What to do with your money right now?

If you are just retired and with plenty of cash, retirement benefits, naturally you will have a dilemma what do with the money safely with maximum returns, liquidity and with minimum income tax liability. While equities and mutual funds seems to get you good returns, never go by television recommendations unless you have in depth knowledge of what you are set up to do.

• Never lose money. Focus on capital preservation strategies.
• Remember, risk exists every where. 
• Spread your money across asset classes; debts, equities, mutual funds, real estate and gold. 
• Retain certain amount of cash both at home and in bank to manage unforeseen situations.
• Make sure to have enough life, accident and health insurance cover for you & family.
• Stay away from hyped markets. That would be the right time to exit.
• Avoid cryptocurrencies unless you are tech savvy, prepared to gamble and lose.
• Don't lend money to friends & relatives. You may end up losing money and also relationships.

INSURANCE

• Insurance is not investment. It is the price you pay for some kind of protection of your family against contingencies of unforeseen events like death / accidental death / hospitalisation shocks. 
• Do take appropriate life, personal accident and mediclaim policies for self and family.
• Don't buy equity-linked insurance plans (ULIPs). Your money goes to the agent and the insurer and not into your investments. They are losing propositions.
• Buy either term policies (these are the cheapest) or buy money-back schemes, which are also cheap but you get your money back. Read the fine print carefully rather than trust an agent's verbal assurances.

80C INVESTMENTS

• Investments in PPF, NSCs, 5 year Bank deposits, NPS etc. may save you on income tax liabilities, But be aware of 5+ year lock in periods.

EQUITIES

• The last two years equities have seen terrific returns from the stock market. Is the economy booming? No, but a lot of investors hope that it will start growing faster. 
• The World Bank and other institutions forecast that growth should accelerate in 2018-19. Many savvy investors have already entered the stock market on that expectation. 
• As more money has come into the market, it has boosted share prices and created a positive feedback loop where investors have pumped even more money into stocks.
• Despite forecasts, markets could go in either direction.
• Unless you are an active watchful person, on daily basis, with propensity to exit as per strategy, risks are high.
• Index funds have shown persistent growth over years with lower risks. Invest in less risky index funds rather than in risky equities.
• Equities may not get you periodical returns but in long term they are sure get you impressive gains.
• Good to be a equities trader rather than and equities investor.
• Those who have time and inclination to do their own research may invest directly in stocks or via equity mutual funds. The second route is fire-and-forget. Both methods can fetch great returns. Both methods also carry the risk of capital loss.
• May be it is good to stick to mutual funds and commit to systematic investment plans (SIPs) for three years, or longer. These are likely to fetch excellent returns.
• The economy may recover. But uncertainty exists.
• Series of assembly elections and a general election scheduled in the next 15 months. Political uncertainty might cloud short-term returns. What happens if there are apprehensions that the Narendra Modi government will not return?

DEBTS

• Debt comes in many shapes and sizes. Bank fixed deposits are the default option. You can also buy mutual funds dealing in different types of debt. In addition, you can buy corporate debentures, or subscribe to corporate fixed deposits.
• Interest rates rise when inflation rises. If inflation rises, the value of money erodes faster. If interest rates rise, any portfolio of previous debt instruments loses value because that same money invested now could be earning more interest.
• Bank deposits are safest, highly liquid but with low returns. The new FRDI Bill highlights the fact that bank deposits are not guaranteed beyond the limit of Rs 1 lakh. That limit was set in 1993. The limit might get raised to Rs.5 lakhs, prior to the passing of Act. Be informed of this.
• Avoid PSU banks with huge NPA's. Also avoid private banks with low equity, lower reserves and higher NPAs. Any government would be reluctant to take this step, fearing a political backlash. Since many PSU banks are struggling to cope with bad debts bail-ins are now neither impossible, nor illegal.
• Mutual funds exploit changes in interest rates. Safety varies. Mutual funds that focus on corporate debt give much higher returns but take larger risks. It's important to understand that you can lose capital in a debt fund. So understand safety, risks and returns before investing.

REAL ESTATE

• Real estate is entirely local market. The investment is illiquid. Selling may take several months. But returns are impressive. 
• This segment has huge percentage of 'black money' intertwined with 'white money'. 60:40 is the default ratio. Even 80:20 is not uncommon. 
• Booms and busts are cyclical and occur side by side too.
• Sometime legal complications might get your investment locked for several years.
• Apart from politicians, corrupt bureaucrats and unethical businessmen, you may get entangled with mafia and local goons.
• So invest only in legally clear properties. Obtain the help of known advocates and chartered accountants. Remember brokers are not your friends.
• Stay away from hypes.

GOLD

• Gold and precious metals are the age-old hedge against inflation and uncertainty.
• But gold yields no interest and capital appreciation is uncertain.
• Making charges for jewellery add considerably to cost. It's still worth investing as security. 

Neither a borrower nor a lender be ... William Shakespeare

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Managing money wisely

• Inflation, taxes, government policies, geo-political situations and economic cycles affect all investments. 
• The day you part with your money, you have taken a risk. Bigger the risk the greater scope for higher returns.
• Holding cash is worst form of investment, which depreciates with time in an inflationary economy like India.
• Understanding risk and managing prudently helps protect wealth and generate higher returns. Saving at the beginning of career alone is not enough. What you do with savings that will help staying ahead is more important.
• Bank fixed deposits are fairly safer but its interest rates falls short of inflation rate.
• Debt mutual funds that invest in bonds for short-term goals returns increase as bank FD interest rates fall. The average returns of such funds over a period of five years are around 12-17%. While FD interest is taxable, debt mutual funds held for three years or longer, you can adjust your gains against inflation, with indexation. Any capital loss can also be offset against capital gains on other investments, like shares or properties sold. 
• Debt is not a bad thing, if used correctly. While education or home loans are good debts, credit card debt or a personal loan, to buy something you could live without, is a bad debt.
• Staying debt free is important because debts carry much higher interest burden than what you earn on your investments. As retirement approaches one must become completely debt free to have peaceful retired life.
• Stocks carries considerable risk although liquidity is good. Hence invest that much money which you can afford to lose. Stock or commodities trading, while returns could be high, risks are also higher if traded without research & strategy.
• It is always good to buy blue chip stocks when the markets are down, at a time when nobody is buying and everybody's selling, for long term holding. Investing in long-term equity mutual funds (MFs) is an option. The risk is higher if your holding them is for few weeks or months.
• Overall, the Indian stock markets have returned a good 10-11% compounded annually over a 10-year period, despite the ups and downs.
• Opting for a systematic investment plan (SIP) where you invest a fixed amount of money every month regardless of market fluctuations suits for investing salary surplus amounts.
• The basic principle of investing is to reduce your risk as you get older. A common thumb rule is that individuals should hold a percentage of stocks equal to their age in bonds, government debt and other safe assets and rest in equities. For a 30-year-old, 30% of the portfolio should be in bonds, government debt and other safe assets and rest 70% in equities.
• If you are in your 20s, 30s or even 40s and have years before you retire then "take some risks and opt for more volatile investment that will potentially give you more returns in the long term". However, if you are retiring in the next few years, depending on your circumstances, invest in a conservative manner.
• Always look at big-ticket expenses (child's education or marriage, retirement) that you could incur over the years. Keep aside money for contingencies and have a plan for a fixed monthly income after retirement (through pension, post office or mutual funds monthly income plans, senior citizen savings schemes, FDs and bonds). Not everything will go as per plans, but planning is imperative.
• Insurance is a premium for someone to pay your family a big sum of money, if you die. That premium is just a cost. For peace of mind, it is important to take insurance that covers health, disability, accident, life and property, you should only buy the cover you really need. The life insurance cover's simple thumb rule is to multiply monthly expenses by 300. You may not need life insurance if no one is dependent on you.
• Remember insurance payments are not investments. Insurance is good. Investment is good. Combined into a single product, they make you poorer.
• Real estate, with low risk over long term, is great investment usually with very high returns but with very poor liquidity. Therefore invest into real estate that much money which you may never need it. 
• Investing in rentable properties is a good idea to get some monthly income.
• Spread the Risk. Research carefully and diversify your investments, placing pre-decided amounts in different asset classes: equity, mutual funds, bonds, FDs and property. Rebalancing and realigning your portfolio at definite intervals, according to your goals and risk appetite, is a good idea.
• Invest in tax saving instruments like PPF, ELSS etc for minimizing tax outgo.
• Spend wisely. Overspending is a bad habit. Before you buy anything ask yourself: Am I buying this because I want it or do I really need it? Can I live without it? And, can I really afford it?
  Remember the words of Warren Buffett: "If you buy things you don't need, soon you will have to sell things you need."
• As lifespans lengthen, the need for money between the ages 70 and 85 increases because of medical expenses, medical insurance premium etc increases. At this age, people need house help and insurance doesn't cover everything. The costs involved in maintaining an older person, who is not fit, is much higher than the expenses of an average person.
• Beware of credit cards which are good, if used judiciously. Otherwise small print terms and service charges are bound to make you poorer, in case of reckless spending using card.

Whatever you decide to invest in, do it regularly. Do not watch your investment too often. Do not speculate. Stay invested for the long term. Your money will not only be safe, it will grow many times over. 

Neither a borrower nor a lender be,

for loan often loses both itself and friend ... Polonius

When real estate become liability

It will be the middle class that accepted the notion that "real estate is the foundation of family wealth" that will be strip mined by higher taxes on immobile assets such as real estate. 

At law courts throughout Greece, people are lining up to file papers renouncing their inheritance. They are turning their backs on what used to be a pillar of Greece’s economy and society i.e. real estate. Growing personal debt, declining incomes and ever higher taxes as Greece’s depression grinds on have turned property and the dream of easy money into dread of a catastrophic burden. Many Greeks went from paying almost no taxes on real estate to not having enough money to pay. 

Assets that once held or gained value now carry high costs of ownership and lose value.

1. Governments desperate for tax revenues raise property taxes, which depresses sales and future price appreciation.
2. High debt levels and high property taxes trigger foreclosures and forced sales that further depress the market with high inventories of unsold & unrented homes.
3. As sales decline, appreciation can no longer be counted on to enrich owners. Instead, owners fear declines in value and higher taxes. This further depresses sales.
4. High debt levels become even more burdensome as property values fall.
5. Rather than offer a means of building and protecting wealth, real estate becomes a liability that destroys wealth via payment of taxes and declines in value.

While it can be argued that Greece is a unique situation, a cumbersome, costly bureaucracy of land transfer coupled with soaring taxes, perhaps Greece is simply early to the party.

Governments everywhere are facing fast-rising pension and healthcare costs, and the need for more tax revenues will skyrocket once the global recession trims income, payroll, business and sales taxes. Additional taxes on assets that can't flee the country i.e. real estate become extremely attractive.  

PM Modi announces demonetization of Rs 1000 and Rs 500 currency notes

PM Modi announces demonetization on Nov 08, 2016.

PM Narendra Modi said the move was aimed at curbing the negative impact of fake currency, black money, corruption and terrorism on the nation's economy. New notes of Rs 500 and Rs 2,000 would be released and circulated soon.

Pakistani spy agency ISI was pumping counterfeit notes of Rs 500 and Rs 1,000 to finance terror activities within, even earning a handsome profit of around Rs 500 crore per annum in the process. While RBI spends Rs 29 to print a Rs 1,000 note, terror financiers incur a cost of Rs 39 per ever Rs 1,000  – but manages to sell it in India through various illegal channels at Rs 350-400.

While the told reasons are impressive and in the interest of the nation the untold reasons are purely political.

The principle untold reason is UP Elections scheduled for Feb/Mar 20017, just few months away. The recent UP Election survey has put Mayawati in the lead, BJP just able to achieve 170/402 and followed by Samajwadi Party in the forth coming UP General Elections slated for Feb/Mar 2017, paving the way for formation of coalition government by Samajwadi Party, Mayawati and Congress thus relegating BJP to opposition benches. Samajwadi Party and Mayawati had access to lots of black money for election spending and for BJP it would be an uphill task to form minority government. The recent surgical strikes by Indian Army on Pakistan based terrorist camps has its telling effect on BJP fortunes improving in UP election prospects but still falling short of absolute majority for BJP. Now with demonetization effectively disarming rivals Samajwadi Party and Mayawati will push BJP prospects towards absolute majority. This would also nullify any possibility of Samajwadi Party, Mayawati and Congress forming coalition government thus relegating BJP to opposition benches.

Govt notifications and Circulars dated Nov 08, 2016.

The devastating immediate effects are felt by near zero business in all shops & establishments, Malls and dwindling state government revenues. Upset KCR met Governor and expressed his displeasure due to projected revenue loss of Rs. 3,000 crores per month which effects salary payments, funding on going projects & new projects on drawing board. Ironically TS govt is solely dependent on revenues from Hyderabad city which are either real estate or commercial & other taxes with black money as its base, which will vanish immediately and recovery is slow process and will reach different levels. Realizing that he is too small to take on Modi, his office denied having spoken this matter with Governor following day. I don't think CM meets Governor just to have a cup of tea ignoring all teething issues.

My View:
Aside political gains for BJP, demonetization of Rs 1000 and Rs 500 currency notes effectively evaporated the entire 'silly money' in the hands of corrupt politicians, corrupt officials and unscrupulous businessmen that has been parked in real estate and housing markets. 

In India, every body talks bad about black money and tax evasion and there is no body who doesn't deal with black cash and evades tax at every opportunity. This reminds me of Dhirubai Ambani challenging members of FICCI in 1970's, who hasn't dealt with him for profit, if he was unscrupulous.

The other good & bad effects are

• BJP disarmed cash rich (silly money) opponents Samajwadi Party and Mayawati in the forth coming UP elections improving its own chances of winning.
• Corrupt politicians, corrupt officials and unscrupulous businessmen hoarding gunny bags of black money are left with waste paper not even worth toilet tissues.
• Real estate deals have collapsed especially in secondary small deals market hurting small players. Real estate recovery will take at least six months and will never be the same again.
• Real estate will become affordable to some middle class people for some time at least.
• Property valuations with 50:50 white & black have lost valuations by more than 50% and owners are impoverished.
• State government will end up losing lots of money towards stamp duty collections of real estate deals.
• While black money hoarders & users are not more than 10% population, remaining people are subjected to enormous difficulties during the transition at toll gates, small shops, small traders small people who doesn't use cards at all and depend only on cash transactions, non availability of small change. Added to the infrastructure in banks & post offices is grossly in sufficient to process currency exchanging/depositing for genuine 90% people. Daily wage earners life is severely disturbed during this transition which may last about 2 months for no fault of theirs.
• While urban people are less dependent on cash with usage of cards & net banking, rural population is solely dependent on cash only. For no fault of theirs they need to go nearest town for exchanging currency and if lucky they will be successful same day else they may have to make several trips before completing exchanging.
• Almost all retired & old people keep about a lakh of rupees at home for managing medical emergencies. They would be subjected to make a trip to bank for depositing this old money and later with drawing new currency. In the intervening period they would be cash less.
• All contractors etc will general disburse lots of cash as weekly wages to their laborers. These laborers weekly earnings will get delayed and consequently even their food will get effected.
• The list could go on and on. 
• The rich seemingly might lose some money (earned effortlessly with manipulations and connections) and continue to live in comfort and the losses any way they will make it good again and, it is the poor and middle class who would bear the burden of the process and its defects arising out of politically motivated gimmicks and adventures.
• Jaitley and Urjit Patel could have done some research to mitigate the process burden on poor, middle class, rural people, pensioners & senior citizens, patients, traveling public and daily wage earners are least effected. 
• The benefits highlighted by Modi, Jaitley & Co are just imaginary and exploded where as real benefits could be far less to the nation especially after discounting negative effects. If all this cash goes into our banking system, as highlighted by Jaitley, it may or may not generate more taxes to exchequer, but banks runs the risk of collapsing with falling prey to vultures like Mallaya etc around.
• Recall January 1978 Janata Party demonetizing Rs.1,000, Rs.5,000 & Rs.10,000 notes and I never felt any positive effect except that Indira Gandhi & Congress leaders lost all their cash meant for political expenditure. However, she returned to power within two years despite loosing all silly money.
• Finally, even though government is empowered to take hard decisions in the larger national interest, subjecting common people especially vulnerable classes to unbearable hardship is neither appreciable nor pardonable.
• Bulk of the corruption money is in gold & diamonds, real estate, benami bank accounts or in foreign country accounts which is safe now. How Modi will attack this? No answer. Let us see.
• If Modi & Jaitley were about black money menace and corruption, they would have demonetized Rs.500 & Rs.1000 notes and and replaced them with Rs.50, Rs.100 & Rs.200 notes only proving difficult for corruption transactions and hoarding that money as well. Demonetization of Rs.500 & Rs.1000 notes had definitely eliminated black money stocked but replacing with Rs.500 & Rs.2000 notes will aid generation of black money & corruption deals and hoarding much easier in future. A loophole deliberately left for their own convenience but will be helpful to all scoundrels.
• Worst of all is that our consumption market is mostly driven by spending black money and never white money. Consumption market will shrink by almost 50% resulting in loss of state revenue, loss of GDP, loss of jobs etc leading to immediate deflation followed by stagflation and managing these are not as easy as managing inflation.  Economic spiraling down at times could result in collapse of economic systems and even country.

Politically motivated gimmicks will usually yield partial results.
The told reasons are different and real underlying reasons are different.

Black Money Menace

Money can be got from three sources - earnings, inheritance & gifts/borrowings. Any other way is corruption and black money.

During Second World War time high inflation and essential commodities shortages people made huge profits by dealing in items in short supply than from production and expansion of business. This has resulted in commodity hoarding activity and black money generation by traders. Post independence, license raj policy led to its misuse by a coterie of power to amass unaccounted wealth in return for favors to some businesses. Today people from all walks of life talk and deal with black money so casually indicating social acceptance of corruption & black money.

• Black money refers to the income on which tax has been totally or partly evaded. 
• Part of this money is utilized for consumption and part for hoarding or investment.
• It causes huge losses in tax revenues to the government.
• The circulation of black money gives rise to a ‘parallel economy’.
• The money involved in illegal transactions is estimated to nearing 50% of GDP.
• Annual growth rate of black money in India is higher than the annual growth-rate of its GDP.
• Black money cripples the free flow of a country's resources in the right direction.
• Black money also widens the income gap.
• Lower rung of the salaried individuals do not see their incomes rising unlike those in the higher echelons who has access to black money sources.
• Tax rates on higher incomes and excess profits prompted many to resort to black marketing and tax evasive measures.
• In the past, the marginal income tax rate was as high as 75% (while it was even 100% when combined with wealth taxes) prompting individuals to evade taxes. 
• Widespread corruption in almost all the departments has rendered tax laws enforcement very weak and ineffective.
• During past 30-40 years, real estate and precious metals & stones have become safe parking for unaccounted black money especially for corrupt politicians, bureaucrats & businessmen. This has led to sharp rise in real estate prices and today a owning home has just become unaffordable for lower & middle classes.
• Black money is also parked in so-called safe tax havens overseas and this way, country also unwittingly becomes a ‘de facto’ lender of capital to more advanced and wealthier nations.
• High tax rates prompted businessmen to evade them, which set off a chain reaction down to the wholesale, retail and production levels.
• Millions of rupees are spent on marriages, functions, parties, all sourced from untaxed funds. With excellent rapport between black money operators and politicians, the Income Tax. department fails to arrest the menace. Voluntary Disclosure Schemes produced limited results.
• It is only the rich who evade taxes.
• India is actually a capitalist economy and black money cannot be entirely controlled. However, it can be limited and brought to manageable limits.
• Black money needs ‘muscle power’ for its protection and proliferation as well as accounting experts, liaison officers who negotiate between black money operators and political leaders, threatening to corrupt the entire social and political fabric of the country.
• Weak justice disposal systems and low conviction rates make corruption a high profit and low risk activity.

Remedial measures:

1. Mandatory moral & ethical education.
2. Create awareness among citizens that obtaining services is their right and they need not and should not pay bribes and promote corruption.
3. Demonetization of high value currency notes.
4. Discourage cash payments by providing incentives for payments in any mode other than cash.
5. Promote payments using credit & debit cards, bank transfers, linking Aadhaar numbers to all bank accounts and transactions should be made mandatory enabling tracking.
6. Stringent penalties and punishments for violations.
7. Simplify tax structures and minimize stamp duties with incentives for compliance.
8. Make tax evasion so much expensive and unprofitable.
9. Corruption is off shoot of high profits and low risk. Take measures to make it high risk and low profit activity.