Assess Your Portfolio’s Performance Using Benchmark

Assess Your Portfolio’s Performance

 

A scheme’s benchmark is an index that is decided by its fund house to serve as a standard for the scheme’s returns. It tells you how a mutual fund has performed vis-à-vis its peers and the market.

 

In the year 2012, Capital market regulator SEBI (Securities and Exchange Board of India) has made it mandatory for fund houses to declare a benchmark index. This benchmark is independent and is based on the objectives of your fund.

 

assessment of portfolio performance using bechmarks

 

In India, the BSE Sensex and the Nifty are the most widely followed benchmarks for large-cap funds. Examples of different market cap based benchmarks in BSE are BSE-100 index (representing the top 100 market cap stocks), the broader BSE-500 index, BSE Midcap Index (for midcap stocks), BSE Small Cap Index (for small-cap stocks), etc.

 

The stock exchanges also have sectoral indices representing different industry sectors. Examples of sectoral indices in BSE are BSE IT Index, BSE Pharma Index, BSE FMCG Index, etc. Hence, if you invest in a diversified equity fund that is benchmarked against the BSE Sensex, its return is compared with that of BSE Sensex.

 

Understanding Portfolio Performance With Respect To the Benchmark

 

understanding portfolio performance with respect to the benchmarks

 

When the market rises or falls, the fund will be impacted. Assume fund ABC is a diversified equity fund which is benchmarked against the Sensex. Thus, returns of fund ABC will be compared with those of the Sensex. If the Sensex rises by 12% over one year and the NAV of the fund rise only 6%, then it has underperformed its benchmark. If the fund does better than Sensex, it has outperformed the benchmark and vice-versa.

 

Now, if the Sensex declines 8% over one year and during the same period the fund’s NAV declines 6%, then the fund is said to have outperformed the benchmark.

 

One must note that if an actively managed fund delivers returns in-line with the benchmark, it should be considered as underperformance. This is because a professional fund manager has charged you a fee and only delivered returns equal to an index fund (a passively managed scheme that does not engage a fund manager).

 

Portfolio Performance – Outperformance & Underperformance

 

portfolio performance – outperformance and underperformance

 

Let us understand in practical terms, what we mean when we say that, your fund should beat the market consistently. You cannot expect the fund manager to beat the market every month or even every quarter. Your fund manager aims to beat the market and as a result, will be overweight or underweight on certain sectors or stocks relative to the market index.

 

Therefore it will outperform the market in some months/quarters and under perform in other months/quarters. If your fund manager is able to beat the market consistently every year or even most years it should be considered good performance. Hence,

 

  • Fund Performance > Benchmark, Outperformance
  • Fund Performance < Benchmark, Underperformance
  • Fund Performance = Benchmark, Underperformance

 

Measuring Portfolio Performance

 

measuring portfolio performance using benchmarks

 

Ascertaining whether a fund has outperformed is an important criterion while selecting a mutual fund. You can determine this looking over your fund’s historical returns.

 

The risk of a fund relative to the benchmark is measured by a metric known as Beta. If the beta of your fund is 1.10, you can expect 10% higher returns than the benchmark in an upward market, and 10% lower returns than the benchmark in a downward market.

 

A beta of 1 implies that your fund will fluctuate in sync with its benchmark. Within the same asset category (e.g. large cap funds) you will find funds with different betas. The beta will help you form return expectations. If beta is high, you can expect higher returns in up markets but also be prepared for more downside in corrections. The lower beta will reduce risk, but you should also expect lower returns.

 

Importance of Long-Term Portfolio Performance

 

importance of long-term portfolio performance with respect to benchmarks

 

When comparing a scheme with its benchmark, ensure that you consider the portfolio performance of the fund over 1 year, 3-year, 5-year and even 10-year returns (if the data is available). A funds ability to consistently outperform its benchmark is a highly desirable trait.

 

However, checking whether the fund has outperformed its benchmark is not the only criterion to select the scheme. But it is one of the important factors to invest in mutual fund schemes.

 

Note that past performance does not guarantee future returns. Hence, it is imperative to consult your financial provider and evaluate your risk appetite before making an investment.

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Anuj Jain May 28, 2019 0 Comments

Why Should Your Family Be Involved While Planning Your Investment Portfolio?

Given the current financial market scenario, building a strong and sustainable investment portfolio is something that one simply cannot escape. In fact, a well built and maintained portfolio is the keystone to financial success. For individuals, it is essential to determine the different asset allocations which work in conjunction towards achieving your financial goals along with keeping the risk tolerance in mind.

 

But if you have a family to take care of, it is important to work with all the members of the family as it no longer remains an individual financial goal, rather the family’s financial goals. Thus, it only makes logical sense to have everyone’s buy-in and inputs towards the family goal.

 

Money Handling Skill is an Acquired Skill

 

money handling skill, family involved while planning investment portfolio

 

While it is an age-old debate if certain skills can be taught or learned, money handling skills can certainly be learned. For some individuals, it might come naturally, but everyone requires money-handling skills.

 

It is important to share the goals, plans and portfolio details with other members of the family. This will enable a couple of things. Firstly, the family members know exactly what to do at the time of need. And secondly, they are aware of what needs to be done in your absence.

 

Financial Planning is Towards a Common Goal

 

financial planning towards a common goal while planning investment portfolio

 

Individually a finger can do a lot of powerful things, however, when combined together to form a fist, it is even a more formidable force. This holds good for financial planning as well.

 

Each member of the family needs to work towards a common financial goal. It is essential that you discuss and arrive at a common goal(s) for the family and work together to achieve the same. Should each member work in a silo, the result will be far below expectations.

An investment portfolio is essentially a collection of assets, which will help you achieve your financial goals. Depending on the needs and requirements of a family, you can set various financial goals. Some examples of financial goals include:

 

  • Paying off any credit card related debts.
  • Saving money for the retirement of the primary earners of the family.
  • Creating a sustainable budget for the family.
  • Save money towards an emergency fund.
  • Save money for children’s education.
  • Save money towards buying a house. And so on.

 

Setting these common goals is just the first step. You would then need to work realistically towards these goals and assess the goals on a timely basis.

 

Risk Appetite and Asset Allocation Needs to be Prepared for the Entire Family

 

risk appetite and asset allocation, family involved while planning investment portfolio

 

Before investing the money into different asset classes, it is important that you determine how much time you want to give the investments to grow. You should consider the age of different family members as well.

 

For example, if you want to create a corpus for your children’s education, you might be looking at a five to ten-year horizon. However, if it is for your retirement, the time frame is much larger.

 

Risk tolerance or appetite is critical as well. Are you someone who is willing to take some risks in return for higher returns? Considering your entire family, you need to strike a good balance between risk and reward.

 

Of course, everyone wants to get higher returns, but you should be able to do that without losing your sleep at night. The risk appetite will help you determine how much money you should invest in different asset classes.


Everyone in the Family Needs to be Aware of Where Money is and How to Handle the Same

 

family needs to be aware where money is and how to handle while planning investment portfolio

 

It is recommended that you share the investment portfolio with some members of the family. This enables them to continue with the investments if you are unable to do so. Being aware of the investments will allow them to be at a much better standpoint to take decisions when it comes to utilizing the funds.


Bonus, Windfalls, Loans, etc. Need to be Managed From a Family Standpoint

 

Depending on the various assets that you have invested in, you might be subject to receiving bonuses, loans etc. Taking the decisions keeping the family in mind will help you achieve the goals faster. For instance, if you receive any bonus from an insurance policy or mutual fund, re-investing them in the fund is the smarter choice.

 

Similarly, you need to be careful while opting for loans so that your financial goals are not hampered.


Prepare Your Children for the Real World

 

Preparing your children for the real world is as important as educating them. Providing them regular life lessons along with means to handle money will make them better planners and consumers. In fact, your efforts will be rewarded, as they can do their bit towards the family goal.

 

prepare children for the real world, family involved while planning investment portfolio

 

Questions such as which car to buy, which size TV is good will be easier to answer if all the family members are aware of the financial plan and are working towards it.

 

Thus, involving your entire family towards a common financial goal through the process of Financial Planning is the best gift to give your family.

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Anuj Jain May 23, 2019 0 Comments

All You Need To Know About The National Pension Scheme (NPS)

Having a sufficient corpus after retirement is what everyone wants so that they can lead a comfortable retired life. While there are various avenues which help build up a retirement corpus, having an earmarked avenue which is meant only for retirement funding is better.

 

With this sentiment in mind, the National Pension Scheme was launched on 1st January, 2000. In the initial years the scheme was open only for the employees of the Central Government except the armed forces.

 

Later on, in the year 2009, the scheme was opened to the general public. Currently, any individual can invest in the NPS scheme to create a retirement corpus.

What is NPS?

 

NPS is an investment scheme where individuals can contribute regularly when they are earning an income. Thereafter, after retirement, the invested corpus can be partially withdrawn in lump sum and partially used for availing annuities.

 

who can and how can i invest in nps

 

Who can Invest in NPS?

 

Every Indian citizen in the age bracket of 18 years to 60 years can invest in NPS. Even NRIs can invest in NPS if they want. However, if the citizenship of the NRI changes the scheme would be closed for them.

 

How to Invest in NPS?

 

You can invest in NPS scheme through financial institutions which are called Point of Presence (POP). Almost every Indian bank and other financial institutions act as POPs which allow you to invest in the NPS scheme with them. Their authorized branches act as collection points where you can deposit your money. These collection points are called Point of Presence Service Providers or POP-SPs.

 

You can get the list of POPs on the website of Pension Fund Regulatory and Development Authority (PFRDA) (https://www.npscra.nsdl.co.in/pop-sp.php ) which is also the governing body of the NPS scheme.

What are the Documents Required When Opening a NPS Account?

 

what are the documents required when opening a nps account

 

After you have located the POP, you can invest in the NPS scheme by submitting the investment amount and your relevant documents. The documents which are required to open the NPS account include the following –

 

  • Registration form
  • Identity proof
  • Age proof
  • Address proof

Different Types of NPS Accounts

 

When you choose to invest in NPS, you would have the choice of three types of NPS accounts. These types are as follows –

  • Tier I Account is the account into which contribution is compulsory. Withdrawals are restricted till the investor attains 60 years of age. Even at that time, withdrawal from the account is restricted and subject to conditions. The minimum investment required in this account is INR 6000 yearly.

 

  • Tier II Account is a voluntary account chosen by the investor. It can be chosen only if the investor has an active Tier I account. The contributions made into this account can be withdrawn anytime as per the discretion of the investor. The minimum investment is INR 1000 to open the account and at the end of a year the minimum balance in the account should be at least INR 2000.

 

  • Swavlamban Scheme is meant for the economically weaker sections of the society. Under this scheme, the Government contributes INR 1000 every year for 4 years to the NPS scheme. The scheme is available for individuals who are economically weak and have opened a NPS account in the year 2010-11

 

Multiple NPS accounts are not available. Investors can invest only in the above-mentioned types of accounts. Moreover, if the minimum investment criterion is not fulfilled, the NPS account is frozen. To activate the account the investor would have to visit the POP and pay the minimum required amount with a penalty of INR 100.

The Basics of Investing in the NPS Scheme

 

basics of investing in the nps scheme

 

When investing in the NPS scheme, you would have two choices of investments –

 

  • Active choice – this choice is when you manage your investments on your own. There are three types of funds available for investment under this choice which are –

 

  1. Asset class E which invests at least 50% of its portfolio in stocks
  2. Asset class C which invests in instruments having fixed interest rates except Government securities
  3. Asset class G which invests only in Government securities.

 

Under the Active choice of investment, the investor can choose to invest the money either entirely in C and G asset classes or in a combination of E, C and G classes with a maximum limit of 50% when investing in asset class E.

 

  • Auto choice – under this choice the investor doesn’t have to manage his investments. The investments are managed automatically based on his age. Investment is done in a predetermined manner as directed by the PFRDA. If the investor is aged 18 years to 36 years, 50% of the money would be invested in Asset class E, 30% in C and 20% in G. This ratio would remain constant till the investor attains 36 years of age. Once the investor attains 36 years of age, the percentage of investment in classes E and C would decrease annually increasing the investment in Asset class G. This reduction in E and C and increment in G would continue every year till the asset allocation becomes 10% in E, 10% in C and the remaining 80% in G when the investor is 55 years of age. Thereafter, the allocation would again remain constant.

 

The money which is invested in the NPS account is then managed by pension fund managers who are registered with PFRDA. Presently, PFRDA has registered eight fund managers which are as follows –

  1. LIC Pension Fund
  2. ICICI Prudential Pension Fund
  3. Reliance Capital Pension Fund
  4. Kotak Mahindra Pension Fund
  5. UTI Retirement Solutions Pension Fund
  6. SBI Pension Fund
  7. DSP Blackrock Pension Fund Managers
  8. HDFC Pension Management Company

Investors can choose to invest in any type fund and as per any investment strategy to build their retirement corpus. They can also choose their fund managers for managing their money. Moreover, once the investment strategy and asset class is selected, it can also be changed once in a financial year in both Tier I and II accounts.

Permanent Retirement Account Number (PRAN)

 

permanent retirement account number (pran)

 

When you invest in the NPS scheme you are allotted a PRAN card which is like a PAN card for retirement benefits. The card contains a unique PRAN number, your name, your father’s name, signature or thumb impression and your photograph. You can apply for the PRAN card online or offline. The method is as follows –

 

  • Online application – you would have to visit the website of NSDL, download the PRAN card application form, fill the form and submit it online. Once the form is submitted, the PRAN number is generated

 

  • Offline application – you would have to visit the website of NSDL and download the PRAN card application form. Then you would have to fill the form, attach your KYC documents and mail the form and documents to NSDL’s office. Once the form is verified, the PRAN would be generated.

 

Maturity or Withdrawal from the NPS Account

 

maturity or withdrawal from the nps account - all you need about nps

 

While withdrawals from Tier II accounts are allowed freely, Tier I accounts have restricting conditions. These conditions are as follows –

 

  • If the investor wants to withdraw the money and exit from the scheme before attaining 60 years of age, 20% of the corpus is allowed to be withdrawn in lump sum. The remaining 80% of the corpus should be used to purchase annuities.

 

  • Partial withdrawals are also allowed from the scheme before the investor attains 60 years of age and the scheme matures. Partial withdrawals are allowed for up to 25% of the corpus from the third year after opening the NPS account. These withdrawals are allowed for specific purposes like medical contingencies, children’s education, marriage costs, etc. such withdrawals can be made for a maximum of 3 times during the tenure of investment and each withdrawal should have a minimum gap of 5 years.

 

  • If the investor has attained 60 years of age and wants to quit the scheme, 60% of the corpus can be withdrawn in lump sum. The remaining 40% of the corpus should then be used to avail annuities.

 

  • If the total corpus at the time of maturity of the scheme is below INR 2 lakhs, the entire amount can be taken in lump sum

 

  • If the investor dies before attaining 60 years of age, the nominee can withdraw the entire corpus in one lump sum.

 

So, withdrawal from the NPS Tier I account can be summarized in the following way –

Moreover, the investor can also defer withdrawing from the NPS scheme after attaining 60 years of age. Deferment is allowed for 10 more years till the investor attains 70 years of age.

Process of Withdrawing from the NPS Scheme

 

process of withdrawing from the nps scheme - all information about nps scheme

 

To withdraw from the NPS scheme, you would have to follow a process which is as follows –

 

Fill up a withdrawal form and submit it to the POP with your documents. The documents include the following

  • Your original PRAN card
  • A cancelled cheque
  • Attested photocopies of your proof of identity and address

Once the documents are submitted along with withdrawal application, they would be verified by POP
After verification the documents are forwarded to the Central Recordkeeping Agency (CRA) and NSDL
The withdrawal claim would be registered by the CRA which would send you the application form and the list of documents required to be submitted
After you complete the formalities, the withdrawal application is processed by the CRA and you get the settlement of your NPS account.

Tax Treatment of NPS Contributions and Withdrawals

 

  • Tax implications on NPS investments

 

tax implications on nps investments - all you need to know about national pension scheme

 

NPS investments are tax-free in the hands of the investor for the contributions done to Tier I account. This means that you can claim a deduction on your taxable income for the investment done in the NPS scheme.

 

However, contributions done to Tier II account do not enjoy tax reliefs. They are taxable in the hands of the investor.

 

The tax benefits on NPS investments are available under three different sections. These are as follows –

 

Applicable sections Who can claim the deduction Limit of deduction available
80 CCD (1) Both salaried employees and self-employed individuals For salaried employees – up to 10% of the basic salary + DA

For self-employed employees – upto 10% of annual income

However, in both cases, the maximum limit of deduction available is limited to INR 1.5 lakhs which also includes deductions available under Section 80C

80 CCD (2) Salaried employees whose employer’s contribute towards NPS scheme Up to 10% of the basic salary + DA
80 CCD (1B) Salaried employees, self-employed individuals and ordinary individuals having an income Up to INR 50,000. This  is in addition to the limit of Section 80C and 80 CCD (1)

 

Thus, individuals can claim a maximum deduction of INR 2 lakhs by investing in NPS through Sections 80C, 80CCD (1) and 80 CCD (1B). Moreover, the employer’s contribution is allowed additionally as a deduction under Section 80 CCD (2).

 

  • Tax treatment of withdrawals from the scheme

 

tax treatment of withdrawals from nps scheme - all you need to know about nps scheme

 

In case of withdrawals, tax treatment depends on when the amount is withdrawn. Let’s understand –

 

Time when withdrawal is done Amount of withdrawal Tax treatment
When NPS matures and the investor attains 60 years of age 60% of the corpus No tax is levied on the lump sum withdrawal
40% of the corpus in the form of annuity Annuity payouts are considered to be an income. They are, therefore, added to the taxable income and taxed at the investor’s tax slab
When the investor dies Full corpus Completely tax free
Before the maturity of NPS, i.e. before attaining 60 years of age 25% of the corpus for specific needs Completely tax-free
20% of the corpus for other needs Completely tax free
80% of the corpus received in annuity Annuity payouts are considered to be an income. They are, therefore, added to the taxable income and taxed at the investor’s tax slab

 

Given these tax implications, NPS is considered to be an EET (Exempt, Exempt, Taxed) investment scheme where the investment is tax exempt, returns are tax exempt but annuity payouts are taxable.

Annuity Payouts Under the NPS Scheme

 

annuity payouts under the nps scheme - get all information about national pension scheme

 

Annuity means a series of payments which are done at regular periodic intervals at predefined rates and for a predefined period. Annuities, therefore, provide a source of regular incomes. Under NPS schemes, 40% or 80% of the corpus is payable in the form of annuity depending on when you exit from the scheme.

 

Annuity payouts ensure that you get a series of regular incomes after you retire to meet your lifestyle expenses. This way, NPS creates a retirement income and proves useful. Moreover, there are different options of annuity payouts which you can choose to receive depending on your financial requirements.

 

These options include the following –

 

  • Annuity payable for the lifetime of the investor at a uniform rate
  • Annuity payable for a guaranteed period (5,10 or 20 years) and thereafter payable for the lifetime of the investor at a uniform rate
  • Annuity payable for the lifetime of the investor at a uniform rate. On death of the investor, the purchase price is returned
  • Annuity payable for the lifetime of the investor where the annuity amount increases @ 3% on a simple interest  basis
  • Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 50% of the annuity is payable to the spouse for his/her lifetime
  • Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 100% of the annuity is payable to the spouse for his/her lifetime
  • Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 100% of the annuity is payable to the spouse for his/her lifetime. After the death of the spouse, the purchase price is returned to the nominee.

 

Who Pays Annuities Under the NPS Scheme?

 

who pays annuities under the nps scheme - all information about national pension scheme

 

You can choose to receive annuity payouts from any of the insurance companies which are empanelled with PFRDA to pay annuities under the NPS scheme. Presently, the insurance companies empanelled with PFRDA to pay annuities include the following –

 

  • SBI Life Insurance Company Limited
  • Star Union Dai-ichi Life Insurance Company Limited
  • Life Insurance Corporation of India
  • Bajaj Allianz Life Insurance Company Limited
  • HDFC Standard Life Insurance Company Limited
  • ICICI Prudential Life Insurance Company Limited
  • Reliance Life Insurance Company Limited

 

So, understand the complete details about the National Pension Scheme before you choose to invest in it so that you can know exactly what the scheme promises and how it helps in tax planning.

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Investwell May 2, 2019 1 Comment

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