Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Gold Savings and Cancer Cure

Posted by Muthu on February 13, 2011

My contribution has appeared in the Q&A of current issue (dated 20.02.11) of Nanayam Vikatan which has hit the stands today. Thank you NV!

For those of us who feel 30% taxation in India is high can take consolation from the following data provided by Nanayam Vikatan.

In Sweden, the income tax rate is 59.17%. Likewise income tax rate for few other countries are as follows: Denmark- 59%, Netherland- 52%, Finland-51.5%, Austria-50%, Belguim-50%, Canada-48.25%, Israel- 46% and our unfriendly neighbour China- 45%.

Of course in western countries higher tax rates are matched by better social security. The only security we’ve is the guy standing outside the apartment with a blue uniform and a stick, paid out of the monthly maintenance fee collected from us!  

We’ve written in the past about poor performance of companies under Reliance Anil Ambani group. Some clients asked us last week about Reliance mutual fund coming under this group.

Mutual funds do not own either your money or the securities. They are with the custodians, supervised by trustees. Mutual funds only manage the assets for a fee. As long as the performance of a fund is good, there is no reason to move the money out.

I do not see a need to link the performance of the group companies while evaluating a mutual fund scheme.

For example, LIC appears very sound and profitable. But many of their mutual fund schemes are performing poorly and we do not recommend schemes of LIC mutual fund to our clients.

All mutual fund houses run under a premise that not all the investors would demand money at the same time. Something similar to your bank. If all the depositors demand money from the bank at the same time, a bank would cease to exist.

At the time of financial calamities, every banker dreads this scenario known as ‘bank run’.

If you recollect there was a beginning of a bank run with a leading private bank in 2008. Timely intervention by RBI and the finance minister saved the day for the bank.

In case of a fund house, the usual settlement period is T+3 days. This is for a normal redemption. Assuming all investors demand money at the same time, it would take a while to liquidate all the securities and pay the money. In such cases regulator may intervene, merge the fund house with another or take any other action which is in the best interests of investors. Only the regulator knows what it would do depending upon the situation. I can only guess.

However I can quote one example. In late 2008, due to global financial crisis, there was a huge redemption pressure on FMPs (Fixed Maturity Plans). There was an asset- liability mismatch due to the tenure of the security and immediate pressure on redemption. RBI opened a liquidity window to all mutual fund houses to meet the redemption pressure. The crisis was effectively managed with the help of RBI.

FMPs were subsequently restructured removing the redemption option before the tenure of the investments.

All I can tell you that mutual fund industry is well regulated in India. Protection of investors’ interest is of paramount importance to the regulator. As you are aware, value of mutual fund investments are subject to market risks. This is something inherent for all mutual fund investments. However given the regulatory structure, I do not see any fund house disappearing with the investors’ money. There is no need for fear on this front.

We never write about individual funds. We want to make an exemption and write about two unique offerings commencing this week which are not there in the industry so far.

First is the Gold Savings Fund offered by Reliance. Now investors can buy, hold and sell 24 carats gold without the hassles of storing it in the physical format. There is also no need for demat account and pay brokerage for each transaction. This fund holds the Gold ETF in demat form and issue an account statement for the same. This is similar to your other mutual fund investments where the fund house holds the securities in demat form and issue an account statement for the same.

Another example is like holding the money in bank and getting the bank statement. The money is safely held by bank and you can obtain one more statement if you loose or misplace the existing one.

Buying physical gold from banks or jewellers involves significant mark up price and wastages are also significant in many cases at the time of reselling it. Storage cost and risk of theft is also high.

You can be sure of the purity here and there is no entry load. There is also no exit load if the units are held for more than a year.

For gold owned through mutual funds, there is no wealth tax irrespective of the amount.

It is further tax efficient as holding of more than a year is considered as long term and the taxation is like that of a debt product.

One can invest as a low as even Rs.100/- every month in gold.

We would advise you to start saving gold through SIP mode for social occasions like daughter’s marriage etc.

We generally do not advice to hold more than 10% of one’s asset as Gold. Gold is a good inflation hedge. It does not provide superior returns like equity or real estate in the long run.

Like any other commodity, gold also goes through bull and bear cycles. The current bull cycle started in 1999. The last bear cycle lasted between 1980 to 1999.

Whenever there is war or any global financial crisis, gold becomes the most sought after commodity. However in the long run, gold has proven to match only inflation. So at best gold protects your capital from inflation. Also in a county like India, gold has lot of social value.

I do not know how the global financial situation would pan out in the next few years. The price movement of gold is likely to be correlated to this scenario.

However all I can suggest, for all your social needs, buy gold through SIP instead of buying it at one go. Likewise, invest up to 10% of your total assets in gold through SIP.

As far as investing lump sum is concerned, only invest smaller amounts. Given that gold has had a more than a decade of bull run, it is safe to be cautious and opt SIP route.

The next one is the debt fund for cancer cure, a social initiative by HDFC.

This is a 3 year debt fund rated AAA (so) by CRISIL. This is a capital protection oriented income scheme.

To support the social cause, there is no investment and advisory fee charged by the AMC. I understand that there is no expense ratio at all and the entire income is fully passed through.

There would be annual dividend. The investor has the option of donating 50% or 100% of the dividend income.

The dividend donation beneficiary is Indian Cancer Society (ICS).

Section 80G benefit is available for the donations made through dividend.

Minimum application amount is Rs.1 Lakh and in multiples of Rs.1000/- thereafter.

Assuming you opt for 50% dividend donation, you would still end up earning better than your savings bank account and would also receive the capital back at the end of 3 years.

We would be glad if each of you can invest atleast Rs.1 lakh in this scheme.  By this

1)    You would be donating a decent sum every year for 3 years towards cancer prevention and eradication

2)    You would also get a return superior to your SB A/C after donating 50% of your dividend income

3)    Your capital also would be back in your hands after 3 years.

Hats off to HDFC and Mr. Deepak Parekh for this initiative.

You now have option of SIP in gold and philanthropy for cancer cure.

You may choose either or both or neither!

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