WEALTH AND TAX MANAGEMENT-4

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Role of Financial/wealth advisor

• Investment planning
• Cash flow and debt management
• Risk management and insurance planning
• Retirement and estate planning
• Tax planning
(Object-maximize client’s returns with minimal risk)
 Diversification-
Risk-return trade
multiple products,
off- specific and

Features of
vary within security
systematic risk
and industry

an
Investment Asset allocation-
CAPM, Sharpe
Investment return

Plan/
Strategy Strategies- active/
passive
Investment timing
Wealth creating (Investment)
products
 • Financial (Paper) Assets • Real/Physical Assets
Investment • EPF • Gold (bullion)
products • PPF
• Long term Govt.
• Real estate
• Antiques, paintings,
securities etc.
• Bank deposits
• Infrastructure bonds
• Insurance products
• Pension products & NPS
• Mutual funds
• Stock markets- equity
and debt
• Commodity markets
Physical (Real) Assets
• India is the second largest market in the world for gold, as it forms a traditional
form of gifting for weddings.
• Families thereafter buy gold for auspicious occasions as an investment and its
wealth creation by appreciation is phenomenal.
• Higher & middle income groups have started to hold gold in virtual form (ETFs)
which can be traded at exchanges whenever required.
• Besides inherited property, Indians also invest in real estate (Land/buildings) to
create wealth on account of its appreciation.
• A few people also consider investments in antiques/paintings/vintage cars as a
form of investment to create wealth.
• Appreciation depends on market conditions & hence some amount of risk is
inherent.
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 • Gold is a safe haven asset that investors
opt for, in the event of any problems in the
physical world (e.g. war) or the financial
world (e.g. serious global recession or lack
of confidence in financial markets).
• Since the turn of the century, gold has also
generally offered Indians a good hedge
against inflation.
• Gold prices in India depend on the
1.Gold international rates. Therefore, any
weakness in the rupee raises gold prices in
India. Thus, it operates as an international
asset for Indian residents to invest in.
• Across the country, gold can be quickly
sold or pawned to raise money. Gold is
thus more liquid than many other financial
assets.
Investing in Gold- (a) Physical

• This is the most popular route. Several investors hold gold in the form of ornaments.
• However, given the making charges and losses in the process of making ornaments,
this is the least advisable form of investment in gold. Ornaments also suffer from lack
of transparency on the caratage (purity) of the gold.
• It is therefore better that physical gold be held in the form of coins and bars. These
need to be hallmarked for the caratage.
Physical gold, held in any form, suffers from the following limitations:
• Cost of storage in lockers
• Fear of loss through theft
• Costs entailed in insuring against theft or other contingencies
• Capital gains on sale will be treated as short term capital gains, unless the gold is held
for more than 3 years
Investing in gold-(b) ETF

• Each unit of a Gold ETF represents a certain quantity of gold (generally 1 gram).
The NAV of a gold ETF unit closely tracks the price of gold. Can be bought and sold
on exchanges as with shares through stockbrokers or other depository
participants.
• Investor does not need to worry about purity of the gold. Further, since the
investment is held in electronic form, the costs and problems associated with
physical gold are avoided. Demat charges however need to be incurred.
• In the case of most Gold ETFs, the units can be converted into physical gold at
investor’s option only if the investment is large.
• The taxation of gold ETFs is in line with taxation of physical gold. It qualifies as a
long- term capital asset if held for more than 36 months.
Investing in gold-(c)Gold Index funds

• These are structured as fund of Funds, which receive money from investors
and invest in one or more Gold ETFs.
• Offer all the benefits of Gold ETF except converting the units into physical
gold even if the investment is large.
• Investor need not have a demat account or stock broking account. Gold
Index Funds can be bought from any mutual fund distributor or directly
from the mutual fund. Investments through SIP are also possible.
• The Gold Index Fund in turn invests in ETF Gold, in order to give investors
the gold exposure. This additional layer adds to the cost, as compared to
ETF Gold.
Investing in gold- (d) E-Gold & Gold futures

• Gold can also be held in the form of electronic Gold certificates. These have their
benefits in long term holding of gold at lower cost. This is in its nascency in India.
Gold Futures
• A benefit of Gold futures is the leverage available. Only the margin payment needs
to be made, initially. If the margin is 20%, then for the same initial outflow as the
other forms of investment in gold, the investor can take 5 times the position.
• The investor should however be mindful of ongoing margin payments that may
have to be made, if gold prices decline during the tenor of the futures contract.
• Futures are essentially short-term contracts that need to be rolled over regularly
to create a long-term exposure. The repeated rolling over can be cumbersome,
besides adding to cost.
Investing in gold-(e) Gold Sector Fund

• A few schemes of mutual funds invest in shares of gold mining and

processing companies. These are gold sector funds.
• An investor in a gold sector fund is taking exposure not to gold
directly, but to shares of the gold companies. Although gold prices
do affect the share prices of gold companies, other factors too come
into play. For instance, if a gold company is not efficient, then it may
report poor profits despite attractive gold prices.
Gold monetization schemes

Sovereign Gold Bond Scheme 2015

• Bonds issued for each 1 gm of gold to investors with 8 years lock-in
period
• Bears interest rate of 2.75%
• Physical gold or gold price at the 8th year would be paid back
Gold monetization scheme 2015
Investors can deposit min 30 gms gold and above with Banks and convert
them into short-term 1-3 years deposits, earning interest.

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2. Real Estate

• Like equity, this is a growth asset. It also offers an income stream through rentals,
often more attractive than the dividend yield from equity investments.
• It is less volatile than equity. Given the inherent demand for occupation from a large
population, the long-term trend appears to be up.
• It is relatively illiquid. Another issue is the lack of transparency on pricing etc.
• Unaccounted money has a significant role in this sector. This is a major problem
given the non-standard nature of the asset and the lack of transparency in pricing.
• Transaction costs associated with real estate ownership, in the form of stamp duties,
registration charges and brokerage are high
Investing in real estate-(a) Physical investment

• The investment may be in agricultural land or non-agricultural (NA) land for

residential purposes or land reserved for specific purposes such as industry,
school, tourism etc.
• The documentation requirements for investment in agricultural land are more
stringent.
• The land-owner needs to be a farmer, as evidenced by a Farmers’ Certificate.
Agricultural land is cheaper than NA land. Some investors buy agricultural land
and go through the legal process and cost for converting it into NA Land. On
conversion to NA, the land value appreciates significantly.
• When land is reserved for a specific purpose, it has a limited market. This can
affect the gains from the investment.
Limitations & hurdles

• Land records in various parts of the country are subject to manipulation. Therefore,
verification of ownership is cumbersome and fraught with risk.
• At times, restrictions on purchase or use of land are known much later. Investors are known
to lose money when it is subsequently found that it is forest land or tribal land.
• Encroachments on land are common. Once encroached, it becomes difficult to get rid of the
encroachers, who are at times backed by local leaders.
• Investor may get duped because of acquisition by Government, after purchase.
• Purchase and sale of land entail stamp duty and registration charges that are high.
• Honest taxpayers find it difficult as most sellers demand black money or cash only deals.
• Land valuation can be quite subjective. The market is not transparent.
• Land is not so liquid and often does not offer rental income.
• There are limitations on access to bank finance for purchase of land.
Investment in land or building?

• The appreciation in real estate comes out of the land; buildings depreciate. Therefore,
subject to the limitations mentioned earlier (many of which are also applicable to
buildings), investing in land offers a better return on investment (in percentage terms)
than investing in land and building.
• Experts believe that growth prospects are better with residential property, while rental
prospects are better in the case of commercial.
Benefits of investing in land and building or such other property:
• Financing from banks or other such intermediaries become possible.
• Rental income is possible.
• Encroachment risk is lower than in the case of investment in land alone.
• Property, especially in cities is more liquid.
Indirect investments-(a) Real estate sector funds

Real Estate Sector Funds

• Mutual funds offer real estate sector schemes that invest in shares of real estate
companies. As in the case of Gold Sector fund, the upside is more closely linked
to the profits and share prices of the real estate companies, than the real estate
asset values.
• Despite appreciation in real estate values, real estate companies may fare poorly
on account of poor management, financial weakness etc.
Indirect investments-(b) Real estate Mutual funds

• These schemes invest directly in real estate. Thus the investment performance will get
delinked from the profits or share prices of the real estate companies.
• Under the SEBI policy, the schemes need to be close-ended. These may be floated by the
traditional mutual fund companies or even real estate companies that meet specified
criteria.
• Since the underlying asset viz. real estate is illiquid in nature, real estate funds can suffer
illiquidity problems, even when they are doing well in terms of valuation.
• Given the role of unaccounted money in the sector, the investor needs to be cautious
about potential siphoning of gains from the fund through cash transactions in real estate
deals.
• As a policy, SEBI has barred these funds from indulging in such cash transactions.
Indirect investments-(c) Real Estate Venture Capital /
Private Equity Funds

• A few companies have floated real estate investment vehicles, structured as venture capital or
private equity funds. These are targeted at high net worth investors.
• These funds are considered as high risk- high return funds and investors need to take greater
responsibility in monitoring their investments.

Real Estate Indices

• A few indices based on shares of real estate companies exist.
• Similarly, there are indices based on real estate projects in different parts of the country. For
instance, the National Housing Bank brings out Residex, which is based on real estate values in
15 cities.
• The indices need a longer track record, before they can be used as a basis for assessing real
estate returns in the country.
Paper Assets (Debt instruments) with no risk to
capital
• Savings Bank deposit (Principal amount)
• Post Office savings Account deposit (Principal amount)
• Term(Fixed)/Recurring deposit (Banks & Post offices) Principal + interest
• Government Bonds (Principal + interest)
• Corporate Infrastructure Bonds(Principal + interest)
• Corporate term deposits(Principal + interest)
• Debentures
• Pension funds
• Provident Fund(Principal + interest) for both EPF & PPF
• National Savings Certificate (NSC) (Principal + interest)

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Debt

• Debt is an income asset. With most debt investments, the proportion of

yield that an investor gets out of regular return is likely to be much higher
than any capital gains.
• Although debt is not meant to provide significant capital gains, such gains
(or losses) are possible when yields in the market change significantly.
• Debt may not protect investors against inflation. However, it fluctuates less
than growth assets like equity. Therefore, it is considered less risky.
• Debt provides a stabilizing influence in a portfolio that also includes growth
assets.
• Fixed deposits, term deposits, debentures, bonds etc.
Small saving debt
instruments

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1. Savings Bank accounts

• Can be opened by an Indian citizen in any of the Banks or in any Post office.
Currently even zero balance accounts are allowed.
• Proof of residential address and PAN details to be submitted.
• Though interest rates are low (currently 2.75%) it is needed from the perspective
of liquidity & cash flow.
• Interest accrued to the tune of Rs.10000 per annum is exempt from income-tax.
• An account without transactions for 2 years becomes an ‘inoperative account’ but
can be revived with Bank’s approval. It is 3 years for Post office SB account.

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2. Term(fixed) deposits/Recurring deposits

• Instead of letting funds idle in SB Account with low interest rates (2.
• 75%), savers can opt for term deposits in banks/POs without sacrificing liquidity.
• Lock-in period varies from 7 days to 10 years, with differential interest rates ranging from
about 3.25% to 6.75% (Individual banks differ slightly).
• Principal + interest is paid at the end after 12th instalment is remitted.
• When deposit is made with a non-banking Corporate body, it is Corporate deposits and
often, their interest rates are higher than bank rates.
• Recurring deposit is a saving instrument wherein the saver deposits or commits for
payment of a fixed sum every month for a year. They would earn about 5 to 6.25%
interest

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3. Employees Provident Fund (EPF)

• EPF is a social security measure wherein it is mandatory to deduct 12% of basic salary of all
employees coming within the purview of PF Act and remit the same monthly to Govt body
Employees Provident Fund Organization (EPFO) after adding equal amount of contribution by
Employer.
• Employees have a UAN (Universal Account No.) and the amount in one’s credit stays even after
changing jobs. New employer just needs to be given the UAN No for continuity.
• Accumulated amount earns interest as decided upfront by EPFO every year
• Normally the entire corpus is paid on a person’s attaining superannuation (as confirmed by
employer). However for pressing reasons like buying property/child’s marriage etc, pre-mature
partial withdrawal is allowed though interest accrual will be on balance amount.
• Income-tax relief for monthly contribution is available under sec 80 C and withdrawals are also
exempt from income tax.

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4. Public Provident Fund

• PPF is a voluntary contribution made by an individual, with min Rs. 500/annum. A PPF account
can be opened in any post office in India, in designated Banks or even online. Started by NSO &
Lock-in period 15 years.
• Interest rates on PPF is decided by Government for every quarter.
• Any Indian citizen can open an Account and keep it valid by remitting minimum Rs.500
annually. Principal and interest accrued is paid on maturity after 15 years and the corpus is
exempt from income-tax.
• Annual remittance to the tune of Rs.1.5 lacs qualifies for income-tax relief. Interest accrued is
also exempt from income-tax.
• Pre-mature withdrawals for specific reasons are permitted after 5 years but an interest rate of
2% is levied on the loaned amount.

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5. Savings Certificates (Post offices)

• National Savings certificate (NSC)

• Indra Vikas Patra
• Kisan Vikas Patra-Can be purchased by an Indian citizen for self or two
citizens can jointly purchase for minor child. Available in post offices for
denominations ranging from Rs.1000, Rs.5000, Rs.10000 & Rs.50000.
Minimum investment Rs.1000 without any cap on limit. Amount doubles in
8 years & 4 months.
• Sukany Samriddhi scheme-
• Senior Citizens savings scheme

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6.Government Bonds

• 1) G-secs: Issued by RBI through pre-announced auctions. Remittance

through Securities GL account with designated bank. Made in multiples of
min.10000. Mostly bought by Banks & other institutions, but a 5% portion
is ear-marked for retail sector.
• Lock-in period of 5-40 years
• Issued by both Central/State Governments.
• 2) Inflation-indexed bonds: Have a fixed coupon rate applied to inflation
indexed principal. Inflation adjustment to principal is done on maturity.
• Can be purchased through NSE.

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7.Corporate bonds

• Debt instruments issued by Private/Public sector companies

• 2 to 15 years tenure.
• Issuers need to specify credit rating
• Listed on stock exchanges
• Coupons paid at pre-determined periods and principal is returned to buyer
on maturity

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8.Infrastructure Bonds

• Similar to Corporate bonds, but investment qualifies for income-tax

benefits under sec.80 C.
• Issued generally by IDBI, IIFCL,NABARD etc
• Min lock-in period of 3 years
• Credit rating required.
• May be issued as interest paying, zero-coupon or in any other structure.

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Debentures

• Issued by Corporates & Government to raise capital

• Non-convertible debentures can be purchased through stock exchanges
• Can be traded like shares through Demat A/c.
• Usually has a term of 10+ years
• Some are convertible to equity & hence it is hybrid between debt/equity.
• Generally offers a higher return than Bank deposits.

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