Look Beyond Bank Fixed Deposits

• If one intends to take loan from bank. Bank will in addition to credit score will demand various other information about bank balance, property details, salary, shares, mutual funds etc. If you don't want to run from pillar to post, you can engage services of  "Account Aggregator" , who will collect these information on your behalf from various sources and make them available to bank.
• So, an Account Aggregator provides data to Financial Information User ( FIU) from Financial Information Provider based on the user's explicit electronic/ digital consent. No financial information of the user is retrieved, shared or transferred by Aggregator without explicit consent of user.
• Various players in Account Aggregator system are -

1. Financial Information Provider (  FIP ) - Banks, NBFC, Mutual Fund Depository, Insurance Repository, Pension Fund Repository, Asset Management Company etc - from there data is retrieved.
2. Financial Information User ( FIU ) - FIU consumes data from FIP to provide various services to end consumers e.g.- loans, guarantee
3. Technology Service Provider ( TSP )- ensure flow of encrypted data.
4. Certifiers - Enable verification of adherence to prescribed technical standards by all AA ecosystem providers.

• Account Aggregator can also help one to track his investment. It allows users to choose whom to share their data with, what data they want to share, for what purpose, for what time period. User can revoke permissions to access data any time.
• The user will retain control to designate the extent to which data can be shared. For instance, if the user has three bank accounts, he or she has the option to provide data from only one or two account. Additionally, the user will be able to limit the period for which the data can be shared with FIU. AA can not see your data, nor keep data in his computer.
• A user may register with an AA through desktop or mobile application. This AA  application displays all the consent provided, rescinded and a record of all data requests made by FIU.
• Prominent Account Aggregators are CAMS Finserv, Jio Information Solutions, National E-governance Services, Aditya Birla Trustee Company among others.
• Rest assured - RBI issues licenses to Account Aggregators and regulates them, just like bank, NBFC...In addition to there are certifiers who periodically checks system of AA to ensure that they are compliant to RBI guidelines.

• On retirement an nemployee gets huge fund be it GPF,CPF,Gratuity, Leave encashment etc. Life expectancy now is around 71 years which is likely to increase further. It means almost 30 years of life after retirement. At current rate of inflation, if your monthly expenditure toady is Rs 50,000 per month, it will increase to Rs 3,00,000 per month after 30 years at current rate of inflation i.e. 6 % p.a. Remember this will be time when you will have no source of income except your savings and your monthly expenditure will not reduce but will increase as cost of medical expenditure will form a higher proportion of your expenditure. This is don' t already have any liability like education or marriage of children.
• If you are government employee and in old pension scheme, you may be getting government pension - but that will be sufficient only for your daily livelihood needs - i.e. Roti, Kapda aur Makan. But if you have hobbies or want to travel distant places or want to buy a luxurious car - your pension may not be sufficient. But if you are  getting CPF ( Contributory Pension Fund ) or EPF ( Employee Provident Fund ), NPS ( New Pension Scheme) - you have to be more careful in managing your money as you will be getting a huge sum.
• Let us consider a very simple way of managing your retirement fund. Devide the money you receive in two equal parts. Or there can be other way - estimate the money you need in next ten years based on your current expenditure. This will be one part, rest of the money will be second part. Keep the first part of your money in bank or postoffice senior citizen funds - this will ensure availability of money for your monthly expenditure for next 10 years. Now invest the other half or second part of your money in Nifty 50 index equity fund. Your are expected to earn about 15 % per year on this investment - which will be almost twice you earn on bank fixed depoits.  
• I have analyzed the mutual fund returns (Nifty index 50 ) for 10 years blocks for different periods. For periods 2004-14, 2006-16, 2008-18, 2010-20, 2012-22 - returns are 16.14, 9.32. 10.62, 6.98, 11.80 percentages per annum respectively. Means that in worst case i.e. for 2010-20, the annual return was 6.98 % per annum. So,  even in worst case we are getting return which is more than bank fixed deposit. Remember 2020 was the worst time for our economy in our lifetime due to covid. However in best case our return can be as higher as 16 % per annum.
•  However based on above data analysis, we expect 10 % return per annum ( actual return received in four of five "10-year" as shown above. Suppose you have received Rs 20,00,000 on retirement - if you follow traditional way and keep this amount on bank / post fixed deposit, you will receive Rs 39,34,000 after 10 years.
• But if you keep Rs 10,00,000 of this fund in bank fixed deposit, you will receive Rs 19,67,000 after 10 years. The other part, if invested in mutual fund will grow to Rs 25,93,000 after 10 years at 10 % p.a. So, the total amount you get after 10 yeras is Rs 45,61,000 vs Rs 39,00,000 in first case ( when you have kept whole of Rs 20,00,000 in fixed deposit) - that is Rs 6,00,000 or 15 % more. There is, as mentioned earlier, 80 % chance that you will get 10 % more return if your manage your money in 50-50 way as above. in worst case you will get 6.5 % return which is equal to the return you get in bank fixed deposit with no income tax to pay.
• So, when after retirement, you don't have any other source of income, getting this Rs 6,0,000 or 15 % extra should not be ignored. If you plan your return more wisely, this return could be as high as Rs 10,00,000 or 25 % more. I have suggested 50 % of your corpus in fixed deposit because in worst case of fall of share market you will have sufficient fund for monthly expenditure.

Einstein has said that " Compounding is the 8th wonder of world. He who understands it, earns it; one who doesn't pay for it"

• So, what compounding is - suppose one invests Rs 100 @ 8 % p.a. for five years. At the end of first year, your money grows to Rs 108 and after 2nd year it becomes Rs 116.40. Meaning in 2nd year, interest is earned on Rs 108 and not on Rs 100- so that total interest earned at the end of second year is not Rs 16 but Rs 16.40. So, this interest earned on interest is compounding.  But as year pass, difference multiplies. But the basic condition is that you don't withdraw money.
• Famous example is given by investment guru Peter Lynch in his book " One up on wall Street " - Manhattan is one of  the island of city of Newyork. Story goes that Indians of Manhattan to a group of immigrants for $ 24 ( in beads & trinklets). These Indians over the years have been ridiculed as loser. But as Peter Lynch has pointed out if Indians had invested $ 24 in 1626 @ 8 p.a., the amount would have grown  to $ 30 trillion in 1989. Real estate of Manhattan was worth of $ 28 billion in 1989. So, $ 30 trillion of Indians vs $ 28 billion of immigrants - obviously Indians were wiser than immigrants. Such is the power of compounding.
• You can reap the power of compounding if you start early. Take example - Rs 5000 invested today at 8 % p.a. interest, will grow to Rs 1,00,627 in 30 years - 20 times in 30 years. But if you start late by 5 years, then same amount will grow to  Rs 68,485 in 25 years, a loss of about Rs 35000 or 35 %.
• One astonishing aspect of compounding is how exponentially money grows. Suppose you have invested Rs (A) at 8 % p.a.rate of interest. Then after 14 years, every year amount equal to RS (A) will be added to your principal. However if you remain invested then after 20 years, every year an amount equal to Rs ( 8A)  i.e. 8 times the principal  will be added to principal every year.
• To benefit from the power of compounding, pre-condition are -

1. Start as early as possible.
2. Don't withdraw money in early years.
3. invest money at reasonably good rate of interest.

So, if you want to become rich, you don't have to take unnecessary risk. Just reap the benefits of  " Power of Compounding ". AS Benjamin Franklin has said - it ill turn your lead into Gold.               

Alternative dispute resolution ( ADR) is designed to settle disputes outside the  courtroom with the impartial third party. This path is generally accessible after efforts between the parties to  resolve the differences between themselves fails and reaches an impasse.

• Arbitration, mediation and Conciliation are the main alternate dispute resolution mechanisms which are generally adopted by the people to resolve their disputes in an informal manner.
• Arbitration is the more formal & technical process, in which parties argue their cases and Arbitraion is decided by imposing award. It is quasi-judicial process without involving judges of competent court - this method is resorted frequently in technical & commercial disputes.
• Other two methods of dispute resolution are Conciliation & Mediation, with subtle difference between them. Mediator is an impartial person possessing specialized skills, requisite training and sufficient experience necessary to assist the disputing parties for reaching a negotiated settlement.
• Mediator doesn't make proposal for settlement, formulate or reformulate the terms of possible settlement. He will merely facilitate a settlement between parties through negotiations. In contrast Conciliator can make proposals for settlement of dispute. He can also decide who is right or wrong.
• Mediation has grown as the most advanced and popular form of alternate dispute resolution mechanism. The basic motive of mediation is to provide oppurtunities to parties to negotiate and come to final settlement  themselves encouraged by mediator.
• Mediation is more informal process as process, venue and schedule of proceeding are according to the convenience of parties. But after resolution is made, parties can formalise the agreement by registering it. 

In Alternate Dispute Resolution, efforts is made to balance the interest of both parties, whereas in litigation, one of the parties loses the case.

• After RBI regulations in 2006, banks have appointed bank representatives in un-banked areas and even in neighborhood. They help you open bank accounts, take deposits and disburse cash. Scope of works undertaken by banking correspondents are - 

1. Collecting deposits of amount up to Rs 20,000.
2. Disbursing cash.
3. Opening bank accounts and doing KYC ( know your customer) on behalf of bank.
4. Furnishing mini account statement.
5. Initial processing of loan applications.
6. Selling of financial products like insurance, mutual fund, pension products etc.
7. Follow up of loan recovery.

• How does banking correspondent work - They are appointed by bank and act as agent of bank. They use internet banking for performing various works. A banking correspondent may have a shop in your locality or they can visit your home at your convenience - in this case they use hand-held device. They work on commission which is provided by bank.
• Who can be banking correspondent -

1. NGO/ Societies/ Trusts/ NBFC
2. Retired bank/ govt employees/ ex-servicemen.
3. Individual/ kirana shops/ common service centers (csc) 

• Conditions of appointment as banking correspondent - 

1. Must be a permanent resident of area
2. Should have ability to invest in POS machines and other equipments
3. Security deposit.

• At present banking correspondent can execute transaction only related to his bank but in future, banking correspondent will be able to execute transactions related to all banks. Then banking correspondent has to be equipped with Deposit Taking Machine, hand-held ATM devices, Kiosks and uninterrupted internet. 
• Banking correspondent provides almost all banking services of day to day needs. So, if you are living in village or in a area where bank branch is far away or bank officials are apathetic to your needs, you can avail services of banking correspondents. Government intention is to have a banking correspondent in every of 06 lakh villages.
• Banks will be fully responsible for the actions of their banking correspondents and their retail outlets. Also  banks are required to set up system for redressing of complaints against banking correspondents. So, you can rest assured that your money will be safe.

• As one ages, years of good health ahead gets reduced & physical capacity deteriorates.  Elder can give Power of Attorney so that his finances and medical care is taken care of. It is  also relevant if someone meets accident and is incapacitated -  specific or conditional POA  if executed beforehand can be very helpful.
• POA is a legal document that authorizes one person to represent and take decision on behalf of another person, generally on matters related to property, finances, banking or other matters of legal significance.
• POA can be used in following situations - 

1. Residing abroad
2. Any person who is unable to present at a place for a task.
3. Illness or bedridden
4. Old age or senior citizens with health problem
5. Any other reason for being unable to conduct the transaction personally.

• Person who gives POA " Donor" and to whom POA is given is called " Donee". Even through it is not mandatory to get all POA registered, it is advisable - at least notorised. However if POA involves transfer transfer of property, it must be registered. 
• Types of Power of Attorney -

1. General Power of Attorney - It leads to Donee representing Donor on all matters relating to property, banking, taxation, legal disputes etc.
2. Specific POA - For specific purpose like to lawyer to represent you in court.
3. Durable POA - POA continues even after death of Donor.
4. Conditional POA - it comes into effect after happening of certain event like when person becomes incapacitated after accident.

• Deciding who is going to be your agent is crucial - if it is general POA then adequate precaution is suggested as donor will be responsible for harmful acts of donee or agent. 
• Revocation of POA - Revocation of POA is possible - it can be revoked both by Donor or Donee. It is also revoked when one of them dies or becomes of unsound mind.
• Medical Power Of Attorney - it falls in category of durable POA - it does not immediately come into effect but rather only becomes valid after the principal is no longer of sound or conscious mind.
• So, timely granting Power Of Attorney can save you from a lot of problems specially in old age - be it operating bank account, collecting rent or meeting hospital expenses when you become bedridden or unconscious. 

• HUF ( Hindu Undivided Family ) is a legal income tax entity separate from nuclear family that can save a lot of income tax if used judiciously. Husband, wife, sons and daughters can decide to form HUF - only thing is that they should have some common property. For this father or any member of family can declare some property as common property. Common property can be ancestral property also. 
• As per income tax act, HUF is taxed separately from individual member. Suppose, Father earns Rs 10.00 lakh and rent from house property is Rs 5.00 lakh. His taxable income will be Rs 2,17,000. But if house property is transferred to HUF, income tax on his income will be Rs 82,500 and income tax on HUF from house property will be Rs 5,000 - so, the total tax to be paid by father will be Rs 87,500 while if HUF is not formed then tax was Rs 2,17,000. So, total saving after forming HUF is Rs 1,30,000. So, from  view of payment of income tax, formation of HUF is always beneficial. 
• For formation of HUF, individual, his wife, sons and  daughters ( having common ancestor) can execute a deed. With this deed they can open open separate bank account and can apply & obtain separate  PAN ( Permanent Account Number ). Head of HUF is called Karta, he is the senior most member of family. Sons and daughters ( co-parceners) have equal rights in HUF.  If karta is non-resident, then a member of family living in India can be acting Karta.
• Disadvantages of HUF - (a) Every member of HUF has equal rights, so property can not be sold without the concurrence of all members of HUF (b) Even for partition of property, every member has to agree to it.(c) A new member born in family automatically becomes member of HUF automatically.
• Beauty of HUF is that, income from common property is taxed separately from income of other members of family - resulting in substantial saving in income tax. However, in addition to common HUF property individual member of HUF can earn separately  and hence will be taxed separately from HUF. So, HUF and individual members can claim deductions under various sections of income tax like 80 C, resulting in substantial saving in taxes     

• Do you know that in last 20 years, no mutual fund scheme of any fund house has maintained its top position in terms of generating returns for its investors - once it was Reliance Growth, then SBI Contra, then HDFC Equity. So, what a long term mutual fund investor ( withe time horizon of more than 10 years ) should do- should he keep the scheme changing or is there any alternative.
• Certainly Exchange Traded Funds or Index Funds are the alternatives. They are similar in the sense that both track the targeted index like Nifty 50 or BSE SENSEX 30 and invest in the shares constituting the underlying index in the same proportion as they are in the index. What it means that if infosys has 7.42 % weightage in nifty, your nifty ETF or Nifty Index will have the same weightage of infosys in their portfolio.
• What this means is that discretion of fund managers in selecting stock is removed as they have to copy the index. It also means that if the underlying index has risen by 5 %, your ETF or Index fund's NAv will also rise by 5 %. Therfore these funds are also called Passive funds as they donot give any discretion to fund managers in selecting stocks to invest in whereas other funds are called Active funds as managers take active call in choosing stocks to invest within the overall objective of fund. Also management charges of index or ETF are at least 1 % lower than actively managed funds which adds up substantially in the long run.
• But there is a major difference between ETF and Index funds. While to invest in ETF you  should have demat account ( as in case if you want to buy share ), you can directly invest in index fund through mutual fund house.
• Why to invest in ETF or Index fund - There are about 10 Nifty index fund - highest return was 15.17 %  per year on a 5 year period and lowest return was 13.77 % which means that even if you make mistake in choosing fund and invest in worst performing Index fund your return will be just 1.5 % lower than best performing fund. This is due to lack of discretion to fund managers in choosing stocks.
• While in case of actively managed large cap fund, highest return was 17.48 % while lowest eturn was 9.55 % per annum over 5 years period. So if your investment decision goes wrong, your actively managed large cap fund can give return which may be 8 % lower than best fund in category.. So the risk spread in index fund is 1.5 % whereas in case of actively managed fund it is 8 %. As stocks are continuously churned in NIFTY or BSE SENSEX, you can be sure that you ETF or Index funds will only have better performing stocks.
• So what is the lesson - if you want to invest for long term and does want to risk of investing in low performing fund i.e. your fund must be top performer year after year- there is no alternative other than investing in ETF or Index funds. In fact US market has the lesson that as share market matures ability of managers of active fund to generate extra return over Index funds fizzles out. In US 45 % of all investment in mutual funds are via Passive fund. Index fund has given return of 11.2 % in last 20 years meaning that Rs 10000 invested in 2000 would have become 9000 in 2020. 

• On 8th Feb 2021, Elon Musk the CEO of Tesla the electric car maker announced that his company has invested $ 1.5 billion in  Bitcoin. As result of this, one bitcoin was worth $ 41000. Before this value of one unit of Bitcoin was traded at $ 20,000 in 2017 then it dropped to $ 3200 per unit of Bitcoin one year later. It means that investing in Bitcoin means a lot of volatility and a lot of profit.
• Bitcoin is a type of digital currency - most popular  among 6000 others- means that it has no physical form like rupee or dollar. A single unit of cryptocurrency is actually a complex computerised code that follows a certain set of rules that cannot be duplicated. There is a network of people and their computers that maintains the ledger. Any exchange of cryptocurrency must be validated by all those present in network.
• Bitcoin or other cryptocurrency can be bought and sold anywhere in the world. They are not regulated by central bank of any country. But you cannot buy anything in India by using Bitcoin - but anything can be bought on dark web by using Bitcoin. However some financial institutions like PayPal, Master Card allows people to buy things using Bitcoin. Also that Bitcoin is now legal in countries like US, UK and Germany.
• Best advantage or disadvantage of Bitcoin is the anonymity associated with it. All Bitcoin owner get public key - it is just like password of bank account. If you forget the public key, all your Bitcoin wealth will be lost for ever. Also in a transaction, buyer and seller don't know each other. No record of transaction is maintained and transaction can not be reversed. But due due to anonymity associated with cryptocurrency, cyber criminals demands cryptocurrency  in cyber crimes.
• Only 900 Bitcoin is minted everyday in the world. Value of cryptocurrency increases because investor thinks that they are going to become legal tender and will be recognised by central banks -- in a way there is only speculation that is driving the prices of cryptocurrency
• But should you invest in cryptocurrency like Bitcoin ? In 2018, RBI prohibited all banks in India to transact in cryptocurrency. In 2020, Supreme Court of India, reversed the decision - meaning that cryptocurrency in India at present is neither legal nor illegal. But wait, RBI is bringing its own currency in India just after budget session in 2021- so wait is suggested.