Here is the edited transcript of the interview on CNBC-TV18.
Q: At a time when equities haven't given a lot of return to most of the investors, if you look over a 4-5 period many investors have started gravitating to FDs or bank deposits or even corporate deposits where you get an assured return of 10-11 percent. But at the same time inflation is also at these levels, so you don't have such a high rate of interest. What does real rate of interest mean? How important is it and how should one calculate? What factors should you keep in mind and how can you make more money keeping into account real rate of interest?
A: Real rate of return is very significant, very important for any investor. It is actually nominal return minus inflation, taxes and cost. While the nominal return represents the growth rate of an investor's money, the real rate of return represents the change in the purchasing power of an investor's money. It's actually the real rate of return that indicates an investor whether his money is growing in value or not.
Unfortunately for most of the investors in India the focus while making an investment decision is on nominal return. That's precisely the reason we see a lot of investors predominantly investing in traditional options and talk about traditional options. We are basically talking about fixed deposits, company deposit, bonds, debentures and the guaranteed returns.
Considering the fact that most of these investment options give a very low return and some of them are not even tax efficient, the real rate of return from these instruments are either negative or minimum. It's very important for investors to focus on three factors, that's inflation, taxes and cost while making an investment decision.
Inflation is crucial because it erodes the value of investment over a period of time. It's always a challenge for an investor to stay ahead of inflation. One of the ways that can be tackled is by following an asset allocation plan.
While investing for a long term the money has to be invested in equities and that's because equity as an asset class has a potential to beat inflation over a longer period of time. Of course, when you invest in equities you have to contain volatility which exists in the market from time to time. Thankfully, there are strategies that can help an investor in tackling this volatility to keep focus on long term goal and invest in a discipline manner.
Tax efficiency is very important for both long term as well as a short term investor. For long term investor, primarily because whenever an investor is investing for long term there are goals like retirement, children education and their marriage. It requires investors to actually create a large corpus and as equity is an asset class which has a potential to beat inflation, primarily the focus is on the equity there. As an asset class, it's also one of the most tax efficient options.
Any capital gain arising after a sale of an as asset investment after 12 months is treated as a long term capital gain and there is no tax on that. The dividend that comes from equity and equity oriented balanced fund is also tax free so whatever returns come from nominal returns from equity becomes the real rate of return.
For a short term investor it is very important because primarily there is a focus on debt and debt oriented hybrid funds. Now, these instruments offer low return and that's why it's very important to invest in tax efficient investment option like mutual funds. This can make a significant difference.
Cost is one of the most ignored aspect of investment. Of course, its not an issue for someone who is investing in traditional options but, anyone who is looking at investing in market related products cost is a very important factor. That is for an investment or an insurance option. It is better to go for a term plan which is much cheaper than for options like mutual funds which charge you lower costs.
Over a period of time, it's very important for investors to be following a tax aware investment strategy. These are three factors that make a difference. So any investor who is looking at making an investment decision should focus on that to ensure that he gets a positive real rate of return.
Q: I require Rs 1 crore after 5 years and based on the real rate of return is an investment of Rs 45000 per month is sufficient in order to achieve my goals? I have already invested in couple of mutual funds like Reliance Regular Savings Fund , Reliance Growth Fund , and HDFC Top 200 .
A: One of the ways to get positive real rate of return is to invest in a asset class that has a potential to beat inflation. Ofcourse, the options have to be tax efficient. That's where mutual fund definitely scores over other investment options.
Ofcourse he has been investing in mutual funds already but the fact is that mutual funds offer variety of funds today not only equity funds. There are balanced funds, debt funds so depending on the time horizon one can look at it basically the kind of funds which will suit an investor.
In this case the time horizon is five years and the fact that money is going to be invested every month and if one has to earn positive real rate of return the ideal option would be to look at equity oriented balanced fund. Ofcourse, I would want him to have some flexibility in terms of time horizon if required. In that case I assume a return of 10-11 percent.
Earlier equity oriented balanced fund were basically categorized as an equity fund from taxation point of view. Any return that will come will be tax free here. If I assume a return of around 10-11 percent with this investment of Rs 45000 he can create a corpus of around Rs 35 lakh.
I don't think this investment can achieve his target but there are two ways he can do it. Either he has to increase his investment to Rs 1, 25, 000 per month or if he can extend his time horizon to 10 years. In that case because he is already investing in equity and I can recommend couple of other equity funds to him ICICI Focus or Reliance Equity Opportunity which he can include in his portfolio because 10 years as a time horizon.
Q: Don't they advice that it's better to put in money in a few funds? Put in a big sum of money rather than diversify into 10 or 15 funds that you can't keep track of. This guy is already invested quite heavily into almost 6 or 8 funds equity funds included. So do you think he should put in more money into new funds?
A: You are absolutely right, there is no point in having over diversification in the portfolio because mutual funds by nature are diversified. If the quality of fund is not good one may have to realign the portfolio over a period of time and I personally believe that rather than having too many funds. If you create a separate portfolio for each of the goal you have a combined portfolio, you loose control on how much you are able to generate for each of the goals that you have.
Having a separate portfolio you are always in control of what you are going to achieve as far as your each goal is concerned. Yes it doesn't make sense to over diversify the portfolio, maybe he can relook at some of his funds. The funds that I am recommending are basically some of those funds which have been performing consistently. So, the key factor is not to always go for large number of funds, go for funds which have been performing consistently and that is the key to get the best result from equity funds.
No comments:
Post a Comment