Kshitij Anand | Mar 26, 2017 06:11 PM IST | Source: Moneycontrol.com
A detailed study by Karvy Stock Broking reveals that if somebody who would have invested just Rs 5,000 per month for the last 20 years in these five funds, you would have earned you more than Rs 1 crore now.
This can’t be true! That would be your first reaction. Making money in the stock market is tough especially when you are a working professional and can’t devote much of your time to read company balance sheets, track quarterly results or learn complicated futures & options.
The simpler way is to give that money on a regular basis via systematic investment plan (SIP) to a fund manager who would use it to invest in stocks, bonds or other fixed income instruments depending on the choice of plan you have taken.
A detailed study by Karvy Stock Broking reveals that if somebody who would have invested just Rs 5,000 per month for the last 20 years in these five funds, you would have earned you more than Rs 1 crore now.
The math behind it is simple. If you had done a monthly SIP of Rs. 5,000 for the past 20 years, your total investment would be Rs 12 lakh according to Karvy estimates, and your money would have multiplied by:
Reliance Growth Fund 18.27x: Rs 2.19 crore
HDFC Equity Fund 15.68x: Rs 1.8 crore
Reliance Vision Fund 11.81x: Rs 1.4 crore
HDFC Top 200 Fund 11.5x: Rs 1.3 crore
Birla SL Equity Fund 7.58x: Rs 0.9 crore
“We believe SIP is a wonderful tool available for investors who wish to create wealth in the long-run. Investors are already aware of the numerous benefits that it offers to them,” AV Suresh of Karvy Stock Broking told Moneycontrol.com.
“It makes the best use of the power of compounding and creates huge wealth for investors. Apart from this, it also helps one to sail through different market cycles by investing at different market levels,” he said.
If you believe in the power of compounding, then equity markets offer you the best tool to harness such a strong force via mutual funds, which let you create wealth in the long-term.
Einstein once said that ‘Power of Compounding is 8th Wonder of the World. He who understands it, earns it … he who doesn’t … pays it.’ Compounding is the first step towards long-term wealth creation.
The idea is to remain patient and allows your wealth to grow. When you buy a mutual fund, compounding allows you to earn interest on your principal and then again when you reinvest the interest it helps you build a huge corpus over a period of time with the small amount of initial investment.
“You just planted a mango tree and you want fruit tomorrow. Oh no. You just can’t. Similar to your investments. A tree undergoes challenges like pest attack, drought etc. before it yields the first fruit. Similarly, business entities are succumbed to internal and external growth barriers,” Vijayananda Prabhu, Investment Analyst at Geojit Financial Services told Moneycontrol.com.
What type of funds should you consider?
To generate wealth over a period of time, selection of funds is very necessary. If you get stuck with a wrong fund then chances of wealth creation reduce significantly.
Equity funds need a holding period of at least 5 years to avoid negative returns. But the next question is how much to expect from them in the long term. After all, you don’t invest in equity to just preserve capital.
“You invest in building wealth. High return expectations, arising from very short-term abnormal rallies in markets, make investors miscalculate what equity funds can deliver. The result? They save less, hoping that high returns will make up for it,” Vidya Bala, Head, Mutual Fund Research, FundsIndia.com told Moneycontrol.com.
“Large-cap and diversified equity funds deliver superior returns over prolonged time frames. As seen about, there is a 43 per cent chance of this category delivering returns of over 15 per cent over any 7-year time frames in the past 10 years (rolled daily),” she said.
Bala further added that this is simply because, over longer periods, they contain down markets (that would have happened during the period) better than midcap funds. Mid-cap funds’ ability to sustain steady periods of high returns is low at 26 per cent.
Top five funds to consider for next 20 years:
How to pick up a fund is critical. Some analysts advise investors just to choose a fund manager and the rest will be all taken care of. The market always rewards risk and we know that risk and return always go hand in hand; hence, any short terms should not lead you to discontinue your SIPs.
“In mutual funds, it’s not the fund that performs but the fund manager. Just hand pick the top 5 fund managers and choose their consistent funds,” said Prabhu of Geojit Financial Services.
“A few things to look for is the ability to protect the downside during volatility, their information ratio (consistency in beating the benchmark) and market experience,” he said.
But, we all are aware of one fact that all past performance is not an indicator of future performance. Moreover, with ever changing markets, it becomes quite difficult to predict the best performers for the next 20 years.
However, Karvy lists out five funds which have the potential to deliver consistent returns. ICICI Pru Top 100 (G), Birla SL Frontline Equity (G), Canara Rob Emerging Equity (G), Franklin India Prima Plus (G), and ICICI Pru Value Discovery (G).
Buying a home early in life helps home buyers.
Kishor Pate CMD, Amit Enterprises | Retrived on 12 July 2016 | Moneycontrol.com
There are lots of arguments for and against buying a home early in life, but the rationale for doing so is, in fact, the strongest and most convincing.
1. In the first place, the longer the tenure of a home loan, the lower the EMIs are. EMIs are calculated on the basis of the loan amount and how long the borrower can logically repay the home loan. In India, the retirement age is 60, and banks will consider this as the age by which the borrower must under any case close the home loan if he or she has not done so already. The longer one defers the decision to avail of a home loan to buy a property, the bigger the EMIs become.
Also, it is easiest to get approved for a home loan when one is young. Lenders are eager to provide home loans to young people because they are at the beginning of their careers, and will doubtlessly grow in them over the ensuing years. Their financial viability – and therefore their future ability to service a home loan – is therefore at its highest point.
2. In fact, the eligibility for a home loan is even higher for young married couples taking out a joint home loan. This is by far the most desirable lending scenario for banks. They are assured that two instead of only one income stream will back the home loan proposal, and the fact that two instead of one borrower are involved decreases their risk. Taking a joint home loan also helps a couple to close down the financial commitment of a home loan much faster, allowing them to focus on other investments earlier in life.
3. Another advantage of purchasing a home early in life is that it becomes easier to pay off the outstanding amount on a home loan with accumulated savings later in life. This opens up the opportunity to upgrade to a bigger, better-located home is the future – which is what most Indians aspire to do at some point.
4. Today, many newly-married couples are deferring their plans to have children until they have had a chance to enjoy some unfettered years together. Such a decision also works very well for such couples from the point of view of home purchase. It means that they can make a big down payment on their home before children and their education become an additional financial responsibility. A bigger down payment reduces the EMI burden, meaning that they can close their home loans faster.
5. It is also important to note that the earlier one buys a home, the longer it has to appreciate in value. Given that the annual appreciation of a well-located residential property can be to the tune of 15-20%. This results in a huge incremental increase of the investment value of such an asset.
6. It also makes much more sense to invest one’s hard-earned money in an appreciating asset rather than pay monthly rentals for which there are no returns at all. Repayment of a home loan also brings with it the financial advantage of income tax breaks. These are an added benefit which the Indian Government has provided with the express purpose of encouraging young citizens to invest in self-owned homes and thereby safeguard their and their children’s future.
7. Finally, it makes much more sense to pay monthly EMIs on a home loan, into an investment-grade asset, rather than pay monthly rent which is nothing but an expense with absolutely no returns on investment.
The above reasons should present a convincing argument for making the important decision of buying a home early in life. The New Age ‘logic’ that it is better to live on rent simply does not hold water if one considers the multi-faceted advantages of investing in a self-owned home while one is young. It is true that it requires financial discipline to service a home loan, but this very desirable quality can never come too early.
Source : http://goo.gl/iGEZw9
In an effort to make the Gold Monetisation Scheme more customer-friendly, the RBI today said depositors will be able to withdraw medium-term (5-7 year) and long-term government deposits (12-15 years) pre-maturely after the minimum lock-in period, though with a penalty.
By: PTI | Mumbai | January 21, 2016 11:07 PM | Financial Express
In an effort to make the Gold Monetisation Scheme more customer-friendly, the RBI today said depositors will be able to withdraw medium-term (5-7 year) and long-term government deposits (12-15 years) pre-maturely after the minimum lock-in period, though with a penalty.
The Reserve Bank today made a few amendments to its Master Direction on the Scheme.
The modifications, it said, have been made in consultation with the government to make the Scheme “more customer-friendly”.
The rate of interest on the deposits will be decided by government and notified by the RBI from time to time.
The current rate of interest as notified by the government on medium term deposit is 2.25 per cent per annum and on long term deposit is 2.50 per cent per annum.
“The depositors will be able to withdraw medium term and long term government deposits pre-maturely after the minimum lock-in period of three years in the case of medium term deposits and after five years in the case of long term deposits,” it said.
However, there will be penalty in the “form of lower rate of interest for premature withdrawals” depending upon the actual period for which the deposit has run.
Further in the case of large tenders of gold, the RBI said the metal can be deposited directly with refiners wherever they have the assaying capacity.
“This will reduce the time lag between the time the raw gold is deposited and it starts bearing interest,” RBI said.
RBI also clarified that government will pay the participating banks a total commission of 2.5 per cent (1.5 per cent handling charges and 1 per cent commission) in the first year.
The Scheme will be reviewed regularly based on feedback so as to address any implementation issue and to make it more customer friendly.
Last week, Economic Affairs Secretary Shaktikanta Das had said under the Gold Monetisation Scheme more than 500 kg of gold has already mobilised and the Scheme was picking up.
Under the Gold Monetisation Scheme (GMS), 2015, banks will collect gold for up to 15 years to auction them off or lend to jewellers from time to time.
In November last year, Prime Minister Narendra Modi had launched a scheme to channelise gold worth over Rs 52 lakh crore lying with households into the banking system and floated paper bonds to curb its imports that have made India the largest buyer of gold in the world.
India imports a staggering 1,000 tonnes of gold every year, draining out foreign exchange and putting pressure on the fiscal deficit. An estimated 20,000 tonnes of gold worth over Rs 52 lakh crore is lying with households and temples.
The RBI further said the principal and interest on Short Term Bank Deposit (STBD) would be denominated in gold.
In the case of Medium and Long Term Government Deposit (MLTGD), the principal will be denominated in gold.
“However, the interest on MLTGD shall be calculated in Indian Rupees with reference to the value of gold at the time of the deposit,” the RBI said in its amended circular.
Resident Indians (Individuals, HUFs, Proprietorship & Partnership firms, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the Gold Monetisation Scheme.
Joint deposits of two or more eligible depositors are also allowed under the scheme and the deposit in such case would be credited to the joint deposit account opened in the name of such depositors.
The existing rules regarding joint operation of bank deposit accounts including nominations would apply to these gold deposits.
All deposits under the scheme would be made at the Collection and Purity Testing Centre (CPTC).
“Provided that at their discretion, banks may accept the deposit of gold at the designated branches, especially from the larger depositors.
“….banks may, at their discretion, also allow the depositors to deposit their gold directly with the refiners that have facilities to carry out final assaying and to issue the deposit receipts of the standard gold of 995 fineness to the depositor,” the RBI circular added.
The government will notify the list of BIS certified CPTC / refiners under the Scheme and would be communicated to the banks through Indian Banks’ Association (IBA).
Interest rates of provident fund might increase to 8.95% from 8.75% earlier
DNA WEB TEAM | Fri, 22 Jan 2016-09:47am , Mumbai , dna web desk
The interest rates of provident fund might increase to 8.95% from 8.75% earlier. The Employees Provident Fund Organisation’s (EPFO) finance panel has recommended the increase in interest rates on statutory savings of over 5 crore subscribers to 8.95% in the current fiscal, according to a leading news agency.
The central board of trustees have endorsed the proposal and is yet to get the finance ministry nod. If the proposal is approved then it will be the highest return since 2011 when the interest rates were 9.5% and the highest ever real interest rate, said the report.
The 8.95% interest rate will translate into returns of nearly 12% for the highest slab as withdrawals and interest earnings do not attract tax at the time of withdrawal.
The government and the Reserve Bank of India (RBI) are looking at reducing deposit rates in order for banks to cut lending rates and push investment. The move to increase the interest rates on EPF deposits may result in a diversion of bank discounts or other small saving schemes.
The finance ministry is expected to lower the interest rates on many small savings schemes by up to 50 basis points.
The EPFO’s, which is a basic investment for many employees, increase in interest rates might face some resistance from the finance ministry. However, it might go through as the middle class depends on it for savings.
By Rishi Mehra | 20 Jan, 2016, 10.17AM IST | Economic Times
It is common to have debt in some form or the other and it is not bad to have them. However, there may come a time when runaway debt may cause problems and you may need professional help. A look at some scenarios that can indicate you need help to tackle your debt.
Caught in minimum payments – This is especially true for credit cards. When your credit card is generated there are two payment terms in that statement. One would be total amount due, while the other is the minimum amount, which is about 1 % of the principal amount outstanding. Minimum amount, being a small percentage of the total amount due, largely consists of interest and fees. This would mean if a person pays only the minimum amount outstanding on the card every month, it would take him decades to pay the entire amount. If you find yourself caught in the trap of minimum payments, it may be time to get professional help to get out of the situation.
Over reliance on credit cards – Being caught in the minimum payment trap may not be the only indicator that your finances may be off track. When debt increases, servicing it may lead to over reliance on your credit card. Having to use the credit card for daily expenses may be proof that your finances are not in shape. However, paying by credit card because you chose to and not because you have cash crunch is okay. Similarly, if you are making payments by credit cards to earn points, rewards or cash back, it makes perfect sense. However, when you start feeling your cash drying up and having to resort to credit cards to fund your monthly need, it may be time to talk to a financial advisor to get your finances in order.
Getting a loan to tackle debt – Unless it’s a credit card debt, or the new loan has substantially lower interest rates, taking a loan to settle another loan defeats the purpose. This can be very counterproductive, especially in cases when you increase the tenure of the loan to ensure you pay lower EMIs. The very idea of taking a loan should be to reduce your debt at the earliest and most frugal manner. By increasing the tenure you may be making things easier for yourself, but the interest outgo will be much higher. You also run the risk of being under debt for a longer time. If you have any debt, your first priority should be to pay them off at the earliest. If you find yourself in a situation where you think you may need a loan to settle another loan, it is best you consult an expert first to get an opinion.
Little or no savings – When your entire income goes on servicing your debt and catering to your daily expenses, it may be time to get help. When you start your career you may not be able to save immediately, but as you progress in life, you should start having some form of saving. What products appeal and suit you can differ, but it is imperative to save money, especially for periods after retirement. However, if your savings are negligible or you have no products that help you save money, you may be in a tricky situation. Get help on what products will be ideal for you and start saving diligently. Failure to do so may be painful when you grow old or during an emergency.
Difficulty in drawing or sticking to a budget – To build some sort of order and responsibility between what you earn, what you spend and what you need to set aside to cater to your debt, it is important to draw up a monthly budget. This helps you come to grips with the regular expenses every month and the special ones that may creep in. This also helps you realize when you are overspending and the need to put money aside as savings. When you have difficulty in drawing a monthly budget or sticking to it despite having one, you may need to get help to figure out ways to correct your situation.
Consistently overshoot payment deadlines – This may be an early and a potentially important indicator to know if you are having problem with your finances. If you miss payment deadlines on your bills because you do not have the requisite money and have to wait for your next payday, things may be tight for you. Servicing your existing debt may be taking its toll and you should get help to see what can be done to address your financial situation.
(The author is co-founder of deal4loans.com)
Source : http://goo.gl/vehEzi
Harshala Chandorkar | Updated On: May 25, 2015 10:32 (IST) | NDTV Profit
Easy and hassle free availability of finance in the form of loans and credit cards is perhaps the biggest advantage that today’s generation has. This easy access to finance has made the potential of realising dreams a certainty, be it a dream to pursue higher education or to buy a dream home. But this opportunity must be used with utmost restraint and caution.
Take for instance the situation of Shreya, a 27-year old financially independent woman who works in an MNC. Like any other twenty first century youngster, she has her own share of aspirations and wanted to gift herself a swanky new car for her upcoming 28th birthday. However, when Shreya applied to a bank for an auto loan for fulfilling this aspiration, it was rejected. The reason for rejection was Shreya’s low CIBIL TransUnion Score due to a delinquent CIBIL Report. What Shreya did not consider was her past behaviour on the loans and credit cards she had taken. Shreya was already servicing bills on four credit cards and EMIs on consumer durable loan which she had taken to buy the latest phone. She had been missing payments on 2 of her credit cards for over 6 months and had also defaulted on her monthly instalments on the consumer durable loan on three instances. This reckless credit behaviour had impacted her CIBIL TransUnion Score and thereby hampered her dream of driving her own car on her birthday.
Shreya’s predicament is shared by a lot of youngsters today. Taking any kind of loan is a serious financial commitment and needs some amount of discipline. And although today banks may seem eager to lend, there are certain important things you need to consider to avoid any surprises and disappointments while applying for a loan which ultimately hamper your financial goals.
Here are a few tips for ensuring you have access to finance for fulfilling your future aspirations:
1. Maintain a healthy CIBIL TransUnion Score:
Your CIBIL TransUnion Score is one the most crucial parameters for being “finance ready”. Banks and credit institutions check your CIBIL Report and CIBIL TransUnion Score along with your income for deciding on your loan or credit card application. Therefore you must ensure that you maintain a healthy credit history and thereby a good CIBIL TransUnion Score.
What hampers your CIBIL Report and CIBIL TransUnion Score is missing an EMI or credit card bill payments and delay in payments. For building and maintaining a good CIBIL TransUnion Score you must maintain a healthy credit history through:
- Keeping a track of all your loan EMIs and credit card expenditures and planning finances in advance each month for servicing the loan/s and paying credit card bills
- Ensuring you make payments of your credit card bills and loan EMIs by or before the due date month -on-month.
- Reviewing your credit report regularly to keep a tab on your credit history and CIBIL TransUnion Score.
2. Chalk an aspirational roadmap
While servicing your loans and managing household expenses and other financial commitments, one tends to forget planning for future aspirations. Chalking out a roadmap of future aspirations and the cost estimate required for fulfilling each of these aspirations is the first step towards attaining them. Once you have chalked out this roadmap you need to carefully plan your expenses and loan payments and ensure that you save money for aspirational milestones according to the roadmap. Consistently saving money in growth plans, fixed deposits and other safe saving instruments will ensure you will have capital required to attain your aspirational milestone at the desired stage in life.
3. Save for the rainy day
While diligently saving for your future aspirations, do not forget to keep aside funds for contingencies. Life is full of uncertainties and unfortunate situations or unforeseen financial losses like illnesses, natural calamities or job losses can catch you off-guard and hamper fulfilment of your aspirations. Therefore it is critical to ensure you save some money or buy insurance coverage for facing such situations confidently.
Wise planning and financial discipline will help you achieve your financial aspirations and goals with ease.
(Harshala Chandorkar is Senior Vice President-Consumer Services and Communications at CIBIL)
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.
Priya Nair | May 18, 2015 Last Updated at 00:10 IST | Business Standard
Be prepared to pay more if travelling abroad or if your child is studying there. Other impacts can be varied
Your family and you are flying to the US next week on holiday. Flight tickets and hotel bookings were done in advance. So, why should the rupee depreciation bother you? It should because all other expenses, such as sightseeing, local transfers and food will increase as a result of the fall in the rupee.
Similarly, if your child is studying in a foreign university, don’t be surprised if tuition fees increase substantially over last year.
There are also some advantages of a falling rupee. Those working abroad will gain, as the same amount they remit will translate into more rupees.
“It looks like the rupee will be in the 64-65 range (to the dollar). As the rupee tends to be overvalued and exports are not growing much, the Reserve Bank might be willing to let the rupee depreciate,” says Madan Sabnavis, chief economist, CARE Ratings.
The immediate impact will be on foreign travel and students studying abroad. The indirect impact will be on other expenses, too, as oil prices will go up and this could push up prices of other commodities. However, this time, as the price of crude oil in the international market is low, there might not be much of an impact on domestic oil prices, says Sabnavis.
Below is a look at some ways a weaker rupee will impact your life and what you can do about it.
Europe tours are popular with Indians in the summer months of April to June. Most people book in October for departures starting in April. Those who have booked and paid earlier, including the forex component, will not feel much of an impact. However, travellers who don’t pay the forex component in advance might feel the pinch. Usually, travellers pay the deposit and for flight tickets in rupees, in advance. The forex component, which covers accommodation, meals, sight-seeing and excursions, can be paid later. “For trips in April, packages are booked as early as October. We pushed many of our customers to pay in advance. Those who did not pay then might feel the pinch now,” says Daniel D’Souza, head of sales, Tour Operating, Kuoni India.
One way to avoid last-minute heartburn is to pay for your entire package in advance and not only the rupee component. If booking last-minute, choosing a short-haul holiday to a destination closer to home rather than a long-haul holiday is also a way to save some costs.
Tips to save
- Reduce the number of days from 10 to, say, eight
- Reduce the number of excursions
- Switching to a lower category hotel or staying in a bed and breakfast or home stay
- Cut on shopping rather than sight-seeing, since it is the experience that matters
- Opting for public transport such as trains, subway or buses, rather than renting a car
- While sightseeing, choose days when tourists are allowed to go for free or given discounts. Most monuments abroad have such days
- While shopping, buying from flea markets can work out cheaper than from stores
- Take a decent amount of cash with you, as you might not get good rates while travelling
- Pre-paid travel cards that allow you to load multiple currencies are a good option. In these cards, the value of the rupee is of the date the money is loaded to the card
Students studying abroad also suffer when the rupee falls. The US, Britain, Canada, Singapore and Australia are popular countries for Indian students. The university will not offer any leeway in tuition fees. Students will have to pay the entire amount. In most cases, you will have to pay before a term starts.
Given the high tuition fees in foreign universities and the cost of living, most students take some loan and pay for the rest by scholarships or taking a part-time job. “When the rupee falls, it becomes difficult for the entire family, not only the student. And, not many individuals know how to hedge themselves against currency fluctuations by using derivative products. What you can do is try and pay the entire fee upfront when the exchange rate is low. Most universities give a discount of one or two per cent if you do so,” says Naveen Chopra, of The Chopras, a foreign educational consultancy.
Neeraj Saxena, chief executive, Avanse, a non-banking financial company that gives education loans, says there is an option to enhance the loan amount during the course. “We don’t usually disburse the full loan amount at one go. We do as per the semester. So, if the fees increase in the third semester, we can increase the loan amount,” he advises.
Saxena suggest students going abroad should look for scholarships or part-time jobs like teaching assistantships. “We find of the Rs 30-35 lakh required for a foreign university course, students often are able to earn Rs 8-10 lakh through part-time jobs, which pay by the hour,” he says.
Tips to save:
- Using discount coupons given by universities and accepted at all major stores
- Using cards like the ISIC (a specialised card for students) for travelling, eating out, even shopping at some departmental stores
- Going for free concerts, to movie halls which offer student discounts
- Going to budget pubs, during happy hours, for leisure
- Use special cards that offer discounts to students for eating out and shopping
The rupee’s weakness will push up medical costs, too. About 30-40 per cent of a hospital’s cost is on account of medical equipment and of these, 80 per cent is imported, says Vivek Desai, managing director, HOSMAC, a health care management consultancy. “Many common procedures in cardiology and cancer care use imported equipment. Even orthopaedic implants and consumables used in laboratories are imported. Any increase in their costs will be passed on to patients and there is nothing the latter can do about it. That is why medical insurance is a must. That, too, comes with a ceiling,” he says.
Other costs like air-conditioning and flooring in hospitals, also imported, will also see an increase and hospitals are likely to pass these on to patients by way of higher charges.
Patients going abroad for treatment will also see an increase in cost due to the rupee’s fall.
Tips to save:
- Health insurance is one way you can deal with rising medical costs. Buy one early in life
- Even if covered under your employer’s group medical insurance, take a separate family floater
- Buy a top-up medical insurance to increase your sum assured without too much increase in premium
A weak rupee will benefit
Non-resident Indians (NRIs) sending money home will benefit from the rupee’s weakness, as they will get more returns for what they send. Typically, NRIs with higher disposable incomes send more money to India when the rupee falls, says Sudesh Giriyan, chief operating officer, Xpress Money. “We will see an increase in remittances when the rupee crosses 64 to a dollar. In the case of cash remittances, we don’t see much increase because these are smaller ticket-size. But in direct remittances, which are bigger ticket-size, currency value has a bigger impact,”
Many NRIs also take loans from banks abroad, since the interest rates are lower, and remit money to India in order to invest, he adds.
There is usually an increase of seven to 10 per cent in remittances on account of rupee weakness, says K A Babu, head-retail and NRI banking, Federal Bank. Remittances from the Gulf countries tend to increase in such times than those from elsewhere.
With regard to investments, those from the lower income group prefer bank fixed deposits – NRE rupee deposits or FCNR deposits which are in foreign currency. The NRE deposits offer the same rates as domestic FDs and can be liquidated easily. The FCNR deposits will provide protection from exchange rate volatility, though the rates are lower.
“Ideally, investors should have a mix of both kinds of deposits. That way, they can earn high interest rates and also get a hedge from currency fluctuation,” Babu says.
For NRIs in the high income segment, banks and wealth management firms offer portfolio management services, through which they can invest in stocks, PMS schemes, mutual funds, fixed income products, real estate, etc. The preference is usually for land or residential property. Some NRIs might also look to expand their business in India and buy commercial property.
International equity funds that invest abroad will benefit from the fall in the rupee. Investors of such funds would have seen their portfolios rise in the past few months. According to data from Value Research, over the past three-month period, returns from international funds have been the highest at 6.19 per cent, while equity multi-cap funds have seen their returns fall 3.19 per cent.
But these gains are marginal and should not be the only reason for investing in international equity funds. For instance, over a one-year period, multi-cap funds have given returns of 34.84 per cent, while in the case of international funds, it is 7.78 per cent.
The US market is currently doing well and will definitely give better returns in the near term, as it will not be as volatile as the Indian equity market. But over a longer term, that is a five-year period, Indian equities will definitely give better returns. So, one can look at international funds provided they have sufficient exposure to Indian equities, say experts.
Anand Radhakrishnan, chief investment officer at Franklin Equity, Franklin Templeton Investments – India, also says investors should not look to time the markets, but invest on a regular basis and in a systematic manner. “Typically, the exposure would depend on the individual’s risk profile and investment objective, but as a thumb rule, one should have at least 20 per cent of their investment portfolio allocated to international assets. Equity investments warrant a longer investment horizon and we recommend investors come in with a three-to-five year horizon or more,” he says.
Source : http://goo.gl/SUyRgr
By: CreditVidya | New Delhi | May 6, 2015 10:16 am | Financial Express
The dream of owning a house if not planned well will remain a castle built in air. To ensure your dream turns into a brick and mortar reality, you will not only require time, effort and energy, but lots of money too, either yours or the banks, ideally both, to take you through the entire process of home building or owning.
The challenge of owning a home, whether bought or built, for the first time can be very overwhelming. It might tempt you to go back to your present place of stay or just go with the first house that falls in your price range or worse, just skip the idea altogether.
Here are 5 top things that you should consider:
1. Plan your finances: Buying a house is a big financial decision. But, before doing that you should determine where you stand today financially. Ideally you should plan a year in advance in order to organise your finances. You need to start saving and cutting down on costs. Another factor you need to consider is the price range you can afford to buy, which is in turn linked to the amount of loan you will be applying for as well as the EMI you would be paying every month after purchase. So, to start with, it’s a good idea to create a separate budget assigned for this purpose.
2. Keep your debts in check: If you are already paying a part of your income towards debts, then you may want to pull your sleeve up and speedup the process. Try and find alternate streams of work to generate more income. If not, start paying a little more from your current disposable income towards the repayment. While it may not be possible to be debt free, you might want to be in control of your debts, as the banks will assess your debt to income ratio, before agreeing to sanction your loan.
3. Score well: Your Cibil score should be the number, you should be falling in love with to get the best out of the housing loan. A good Cibil score of 700 or more on your Cibil report can definitely earn you that loan with best interest rates and terms. So, make sure you are consistent with your credit card payments, and pay it on time to boost your credit score.
4. Build a fund for down payment: 10% to 15% of the cost of the house will have to be paid upfront at the time of purchasing the house. So, it is imperative that you start building towards this fund.
5. Define your dream home: Defining the kind of home you are looking for, is another key factor you need to work on. This should be in terms of type of residence, its location, amenities and its surroundings. Clarity in the above factors will get you closer to your dream home.
Owning a house for most of is associated with a sense of pride, ownership and security. Planning to buy a house is the biggest investment decision one takes in life. Therefore, it is important to remove the emotionally tinted glasses and practically assess the pros and cons before purchasing a house. Otherwise, chances are that your dream house will remain just that, a dream!
Source : http://goo.gl/GxZXkB
AARATI KRISHNAN | April 26, 2015 | Hindu BusinessLine
It’s a myth that real estate guarantees pots of money. If you’re young, here’s why equity funds may suit you better
There’s an abiding belief among Indians that the only investment that can make you rich is real estate. Such is the allure of getting rich through property that many people in their twenties and thirties want to take on a large home loan and sign up for their first apartment as soon as they receive their first pay cheque.
But if you’re in your twenties or thirties, it makes more sense to invest in equity or balanced mutual funds instead. Not convinced? Here’s why.
EMIs are compulsory savings. Without it, I will just spend the money.
The Equated Monthly Instalment (EMI) on your home loan is not an investment. It is a loan repayment where the lender earns interest off you. Let’s say you have booked a ₹50-lakh apartment and taken a 10-year home loan at 10.5 per cent to fund it. The EMI will amount to ₹67,467. At the end of 10 years, you would have paid a total of ₹80.96 lakh to the bank, of which ₹30.96 lakh will be the interest component alone!
For the apartment to be a truly good investment, it will have to generate a return over and above the ₹80.96 lakh you paid for (not the ₹50 lakh that most people assume). Instead, investing the same money in good equity or balanced funds will earn you a return on your capital, without incurring interest costs.
But I get to create an asset. With equities, after ten years, I may be left with nothing.
If this is your first home and you are actually living in it, it is not an asset at all, because it does not earn you any return. There has been no ten-year period in Indian stock market history when SIPs in equity or balanced funds have delivered nothing.
Between June 1992 and June 2002, which was among the worst ten-year periods for Indian markets, an SIP investment in an equity fund like UTI Mastershare delivered a 13 per cent annualised return. Again between September 1994 and 2004, a flattish period for the markets, SIPs in Franklin India Bluechip earned over 20 per cent CAGR.
That’s not enough. My friends say their property investments have gone up five or six-fold in the last seven years.
Translate that into compounded annual returns, and you will find that the returns aren’t much higher than that earned by good equity funds. To give you an example, Annanagar has been a booming locality in Chennai in the last ten years.
If you bought an apartment there at ₹40 lakh in 2001 (the previous real estate downturn), it is now worth ₹2.4 crore. That’s only a 13.6 per cent CAGR (compound annual growth rate). This is true across markets.
Data from the National Housing Board show that of 26 cities tracked, Chennai delivered maximum appreciation between 2007 and 2014, with the Residex for the city going up 3.55 times.
That’s a CAGR of 19.8 per cent. Markets such as Pune (241 per cent), Mumbai (233 per cent), Bhopal (229 per cent) and Ahmedabad (213 per cent) were other top ones. Their effective returns were 11.4 to 13.3 per cent.
Doing an SIP with a middle-of-the-road equity fund like the Sundaram Growth Fund for the same period would have fetched you a return of over 17 per cent; top performers would have earned you 20 per cent plus.
That’s all-India data. Some localities would have delivered bumper returns.
True, but how would you identify those localities in advance? This is the disadvantage of investing in real estate.
To make sufficient gains, you have to know not just the right state to invest in, but also the right city and locality within it. The same NHB data, for instance, shows that property prices in Hyderabad and Kochi have declined in seven years. Even in a locality, different transactions may yield different prices. To be sure, selecting the right mutual fund to invest in is difficult too. But with funds, you can invest based on the fund’s three-year, five-year or 10-year track record and can be assured that the price you are paying is right.
If you could diversify your property investments across many markets, your results would be better.
But given the large ticket sizes of property investments, most people end up betting much of their monthly pay cheque on just one piece of property. That’s concentration risk.
But I’ve never heard of anyone who became a millionaire by investing in equity funds.
Because mutual fund NAVs are available to you on a daily basis, there’s a temptation to over-trade. Most people who haven’t made money on equity funds are those who haven’t stayed on for ten years or more. They’ve bought funds, sold them and bought them again trying to time markets.
If you did the same with property investments (they have cycles too) you would lose money. Even long-term investors in equity funds invest too little in them.
A 15 or 20 per cent return from equity funds will seem small if only a fraction of your wealth is invested in it. While EMI commitments typically run into ₹30,000-₹70,000 a month, most people don’t venture beyond ₹1,000 or ₹5,000 SIPs.
We’re not recommending that you commit half or three-fourths of your monthly pay to SIPs in equity funds. But if you are in your twenties or thirties, you can certainly afford to commit 20 per cent.
Remember, once you sign up for a home loan, you can’t vary your EMI or stop paying it, if the property doesn’t appreciate or if you quit your job.
With an SIP, you can take a rain check in an emergency.
Source : http://goo.gl/NNgy6P
It could mean having to prolong work life and putting money in risky investment options
Arvind Rao | April 25, 2015 Last Updated at 21:25 IST | Business Standard
It’s a dilemma several middle-aged parents grapple with. Two goals – retirement and saving for children’s higher education – but not enough funds to meet them. Parents would be tempted to compromise on the former to meet the latter. But with medical costs rising exponentially, this can’t be looked at as a viable solution. This could also mean extending their work life or taking greater investment risks closer to retirement.
Here’s a case study that shows how one can strike the right balance. Ajay and Varsha Sharma, aged 50 and 48 respectively, earn Rs 40 lakh annually, which is not enough to fund all of their major goals. They have to repay their existing home loan of about Rs 40 lakh in the next five years. The couple needs Rs 4.5 crore for retirement and Rs 70 lakh in the next 10 years to fund the higher education of their two children.
The family savings work out to about Rs 15 lakh a year. Their employment-linked retirement benefits and 1 BHK property investment is expected to fetch Rs 2.12 crore, or 45 per cent, of their retirement corpus. This leaves them with a gap of Rs 2.48 crore, or about 55 per cent of the total corpus.
To fund the gap, the Sharma’s can invest Rs 10 lakh per annum in a mix of diversified and mid-cap equity funds. Assuming annualised returns of 12 per cent, they should be able to garner Rs 2.48 crore over the next 12 years.
At the current EMI of Rs 54,000, their home loan outstanding at about Rs 40 lakh is projected to close at the end of 10 years. They aspire to accelerate the repayment and close the loan in four years. For this, they will have to accumulate at least Rs 6.50 lakh annually via monthly contributions in recurring deposits. At the end of every year, the accumulated amount should be used to prepay the loan.
The amount of Rs 70 lakh for higher education can be mopped up by investing about Rs 4.5 lakh per annum over the next 10 years in equity-oriented balanced funds, assuming annualised returns of 10 per cent.
With the current family savings, they are looking at a deficit of about Rs 6 lakh per annum, at least for the first five years.
Part-funding children’s education
The couple has decided to make a provision for up to 50 per cent of their children’s higher education budget by extending the period for their accelerated home loan. They can cut the savings rate for the repayment by 50 per cent to Rs 3.25 lakh a year, thereby extending the period for their home loan repayment to about six years. This way, their contribution for the education also comes down to about Rs 2 lakh and savings for all three goals fit within the family savings. The additional family savings at the end of the home loan period could be used to boost retirement savings or for their children’ marriages.
To accumulate the remaining 50 per cent of their education corpus, Sharma’s children can fall back on scholarships. They can also meet the expenses through education loan or loan against fixed deposits:
Education loan: Interest rates on these are 11-12.5 per cent, with tax benefits available under section 80E. A good retirement corpus, in the form of investments, will enable one of the parents to stand as guarantor/co-applicant for the loan. For loans above Rs 4 lakh, margin money, ranging between 15-20 per cent of the loan, may be required, which can be funded by the parents.
Loan against fixed deposits: Let’s assume the Sharma’s garner a corpus of about Rs 2.5 crore at the time of retirement, which they don’t fully need immediately. They could invest, say, Rs 25 lakh in a bank FD giving 8 per cent per annum and take an overdraft against the same for their children’s education. The rate of interest charged in case of overdraft will be 1-2 per cent higher than the FD interest rate. Even assuming a 10 per cent rate of interest, this option works out to be cheaper than an education loan, but the interest paid will be sans tax benefits under section 80E.
The parents can make the children responsible for repaying the overdraft with their earnings. This will enable them to get their fixed deposit back along with the accumulated interest, which can then be utilised for their retirement. The Sharma’s should avoid loans against property as the EMI would be calculated only for their balance working years, which could mean a bigger outgo per month, plus no tax benefits on the interest paid thereon.
Funding education completely
In case the Sharma’s decide to fund 100 per cent of their children’s education and continue with the six-year home-loan closure plan, they would need to set aside Rs 7.5 lakh per annum and work for two more years to fund their retirement corpus. The Sharma’s may have to invest more aggressively, allocating as much as 75 per cent of their savings in a mix of equity mid- and small-cap and sectoral funds, and the remaining 25 per cent in balanced funds to achieve an 18 per cent growth rate and retire within the next 12 years. This strategy, however, may expose the Sharma’s to a bigger risk of not achieving their target corpus within the available time frame if the equity market do not deliver good results. Considering these risks, it is definitely better for them to part-fund their children’s education needs and not compromise on their retirement goals.
The writer is a chartered accountant
Source : http://goo.gl/lNXl7d
Gaurav Mashruwala, TNN | Apr 25, 2015, 07.08AM IST | Times of India
Mohit Khullar (31) lives with his wife Manika (28) in Haryana. He was born and brought up in Punjab. They have a two-year-old daughter, Ashwika. Mohit is an electrical engineer and currently works in the private sector while Manika is a homemaker.
What is the couple saving for?
They want to purchase a house worth Rs 45 lakh two years later as an investment. Rs 50,000 for Ashwika’s education two years from now. A corpus of Rs 15 Lakh after 24 years for Ashwika’s marriage. For their retirement, the couple wants Rs 1 core after 30 years. Apart from these goals, they also wish to own a luxury car worth Rs 10 lakh after four years and go on foreign travel.
The costs will be revised based on inflation.
Where are they today?
Cash flow: The gross annual inflow from all sources is Rs 12.48 lakh against an outflow of Rs 8.05 lakh. The outflow includes routine household expenses, taxes, insurance premium and contribution to provident fund
Net worth: The market value of all assets owned by the couple is Rs 21.31 lakh. Out of this, Rs 3 lakh is for personal consumption in the form of car. The rest are investments. They do not have any liability as of now. The house that they are living in is owned by Mohit’s parents.
Contingency fund: Against the mandatory monthly expenses of Rs 44,000, balance in savings bank and FD together amounts to Rs 2.80 lakh. This is equivalent to 6 months’ reserve.
Health & life insurance: There is a Rs 3 lakh health cover provided by employer for the entire family. Total life insurance of Mohit is Rs 40 lakh, out of which Rs 30-lakh cover is provided by the employer.
Savings & investment: Assets for savings and investment include Rs 2 lakh in savings bank, Rs 80,000 in bank FD, Rs 4 lakh in direct equity, Rs 50,000 in bonds, Rs 86,000 in a provident fund and Rs 15,000 in post-office schemes.
The couple’s rate of savings is good. The balance in savings bank should be reduced and they must enhance health and life cover. Most assets are investment-oriented because they are living in their parental house.
The way ahead
Contingency fund: Their three months’ mandatory expense reserve should be around Rs 1.30 lakh. Of this, they should keep about Rs 30,000 in form of cash at home and the rest in savings bank account linked to a fixed deposit.
Health & life cover: Mohit and Manika should have a health cover of Rs 5 lakh each and Rs 3 lakh for their daughter. Considering Mohit is single earning member of the family, he should opt for a life cover of Rs 1 crore for now and increase to another Rs 1 crore in next four to five. All these policies should be in form of term plans.
Planning for financial goals
Home buying: Since they do not need a house for staying, they should defer this goal for another decade. This is keeping in mind the fact that there is lack of funds currently and overall portfolio will get skewed in favour of illiquid, immovable, indivisible asset if they purchase a new house now.
Daughter’s education: They should invest Rs 2,500 every month in recurring deposit.
Daughter’s marriage: The should start an SIP of Rs 3,000 in and equity based mutual fund and another Rs 2,000 in a gold fund and increase the amount by 15% every year.
Retirement planning: Invest Rs 7,500 each in three equity mutual fund schemes: Large-cap fund, mid-small cap fund and an international equity fund every month — increase the amount by 10% every year.
Foreign travel: Set aside funds from regular income to fund the trip.
Luxury Car: Defer this goal for a few years.
Young couples with clear goals, humble expenses, high savings rate and living with parents. For them these are golden wealth creation years. If they stay focused like this for another 5/7 years, they will be on massive wealth creation trajectory. Usually it just requires about a decade of frugality in entire career to create wealth. If that is done during initial period of life it is more beneficial.
Source : http://goo.gl/d3PWVT
Creditvidya.com | Updated On: April 11, 2015 14:11 (IST) | NDTV Profit
If you take a quick look at your finances, it may seem like everything is in order. From a distance, your finances may appear to be devoid of any discrepancies: You have a steady income and manage to pay off your mortgage/credit card bills on time and also have that extra bit to splurge on each month. However, a closer look may reveal that you are actually making several money mistakes that may lead to disastrous consequences in the days to come.
Let’s take a look at some of these mistakes:
1) Treating home loan as just another ‘to do’ item
If you have taken a home loan, just paying EMIs on time isn’t enough. You must keep an eye on the interest rate cycles and ensure that you are in touch with your lender on a regular basis. Putting your home loan on a backburner may mean that you are missing out on big monthly savings.
2) Putting away the task of checking credit score
Most of us are guilty of some procrastination, but this is one habit that may cost you dearly. Do not wait to check and improve your Cibil score only when you are planning to apply for a crucial loan. Keeping a tab on your Cibil report from time to time to see that your financial health is in order is a good practice.
3) ‘Retirement savings can wait’
When you are young and have good prospects in your career, you may have a feeling that it is too early for you to start planning your retirement. This is, however, a crucial mistake because you are ignoring the benefits of compounding and also missing out on having the safety net of your own contributions. The later you start saving for your retirement the costlier it gets for you.
4) ‘Medical insurance is a waste’
You may be in perfect health now, but there is no saying when calamity strikes. That is exactly the reason why you need to invest in a good health plan. In case a medical emergency occurs, you may end up wiping off all your savings at one go.
5) No savings for a rainy day
When the going is good, people think that they can put away their savings for a later day. But what if there are unforeseen events in the future like a job loss or a large, unexpected expense? If you do not have a pool of savings to dip into at such times, you may end up making huge expenses on account of emergencies on your credit card. This may inflate your debt burden into an unmanageable size in the future. Making sure that you have put away at least three to six months of your monthly expenses as savings all the time is a healthy practice.
Maintaining a good financial health is as important as physical health. By keeping these five points in mind, you can ensure that your financial health is in order.
Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.
Source : http://goo.gl/SEqSMN
By: CreditVidya | New Delhi | April 14, 2015 5:02 pm | Financial Express
Bad financial habits getting the better of you? Do you constantly berate yourself over your money habits? Those quirks you develop sometimes can become lifetime companions paving the way to financial ruin, if not worse. If you don’t recognize bad financial habits in time, you run the risk of losing a lot of money and damaging your Cibil score in the process – a bad Cibil score means you will not have access to credit when you require it.
Here is a list that can serve you well:
1. Not budgeting your spend
A simple way to control your expenses is to start budgeting your spend. There are some mandatory payouts you need to make in a month, but what about your other expenses? Is there a scope of cutting your spend there?
When you make a budget and mark out categories there, you will find there are places that you are overspending. More often than not it is in categories such as entertainment or shopping. Tracking your expenses over time will show you the problem areas after which you should make a few conscious decisions to cut down on unnecessary expenses.
2. Going overboard with the credit card
As easy as it is to use your credit card, it may lead you into a debt trap that is not easy to get out of. Many people give into the temptation of buying things they cant afford by using their credit cards. As a result they are unable to make repayments on time. Credit cards are the most expensive form of debt as the annual percentage rate of interest on them is as high as 36-40%. Credit cards should therefore never be used to fund your desires. On the other hand, if credit cards are used judiciously each month, and repaying the outstanding amount in full, it may lead to a stellar Cibil score.
3. Dipping into emergency funds
Financial planning wisdom suggests that every person should have an emergency fund that should see him through at least three to six months. If you have created an emergency fund and dipping into it now and then, it will be of no use to you when an emergency really crops up. Therefore make it a conscious habit to put in a bit of your earnings away in an emergency fund each month. If you get a bonus or a monetary gift sometime, make sure a large share of it is directed towards this emergency fund. That is called being prepared for a rainy day!
4. Buying things to make yourself happy
There are a lot of businesses out there that are making money because you like to binge. This is not to deride the fact that India is called a “consumption” led economy, but give it a careful thought. Do you buy things to uplift your mood, or just because you are bored? If that is so, you are perhaps consuming mindlessly to make yourself content, and sorry to sound philosophical, but material things cannot buy you happiness. Do buy yourself a nice thing or two once in a while, but make it habit to save more than you spend.
5. Waking up late
As bizarre as it sounds, waking up late can also have a negative impact on your finances. Imagine the number of times you have switched off that alarm button and gone back to bed and before you know it, there’s barely enough time to get to work! Now rewind and think what would have happened if you had not hit the snooze button on your alarm. In that extra hour that you would have gotten maybe you could exercise to give your day a jump start, do some long pending reading or get started on your plans to learn a new skill.
All these activities can directly or indirectly lead to a higher income. So instead of getting that coveted hour of sleep, fill in your morning hours with these activities and guess what, you will feel more productive than ever before. And as they say, “Early to bed and early to rise, makes a man healthy, wealthy and wise!”
Bad habits are not easy to get rid off, but with a bit of hard work and conscious efforts you can indeed get rid of them, especially when they are impacting your finances. If you have empathized with one or more of the above mentioned points its time for you to make the effort now! It may be painful for you to make these changes in the immediate short term, but inculcating good financial habits over time will lead to you saving more money over time as well as maintain a healthy Cibil score.
Source : http://goo.gl/OJIu7D
Bindisha Sarang, ET Bureau Dec 29, 2014, 08.00AM IST | Economic Times
The banking space was a mixed bag for retail customers in 2014. Interest rates remained decidedly high during the year, delighting depositors but dismaying borrowers. HDFC reduced its home loan rates by a marginal 15 basis points.
There was some relief for home loan customers in the Budget. The deduction limit for home loan interest was raised from Rs 1.5 lakh to Rs 2 lakh a year. But this won’t offer any benefit if your loan is less than Rs 15 lakh because the interest will not be more than Rs 1.5 lakh a year.
The RBI introduced several customer-friendly measures during 2014 and even took up cudgels on behalf of the aam admi by laying down a charter of rights. But all these got balanced by a new rule that allows banks to charge for ATM usage beyond five times a month.
Other banks’ ATM can be used for free only three times in a month. After that, transactions will be charged Rs 20. SBI, Axis Bank and HDFC Bank have already started charging customers for usage beyond the free transactions. However, in response to a PIL, the Delhi High Court has asked the RBI to explain why customers should be made to pay for taking out money from their own bank’s ATM.
Financial inclusion at 10
Another major change was the RBI’s nod to allow children above 10 to operate their bank accounts independently. Kids are permitted to use facilities like ATM and cheque books.
The objective is to familiarize children with banking procedures but many parents are skeptical about letting children handle money so early.
Rate cut seems imminent, but…
Though most analysts expect the RBI to cut rates in 2015, it is not clear if this will happen in the next couple of months. Till that happens, make best use of the high deposit rates offered by banks. If you do not have a large sum to invest in a fixed deposit, use recurring deposits to lock in to the high rates.
Bank deposits are not as tax efficient as debt funds, but the 2014 budget levelled some portions of the playing field. If the investment horizon is less than three years, there will be no difference in the tax.
Also, if you plan to take a home loan in 2015, opt for a floating rate loan. Given the imminent cut in rates, a fixed rate home loan will not be a good idea. Customer friendly steps by the RBI in 2014:
KYC norms eased
Customers may submit only one proof of address when opening a bank account or during periodic updation.
Banks not to charge foreclosure charges on floating rate loans.
Minimum balance in savings accounts
Instead of penal charges for not maintaining minimum balance, banks should limit services available on such accounts.
Minimum balance in dormant accounts
Banks not to levy penal charges for non-maintenance of minimum balance in any inoperative account.
Banking for minors
Minors above the age of 10 allowed to open and operate savings bank accounts independently.
SMS alert charges
Banks told to charge customers only on the basis of actual usage.
Source : http://goo.gl/8oiRHw
Rajiv Raj | Dec 9, 2014, 04.49 PM | Business Insider
Earning your first salary is undiluted pleasure. It is all too easy to get soaked in its headiness and go a bit haywire in your expenses. However, this is a curial period of your life to build it financially. Decisions made in these initial years will affect your financial status throughout the life.
So if you are young and have just started earning, here is some important money advice that will serve you well for life.
1. Start with a small fixed saving every month
When we first start earning, money always seems short. We are perpetually overdrawing from a credit card or waiting for the next salary to come in. Even so, it is essential to start saving early. Even a small amount grows fast if invested early, much faster than a larger amount invested a few years later. The power of compounding helps money grow in multiples over a longer period of time. To ensure that there is a compulsory saving, invest in an instrument like Systematic Investment Plan (SIP) or a recurring deposit, and instruct your bank to directly debit your account at the beginning of the month.
2. Start building your Cibil credit score
Your borrowing and repayments is what builds up your credit score. Borrowing could be spending on a credit card or taking an EMI loan for a car or even a home loan. Importantly, the loans need to be repaid on time to build a positive credit score. Also avoid spending more than 30% of your credit limits. Maxing out on the credit cards will bring down your credit score. At this stage of life, building a good Cibil credit score is of paramount importance as you will soon be in the market for the all important home loan, and a good Cibil credit score can make all the difference.
3. Buy insurance
For most Indians, insurance is a source of investment. Insurance,however should be used only to cover risk. Buy a term policy that is easy on the pocket and serves the purpose of giving you risk cover. The remaining amount must be invested in other areas.
4. Take advantage of the benefits offered by your company
Many company offer reimbursements for health-related expenses. They also help you to structure your salary in the most tax-effective manner. Some companies may also offer group life insurance and medical insurance, where the rates work out to be much cheaper. Become friends with the people in human resources and take advantage of what the company has to offer its employees.
5. Pay attention to taxes
The government of India gives its citizen excellent opportunities to save tax along with encouraging investments. You can get exception under sector 80 C upto Rs 1.5 lakh in taxes every year by simply investing in your Provident Fund account or paying your life insurance premium etc. Also do file your tax returns on time to avoid the heavy penalties.
6. Make a career plan
It is essential to make a career continuity plan. You may have joined a firm as a graduate, but to move ahead an advanced degree is needed. A rough plan must be chalked out. For instance, you might want to study for an MBA degree in 2 years time. So you need to plan out the source of finance to pursue the course along with living expenses for that period. An education loan can be taken, but to avail that loan you must have a good Cibil credit score. It is a full circle which comes back to prudent spending and investments.
About the author: Rajiv Raj is the director and co-founder ofwww.creditvidya.com.
Source : http://goo.gl/zQYyVU
Rajiv Raj | Nov 11, 2014, 03.02 PM | Business Insider
Money management is a tricky task. Some of us loathe it, while others love it. Whatever it is, nobody can ignore it, because it is a very important skill that all of us should acquire. If only it was as simple as learning alphabets in schools? That said; it is not rocket science as well. Unlike popular belief it is not even time-consuming. I even know of a friend who jokes constantly, “I can make money, but for life of mine, I cannot manage it.”
So, for the benefit for all those who feel that they cannot manage their funds well, we decided to put together a list of eight money management moves that can be made in 15 minutes or less. Unbelievable? Read on to find out:
1) Pull out CIBIL score: A credit score and a report from the Credit Information Bureau of India Ltd (CIBIL), India’s leading credit rating agency, is a record of a person’s credit history, his payments and outstanding dues. Lenders pull out your CIBIL report and score before approving you a loan. To get a loan at an attractive interest rate you need a score of 750+ (ranges between 300-900). Check your score at least once a year, to make sure there aren’t any errors or discrepancies even though you have been paying on time.
2) Start an RD: A recurring deposit (RD) account can be easily linked to your savings account. Banks can take a request for an RD on phone and you can start saving as low as Rs 1,000 a month. Instead of spending money in paying interest on those products, which are available under easily available equitable monthly installment schemes, save up through RD, earn an interest and buy it.
3) Update your nominees: You have been putting away money to save for your wife, children or any other family member. If something were to happen to you tomorrow, are you sure all your loved ones get exactly what you intended for them? It is always a good idea to name your nominees in every kind of saving instruments; be it an insurance policy or a simple savings bank account.
4) Make a will: We love to believe that our children will not fight over property after we are gone. But the reality is different. It is important for us to create a will as we reach 35 years of age. I know of friends who started writing a will as soon as they had their children. The advantage of a will is that after we are gone, our near and dear ones know what exactly they get from what we have earned and saved. It also prevents any kind of misunderstanding among our children and results in easy distribution of our wealth. Ensure you make provision for your spouse as well. Once written, it is open to any kind of amendments you want.
5) Update account passwords: It might seem like a mundane task, but an important one. This helps in keeping your money safe and protected from phishing and fraudulent activities.
6) Plan your pension: Earlier our parents, most of them worked in government agencies. These jobs were not only safe, but also promised pension after they retired. Since most of us are working in private sector these days, can you think of a regular income after you retire? Hence, it is important for us all to have a financial plan in place to fund our expenses during our later years.
7) Scan important documents: Your form 16s, house registration papers, insurance policies, savings instruments documents, fixed deposit (FD) certificates, vehicle ownership papers and all other such documents have to be safe. Scan and keep a soft copy handy and keep the originals locked in a bank locker. There are many phone apps available for download that can help you scan these documents.
8) Identify saving goals: Yes, it can be overwhelming to save when half your salary goes in paying up mortgages, but that should not stop you from saving. You should always target to build a corpus continuously. For all you know, some day you decide to buy another house and you may not have to run from pillar to post for funding the down payment.
About the author: Rajiv Raj is the director and co-founder ofwww.creditvidya.com.
Source : http://goo.gl/2GPyWr
ET Bureau | Nov 18, 2014, 08.08AM IST | Economic Times
NEW DELHI: The government will relaunch the Kisan Vikas Patra scheme on Tuesday, hoping to lure investors away from gold and fraudulent schemes by offering attractive terms. There won’t be any upper limit on investments, the minimum denomination being Rs 1,000.
Investors will be able to double their money in 100 months but the government has bundled in a number of features to enhance liquidity of the instrument as the new regime looks to raise the level of financial savings that fell to 7.1 per cent of GDP in FY13 from more than 12 per cent in FY10.
“Kisan Vikas Patra was a popular instrument among small savers. I plan to reintroduce the instrument to encourage people… to invest in this instrument,” FM Arun Jaitley had said in his budget speech in July.
The government has already rolled out an ambitious scheme, Pradhan Mantri Jan Dhan Yojana, to ensure financial inclusion. Nearly 8 crore accounts have been opened under the scheme so far. “The (Kisan Vikas Patra) scheme will safeguard small investors from fraudulent schemes,” the finance ministry said in a statement.
The popular scheme had been closed in 2011 as part of the government’s drive to rationalise small savings schemes. “Re-launched KVP will be available to investors in denominations of Rs 1,000, Rs 5,000, Rs 10,000 and Rs 50,000, with no ceiling on investment,” the statement said.
The certificates, which will be initially issued by post offices, can be bought in single or joint names and can be transferred from a person to another multiple times. Investors will also be able to transfer them from one post office to another, and later they could be made available through nationalised banks as well.
The certificates can be used as collateral to avail of loans. As an additional liquidity feature, investors will also have an exit option after two years and six months, and every six months thereafter at a pre-determined exit value. There are no tax benefits as of now for investments in the scheme that will yield an annual rate of nearly 8.7 per cent, more than most other small savings instruments.
“With a maturity period of eight years and four months, the collections under the scheme will be available with the government for a fairly long period to be utilised in financing developmental plans of the Centre and state governments and will also help in enhancing domestic household financial savings in the country,” the statement said.
It also sought to allay concerns that the scheme could be used to launder black money. “KYC (know-your-customer) norms regarding all National Savings Schemes (NSS) are now applicable in post offices and banks with effect from January 2012,” the statement said.
The KYC rules can help tap big-ticket transactions.
Source : http://goo.gl/iBmU0J
Creditvidya.com | Updated On: October 18, 2014 11:33 (IST) | NDTV Profit
Though it’s a great feeling to be a homeowner, paying a fat portion of your salary towards the EMI payment is not the happiest feeling. And to to keep paying this sum of money for a period of 10-15 years (the tenure of your home loan) may feel exasperating, as the best part of your youth is over by then. Besides, the interest rate you pay the lender may actually end up making the repayment amount bigger than the principal amount you have borrowed. What then is the solution? The solution is prepayment of your mortgage in easy and simple steps to lighten your debt burden and save money in the long run.
Till about a couple of years back, one had reason to be worried about the prepayment of one’s home loan because of the costs involved. But that does not hold true any longer, with the RBI having directed banks and financial institutions to do away with any penalties on floating rate home loans.
This directive from the apex bank came in the monetary policy announcement in June 2012.But if you still think that prepayment of your mortgage is an impossible feat given the fact that you are barely managing your other fixed expenses, read on to find out how it may not be such a far fetched possibility after all.
1. Take a look at your financial plan
Before you jump the gun and panic thinking that you must pay off your home loan as soon as you can or at least think about a refinance option for your home loan, take a closer look at your financial plan. See the number of investments you have and the returns they are yielding. Once you are assured that your investments are taking care of your short, medium and long term financial goals, you can direct the surplus you have towards the prepayment of your home loan. The thing to remember here is that you should not dip into your emergency fund or compromise with your financial goals to make this prepayment.
2. Tweak your EMI structure
The thought of part payment of EMI may seem intimidating to you, because it is not possible for you to make a full payment of an EMI altogether. But have you considered the possibility of making a slightly higher EMI payment? Even a small amount of Rs. 1,000 to 2,000 will go towards towards the repayment of the principal amount of your loan. As your principal comes down, so does your interest amount and you end up reducing your tenure by at least 1-2 years.
3. Make partial payments whenever possible
Most large banks allow their home loan customers to make N-number of partial payments in a year (However some banks may have a limit of the number of partial payments one can make in a year, so make sure you check with your lender about this provision upfront) . So whenever you have a festival related bonus or a performance bonus coming in, use it for the part payment of your home loan, instead of buying that expensive LED television set or the latest iPhone in the market. While, you may have to make certain compromises, you will end up saving a lot of money in the long run.
4. Cut your costs and live below your means for the first few years
Having a home loan to pay off is a great financial burden, but there is nothing that matches up to the satisfaction of having a roof over your head. Let this be your motivation to cut corners wherever you can and direct the money saved towards the prepayment of your home loan. You may have to let go off the annual vacation in a foreign location for the first few years of your mortgage tenure, but having the peace of mind will be a much bigger incentive.
5. Get the family involved
You may be the main breadwinner of the family and the onus may be on you to manage the finances, but when it comes to the mortgage, make your family as responsible as you are. Make them as involved in the prepayment process as you are. They may not be able to pitch in with the extra money, but they can sure think up some interesting means of spending quality time together. A vacation in a place that is closer to home or doing up the kid’s room with their favourite furnishings could save money and give them as much joy!
By using these simple yet effective strategies you can actually end up saving a lot of money and having the full ownership of your home much before your tenure ends.
Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.
Source : http://goo.gl/ulJp8s
Press Trust of India | Updated On: January 07, 2014 16:44 (IST) | NDTV Profit
Salaried taxpayers, who want to claim I-T exemption on house rent allowance exceeding Rs. 1 lakh per annum, will have to obtain the PAN card number and other details of their landlord on a plain A-4 size paper before submitting it to their employer.
A number of tax department officials PTI spoke to said the circular does not state that such a document has to be a ‘sworn affidavit’ or a ‘notarised document’. Hence, an individual should obtain the information from his or her landlord on a simple plain A-4 size paper.
The tax returns and exemptions filing season will gather momentum in the coming days as the financial year closes on March 31 (2013-14).
“The department has a number of technical platforms to check the authenticity of this information that is provided to it by a salaried taxpayer. The circular has not stated explicitly about the kind of document so it is considered that a plain piece of paper would do,” a senior department officer said.
The Income Tax department will require this document to enable exemption for a taxpayer under House Rent Allowance (HRA) after the Central Board of Direct Taxes (CBDT) issued a circular in this regard in October last year.
The circular (08/2013) states that “…an employee claiming exemption from tax with respect to House Rent Allowance received is now required to report the PAN of the landlord to the employer, if the rent paid by the employee to the landlord exceeds Rs. 1 lakh per annum, along with the rent receipt.”
It further adds that “in case the landlord does not have a PAN, a declaration to this effect from the landlord along with the name and address of the landlord should be filed by the employees.”
Source : http://goo.gl/7g2D88
By ET Bureau | 6 Jan, 2014, 12.12PM IST | Economic Times
Multiple options. Contradictory advice. And a deadline that’s approaching fast. Many taxpayers find themselves in this situation at the beginning of the year when they have to make tax-saving investments.
Are you also confused? Before you make a choice, go through our cover story to know which is the best option for you. We have ranked 10 of the most common investments under Section 80C on five basic parameters: returns, safety, flexibility, liquidity and taxability. Every investment has its pros and cons.
The PPF may not have a very high return, but its tax-free status, flexibility of investment and liquidity by way of loans and withdrawals, gives it the crown in our beauty pageant. Equity-linked saving schemes come in second because of their high returns, flexibility, liquidity and tax-free status. However, traditional insurance policies, an all-time favourite of Indian taxpayers, manage the ninth place because of the low returns they offer and their rigidity.
Some readers might be surprised that the much reviled Ulips are in the third place. The Ulip remains a mystery and its returns are seldom tracked. We checked Morningstar’s data on Ulips and found that the returns have not been very good in the past 1-5 years. Even so, it can be a useful instrument for the smart investor who shifts his money between equity and debt without incurring any tax.
We have tried to separate the chaff from the grain by assigning a star rating to the various tax-saving options. Whether you are a novice or a seasoned investor, you will find it useful. It will help you cut through the clutter and choose the investment option that best suits your financial situation.
What the ratings mean
PUBLIC PROVIDENT FUND
RETURNS: 8.7% (for 2013-14)
This all-time favourite became even more attractive after the interest rate was linked to bond yields in the secondary market.
The PPF is our top choice as a tax saver in 2014. It scores well on almost all parameters. This small saving scheme has always been a favourite tax-saving tool, but the linking of its interest rate to the bond yield in the secondary market has made it even better. This ensures that the PPF returns are in line with the prevailing market rates.
This year, the PPF will earn 8.7 per cent, 25 basis points above the average benchmark yield in the previous fiscal year. The benchmark yield had shot up in July and has mostly remained above 8.5 per cent in the past six months. Although the yield is unlikely to sustain at the current levels, analysts don’t expect it to fall below 8.25 per cent within the next 2-3 months. So it is reasonable to expect that the PPF rate would be hiked marginally in 2014-15.
The PPF offers investors a lot of flexibility. You can open an account in a post office branch or a bank. However, the commission payable to an agent for opening this account has been discontinued, so you will have to manage the paperwork yourself. The good news is that some private banks, such as ICICI Bank, allow online investments in the PPF accounts with them. There’s flexibility even in the quantum and periodicity of investment.
The maximum investment of Rs 1 lakh in a year can be done as a lump sum or as instalments on any working day of the year. Just make sure you invest the minimum Rs 500 in your PPF account in a year, otherwise you will be slapped with a nominal, but irksome, penalty of Rs 50. Though the PPF account matures in 15 years, you can extend it in blocks of five years each. However, this facility is no longer available to HUFs.
The PPF also offers liquidity to the investor. If you need money, you can withdraw after the fifth year, but withdrawals cannot exceed 50 per cent of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower. Also, only one withdrawal is allowed in a financial year.
You can also take a loan against the PPF, but it cannot exceed 25 per cent of the balance in the preceding year. The loan is charged at 2 per cent till 36 months, and 6 per cent for longer tenures. Till a loan is repaid, you can’t take more. If you dip into your PPF account, be sure to put back the amount at the earliest. Withdrawing from long-term savings is not a good strategy if you do it frequently. It can dent your overall retirement planning.
The PPF is especially useful for risk-averse investors, self-employed professionals and those not covered by the Employees Provident Fund and other retiral benefits.
BRIGHT IDEA: Invest before the 5th of the month if you want your contribution to earn interest for that month as well.
RETURNS: 17.5 per cent (Past five years)
The potential for high returns, wide choice of funds and flexibility make these funds a good tax-saving option for equity investors.
Equity-linked saving schemes (ELSS) have the shortest lock-in period of three years among all the tax-saving options under Section 80C. However, this should not be the most important reason for investing in this avenue. Being equity funds, these schemes can generate good returns for investors over the long term. In the past five years, this category has created wealth for investors with average returns of 17.5 per cent.
However, this potential to earn high returns comes with a higher risk. There is no guarantee that your investment will generate positive returns after the 3-year lock-in period. The category has generated an average return of 2 per cent in the past three years. Even the best performing funds have churned out disappointing returns. The returns will naturally mirror the performance of the stock markets. Therefore, only investors who have the stomach for a roller-coaster ride should consider this option.
Should investors avoid ELSS now, especially since the stock market is close to its all-time high? Not really, because the stock market has returned to the previous high after a 6-year gap and, therefore, is not overvalued at all. “Since the stock market is reasonably valued now, ELSS should generate good returns for investors who can remain invested for 5-7 years,” says Gajendra Kothari, managing director and CEO, Etica Wealth Management.
Though the large-cap Sensex and Nifty are at higher levels, the mid-cap and small-cap indices are at much lower levels. This means there is enough value in midcap stocks, which should help the fund managers do well in the coming years. Selecting the right scheme is crucial since there is significant variation in the returns of different schemes.
Though past performance is an important parameter, also take into account the track record of the fund house and fund manager. Once you select a scheme, decide whether you want to go for the dividend or growth option. There is no difference in the tax treatment of the two options. The decision should be based on the cash-flow requirements of the investor. If you opt for the dividend option of the fund, you might get some portion of the money back within 1-2 months. Dividends from mutual funds are tax-free so there is no tax liability as well. Avoid the dividend reinvestment option for ELSS schemes because the lock-in period will prevent you from exiting fully.
Though the ELSS funds invest in equities, they are different from other open-ended diversified equity funds. Due to the lock-in period, the ELSS fund manager does not have to worry about redemption pressure from investors. This gives him the freedom to invest in shares as per his conviction and hold them for longer periods.
In the past few years, the ELSS category has consistently outperformed the large and midcap sub-category of diversified equity funds (see graphic).
ELSS funds offer tremendous flexibility to investors. As mentioned earlier, the 3-year lock-in period is the shortest. Since there is no tax on gains from equity funds after a year, an investor can safely recycle his investments every three years and claim tax benefits on the reinvested amount.
Young taxpayers, who have taken huge loans and don’t have enough surplus to save tax, will find these schemes very useful. If you can help it, don’t exit the scheme after three years just because lock-in period is over. Studies show that equities give better returns in the long term. The minimum investment is also very low.
Though regular equity mutual funds have a minimum investment of Rs 5,000, you can put in as little as Rs 500 in an ELSS scheme. Unlike a Ulip, pension plan or an insurance policy, there is no compulsion to continue investments in subsequent years. Since ELSS funds are a high-risk investment and their NAVs are volatile, you need to stagger your investment over a period of time instead of going for a lump-sum investment at the end of the financial year. This is more important at this juncture when the benchmark indices are trading close to their all-time high levels.
Your best option is to take the SIP route. This may not be possible now because you have less than three months before the 31 March deadline. At best, you can split the investment into three tranches. Before you take the plunge, remember that your investment should be guided by your overall asset allocation. If your exposure to equities is lower than what you want, go for the ELSS fund. If your portfolio already has too much equity, avoid investing in these funds.
BRIGHT IDEA: Don’t invest a lump sum. Split investments in ELSS funds into three SIPs starting from January till March.
RGESS: An avoidable option for the first-time equity investor
The RGESS allows first-time equity investors earning up to Rs 12 lakh a year additional tax savings under the newly introduced Section 80 CCG. If you invest in the RGESS options, you can claim a deduction of 50 per cent of the invested amount. The maximum investment is Rs 50,000, so the maximum deduction availed of can be Rs 25,000. This is over and above the Rs 1 lakh limit available under Section 80C.
The scheme permits investments in the BSE-100 or CNX 100 shares, shares of Maharatna, Navratna or Miniratna PSUs, or in designated equity mutual funds and ETFs. Should you invest in it to avail of this benefit? We would not advise investing directly in shares just to claim tax deduction. In fact, the first-time investors are better off taking the mutual fund route.
If you do opt for any RGESS fund or ETF, your investment is locked in for three years (fixed lock-in period during the first year, followed by a flexible lock-in period for the two subsequent years). Under the flexible lock-in option, you are allowed to sell your RGESS shares or mutual funds units and reinvest the proceeds in any other RGESS instrument. This will enable you to get rid of the underperforming investments and shift to better options. However, in the absence of an SIP facility, you are exposed to market timing.
Also, the maximum tax saving you can get through this scheme is Rs 7,725 for those in the 30 per cent income tax bracket. In the 20 per cent bracket, the maximum saving is Rs 5,150, while you save only Rs 2,575 in the 10 per cent bracket. This is not much considering the risk you are taking by investing in equities. Besides, investors will also need to open a demat account to invest in the RGESS, which would incur annual charges.
RETURNS: 7.2-11.8 per cent (Past five years)
Don’t go by the past record. The new Ulip is a good way to invest in the equity and debt markets for tax-free returns.
There’s a good reason why this most hated investment is so high on our rating scale. For many policyholders, Ulips denote the costly mistake they made a few years ago. But that was a different era, when companies were gobbling up 50-60 per cent of the premium in the first few years in the guise of charges.
The 2010 guidelines have reformed the Ulip, turning it into a more customer-friendly investment. Though a Ulip should not be your first insurance policy, you can consider buying one as an investment that also helps you save tax. Of course, it also offers a life cover, but the stress is on investment, not protection. Don’t buy a Ulip (or any other insurance policy, for that matter) if you are not sure whether you can continue paying the premium for the entire term. If you end it prematurely, be ready to pay surrender charges.
Your insurance policy should not impinge on other financial commitments. It’s easy to set aside a big sum when you are young because your liabilities are limited, but this changes and expenses shoot up when you start a family or buy assets. If the premium is very high, the policyholder may find it difficult to pay it year after year.
Under the new Ulip rules, you cannot take a premium holiday. If you stop paying the premium, the policy will be discontinued. Also, you need to take a long-term view when you buy an insurance plan. A Ulip will yield good results only if you hold it for at least 10-12 years. Before that, the plan may not be able to recover the charges levied in the first few years. This is why short-term plans of 5-10 years usually give poor results, which pushes investors to dump them within 3-4 years of buying.
Buyers must also understand that a Ulip is not necessarily an equity-linked investment. You can also invest your Ulip corpus in debt funds. Right now, debt funds are looking attractive because of the possibility of a drop in bond yields, while the equity markets are looking overheated. Instead of investing in the equity option, put your corpus in the debt fund.
You can start shifting the money to the equity fund when the prospects look rosier. Only a Ulip allows you to switch from debt to equity, or vice versa, without incurring any capital gains tax. It is best to invest in a plain vanilla Ulip that allows you to choose your investment mix and also offers online transaction facilities.
BRIGHT IDEA: Opt for the liquid or debt fund and then shift to the equity option as per your reading of the market.
RETURNS: 8.5 per cent (for 2013-14)
This little used option is available only to salaried taxpayers covered by the Employees’ Provident Fund.
The contribution to the Employees’ Provident Fund (EPF) is a compulsory deduction, as also an automatic tax saver. However, you can contribute more than 12 per cent of your basic salary that flows into the EPF every month. This voluntary contribution will earn the same rate of interest, will fetch you the same tax benefits under Section 80C and the maturity corpus will also be tax-free.
A key disadvantage is the limited liquidity that the Provident Fund offers. You cannot access the money till you retire. A one-time withdrawal is allowed in special circumstances, such as medical emergency, purchase or construction of a house, or a child’s marriage. However, it may not be possible to opt for the VPF at this juncture.
Companies typically ask their employees to submit the VPF mandate at the beginning of the financial year. Ask your company if you can start contributing to the VPF from this month onwards. Once you have opted for the deduction, you cannot discontinue it till the end of the financial year, except in extraordinary circumstances. While the VPF gets tax deduction and the maturity corpus is also tax-free, you will have to pay tax on the interest if you withdraw the money within five years. So, opt for it only if you are sure that you can remain invested for the long term.
Another drawback is the possibility of a lower interest rate for the PF in the coming years. The rate is announced by the EPFO Trust after examining the interest earned by the EPF corpus. It is likely to be 8.5 per cent for the current financial year, but there is no certainty that this will be maintained over the longer term.
Contributing to the VPF is suitable for taxpayers in their 50s, who want to aggressively save for their retirement but don’t want to invest in market-linked options or tax-inefficient fixed deposits.
BRIGHT IDEA: Channelise at least 10 per cent of your increment to the VPF every year. The higher savings will not pinch you.
SENIOR CITIZEN’S SAVING SCHEME
RETURNS: 9.2 per cent (for 2013-14)
This remains the best way for retirees to save tax, though the Rs 15 lakh investment limit is a damper.
With four stars, this assured return scheme is the best tax-saving avenue for senior citizens. However, the Rs 15 lakh investment limit somewhat curtails its utility as a tax-saving option. The interest rate is 100 basis points above the 5-year government bond yield.
Unlike the PPF, the change in interest rate does not affect the existing investments. This year, the interest rate has been cut by a marginal 10 basis points to 9.2 per cent. Many grey-haired investors may not be enthused by this. Banks are offering up to 10 per cent to senior citizens right now, almost 50-60 basis points higher than what they give to regular customers.
There’s a good reason for this pampering. Senior citizens have a bulk of their investments in fixed deposits, which which makes them prized customers for banks. So, if you do not consider the tax deduction under Section 80C, this option is not as lucrative as bank FDs. However, as a tax-saving tool, the scheme scores over bank fixed deposits and NSCs because the quarterly payment of the interest provides liquidity to the investor. The interest is paid on 31 March, 30 June, 30 September and 31 December, irrespective of when you start investing.
This aspect of the SCSS, and the fact that it is an ultra safe scheme backed by the government, makes it an ideal option for retired taxpayers looking for a steady stream of income. Though the interest earned is fully taxable, retired people usually don’t have a high tax liability. Keep in mind that the basic tax exemption for senior citizens is higher at Rs 2.5 lakh. For very senior citizens, it is even higher at Rs 5 lakh.
The only glitch is the Rs 15 lakh investment limit per individual. If a person parks Rs 15 lakh of his retiral benefits in the scheme, he will be able to claim deduction for only Rs 1 lakh. Although the scheme is for senior citizens (60 years), even those above 55 years can invest if they have taken voluntary retirement. Retired defence personnel can join irrespective of their age if they fulfil other conditions.
BRIGHT IDEA: If you have Rs 15 lakh to invest in the scheme, stagger the investments over 2-3 years to claim more tax benefits.
NEW PENSION SCHEME
RETURNS: 4.2-10.2 per cent (past 3 years)
The low-cost retirement product is a good option fro those saving for retirement, but watch out for the limited liquidity it offers.
Its low-cost structure, flexibility and other investor-friendly features make the New Pension Scheme an ideal investment vehicle for retirement planning. However, even though the fund management charges have been raised from the ridiculously unviable 0.0009 per cent to a more reasonable 0.25 per cent, the pension fund managers are not hardselling the scheme.
If you want to save tax through the NPS this year, be ready to do a lot of legwork and paperwork before you can get to invest in this unique pension plan. The returns from the NPS funds are a mixed bag (see table).
While the returns from the E class (equity) funds are in line with the market returns, those from the G class (gilt) funds are quite a disappointment. Government employees, who have a chunk of their pension funds in the G class schemes of LIC Pension Funds and SBI Pension Funds, would be especially hit. The redeeming feature is the high returns churned out by the C class (corporate bond) funds. However, these bonds carry a higher risk.
The scheme scores high on flexibility. The minimum annual contribution is Rs 6,000, which can be invested as a lump sum or in instalments of at least Rs 500. There is no upper limit. The investor also decides the percentage of the corpus that goes into equity, corporate bonds and government securities, the only limitation being the 50 per cent cap on exposure to equity.
One of the most outstanding features of the NPS is the ‘lifecycle fund’. It is meant for those who are not financially aware or can’t manage their asset allocation themselves. It is also the default option for someone who has not indicated the desired allocation for his investments. Under this option, the investor’s age decides the equity exposure. The 50 per cent allocation to equity is reduced every year by 2 per cent after the investor turns 35, till it comes down to 10 per cent. This is in keeping with the strategy to opt for a higher-risk, higher-return portfolio mix earlier in life, when there is ample time to make up for any possible black swan event.
Gradually, as the investor approaches retirement, he moves to a more stable fixed-return, low-risk portfolio. This automatic rejigging of the asset allocation is a unique feature of the NPS. No other pension plan or asset allocation mutual fund offers such a facility to investors. There are a few funds based on age, but they are one-size-fits-all solutions, not customised to the individual’s age.
Another positive feature of the NPS is the wide choice of funds for the investor. Though you can switch from one fund manager to the other only once in a year, it is still better than investing in a Ulip or a pension plan where you are stuck with the same fund manager for the rest of the tenure. IDFC Pension Fund quit the NPS last year, but two well-regarded entities — HDFC Pension Fund and DSP Blackrock Pension Fund — have joined the club.
Another unique feature of the NPS is the tax benefit it offers under the newly added Section 80 CCD(2). Under this section, if an employer contributes 10 per cent of the salary (basic salary plus dearness allowance) to the NPS account of the employee, the amount gets tax exemption of up to Rs 1 lakh. This is over and above the Rs 1 lakh tax deduction under Section 80C. It’s a win-win situation for both because the employer also gets tax benefit under Section 36 I (IV) A for his contribution.
By putting in money in the NPS, the employer can provide an additional tax benefit to the employee by simply reorganising the salary structure without incurring any additional cost to the company (CTC). The wart in the NPS is the lack of liquidity. You cannot access the funds before you turn 60. On maturity, at least 40 per cent of the corpus must be used to buy an annuity. Some see this as a positive feature that prevents premature withdrawals.
BRIGHT IDEA: Get your company to opt for the Section 80CCD(2), under which you can save more tax through the NPS.
NSCs AND BANK FDs
RETURNS: 8.5-9.75 per cent
They appear attractive, but taxability of income takes away some of the sheen from these instruments.
There are many misconceptions about bank fixed deposits in the minds of investors. Many think that up to Rs 10,000 interest from bank deposits is tax-free, as announced in the budget two years ago. This is not true. The newly introduced Section 80TTA gives a deduction of up to Rs 10,000 on interest earned in the savings bank account, not on fixed deposits and recurring deposits.
Also, the nomenclature ‘tax-saving deposits’ means you save tax under Section 80C. It does not mean that these deposits are tax-free. The interest earned on deposits is fully taxable at the normal tax rate applicable to you. You have to mention this interest under the head ‘Income from other sources’ in your income tax return. Keep in mind that this tax is payable every year on the interest that accrues in that financial year, even though you get the amount on maturity.
So don’t get misled by the high interest rates offered on the 5-year bank fixed deposits. The post-tax yield may not be as high as you think. In the 20 per cent and 30 per cent income tax brackets, it is not as attractive as the yield of the tax-free PPF.
The second misconception is that there is no need to pay tax if TDS has been deducted by the bank. You may have to pay tax even if TDS has been deducted. TDS is only 10 per cent (20 per cent if you haven’t submitted your PAN details), and if you are in the 20-30 per cent bracket, you need to pay additional tax. Ignore mentioning the interest income in your return at your peril. The TDS is credited to your PAN and reported to the tax authorities. If there is a mismatch in the TDS details in the tax records and in your return, you will surely get a tax notice.
The Central Board of Direct Taxes has a computer-aided scrutiny system (CASS), which flags any discrepancy in the tax return filed. Check the TDS in your Form 26AS, which has details of the tax deducted on your behalf. It can be easily checked online. It is easier if you have a Net banking account with any of the 35 banks that offer this facility. Otherwise, you can go to the official website of the Income Tax Department and click on ‘View your tax credit’. The first-time users will have to register, but it takes less than 5 minutes to log on and view your details.
The interest on NSCs is also taxable but very few taxpayers include it in their returns. However, with the integration of tax records, a taxpayer may not be able to escape the tax net easily. For instance, if you have claimed tax deduction under Section 80C for investments in NSCs or FDs in one year, the tax department may want to know why the interest earned is not reflecting in your tax returns for subsequent years.
BRIGHT IDEA: Don’t try to avoid the TDS by investing in FDs of different banks. You will have to pay the tax later anyway.
LIFE INSURANCE POLICIES
RETURNS: 5.5-7.5 per cent
Despite the revised guidelines, insurance plans are still not a good investment. Only HNI investors will find the tax-free corpus appealing.
Though the Irda guidelines for traditional plans have made insurance policies more customer-friendly by ensuring a higher surrender value and larger life covers, they are still the worst way to save tax. The tax saving is only meant to reduce the cost of insurance. It is not the core objective of the policy. Money-back and endowment insurance policies score low on the flexibility scale. Once you buy a policy, you are supposed to keep paying the premium for the rest of the term. This can be a problem if you took the policy only to save tax.
However, these policies are not as illiquid as they appear. You can easily get a loan against your endowment policy from the LIC. The terms are quite lenient and repayment can be done at your convenience. Insurance companies claim their products offer the triple advantage of life cover, long-term savings and tax benefits. That’s not true. Traditional plans give a low life cover of 10 times the premium.
For a cover of Rs 25 lakh, you will have to spend Rs 2.5 lakh a year. They also give niggardly returns. The internal rate of return (IRR) for a 10-year policy comes to around 5.75 per cent. For longer terms of 15-20 years, the IRR is better at 6.5-7.5 per cent. As for the tax benefit, there are simpler and more cost-effective ways to save tax, such as 5-year bank FDs and NSCs. If the taxability of the income worries you, go for the tax-free PPF.
However, traditional insurance policies still make a lot of sense for the HNI investor who is more concerned about the tax–free corpus under Section 10(10d) than the deduction under Section 80C. Even for such investors, a Ulip will make more sense as they will have control over the investment mix. The opacity of the traditional plan is best avoided, but your agent might not be very keen to sell you a Ulip this year because his commission has been cut to 6-7 per cent of the premium.
RETURNS: 7-10 per cent
After a hiatus of 2-3 years, pension plans are making a comeback, but the high charges mean lower returns for investors.
Pension plans offered by life insurance companies made a comeback in 2013. However, the charges of these plans are significantly higher than those of the NPS. While the NPS has a fund management charge of 0.25 per cent, a typical pension plan from a life insurance company charges almost 3-4 per cent. This difference can snowball into a wide gap over the long term, reducing the returns of the pension plan investor by a significant margin.
Insurers argue that the low-cost NPS is good only on paper because there are so many hurdles to investing in the scheme. A pension plan from an insurer is costlier but you don’t have to go around in circles trying to invest in it. That’s true to a great extent. Even after four years of launch and offering additional tax benefits, the NPS has not been able to attract investors in hordes. However, the solution is not a high-cost pension plan.
A few mutual funds also have pension plans. The Templeton India Pension Plan is one of the oldest schemes in the market and offers deduction under Section 80C. It is a debt-oriented fund that invests 30-40 per cent of its corpus in equities and the rest in debt. But at 10.7 per cent, its 5-year annualised returns are nothing to gloat about. A better option would be a combination of an ELSS scheme and any of the debt instruments that offer tax deduction.
BRIGHT IDEA: It is not a good idea to invest a large sum in the equity option at one go. Opt for the liquid or debt fund instead.
Source : http://goo.gl/9I8cz9
BHAVANA ACHARYA | Jan 4, 2014 | Hindu Business Line
Franklin India Prima Plus, in the past one year, is up around 2 per cent. That’s better than the flat returns logged by its benchmark CNX 500.
The fund also makes only the mid-quartile category of diversified large-cap equity funds in the one-year period. It, however, does not frequently switch sectors and stocks and bases calls on valuations.
A strategy of this nature tends to deliver well over the longer term and indeed, Franklin India Prima Plus has delivered well over the past nearly 20 years.
The fund, which has a long history, has seen out many a market cycle well. Its 10-year annual return of 19 per cent beats the approximately 13 per cent delivered by the Nifty, Sensex and CNX 500. It’s also among the best performers in this period.
Strategy and suitability
The fund invests in large-cap stocks (which hold lower risk) with some mid- and small-caps added to pep up returns. Its latest portfolio, for example, has a 19 per cent share of stocks with capitalisation of less than Rs 7,000 crore.
Calls are made based on valuations. The fund has also maintained equity investments above 90 per cent, even during bear markets. This allows it to make the most of subsequent market upswings.
Investors with a moderate risk appetite can invest in the fund. Investors should also be willing to hold the fund for a period of five years or more. The systematic investment route can be used.
Thanks to its buy-and-hold and valuations-based strategy, the fund has seen temporary blips in performance from time to time — in early 2010, mid-2008 and late 2007, for instance. But performance evens out over the long term. On an annual rolling return basis, the fund has done better than the CNX 500 index a good 86 per cent of the time in the past ten years.
Over the one-, three- and five-year periods, Prima Plus has beaten the CNX 500 by two to five percentage points. Even comparing its returns with the narrower BSE 100 – given the fund’s large-cap bias – the fund has done well over the longer term.
The fund is also good at containing downsides. During both the previous market downswings of 2008 and 2011, for example, it lost eight to ten percentage points lesser than its benchmark.
The banking sector has been the top holding in the portfolio for several years, only briefly ceding top spot to sectors, such as FMCG, software, telecom and capital goods.
Calls in this space, apart from the tried-and-trusted ICICI Bank and HDFC Bank, include more offbeat ones, such as Federal Bank, IndusInd Bank and Kotak Mahindra Bank.
With the fund’s tendency towards value picks, holdings in over-heated sectors, such as FMCG have been cut gradually over the past year. It added to software significantly in 2011 and 2013. Holdings in sectors, such as automobiles and pharma, have also been steady over the past few years.
The fund also has a fair share of stocks in sectors such as mining and cement which have been beaten down of late, and could turn around.
(This article was published on January 4, 2014)
Source : http://goo.gl/C8qf1z
Babar Zaidi, ET Bureau Dec 30, 2013, 08.00AM IST | Economic Times
The new year gift by Sebi for mutual fund investors has proved its utility. The direct plans launched by mutual fund houses at the beginning of 2013 churned out better returns for investors than their regular counterparts.
In some equity funds, this outperformance was as high as 75-80 basis points. Don’t underestimate the potential of what seems like a minor difference. Even a 75 basis point higher return on a 10-year SIP of Rs 5,000 can make a difference of Rs 50,000 in the final corpus value.
Within six months of their launch, the direct plans had cornered 25% of the total AUM of the industry. Reliance Mutual Fund had the largest AUM under direct plans, followed by UTI Mutual Fund and ICICI Prudential Mutual Fund. However, a study by Crisil shows that direct plans mostly attracted large investors, such as corporates and institutional investors.
Direct plans are no different from regular plans except that they have lower charges. The amount that the fund house saves on the distribution and commission expenses is passed on to the investor.
The year offered very important lessons to mutual fund investors. For one, small was beautiful. A clutch of tiny equity funds delivered spectacular returns, even as giant-sized schemes moved sluggishly. These money spinners are not mid- and small-cap funds that invest in little-known stocks and typically have low asset bases. They are large-cap and multi-cap schemes, which invest in blue-chip stocks and are highly rated by Value Research. Their performance is also no flash in the pan but has been consistently good over the past three years.
However, despite the good returns and high ratings, these schemes have not attracted the attention they deserve. The total AUM of these five schemes grew from Rs 210 crore in January to Rs 234 crore in November. Despite giving a return of 17.36%, the AUM of Tata Ethical Fund grew 7.5%, which shows that some investors actually sold off this money spinner.
On the other hand, gigantic funds, such as HDFC Top 200 and HDFC Equity, gave muted returns in 2013 because of their concentrated exposure to banking stocks. The two largest equity schemes in India had 28-30% of their total corpus in banking stocks. The sector declined by over 10% in 2013.
This brings back memories of the tech boom and bust of 2000, when equity schemes had lined their portfolios with IT stocks. In 2007, they had made the same mistake with infrastructure and realty stocks.
Strategy for 2014
If you are confident of investing on your own, it will be a good idea to move your investments to a direct plan. Before you do so, here are a few things to keep in mind. One, you might be slapped with an exit load if you shift out of the regular plan before the minimum period.
Also watch out for the capital gains tax. If you shift from one scheme to another, it is treated as a redemption. If your equity or balanced fund investment was made less than a year ago, there’s a 15% tax on any capital gain. If it is a debt-oriented scheme, the gain will be taxed as regular income.
Diversified equity schemes will be your best bet in 2014. Sure, some sectors such as IT, pharma and banking are expected to do better than others, but an astute fund manager will take this into account while picking stocks for the fund. If you still want concentrated exposure to a single sector, pick a good tech, pharma or banking fund. They may prove rewarding in 2014.
Source : http://goo.gl/eJcReK
It’s that time of year again–forget the diet and instead get your finances in order for a prosperous year ahead.
Vicky Mehta,Senior Research Analyst with Morningstar | 30-12-2013 | Morningstar.in
The New Year is here. For many, a ritual practiced at this time of the year is to make resolutions. In keeping with tradition, we present a checklist of five resolutions for mutual fund investors, which will hold them in good stead in the year 2013.
1. I will make informed choices
Since January 2013, mutual fund investors were given the option to invest directly with the fund company (i.e. bypass the distributor) through a separate plan. The market regulator, SEBI, mandated that such direct plans will have a lower expense ratio versus the conventional plan wherein investments are routed through a distributor.
It’s time for investors to make an informed choice—invest directly or engage the services of a distributor. The former option is best suited for investors who are equipped to conduct research to select the right funds, and also construct and manage a mutual fund portfolio. Conversely, for investors who choose to engage a distributor, it is important to find out more about his services i.e. how he makes recommendations, portfolio tracking and management tools offered, number of portfolio reviews and other terms of engagement. In any case, making an informed choice is important.
2. I will be resilient
While investing in market-linked avenues, resilience is a trait investors must possess. There will be periods when markets run into rough weather and test the resolve of investors. That is the time to be resilient and not deviate from one’s investment plans. For instance, if you are investing in equity funds and the market experiences a downturn, don’t hit the panic button and discontinue your systematic investment plan, or SIP. Indeed, that’s the time when the benefits of an SIP kick in, by lowering the average purchase price. Conversely, when mutual funds that don’t suit one’s risk appetite emerge as the season’s flavour, there is a need to be resilient to resist the temptation of investing in them.
Being conversant about investment avenues and their nuances can aid investors in becoming resilient. While investing in an equity mutual fund, it would help to have a long-term investment horizon (at least five years), be aware of the potential downside (loss of capital) and understand the scenarios wherein the fund is likely to be at its best and struggle to deliver. Simply put, being aware can make investors more resilient and in turn, better equipped to deal with testing conditions.
3. I won’t let noise influence my investments
It isn’t uncommon for the media to carry reports on trends in mutual funds. Often, the discussion centers around how much assets a given category of mutual funds gained or lost, or which mutual fund segment was the best performer in the last month or quarter. Such articles are at best examples of data compilation. However, investors run the risk of hurting their cause, if they treat the same as investment advice or base their investment decisions on such reports.
Simply because a story claims that investors have taken a liking to debt funds or have developed an aversion for equity funds, there is no reason for investors to follow suit. In the world of investments, one size doesn’t fit all. Instead, investors would do well to block the noise and focus on their investment goals, plans and adhere to the same, irrespective of what the popular trend suggests.
4. I won’t be an ‘autopilot’ investor
Often mutual fund investors are guilty of investing in an autopilot mode i.e. not reviewing their investments at regular time intervals. While selecting the right fund is important, evaluating its aptness on a recurring basis is no less important. For instance, if the manager departs or the manager decides to ply a different investment strategy, it could result in a fundamental change in the fund’s nature. In such a scenario, it is important to assess if the investor should continue to stay invested in the fund.
At times, the need to review the portfolio could be triggered by a change in the investor’s investment objectives, risk profile or investment horizon. As a result, a fund that was apt for the investor in past may no longer be suitable or might be apt for a different role in the portfolio (core versus supporting). The importance of not being an autopilot investor cannot be overstated.
5. I won’t be swayed by fund companies’ marketing spin
Fund companies can be quite fairly creative with their marketing spin in a bid to convince investors about a fund’s prowess. Then, there are media-savvy portfolio managers who preach that investors should be investing in their funds, irrespective of the scenario. For example, an upturn in markets is portrayed as a sign of future highs that markets will eventually scale; conversely, a downturn is presented as an attractive opportunity to get invested.
On their part, investors need to be cautious. The onus of differentiating marketing spin from sound advice lies with investors. Investors must add funds to their portfolios based only on solid rationale. More importantly, the fund selected needs to be right for the investor i.e. suited to his risk profile and equipped to help him achieve his investment goals.
This original version of this article appeared in January 2013
Source : http://goo.gl/Urfjlp
BankBazaar.com | Updated On: December 25, 2013 13:15 (IST) | NDTV Profit
As the year draws to a close, looking back at the overall financial report of the year gone plays an important role in effective financial management. The end of the year gives us a perfect time and opportunity to check the financial books to asses tax strategies for the current financial year. Exploring tax saving options at the last minute are a bad idea and the end of the year offers the perfect window of opportunity to evaluate and change taxation strategies as required. Irrespective of whether you are a salaried individual or a business owner or self employed professional, there are some essential financial to do things that must be a part of your overall financial planning routine.
- Assess your tax strategies: With the financial year ending closing in, the end of year is the perfect time to assess your tax strategies for the year. Irrespective of whether you are self employed or salaried, tax strategies play an important role in a financial well being. Any major purchases that can potentially give you tax rebate must be done in 2013 itself to counter any unexpected large chunk of taxable profit. A lot of people commit the cardinal sin of checking their books only a few weeks before the March 31 deadline. By that time it is usually too late to embrace effective tax planning. The last month of the year offers a perfect opportunity to evaluate and assess the taxation strategies to make sure one does run out options in the last minute.
- Make a capital purchase: Making a capital purchase before the end of the year can bring multiple benefits especially if you are a business owner and seeking to buy a vehicle. Firstly one may get a cheaper deal as most buyers wait for the New Year before taking delivery of their vehicles and secondly one can show the purchase under capital expenses which can compensate for taxation in the business ownership. Technically one can buy any asset that has a useful life for more than a year including vehicle, electronic equipment or machinery and even furniture to increase your capital expense in the current year.
- Make a charitable gift or donation: The year end is one of the best times to contribute to society by donating for charity or a cause you believe in. Apart from bringing a smile on the faces of the under privileged, all donations and charity can avail you deductions from 50 to 100 per cent under Section 80G of the Income Tax Act. However, deduction for donations made cannot exceed 10 per cent of gross total income.
- Explore other tax saving instruments: The end of the year is the best time to evaluate your personal finance goals for the New Year as well as commit tax planning for the current financial year. There are a number of tax saving options that can be availed. The earlier one commits to tax planning, the better the chances of effective tax management. A lot of people end up paying a hefty tax only due to poor tax planning. Explore tax saving instruments like provident funds, National Savings Certificates and Senior Citizens Savings Scheme and other schemes like Section 80D for payment of health insurance premium. The sooner one starts to plan; the better it is for the overall financial well being.
- Get your financial books in order: Do not wait for the last week of March to get your financial books in order. The end of the year is the best time to get all your financial books updated to avoid the last minute jitters before the end of the financial year. It is useful to update all your bank account statements and any Tax Deducted at Source (TDS) certificates and compile them in your financial folder updated till December. If you have made a donation to any charitable organization make sure that you collect a valid receipt to claim deduction u/s 80G. Compute your tax for the year and assess your profit and expenditure till December to give you a better insight into the future tax planning that can be useful in saving tax for the current financial year before the March 31 deadline.
BankBazaar.com is an online loan marketplace.
Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.
Source : http://goo.gl/vv3oO1
“Smart” home loans do reduce your interest outgo. But which is the smartest of them all.
By Munir Kulavoor | 11th December, 2013 | Integra FinServe
Banks product teams usually come up with variations of home loans from time-to-time, such as floating-rate loans, fixed-rate loans, fixed-floating loans, teaser rate, dual-rate etc. There is a category of home loans that are gaining popularity wherein your surplus funds can be linked to the home loan to reduce the interest outflow. Here is how State Bank of India’s Max Gain works and what it means for you.
What’s the offering?
In case of Max Gain, you DO NOT have to link a current account to your home loan unlike other banks. You can deposit any surplus funds irrespective of amounts directly in the Max Gain account, the bank deducts it from the principal of your home loan while calculating the interest for the number of days it stays in the account. Whereas other banks insist on a linked current account and the average monthly balance in the account is considered to calculate interest. This clearly demonstrates why SBI Max Gain is far superior in this category as the interest is calculated on daily reducing balance compared to others – monthly reducing balance.
Interest rates charged on such “smart” home loans are usually higher than that of normal loans—0.5-1.0 percentage points more. For instance, HSBC, on its website, states that interest rate on normal floating rate home loan for up to Rs.50 lakh loan amount is 10.75% per annum. However, interest rate for smart home loan for the same amount is 11.00% per annum. Similarly, IDBI Bank charges a higher interest rate on “smart” loan. Its usual home loan interest rate is currently at 10.25%, but 10.50% for the “smart” loans. State Bank of India, which calls this product SBI Maxgain, charges 0.25 percentage points over the applicable home loan interest rate for home loans above Rs.1 crore, the bank states on its website.
Advantages therefore are:
- Mechanism does away with liquidity crunch
- Allows you to maintain emergency fund & simultaneously save
- Huge saving of interest obligation over the entire tenure
- No pre-payment penalty or fee charged
- Interest saved is not taxable
- Faster repayment of loan
How does it work?
You take a Rs.50 lakh home loan, assume you have a surplus amount of Rs.5 lakh. Deposit that money in Max Gain account, the interest obligation would be calculated on the loan outstanding less Rs.5 lakh (this is Rs.45 lakh), and not on the entire loan outstanding. (See illustration below)
|SBI HOME LOAN||Normal Home Loan||Max Gain ‘A’||Max Gain ‘B’|
|Rate of Interest||10.50%||10.50%||10.50%|
|Tenure (in months)||240||240||240|
|Max Gain ‘A’ – is when you deposit an incremental amount every month|
|Max Gain ‘B’ – is when you maintain a constant deposits from the start of the loan|
|Interest Saving||Normal Home Loan||Max Gain ‘A’||Max Gain ‘B’|
|Interest saving over the tenor of the loan||2,922,867||2,500,805|
|Tenor Saving||Normal Home Loan||Max Gain ‘A’||Max Gain ‘B’|
|Saving in no. of EMIs||90||62|
|Interest rate on normal loan for similar interest obligation||10.50%||6.66%||7.24%|
This money can be withdrawn fully or partially whenever you want. Even if you deposit a recurring amount in your account, this deposit will still be subtracted from principal outstanding to calculate the interest. Interest component will be lower compared to ammortisation schedule in normal case. As it is a component of EMI, Principal Repayment part will be higher than normal. However, if you don’t deposit money in your account then you will end up paying a higher EMI as the interest rate is higher than that for normal home loan (SBI charges 0.25% extra for loans greater than 1 crore).
Who and why should you opt for it?
Max Gain product may not be as advantageous, if you have avenues such as mutual funds, which can give better returns. Secondly, Max Gain is given at 25bps higher rate than a normal home loan for amount greater than 1 crore. However, this is still better than peer banks typically charging 0.5-1.0 percentage points over the normal home loan rates.
Borrowers must also bear in mind that in normal home loan if he does not pay for 90 days the bank tags the account as Non-Performning Asset (NPA) but in Max Gain if borrower pays even Re.1 short from the EMI it will be treated as overdue and once it crosses 90 days its an NPA. Some banks charge an annual fee of 1% on the outstanding loan amount for this product making it quite expensive; not in case of Max Gain though.
The concept, though simple, is powerful. Another way of looking at it, is that your deposit is earning an interest equal to your home loan interest rate. The idea is to make use of all your surpluses lying idle due to oversight (sometimes) in your current or savings account to offset a part of the principal.
Max Gain suits everybody particularly those borrowers looking for balance transfer of high cost home loan running with other banks. It is imperative for those with home loan linked to Benchmark Prime Lending Rate (BPLR) system before Base Rate system was implemented by RBI w.e.f. 01-07-10. Now if you are an existing borrower and want to switch to Max Gain, first look for the cost. Be prepared to shell out at least fees & stamp duty close to one EMI.
This “smart” product requires the borrower to be smart and utilise its advantages to even undertake financial planning effectively!
In case of a linked current account scenario, you earn an interest from the money that you deposit in the account against which the loan is offset. The amount has to be disclosed to the income tax department. There is ambiguity on how it will work in such cases whereas in Max Gain there is no such issue as the funds are directly credited to Max Gain.
Finally even though the interest rate is higher in this product (> 1 crore), the fact that it reduces the tenor will lower your total loan outgo.
Priyadarshini Dembla | Dec 10, 2013, 05.54AM IST | Times of India
The importance of saving and investing cannot be overstated. And, it is never too early to start investing. Rather, it is a case of sooner the better. However, with rising costs and tight budgets, the question is how one should go about with investments? In addition, there is the market scenario to consider. For instance, if the equity markets have recently scaled new highs or have corrected sharply, the dilemma is would it make sense to invest or should one hold off for a while?
This is where the systematic investment plan (SIP) method of investing in mutual funds comes into the picture. SIP is a simple and proven investment strategy which can help investors in accumulating wealth in a disciplined manner over a longer time frame. In an SIP, instead of investing a lump sum, a fixed amount (which can be as small as Rs 100) is invested at regular intervals in mutual funds. Some of the key benefits of SIP investing are listed below.
No need to time the market: At no point of time, should the current market level deter a long-term investor from making a beginning. One cannot always be the best buyer or the best seller. Timing the market is a time-consuming and a highly risky strategy for investors. Not many investors can claim to have the ability to consistently time the markets accurately. This is the reason why several investors end up losing out on market opportunities in pursuit of trying to time the market in vain.
Rather, investors should focus on meeting their investment objectives and deciding where they should invest. With an SIP, one does not have to worry about what the market levels are. All one needs to do is to identify the right funds and get invested. In the process, investors do not have to delay their investments either.
A convenient investment mode: The SIP mode of investing is more convenient than making lump sum investments. Typically, an SIP entails investing a smaller sum every month vis-a-vis larger amounts in lump sum investments. This, in turn, makes the SIP mode apt for investors who are struggling with tight budgets and EMIs. Often, lack of adequate funds is an excuse for delaying investments. An SIP enforces discipline in investments by ensuring that a fixed sum is invested every month, and is convenient on account of the small ticket size.
Using rupee-cost averaging: The benefits of investing via an SIP become apparent in times of market volatility. When the net asset value (NAV) of the mutual fund unit drops during a downturn, each SIP installment invested results in more units being credited to the investor. This, in turn, results in averaging out the cost of purchase. In effect, in times of volatility, investing via the SIP route becomes more lucrative. This is further explained through the table given here.
|A disciplined approach to creating wealth|
|2013||SIP Amt (Rs.)||NAV (Rs.)||N o. Of Units|
|Note: Avg Cost = Total cash outflow/Total no of units, i.e. Rs.10000/605.5=Rs.16.5. Whereas, Avg Price=Sum of all NAVs at which you have invested/Number of months of your investment, i.e. Rs.178/10=Rs.17.8. Therefore the Avg Cost is Lower that the Avg Price.|
It is also noteworthy that SIP helps an investor avoid a knee jerk reaction of selling his/her investments during a bear market, thereby helping him/her realize the full value of his investments.
(The writer is research associate, Morningstar India)
Neha Pandey Deoras | Mumbai | October 30, 2013 Last Updated at 22:16 IST| Business Standard
Floating-rate housing loans are better, as these insulate you from sudden spikes in EMIs
Though dual or fixed-cum-floating rate home loans schemes launched by a number of foreign banks are tempting, these might not be your best bet. Reason: While the rates are lower now, there could be a sudden rise in equated monthly instalments (EMIs) once the loan moves to a floating rate.
At 10.25 per cent, Citibank’s and HSBC’s home loan rates are the lowest for loans more than Rs 30-50 lakh. State Bank of India, in comparison, charges a floating rate of 10.10 per cent for loans up to Rs 30 lakh and 10.3 per cent for loans more than Rs 30 lakh. The rate for Citibank’s floating rate product is 10.75 per cent. Citibank and HSBC’s loan products would have a two-year fixed tenure, while Standard Chartered’s fixed rate of 10.26 per cent would be applicable for three years. For home loan borrowers, there would be sense of relief for the first two-three years.
“The dual-rate product is being offered for the convenience of customers. It makes sense for customers, as well as banks, to fix the rates to tackle potential volatility,” says Daryl D’souza, vice-president and business head (mortgages), Deutsche Bank India.
After the ‘fixed period’, however, for all the three banks, the rate would be 50-100 basis points above the base rate. Currently, most banks charge 50-75 basis points more than the base rate for home loan borrowers.
While there are expectations the rates might continue to rise in the near future, say two-three quarters, the question is how long would the rise continue. “In the immediate short term, interest rates might go up. But through the next one-two years, interest rates can’t be predicted. Therefore, taking a home loan with a rate fixed for a year may be better than one in which the rate is fixed for two and three years,” says Harsh Roongta of Apnapaisa.com.
The borrower, while getting the benefits of the locked rate in the first few years, insulates himself/herself from a spike in EMI. So, the EMI for a loan of Rs 50 lakh for 20 years, at 10.25 per cent, would be Rs 49,082. Of this, Rs 42, 708 would go towards the payment of interest, as banks front-load the interest payment in a home loan. But if the rate falls during the ‘fixed period’, they would be at the losing end, as their interest payout would be more.
Even after the fixed period of two years, if the bank increases the base rate by 100 basis points, the EMI would rise by Rs 3,087 to Rs 52,169. If the base rate falls, the EMI would come down. But even at 10.5-11, the new EMI would be about Rs 50,000. It is for this reason that experts feel floating rate schemes are better. Some banks may levy a part prepayment penalty of up to one per cent during the fixed period.
Of course, if you seek safety from EMI volatility because of the weak economy and the insecure job market, this could help. These products also help if you want to increase the loan eligibility to an extent. At best, go for a one-year product.
Adhil Shetty | Updated: Nov 29 2013, 15:38 IST
Financial planning is necessary as marriage changes an individual’s life in many ways.
Marriage changes an individual’s life in many ways, bringing a lot of joys, additional responsibilities and worries in small measures as we try to adjust to the new person in our lives. After marriage, both of you might be working or either one of you. This will determine your income source and as for expenses, it is largely based on the standard of living that one maintains. There are a lot of things that a couple must clarify right at the onset of their marriage such as life goals and financial aims. In fact, keeping in mind the rate of inflation, it is sensible to start planning for children’s education, marriage and retirement right from the first day of marriage.
Managing money and family planning
Mostly, in India, people begin any serious investments such as gold or property only after marriage. Money management takes serious undertones as family planning also enters the picture. Many couples make the mistake of paying greater importance to either money management or family planning, whereas both must be managed simultaneously. Expenses towards children begin right from their delivery, schooling to higher studies. There is an argument both for and against starting a family early in life; on one hand, it means that you will be through with all the big responsibilities of your life by the time you retire; and on the other, it means more financial stability before you take on the responsibility of a child.
Contrary to the previous era when the majority of the weddings went unregistered, most of the urban marriages are registered formally, often in the marriage hall itself where the wedding is conducted. There are numerous legal rights and obligations that come into action once a marriage has been legally formalised. There are a few age old financial precepts of marriage which hold true even today such as: Have at least one bank account which is held jointly by the couple. This is very helpful especially when you are making investments or taking a loan jointly.
As far as possible, apply for home loans jointly, as the chances of sanction rise.
Also, in case both the partners are working, then both can enjoy tax concessions. Register all real estate property in both your names for administrative as well as loan purposes. Change the wife’s name on all legal documents including bank accounts, PAN card, passport etc. Have a budget to keep track of your monthly expenses and how to manage them.
Financial planning for the newlyweds
As is the case of all personal financial planning, it is essential to have short-term, medium-term and long-term financial plans which can be used as a definite plan or as a yardstick by which you can measure your financial success and also keep a tab of the roadmap you have set for achieving your joint goals. These goals may be further categorised into needs and wants to mark their importance.
Financial planning is a dynamic process that will evolve as the years pass and the couple assumes new roles and responsibilities. However, it is essential to have a shared vision and attitude towards expenses as this financial stability is highly essential for a stable future.
The writer is CEO, BankBazaar.com
Anand Kalyanaraman | Business Line Research Bureau | November 30,2013|
If you did not invest in the tax-free bonds issued earlier this year, here is another good opportunity to do so. NTPC, the country’s leading power generator, is offering attractive rates on its bond issue, which opens on Tuesday.
Retail investors (those who invest up to Rs 10 lakh) will get 8.66 per cent annually on the 10-year bonds, 8.73 per cent on 15-year and 8.91 per cent on the 20-year instruments. Investors having a long-term horizon and looking for safe instruments can consider buying.
The returns on NTPC’s bonds are higher than the after-tax returns on bank deposits. Currently, the best rate on five-year bank deposits is 9.25 per cent, which compounded quarterly works out to 9.58 per cent. But after considering taxes, the return falls to 8.6 per cent for depositors in the 10 per cent tax slab, 7.6 per cent for those in the 20 per cent tax slab and a mere 6.6 per cent for those in the 30 per cent slab.
NTPC’s bonds thus, offer a superior alternative to bank deposits for investors. Interest on the bonds will be paid out annually and will not be subject to tax.
The rates on tax-free bonds issued by public institutions are linked to those prevailing for Government securities (G-secs). NTPC is able to offer attractive rates because G-sec yields have been quite buoyant in recent times. The yield on the 10-year G-sec is currently around 8.7 per cent. This may moderate in the coming months, and so, future tax-free bond issues may not be able to match rates being offered by NTPC. So, it is a good time to invest in the bonds now.
NTPC’s bonds are rated ‘AAA’, indicating the highest degree of safety for investors. This is a notch higher than the ‘AA+’ rating for the tax-free bonds being issued by housing financier HUDCO from Monday.
Though HUDCO is offering 10 basis points (0.1 percentage point) more than NTPC, the latter provides more investor comfort, thanks to its higher bond rating and regular disclosures as a listed company.
NTPC’s business model, based on regulated returns, is also more stable and provides better long-term visibility on profits. Its revenues from operations have grown at an annual average of around 13 per cent in the four years to 2012-13 while its profits have grown at nearly 12 per cent annually.
Before investing in tax-free bonds, keep aside funds for your public provident fund (PPF) investment. With good tax-free returns (8.7 per cent currently), PPF provides tax deduction on the initial investment up to Rs 1 lakh, making it a superior investment.
Source : http://goo.gl/RMyWN7
B. Venkatesh | Business Line | November 30, 2013|
This cookie jar method is about earmarking expenses and keeping money for each expense separately.
You may have seen your grandmother manage her household budget using the cookie jar method. This method is about earmarking expenses and keeping money for each expense in a separate jar. That is, money for monthly grocery is kept in one jar, rent in another jar and so on. An important rule was that the money can only be spent on the expenses for which it was earmarked. Grocery money, for instance, cannot be used to pay rent. This behaviour, called mental accounting, is well-documented in behavioural economics. The question is: Can you use mental accounting to your advantage?
So, what does mental accounting actually mean? Classical economists would consider, say, Rs 10,000 as cash that can be used for spending. But behavioural economists documented evidence that our spending habits can be governed by the source of the money; you are more likely to indulge with Rs 10,000 if the money came from lottery winnings than if it came from your salary.
That said, the truth is that we cannot often resist spending. So, the question is: Will you spend less if you separate your money into various expenses and follow the cookie jar method? It appears you can! Research in neuroscience has shown that you exert more self-control when you feel guilty of spending. And your guilt is more when you spend on luxury products with cash earmarked for grocery or rent.
But is your grandmother’s cookie jar method practical in today’s world? It can be. And you do not have to maintain jars for each expense. You can instead earmark cash in envelopes at the beginning of each month, especially for expenses for which you want to exert self control — entertainment expenses, for instance.
Interestingly, the cookie jar method can work for savings as well. Picture each mental account or cookie jar as a goal, and invest accordingly. This will help you stay focused on your life’s goals. In fact, you are more likely to achieve your objectives if you follow such goal-based investing than if you have a single investment portfolio for your life’s goals.
Consider that you have a goal to create an education fund for your children. Suppose, you have two children, and one will enter college in 10 years and the other in 14 years. You should create two mental accounts or investment jars, one with a portfolio to suit an investment horizon of 10 years, and the other with 14 years.
Finally, you can also use the cookie jar method to teach children to handle their weekly allowances wisely, by creating three cookie jars for spending, saving and gifting.
(The author is the founder of Navera Consulting. Feedback may be sent to email@example.com)