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By Col. Sanjeev Govila (Retd.)      | Mar 21, 2016
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Bonds

What are green bonds? Who are eligible to invest in this bonds and expected rate of returns?

– Lalit Singh, Nashik

As of now, there is no standard definition of a green bond. As we all understand, a bond is a debt instrument with which an entity, corporate or government raises money from investors. The bond issuer gets capital while the investors receive fixed income in the form of interest. When the bond matures, the money is repaid. A green bond is very similar. The only difference is that the issuer of a green bond publicly states that capital is being raised to fund ‘green’ projects, which typically include those relating to renewable energy, emission reductions and so on. While they have been around in other countries for quite some time now, in India they have lately shot into prominence with SEBI issuing new norms for issuance and listing of such securities in the stock market in January 2016. The move was aimed at helping meet the huge financing requirements worth $2.5 trillion for climate change actions in India by 2030. 

These bonds, four of which were issued in 2015 by Indian corporates like Yes Bank, Exim Bank of India, IDBI Bank and CLP India, are not any different from other bond issues. While the rates of interest and eligibility conditions would depend on the target audience of the issuer, green bonds are typically perceived to be carrying lower risk than other bonds. According to a KPMG report, in case of a green bond, “proceeds are raised for specific green projects, but repayment is tied to the issuer, not the success of the projects.” This means the risk of the project not performing stays with the issuer rather than investor.


Life Insurance

LIC has launched a new endowment plan Jeevan Shikhar. Please advise is it worth to invest into it for tax saving and insurance purpose. I have insurance cover of Rs 20 lakh and paying annual premium of Rs 1 lakh approx.

– Vishal Shah, Surat

This is a typical single premium, participating, non-linked, savings-cum-protection insurance policy wherein the risk cover is 10 times of the single premium paid. The plan tenure is 15 years. LIC has a history of launching single premium plans in the tax saving season (Jan – Mar) each year to meet the urgent needs of people who’ve not planned their taxes during rest of the year. Like all such insurance endowment plans, the returns are likely to be in 4-6% per annum range and the insurance cover is likely to be minimal. Hence, it would neither meet your insurance nor investment requirements adequately. You are already paying a very large premium on your existing policy wherein just Rs 20 Lakh of insurance requires you to pay a huge premium of Rs 1 Lakh.

Instead of opting for this sub-optimal solution, I would recommend you to take a pure term insurance for your insurance requirements. Any good financial planner would be able to suggest you the amount and duration of insurance cover that you actually need. If you take a term insurance online, it will also save you quite a lot of yearly premium payment by saving you the agent commission. For your tax requirement, we feel PPF is the very best if you wish to go conservatively. If you’re comfortable with market linked returns, you may go in for a good ELSS (Equity-Linked Savings Scheme), which is essentially a tax-saving equity mutual fund. ELSS has the shortest lock-in (of only three years) of all the tax-saving products. Both these products will also give you returns much better than any endowment insurance policy. I would further suggest you to go about your yearly tax requirements in a comfortably planned manner throughout the year rather than responding to it in an adhoc manner towards the end of a financial year. This can be done by regularly contributing to a PPF or for a monthly SIP in an ELSS.


Mutual Funds

I am 28 years old. My portfolio is very conservative and mainly invested in debt products (90% approx). Now, I want to increase my exposure into equities. Should I opt to invest in balanced funds or equity funds? Please explain difference between equity funds and equity income funds.

– Ajit Kawali, Pune

You have correctly concluded that you need to take a gradual exposure to equity since you haven’t invested in this class of products in the past. Balanced or hybrid funds would give you a good starting point. Typically, Equity-Hybrid funds would have more than 65% equity exposure while Debt-Hybrid funds would have lesser equity. Their taxation would also be like-wise calculated. You may start with MIP type of products in the beginning which have about 15-20% equity exposure. Please remember that the debt component of hybrid funds is also generally dynamically managed for duration and/ or credit risks, while the equity portion is managed as a multi-cap fund. Gradually, you could get into Equity-Hybrid Funds and pure equity funds as you gain confidence and get comfortable with equity.

Equity Income Funds are a recent entrant to India. These schemes invest more than 65 per cent of the money in equities – for equities tax treatment – and the rest in debt or cash. Out of this 65% equity, generally 25-40% is in pure equity and balance of equity portion is in arbitrage, which is fairly safe. So, the investor is quite protected if the equity market falls sharply due to the arbitrage and debt component of his equity income fund. These schemes are meant to attract first-time or retired investors who are unsure of the equity market. Once, they see good returns for a few years, they can graduate to equity funds with more confidence.


Mutual Funds

In portfolio, one should invest in how many mutual fund schemes? I have a belief multiple mutual fund schemes will help my portfolio to diversify. Please explain.

– Rangarajan Kumar, Chennai

Diversification in any investment portfolio reduces risks and is a good principle to follow while planning investments. That is why asset allocation is considered the corner stone of any investment plan. However, diversification just for the sake of it without consideration of the underlying securities could be meaningless. E.g., if you have five large cap mutual funds and believe that you have diversified enough, you may be grossly off the mark. Due to the limited universe of stocks that all these five schemes would have in their portfolio, you could simply be having large duplication of underlying stocks. Typically, a portfolio of 6-7 mutual fund schemes should give you good diversification if you’ve carefully selected the schemes from various categories of equity, debt and hybrid (mixed) mutual funds as per your needs and risk profile. Please carefully go through the fund objectives, fund manager’s experience and performance of managing such schemes in the past, fund house philosophy and of course, how the particular scheme has performed during various market cycles in the past. 


Col. Sanjeev Govila (retd) is CEO, Hum Fauji Initiatives. He is a Certified Financial Planner and SEBI Registered Investment Advisor.

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