Tax-Efficient Cross-Border Investing: OECD Guidance and India’s GIFT City Advantage

 Abstract: This article explores how international investors—particularly NRIs—can navigate the complexities of cross-border taxation through OECD-guided frameworks and India’s Double Taxation Avoidance Agreements (DTAAs). It outlines key tax credit methods used globally, explains India’s approach under Rule 128, and highlights the strategic role of GIFT City in enabling tax-efficient investments. The piece also touches on OECD’s BEPS initiative and transparency goals, offering practical insights for optimizing global returns while remaining compliant.

While investing abroad or in a country other than the investor’s country of residence (not necessarily citizen of the country) creates complexity of tax treatments. These taxes add complexity beyond managing product structure, liquidity, volatility, and currency dynamics. To help better execution of investments across different countries, The Organization for Economic Co-operation and Development (OECD) has provided a platform and guidance to invest tax effectively across many countries who they signed Dual Tax Avoidance Agreement. The OECD has been instrumental in shaping the global tax landscape, especially through its work on tax treaties and investment tax guidance. Most of these tax treaties (not all) follow Article 23A and 23B of the OECD Model, which outline Exemption with progression that exempt foreign income but include it for rate calculation and to provide Ordinary credit (Credit limited to domestic tax on foreign income).

The OECD also help countries to managed BEPS (Base Erosion and Profit Shifting). Base erosion occurs when companies shift profits away from high-tax jurisdictions to low or no-tax jurisdictions and that erode the tax base while profit-shifting is a method adopted by companies when profits are artificially move, often through transfer pricing or intellectual property licensing to jurisdictions where little or no economic activity occurs. To align taxation with actual economic activity, the OECD and G20 initiated the BEPS project.

In a simple term for individual investors- If Country X signs DTAA (Dual Tax Avoidance Agreement) with country Y; then resident of Country X can invest in country Y and pay taxes on these investments in accordance with country Y and will get tax credit (or in simple term tax benefit) in home country X by any of the tax credit methods explained below.

Tax Credit Methods: Most Countries use below mentioned tax-credit methods or the variation of these for taxes on investment abroad.

Method	Description	Tentative list of Countries Using it
Exemption Method	Income earned abroad (after the tax paid abroad) is exempt from domestic tax.	Netherlands, France, Germany (for certain types of income)
Credit Method	Foreign taxes paid are recognized and credited against domestic tax liability.	USA, UK, India, Canada, Australia
Deduction Method	Foreign tax is treated as a deductible expense, then domestic tax is calculated on remaining amount	Used occasionally in  some countries with limited treaty networks
Underlying Tax Credit	Generally corporate tax paid on total profits and then dividends are again taxed; this method recognize earnings are double taxed and provide exemptions accordingly to resolve this issue.	USA, UK, Japan, Singapore, Australia, Ireland, Malaysia, Spain
Hybrid Method	Combines exemption and credit methods depending on income/ asset type or treaty.	Belgium, Switzerland, Luxembourg
Tax Sparing Credit	Credit for taxes “spared” by the host country under some scenarios are still eligible for tax credit in domestic country.	Japan, Singapore

India’s Approach

India adopts the credit method for foreign tax relief, as outlined in Rule 128. It allows taxpayers to claim credit for taxes paid in foreign jurisdictions, provided documentation is submitted. India has signed DTAA with multiple countries and we can access these list and understand tax treatment through income tax portal (Link https://incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx).

 

GIFT City (Gujarat International Finance Tec-City):

India has introduced an investment module via GIFT City. It is India’s answer to global financial hubs like Singapore and Dubai, and it plays a strategic role in enabling tax-efficient international investment, especially within the framework of OECD-aligned DTAAs. GIFT City functions as a regulatory testbed, advancing India’s global financial aspirations. It helps in efficient capital flows, reduced tax leakage and alignment with OECD’s BEPS and transparency goals. Gift City provide:

1. Offshore Status Within India

• GIFT City is designated as an International Financial Services Centre (IFSC).
• Transactions conducted here are treated as offshore, even though geographically within India.
• This allows non-residents and global investors to invest in India without triggering domestic tax complications.

2. Tax Incentives for Investors and Institutions - No tax on Capital gains from derivatives and certain securities and also provide tax-free interest on specific bonds and deposits; there is also charges of STT, GST etc.

3. Global Access with Currency Flexibility

• Investors can operate in foreign currencies like USD, avoiding INR conversion losses.
• Enables direct investment in global assets like equities, ETFs, bond via GIFT City platforms.
• Facilitates cross-border fund structures like AIFs and PMS with global reach.

4. Treaty-Aligned Compliance and Transparency

• GIFT City follows OECD-aligned disclosure norms, including IFRS-based reporting.
• Structures are compatible with India’s DTAA network, allowing investors to claim foreign tax credits efficiently.
• Reduces friction in cross-border tax planning, especially for NRIs and FPIs.

 Conclusion: Navigating international investments requires more than financial acumen, it demands a clear understanding of cross-border tax frameworks and treaty benefits. For NRIs and global investors, India’s DTAA network and the strategic infrastructure of GIFT City offer a compelling pathway to optimize returns while maintaining compliance. By leveraging tax credit mechanisms and treaty-aligned platforms, investors can reduce friction, enhance transparency, and invest with confidence across borders.

Money Scripts (Klontz-Money Script Inventory)

Today I would like to explain about the interesting paper published in the year 2011 in Journal of Financial Therapy, Volume 2, Issue 1, authored by Brad Klontz, Sonya L. Britt, Jennifer Mentzer, and Ted Klontz. 

This paper has considered original list of 72 commonly heard money scripts, the factor analysis revealed four distinct money belief subscales: (a) Money status, (b) Money worship, (c) Money avoidance, and (d) Money vigilance; these are known as the Klontz-Money Script Inventory (Klontz-MSI). Klontz et al. have based these research on the extension of previously published paper of Yamauchi and Templer’s (1982) and Money Attitude Scale and Furnham’s (1984).

In the simple term, these above-mentioned Money Scripts actually explain approach of investors towards Wealth and categorize them in 4 broad categories.

(a) Money Status

This belief links a person’s self-worth to their net worth. People with this script often feel that having more money makes them more valuable or respected.

Impact: People who tie self-worth to wealth may overspend to maintain appearances. This can lead to debt, poor savings habits, and risky investments. They might also avoid financial help out of pride, worsening their financial health.

(b) Money Worship

Money worshipers believe that more wealth will solve all their problems and bring happiness. They often think that having more money will lead to better relationships, less stress, and more freedom.

Impact: Believing money solves everything can drive compulsive earning and spending. These individuals may chase wealth at the cost of relationships or health, and still feel unsatisfied. They’re prone to financial stress and poor long-term planning.

(c) Money Avoidance

This script reflects a negative view of money. People with this belief may think money is bad or that rich people are greedy. They might feel guilty about having money or avoid dealing with financial matters altogether.

Impact: Viewing money as bad or shameful often leads to neglecting financial responsibilities. These individuals may under-earn, avoid budgeting, or fail to invest. Their finances can suffer due to lack of engagement or avoidance of financial literacy.

(d) Money Vigilance

Money vigilance is about being cautious and alert with finances. People with this belief value saving, budgeting, and financial security. They may be secretive about money and feel uncomfortable spending it, even when it’s necessary. While this script can lead to financial stability, it may also cause some uncomforted feeling to enjoy the wealth.

Impact: While this belief promotes saving and caution, it can also lead to excessive frugality or anxiety around spending. People may miss out on opportunities or struggle to enjoy their money. However, they’re usually better at budgeting and long-term planning.

Conclusion: Each of these beliefs is shaped by early experiences and can influence financial behavior in powerful ways. These frameworks, like the money script theory, challenge the idea that we as an investor are always rational. 

Understanding our own money script can help us make better financial decisions and improve our overall financial well-being. In short, these beliefs act like invisible scripts that guide financial behavior. Recognizing our dominant script can help us break unhealthy patterns and build a more balanced relationship with money.

These factors strengthen my earlier article explaining importance of choosing right wealth advisor is a critical factor to consider for balancing our dominant money script and helping us to grow better with less biased approach.

Understanding Retirement Planning: Key Phases, Risks, Withdrawals, and Investments

Planning for retirement is an important step to ensure you have enough money to live comfortably when you stop working. Retirement planning involves two main stages: saving money while you work (accumulation phase) and using those savings after you retire (decumulation phase). It also involves understanding important ideas like the funding ratio, matching your investments to your future needs, dealing with risks, choosing how to withdraw your money, and picking the right investments.

Saving for Retirement: The Accumulation Phase

The accumulation phase is the time when you are working and putting money aside for your retirement. You save money through plans like NPS, pensions, or  with multiple investment tools. During this time, your money is often invested in things like stocks that can grow over time. The goal is to build a good amount of savings to support you when you retire.

Using Your Savings: The Decumulation Phase

This phase starts when you retire and begin to use the money you saved to pay for your living expenses. Since retirement can last many years, it’s important to plan how much money you take out each year so that you don’t run out too soon. At this stage, your investments often shift towards safer options that provide steady income and protect your savings.

What Is Funding Ratio?

The funding ratio tells you how well your savings cover your future retirement needs. It is the value of your savings compared to the amount of money you expect to spend in retirement. A ratio of 1 means you have just enough saved, while less than 1 means you might need to save more or adjust your plans.

Matching Investments to Future Needs

It’s important that your investments behave in a way that matches your future expenses. For example, if your costs go up with inflation, you want investments that also grow with inflation (Asset having high Correlation with Inflation). This reduces surprises and helps make sure your money lasts.

Risks You May Face in Retirement

There are several risks to consider when planning for retirement money:

• Living Too Long (Longevity Risk): You might live longer than expected and run out of money.

• Running Out of Money (Probability of Ruin): There’s a chance your savings could be used up if withdrawals are too large or investments don’t perform well.

• Inflation Risk: Rising prices can reduce the purchasing power of your money.

• Market Risk: Investments like stocks can go down in value, especially early in retirement.

• Sequence of Returns Risk: The order in which your investments earn or lose money matters; bad early years can hurt your savings more.

• Health Costs: Medical emergencies or long-term care expenses can be very costly.

Ways to Withdraw Money in Retirement

How you take money out affects how long your savings last. Some common methods are:

• Fixed Amount: Withdraw a set dollar amount each year. Simple but risky if the market falls.

• Fixed Percentage: Withdraw a set percent of your total savings each year. Amount varies with portfolio value.

• The 4% Rule (Popular rule globally, might not fit well in Indian Scenario): Withdraw 4% of your savings in the first year, then adjust that amount each year for inflation. This is a guide to help money last about 30 years.

• Required Minimum Distributions (RMDs): Certain retirement accounts require you to withdraw at least a minimum amount each year by law.

• Minimum and Maximum Amount Cap: Fixing a a general withdrawal rate but putting and Minimum & Maximum Cap rate to counter volatility in the portfolio.

• Bucket Strategy: Divide your savings into different “buckets” for short, medium, and long-term needs. This helps manage risk and income better.

Investment Options for Retirement

Choosing the right investments helps balance growth, income, and safety. Some options to consider:

• Stocks: Good for growth and beating inflation.

• Bonds: Provide steady income and are less risky. Inflation-protected bonds guard against rising prices.

• Annuities: Insurance products that guarantee income for life, helping protect against living too long.

• Target-Date Funds: Automatically adjust to become safer as you get closer to and into retirement.

• Real Estate: Can provide rental income and diversify your investments.

• Cash: Keeps money safe and available but doesn’t grow much.

Combining these options with your withdrawal plan and risk comfort can help you have enough money throughout retirement. Regularly reviewing and adjusting your plan is also important.

In Summary

Retirement planning means saving carefully during your working years and spending wisely when you retire. Understanding the funding ratio and how your investments relate to future costs helps keep your finances on track. Being aware of risks like living longer than expected or market changes lets you prepare better. How you withdraw money and the investments you pick will greatly affect your financial security. A well-thought-out plan can help you enjoy your retirement without money worries.

Choosing the Right Wealth Manager: A Strategic Approach

 

Choosing the Right Wealth Manager: A Strategic Approach

Wealth management may seem straightforward during stable or bullish market conditions, but true expertise is revealed when markets turn volatile. In such times, the ability of a wealth manager to protect and grow your portfolio becomes critical. Selecting the right professional requires thoughtful evaluation—not just of returns, but of skill, service, and judgment.

Decision Outcomes in Wealth Manager Selection

When deciding whether to hire or reject a wealth manager, we encounter four possible outcomes. These can be categorized as follows:

Decision Actual Skill Level Outcome Type of Error Select the manager Has the right skills ✅ Correct decision None Reject the manager Lacks the right skills ✅ Correct decision None Select the manager Lacks the right skills ❌ Incorrect decision Type 1 Error Reject the manager Has the right skills ❌ Incorrect decision Type 2 Error

Why Errors Matter

• Type 1 Error (False Positive): Choosing someone who lacks the necessary skills can lead to poor portfolio performance, especially in turbulent markets.
• Type 2 Error (False Negative): Rejecting a skilled manager means missing out on potential gains and quality service.

Minimizing both errors is essential. This requires a structured evaluation process that goes beyond surface-level performance.

Skill vs. Market Conditions

In bullish markets, most portfolios show positive returns, making it hard to distinguish between luck and skill. However, during volatile or bearish phases, a skilled manager stands out by:

• Preserving capital
• Rebalancing effectively
• Communicating clearly during uncertainty
• Making informed decisions based on macro and micro trends

What to Evaluate Beyond Returns

While performance is important, a holistic assessment should include:

• Service Standards: Is the manager proactive and client-centric?
• Responsiveness: Are queries and concerns addressed promptly?
• Knowledge Depth: Does the manager understand complex financial instruments and macroeconomic trends?
• Communication: Are portfolio decisions explained clearly and regularly?
• Transparency: Are fees, risks, and strategies disclosed openly?

Final Thoughts

Choosing a wealth manager is not just about returns—it's about trust, skill, and long-term alignment. By applying a structured decision-making framework and evaluating both technical and interpersonal qualities, investors can reduce the risk of costly errors and build a more resilient financial future.

 

Shall we worry for market corrections?

Today the market has seen  2.7% fall and last one month market return is -1.5%.

Though this correction is not significant, most of our colleagues are worried. It's not this small market changes they are worried about rather they are considering the possibility of deep market correction which is due since long time. Last 4 years, the Indian Equity market has been uni-directional and delivered a good return, but every market rally has to correct at some point. Equity markets always grow between up and downs. 

None of us can predict the market with certainty but what we can do is to keep our portfolio aligned by taking notes from the current economic outlook. 

Its time to tilt our portfolio towards the large cap and hybrid funds. These portfolio actions will keep our portfolio better equipped to manage any unfavorable conditions. 

Investment is boring

Investment success does not demand chasing market thrills, but it is built on timeless principles like disciplined asset allocation and unwavering fundamentals. While market swings grab headlines, they matter little for the core of your portfolio, influencing only a tiny tactical slice. My interactions with our clients are always center on crafting a portfolio tailored to their goals and comfort with risk, ensuring steady wealth growth over time.

Why Long-Term Strategies Trump Market Noise

Markets are unpredictable, shaped by fleeting events from geopolitical tensions to policy shifts. Yet history shows that fixating on short-term scenarios erodes returns through emotional trades and high costs. Instead, success lies in a robust asset allocation framework, it means spreading investments across categories to weather volatility. This approach, backed by decades of data, prioritizes consistency over speculation.

 Think of it as constructing a resilient home: strong foundations (basics like diversification) endure storms, while flashy add-ons (tactical bets) are optional. By keeping 70-80% of your portfolio in strategic, long-term holdings, you harness compounding's power. Tactical moves, limited to 20-30%, can exploit opportunities but never dominate.

Core Pillar: Diversification Across Assets

Diversification remains the bedrock of risk management. A well-rounded portfolio blends equities for growth, debt for structural support, and alternatives for hedging or reducing correlations; adding all these assets helps in reducing drawdowns without sacrificing upside.

Equities drive expansion through corporate profits and economic cycles, historically delivering 10-12% annualized returns in India over 20+ years. Debt instruments, meanwhile, preserve capital with predictable yields, often 6-8% from bonds or deposits. This mix smooths the ride: during bull runs, stocks shine; in corrections, fixed income stabilizes.

Optimizing Equity Exposure

Dedicate 40-70% to equities, scaled to your age and horizon; a younger investors lean aggressive while investors nearing retirement will take conservative stance. Within equities, blend large-cap funds for stability (Top 100 Companies in terms of Market-Cap), mid-caps for growth (101st to 250th Company), and allocation to small-caps for alpha potential. 

Stabilizing with Hybrids and Fixed Income

Counter equity risks with 20-40% in hybrids and fixed-income options. Balanced Advantage Funds (BAFs of MF schemes) dynamically shift between stocks, Aggressive hybrid funds, which allocate 65-80% to equities and 20-35% to debt, offer balanced growth potential with reduced volatility compared to pure equity funds and debt, targeting 8-11% returns with moderated volatility. Fixed deposits or government bonds offer guaranteed 6-7% yields, ideal for near-term needs.

These act as shock absorbers: in 2020's crash, debt-heavy portfolios lost just 5-10% versus equities' 30% plunge. For retirees, corporate bond funds or debt mutuals provide liquidity without lock-ins, blending safety and modest growth.

Strategic Roles for Gold

Limit gold to 5-10% of portfolio—they diversify beyond financial assets. Gold shines during uncertainty, returning 9-10% long-term and curbing inflation erosion (though exceptional return in recent times).

Venturing into Alternatives

For high-net-worth clients, allocate 5-15% to alternatives like Alternative Investment Funds (AIFs) or Portfolio Management Services (PMS). Category III AIFs tap hedge strategies or private credit, aiming for 12-15% returns with low correlation to markets. PMS suits customized equity picks, often beating benchmarks by 2-4%.

Mastering Risk and Rebalancing

Risk tolerance is personal: conservative profiles favor 60% debt/equities; aggressive ones prefer to have 70% stocks. Annual portfolio reviews align portfolio with life changes and requirements. 

Rebalance yearly: sell winners, buy undervalued stocks (or funds or bond) to restore targets. This enforces "buy low, sell high," adding 1-2% annual value. In downturns, it equips you to stay invested, avoiding panic sales that lock in losses.

The Rewarding Patience of Boring Investing

Wealth creation feels mundane; no viral trades or guru tips. Yet this "boring" discipline has minted millionaires: a Rs. 1 lakh per month investment at 12% compounds to Rs. 9 crore in 20 years. 

In India's evolving landscape, rising per capita income, formalization of economy and we sticking to basics unlocks prosperity. 

Hybrid Category Mutual Funds

 What are the different kinds of Hybrid funds in MF? How they are different? What is applicable tax towards these?

Hybrid funds are the schemes which has equity, fixed-income and sometime other asset class in the portfolio. Mix of these asset class can be different, so accordingly they are categorized in different schemes and applicable for different taxation.

Let me explain benefits of Hybrid funds.

1- Biggest benefits of investing in Hybrid fund is regular rebalancing of portfolio. When equity market goes up, equity portion of portfolio grows and it become higher percentage of portfolio. Then fund manager sells equity shares and buy fixed-income papers. Means profit booking.

Similarly if equity market corrects (goes down), then fund manager has to sell fixed income papers and buy equity to make it again at least 65 % of portfolio (as per regulatory requirements). Means cost averaging.

2- It has lower volatility than pure equity portfolios.

3- these funds required almost no market timing for entry and exit.

We can broadly classify Hybrid funds in 4 categories.

Aggressive Hybrid funds- As name suggest, these are aggressive funds which has more than 65% Equity in portfolio (Equity taxation- as it has more than 65% portfolio in dimestic equity) and remaining in Fixed Income portfolio (and mostly in high quality-medium duration portfolio). We also known these schemes as plain vanilla balance funds. As they have least 2/3rds of portfolio in equity, they are the most volatile among Hybrid funds.

Because of above higher equity portion, most of these aggressive funds deliver similar returns to any large cap category funds with lesser volatility.

Dynamic Asset Allocation- This is the category of scheme which keep changing their net-equity position of portfolio as per market valuation. Idea is to increase equity percentage in portfolio when market looks under valued and similarly decrease equity weight when market look expensive.

Most of the funds in this category uses either PE ratio of PB ration to determine valuation of equity market and their net-equity portfolio keep changing from as low as 10% to as High as 90 %.

Remaining portion of the portfolio has arbitrage and fixed-income papers (in efficient combination to qualify Equity taxation).

Conservative Hybrid funds- These funds have very high amount of fixed-income papers and a small percentage (most case 20 to 25%) is equity. These funds are liable for debt taxation.

Equity Saving fund – These funds broadly follow principle of one third to each asset class (Equity, arbitrage and fixed-income). This composition might change slightly depending upon market outlook of fund manager. This fund also qualify for equity taxation. 

Allocate your funds in these categories as per your requirements. 

 

Do You Really Need a Financial Advisor? Here’s the Truth

Self-medication and web-based diagnosis is something we all avoid.

Similarly when it comes to investment, we must take help of experts. This will optimize our investment results and will reduce volatility. Investment has multiple options, it has multiple possible combinations and the most important it is never been as simple as it looks.

You need advisor for below reasons.

• He (or She) will understand your risk profile.

• He will be able to segregate your goals in different timelines.

• He will create be-spoke asset combination suitable to you.

• He will be the one evaluating your assets from tax-angle too.

• He will execute all your transactions.

• He will monitor your transactions on your behalf.

• He will re-balance your portfolios in frequent intervals.

• He will provide consolidated report of your complete assets at regular intervals.

• He will be the one who will help you for any changes or updatie required in your investment (Eg Nominee & Contact update, bank change, address change etc).

• He is the one who will understand complexity of economic situation and will provide ideal solutions in those troubled period.

• Last but important- in case of your death, he will help your family to transfer these assets and will advise on the tax angle of the same.

In short, we all need a personal advisor to our portfolio.

Global Investment- Requirements and benefits

Diversification is something which we talk about everyday. Yet we miss taking advantage of it in many aspect.

Geographical diversification means having some part of our asset must be allocated into various geographical market. This reduces our risk of depending completely with home economy and also provide cushion of global investment & currency diversification.

Every economy has some unique characteristics and so it has its own inherent market cycle. So when we allocate to any other country (popularly US, Europe, South Korea and Japan etc.), we actually reduces standard deviation of portfolio. This help us to reduce volatility.

That's why expert suggest a small portion of your portfolio should allocated in global market.

SIP + Top-Up: The Smart Way to Multiply Your Wealth Over Time

Investment is one of the most simple and yet confusing need of our life. When we think investment, we start assuming making super abnormal return overnight or to become rich by investing for couple of years. 

Thankfully, we Indian understand patience is key ingredient of creating wealth, our parents and grand parents use to save bigger percentage of earning and kept investing in limited popular options available to them, mostly bank or post office deposits. They did for many years and with lot of patience. 

Unfortunately, our generation has no such good term deposit rates offered by banks nor by any postal certificates but I am sure we still have patience to create wealth. 

Yes patience is a key to investment, it gives your investment a good time to accumulate, deliver power of compounding and provide chances to take benefit out of market volatility. 

Systematic Investment Plan (now onward SIP) is a simple investment tool where we keep investing a small amount monthly (or any other frequency but monthly is most popular method) over long period of time.

Lets understand this by example, if Mr X invest Rs 10000 monthly SIP for 20 years and if return expected to be 10% , his accumulated wealth at the end of 20th year will 76 lakh (invested Rs 24 lakh over the period). 

Similarly his friend Mr Y also did sip of Rs 10000 but kept investing for additional 5 years and ended his sip after 25 year. With similar expected rate of return (10%), Mr Y will have corpus of Rs 1.33 Crore at the end of 25th year. 

So just by adding another 5 year, his wealth is increased by 57 lakh. 

In simple words, this magic is called power of compounding. 

SIP has additional benefits apart from compounding. 

SIP can be done with any asset class Equity, Hybrid (mix of Equity and Fixed Income), Gold or Fixed Income but most popular is Equity and Hybrid fund SIP. 

SIP actually debit a specific amount from your account and buy units of fund as per prevailing market rate. This rate is called Net Asset Value (NAV). NAV can go up and down depending upon underlying assets in fund. So any point of time your fund valuation is nothing but multiple of current NAV and accumulated units. 

SIP done over long period of time actually goes through multiple market phases. Most of the time Equity market is volatile. So when equity market goes down, your Equity fund SIP will be buying funds at NAV meaning more accumulating more number of units. We can safely say, during volatile market SIP investors accumulate more units by just keep running their SIPs. 

We can also create additional wealth for us by just taking few additional steps. We can start a Top-up SIP than a traditional SIP.

Top-up SIP is a SIP where you customise increase of SIP amount (with some specific percentage or fixed amount) in future at specific intervals (may be annually) considering increase in your saving and income rate of future. 

So Mr X can start sip of Rs 10000 and keep increasing 8% additional SIP amount every year by just starting Top-up SIP in place of traditional SIP. 

Most of fund houses offer SIPs which can be paused and cancelled at any point of time without any additional cost. This make it more simple and friendly tool for all of us. 

Happy Investing !

Diversification Done Right: Reduce Risk, Maximize Returns

What are basics of creating portfolio and why to add so many different kind of asset classes in our portfolio?

These are the few questions we ask to our advisors. 

Let me try to explain this. Our idea is to create portfolio with two basic objectives. First to create wealth or in layman terms a good return and second objective is to reduce risk of negative or low returns. 

Financial basics says, if you chase higher return, there is always higher amount of risk associated with it, we measure these risk for equity assets in terms standard deviation. 

Every asset class has there own cycle of performance, meaning different asset classes have different cycle of good and poor performance. 

When we add these 2 fundamentals in our consideration, then logical way to create portfolio of assets in such a way that at any point of time one or more asset class should deliver good return while may be one or more assets might have delivered bad returns. By doing this we assure lesser volatility in our portfolio. 

Now question is how we know, is my portfolio have properly diverse asset class or not? 

Actually it is simple, we have create portfolio of low correlated assets. Correlation is mathematical number ranging from -1 to +1 which explains relationship between two asset class. Where +1 indicate the two assets are of similar kind and having exactly similar cycle of performance and -1 correlation explains they are of exactly opposite cycle of returns. 

In practical investment world, we do not find any two asset of perfect +1 or -1 correlations. All assets have correlation between these two numbers. Our idea of creating portfolio is to create mix of low correlated asset classes. 

If we look into correlation of share prices of stock, returns of index funds and of equity mutual fund, they will be closer to +1 correlation so they are not diversified asset class. 

While in other hand Equity assets (equity mutual fund, shares, index funds, etc) and Fixed Income assets (like fixed income mutual funds,  corporate bonds, term deposits etc) is of low correlated and ideal mix to create portfolio. 

Ideally, we should hold mix of Equity,  Fixed Income and Gold in our portfolio. We can diversify further by adding International equity funds in portfolio. 

Percentages of these mix should be different for different age groups and their financial requirements. If investor is of 30s or 40s of age group should have higher equity (may be 50 to 70%) and can have 20 to 40% Fixed income asset and approximately 10% gold). Where investors of 50s age group and he is in earning phase can reduce equity to 30 or 40%. In the retirement age, there should be negligible equity exposure and investment should be kept in low volatility assets. 

These are all indicative examples, they may or may not fit to your portfolio. Please take help of advisor to find your optimal mix. 

Amitav Ghosh my new favourite

Its always peace and relax whenever you feel your parent is nearby to you, and this was awesome week when my papa is here in Bangalore, i read great number of books, more than 7000 pages but restricted myself to only three writers and all this in category of fiction.

Amitav ghosh, i have never done much reading of his work before The Calcutta Chromosome, it is the most complicate novel I have read recently. Even after 24 hours since reading the book, still I couldn’t come to a conclusion whether I liked the book or not. There are so many fine points to say about this book. At the same time, this book left me in utter confusion which had never been managed by any other books I have read so far. If I don’t like a book, I will just drop it and go for the next one. But this is not the case with ‘Calcutta Chromosome’. Each page was crafted with skill and that alone makes me adore Mr.Gosh. There is a deep mystery that lurks on every page and that makes the reading more fascinating. The story shifts between different time frames among various characters. I found myself eager to know what would happen next to each of them.

Having said all these, there comes the sad part – the conclusion. I found the ending abrupt. I expected big explanations but much were left to reader’s choice which was frustrating. This was beautifully told tale page by page, but only to leave the reader in chaos at the last page.  There were so unanswered questions that will haunt sometime after done with this novel. 2nd was in this series was Sea of poppies, varied collection of characters to love and hate, and provides wonderfully detailed descriptions of opium production and variety.

Mr Kamkazi and different kind of PE

Mr Kamkazi have tried explaining about Valuation methods to his students.

PE Multiple

Price-earnings or PE is the most commonly used multiple. But it may have several variants- current PE, trailing PE and so on.

The ‘plain vanilla' PE is computed by dividing the share price of the firm by its earnings per share. PE multiples usually take into account the current market prices of a company.

When it comes to the denominator - the per share earnings, one can use the company's earnings for the past twelve months (known as trailing EPS), estimated earnings for the next 12 months EPS (forward EPS) or the earnings for a future year (future EPS).

A higher PE ratio indicates that the market perceives the company's growth rate to be higher or its risks to be lower and its payout ratio too could be higher (alternatively the company's reinvestment needs are lower).

PEG ratio

The “Price Earnings Growth ratio” compares a company's PE multiple with its expected growth rate in profits.

It is computed by dividing the PE multiple of the company by its expected growth rate in EPS. Note that the number used for EPS should be the same in the calculation of both “PE multiple” and “G”. For instance, if Company A expects a 10 per cent growth in its EPS this year and its current PE is 18.15, then its PEG would be 18.15/10 = 1.815 times. A PEG multiple of 1 is considered a rule-of-thumb measure of ‘fair value'.

PEGY Multiple

It is another variant of PE multiple. It is calculated by dividing the PE ratio of a company by the sum of its growth rate and dividend yield, the idea being that dividends also add to an investor's total return.

Here, dividend yield is computed by dividing the expected dividend payout of the company by the market price of the stock. PEGY is relatively better than PEG as it considers the differences between companies in growth rate in EPS as well as expected dividend yield.

For example, if TVS motor's growth rate is 8 per cent and its expected dividend yield is 7 per cent, if the stock's PE is 18.65, then the PEGY for TVS Motors is 18.65 / (8+7) = 1.24 times while its PEG is 18.65/8 = 2.33 times. If a company's PE multiple is lower than the sum of its growth rate in EPS and expected dividend yield, then the company is undervalued.

Relative PE

The PE ratio or PEG may help you evaluate if a stock appears expensive or cheap relative to its profits or growth rates, but how do you decide which stock within the market or a sector is a good buy?

One relative valuation measure is to divide a company's PE multiple by the PE ratio of the market.

For example, the PE ratio for Nifty (this is available from the website www.nse-india.com) as on 24-12-2010 was around 24.

The relative PE for company B was 17.80/24 = 0.74 times. We can state that B is undervalued compared to the Nifty or the market. While using relative valuations here, it is also necessary to take into account the company's historic premium or discount to the markets. For example, if B has historically traded at 90 per cent of the market PE, it is now undervalued.

The above variants of PE ratio measure the market value of a company's shares by comparing it to its earnings. But these multiples do not value the entire firm. This drawback is addressed by the following measures.

Value to Earnings Multiple

It is arrived at by dividing the value of the entire firm by either its pre-tax profits (earnings before interest and taxes or EBIT) or its post-tax profits from operations, operating earnings.

What is the value of the firm here? It is the “Enterprise Value”, calculated as (Market value of Equity +Market Value of Debt – Cash). Higher the number, higher is the valuation the market is assigning to the company.

Value to EBITDA multiple

A small variation of the above, this measure uses EBITDA (Earnings before interest, tax, depreciation and amortization); this is especially applicable to loss-making companies. Some investors may want to value a company before considering the impact of financial leverage and depreciation on its earnings.

It is also possible that some companies may operate in industries with a longer gestation period. In all these situations, one can not arrive at the appropriate value for a company by employing the value to earnings multiple.

Investors able to estimate the future cash flows of a firm also employ a measure called value-to-free cash flow, which examines cash flows to a firm instead of its book profits.

So what is the ideal measure of value? Maybe a combination of the above. Apart from ascertaining the value of a firm using earnings multiples, one should also measure using traditional methods such as discounted cash flow to arrive at the correct value of business.

Each of the above multiples is suitable for a particular situation and no two multiples act as substitutes. After all, the valuation lies in the minds of the valuer.