Thursday, May 28, 2015

Asset Allocation - Why You Should Invest in Mutual Fund Schemes That Investing Overseas?

Why you should invest in MF schemes investing overseas?

Investors must understand the associated risks before investing into them. An

allocation of 10% to the global funds may be preferred.

Choppy equity markets and spurting bond yields in the recent weeks in the domestic market should not materially alter the long term asset allocation levels. But these events do serve as a good reminder to diversify the domestic portfolio. In India, the major asset classes that offer easy tradability are listed equity, fixed income, gold through ETFs and commodities to some extent. This diversification alone may not be enough given that Indian market is increasingly being impacted by global events over and above the domestic ones. Globally, different economies are driven by internal growth factors and respond differently to major events. The stability in the equity market of a developed economy can cushion the high volatility seen in an emerging market like ours.

Indian investors can invest in overseas assets through the liberalized remittance scheme (LRS) which allows up to $125000 (proposed $250,000) per annum. A simpler route is through domestic mutual funds that offer exposure to global equities either by feeding into an existing offshore fund or investing directly into overseas equities. The mutual fund route doesn’t come under the purview of LRS.

Over a period of time with wealth managers acknowledging the need of geographical diversification, mutual funds have launched plethora of funds providing exposure to global equities . The universe of feeder funds offers geographical diversification as well as interesting themes. The funds may target specific region like US, Europe, Asia, Latin America, a combination of developed regions or emerging markets in general. The funds also tap sections of the region like periphery of Europe or Value / Growth companies in the US. Global thematic funds offer new opportunities for Indian investors to tap specific segments in the global markets. Themes currently available include commodities, bullion, oil, real assets, real estate, mining and agriculture. These options are not otherwise available as investment vehicles in India due to lack of a tradable market for these assets or regulatory restrictions in India.

Investment in overseas tradable assets is considered as non-domestic equity and attracts fixed income taxation of 20% with indexation. Hence some mutual funds maintain a minimum of 65% in domestic equity and deploy the rest in the overseas fund to qualify for equity taxation. But, diversification of the domestic portfolio being the primary criterion for inclusion of overseas equity, a heavy tilt towards domestic equities in a global fund will dilute the essence of diversification. Hence, we would prefer funds that offer unhindered 100% participation in overseas equities.

Funds focusing on a single region expose the investor to higher levels of country specific risks and currency fluctuations. For optimal diversification, investors may consider feeder funds that provide non-concentrated exposure to top few regions rather than a single country. For example, if India displays risk-return characteristics similar to those of other emerging economies then global events would have comparable impact on India and other emerging economies. In such a situation, investing in a global emerging market fund will not serve the purpose as most emerging economies are highly correlated. Instead, looking at a fund that invests in a bunch of less correlated developed economies can counterbalance the domestic market volatility to some extent.

Some other key points to consider

• Feeder fund route Versus direct overseas equity fund

The underlying parent funds of Feeder funds usually have a long and a proven performance and fund management track record as compared to Indian domestic funds investing directly in overseas equity which seek advisory from the overseas fund managers. Expense-wise, all the funds are bound to follow the same upper limit prescribed by SEBI. This upper limit for expense should include charges by parent and feeder fund.

• Investment Tenure

Positive effect of Rupee depreciation further adds to the returns made by global funds. This effect is experienced over the medium term. Also, equity as an asset class requires a medium to long term horizon to see meaningful returns. An investment horizon of at least three years should be preferred for these investments. Overseas equity is treated as non-domestic equity investment in India for taxation and thus attracts debt taxation. Having a 3-year horizon will also help benefit from long term debt taxation of 20% with indexation.

• Risks

Region-specific risks can be handled by the way of geographical diversification. But at times, major global events have the propensity to affect all global economies and commodities in similar fashion. In case of a catastrophic event where all markets behave likewise, the essence of global diversification will be lost. Another risk is posed by currency movement. Returns from global mutual funds have two parts – performance of the underlying market/ parent fund and domestic currency movement (investor’s home currency). An appreciating rupee over a period of time can shave off some gains from such funds for the domestic investor.

In conclusion, investors must fully understand the nature of the global funds and the associated risks before investing into them. An allocation of 10% to the global funds may be preferred. Investors may choose global feeder funds with multiple underlying regions that are less correlated with each other and with the Indian markets. Within themes, investors may pick up those that are sustainable for a longer time period like agriculture rather than a transiting or cyclical trend.

Source - moneycontrol.com

Tuesday, May 26, 2015

Retirement Planning - How to Plan Your Retirement Draw Down and Spending?

Retirees must plan how to draw down retirement savings...

Your financial life, like climbing a mountain, does not end when you reach the summit, your retirement. Getting down safely, or making your retirement income last, requires a set of different strategies. How can you withdraw your money without depleting it?

For years, you work, live below your means, save and invest. Your savings and investments grow moderately at first but faster over time. Your balances and net worth climb upward at a sharper angle now, just as mountain slopes steepen above the surrounding foothills.

Now you can see the summit. This is your retirement. You reach the point where you feel secure about funding your preferred lifestyle after your working years.

But this summit, alpine or financial, is no finish line. Your ascent is complete, but now your goal changes quite a bit. Getting down the mountain safely is just as challenging. You face new risks different from those on the way up.

Your definition of risk changes in retirement. While building savings, volatility of markets is your risk. Once you retire, risk is the potential shortfall of funding your needs — usually because of longevity, spending or lower-than-

expected investment returns.

Because going back to work is harder, you probably have limited options to react to shortfalls. If you have to sell investments during a significant market decline, those assets can no longer recover.

When you save, the order of returns doesn’t matter. Whether poor returns happen this year or the next, you get to the same place. But when you retire, the sequence of returns can change the trajectory of your income substantially.

Withdrawing assets to fund your retirement spending also reduces the power of compounding. In an ideal world — one that many investors think exists — you live off of dividends and returns without touching your principal. However, even if you shift to a portfolio heavy on income-producing assets, this strategy is not likely to work persistently over a multi-decade retirement.

Here are a few tips that help you come down from the summit with a better chance that your money will last as long as you do.

• Set a cash bucket aside. You need a multiple-bucket strategy for your retirement. To supplement Social Security and any other non-investment income, you want a bucket to hold cash of around two years of expected withdrawals. This way, you don’t have to sell something while it is temporarily in decline.

• Replenish the cash bucket when you rebalance your portfolio. When stocks or bonds grow to be larger than their target weight, capture the gain and put it into the short-term bucket for upcoming expenses.

• Make a spending plan. Expenses can vary during phases of retirement — typically high in the early years because of more activities, lower in the middle, and then higher later because of health-care costs. Your planning should accommodate all these expenses.

• Spending from principal is OK if you position the rest for longer-term growth. Research suggests that if you withdraw 4 percent of your retirement assets, adjusted for inflation each year, you probably will not run out of money.

• Mind the tax consequences. If you withdraw money from tax-deferred retirement accounts, you owe ordinary income tax. A distribution from a Roth IRA is tax-free, while money from a brokerage account is subject to capital-gains taxes. Large withdrawals can bump you into a higher tax bracket and also increase your Medicare costs.

• Maintain a safety margin. Keep some money left over in case you live longer than you expect, expenses are higher or your investments return less than you plan for.

Source - dispatch.com

1. How to (safely) draw down your retirement savings?

2. How to draw down your retirement savings - The Flexible 4% Guideline

3. How do retirees draw down their savings?

4. Retirement 'Danger Zone' -- How to Get Through It

5. 4 Ways To Avoid Outliving Your Nest Egg

Retirement Planning - 6 Common Retirement Fears

Prepare yourself

After a lifetime of hard work, you want to be sure you will be comfortable in retirement. Understanding the ins and outs of retirement while in your working years can take some time, but will be worth it in the long run. Even people with a good knowledge of retirement issues can be fearful about a future so different from what they’re accustomed to. Consider the most common retirement concerns and prepare yourself so you will not fall victim to potential pitfalls.

1. Running Out of Money

Between saving enough, being able to spend efficiently, affording your desired lifestyle and the possibility of outliving your money, running out of funds is likely your top retirement concern. It may seem overwhelming to live without working, but if you plan well, it can be possible. It’s important to determine how much you will need to save, create a budget that factors in reaching that amount of savings, and you should be able to live without this fear.

2. That Empty Feeling

Once you become accustomed to the busy schedule of juggling your work routine and your personal life, it may be challenging to have so much free time. To avoid being in a slump and experiencing the empty agenda feeling, consider taking up some hobbies more seriously, joining a local group, spending more time with friends and family or planning a trip to kick off your retirement.

3. Healthcare

While health declines as you age, affording healthcare is a common concern among retirees and individuals preparing for retirement. While it is true that maintaining your well-being can be expensive, insurance should help cover your costs and this is just one reason it’s important to maintain an emergency fund into retirement — in case of any uncovered health issues.

4. Not Finding Work or Forced Retirement

Since not all retirement is a choice, a common fear about retirement is that it will happen before you are ready and you will not be able to find another full-time — or even part-time — job. For this reason, it’s a good idea to maintain your online work profile, continue to network and keep your resume up to date, so you can be prepared for a job hunt, if it becomes necessary. This is true even if you plan to finish out your working days with one company.

5. Falling Home Values

Oftentimes, people plan to supplement their retirement savings by selling the home they lived in while working and possibly raising children. If you planned your retirement timing and total savings taking in the factor of home appreciation, it’s a good idea to allow that to be a bump up in lifestyle but not the money you need to live. This is in case home values decline or a recession sets in just as you retire.

6. Investment Losses

Investing always involves some risk, and many planning for retirement fear that investment losses will ruin all they have worked for. It’s important to adjust your investments as you get nearer to retirement. In general, you can take bigger risks when you have more time to recover any potential losses. As you approach retirement, it’s generally a good idea to invest more conservatively.

Source - msn.com

Retirement Planning - The 2 Events Americans Most Fear About Retirement and It Applies To Everyone!

The 2 events Americans most fear they can’t afford are things that happen to everyone

Northwestern Mutual’s 2015 Planning and Progress Study surveyed over 2,000 Americans in January to gauge how they feel about their money.

One of the most interesting insights it uncovered is that more Americans fear unplanned financial emergencies and the inability to afford to retire comfortably more than anything else to do with their money:

What’s the big deal about that?

Retiring and facing an unplanned financial emergency are things that happen to nearly everyone. They’re events that can be foreseen and planned for, in the form of an emergency fund or a retirement account.

If you keep reading beyond the two greatest fears, the third and fourth-greatest are incredibly similar to the leaders: “unplanned medical expenses due to an illness” and “outliving my retirement savings.” Out of the top five fears, four are about emergencies and retirement.

While the idea of being unable to afford your future is undoubtedly scary, there’s another way to look at this information: It’s good news!

No one can predict the future — maybe you’ll be laid off and have to retire earlier than planned, maybe your emergency will take the form of a lost job or a stock market dive — but it’s pretty safe to assume that most people will, at some point, either have a financial emergency or bow out of the workforce. Or both.

There’s a safety in knowing that you have the power to neutralize your fears. You have the power to open a retirement account early and take advantage of compound interest; you have the power to eliminate your debt and put that money into savings instead; you have the power to build your emergency fund to cover months, if not years, of living expenses.

If you know what scares you, you can face it head-on.

Source - businessinsider.my

The Retirement Crisis - Statistics Everyone Should See in U.S. Context

The Retirement Crisis: Statistics Everyone Should See

The retirement crisis in America does not discriminate against consumers based on age; it’s an equal opportunity punisher seeking out anyone not properly handling their personal finances. We may hear one generation is more doomed than the other to spend their so-called golden years in a perpetual state of poverty, but truth be told, every age group in America has its fair share of retirement problems.

Who wants to be a millionaire? A new report from Transamerica Center for Retirement Studies (TCRS) finds that workers of all ages think they will need to accumulate a median of $1 million to live comfortably in retirement, presenting a wall of worry to savers. While this figure is merely guesswork by many of the respondents, there is a legitimate foundation of concern when taking a closer inspection at how workers are building their nest eggs. Let’s take a look at how five age brackets are handling retirement planning these days.

Twenty-somethings:

Young workers may not be as helpless as previously thought. Impressively, 67% of twenty-somethings are already saving for retirement through an employer-sponsored retirement plan or outside of work, and they started saving at a median age of only 22. In fact, 68% expect these accounts to serve as their primary source of income.

However, this demographic faces financial challenges not commonly seen in other age groups. Four out of five of twenty-somethings are concerned Social Security will not be available by the time they retire. Furthermore, 34% say paying off student loans or credit cards is their greatest financial priority right now. Making matters worse, the aftermath of the Great Recession still haunts retirement portfolios. Nearly a quarter of twenty-somethings who are saving for retirement are invested mostly in bonds, money market funds, cash, and other risk adverse investments. Due to inflation, being too conservative with money is a real threat to retirement aspirations.

source - istock

Thirty-somethings:

With the Great Recession in the rear-view mirror, 43% of thirty-somethings say they have either fully recovered or were not impacted by the worst financial downturn since the Great Depression. Nearly eight out of 10 are saving for retirement, and started placing money aside for their future self at a median age of 25. Three out of 10 who participate in a retirement plan are saving at least 10% of their annual pay.

This group may be feeling too confident, though. The report finds that 52% of thirty-somethings believe they are building a large enough retirement nest egg, but 57% have only “guessed” how much they will truly need in retirement, and 68% agree they don’t know as much as they should about retirement investing.

“Thirty-something workers are now well into their careers, albeit with the major disruption of the Great Recession. The good news is many are saving for retirement,” said Catherine Collinson, president of TCRS, in a press statement. “For those who are not yet saving, now is the time for them to get started. For those who are saving, now is the time to save even more and expand their efforts to include building knowledge and planning.”

Source - Thinkstock

Forty-somethings:

If you haven’t started saving for retirement by now, time is running out for a multi-decade savings period. On the positive side, 76% of forty-somethings are saving for retirement, and 82% who are offered a 401(k) or similar plan participate in it. Nonetheless, this is the age group where life catches up to you if you’re not careful. “Forty-something workers endured the Great Recession and are in their sandwich years, which can include a delicate balancing act of work, kids and possibly aging parents, and they are feeling financially frazzled,” said Collinson.

Only 10% of workers in their forties are “very confident” they will be able to fully retire with a comfortable lifestyle, while 27% have not yet begun to recover or believe they will never recover from the recession. Despite the majority of forty-somethings saving for retirement, they are only saving a median of 7% of their annual pay. Almost a quarter have taken a loan or early withdrawal from a retirement plan. These figures help explain why 3 in 5 forty-somethings also expect to work past age 65 or don’t plan to retire at all.

Source - Thinksource

Fifty-somethings:

The time is now or never to boost your retirement savings. With catch-up contributions available to people at least 50 years old, 37% of fifty-somethings say saving for retirement is their greatest financial priority. Furthermore, 83% who are offered a 401(k) or similar plan participate in the plan, while 61% are also saving outside of an employer plan. Three in 10 workers are contributing more than 10% of their annual pay.

Age brings wisdom, which brings the stark reality of how retirement will play out. Four in 10 fifty-somethings expect their standard of living to decrease when they retire, and only 45% agree they are building a large enough nest egg. In order to compensate for the savings shortfall, 59% plan to work past age 65 or plan to work until they die, a dangerous strategy considering many workers are not able to stay in the workforce because of health issues.

Source - Thinksource

Sixty-somethings:

Retirement outcomes are now a reality. More than half of respondents still plan to continue working after they retire, mostly to collect income and health benefits. Four in 10 sixty-somethings are envisioning a phased transition into retirement that involves shifting from full-time to part-time or working in a different capacity. “Workers in their sixties and older have cast aside long-held societal notions about fully retiring at age 65. They are literally transforming retirement as they retire,” said Collinson.

Even at this stage, only 15% of respondents have a written retirement strategy. This may be caused by the large role Social Security plays. Almost half of sixty-somethings expect Social Security to be their primary source of income when they retire. However, a lack of financial knowledge and planning may still hinder the retirement experience. Just 29% of respondents claim to know a “great deal” about Social Security retirement benefits. Overall, the median amount saved in all household retirement accounts by sixty-somethings is $172,000.

Source- cheatsheet.com

1. Most Malaysians fear post-pension poverty, but half say can’t save for debts, survey shows

2. Most Malaysians are ill-prepared for life after retirement

3. HSBC: Most Malaysians see owning a second property essential to fund retirement

4. Retirement - HSBC Malaysia

5. Employees fear they will run out of money in retirement

Sunday, May 24, 2015

Diversification - What does it mean to be diversified?

by Byron R. Moore,May 22, 2015

Question: I keep hearing and reading that I am supposed to be diversified in my investments. I feel dumb asking, but what does that even mean?

Answer: The dumbest question is the one you never ask, so thanks for asking!

Diversification is a risk reduction tool.
By their very nature, investments are risky. The value of any single investment can go down dramatically due to any number of circumstances. But when you spread that risk around by having different kinds of investments, your risk of losing money over the long term is greatly reduced. Not eliminated, but reduced.

I recommend you diversify your investments (or assets) themselves and also the types of accounts that contain those diversified investments.

Let’s look at the diversification of your assets.

Different types of assets tend to move up or down in different cycles. Blending the assets (and therefore the cycles) together can smooth out the ups and downs of your overall investment portfolio. The term “asset allocation” refers to a strategic proportional positioning of one’s investment assets over a number of investment types or classes.

Think of a recipe that calls for a variety of ingredients in varying proportions. The cook knows what those ingredients are. Everyone else just says, “Save me a piece!”

Stocks, bonds and cash are the most commonly used asset classes (ingredients).

So what is a stock? It is a security that represents ownership in a company. By owning a stock, you participate in the increase (or decrease) in value of the company as it is traded in the public market.

What makes a stock increase (or decrease) in value? The most fundamental reason is the earnings performance of the company issuing the stock — did they make money or not? But current events can have an impact. And so can the emotional outlook (optimistic or pessimistic) of the millions of individuals that make up what we call “the market.” Anyone familiar with markets knows emotional outlook (also known as sentiment) can change rapidly.

And what is a bond? It is a security that represents your having loaned a company, a government or a municipality a specific sum of money for a specific period of time. In return for the use of your money, the borrower pays you a stated rate of interest for the duration of the bond. At the end of the duration, your bond is redeemed and you get your money back.

Both stocks and bonds have myriad sub-categories depending on company size, performance, geographic location etc. There are other assets classes (such as real estate or currencies) that may also be used, depending on individual needs and preferences.

Designing and constructing a portfolio of various asset classes appropriate for you and your specific circumstances is only the first step.

Since both investment markets and investor circumstances constantly change, the practice of portfolio rebalancing is important. Asset classes will rise and fall at different times and in differing proportions. By regularly “re-balancing” to your original asset allocation, you avoid over concentration in areas that have recently outperformed and maintain the original balance of your portfolio.

Most investors will benefit from the services of a professional money manager and/or financial advisor to assist them in the overall portfolio design and asset allocation process.

Source -thetowntalk.com

Diversification for Dummies

Moneywatchers: ‘Diversification for Dummies’

By Nick Bertell

POSTED: 05/23/15,
Is it insulting to use the word dummy in reference to anything? It used to be, but not anymore — not since the immensely popular “Dummies” series of guides started being put out by Wiley Publishing. I have six of them myself, and there actually is a “Diversification for Dummies.”

Needless to say, that when it comes to portfolio management, diversification is a key component. We all know about eggs and baskets. And that’s why people accept it and allocate their portfolio accordingly. The process is simple; you typically put money in stocks, typically a little less in bonds, and typically keep some in cash. Although this will not be appropriate for everyone, a common allocation for a diversified portfolio is 50 percent in stocks, 40 percent in bonds and cash and 10 percent in riskier or speculative assets. Presto, you’re diversified .

What may be a little less understood is the thought process behind diversification. After all, why should you diversify just because everybody else is? Maybe you want your entire portfolio in bonds, or cash, or gold for that matter. One of the strongest arguments behind diversification is that it actually works to protect the value of your portfolio by allocating portions of it to areas that you wouldn’t otherwise feel comfortable. The irony is, avoiding entire asset classes in favor of others to protect your wealth may actually leave you more exposed. Here is a parable about how diversification actually works.

Let’s say you have money you would like to invest in a local business. You notice that the local sunscreen plant (Sunboldt) has been thriving due to the summer sun and so you decide to invest with them. As a result of their success, you see your money begin to grow and feel comfortable that you made the right choice. However, a few months later it starts to rain (please). You think nothing of this at first until you notice that your gains from Sunboldt have recently begun to decline rapidly. In fact, at this rate of decline your account is about to drop below your initial investment. What went wrong?

The world of investing can act a lot like the weather. No matter how clear the forecast, events outside of your control cause unintended outcomes, otherwise known as risk. Diversification works to offset this risk by allowing your money to be in multiple places at the same time. So if you would have invested in the local sunscreen plant and the local umbrella factory, your portfolio could be making money whether it rains, pours or is beautiful. The idea is to offset losses in one market by gains in another market all the while keeping a constant and reliable rate of growth.

One of the keys to diversification is a statistical measure called correlation. In investing, correlation measures the degree two asset classes move together. A reading of 1.0 means two assets move in tandem and -1.0 means they are polar opposites. Stocks and U.S. Treasury Bonds have a very low correlation making them ideal portfolio partners. This simple risk management principal is the rationale behind the diversification in modern portfolios. In the example above, investing in sunscreen and umbrellas is similar to investing in stocks and bonds. Diversification is also used within these two asset classes to broaden your investments even further.

It’s important for you to know how well your current portfolio is diversified. Reviewing your investments at least quarterly will help you ensure that your current diversification strategy meets your long-term investment needs. After all, you don’t want to be the one caught in a rain storm with a handful of sunscreen.

Until the next time, we’ll watch your money.

Source - times-standard.com

Monday, May 18, 2015

Diversification - What is "Offshore Investment"?

"Offshore investment" is the keeping of money in a jurisdiction other than one's country of residence. Offshore jurisdictions are a commonly accepted means of reducing the taxes levied in most countries to high net worth investors.

In the past or to certain extent even now, offshore investments is often demonized in the media, which paints a bad picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing.

No doubt, it's rather true that many poorly monitored and regulated offshore centres have served historically as havens for tax evasion, money laundering, or to conceal or protect illicit or black money from law enforcement authorities in the investor's country.

However, the modern and well-regulated offshore centres now allow legitimate investors be it corporate or individual to take advantage of higher rates of return or lower rates of tax on that return offered by operating via such centres and investing in these offshore centres that are absolutely .... and perfectly legal when repatriate money back to their home country.

Among those well- regulated famous offshore financial destinations located in Asia is Singapore in which it has been risen in stature as a centre for wealth management and ranked fourth in the world in the 2009 Global Financial Centres Index. The state is a hub for hedge funds and its private banking industry is growing at a rate of 30 per cent annually. Singapore is now seriously challenging Switzerland as the world's largest private-banking center, thanks to Asia's burgeoning ranks of millionaires.

Another well know offshore centre in Asia is Labuan International Offshore Financial Centre in Malaysia. It establishment in complementary to it existing onshore banking in particular Islamic financing. It is an integrated offshore financial centre which offers a wide range of offshore products including the development of Islamic instruments; and providing a legal framework conducive for the development of offshore industry in Labuan.

Some Basic Information of Offshore Investing

Offshore centers are widely used and are accessible to anyone who can meet the minimum investment amount or pay the obligatory fees required to open such an entity.

Investopedia indicates that, "More than half of the world's assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales."

Payment of less tax is the driving force behind most 'offshore' activity. Due to the use of offshore centers, investors are able to conduct more flexible investment activities in a more profitable fashion and manner.

Often, taxes levied by an investor's home country are critical to the profitability of any given investment. Using offshore-domiciled special purpose mechanisms (or vehicles) an investor may reduce the amount of tax payable, allowing the investor to achieve greater profitability overall.

Another reason why 'offshore' investment is considered superior to 'onshore' investment is because it is less regulated, and the behavior of the offshore investment provider, whether he be a banker, fund manager, trustee or stock-broker, is freer and less restriction than it could be in a more regulated environment.

The Compelling Reasons for offshore investment

Motivations for investment offshore include:

Tax advantages - tax regulations often contain provisions to protect against taxation by multiple jurisdictions which can be exploited for legal tax reductions. Nations intentionally attract business investments through lower tax rates. Many countries (known as tax havens) offer tax incentives to foreign investors. The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country like Singapore with very few resources and a small population, attracting investors can dramatically increase economic activity. Many foreign companies also enjoy tax-exempt status in some offshore centers or a low tax rate of just 3%, which capped at a maximum of RM20,000 per year when they invest in Labuan International Offshore Financial Centre . As such, making investments through foreign corporations can hold a distinct advantage over making investments as an individual and investing in such an environment can improve the investor's rate of return on investment.

Investment diversification - risk can be managed by diversifying investments among a wider range of options than are available for onshore investment. Offshore accounts are much more flexible, giving investors unlimited access to international markets and to all major exchanges. On top of that, there are many opportunities in developing nations and emerging markets, especially in those that are beginning to privatize sectors that were formerly under government control.

Avoidance of forced heirship and asset protection- inheritance may be passed to the preferred heir, regardless of regulations such as community property laws in the jurisdiction of residence/death. Offshore centers are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities. Many individuals who are concerned about lawsuits, or lenders foreclosing on outstanding debts elect to transfer a portion of their assets from their personal estates to an entity that holds it outside of their home country. By making these on-paper ownership transfers, individuals are no longer susceptible to seizure or other domestic troubles.

Lower levels of regulation and restrictions- a broader range of investment options are available (e.g. hedge funds, which thrive in low regulatory environments due to their highly aggressive investments strategies, thrive in offshore jurisdictions, principally the Cayman Islands)

Privacy and confidentiality- confidential financial information helps the individual manage taxes on capital gains, income, and inheritance. Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions. However, this secrecy doesn't mean that offshore investors are criminals with something to hide. It's also important to note that offshore laws will allow identity disclosure in clear instances of drug trafficking, money laundering or other illegal activities. From the point of view of a high-profile investor, however, keeping information, such as the investor's identity, secret while accumulating shares of a public company can offer that investor a significant financial (and legal) advantage.

Specialist financial services - the leading offshore centres have highly developed financial services sectors with expertise in stock broking, asset management, banking, insurance, trusts, funds and legal services.

One of the demerit factor of offshore investing is "Cost" - Offshore Accounts are not cheap to set up. Depending on the individual's investment goals and the jurisdiction he or she chooses, an offshore corporation may need to be started.

Setting up an offshore corporation may mean steep legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company.

Furthermore many offshore accounts require minimum investments of between $100,000 and $1 million. Businesses that make money facilitating offshore investment know that their offerings are in high demand by the very wealthy and they charge accordingly.

How Safe Is Offshore Investing?

Popular offshore countries such as the Bahamas, Bermuda, Cayman Islands and Isle of Man and Singapore are known to offer fairly secure investment opportunities.

As mentioned, more than half of the world's assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales. Still, like every investment you make, use common sense and choose a reputable investment firm.

It is also a good idea to consult with an experienced and reputable investment advisor, accountant, and lawyer who specializes in international investment. If you are looking to protect your assets, or are concerned with estate planning or business succession, it would be prudent to find an attorney (or a team of attorneys) specializing in asset protection, wills or business succession. Of course, these professionals come at a cost. In most cases the benefits of offshore investing are outweighed by the tremendous costs of professional fees, commissions, travel expenses and downside risk. (Source - wikipedia and investopedia)

Sunday, May 17, 2015

Currency Diversification - World Global Currrency

In the era of globalization, many countries around the world are fighting for market share in cross boarder trade to gain economy advantage and in most countries international trade represents a significant share of gross domestic product (GDP), an indicator commonly used to measure the economic health of a country, as well as to gauge a country's standard of living.

While cross broader and international trade is rising tremendously hence making the demand of international currencies for trade settlement is also high in demand. Coupled with speculative trading of currencies have somehow made foreign exchange markets very volatile in recent years.

Why currencies volatility has got worse?

In a series of events happened early of the year, FOREIGN-exchange markets are suddenly in turmoil. The Swiss franc jumped by 30% in a matter of minutes last month. Over the past year, the Russian rouble has fallen by 40% against the dollar, while the Canadian and Australian dollar have recently dropped to six-year lows against the greenback. These shifts have proved costly for many in the markets. Alpari, a foreign-exchange broker, went bust, and Everest Capital, a fund manager, had to close its main hedge fund after suffering heavy losses. Why has currency volatility got worse?

There are two reasons for the recent currencies volatility. The first is a divide between the Federal Reserve and the developed world’s other two big central banks—the Bank of Japan and the European Central Bank. The Fed has stopped its quantitative easing (QE) programme and may look to tighten monetary policy this year; meanwhile the Bank of Japan is still pursuing QE and the ECB has just agreed to start buying bonds. This shift has been driving the dollar higher against both the yen and the euro.

Secondly, the sudden drop and falling commodity prices in particular cruel oil are bringing headline inflation rates down and causing economic weakness in some producing countries (such as Russia). This is leading many central banks to cut interest rates; 11 have done so (including the Canadians and Australians) since the start of November. Lower rates diminish the appeal of a currency to yield-seeking international investors. But governments are happy to see their currencies weaken in the current situation, when global economic growth is sluggish and a lower exchange rate might boost the prospects for exports.

So why adding developed foreign currency to your investment portfolio is important?

Many investment experts now advocate and suggest that currencies as the new answer for a truly diversified portfolio.

Currency can play an important role in the overall results delivered by a diversified portfolio. The benefits of holding foreign currency exposures can offers strong diversification benefits and reducing financial risk.

As demonstrated by the below chart, adding developed market foreign currency reduced the total fund risk and indeed for a reasonably large exposure there is a reduction in volatility.

Source: Perpetual, Bloomberg. Both live and back tested data has been used for the Diversified Real Return Fund. Results are for 31/12/1987 to 30/06/2013. Developed and emerging market currency baskets approximate the foreign currency exposures of the MSCI World ex Australia and MSCI Emerging Markets.

Another reason of the need of currency diversification from your home currency is when you think the economy of the country is mismanaged, natural resources are not maximized and utilized effectively and efficiently, high debts, corruptions are rampant and the favoritism and discrimination policies practiced by the ruling elites, then it is a high time for you to look into the need for home currency diversification in order to leverage and spread the investment risk across.

Adding hard currency into your investment portfolio is one of the option, a portfolio diversification strategy in which securities are purchased in various foreign currency denominations for purposes of minimizing foreign exchange risk, increasing global exposure, and capitalizing on exchange rate disparities is also highly sought by many investors to reduce risk and maximize portfolio return.

Which currency is the World Global Currency or Developed Market Currency?

In the foreign exchange market and international finance, a world currency or global currency refers to a currency that is transacted internationally, with no set borders. In this respect, the US Dollar and the Euro are by far the most used currencies in terms of global reserves as well as for trade and commodities settlement due.

The US dollar is still the world's reserve currency. In many places from China to Africa to South-East Asia currencies are strongly linked to the greenback. However, a third currency set to challenge US Dollar and Euro dominance as global currency is Chinese Yuan Renminbi (RMB), the official currency of People's Republic of China. China is set to continue its' call for a global currency to replace the dominant dollar and it's showing a growing assertiveness on revamping the world economy.

The establishment of Asia Infrastructure Investment Bank (AIIB) lead by China which attracts 57 founding members around the world including U.S.'s key allies like Australia, Britain, Korea, Canada is set to challenge and shake up the traditional American-led global financial order.

After all the fuss by U.S. and the reality is despite their constant lobbied against the establishment of China-led New AIIB from the start, and to the surprise and embarrassment of the Obama administration, the list of participating nations includes nearly every major economy, except for the U.S. and Japan is in fact a wake-up call for Washington.

Slated to start operations this year, the bank is expected to have $100 billion in capital, which properly borrowed against could underpin some $1.3 trillion in financing. The bank fits in nicely with Beijing’s aspirations for a more internationalized yuan(RMB) and also fulfills the continent’s need for greater investment in infrastructure: The Asian Development Bank estimates Asia will require some $8 trillion in investment by 2020, or face “negative consequences on economic growth.”

Another trend is the accumulation of "Gold" by China's Central Bank in recent years is yet another strong signal to international communities that China's ambition and desire to spread the usage of the Chinese Yuan Renminbi as a reserve currency, requiring them to take steps towards legitimizing the yuan for trade and accumulating gold reserves is one of these steps.

According to an industry expert, China’s secretive central bank may have stocked up heavily on gold in the past few years, and might own about 2,710 tons as of the end of 2013.

Precious metals expert and gold bug Jeff Nichols, a managing director of the American Precious Metals Advisors, wrote that much of this reported increase in holdings came from domestic Chinese mine production and secondary supply, which involves scrap or recycling gold.

According to Nichols’ sources, the Peoples' Bank of China (PBOC) bought 654 metric tons of gold from 2009 to 2011, 388 tons in 2012, and more than 622 tons in 2013. There is no recent official data about Chinese central bank gold holdings, as the institution last announced its gold holdings in April 2009, at 1,054 tons and this is the same amount of gold reported by World Gold Council as at Mar 2015.

There is a prediction that “By the end of Obama's second term as President, The Central Bank of China will publicly announce that they have an amount of gold in reserve that is greater than Germany's.” Germany is currently the 2nd biggest gold holding country with total holding of 3,383.4 tonnes as at Mar 2015.

Besides USD, EUR and RMB, others currencies worth to take a closer look and review are SGD, AUD and CHF.

Below are some charts on the performance of Ringgit Malaysia against major currencies and neighboring currencies for the last decade.