30 Apr 2020

“Children are seriously children for a decade. But for five or more decades after that, they will be your friend—if you're fortunate to like each other.” — Elaine N Aron in The Highly Sensitive Child

22 Apr 2020

How big a bag do you need for a 1kg gold bar?

I don’t often go to jewellery shops. The first time I was at a shop exchanging an old gold jewellery for a new one, I had a pretty novel experience. They took our old jewellery and melted it down to a small piece of gold. What was a relatively big piece of wearable shrank to a tiny piece of metal. I held it in my hand, and it was surprisingly heavy for its size! Of course it’s the same weight as the jewellery we gave them, but the smaller size made my brain expect something much lighter.

You can look up the density number on the web and see for yourself. However, I think the image below communicates gold’s density a lot more intuitively. (This is a screenshot from “Coins vs Bars“ video of Strategic Wealth Preservation YouTube channel.) The larger bar in the picture weighs 1kg despite being so small! This is so novel, I want to get a 1kg bar and just keep it with me, like a fancy toy. 😬

Picture showing a 10 ounces (about 283 grams) gold bar and a 1kg gold bar

20 Apr 2020

Capital gain tax and reinvestment (into residential property)

I just came across something interesting: apparently if you sell some long-term asset, such as shares/mutual funds or house, and put that money into buying a residential house property, you don’t have to pay capital gain taxes on the sale. Quoting ClearTax article on Capital Gains with some edits:
Exemption under Section 54F is available when there are capital gains from the sale of a long-term asset other than a house property. You must invest the entire sale [proceedings] to buy a new residential house property to claim this exemption.
Making it apply only to residential property is limiting: you’d still have to pay capital gain taxes when switching from one mutual fund scheme to another or while rebalancing your portfolio by selling equity/debt shares and buying the other. However, I think I should still be happy about this exemption for these reasons:
  1. This is better than nothing. Governments usually subsidise only some kinds of investment; investing in residential properties is a popular one.
  2. This can actually be useful to me. I have been toying with the idea of selling some equity shares and putting that money into buying a house. Saving some tax in the process only makes the idea more attractive.
  3. While some of us might be unhappy that for some capital reinvestment there is no tax break, we should keep in mind what Aashish Somaiya of Motilal Oswal Asset Management Company said in a recent interview: “tax is a happy incidence; you have tax when you have a return”. Rather than fretting about the 20% tax, one should be happy that their investments have made them the remaining 80%.
PS: This is no tax advice. Neither am I qualified to provide tax advice. Even if I were to take advantage of this scheme, I’d consult a professional tax advisor before executing the plan.
Update (1 May 2020): I was re-reading information on this topic and was dismayed to see mentions of “new residential house property” in ClearTax:
A new residential house property must be purchased or constructed to claim the exemption
This was a shock to me because the house we were considering to buy was not a new construction. Worried if I might not be able to take advantage of this tax exemption, I decided to read the actual text of the law itself, rather than interpretations of it, to see for myself what restrictions apply. Going through the text of Section 54F of the Income Tax Act, it’s clear that the exemption applies to both newly constructed and old houses. Phew!

3 Apr 2020

How I blew an opportunity to buy equity funds for cheap

Equity investments are losing valuation due to the market crash. Depending on whom you ask, what to do in such a situation varies. The advice I took was to maintain asset allocation and rebalance when the allocation is off.

It’s not obvious how maintaining asset allocation can help during a market crash like this. But it’s not hard to understand if you think about it a little. Let’s say your desired asset allocation is 30% debt and 70% equity. When equity loses value and debt increases in value, your portfolio could get to something like 38% debt and 62% equity. The advice is to sell your (potentially overvalued) debt and buy undervalued equity at a cheaper price. As the equity market recovers, you would make some profit.

I did have a desired asset allocation before market rout, but due to some (self-induced) complexity, I had messed it up. I was over-invested in equity than I had thought. I discovered that mistake when I was taking a deeper look at my portfolio. I also found out that equity losing value had brought my portfolio down to the desired allocation. I don’t have to do anything for now; the market has rebalanced my assets. 🤦🏾‍♂️

But that also means that, because my asset allocation was off, I am not able to buy more equity at a cheaper price now. The equity I hold were bought at a higher price and I am holding onto the loss. It’s a lost opportunity.

While it’s true that nothing stops me from buying more equity now even if it means my asset allocation will be off for a while. I have decided to not do that because that’s essentially timing the market. There’s no guarantee that the market will recover after my equity purchase. Debt funds, at least in India, are not really going up in value either. Because many companies are at the risk of going bankrupt, investors are not keen to buy debt funds as well. Because demand is fairly flat, the value is also mostly flat. By selling my debt funds now, I may not be selling overvalued assets.

Moral of the story: asset allocation is actually important. Assets being off balance could lead to lost profits.