’d underestimate the power of compounding. Regular and disciplined investment can yield good results over the long term.A monthly investment of Rs 30,000 in an option that earn 12 per cent annually will grow to Rs 3 Crore in 20 Years.

.......You have started late
If you don’t have too many years to retire, maximize your saving by cutting down on discretionary expenses. Don’t go for high risk investment just to make up for the lost time. instead, consider postponing retirement by 2-3 years.

......You can’t monitor
You don’t have to. There are option that reset asset allocation as the investor grows older and his risk appetite comes down. So, even if you don’t know how much to invest in equities at 30 or how much to shift in debt at55, your fund will.

.... you don’t know how
Go to an Exoer for advice. A Financial Planner will tell you how and where to invest to reach your retirement target as well as other financial goals comfortably. Sure, you have to pay him,but you will realize that your is money well spent

Vcare Investment Services Pvt ltd
201 Sai Sadan 76/78 Modi Street, 
Fort, Mumbai 400001