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Arbitrage Funds and Investments After Marriage

Author: Col Sanjeev Govila (retd)/Tuesday, December 27, 2016/Categories: Ask the Finapolis

Arbitrage Funds and Investments After Marriage

I have some Rs 500 and Rs 1000 notes. Please answer urgently as I do not want to go into trouble for this. I have Rs 75,000 in large notes. I am saving money since long time and to prepare in case of emergency in family. Most of this money is small savings over the years. Now with all notes becoming illegal, is it alright if I invest these back in my bank account? I cannot show withdrawal of this much amount, but money is genuine and mine. 

- Dheeraj K, Nellore

Dheeraj, you need to understand that this whole exercise of Note-change is to unearth illegal money. Genuine, legal money has nothing to worry over this on any count. Assuming that your money is invested in legal avenues, there should be no problem at all since you can answer any questions about the origin of this money, should such a need arise. It has been already announced by the Government that they will not question savings bank deposits of up to Rs 2.5 Lakhs. This announcement is probably on a premise that a large number of people would have
a tendency to keep amounts of this order in cash at home for family emergencies or needs as Indian economy till now is largely a cash-driven one. 

I am 31 and I am soon getting married. My current investments are tax-savings products such as ELSS and PPF. I also have two term policies? What should I invest next after marriage? 

- Surinder Singh, Amritsar 

Please remember that investing is not merely about saving tax. Tax saving is just a small part of your overall financial management. You should take care that the avenue you select should meet your future requirements, consistent with your comfort level of risk. You should also have adequate liquidity to meet any emergencies
that may arise in future. Tax saving instruments typically have long lock-in periods and hence, cannot be relied upon to give you such emergency funds, at least in the initial years of your investing journey.

Hence, my advice to you is that you should start thinking about what all the big-ticket requirements, called financial
goals, that are likely to come up in your life, as now you’re soon getting married. Such requirements would typically relate to your children, getting a home in due course of time and the lifestyle (car, vacations etc) that you wish to have. As already brought out, emergency fund is also an important component of this planning. In addition, life insurance, medical insurance, provident fund and retirement planning are other aspects which you have to plan
for. My recommendations to you is to read up about it through books, internet or by interacting with other knowledgeable colleagues. If required, take the advice of an experienced fi nancial planner to plan your financial journey.

Can you please tell about arbitrage funds? I am interested in making money in their method. Whether it is suitable for retail investor to copy their tactics? - Jal Jayaram, Mumbai 

Arbitrage funds capitalise on the market ineffi ciencies to generate profits for their investors. In a situation of high and persistent volatility, arbitrage funds provide investors a safe avenue to park their money. As these funds invest predominantly in equities, their tax treatment is at par with equity funds. In fact, that is one of the big attraction of these funds – their risk and volatility is at par with debt funds while taxation is of equity funds – the capital gains
are tax-free after one year. I would not recommend you to try to mimic their style. Please remember that there is a lot of technicality involved in arbitrage methods. Also, you would require a large amount of money for any meaningful arbitrage operations to be taken. The brokerages charged for such operations are also high for retail investors which will further reduce the gains. So, unless you have enough skills to trade in derivatives, you must avoid trading in such instruments of equity markets. The arbitrage funds themselves have seen their returns
go down in the past few years as technology and large number of players in this field vie for the same arbitrage opportunities. 

My insurance cover is for Rs 35 lakh, which is around 4x my CTC. I want to increase this coverage now as I will be getting married soon. What other options can I choose? - Kisshaen Pandit, Thane 

Your contention that you should take a proper insurance cover since you’re getting married, is absolutely right. But please remember that over-insurance is as bad as under- insurance. It’s not that you need to have an insurance cover 5 times or 10 times your earnings. You need to properly calculate your assets, liabilities, expenses and income, including the future earnings and requirements, to assess the insurance cover that you actually require.
It’s quite possible that one may not even require any insurance cover depending on the assets and liabilities.
However, as you are young, the likelihood of you needing additional insurance cover are quite high. As a rule, never combine insurance with investment in a product. I would recommend you to go in for term insurance of an adequate amount from a reputed insurance provider who is well-established in the industry, has a good claims
ratio, good service network and reputation for good service. Online term plans are quite cheap and most of the insurance companies also provide some sort of an insurance needs calculator for you to get a rough idea of the insurance cover that you should take. But please remember that insurance requirements are dynamic, need to be
re-assessed every few years or on some major life-event taking place, and additional cover taken or unnecessary
cover shed, if the need be.

You may even consult a financial planner to assist you with your future financial requirements and reduce
the risk of taking the right insurance plan and avoiding over- or under-insurance. 

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