It pays to stay invested in the long run…

The myth is equity investing is risky business. Find below a chart to show how it makes sense to stay invested in stocks in the long run. Holding stocks for a year or so may give negative returns but if held for more than 5 years returns have always been positive. (Even in 2008 when the markets crashed). So equity investments are not that risky if held for more than 5 years. If we have a good portfolio of stocks timing doesn’t matter, if held for more than 10 years expect double digit returns. To top it all the chart below only shows index returns & stock portfolios outperforming the index will give higher returns. Please note that returns calculated are only on the principle and not dividend, if included returns will be higher.

SENSEX Returns over the last 19 years
Returns (%)
Date SENSEX 1 3 5 7 10 12 15
Year Years Years Years Years Years Years
27-Nov-98 2782              
26-Nov-99 4705 69.13            
27-Nov-00 3969 -15.64            
27-Nov-01 3288 -17.17 5.72          
27-Nov-02 3174 -3.45 -12.3          
27-Nov-03 4989 57.18 7.92 12.39        
25-Nov-04 6035 20.97 22.44 5.11        
26-Nov-05 8889 47.29 40.95 17.5 18.05      
27-Nov-06 13774 54.95 40.28 33.18 16.58      
27-Nov-07 19128 38.87 46.89 43.22 25.19      
26-Nov-08 9027 -52.81 0.51 12.59 15.52 12.49    
27-Nov-09 16632 84.25 6.49 22.48 26.7 13.46    
26-Nov-10 19137 15.06 0.02 16.57 21.17 17.04 17.43  
25-Nov-11 15695 -17.98 20.25 2.65 14.63 16.92 10.56  
27-Nov-12 18842 20.05 4.25 -0.3 11.33 19.5 13.86  
27-Nov-13 20420 8.38 2.19 17.74 5.79 15.13 16.44 14.21
28-Nov-14 28694 40.52 22.28 11.52 5.96 16.87 20.14 12.81
30-Nov-15 26145 -8.88 11.54 6.44 16.41 11.39 14.80 13.39
30-Nov-16 26652 1.94 9.28 11.17 6.97 6.82 13.18 14.97
29-Nov-17 33602 26.08 5.40 12.27 8.37 5.80 11.72 17.04
No of Rolling Returns 19 17 15 13 10 8 5
Negative Returns 6 1 1 0 0 0 0

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Importance of nominee in a mutual fund investment

Providing a nominee may be a simple but important step in making a mutual fund investment. The importance of this step comes in when a nominee or legal heir has to claim the investment proceeds after the death of a mutual fund investor. A joint-holder, nominee or legal heir can claim the proceeds. The process is called transmission.

Asset Management Companies (AMC) have a common procedure for transmission of units, however, there might be a slight variation in formats or documents required across AMCs, but broadly the process is the same.

The nominee or legal heir should submit the required documents along with the letter requesting transmission of units to the AMC. It is necessary to contact every mutual fund house separately where the deceased person had investments.

There can be three situations:

  1. Transmission to surviving joint holders
  2. Demise of sole or all holders, where nominee is registered
  3. Demise of sole or all holders, where nominee is NOT registered.

In all the cases, surviving holders or nominees or legal heirs should submit the following common documents with the AMC.

  1. Letter requesting for transmission of units-It should be in the AMC’s specified format.
  2. Original or duly notarized or attested photocopy of death certificate of the deceased unit holder
  3. KYC confirmation of nominee or claimants or surviving unit holders
  4. New bank mandate in AMCs specified format with attestation from bank branch manager or a cancelled cheque with account number and holder’s name printed on the cheque or bank account statement. The bank mandate has to be given on bank’s letter head or, if on a plain paper, bank branch seal, employee name and number seal should be affixed on it
  5. FATCA self-certification

Now coming to the most important part, while in case of situation 1 and 2 one will require the documents stated above in case of situation 3 where nominee is not registered needs two additional legal documents- Indemnity bond signed by all legal heirs confirming the claimant and individual affidavit by legal heirs. However, if the claim amount is above a certain hurdle limit, the claimant will be required to produce a notarized copy or probated will or succession certificate by a competent court or Letter of Administration, which makes the process harder.

The problem arises if claimant’s name in the identity documents or bank record and AMC’s record do not match. For instance, the identity documents carries middle name and AMC’s record do not or vice-versa, or different spellings. So, while mentioning nominee, make sure the details match the nominee’s identity records. Also, if the claimant is a minor, all stated document of the guardian will be required. If all required documents are in place, the process will take up to 15 days after submission of request letter and relevant documents.

Finally, all these things are possible only if the investor keeps someone informed about his investments. If no one is aware of the investments, the investment will keep lying as unclaimed. So, make sure that you keep the nominee or someone in the loop about your mutual fund investments.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

The smart borrower…

As a smart borrower make sure you are taking the loan for the right reasons. Don’t borrow just because the interest rate is attractive or you can claim tax benefits. Here are a few basic rules to keep in mind:

Take on an EMI only if you can afford it: A smart borrower will never bite off more than he can chew. Typically different types of loan EMIs should not be more than a proportion of your monthly income. Your total monthly EMI should never go above 50% of your monthly income. Don’t take into account your future income. Times are bad, and the 10% increment you may have based your projections on could actually be only 6% or even flat, if your industry goes into a tailspin.

Type of Loan Maximum proportion of monthly income (%)
Home Loan 40
Car Loan 15
Personal Loans 10
All Loans 50

Keep the tenure as short as possible: The longer the tenure, the bigger is the interest burden on the borrower. If you take a loan at 9.75% for 10 years, the interest outgo will be 57% of the principal amount. This figure jumps to 91% if the tenure is 15 years and shoots up to 128% for a 20-year loan. In 25 years, the interest outgo is 167% of the principal. Borrowers are tempted to go for long term loans because the EMI is lower and they enjoy tax benefits on the loan. But this is a misconceived strategy because they end up paying a huge interest on the loan.

Take a simple term plan for big ticket loans like home loans: Banks usually try to push customers to buy a reducing cover term plan that covers the outstanding amount. However, a regular term plan is a better option because it continues even after the loan is repaid or if the borrower switches to another lender. Also, insurance policies linked to a loan are typically single premium plans. Regular payment plans are the best way to insure yourself.

Retirement corpus vs child’s education: Don’t dip into your retirement corpus to fund your child’s education. Education loans are easily available and bright students also get scholarships. But nobody is going to give you a loan for your retirement needs. Taking an education loan will not only keep your retirement kitty safe, but also inculcate a sense of fiscal responsibility in the child, who has to repay it. What’s more, education loans also offer tax breaks so the effective cost of the loan comes down.

Increase the EMI gradually to reduce loan tenure: This is the best way to repay say a 25 year loan in 10 years. For example:

Hike EMI by 10% every year Loan ends is in 10 years 2 months
Hike EMI by 5% every year Loan ends in 13 years 3 months
Pay one extra EMI every year Loan ends in 19 years 3 months
If EMI remains constant Loan ends in 25 years

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Debt Mutual Funds: Duration Funds vs Accrual Funds

A debt fund holds debt instruments, and these instruments pay a particular coupon (interest). An accrual strategy is holding a bond, earning the interest due, collect the principal at maturity and reinvest it in fresh bonds. Liquid funds, ultra-short term funds, short-term debt funds, income funds and credit opportunity funds primarily follow an accrual strategy.

A fund following a duration strategy seeks to gain from bond price rallies when interest rates fall. When interest rates fall, bond prices rise – since new bonds will carry a lower interest, existing bonds become more attractive and thus prices rise until yields match the new bonds. A duration fund will try to make capital appreciation from the bonds it holds.

An accrual fund does not try to time the interest rate cycle. Given the rate scenario and its own mandate, it will look for those instruments that deliver an optimal yield. A duration fund, on the other hand, will estimate the direction interest rates will move and adapt the portfolio to maximize the chances of bond price appreciation.

Duration potential is felt the most in government bonds (sovereign bonds or G-secs or gilts). Gilts are the most liquid debt instruments and also among the few instruments with very long maturity (10-20 years). They tend to therefore reflect rate cuts and rate cut expectations the most. Therefore, a duration fund will load its portfolio with gilts when it anticipates rate cuts. If you see a debt fund holding a large proportion of sovereign bonds, you will know that it is playing duration. These funds will have high average maturities (usually above five years). As gilts don’t pay high interest, the yield-to-maturity of these portfolios will be low. Investing in gilts is for the capital appreciation they offer and not for the interest component.

An accrual fund will primarily have corporate bonds or NCDs, commercial papers, bank bonds and certificate of deposits. It will have minimal to no holding in gilts. Depending on the type of accrual fund it is the average maturity of the portfolio ranges from a few weeks to a few months to a few years. Depending on the fund, the yield to maturities will be higher than duration funds.

When rates are falling duration funds delivers more than accrual. Accrual funds too use duration strategy in a falling rate scenario (as the top-rated corporate bonds they hold can be traded) to push up returns.

Duration funds are inherently more volatile. As bond yields and prices fluctuate on both actual and expected rate action, the NAVs of the funds will also fluctuate. Funds also actively manage the portfolio, upping or dropping the gilt holdings, adding to volatility. Apart from the volatility, the risk is that the fund gets the interest rate call wrong. These funds are generally meant for holding periods of more than two years.

Accrual funds have lower volatility. But they aren’t automatically lower risk than duration. Risk in accrual funds comes in when the funds hold debt instruments that are of lower quality or credit rating, called credit risk. Funds take this risk for the higher coupon such papers offer. Rating downgrades hit bond prices and thus NAVs. Defaults by shakier companies, though rare, can cause losses. So when picking an accrual fund, you need to be careful and look at the portfolio.

In some accrual categories, the credit risk is more or less clear. Liquid funds stick to very short-term papers of the highest quality. Income funds are meant for holding periods of over two years and these funds take limited to no credit risk. Credit opportunity funds make it a point to take high credit risk. It gets tricky in short-term and ultra-short term funds as some take credit risk in various degrees and some do not.

Duration suits investors who can take bouts of volatility in their debt fund returns. Dynamic bond funds are the best since they change their portfolio and strategy as per the rate scenario leaving little to do on your part other than sit tight. Gilt funds need timed entry and exits as duration works only on falling rates and thus suit only informed investors. Accrual suits moderate and conservative investors as they do not have much volatility and are stable.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

How to tackle fraudulent banking transactions…

Instances of banking fraud are becoming all too common in India. Seeing a rise in customer complaints regarding unauthorized electronic transactions the RBI in July released new rules which make it safer for customers to transact electronically.

The notification relates to- Customer protection – limited liability of customers in unauthorized electronic banking transactions. Now the onus is on the banks to prove that a fraud has taken place, but customers should inform the bank as soon as possible to avoid being penalized. According to the notification, “the systems and procedures in banks must be designed to make customers feel safe about carrying out electronic banking transactions”.

What do the banks have to do? Banks must ask their customers to mandatorily register for SMS alerts and wherever available register for e-mail alerts. Further, banks have been told to not to offer the facility of electronic transactions other than ATM cash withdrawals to customers who do not provide mobile numbers. Banks also have to inform customers that they should notify the bank as soon as possible of any unauthorized electronic transaction and that the longer they take to notify the bank, the higher will be price they have to pay.

What does the customer have to do? If the fraud happens due to negligence from the bank’s end, the customer obviously is not liable. For instance, if there is a glitch on the backend of the bank where customer details are compromised, then you will not be liable to pay. Or if bank employees are involved in fraudulent activities where they give away customer details. The RBI notification states that if a ‘third-party’ breach happens when neither the bank nor the customer is at fault and the customer informs the bank within three working days, here too the customer is not liable to pay.

So, to protect yourself and your money, the first step is make sure you apply for the SMS and email alerts service of your bank. The second step would be to intimate the bank as soon as you get the alert that money has been debited from your account. Do it within three days. If you do not, then depending on how long you take, your liability increases.

Now if the bank is at fault, you do not pay, but if the fraud or wrongful debit has happened because of your negligence, then you will have to bear the brunt. This could happen if you mentioned your PIN number or password in passing or left it lying around and someone used it without your knowledge. The good news is that even though this transaction has happened due to your negligence, if you report it to the bank before seven working days (and after three days) from receiving the debit message, the RBI notification says that the per transaction liability of the customer will be limited to the transaction value or an amount set by the central bank, whichever is lower.

Type of Account

Maximum Liability (Rs.)

Bank savings a/c


Other savings bank a/c


Pre-paid payment instrument / gift cards


Current/Cash credit/ OD a/c of MSME


Current/Cash credit/ OD a/c with limit upto Rs. 25 lakhs


All other Current/Cash credit/ OD a/c


Credit cards with limit upto Rs.5 lakhs


Credit cards with limit above Rs.5 lakhs


The above will be applicable only if it is reported within seven working days. If you take more than seven days, “the customer liability shall be determined as per the bank’s Board approved policy,” says the RBI notification.

Banks have to credit or reverse the unauthorized electronic transaction to the customer’s account within 10 working days from the date of notification by the customer. And once reported, in case of debit card or bank account fraud, the bank should ensure that the customer does not suffer loss of interest. If the transaction has happened on a credit card, the customer should not have to additional burden of interest. Also, once reported, banks have to resolve the case within 90 days from the date of receipt of the complaint.

RBI’s circular says that banks must provide customers 24/7 access through multiple channels like SMS, email, IVR and so on for reporting unauthorized transactions. A new facility that banks have been asked to provide is that of allowing customers to “instantly respond by “Reply” to the SMS and e-mail alerts and the customers should not be required to search for a web page or an e-mail address to notify the objection”.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Go on a Tax-Free vacation

Leave Travel Allowance (LTA) is a type of allowance which is given to an employee by his employer to cover his travel expenses when he is on leave from work. Sometimes it is also known as Leave Travel Concession (LTC). LTA is exempt from tax u/s 10(5) of Income Tax Act, 1961. Only individuals whose employers offer leave travel allowance (LTA) can claim it. You would have to take leave and actually travel to be able to claim the exemption. The exemption must be claimed by submitting proof of your travel to your employer; you cannot claim it directly in your income tax return.

LTA covers journeys made by any mode–air, rail or road. You can claim up to economy fare to the destination for national carriers (in case of air travel) and AC first class rail fare (for rail travel).

Some employers may offer LTA as a reimbursement. In such cases the tax exemption is available only on the permissible fare amount. While the entire amount is reimbursed, the payment made to you in excess of the exemption allowed, is taxed like salary. When LTA is fixed as an allowance, the exemption is allowed based on the permissible fare, while the rest is taxed like salary. For example if your LTA is Rs 50,000, and your actual fare expenses are Rs 28,000 for four members of your family, but the economy class air fare is Rs 20,000, the balance Rs 30,000 will be taxed as salary.

The claim must be made for the fare of the shortest distance to the destination, even though you may have made detours and stops in between. Where the destination is not covered by rail or air, first class fare of public transport such as a bus may be claimed. The tax benefit applies only to travel fare, not for connecting taxis or hotel expenses.

You are allowed to claim exemption for yourself, your spouse, two children, dependent parents and dependent siblings.

LTA can be claimed for maximum of two trips in a block of four years. These blocks are not determined by your employment date, the government fixes them. The current block of 2014-2017 and expires on 31st December 2017.

As of now, LTA can only be claimed for trips made within India & overseas travel is not allowed for exemption.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Public Provident Fund…Did you know?

The Public Provident Fund (PPF) is one of the most popular savings vehicles in India. One of the reasons for this is the tax benefit it offers – it comes under the EEE (exempt-exempt-exempt) tax status. What this means is that at the time of investment, the interest earned, and proceeds received at maturity are all tax-exempt.

Here are some lesser-known facts about the PPF that can help you make a more informed investment decision:

  • PPF comes with a lock-in period of 15 years. As per the Public Provident Fund scheme rules, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made. It does not matter in which month or date the account was opened. For example you made your first contribution in June 2014. The lock-in period of 15 years will be calculated from the March 31, 2015, and the year of maturity, in this case, will be April 1, 2030.
  • A minimum contribution of Rs.500 per annum and maximum of Rs 1.5 lakh per annum is allowed. You either make lump sum or monthly contributions, but it cannot exceed 12 in a financial year. Any contribution made above Rs.1.5 lakhs is not eligible to earn any interest.
  • As the lock-in period of the scheme starts from the end of the financial year in which the deposit was made, if you make an annual contribution you make a total of 16, and not 15, contributions during the tenure of the scheme.
  • It is recommended that one must invest in PPF before the fifth of every month in case of monthly contributions (in case of cheque, ensure that the payment to PPF is received). This is because the balance taken for calculation of interest is taken as the minimum between the fifth day of the month and end of the month. In case lump sum annual investments, it is advisable to do it before 5th April.
  • Only a resident individual can open a PPF account and joint ownership is not allowed. However, a minor is eligible to open a PPF account with a guardian. A guardian can either be the father or the mother (not both) or a court-appointed guardian. A grandfather or grandmother cannot open PPF account on behalf of their grandchild except in cases where both the parents have died.
  • Non-resident individuals (NRI), Hindu Undivided Families (HUF) or body of individuals (BoI) cannot invest in PPF. Recently, government notified that the day an individual becomes an NRI, the PPF account will be closed. The interest paid from that date till the closure of the account shall be equivalent to the post office savings account i.e., 4%, as against 7.8% earned by PPF.
  • Even though PPF has a lock in period of 15 years, it offers partial liquidity through loan and partial withdrawals. You can take a loan after 5 years and the interest rate charged on the loan is more than 2% of the interest earned on the scheme. From the 7th year as you become eligible for withdrawal, then you are not allowed to take a loan. Also, a subscriber shall not be entitled to get a fresh loan until the earlier loan has been paid off along with the interest. Only one withdrawal is permissible during the financial year.
  • Since PPF comes under the EEE status, any withdrawals made before the expiry of lock-in period is exempted from tax. However, you are required to declare that you have withdrawn from PPF while filing your income tax returns.
  • A PPF account cannot be attached by a person or entity to pay off any debt or liability. Further, even a court order or decree cannot make a person liable to pay off his debts using money from his PPF account.
  • If you don’t make atleast a minimum contribution, i.e. Rs 500, in a particular financial year, your PPF account will become inactive. To revive an inactive account, you will have to pay a penalty of Rs.50 per year for the number of years the account has been inactive along with a minimum contribution of Rs 500 per year.
  • If you discontinue your account, then you will not be eligible for loans and withdrawals until the account is revived by making a payment of penalty fees and minimum contributions. However, the account will be eligible to receive interest as per the prevailing rate.
  • After maturity, a subscriber has the option to extend the maturity period of the PPF account in a block of 5 years. The account can be extended for ‘N’ number of blocks of 5 years each. It will continue to earn the prevailing interest rate even if you do not make any contributions. However, this extension must be given within a year of maturity.
  • A person has the option to transfer his/her post office PPF account from post office to banks (authorized by the government) or vice versa.
  • PPF accounts are exempted from the ambit of wealth tax.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’