The Rule of 72

Everybody wants to see their money growing and the very first question that comes in mind is ‘How many years will it take to double the amount? ’ . For this Rule of 72 is the best way to understand the concept. What is the rule of 72? It states that you can find out how many years it will take for your investment to double by dividing 72 by the percentage rate of growth. So it will take 8 years for your investments to double if it grows at 9% a year (72/9=8). But it will take only 4 years if they grow at the rate of 18% a year and so on.
The biggest thing that investors should appreciate about compounding is the enormous value of time. As your returns themselves start earning, and then the returns on those returns themselves start earning, the profit starts piling up at an enormous pace.Starting to save at the age of 35 instead of 50 can mean retiring with four times the wealth. If one has time to learn just one thing about investing, then it should be this.

Living longer is the biggest risk

WE ALL ARE FACING A VERY BIG RISK OF LIVING A LONGER LIFE!

Biggest Risk in Life

When it comes to investment related risks or financial risks, we are aware of the risks like credit risk, currency risk, market risk, liquidity risk etc. But the bigger risk in today’s life which we all are facing is almost unknown to all of us. And that risk is the risk of living longer.

Average life expectancy of Indian is increased from 35 years to 67.8 years in 2014 since independence (Source: World Bank, World Development Indicators). And this number is increasing every year. Average Indian is expected to live longer and the life span is still expected to increase due to advancement in clinical research and medical field. The first thought which could occur in anyone’s mind after reading this number is, GREAT, IT'S A REASON TO CHEER! But the fact, which at first glance looks like a reason to cheer, is in fact a reason for a BIG WORRY. A longer life, if not coupled with financial independence is of no meaning.

Classic example is Japan. In Japan today the life expectancy is little more than 82 years. Look at the growth rate of economy. It’s almost NIL. As the life expectancy increases the number of more financially dependent people increases. The same could be the case with India in after 2 decades.

Three Phases of our life

In our life span we pass through 3 phases.

1.    Learning Phase

2.    Earning Phase

3.    Reaping Phase

In First phase i.e. learning phase which lasts for on an average 2 to 2.5 decades, one spends most of the time in getting education and acquiring the skills which he can use in future to earn money. In Earning Phase which lasts for approx 3 decades where one spends most of the time in earning money using the skill obtained during learning phase. And while earning one also tries and saves for the third phase i.e reaping phase which is also known as retirement. In this phase one is financially dependent on either one's own savings which is accumulated during second phase or their children.

Assume the situation in which you are solely dependent on your retirement kitty and your retirement account gets exhausted in 7 to 8 years after you attain the retirement and you still have a decade more to live.

Dependency is curse

More and more number of people are getting added to old age homes and living their life on the support and pity of others. It’s not because, they didn't saved during their earning life, they surely would have. But it's because of lack of knowledge towards channelizing the savings into the right investments.

These people when they were young they never have thought that monthly grocery bill which was Rs. 1000 to 2000 per month at that time will rose to Rs. 20,000 to Rs. 25,000 per month when they retire. They never visualized that the medical expenses will increase many folds during the old age. They could never imagined that the cooking gas cylinder which was costing less than Rs. 100 at that time would cost them more than Rs. 650 at the time of retirement.

They kept on saving but never planned or never calculated the exact amount of money they would require for their retirement. This might happen to you as well. Have you ever planned your investment thinking that the petrol which is costing Rs. 75 today would be Rs. 500 per litre and the monthly expense to survive could increased to 1.5 Lacs rupees per month during your retirement.

Highest returns from this tax saving fund

As the financial year draws to a close, investors who still have tax saving investments to make under section 80C, should evaluate Equity Linked Savings Scheme. Equity Linked Savings Scheme (ELSS) is one of the most popular tax saving investments under section 80C of the Income Tax Act, where investors can avail the triple benefits of tax savings, capital appreciation and tax free returns. In the 2014 budget the overall limit under section 80C has been increased to Rs 1.5 lacs. This gives investors an opportunity of saving more tax and allocating more investment to ELSS, which in turn will help them with higher capital appreciation over the long term.

Reliance Tax Saver fund has been one of the best ELSS performers in the last three years. In fact this ELSS fund gave the highest trailing returns among all ELSS funds over the last one and two year periods. This fund launched in Aug 2005, has generated nearly 19% annualized returns since its inception. The fund outperformed its peers on a fairly consistent basis ever since its inception. The fund has been ranked a “Very Good” performer (Rank 1) by CRISIL for several successive quarters. Morningstar has assigned a 5 star rating for this fund.

Fund Overview

This fund is suitable for investors looking for tax planning investment options under Section 80C with the expectation of long term capital appreciation. Equities as an asset class generate superior returns over the long term and serves as an effective hedge against inflation. What distinguishes Reliance Tax Saver funds from most of its peers is the midcap orientation of its fund portfolio. As such, midcap stocks have the potential to provide higher returns than large cap stocks. However, the volatility of midcap stocks is higher than large cap stocks. This fund is suitable for investors planning for long term financial objectives like retirement planning, children’s education, marriage etc. The fund has an AUM base of over Rs 4,100 crores.

Portfolio Construction

The fund manager employs a bottoms stock picking approach to his portfolio and identifies companies at attractive valuations with high growth potential. About 70% of the portfolio holding is invested in small and midcap stocks. From a sector perspective, the portfolio has a bias for cyclical sectors like Automobiles and Auto Ancillaries, Engineering, BFSI, Metals and Cements. As the investment cycle revives in our economy these sectors have the potential to deliver strong earnings and consequently excellent returns. In terms of company concentration, the portfolio is very well diversified with its top 5 holdings of TVS Motor, SBI, Tata Steel, BHEL and Wipro accounting for only 30% of the total portfolio value. Even the top 10 stocks account for less than 45% of the portfolio holdings.

Performance comparison with Peer Set

A comparison of annualized returns of Reliance Tax Saver Fund versus its peer set over various time periods shows why this fund is considered a chart topper among ELSS funds. In terms of trailing annualized returns, the fund has beaten all its peers across most time periods.

Risk & Return

In terms of risk measures, the volatility of the Reliance Tax Saver fund is understandably on the higher side, given its small and midcap orientation. The annualized standard deviation of monthly returns of Reliance Tax Saver Fund over the last three years is 21.6% compared to 15% for the ELSS category. However, on a risk adjusted return basis, as measured by Sharpe Ratio the fund has outperformed the ELSS category.

Rs 1 lac lump sum investment in the Reliance Tax Saver fund NFO (growth option) would have grown to value of nearly Rs. 5 lacs as on February 18 2015..A monthly SIP of Rs 3000 started at inception of the Reliance Tax Saver fund (growth option) would have grown to over Rs. 9.9 lacs by February 18 2015, while the investor would have invested in total about Rs.3.4 lacs. The SIP return (as measured by XIRR) since inception of the fund is nearly 22%.

Conclusion

Reliance Tax Saver fund has established itself as one the best ELSS funds in the last few years. It has delivered strong outperformance and has created wealth for its investors. The long term performance of Reliance Tax Saver fund is a testimony of the power of ELSS as a wealth creation investment. Investors planning for tax saving investments can consider buying the scheme through the systematic investment plan (SIP) or lump sum route with a long time horizon.

( Mutual Fund investments are subject to market risks, read all scheme related documents carefully.)

Taxable Income for Seniors

For senior citizen with taxable income, ELSS funds are an excellent option for tax-saving

A popular misconception is that ELSS of mutual funds are not suitable investment options for senior citizens and retired persons. this comes from the widespread notion that equity-backed investments in any form are unsuitable for older and/or retired people. The reality is to the contrary.

Everyone who has taxable income should invest in ELSS. The idea that equity is risky and therefore suitable only for young people actually pushes many old, retired people towards financial problems. The culprit, of course, is inflation. And that's a problem that may abate, but will not go away to any substantial degree for a long time.

Equity investment maybe risky over the short term, but the long-term is an entirely different story. For investment periods of three to five years or longer, equity investments are actually low in risk and high in returns.

In fact, when you take inflation into account, it is bank FDs and similar deposits generate returns that are barely higher than the inflation rate and in effect, you lose value or barely maintaining it. The purchasing power of your money reduces at about the same rate as its value increases in a fixed deposit.

There are also some other points you should consider:

1.    The returns you will earn from ELSS will also be tax-free because there is no long-term capital gains tax payable on equity. On FDs, the returns are taxable and TDS is deducted yearly. The yearly deduction of TDS further reduces returns by making less money available for long-term compounding.

2.    ELSS is more liquid because the lock-in is three years. In tax-saving FDs, the lock-in is five years.

3.    Unlike other kinds of FDs, tax-saving FDs are completely illiquid. Not only can you not break them prematurely, you cannot take a loan against them either.

Of course, like all equity investments, the best way of investing in ELSS funds is through monthly SIPs throughout the year. However, a smaller number of evenly spaced investments are also suitable.

Moment for India markets

Investors' unflinching faith in Indian Prime Minister Narendra Modi will be put to the test later this month when the government presents its annual budget, which strategists say could be an inflection point for the country's roaring stock market.

The budget, to be delivered by Finance Minister Arun Jaitley on February 28, is the Modi government's first full-year budget since coming into power last May.

With investors keenly focused on the budget as a gauge to measure the government's reform resolve, "the upcoming budget could be the most important one for the stock market after the early 1990s, when India launched economic liberalization," Ridham Desai, India strategist at Morgan Stanley wrote in a note.

India's benchmark Sensex was among the world's best performers last year, advancing around 30 percent, on hopes of a turnaround in India's economic fortunes under Modi's leadership. The gains have extended into 2015, with the index up 4 percent year to date.

Budget check list

The market will be tracking three key areas in the budget: a credible fiscal consolidation path, a shift from subsidies to capital spending and specifics on the government's structural reform agenda, says Andrew Tilton, chief Asia economist at Goldman Sachs.

Economists expect the government to set a fiscal deficit target of 3.6 percent of gross domestic product (GDP) for fiscal year 2015/2016, down from 4.1 percent in the current fiscal year ending March 31.

The lower target will likely be based on a reduction in subsidies as a result of lower commodity prices, said Tilton.

The Reserve Bank of India has stressed fiscal consolidation as a necessary prerequisite for further easing.

The accompanying statement to the RBI's surprise rate cut last month left the door open for further monetary loosening, but this was contingent on "sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure."

From subsidies to capital spending

Investors will be looking for the government to shift capital spending towards public projects, using the savings from a reduction in subsidies.

Reform watch

Last but not least, markets will be looking for signs of wide-ranging reforms.

"The budget provides an opportunity for the government to push its reform agenda forward," said Tilton of Goldman Sachs.

A roadmap for the Goods and Services Tax (GST), which would help to broaden the tax base and ensure a more stable flow of government revenues, is top on investors' wish list.

Incentives to boost manufacturing and infrastructure investments, including measures to reduce the cost of doing business and amendments to labor laws, also rank high.

Supplementing this, investors are looking for reforms to boost urbanization, including budget support for urban infrastructure.

The government's privatization targets will also be closely watched. Due to a combination of strike action and bureaucratic constraints, previous privatization plans have a history of missing targets.Looking ahead, the Finance Ministry may actually gain credibility if it were to set more realistic, lower, targets for asset sales next year.