Conclusion
For the conclusion I would like to say that in spite of so much research and matter that has gone into this paper, it only covers a fraction of a fraction of the entire subject and topic of wealth management. As of today not even five percent of the wealth, both government and private, has come under the wealth management discipline. The opportunities are immense and there still remains a lot of scope for further study. Moreover as per the article dated 6th September 2008 in Hindustan Times it says that India has only 1% of Global Wealth Market.
Through this study I have not only realized the beauty and the benefits of wealth management but also the necessity of it.
Findings
It is always going to be a win-win situation for the investor and the amount invested under wealth management. Now especially with the advent of technology that communication time gap has reduced itself to being almost real time. That means zero loss of time. Moreover thousands of crores of rupees can be transacted upon with efficiency and no hitches of procedural delays. These mediums are reliable, fast, smart and intelligent. The advent of technology is what has been the main crusader towards enriching India.
Technology has facilitated demat accounts which I think is a major hurdle that has been overcome. Through demat now millions of transactions are possible through a single person which was unthinkable until recently. It would generally take days on end to process only one transaction.
Apart from that millions of dollars are saved on a daily basis only saving the ink and paper which would have otherwise been used.
Not deviating from the topic however if we talk about wealth management, it is an awesome tool to save time and money. The beauty of it is the more you employ wealth management strategies the more time you will save in earning that much money and you’ll consequently save money in the process. It is like a dynamic system where the growth of the money is not a linear addition terms but mostly in multiplicative terms.
Most companies may just perish due to not knowing how to manage their own funds. Dell for example came to a point in existence where Michael Dell didn’t know what to do and how simply because his profits were soaring and the company was expanding almost uncontrollably. At that point it not only becomes should-be-managed thing but a necessity. There have been instances where people and companies have been able to bail themselves out of situations only on the basis of the returns accrued due to the wealth management.
There is a very thin line between resource allocation and wealth management. In resource allocation one makes money more manageable whereas wealth management makes sure that one allocates the money to the right channels and gets a benefit out of it.
Today retirement has become a major concern. Today people are deciding to retire earlier and most will not have enough only on savings to last them their entire remaining life. Today I think it has become more important for the youth of the nation to recklessly indulge in wealth management. This will not only take care of his retired life but also enable extra income currently and may help in times of sudden crisis that develop during the course of one’s life time. Any individual’s needs for more income are undying. A youth may have a wife in the very near future. Then kids. More and more money will be required to lead a comfortable life in the future. Especially in an age of rising cost of living and cost of education.
Though wealth management, share markets, insurance, finance may sound scary (at least for the 60-80% of the people who fear numbers), the fact is it is not all that difficult. it may sound complicated at the beginning but once you get the hang of it you will almost laugh at yourself. I say this because I would always maintain a safe distance from anything related remotely to something as monstrous as finance. But then I realized that money itself is the source of survival, livelihood and the very basis of why anyone would or should work. And one day everyone has to deal with money. Dealing with money doesn’t start and end at any given points. It starts and goes on. So might as well be prepared when it is inevitable.
Wealth Management:
Global stock markets have rebounded sharply and posted hefty gains during the last four years, after bottoming out in 2003. Property and commodity sectors have done exceptionally well. Buoyed by rising global wealth, private banks and wealth managers globally are upbeat about the prospects for this sector. Notwithstanding the US sub-prime meltdown in 2007 and its attendant impact on the US and world economy, the core drivers for wealth creation including increasing integration of world economies, use of technology, changing demographics, creative finance, supportive governments, rule of law and immigration and trade are likely to ensure that wealth and correspondingly the wealth management business continues to grow at above average rates during the foreseeable feature.
Some of the current trends impacting the wealth management industry are:
Wealth Managers Seek Increased Share of Wallet
Unlike mass-retail financial services where a person deals with a large number of service providers, clients tend to entrust their wealth with no more than 2-4 wealth managers. This still means that very few wealth managers can claim to have at least 50 to 60 per cent of a client’s wealth. This is changing. Wealth managers are seeking an increased share of wallet. First, this is an excellent source of new assets, revenue and increased profitability, with low acquisition costs. Second, a greater share of wallet makes it more difficult for the client to leave. This has negligible impact on the wealth manager’s scarcest resource – the Relationship Manager.
Increasing Breadth of Offerings
Breadth of offerings is likely to be a potent differentiator for wealth managers going forward. As the range of products on offer for wealthy customers is quite large, wealth managers are moving into a hybrid producer-plus-distributor model. Wealth managers realize that it is not possible for them to produce each and every product. At the same time, they require a bouquet of products to acquire and retain clients. Alternative
Growth is booming in the Asia Pacific, especially in
Structurally higher margins will continue because clients demand complex and sophisticated products. In contrast, non-structural margins come about because of imperfections in the market and, eventually, these margins will be eliminated by
regulation, technology or competitive pressure. Clients are increasingly reluctant to pay for ad valorem charges and prefer paying separately for the advice – which incidentally is not related to the assets under management. Although the wealthy are prepared to pay premium prices for established exclusive and luxury products, they are increasingly reluctant to pay a premium for products or services that are simply re-branded mass market products, available at a lower cost elsewhere.
The current Relationship Manager (RM) model is under severe strain and needs re-engineering. Asia Pacific already has the lowest ratio of RMs to clients compared to the Americas and EMEA, and with anticipated growth rates this is expected to further deteriorate. Wealth managers have to
bring forth new strategies to increase the supply of available RMs and improve training for existing ones. Though poaching RMs from competition is likely to remain an attractive strategy, wealth managers are likely to look at training employees from other areas and at fresh graduates with wealth management qualifications to ensure an adequate supply of RMs. In addition, relationship manager training is likely to focus on areas such as third party and own products, AML and KYC policies, taxation and legislation update and financial markets updates.
Branding has always been important in attracting and retaining clients, now likely to get more attention going forward. In branding, the important features to be addressed are familiarity, positioning, differentiation and emotional attachment.
The composition of the wealth management clientele is changing rapidly. The number of
“traditional” HNW individuals continues to fall and this is being replaced by individuals with far greater financial knowledge and confidence, prepared to devote more time to financial matters. ‘Traditional’ clients are content to let their portfolio be managed by a wealth manager on a discretionary basis. ‘Self directed’ individuals, on the other hand, are confident of their own financial skills and are often reluctant to pay for advice. They tend to be very interested in the performance of their investments and use journals, newspapers and the Internet as sources of financial information.
Wealth managers typically come from retail banks wishing to expand into the investment space on one hand with brokerages, and trying to move into the ‘trusted advisor’ space at
the other end. Technology is bringing about far reaching impact on how competition plays out in this space. It is making it easier for new entrants to enter and for existing players to expand their offerings quickly. Worldwide wealth management offerings are provided by specialized private banks, retail banks, brokerages, investment managers and specialized personal financial advisors (PFA). In India this service is currently being offered by leading private banks, foreign banks and brokerages.
Solution Framework
Generic services offering model is going to play a big role in case of wealth management services. A HNWI client expects exclusiveness in services in a normal manner. In highly competitive market, key to success for a firm lies in offering exclusiveness in services delivery (high quality services on most personalized basis), going beyond the client expectations.
A solution framework with considered inclusion of following key elements would help firms in meeting and exceeding client needs towards sustainable business growth.
Quality of Service Level
Quality of service level provided by the service provider firm would the key determinant of growth and success in client acquisition, client satisfaction and client retention aspects.
In a sense, service offering could be developed in the form of partnership with the client based on trust and integrity, where the relationship manager remains highly responsive to client sensitivities and expectations.
Without over-emphasizing, a satisfied client would provide multitude of opportunities of growth of business – through deepening the relationship, direct / indirect referencing as well as cross selling of products. In the other situation of deficiency in service level, he would not hesitate to move the business to another firm.
This keeps strong emphasis on continued engagement with the client on the aspects of client expectation and servicing, rather than showing extra attention only during the period of client acquisition. Focused around client needs, a broad framework of service offering during whole lifecycle of client investment management would be revolving around: Anticipate, Analyze, Advice, Act and Monitor cycle.
Universal Service Offering
To meet the client needs in holistic manner, product and service offering range of the firm should be wide enough to cover the investment spectrum across its lifecycle.
In an ideal situation, a client would expect to deal with a single firm to get complete range of investment management services. However, for various business considerations of the service provider firm, in many situations it may not be a viable proposition to offer those services.
While universal service offering with assortment of services under single umbrella is not attainable in house, it could be achieved through active partnership and affiliation. But, due consideration is required that quality of service level provided by partners/affiliates does not get compromised in any manner. Any shortcoming in service quality, even if caused by partner/affiliate’s services, would be ultimately impairing
client satisfaction towards the firm.
Investment in People Processes
As relationship manager remains the face of the firm to a client, success of the firm would be greatly dependent on the skills, drive and enthusiasm of relationship managers (to take an extra mile), while bonding and dealing with any of client issues.
This aspect is more challenging than as it appears. This necessitates transformation of organizational philosophy towards its people and people processes contributing to business success. Firms would be required to invest heavily in human processes to attract, groom and retain a motivated team of relationship managers, who will make the real difference between winning and losing the game.
Pricing as a key differentiator to distinct the service offering from one firm to other may not be highly relevant in case of wealth management services. Focused on performance and quality of service, pricing in isolation will not make much meaning to service seeking clients. Client would always value the pricing from the quality of services received. He will certainly not mind paying extra, if he finds services offered
to him meeting and exceeding his expectations.
Delivery channel for service content and mode of communication has to be greatly customized – aligned with the client-desired vehicles. This would require a process of continuous re-inventing and re-defining the grid of delivery and communication channels to meet client expectations. Impact of technological advancements and its interplay on service delivery and communication method would certainly be an equally challenging aspect to be factored in, while designing such strategies.
While business potential appears to be quite high, existing business architecture still does not provide any sound basis to formulate technical roadmap. Added to that, dynamic characteristics of client profile bring an increased challenge in drawing a firm implementation blueprint.
In the given situation, any big-bang commitment towards technical implementation plan would not be a wise idea. A prudent approach would be to get started on modular basis with progressive integration of functional components in order of its functional significance. Gaining insight and confidence around the business processes, this could be gradually scaled over the period of time.
To meet the information technology requirements, a firm has several alternatives (or combination of alternatives) to consider:
Ö Service Bureau /ASP Model: A recent trend has been witnessed in the solution provider’s landscape. Many of information technology service providers have come out with novel solution for investment management / investment processing platform in the form of service bureau / ASP. This platform provides integrated end-to-end processing infrastructure and services including core of business processes of wealth management.
On the part of a wealth management firm, paying agreed charges to service bureau provider, option of service bureau completely eliminates the requirement of ongoing resource commitment and cost of maintaining information technology infrastructure.
While total cost of owning may be the key motivating point for a wealth management firm to adopt service bureau model, the key consideration of providing high quality of service level with enhanced responsiveness may not be adequately answered. The question remains to be answered is – what would be the key differentiator in service offering of two wealth management firms operating from the same service bureau?
Ö Stand-alone commercial software product/solutions: Pre-packaged solutions that can be focused to specific part of services or provide comprehensive end-to-end processing. These can be deployed independently or could be integrated with existing systems. Cost, customization and integration difficulties would be the challenging points.
A loosely oriented technical architecture with optionality and mix of Build – Buy – Integrate components would be considered as a good beginning point. To provide enough resilience and high business relevance, any of the considered option and associated structure should keep due provisions for the following key elements:
Ø Considering the complexity of business processes and involved business rules, rule based processing would be the core of processing.
Ø Decision support and client oriented analytics acquire more importance.
Ø Applications should provide adequate flexibility to incorporate manual processing interfaces
Key Challenge Areas
While immense business potentiality of this emerging sector is a driving point for most of the firms, they face many challenges in formulating winning services offering meeting the client needs. In the following section, we would briefly take a look on the key challenges area in the present context.
Highly Personalized and Customized Services
Unlike other stream of financial services, mostly being transactional /commoditized in nature, wealth management services require client specific solution and service offering. No one solution exactly meets the needs of other client. In a situation of highly personalized and customized nature of service offering, developing any form of generic service model does not support growth of the business.
Personal relationship driving the business
To meet client expectation of personal attention, mode of communication in wealth management services tends to be highly personalized. Thus, the conventional grids of communication, such as call centre, data centre does not fit well. Success of wealth management services heavily draws on personal interaction with the dedicated relationship manager, who takes care of whole investment management lifecycle for bunch of clients on one-to-one basis. This essentially requires service firm to invest heavily in human processes to groom and retain a team on competent relationship managers with cross functional skills.
Evolving Client Profile
The biggest challenge in providing wealth management service offering is to factor and reckon the evolving nature of client profile, in terms of investment objective, time horizon, risk appetite and so on. Thus, a service model developed for a particular client cannot remain static over a period of time. Any service model has to be flexible enough to consider the dynamic nature of client profile and expectations arising out of it.
The conventional adage – the more money you have, more effort is needed to manage it – proves to be otherwise in case of HNWIs. Generally, client involvement in managing the finance remains on the lower side. This brings onus of managing the whole gamut of investment and due performance single-handedly on the shoulders of investment manager.
Passion Investment (Philanthropy and Social Responsibility)
In the recent years a trend has been observed that bulk of investments by HNWIs has been directed towards passion investments (art, antique, jewellery, coins, unique assets, luxury), philanthropy and social/community causes.
As per World Wealth report, 11% of HNW investors worldwide contributed to philanthropic causes with a contribution over 7% of their wealth in year 2006. Ultra-HNWIs contribution was even more - 17% of Ultra-HNW investors that gave to philanthropy contributed over 10% of their wealth. In total, this equates to more than US$285 billion globally.
Against this backdrop, new breed of HNWIs expect to strategically manage the wealth and personal resources allocated to philanthropy purpose, in order to maximize its impact. This demands a relationship manager not just to be a passive financial advisor rather a passionate partner sharing interest and inclination of the associated client.
Limited Leveraging Capabilities of Technology (as an enabler)
In the recent times, we have witnessed technology a key enabler to help business to expand its market reach with reduced cost of services offering. Online banking and online trading/brokerage services are the best examples in this regard. Technology leveraging has helped services firm to achieve universal proliferation of market with substantially reducing transaction cost. As business rules and service definitions to guide the applications tends to be quite composite in wealth management services, leveraging the capabilities of technology to meet the business requirement may not be highly feasible in the initial years.
As business architecture is still evolving, a proven basis of resilient technical architecture and framework to support the emerging business greatly remains missing. In absence of this framework, any investment commitment towards application development / system implementation would be fraught with severe risk.
Intricate Knowledge of Cross-functional Domain
By very nature of wealth management, it not just involves matters of plain vanilla finance but has intricate relationship with many elements of domestic / international law, taxation and regulatory norms. In order to provide sound investment guidance, a relationship manager is required to have intricate knowledge of domestic/cross-border finance, accounting, legal and taxation subjects.
Wealth Management and Private Banking: Building a Proactive Model
Wealth management and private banking divisions are increasingly gaining importance in the banking sector, as banks in
Banks are currently looked upon by both corporate and individual investors in providing innovative financial solutions like selection of best managed products and structured products.
Differences between the traditional type banking players and complete solutions providers can be noticed in the existing industry players based on the fee income these players generate from wealth management and private banking services. The quality of advice and level of service play an important role in building a winning business model for banks.
Various wealth surveys conducted in the recent past suggest that investors need broader wealth management advice on tax planning, business succession planning, international Wealth Management and Private Banking Building a Proactive Model investments, art, real estate and other innovative investment options. Managing investor needs, aspirations and goals are the three key drivers for all the players to ensure customer retention and further penetration. Customer confidentiality is increasingly gaining momentum in the Indian space and is being promoted as important criteria by most players in their positioning.
Sophisticated financial products and solutions are no longer seen as value proposition by the ultra affluent investors, as these products with little variation are available from all the players in the market. The real difference stands out in the personal touch and technology of the service provider. Offering investors online purchase, sale and tracking capability in addition to personal touch are critical drivers of this business.
Right quality of advice and experience of the advisor are two important drivers of wealth advisory business. With more number of banking players now offering advisory services, attracting the right quality of advisors with good understanding of capital markets and experience becomes critical in developing a strong advisory model. Unfortunately, many players are experimenting with new talent in this space as there is a shortage of experienced talent.
Currently, banks are investing very little in training their advisors on market and economic trends. Very few players have invested in developing internal on the job training grounds for their wealth advisors. Moreover, very few banks have the so-called product specialist to guide their wealth advisors and clients. Product specialists help both internal advisors and clients in identifying market trends and opportunities well in advance. Portfolio regular reviews with product specialists help in building the client’s confidence and rebalancing the portfolio on regular intervals.
Attracting and retaining clients, places an enormous demand on expertise, technology and product capabilities. A complex range of services needs to be provided online and off-line. Personalized advice covering a diverse range of investment alternatives and related services (at a minimum, tax and inheritance planning and extending to real estate, art and gems) needs to be matched with sophisticated financial advice. Most individual investors believe they have a better understanding of their assets than their relationship managers do. They value personalized, timesaving service and expert advice on a wide range of investments. The challenge lies in dynamic implementation of investor suggestions and feedback and building a proactive model.
Practice Models and Fees Structure
Responding to continuous increasing demand for wealth management services by HNWI’s, many individual wealth managers, investment management firms, private banks and other financial institutions are competing fiercely amongst themselves to tap maximum possible market. Each entity invest considerable amount of time in deciding practice model that would address issues such as time management, income growth, client service and business growth in a satisfactory manner. Further due to intense competition amongst the service provider, it forces them to think hard on methods of fee structure to be charged to the clients. Let us see few of the practice model and fee structure of wealth management service.
Practice Models
There are three different ways of classifying wealth management practice models. They are as follows
1) Individual planners
2) Corporate firms
3) Team structures
Individual planner: It is further divided into three parts namely:
- The Hourly Planner
- The Niche Planner
- The Virtual Planner
The Hourly Planner: Many clients do not qualify for the need of full time wealth manager because of limited net worth. Moreover they cannot afford the costly fees charged by wealth managers for such services. Alternatively, some of them have sufficient knowledge about the wealth management and prefer doing it on their own, some of them feel insecure disclosing their all wealth to wealth manager. These clients under certain situations are not able to take right decisions at right time and feel
The Niche Planner: Clients wealth management goal, profit expectation, risk taking capacity not only varies from person to person but also from profession to profession. Niche Planners are known to provide services to certain group of clients, who have unique requirement than other people. Such planner builds expert level knowledge about the particular profession and takes into consideration the future prospects of the client’s profession while providing wealth management service.
The Virtual Planner: Leveraging the technology, wealth managers provide services to the clients through internet. They use advanced technological tools, in order to get in touch with distant clients and provides services at their ease and convenience. Though it involves high investment in initial days, this model helps wealth managers to reduce overheads cost by a great margin. Technology is also helpful in outsourcing certain administrative work and helps wealth manager to concentrate fully on his core job.
Corporate Firms: Corporate entities including private banks, brokerage firms and family offices apart from providing their core services, have now started providing wealth management services on a large scale. Such firms hire professionals and have offices across the world.
Private Banks no longer operate merely as banking destinations. HNWI’s in recent times, apart from asset management services, demands services to manage their excess wealth in manner that compliments their lifestyle. Major global banks with the help of robust technological infrastructure and extensive research provide comprehensive wealth management services such as tax advice, retirement planning, international property acquisition and so on.
Moreover they also provide guidance to personal issues of family such as security, travel, distribution of wealth to legal heirs etc. Family offices operated in three different models depending on the number of families served.
Single family offices serve only one family. Multi family offices serve more than one family, where one family operates as anchor family. Commercially family offices serves number of families, but there exists no anchor family.
Of these, Multi family offices are most renowned model. They provide services to a group of families, which share common needs. Sometimes assets of the families are pooled together, which results in economies of scale for wealth managers.
Team Structure: Alternative method of classifying model of wealth management is method of forming different team structures. Three widely prevalent team structures are discussed below:
i) Sole Model: Under this model, sole practitioner possesses requisite advisory talent and other client characteristics. This model is generally consider to be the first stage in career of most wealth managers. Such wealth managers prefer to remain in direct contact with the clients and hence do not hire more people and delegate responsibilities to them. Though they engage themselves in servicing few clients, they derive immense satisfaction from them. They have flexibility to choose the number and type of clients.
ii) Ensemble Model: This model involves multiple wealth managers working together, towards a unique goal. This model can be further classified into three types depending upon the kind of relationship maintained amongst the professionals.
The most simple and widely prevalent structure is Parent Company Team.
Second model is Self contained team, whereby experts from different fields are hired by the organization and they provide, whereby experts from different fields are hired by the organizations and they provide client service as a team. The cost incurred by this model is high as compared to parent company team but with large number of clients being served, the incremental profits may overshadow the cost.
Third model is Virtual team, where managers work themselves and consult the specialists as and when needed. Once the need is taken care of, there is no compulsion to maintain relation with the experts.
iii) Silo Model: This model is combination of solo and ensemble model. Under this model a group of solo practitioners come together and establish organizations, but however they have individual goals. They provide individual client services and earn individual profits. Since they operate from same office they share the overhead costs. Moreover they also share their expertise as and when required.
Fee Structures: Wealth managers invest their knowledge, time and resources for the client and in return expect decent profit for their sustenance. Unless profit is ploughed back, wealth managers cant grow and provide more advanced services to the client. At the same time increasing competition and ever increasing demands of the client has resulted in experimentation with different fee structures.
Depending on the model of practice adopted by the wealth manager, the fee structure vary from as simple as fees for a particular advice for an individual client, to a lifetime fees charged for multi family office. Generally there are four types of fee structures:
1) Percentage of Assets Under Management (AUM): It is a most traditional pricing mechanism. But, there exist a constant argument on which assets to be
included in AUM and which to be excluded. Further since the AUM keeps on fluctuating, depending on the investment activities, revenue of wealth managers also fluctuates equally. Moreover sometimes clients may suspect that in order to earn more fees, wealth managers would take more risk while investing client’s assets.
2) Hourly basis: Hourly planner and solo practitioners use this model on a large scale that has its roots from accounting and law firms. Fee charged depend on the time spent by the wealth manager in understanding clients goals, needs and thereby, providing advice. Though it looks simple, it can be difficult to keep a track record of exact time spent on a client.
3) Flat Fees: Depending on the services to be provided to the client, wealth managers decide a flat fee per year and charge them quarterly. Many large financial institutions are generally known to follow this practice. Only disadvantage with this pricing mechanism is that, the extent of service provided to client may increase sometimes, than what was agreed upon at the start of year. In those cases it becomes very difficult for wealth manager to ask for extra fees from client.
4) Percentage of Net Worth: Though it is less practiced it is an important fee structure.
Apart from above four pricing mechanism, a new mechanism called Unbundled pricing is emerging. Under this mechanism, the client is allowed to choose from the list of services, the services he intends to receive from wealth manager. Each service is allocated fixed basis points. After deciding portfolio of services, a consolidated fee is charged from client based on cumulative basis points of services.
It is very tough to identify any practice model and fee structure to be the best one. It rests with wealth manager to choose the optimum options depending on the services provided by him, characteristics of client, industry movements and competitor behaviour.
Wealth management: under the umbrella of the Income tax.
Wealth management is the need of hour. If we do not agree, then we need to think over it again. Income tax laws have already spelt out some of the basic attitudes, beliefs and strategies of the government towards economic growth. We may say that rebate under the small tax savings scheme is to make the citizen of country liable towards their one social objective of saving for oneself and one’s kith and kin. Maximization of wealth through strategic planning in the income tax law would make the deal sound better. Let us see the income tax law through two different dimensions i.e. individual level and company level.
Tax saving instruments:
At individual level, the needs of each one is unique so as the style and pattern of investing and managing wealth. Today, at individual level, professional like certified financial planner (CFP) carves out strategies for individual to satisfy one’s unique needs with various instruments of investing. The major instruments are
- Mutual funds through ELSS way.
- Life insurance
- Public Provident Fund
- National Saving Certificate.
All instruments are invested for taxation benefits. Each of them get rebate under section 80 C. But all the instruments has some pros and cons
1) Mutual funds through ELSS way: One should invest in such scheme if one lacks time and expertise to analyze and invest in stock market. Professionals managing funds are experts in such fields and have enough access to lot of information. The commonor invest in haphazard manner and ends up in investing one or two scrip as compare to fund managers who will never invest in same but diversifies the risk. One may invest in tax savers through Systematic Investment Plans (SIP) which tends to reduce the effect of fluctuations and is based on rupee cost of averaging i.e. money is invested throughout the years with ups and downs to minimize average cost of holding in volatile market. Mutual funds works on the
principle of never putting all eggs in one basket. All tax saver plans in long term give good returns.
2) Life Insurance: Thus is popular mode of investment and all investor tend to protect against the risk of one’s life. Insurance protects one against all odds that work against the investor’s life in monetary sense to the family members of investor. In case of death, the beneficiary gets the sum assured. Investor does not invest in pure insurance or term product plan, but prefers to invest in endowment or money back policy. Generally, the insurance companies help the people to cultivate the habit of saving the money annually though small but create the value for money in the long term. Insurance company has now discontinued guaranteed return products due to decreasing trend of bank rate and today ULIP has taken over the investing pattern of investor. The overall working of ULIP does matche with the mutual funds with the added benefits of insurance cover.
3) Public Provident Fund: A low risk option, one can invest in maximum RS.70000 annually in designated banks or post office. Currently one gets 9%tax free interest and is subject to change as per the government policies or implementing Exempt Exempt Tax (EET). The period of the scheme is 15 years and can be extended for 5 years thereafter. The best part of PPF A/c is that even court cannot attach this A/c for any types of dues payable.
4) National Saving Certificate: National Saving Certificate (NSC) is a low risk investment with tenure of 7 years backed by government. Rate of interest is 8% which is taxable.
Housing loan: An important question arise that if one is buying a new house, should one buy with the money he saved or go for housing loan???? If one does not have saved money then obviously he has to go for loan. But should one go for a loan if money is available????? If housing loan is taken then one get deduction from tax in two ways; first the interest paid is fully deductible up to RS.150000 and second principal paid is deductible under section 80C. Hence keeping one’s money intact he can go for housing loan and avail all the deductions. As the interest rates are firming up for last three years from 7.5% to 9%, it is advisable to go for fixed rate of interest.
There are various provisions in income tax laws. If one effectively uses those provisions, one can maximize one’s wealth. Thus when to invest, where to invest and how much to invest depend on the particular need of investor.
ELSS: Growing Strong
What is the traditional thinking of any investor??????
It is nothing but to generate more income. This indulges for a tax saving investment with a base in equity- Equity Linked Saving Scheme (ELSS). ELSS is equity diversified fund with its corpus invested in equities. It invests more than 90% of its corpus in equity market. In other words, it is an instrument where savings is linked to the equity. It has a lock-in- period for three years for its investor, comprising higher risk and returns as well. The main benefit attached to the ELSS is tax advantage under section 80 C where assessee gets deductions up to Rs.1,00,000 per year on investment under the scheme. The minimum amount under ELSS scheme for investing is Rs 500. Thus, this gives opportunity for small investors to invest and earn handsomely.
Advantages of ELSS
1) The main benefit of investing in ELSS is tax benefits. The benefit is given under section 80 C and it could be availed by any individual or HUF irrespective of their income level.
2) Investments are equity linked, so investors get higher returns which along with dividends are non taxable.
3) Capital gain on ELSS is not liable to tax as its investment focuses more than one year.
Disadvantages of ELSS
1) These funds are subject to high risk as investment is equity based.
2) The lock in period of three years is the main disadvantage of this scheme. This does not allow short term gain from this investment.
3) The past performances are not the predictor of the future, hence proper analysis has to be done.
Investment In Arts
It is widely accepted that the key to creating wealth is through building a diversified portfolio of investments with a long-term horizon. The recent performance volatility in world markets, particularly in the traditional asset class of equities has demonstrated the benefit of including alternative investment strategies as part of a diversified approach, especially those that have an established trend of showing capital appreciation over a longer term.
Study has shown that art holds demand in the market during an economic boom as well as a slowdown. Investing in art is one alternative investment strategy, which has been gaining increasing acceptance around the world. The increasing activity of art auction houses over the last decade has provided an important secondary market which has resulted in liquidity, promoting art not only as an object of pleasure but also as an inevitable asset.
The Indian Art Market
Art is an inherent part of Indian culture. Its presence plays an important role in Indian history and society. The following are the trends in the current Indian art market scenario:
Contemporary art grows as economies globalize: it is happening here and now
Growth of GDP & and the economy as a whole
An immense increase in purchasing power of HNI’s & NRI’s
Art is regarded as a trend for safe haven emulated by HNI’s & NRI’s
NRI’s looking for identity
Indian affluent looking for a new status symbol
Availability of documentation and authenticity of works of art.
Awareness about artistic significance and pricing of paintings
Growth of services and expertise within the art world
Market infrastructure is falling into place
Growing secondary market has resulted in liquidity.
No secondary market for any other collectable category
‘Never sell culture’ resulting in limited supply
Increasingly being viewed as a component of portfolio analysis and investment
An increasing realization regarding the limited supply situation for great works of art; hence they tend to command a high premium in price.
Investment in a new age market. Enter in early growth phase
Supply side has matured over 3 decades with established art history, artists and galleries
Buy side is consolidating after a break out
Market is firmly in the sight of affluent Indian Diaspora
Early mover scenario is still on offer
Asset has a long term investment perspective
Established artists have sustainable value
Younger artists have higher risk/higher return
Best value as an investment in times of economic depression.
Art Investment VS Other Investments
5 years
Percentage Return
With a simple buy and hold investment strategy, Indian Art has given a 2000% return over the last 5 years. This figure has been calculated by taking an average appreciation in value of paintings by 50 artists over the last five years.
The best Equity Mutual Funds have given a return of 1100% over the same period as compared with the Sensex which has appreciated by only 200% And property which is considered a safe investment has given a return of 250% over the same term.
Thus, compared to the other asset classes Art has out performed them considerably giving the highest returns.
Benefits
Buy side will dominate market for many years driving prices and growth market width and depth increasing every day
Well managed early movers will reap the whirlwind
Above average returns only expected from ‘niche’ asset classes such as paintings
Gold: King of Commodities Investments
Out of all the investment option available, gold is single, easier and safest to invest in. Physical gold is easy to buy, requires no upkeep, and great deal of wealth can be secured and stored in relatively trivial volume. Investment in gold is always welcomed by the analysts mainly due to depreciation of currencies and inflation. Investment in gold can be treated as hedging against inflation. Looking at stock exchanges gold is performiong very well as compare to debt instruments. It has been giving good returns of around 15%-25% covering on year to year basis. For short term, it may not be a better investment avenue but if one thinks for long term, gold can be a better investment avenue. If we take currencies, gold has increased 31% in terms of yen, 16% in terms of dollars.
Gold shares can be owned through mutual funds or stocks of gold mining companies. But after introduction of Gold Exchange Trade fund (Gold ETF) by World Gold Council across the world, trading on bullion market has become effective and it is now easier to own gold shares. These Gold ETFs are available in the stock exchanges called Gold Bullion Securities. Each share of gold securities will be equal to 1/10th of an ounce of gold and is supported by physical holding of gold in the custody of HSBC. Presently, these gold securities are the most efficient way of investment in gold. Only 0.3% management fees has to be paid towards insurance and storage including brokerage charges.
As volatility is always there with this metal, one can purchase it to invest for future once the price come down. Few analyst believe that after touching the specific price the value of gold will fall. But on other hand, few believes that price will increase to such a level where it ordinary person will find difficult to buy gold. So even if one buys now he is not going to lose anything. Gold will remain bullish in times to come and one can diversify one’s portfolio towards gold.
Real Estate: The Hot Market
Property has always been looked upon as lucrative investment. The government clearing 100% FDI investment on the automatic approval route in construction and development project in February 2005 has seen a buoyant boom in the real estate market. The real estate market in India is expected to touch US$50bn in 2008, is expected to grow at 30% per annum and is predicted to be one of the key contributors to GDP.
According to experts and analysts, investment in real estate is expected to yield between 13%-16% returns. The booming real estate sector has seen a host of new property developers entering the market which include both foreign and domestic developers. The boom in Indian real estate sector is mainly due to demand for official and commercial space. Also the economic growth of the country is strong reason for boom in real estate.
Reasons for Investing in Real Estate:
1) Higher risk adjusted returns as compared to various asset classes over a period of time.
2) Assured regular income
3) Capital appreciation
4) Inflation Hedge
5) Portfolio diversification.
Advantages of Investing in Real Estate Market
1) Theee is low correlation between real estate and other asset classes such as equities and bonds. Thus investor holding diversified portfolio of real estate securities across the world can yield more benefits than equities and bonds.
2) Investment in real estate are not prone to severe shocks as experienced in equity market and FII outflow from
3) Profits from real estate investments results from various factors such as:
- A dependable and growing flow of income
- Amortization
- Value creation (appreciation)
- Instant gain (bargain purchase and selling price)
- Government benefits (Tax deductions, etc)
- Hedge against Inflation
- Portfolio risk diversification
Disadvantages of Investing in Real Estate Market
1) A mere possession of real estate property without any intention to seel it, would not reap any benefits
2) Real estate requires expenditure for maintenance at regular interval of time.
3) When needed to sell, it is not easy to find a buyer.
4) The market value keeps on fluctuating
5) Real estate properties are bounded by geographical restrictions, because their value keeps on fluctuating with respect to changes in local laws, government policies etc.
Strategies of Investing in Real Estate
Cost approach: The investor should subtract the depreciation that would accumulate on the real estate, compare the present time value with the cost acquiring any other asset for the same amount and then decide to purchase the least cost investment.
Comparable Sales Approach: The investor should compare the cost of similar property that would have sold in recent past and considering the market trend, appropriate decision should be taken by the investors.
Income approach: The investor should compare the prospects of the income of intended property with other alternatives, keeping in mind the market trend, inflation, and other economic factor.
