Each week, I try and answer generic questions from readers. Here is this week’s edition. You can use the form below to ask your question. The tougher the question, the more I learn and hopefully more the benefit for readers. This week we consider questions on the PE of a mutual fund, health insurance for parents, renting forever and more.
Sanjay: I came across your website and got a lot to learn. I would classify me as an informed investor. I am travelling next week so bought your book on Amazon so that i can read it in my spare time. Faced a tough question so thought of asking you. My senior citizen parents had a New India insurance policy of 1.5L cover each at a total premium of Rs. 11000. In addition to this my employer has a family floater of 5L, my wife’s employer has a family floater of 6L – both of these cover my parents. Also my mom is a retired bank employee so her bank’s retiree organisation has a group mediclaim of 3L floater (for both parents) for which they pay a premium of Rs. 15000 I understand that an individual mediclaim is required for parents in case i change my job, blah blah blah…, hence had kept their personal mediclaim active. However New India sent a letter saying they are closing their Mediclaim 2007 policy and it won’t be renewed. They are giving an option to migrate to their current Mediclaim policy at existing rates. Now I doubt all the 3 group mediclaims would terminate parallel. Does it make sense to buy a costly personal individual mediclaim for my parents ? Even if they make a claim, it will always go to one of our group mediclaims . So i don’t see them using their personal mediclaim. Senior citizen mediclaims from private insurers charge 25000 for a 2L senior citizen floater, which I feel is too high and if invested for 3-4 years would create a 2L corpus to be used instead of the personal mediclaim cover. Could you please send the link to the article where you answer my question?
Pattu: Thanks for buying my book. If you do not wish to buy them a separate cover (which is taking a chance, the two of you could predecease your parents, become unemployable etc.), then better shift a few lakhs in their name right away to serve as an emergency corpus. Every action we take has a benefit and a cost. Some see the benefit first, I prefer to see the cost first. Sorry, I only had usual blah blah to offer.
Bobby: This was a post – How to invest a lump sum in an equity mutual fund – I was looking, especially in the context of one of your previous articles on the correlation of returns with NIFTY P/E ratio. I would like to know your thoughts on whether a mutual fund’s P/E ratio (such as seen on value research) should be considered, when deciding whether to invest in a particular fund. For example the NIFTY P/E is around 26 now, which is probably indicates that it is not a good time for a bulk investment. But if an MF I like has a P/E of around 23, (still high, but relatively better), would it be worth considering.
Pattu: Consider the PE of an index. You know all the constituents of the index. You know when they are changed and why and you get data on a daily basis. Now compare this with the PE of a fund. The key difference is that we do not know why a fund manager has changed a stock holding (either entirely or weight). In the absence of such key information, the fund PE is irrelevant in my opinion.
The PE of a fund is used as an indicator of investment strategy. Growth funds have a high PE and Value funds a low PE. But this is simplistic. A fund could have held on to a multi-bagger stock from the right it had a low PE and currently has a high PE. When the fund manager purchased it, it could have been (in his opinion*) a value buy. When we look at it, it may not seem so. So such considerations will affect the PE of a fund on a monthly basis.
Looking at the PE of an index fund and investing tactically to reduce risk is absolutely fine because the index construction is well defined.
However, looking at the PE of an active fund is like judging a blog by its website design.
* The notion of what is growth investing, growth stock, value investing, value stock, large cap, mid cap, high PE, low PE ….. are purely opions. And opinons are not facts.
If it worries you too much, invest in a fund like Quantum Long Term Equity or ICICI Dynamic. That will try and limit the downside depending on market opportunities available. So you can always invest in them and let them figure it out.
On a daily basis, I would prefer to worry about my asset allocation and not what the fund manager does or when to invest. Back-seat driving a mf is not a good idea, imo.
SD: I am afraid to invest in debt funds because of my fear of calculating taxes for different transactions and also navigating a complicated tax form when I have such taxes to pay. So much so, that right now I am rebalancing my portfolio by moving money into an arbitrage fund thinking that a year from the investment, there will not be any tax related hassles should I need to move money out. I am a government servant and therefore I pay all taxes (employer deducts), and I consider taxes an important social responsibility. Therefore, I am primarily looking for a tax software (I prefer the comfort of home) that does these calculations and makes returns easy. Another result of my fear is a 85 % equity MF (conservative funds) investment which is really much higher than it should be (here I am only considering my personal MF investments). I console myself by thinking that PPF and NPS included it will be much less, but it is only an excuse and not a solution. I would really appreciate any suggestions or help in this regard.
Pattu: I think you fear is unfounded. unlike a fixed deposit, you need to pay tax on debt funds only when you redeem. A simple excel sheet with a list of all your transactions and first-in, first-out logic for redemptions is all that you need to compute the purchase price and capital gain (before indexation). the ITR2 form will do the rest.
You can always cross-check your calculations with the CG acct statement from amcs before the end of FY, pay necessary tax (adv tax requirement will not be there for you, as you had TDS) and then use that information to file ITR.
sunil gomes: The ultimate guide to travel and ultimate travel training kit is both separate and we have to buy separately. This Rs. 199 is the price of the book only or both. Pls advise. Thanks.
Pattu: They are both one and the same.
Sid: Hi Patty, I have been doing SIPs since 2009 in 5 funds and the returns are in the range of 17 to 20 percent until now. My question is if it will be a good strategy to redeem them now and invest the amount again via SIP along with my regular SIP investment. I have this question because I feel we might see a Big crash like 2008 in few years and this way I would have reaped the benefit of growing market of past 8-9 years and can take advantage of the crash, if it happens. Please to clarify this for me. Regards, Sid
Pattu: You will take advantage of a crash only if redeem now and invest it again after the crash, then you assuming that after you invest the market will pick up again! That is a fantasy!
All I can say is, focus on the asset allocation needed for your goals. If you must tactically change it, follow a proper plan and not your feelings. SIP has no discipline associated with it. It is just dumb automation. Tactical investing needs a lot of discipline. Question is, are you up for it. Only you can answer.
A Ram: From last posts, i have been hearing direct MF is better than regular MF as there is no commission to anyone. But how one can switch from regular to direct?
Pattu: Please see How to Invest in, or Switch to Direct Mutual Fund Plans
Vandhi: If i use conservative estimate like 10% return from over all portfolio for my goals, I am unable to fund the Monthly required investment. But if i change to Aggressive ( 80:20) Asset allocation and return expectation of 11%. Then its possible to fund my goals. Should i continue aggressive allocation till mid of the goal and change conservative after that period. It gives me psychological comfort zone that i can invest all my goals when I choose aggressive profile 🙂
Pattu: Yes, pease use the aggressive allocation. Once your wealth grows a bit, you will feel more comfortable to become conservative 🙂
JL Bansal: I bought and read -You can be rich too.It is easy to understand and easy to implement.Well done Pattu Sir. Your Plumbline is also very informative.Dont discontinue it.November edition is awaited.Dont worry about critics.Your admirers are manifold.
Pattu: Thank you. Truth is, many of the critics to Plumbline are saying so only with my benefit in mind. So I have no issue with that. Yes will post plumbline each month. My only request to readers is that they should not expect funds to change each month. Otherwise, the whole point of the exercise is lost.
T.Dayalamurthy: Sir, Would the merger of existing funds, to conform to SEBI categorisation, result in a reduced NAV of the funds in new avatar? What is the probability that the new fund will perform, by and large, as per the historical trend of the old fund? Is there a possibility of AMCs taking present investors for a ride in the name of new funds? How can SEBI ensure/protect present investors from this possibility?
Pattu: The merger will not affect investors in any way except for in the form of taxation and only if they wish to exit. The probability of the new fund performing is as much as the probability of the old fund performing. I would suggest that we not speculate and take things as they come. I believe this move will be beneficial in the long run.
Ganeshan venkatarama: For a taxable income of rs.10,50,000/- how much will be the tax. Can you show the step by step calculation arrived at, viz. First 2.5 lcs, to be reduced out of 10,50,000/-, and the next 8.5 lacs tobe arrived at a particular percentage, etc.
Pattu: Please use this tool: income tax calculator
Venkatakrishnan J: I have been investing Rs 5000 in PPF for the last 4 years, is there a way where in i can stop this or reduce it by keeping it to min investment and invest the rest in a quality ELSS instead.
Pattu: Rs. 500 per financial year is necessary to keep the PPF account alive. That is the rule. No comment on your idea.
Hema: Sir,. My query is regarding health insurance….l, Husband,son have an individual policy of 5 lakhs each…I want to take a family floater for 5 lakhs..is it a good idea to opt for health insurance offered by banks ..like syndarogya by syndicate bank as the premium s are lower than that of insurance companies. Regards. Hema
Pattu: Take the bank policy and compare it word for word with an equivalent policy offered by the insurer tied up with the bank. Then you can understand the differences. Please note that these bank-insurer arrangements can be dissolved at any time. So do not opt for it unless you have no money to space.
See an example here: Health Insurance from Banks: What to look for, How to buy.
krishna: Dear Pattu Sir, You may laugh at my question. What do you advise someone who is in early forties who doesn’t have own house. If we use our savings to fund down payment so as to keep the emi to manageable level it will wipe our savings or if we maximize loan amount, EMI will be too stiffling, In current situation of Global slowdown how do we plan in this case? Is there are rent forever calculator?
Pattu: It is a pretty serious question! One for which there are no easy answers! If you have skills that are employable, then save for the down payment and get an EMI that will not be stiffling. I am assuming that you reasonably young.
Rent-forever-calculator: The calculation is simple. All you need is to add the rent to your expenses and re-work the retirement calculation. Before you do that, learn some de-stressing exercises! If you are in your late 40s or mid-50s, renting untile retirement and then buying a retirement villa is a decent option. If you are younger, it may be tough to say in rent for so long.
Saisundar: Sir, unfortunately, lot of misselling happening by quoting such tax saved as instant saving. I have even seen LIC agents do it. Good to see these myth-busting articles. However, I feel, instead of looking at tax saved as a percentage of total income, using the marginal tax rate is the right measure because that is the actual impact of undertaking this activity or now. For eg, in this simplified case, if someone with 10.5L inc at 30% bracket uses 50k in NPS, tax does reduce by 15k.
Pattu: This is a comment to: Myth busted: You do not get 30% returns by investing 50,000 in NPS!
The essential idea is, when we money saved is money earned. We only mean that we should save more (I have no issues here). But to take that saying too literally and assuming money saved = money earned = return is folly.
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