Articles

Indians are reputed to hold around 9-11% of the total physical gold in the world. It is estimated that more than 75% of Indian households own gold in some form, spanning across geography and income levels. We are amongst the top consumers of gold globally. For most of us, gold is part of our culture, practices and age-old belief in gold being a good asset class for those bad days. For ages, our ancestors have saved and invested in gold long before any formal investment or saving avenues were available. 

Today, gold still continues to be an important asset class for investment. We now have the option to invest in digital gold and not physical gold, saving us from all costs & concerns of security, storage, purity, making charges and so on. Sovereign Gold Bonds (SGBs) and gold ETFs are the available options to buy gold in a digital form. However, SGBs have seen a sharp rise in investors because they are seen as a viable alternative to actual gold and have been actively promoted by the government. In this article, we will dig deeper into this new-age gold investment product called SGB. 

What are SGBs? 

The Government of India introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 to reduce the demand for physical gold and shift a part of domestic savings for gold into financial savings. SGBs are government securities issued to resident Indian entities by the RBI on behalf of the central government and thus are considered safe. Their value is denominated in multiples of grams of gold. This is a long-term form of market instrument traded on the stock exchange. Investors have to pay the issue price in cash and the bonds are redeemed in cash on maturity, meaning that the maturity will not be in physical gold. 

Every year RBI offers SGBs in tranches with new series for limited periods during which time new buyers can buy the SGBs. For instance, Sovereign Gold Bond Schemes 2022-23 - Series IV (tranche), the most recent offering from the government, commenced on March 6 and closed on March 10. This was the final batch of SGBs for the last fiscal year. The issue price for one gram of gold had been set by the RBI at Rs 5,611. Let us now understand some of the fundamentals of SGBs.

Quantity- The Bonds are issued in denominations of one gram of gold and in multiples thereof. Whereas, a maximum limit of subscription for individual and Hindu Undivided Family (HUF) is 4 kg and 20 kg for trusts and similar entities notified by the government from time to time.

Liquidity- The maturity period of SBGs is eight - 8 years. However, the exit in SGBs is possible when the government opens the repurchase window after 5 years. One may sell these SGBs on secondary markets in the event of an early redemption, but doing so would subject him to capital gains tax.

Returns- The returns from these bonds are in the terms of interest and capital appreciation. The returns earned by the price differentiation of gold price is same for physical as well as sovereign gold bonds. However, SGB investors additionally benefit from a fixed interest rate of 2.5% p.a. payable semi-annually in a financial year. Moreover, such gains are over and above the price return of the gold.

Taxation- Both interest income and capital gains are taxed differently. The interest return on these bonds will be added to the total income of an investor. While, in the case of capital appreciation, if a primary issuance bond is redeemed early (post 5 yrs.) or kept until maturity, there will be no capital gains tax to pay. However, the taxation of the SGB bond will be different if the transaction is made on the secondary markets. The tax rate in this case for bonds sold after three years is 20% with an indexation benefit. While, short-term capital gains tax will be assessed on bond sales made before three years, and this tax will be added to the investor's income. TDS is not applicable to SGBs.

Eligibility- Any Indian resident – individuals, Trusts, HUFs, charitable institutions, and universities – can invest in SGB. One can also invest on behalf of a minor. As it is issued in dematerialized form, investors must have a demat account. For investors without a demat account, the government does provide paper certificate choices for investors adhering to the KYC requirements. 

Now, one may be curious about how they can purchase or redeem SGBs. So, let us know it how.

How do I buy and redeem SGBs?

Investors have an option to either buy these gold bonds in physical, digital or dematerialized format. The online and offline purchases are allowed through designated post offices, stock exchanges (NSE or BSE) or scheduled banks. There is a discount of ₹50 per gram for investors applying online where the payment is made online.

The investor will be advised one month before the maturity of 8 years and on the date of maturity, the maturity proceeds will be credited to the bank account as per the details on record. As said, early encashment/redemption of the bond is allowed after the 5th year from the date of issue on coupon payment dates. The bonds are traded on exchanges, if held in demat form. It can also be transferred to any other eligible investor. 

Benefits of SGBs:

To summarise, SGBs in India offer several benefits for investors, including zero quality risks, no storage costs, no making charges, high liquidity, guaranteed interest earnings, tax benefits and convenience. It can also serve as collateral for loans and carries no default risk. Needless to say, if you are looking at gold as an investment avenue for diversification or as an inflation hedge, investing in the SGB scheme seems like a pretty obvious choice. So if you are interested, keep a watch for the announcement for the next tranche. Till then, share this idea of purchasing this digital form of gold with your spouse and friends too. 

Every time the Indian markets, a specific stock, or a sector reaches a new milestone, a new notification from the media appears on our mobile phones. We hear so much about the increasing economic developments as well as the innovations through numerous startups taking place all over the country. These achievements make us believe that we have a higher scope to earn returns. But when we look into our portfolio returns, they make us realize that there is something that is pulling our portfolio down. Often the portfolio returns would be below the high expectations we may have set for ourselves. There could be various reasons behind it. Let us try to understand these reasons one by one:

1. Inappropriate Asset Allocation: Your asset allocation plays an important role in the overall performance of the portfolio. It can be impacted by both underexposure and overexposure to a single security or asset type. The asset allocation of your portfolio with time will have the greatest impact on the portfolio performance as different asset classes have different risk and return trade-off. It would be challenging to achieve higher returns with the lower allocation to growth assets. Moreover, the portfolio’s asset allocation should be closely monitored as many opportunities can be missed over the investment period.

2. Wrong selection of products: It is important to match the product features with their suitability for you to get the best results. However, if you try to forcefully fit a product in your portfolio, just because you like it, the result is most likely to go unfavourable. Say, for example, you have invested majorly in guaranteed plans and the timeframe for that particular investment is around 15-20 years, it is possible that you may earn lower inflation adjusted returns in the long run. 

3. Frequent buy/sell transactions: Any asset class needs a certain time to perform. In a rush to attain quick momentum profits, you may try to transact buy/sell positions frequently. You will most likely cut your winning bets too early. Frequent transactions could not only lead to high risk & costs but could also result in increased tax liability. Ideally, an asset class or product should be given sufficient time to perform in accordance with its suitable investment horizon. 

4. Concentrated Portfolio: It is a common saying that one should not put all eggs in one basket as it could increase the risk of your portfolio. This is advised to avoid concentrated risk in a portfolio. If you have a higher allocation to a certain sector or security, your portfolio is more likely to go down in an event of a market correction, moreover, you are also exposed to liquidity risk. Hence, ideal diversification helps to reduce the concentration risk in the portfolio. Having said this, too much diversification also means that you are exposing your portfolio to sub-performing and riskier assets/investments. 

5. Missing reviews: Your portfolio and investment plans need a periodic review. With time, your financial situations, family composition, lifestyle and needs /desires change. There might also be extreme market movements throwing up opportunities to invest or book profits. Not reviewing your portfolio on a periodic frequency or need /event-based, can put your portfolio on a lower-performing trajectory. Without reviews, you would be also losing sight of your targeted asset allocation and miss the benefits of actively managing your asset allocation.

6. Timing- a myth: It is a tendency of an investor to time the market. Quite often most investors keep waiting for market corrections before investing and in the process, lose precious time in the market and returns that they could have enjoyed. Although market valuations do have an impact, but timing the market is very difficult. Our focus should be on the period of the investment, rather than timing the market. Many studies have also shown that timing markets as a strategy have a very negligible impact on portfolio performance over the long term. 

7. Unreasonable expectations: Most first-time investors enter the markets in the middle of a bull run or when that bull run is coming to an end after knowing of the huge returns that people have made in a short period of time. People expect that markets will continue to perform in a straight line and deliver handsome returns on their investments without really understanding how markets and equity investments function. Thus, you may feel that your portfolio is underperforming when you have set unreasonable return expectations in a short period of time.

Conclusion

Ensuring that your portfolio asset allocation is optimum and in tune with your risk profile and expectations, both are the first step of any investment journey. Next, one should regularly keep reviewing the same and make the necessary changes. Having the right expectations and financial behaviour may also impact your satisfaction levels. Not all of us may have the necessary time, knowledge or ability to do all this consistently over time. This is where an expert or a mutual fund distributor can play a very important role in making sure that you and your portfolio are aligned to each other and more importantly, your portfolio behaves in line with your expectations over time.

“Successful Investing is managing risk, not avoiding it.” 

Benjamin Graham, the father of value investing might have said this decades ago, but it still holds true. Any investment entails some element of risk. Depending on the asset class and the underlying investment attributes, the risks would differ. If you are investing without understanding and managing risk, you are playing a dangerous game. We cannot completely eliminate investment risk, but we can definitely reduce it by managing it effectively. Now, you must be wondering how we should manage the risk? In this article, we will explore some smart ways to reduce such investment risk. 

Every asset class and the related investment is vulnerable to certain risk factors, and the most common mistake investors make is not understanding and/or ignoring such risks. When we are investing, we need to adopt investment risk management strategies for reducing losses and investment risk. Optimum risk management can help you grow your wealth and achieve financial goals with ease. So, let us discuss 7 smart ways to reduce investment risks.

(a) Know your Risk Tolerance Capacity:- Risk tolerance refers to the ability of an investor to pursue the risk of losing the capital. Risk tolerance mainly depends on your financial obligations and age. As a general rule, younger investors tend to be more risk-tolerant than older investors. Knowing your risk tolerance will allow you to focus on instruments that match your risk appetite. It is critical to understand how much risk you can take and invest accordingly. 

(b) Maintain Adequate Liquidity in Your Portfolio:- One thing that COVID has taught us is that a financial emergency can strike at any time! So, in the event of an emergency, we may need to redeem our investments anytime, even when the markets are down. This risk can be mitigated by maintaining adequate liquidity. Having liquid assets in your portfolio can help you in uncertain times and act as your financial guard. One of the ways of maintaining sufficient liquidity in your portfolio is by setting aside an Emergency Fund that should be equal to 6 to 8 months of expenses.

(c) Implement an Asset Allocation Strategy:- Asset allocation can be a crucial point to your overall investing pattern and one should have own asset allocation strategy rather than mimicking others. There are asset classes available to invest like Equity, Debt, Real-Estate, Gold, Commodities, Alternative Investments, etc. To help ensure the success of your portfolio, you may consider employing an asset allocation strategy that involves a mix of assets that are negatively correlated; for instance, when one asset class is not performing well, the other asset classes should perform well, reducing the overall risk of the portfolio. Here in India, retail investors primarily invest in Equity, Debt with some exposure to Gold. 

(d) Diversification:- By diversifying your portfolio across different asset classes, products, sectors, industries, etc., depending on the underlying product, you can reduce the overall investment risk, specifically the unsystematic risk which is limited in nature and not affecting the entire market uniformly. If you are investing in Equity Mutual funds, then you can diversify by investing in large, middle or small-cap equity mutual funds, style of investing and also at the AMC level. Diversification gives the portfolio some cushion for specific risks arising in select investments. However, diversification only to a point is logical and over-diversification is not recommended. The reason is, you may not get any additional benefit for diversification, the question of manageability and lastly, you may find non-performing investments creep into your portfolio. Warren Buffet once said, "wide diversification is only required when investors do not understand what they’re doing".

(e) Focus on Time in The Market:- In the formula of compounding, the variable of ‘n’ - period makes the real difference. Here, people often focus on ‘r’, i.e. how much return will it give, but ignore the ‘n’ factor. The holding /investment period also matters a lot in managing risk, especially when it comes to equities. We all know, equities are far too risky in the short term as it gets impacted by news, events and so on. But in the long term, the price growth would mimic the profit or revenue growth of the company. Risk management can be also done when you match the ideal investment horizon with the asset class. In equities, your focus should be to spend as much time in the market and forget about timing the market, which no one can predict. 

(f) Due Diligence:- It is always important to conduct due diligence before investing. If you are buying a stock for long-term investment purposes then you should consider the quality of management, the fundamentals and also the technicals while making buy/sell decisions. That’s a lot for a normal investor. Investing through mutual funds eliminates this to a large extent but still requires some due diligence and this is where a mutual fund distributor helps a lot. If you blindly follow the tips of others and from what you hear and read in popular media, without your own research, it will lead to losses. 

(g) Monitor Regularly:- Having created a portfolio, one also needs to monitor their portfolio regularly. If you’re a long-term investor, that doesn’t mean that you invest and forget about your portfolio in this fast-paced world. Periodic reviews aid in identifying and closing the gaps. With time, your portfolio asset allocation changes, the economic fundamentals change, the personal risk profile and investment objectives change, the attributes and performance of underlying investment avenues also change, and so on. If you do not monitor your investments on a regular basis, the risks in your portfolio also increase. As a result, keeping track of your portfolio becomes critical and it is recommended that you revisit and review your portfolio at least once a year. 

Summing Up

As every investment involves some risk, it is impossible to construct an investment portfolio that guarantees zero risk. However, by implementing the strategies discussed above, we can ensure that you will be able to find the appropriate balance between risk and return. Optimum risk management allows your investments to grow and help you to achieve your financial goals with ease.

Even though the COVID-19 global pandemic began more than two years ago, we are still feeling the effects and disruptions in our lives. If we've learned anything from COVID-19, it's that the only thing certain in life is uncertainty.

It is a fact that unexpected events occur. You can sit down and make all sorts of financial plans and budgets but life, on the other hand, has its way of striking. Whether it's a medical emergency, a major home or vehicle repair, a death in the family, or any other unexpected event, your finances are thrown out of the window. These situations can be emotionally as well as financially draining. Even the most meticulous planners can be caught off guard by an unplanned or unprepared event.

There is no way to predict the future, but the best way to deal with them is to be prepared for the unexpected ahead of time. Just as you should adjust your plans to accommodate unexpected weather, you should also have a financial backup to accommodate unexpected expenses. Here are five tips to help you deal with unexpected expenses and be better prepared for a rainy day.

1. Tighten your belt

As a general rule, for wealth creation and financial freedom, we need to save aggressively over a short period of time. People looking to retire early too need to cut expenses and save more in a short time. Cutting down on your expenses becomes avoidable if you feel that your financial situation is not good and if you feel that there are bad times ahead. To stay prepared for such a situation, one needs to cut back on non-essential and discretionary expenses. Examine your spending habits and make a note of any such expenses you could forego. It will make you save more and make your cash last longer during a crisis. Frugality, minimalism and short-term sacrifices, to the extent you feel comfortable, will surely pay off in the long run and save you in your rainy days.

2. Set up an emergency fund

The primary step in preparing for a rainy day is to set aside a sufficient emergency fund. When unexpected expenses exceed your monthly budget, an emergency fund can help you stay afloat. 

There is no universal measure for emergency funds. As a general rule, save at least three months' worth of your regular expenses. This amount of money cannot be saved overnight. The trick is to start saving small amounts regularly and consistently so that you can accumulate your desired amount over time. Even if you can only save a small amount, it will give you a sense of security if you need money right away. To avoid being tempted to spend your emergency fund, keep it in a separate savings account.

3. Get adequate insurance coverage

It is easier said than done to protect your loved ones and prepare for the worst-case scenario, but it is critical in today's world to be prepared for the unexpected. It is vital to ensure that you have sufficient insurance coverage for all possible scenarios. To help mitigate the financial impact of any unexpected event, people of all ages and income levels should purchase insurance policies as required, covering the different risks that they are exposed to. This includes the risks of the 4 Ds' - death, disease, disability and damages. 

Apart from life insurance and health insurance, one must also explore other insurance covers like personal accident, critical illness, travel insurance, global health insurance, etc for personal coverage. In addition, vehicle insurance with comprehensive coverage, home insurance, shopkeepers insurance, fire & marine insurance, professional indemnity, etc can also be explored on a need basis.

4. Have a passive or secondary income

Sometimes, the salary from your primary job is not enough to make ends meet. So, having a side hustle or a passive source of income pays off. As a result, you can save and invest the money you earn from them to create wealth, an emergency fund or to fund your discretionary expenses, without affecting your monthly budget. It is an excellent way of improving your financial security and hedging against your primary income source. Having multiple income sources can be a boon in times of crisis and it is something everyone should aspire for. 

5. Have low liabilities 

It is always better to have low liabilities and debt, regardless of your financial situation. As a general principle, your monthly debt repayments, or EMIs, should ideally be lower than 30% and never more than 50% of your net income. Having too much debt can lead to a cycle of overwhelming stress and the inability to save for future financial security. With credit easily available, most of us would be tempted to fall into the debt trap, spending more on non-asset creating, personal and consumer loans, at the cost of future wealth creation. In times of financial difficulties, your debt burden will be the primary cause of high stress on you and your finances.

Summing Up

You don’t require any crystal ball to be prepared for unexpected events you couldn’t have predicted. You don’t need to know where they will occur, or even what they do, to protect your personal finances and safeguard your financial goals. The above things can help you not just tide over bad times and situations of financial stress but also prepare you to face uncertainties in life with confidence. As the new year starts, let us step up our finances and indeed our financial objectives and behaviour and set the right tone for the rest of the year.