May 2023 - Deeva Ventures Pvt Ltd

How to understand your relationship with money

Let me start by sharing a real-life experience and the reaction on social media.

The story begins with an individual ordering a sandwich on Swiggy. Let’s call him Kiran.

Kiran was telling me how one has to budget for a higher amount when opting for the convenience of an online delivery. And yes, convenience comes at a steep cost. This is what Kiran showed me on his Swiggy account:

Sandwich: Rs 138.09
Packing: Rs 25
Delivery Partner Fee: Rs 51
Taxes: Rs 6.90
Tip: Rs 70

I posted this on Twitter with just one statement: A 138 sandwich is now Rs 291!

Well, the comments were brutal. Not surprising, as people love to outrage on social media. People questioned as to why the individual could not make a sandwich at home. Labelled the person as lazy. They wondered who would order a sandwich that costs so much. And I was even accused of spreading “fake news” and maligning Swiggy.

While I was flummoxed at the judgement received, I want to focus only on one aspect – the money angle. Majority had a huge problem with the Rs 70 tip. There were sarcastic remarks about it as well as Kiran being called stupid (for being so generous).

This incident reiterated how personal people get when the subject is money.

Money is a touchy subject filled with value judgements.

Now let me give you the other side of the story by telling you something about Kiran.

Kiran is a well-to-do senior citizen whose children reside elsewhere. Could not step out due to a sprained ankle and was in a fair bit of pain. He does not have a car or a driver who he could direct to go pick it up. The house help who comes during the day was ill. The cook only comes thrice a week and that was her day off.

Kiran really felt the urge to have a veg grilled sandwich and decided to order for it. I guess that demolishes the lazy accusation. But the bone of contention was about Kiran paying Rs 70 as a tip for a sandwich that costs Rs 138.

I know Kiran and I do know that he firmly believes in using money as a means to give back to society. Kiran is of the opinion that if he does not help the individuals who make his life more easy, he is being selfish and self-centred.

I have seen Kiran tip the Urban Clap staff lavishly. He is always sending food for the watchman. When the municipal workers were doing up the road, he ordered samosas for all of them. He pays the househelp well, and whatever is cooked for him, he often shares with them.

The default tip that is set on the Swiggy app is at Rs 70. The logic being, whether the dish costs Rs 1,000 or Rs 100, the individual had to make the same effort to go and pick it up and drive in the hot sun and traffic to come deliver it at your doorstep. He believes that they deserve at least Rs 70 as the tip.

Because our relationship with money is complex, it gets manifested in various ways.

This is why you have no right to judge someone else for their money choices, unless you are directly getting impacted by it. Go easy on your judgements!

It is not just about spending, it is also about investing. Have you realised how many of our investment decisions are justified by emotion, and not logic? Innumerable times I have seen individuals invest because they “have a good feel” about the stock. Or the next big theme has caught their attention and they get carried away by the frenzied narrative. Or, they sell in haste because they are afraid that they will lose all their money.

In Kiran’s case, there was something else that I noticed. “I think about these young men who deliver the food to my house, and they can’t afford to eat such food or even buy it for their children. How bad they must feel.”

When he told me that, I could see what a sensitive human being he is, but I also picked up something else. I believe there is some amount of guilt at his privilege that motivated the lavish spending on those lower down the economic ladder.

I have no intention of debating whether Kiran’s intentions are driven by ego or empathy or altruism. That is no concern of mine or yours. But I have every intention of pointing out that our relationship with money is deeply personal and has many layers and facets to it.

Our relationship with money brings out an intricate web of motives, interests, passions, desires, needs and compassion.

Because our relationship with money is personal, it is emotional. And hence, cannot be ignored or treated with disdain. If you are curious about your relationship with money, answer these questions with brutal honesty. They will help you obtain a better comprehension of the money dynamics in your behaviour patterns.

Why am I working so hard to accumulate money?

Money is a tool – like a hammer, like a chisel, like a scissors, like Zoom. It is there to serve a purpose.

Money is a transaction tool. Its purpose is to get you what you desire. It could be status, security, lifestyle, experiences, convenience, a home, a car, a holiday, an iPhone, mental peace… you get the gist.

Money is never an end in itself. If money is an end in itself, then you will never have enough. You will never be satisfied. The purpose of money is to support well-being and empower you. So ask yourself, what is it that you want from your money?

How do I feel when I spend money?

The way you spend and manage your money is individualistic. It is shaped by your experiences, upbringing, emotions, how you view society, as well as your religious beliefs. You may feel absolutely no guilt at buying a bag that sets you back by many thousands but will cringe at the cost of replacing the old and worn out upholstery at home. Ask yourself why. You may enjoy a lavish meal at a restaurant and run up a gigantic bill, but will not pay more than 10% as a tip, however large the bill or great the service. Dig deeper.

Where do I get the most satisfaction?

Don’t be swayed by what someone else is doing. You may get joy when you use your money to help others. Others may find fulfilment is spending on numerous outings and vacations in a year. A few may prefer just spending it on wining and dining.

I repeat; answer the above candidly. There is no judgement. Your life. Your money. Your choice.

Being aware of your relationship with money helps you get the best out of it. Knowing the source of your emotion and the drivers will help you get to the root of the issue and improve your relationship with money.

Source- Morningstar

What’s your Investment Personality?

Few investors neatly conform to a single description. The Standard Chartered Investor Personality Study 2020 surveyed 1,200 affluent and high net worth investors and founds that geographic and cultural differences shape behaviours and personalities. For example, Hong Kong has the highest proportion of “Enthusiastic” investors. Singaporean tended to fall into the “Comfortable” category, while Taiwan cornered the “Conservative” archetype.

John Rekenthaler, director of research for Morningstar, believes that most investors have blended traits. Here he explains how personalities affect investment behavior. After describing three personality types, he concludes by telling us (in a very amusing way) where he fits it.

Loners

Investors who belong to this group make their own decisions. They consume investment research neither for its counsel, nor to learn what others are doing, but instead as grist for the mill. Such investors ignore the actions of the crowd. Should they see a line snaking around a block, they will not try to learn what they are missing. They will instead go on their way while pitying the line’s occupants.

Strength: Buying Low

Loners are not the only investors who try to buy low. Equity mutual funds sometimes receive inflows after market declines because the overall marketplace believes that the dip presents a buying opportunity. Overall, though, loners are the likeliest investor type to sift among discounted securities, seeking bargains.

Strength: Early-Bird Gains

Besides receiving “dead cat bounces” from securities that are deeply depressed, loners may also profit from the opposite form of investment: highly expensive emerging-growth stocks. Before Tesla was mainstream, it was owned mainly by iconoclasts who discovered its story. The same holds for all winning startups.

Weakness: Self-Delusion

Unfortunately, not all that glitters is gold. For each dollar they stashed in Tesla or bitcoin, loners squandered thousands on investment dreams that never materialized. Sometimes, wisdom does in fact lurk within the crowd. Loners constantly face the possibility their “insight” is instead self-delusion—the mistaken impression that they have spotted what others missed.

Weakness: Bear Traps

A related problem is bear traps. This error has happily become less frequent, because market-timing has become unpopular, but loners nevertheless tend to exit the stock market, believing they have identified an upcoming bear. (A little knowledge can be a dangerous thing.) Once out of equities, they have trouble getting back in, because doing so before stock prices collapse would be a tacit admission of failure. Loners do not always benefit from having large egos.

Followers

More common than loners are followers, who derive comfort from crowds. Rather than walk past lines, they join them. Followers are strongly influenced by recommendations—from researchers, the media, friends and family, and internet boards. They seek investment allies.

Strength: Staying Informed

Followers listen to others. Doing so helps to keep them knowledgeable about investments, thereby reducing the chance of an unpleasant surprise. As with inflation, which causes the most damage when it is unanticipated, unforeseen investment losses carry the sharpest sting. Followers who listen to both side of the investment debates—which, it must be confessed, does not always occur—are well prepared for bad news.

Strength: Trading Opportunities

By the time that followers learn of an investment possibility, the loners have already found it. Word takes time to spread. Astute followers, however, may still reap ample profits by arriving before the rest of the marketplace. Discovering Tesla in winter 2020 was too late. But buying the stock two years before, when it was well known but not yet the investment rage, would have been a splendid trade.

Weakness: Tail Chasing

A fine line separates being guided by the collective from being controlled by it. Those who appropriately use investment information, by applying common sense and at least a modicum of their own judgments, can prosper. Not so those who become bewildered by the investment gossip, turned this way and that, like dogs distracted by a fluffle of rabbits. Such is the constant danger for followers.

Weakness: Mob Mentality

Followers are the most prone to being harmed by their emotions. As anybody who has participated in internet forums can attest, chat groups can quickly become mobs. (Whenever I receive an openly insulting email, I know that my column has been posted on a Reddit board.) Investors may benefit from hearing additional views, but rarely will they succeed by sharing others’ emotions.

Zombies

Most investors are zombies. The less they know about their portfolios, the happier they are. Consequently, they tune out the noise. Back in the day, that meant owning a portfolio that had been assembled by a stockbroker, and then leaving future decisions in the broker’s hands. These days, zombies are typically 401(k) participants or index-fund proponents. Either way, they stand aside.

Strength: Investment Discipline

This one is obvious. To the extent that investment success comes from staying the course—a hoary cliché, but not without truth—zombies are perfectly situated. They possess neither the faith to make their own adjustments, nor the interest to copy other investors’. Their portfolios therefore tend to remain unchanged.

Strength: Emotional Control

In the 1990s, many investment experts speculated that when the long-awaited bear market finally arrived, 401(k) participants would be the first to sell, given their inexperience. They were instead the last. During the technology stock crash of 2000-02, 401(k) assets were more stable than either retail investors’ taxable accounts, or the portfolios run by professional managers. There is an advantage to lacking an investment brain.

Weakness: Missing Out

Although zombies will neither become ensnared by bear traps nor chase their performance tails, neither will they spot investment opportunities. To return to our previous example, some people bought Tesla before the company joined the S&P 500 in late 2020. They might have been loners, or they might have been among the earlier followers. But they assuredly were not zombies.

Weakness: Structural Changes

Over the long haul, the markets are very stable. Roughly speaking, bond yields increased for 30 years, from 1950 through 1980, before subsiding over the next three decades. That made for one inflection point during the Depression generation’s investment lifetime. The long-run performance of equities has been equally predictable. Thus, structural changes rarely leave zombies behind. When such shifts do occur, though, zombies are the last investment type to know.

My investment type can best be described as “artificial zombie.” That is, while I am a loner by nature, I have learned through experience the difficulty of outguessing the crowd. Thus, I behave like a zombie, by making few trades and distancing myself emotionally, although of course I am much too informed to be among that breed.

And you?

Source- Morningstar

Investment in units of Mutual Funds in the name of minor through guardian

SEBI Circular no. SEBI/HO/IMD/DF3/CIR/P/2019/166 dated December 24, 2019 has prescribed the uniform process to be followed across Asset Management Companies (AMCs) in respect of investments made in the name of a minor through a guardian. Based on recommendation of Mutual Fund Advisory Committee, it has been decided as under:

1. In partial modification to the above SEBI circular, it has been decided as under:

i. Para 1(a) shall read as under:

“Payment for investment by any mode shall be accepted from the bank account of the minor, parent or legal guardian of the minor, or from a joint account of the minor with parent or legal guardian. For existing folios, the AMCs shall insist upon a Change of Pay-out Bank mandate before redemption is processed”

ii. Irrespective of the source of payment for subscription, all redemption proceeds shall be credited only in the verified bank account of the minor, i.e. the account the minor may hold with the parent/ legal guardian after completing all KYC formalities.

iii. All other provisions mentioned in the aforesaid circular shall remain unchanged.

2. All AMCs are advised to make the necessary changes to facilitate the above changes in mutual fund transactions w.e.f. June 15, 2023.

3. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with Regulation 77 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Source- SEBI

National Pension System (NPS) exit rule changed: Now buy multiple annuities of minimum Rs 5 lakh each

National Pension System (NPS) Exit Rules 2023: The Pension Fund Regulatory Development Authority (PFRDA) has decided to allow NPS subscribers to purchase multiple annuities on exit if their corpus is over Rs 10 lakh and they utilize at least Rs 5 lakh to buy each annuity.

“The option of multiple Annuities shall be provided for those Subscribers who earmark the annuity corpus more than Rs 10 lakhs wherein Rs 5 lakhs utilized to buy each annuity scheme,” the regulator said in a circular dated May 10.

Under NPS, subscribers are allowed to buy immediate annuities from Annuity Service Providers (ASPs) under the enabling provisions of Exit Regulations of PFRDA. Till now, the subscribers were allowed to buy only one annuity scheme from the ASP at the time of exit.

The regulator said that it has taken the decision to allow the purchase of multiple annuities in the interest of subscribers.

“In the interest of subscribers’ retirement income optimization and to provide them with a wider range of annuity options, PFRDA is pleased to inform that the choice of multiple annuities from the same ASP will be made available,” the regulator said.

What’s new

As per the regulator, the option of multiple Annuities will be provided for those subscribers who earmark an annuity corpus of more than Rs 10 lakhs wherein Rs 5 lakhs is utilized to buy each annuity scheme.

The regulator has advised CRAs to build the necessary system-level functionality to facilitate the implementation of this change.

“Until this feature is developed, ASPs can handle the requests for multiple annuities received from subscribers and provide the necessary information to CRA through Reverse Information Flow (RIF),” the regulator said.

“PFRDA believes that this change will greatly benefit subscribers by providing them with a wider range of annuity options and optimizing their retirement income,” it added.

Source – Financialexpress

High pension recipients can get short-changed in bailouts

In 1983, the excitement was palpable as Kapil Dev hoisted the Prudential trophy after the limited-overs World Cup held in England. The 1987 event, initially set for England, was moved to India and Pakistan due to the financial woes experienced by the United Kingdom’s (UK) pension providers, including Prudential, the World Cup’s sponsor then.

The pension industry was struggling because pensioners were living longer, investment returns were lower than estimated, and pension payments were fixed and payable for the pensioner’s lifetime. Ultimately, the UK government took over the liability. Some individuals, who were eligible for a higher pension, experienced losses as the government capped the maximum pension amount.

A similar situation unfolded in the wake of the 2008 Great Financial Crisis, when General Motors (GM) faced bankruptcy due in part to high pension liabilities towards former employees. The US government nationalised GM, took over the pension liability, again capping the maximum pension amount. Pensioners eligible for a higher pension again suffered.

These events show that reckless pension schemes eventually fail. Another lesson is that when the government steps in, it focuses on protecting those who need the pension the most. Those receiving higher pension amounts often suffer.

This leads to the current debate among executives about whether they should opt for a higher future pension by diverting a portion of their existing Employees’ Provident Fund (EPF) corpus.

Let’s say an employee, whose salary is Rs 1 lakh per month, contributes 12 per cent (Rs 12,000) to his EPF account. The employer contributes an equivalent amount (12 per cent of salary or Rs 12,000) over and above the salary. Of this 8.33 per cent, subject to a maximum salary limit of Rs 15,000 (or Rs 1,250 per month) has to be contributed to the Employees’ Pension Scheme (EPS).

The balance Rs 10,750 (Rs 12,000 less Rs 1,250) is transferred to the EPF account. The employee’s EPF account receives a total of Rs 22,750 per month (Rs 12,000 from the employee and Rs 10,750 from the employer). The accumulated balance in the EPF account is tax-free, and can be withdrawn fully on retirement.

The EPS fund receives Rs 1,250 per month from the employee. Additionally, the central government tops up with a proportional contribution to enable EPS to meet its pension liability. This contribution is Rs 174 per month (1.16 per cent of salary, with a maximum salary cap of Rs 15,000).

The pension on retirement is based on the number of years of contribution and the salary at retirement. The maximum salary assumed on retirement remains Rs 15,000 per month and the maximum pension is Rs 7,500 per month (for those who have contributed for 35 years or more).

The retirement pension is available only if the employee completes 10 years in the scheme. Those who don’t can withdraw their EPS contributions. Many employees don’t withdraw this EPS amount even though they are eligible to do so. This unclaimed amount is exceptionally large and is likely to be never claimed back. The interest earned on this “surplus” powers many of the unsustainable pension promises, like a minimum pension of Rs 1,000 per month.

A Supreme Court decision has allowed some EPF subscribers to receive a higher retirement pension without the constraint of a cap on maximum salary of Rs 15,000 per month. To be eligible, however, they would need to transfer significant amounts from their EPF accounts to EPS, sparking a debate on the advisability of such an action.

A valuer assesses whether the resources can meet the liabilities. The latest valuation for the year ended March 31, 2017, revealed a deficit of Rs 15,000 crore. The deficit is expected to grow even larger with the removal of the cap on retirement pensions and growing life expectancies of Indians.

Truth be told, employees hoping for a larger pension in the future by contributing more from their EPF corpus are betting on the government stepping in to cover the deficit. However, history has shown that when a government intervenes, those receiving higher pensions often suffer losses. Employees with higher salaries would be better off investing their tax-free EPF corpus in suitable financial instruments upon retirement rather than trusting that money to an uncertain future pension.

All data taken from EPFO annual accounts of 2021-22

Who should opt for higher EPS pension, what could go wrong if you opt for it

Till some years ago, the pension that subscribers to the Employees’ Pension Scheme (EPS) received after retirement was not worth talking about. The cap on the annual contribution meant that the pension was too low. A person who contributed the maximum Rs.1,250 every month to the EPS for 30 years would get a monthly pension of Rs.6,857. Little wonder that three out of five respondents to an online survey by ET Wealth in 2013 were not even aware that they were eligible for pension after retirement. Fast forward to 2023, when a Supreme Court ruling has transformed the EPS pension from a peripheral benefit into potentially the principal source of income in retirement.

The apex court has removed the cap on contributions to the EPS, so subscribers can opt for a higher pension equal to 50% of the basic pay. ET Wealth looked at three subscribers from different stages of life to understand the impact of opting for a higher pension. On the face of it, the prospect of getting an assured pension equal to 50% of your basic pay for life seems very tempting. Someone with a basic pay of Rs.1 lakh will get Rs.50,000 every month for life. It can easily become the principal source of income in retirement. Of course, this enhanced pension will come for a price. If a subscriber wants to get a higher pension, the contribution to the EPS has to be 8.33% of the basic pay.

Till now, the contributions to the EPS were capped. Members were contributing as little as Rs.5,000 a year (`416 a month) till November 2001. This was raised to Rs.6,500 a year and currently stands at Rs.15,000 a year (Rs.1,250 a month). To get the higher pension, a person will have to increase his contribution to the EPS as well as deposit the deficit payments as well as the interest earned on that since the time of joining the EPS. A person who joined EPS at 28 in 1995 when his basic salary was Rs.10,000 per month will have to deposit Rs.20.5 lakh in the EPS if he opts for higher pension. His monthly contribution to the EPS will also increase more than five-fold from Rs.1,250 to Rs.8,200, which means the inflow into the EPF will be that much lower. The calculations assume that the salary increased by 8.5% every year. Interest deficit has been calculated using historical interest rates offered by the Provident Fund.

Should you go for it?

Financial planners are divided on whether one should opt for the enhanced pension. Some say the higher pension is a good opportunity for subscribers. “Retirement planning is the most neglected financial goal in India. The option to get an enhanced pension would help individuals get an assured income in retirement,” says Amol Joshi, founder of Plan Rupee Investment Services. “It will be especially useful for those who may not have been able to save enough for retirement,” says Dheeraj Sharma, a Delhi-based wealth adviser. As our calculations show, opting for the higher pension makes perfect sense for subscribers in almost all situations. “The lump sum amount that will shift from the Provident Fund to the EPS will come back within a few years. The return is much higher than what a regular annuity offers,” points out Sharma.

Boomer aged 56 who will retire soon

Opting for higher pension seems like a golden opportunity.

Note: If opting for higher pension, monthly contribution to EPS will increase from Rs.1,250 to roughly Rs.8,200

At the same time, some financial advisers say that EPS takes away flexibility from the individual. “A young person with a long-term investment horizon may be better off investing in more lucrative options where he has greater control over where and how much to invest,” contends Deepti Goel, Associate Partner of wealth advisory firm Alpha Capital. For instance, if someone aged 25 years with a basic salary of Rs.50,000 opts for higher pension, he will have to put Rs.4,165 in the EPS every month. Assuming his income increases by 8.5% every year, he would put some Rs.81 lakh into the EPS over the next 33 years and get a pension of Rs.3.4 lakh.

“The option to get higher pension from EPS would give individuals an assured income after retirement. Everybody should opt for it.”
AMOL JOSHI
FOUNDER, PLANRUPEE INVESTMENT SERVICES

Instead of putting in the EPS, if that money is put in a mutual fund to earn 10% returns, he would have a retirement corpus of almost Rs.3.2 crore in 33 years. But this 10% return is not assured while the pension from the EPS comes with government assurance. Another key difference is that the EPS guarantees pension even in case of early death of the member. If a member dies during service, his widow will get his pension for life or till she remarries. Two children will get an additional sum equal to 25% of the pension. If there is no widow, two children of the deceased will receive 75% of the pension till the age of 25. If there are more than two children, the benefit will continue till the youngest is over 25.

Gen X employee aged 46

Even more compelling reason to opt for higher pension.

Note: Monthly contribution to EPS will increase from Rs.1,250 to roughly Rs.7,200. This will increase 8.5% every year with rise in income.

Interestingly, the development would help individuals realise the advantage of compounding and patience. The EPS pension is linked to the number of years a member contributes to the scheme. People who withdrew their Provident Fund corpuses and pension contributions every time they changed jobs will not get as much as those who kept their retirement savings untouched. The withdrawn amount is often blown away on discretionary spending and disrupts the compounding. As the legendary investor Charlie Munger once said, “The first rule of compounding: Never interrupt it unnecessarily.” What’s more, if a member has contributed to EPS for 20 years or more, two bonus years are added to the calculation. So, if a person with a pensionable salary of `1 lakh has contributed for 19 years, he will get a monthly pension of Rs.27,142. But if he contributed for 22 years, the pension calculation will give him two bonus years and give him Rs.34,285 per month.

Rs.6,89,210 cr: was the corpus of the EPS as on 31 March 2022. The scheme receives inflows of roughly `4,200 crore every month.
Rs.37,327 cr: was the deficit projected in the EPS as on 31 March 2019. In November 2022, EPFO appointed actuaries for valuation of the scheme.
72.73 lakh: pensioners were drawing pension from EPS as on 31 March 2022. 66% of these were members, while 33% were spouse and children.

What could go wrong

But subscribers need to keep in mind a few things before they click on the option. First, the EPS pension will not be linked to the last drawn salary but to the average salary in the last 60 months. In most cases, this would be much lower than the last drawn salary. Secondly, there are concerns about the viability of the EPS scheme. In the past, various actuarial studies have projected very high deficits in the scheme. As on 31 March 2019, the deficit was projected to be Rs.37,327 crore. “With the increase in the number of pensioners, the amount disbursed as pension has also shown a steady increase over the years. However, the fund has not witnessed any cash flow problems till now, in spite of there being a projected actuarial deficit in the valuation of the fund,” notes the annual report of the EPFO for 2021-22.

“Pension equal to 50% of salary is tempting but the amount will remain constant. Inflation is one reason why EPS alone will not be enough.”
RAJ KHOSLA
MANAGING DIRECTOR, MYMONEYMANTRA

“A young person with a long-term horizon may be better off investing in more lucrative options where he has greater control and flexibility.”
DEEPTI GOEL
ASSOCIATE PARTNER, ALPHA CAPITAL

In November 2022, the EPFO appointed actuaries for the valuations of the pension scheme. The report is not out yet but it is not incorrect to assume that the higher pension option may further dent the sustainability of the scheme. The changing demographics of India only adds to the problem. Right now, there are more contributors than pensioners to the EPS. But as the population of the country ages and more contributors turn pensioners (with many of them drawing a higher pension), the scheme could face more difficulties in the years to come. This is already reflected in the decline in contributions to the scheme. Annual accounts for 2020-21 indicate a drop in contributions to Rs.50,562 crore from Rs.51,953 crore in the previous year.

Millennial worker who just joined

The long-term sustainability of the EPS is a major concern.

Note: The projected monthly pension looks enticing. But over 27 years, even 6% annual inflation will reduce its value to Rs. 51,400.

This is not to say that the EPS would default on pension payments. The scheme is managed by the government and will continue to pay the pension as promised. Even so, financial advisers ring a note of caution. “People who have retired or are just about to retire may not face any problem, but those who will retire 15-20 years from now should be wary,” warns Sharma. Another problem is that the EPS is for life but there is no option of return of principal to the nominee or the legal heir after the death of the subscriber. After the member dies, the spouse gets 50% of the pension for life. So the risk of early death, within a few years of retirement, would mean very low returns on the money that flowed into the EPS. On the flipside, living longer till the age of 85-90 or beyond would prove bountiful.

Don’t rely on EPS alone

Experts say while the EPS could provide a tidy income in retirement, one should not depend solely on this income. “Inflation is one key reason why even the enhanced EPS pension may not be enough in retirement,” says Raj Khosla, Managing Director of MyMoneyMantra.com. Unlike the pension for government employees, the EPS pension is not linked to inflation and will remain constant. This means its purchasing power will decline over time. Even a modest 6% inflation will reduce the value of Rs.1 lakh to less than Rs.54,000 in 10 years. In 20 years, it would be worth only Rs.29,000. “The EPS pension can be an important but not the only pillar of your retirement plan. The retirement savings should be spread across various instruments, including annuities, fixed income and equity based investments,” says Joshi.

Benefits offered under EPS
The Employee Pension Scheme offers the following benefits to private sector employees covered by the Employees’ Provident Fund.

Pension for life to member and spouse
Pension starts at the age of 58 and is based on the number of years of service and the basic salary.

Pension to widow
If a member dies during service, his widow will get his pension for life or till she remarries. Two children will get an additional sum equal to 25% of the pension.

Pension for orphans
If there is no widow, two children of the deceased will receive 75% of the pension till the age of 25. If there are more than two children, the benefit will continue till the youngest is over 25.

Disability benefit
If a member is permanently and totally disabled during service, he will get full pension for life.

Early pension
A member can opt for early pension after 50, but he will have to take a cut of 4% for every year before 58.

Bonus years for long-term contributors
If the member has contributed to EPS for 20 years, two bonus years are added to the calculation.

Source – Economictimes

4 things investing is, and is not

Investing is NOT Hectic. Investing is calm and measured.

Today you can check the value of your investments on a minute-by-minute basis if you want. But just because you can doesn’t mean you should. Investors who trade more have lower returns, as Brad M. Barber and Terrance Odean demonstrated years ago. And checking your portfolio more frequently will inevitably lead you to trade more.

Doing nothing and sticking to selected funds for the long term can be a significant source of alpha in the long run. Of course, this requires something that many investors find very difficult to implement: patience and discipline.

Resisting that urge to adjust your portfolio becomes particularly difficult when you’re faced with losses. Loss aversion means you suffer losses more than you enjoy gains. And what’s still the best way to avoid losses? Don’t look at your portfolio.

Assume an equity portfolio with a 10% annual return and volatility of 15%. The probability of a positive return over any given year is 93%. As a result, an investor who evaluates the portfolio once a year will experience a loss once every 10 years or so. If the same portfolio is evaluated quarterly, a loss will occur about once every four quarters, or once a year. And if that portfolio is evaluated daily, roughly 120 days a year will register losses.

It takes superhuman discipline not to change a portfolio when you are confronted with losses 120 times a year. But the best returns in the long run are achieved by adhering to a well-diversified investment strategy that lets you reap the benefits of the different risk premia available to long-term investors.

To stay calm and measured, you need to turn off the noise and look at performance only sporadically, and avoid the temptation to tinker too often with your portfolio.

Investing is NOT precise. Investing is rough and dirty.

Investing isn’t watchmaking either. As an investor or portfolio manager, you cannot precisely manipulate the mechanics of the market the way a watchmaker can the mechanics of a wristwatch. If a stock or a bond has a portfolio weight of less than 2% or an active weight of less than 2% compared to the benchmark, it is almost guaranteed that the effect on the overall portfolio will not be meaningful in any practical sense.

And now think about the time spent analyzing the details of stocks that will end up with an allocation of 2% or less in the portfolio. Each of these details has a miniscule influence on the overall stock performance, and the overall stock performance has a miniscule influence on the overall portfolio.

Just because you can calculate risk exposures to the second decimal place and adjust portfolio positions to the basis point doesn’t mean you should. Fighting for every basis point is best left to money market fund or government bond fund managers who have to because of current central bank policies.

If you work in the equity space, across asset classes, or in any asset that has some volatility, always remember that even the best model can only explain less than 50% of the variation in returns when applied out of sample — and out-of-sample tests are the only ones that count.

What does this mean? Over 50% of your returns will be noise. And that noise will inevitably drown out any benefits accrued from fine-tuning a model or investment portfolio.

Investing is NOT rational. Investing is emotional.

The financial industry is incredibly innovative — mostly when it comes to reinventing the wheel. For most investors, the simple and transparent solution will do just fine most of the time. But every once in a while an innovation comes along that benefits investors as a class. Just think: Where would we be without the limited liability company, the stock exchange, diversification, the mutual fund, the index fund, options, or futures?

Thanks to all of these inventions, investing has become cheaper, risk management more effective, markets more liquid, and access to investments more open. Ultimately, financial markets are among the most democratic institutions in the world today.

But very often financial innovation is a recipe for disaster. Investing may be rational, but money is emotional, and when risks — or opportunities — materialize, emotions take over and investors make crucial mistakes.

I have made it a rule to recommend only those investments that I have experienced myself. If a new innovation comes along, I tend to add it to my own portfolio with a little bit of money just to know what it’s like to live with it. Experiencing a new innovation firsthand will elicit the same emotions in me as it will in my clients. And only then can I judge if the investment is appropriate for a specific investor.

Emotions cannot be imagined. As a portfolio manager or adviser, you have to experience them to improve your recommendations and decisions. Research shows that fund managers who invest much of their personal wealth in their mutual funds generally outperform. Similarly, advisers who eat what they cook tend to cook better.

Investing is NOT entertaining. Investment is boring.

Is there a television on nearby turned to CNBC, Bloomberg TV, or any other financial news channel? If so, please get up and switch it off.

Let me explain why you shouldn’t watch what I call “Bubble TV.”

The people working at Bubble TV and their counterparts at financial newspapers, investment newsletters, etc., are not in the business of providing good advice. They are in the business of selling airtime, newspapers, and newsletters. And the best way to attract attention is to appeal to the emotions and instincts of their viewers and readers.

“If it bleeds, it leads” is an old saying in the news business. Spectacular earnings surprises and cratering stock markets generate more viewers and readers than stories about meeting earnings expectations and stock markets grinding their way up.

“Experts” who want to be mainstays on Bubble TV have to entertain. And it is much easier to accomplish that by stoking people’s fears of a crash or their desire to get in early on the next superstar investment. As a result, Bubble TV is full of “news alerts,” “breaking news,” and pundits predicting imminent doom or eternal bliss — often both at the same time.

TV experts make bad investment advisers. So keep your TV switched off and focus on what really matters in investing: having a thorough understanding of each investment and how they interact in a diversified portfolio.

Source – Morningstar

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Monthly Archives: May 2023