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10 Financial Lessons from KBC & Bigg Boss

Financial Planning

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December 8, 2011

10 Financial Lessons from KBC & Bigg Boss

These days reality shows are part of our life & I am not joking when I say I start my day with Bigg Boss. Yup! We record it on Tata Sky & once I am back from my Tennis Lessons, I & my wife watch it – I feel it’s a better option than listening to commentary of so called experts on Business Channels. Even I prefer watching ‘Doremon’ with kids over ‘Markets Today with Udayan’. But what should I do with power of my subconscious mind that can link even these Reality Shows with Financial Planning & Investments.

What KBC Can Teach Us

1. Setting Goals – First thing that Amitabh Bachaan asks is – where would you like to set your goals that you can achieve in given limited time. So there are 2 things, you set your goals according to your knowledge/stamina/capacity; second, risk is involved either you undershoot your goals or overshoot them. Setting realistic Goals is very important decision in your financial life & you should do it considering your resources & risk appetite.

2. Mind Game – participants get tensed as the stakes get higher. Investors say, we are very patient about our investments – we are investing since 2005 & we never sell in fear. (Even in 2008 when market was down more than 50%) And they are very sure that they will not do this in their lifetime – so my question is which one was your equation in 2008:

Your income was 10 Lakh & your equity portfolio size 5 Lakh. Or
Your income was 10 Lakh & your equity portfolio size was 50 Lakh.

There is difference between loosing 3 months’ salary in comparison to 2.5 years salary. In your investments your biggest enemy is your behavior & you do more mistakes when stakes are big.

10 Financial Lessons from KBC & Bigg Boss Click to Tweet

3. Everything is equally important – is it possible that contestant give a wrong answer to one question & still win the Jackpot. Answer is NO. So it possible that one person is good at one aspect of financial life & he can have a successful financial life. Again answer is NO. One should be good at all the parts including investment, insurance, taxation, debt management, budgeting etc.

4. Help is Available – KBC gives 4 lifelines but contestant have to use it judiciously & some time a wrong choice can be fatal. Let’s check the Lifelines:

Audience Poll – this is following the herd mentality, which investors do very often in equity markets.
Phone a Friend – how many times you take financial decisions based on friends suggestions. But are they expert or they are just like you?
Double Dip – Some time luck is on your side & you make some money but luck never gives you a second chance. “Never Confuse Brains with a Bull Market”
Expert Advice – In KBC expert advice is available free but in real life it is not. Pankaj Pachuri helped Sushil Kumar winning is 1 crore but have you thought, what a wrong advice would have cost. Rs 48,40,000!! (or losing 95% of his money)

5. Tax – Sushil Kumar got 5 Cr or 3.5 Cr? Every investment should be seen in the light of tax – investments are compared on their after tax return. Is 8% return from PPF & FD are equal or 10% return from Debt & Equity are equal.

Bigg Boss lessons other than Cat Fights

1. Budgeting – these guys make weekly budgets with limited resources. Budget is the first step of financial planning & it is also the only medicine for good financial health. With technological enhancements, every day it we face new ways to spend our money without realizing its long term impact. When you don’t have budget everything looks important & necessary.

2. Cool Headed – why do you think most of the fights start in Bigg Boss House? Because most of the time we use Reflexive part (quick reaction) of the brain rather than Reflective Part (do analysis). Lot of time in articles I leave decision to you & write “take a cool headed decision”. This is part of Neuroeconomics – which says most of the financial decisions are taken by Reflexive part & Reflective part is not used. If you have invested heavily in some stock/asset – how you will react to some negative news flashing on TV during trading hours. THINK!

3. Wild card entry: Like entry of Sunny Leon, in Bigg Boss 5 or Dolly Bindra in Bigg Boss 4 changed the statistics of the game, same way financial life can also be full of surprises (and generally these are negative in nature & which is marked by cash outflows). In financial life one should be ready to face any negative accident and should change or revise his strategy accordingly.

4. Market is Supreme – Mr Bigg Boss changes the game with a small announcement. It doesn’t matter what you think about market – if you think market is undervalued, it can still go further down or vice versa. Don’t fight with the market – respect it.

5. And the winner is – who stays longest in the Bigg Boss house. Your one week/month performance will not make you the winner – you have to stay in the game till the end. Its time in the market & not timing the market which creates wealth.

Would you like to share what you have learned from these reality shows or any other TV Serial? Please don’t give examples from Serial KILLERS like CID or Kyonki Saas Bhi Kabhi Bahu Thi. 😉

Mutual Fund Taxation in India

Hemant Beniwal

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December 2, 2011

156

There are very few things in this world which are both “Legal” & “Lethal”. TAX is one of them. If not understood or paid in a proper way, it is enough to give you hypertension which is one of the most common reasons for a heart stroke. See, I made you look gloomy and stressful. Hence it is very important to have elementary knowledge of Tax Provisions.

I believe most of the readers are new to the Mutual Funds so they will have many queries on taxation of Mutual Funds. So, here is an attempt to cover Mutual Fund Taxation for individuals, HUF & NRIs.

Income from Mutual Fund can be divided into 2 parts Capital Gain (increase in value of your investment) or dividends that investors receive on regular intervals if they have opted for dividend plans. So taxation of Mutual Funds in India can be divided in 2 parts Capital Gain & Dividends.

Capital Gain Taxation on Mutual Funds

Capital Gain is appreciation in the value of asset – if you buy something for Rs 1 Lakh & sell it for Rs 1.5 Lakh, you have made a Capital Gain of Rs 50000. Capital Gains are further divided into short term & long term depending on their investment horizon.

Short term capital Gain arises if investment is hold for less than 1 year or in simple words sold before completion of 1 year. Here 1 year means 365 Days.

Long Term Capital Gain arises if investment is sold after 1 year.

Mutual Fund Capital Gain Tax further depends on which type of fund it is – Equity or Debt.

Must Read – 11 Unusual ways of smart tax planning

Capital Gain Tax on Equity Mutual Funds

Equity Mutual Funds are those funds where equity holding is more than 65% of the total portfolio so even balanced funds will be categorized in Equity Funds. Fund of Funds (mutual funds which invests in other funds) & international funds (funds which have more than 35% exposure to international equities) will be kept under debt category for tax purpose.

Long Term Capital gain on Equity Mutual Funds – if you buy & hold an equity Mutual Fund for more than 1 year, there will be NIL Tax. Eg. If you invest Rs 1 lakh in XYZ Fund & after 1 year, its value is Rs 1.3 Lakh – there will be zero tax on capital appreciation of Rs 30000. This is a very big advantage of equity mutual funds.

Mutual Fund Taxation in India Click to Tweet

Short Term Capital gain on Equity Mutual Funds – if you sell equity mutual fund before completion of 1 year you need to pay tax of 15% on capital gains. In the above example where gain was Rs 30000 – if this was a short term capital gain, investor would have paid Rs 4500 as short term Capital Gain.

Note for NRIs – Same capital gain is applied for NRIs but in case of Short Term Capital Gain there will be a TDS (tax deducted at source). Which means Tax will be deducted by Mutual Fund Company before paying redemption (sell) amount.

Capital Gain Tax on Debt Mutual Funds

All other funds which will not qualify as equity fund, including Fund of Fund & international Fund will be part of debt mutual funds. Definition of Short Term & Long Term is same as mentioned in equity category.

Short Term Capital gain on Debt Mutual Funds – any short term capital gain that arises due to selling of debt fund before 1 year will be added to investor’s income. Once it is added to income it will be taxed according to tax slab of that individual.

Long Term Capital gain on Debt Mutual Funds – here taxation depends on whether investor would like to use indexation or not. (To understand more on indication read this article – Taxation on Fixed Maturity Plans.

Without Indexation – 10% tax on capital gains
With Indexation – 20% tax on capital sains

Note for NRIs – NRIs will receive their redemption amount only after tax:

Short Term – 30% TDS
Long Term – 20% TDS
Cess of 3% will also be applied to this TDS.

Shailesh asked couple of questions regarding capital gain taxation on mutual funds – hope this will help you to understand the concept better:

“I know that some short term as well as long term tax need to paid on redemption of mutual fund, but I don’t know where to pay and how much to pay.

Can you please take following scenario and help me out to calculate tax?
Suppose my salary income is Rs. 8,50,000 per annum, I am in 20% tax slab. Apart from that only mutual fund income is there.

1. I have purchased Equity mutual fund Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. Here Long Term Capital Gain on Equity is applied – So NIL tax.

2. I have purchased Equity mutual fund Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Here Short Term Capital Gain on Equity is applied – So 15% tax on gains or Rs 150.

3. I have purchased Debt mutual fund Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. Here Long Term Capital Gain on Debt is applied – So 10% tax or Rs 100 (I am assuming that Indexation is not used).

4. I have purchased Debt mutual fund Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Here Short Term Capital Gain on Debt is applied – so appreciation of Rs 1000 will be added to your income tax & taxed according to your slab.

5. I have purchased hybrid mutual fund(say HDFC Balanced) Rs. 10000 on 20-04-2010 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much long term capital tax I need to pay in this year?

Ans. As I told you earlier that balanced funds or funds with more than 65% in equities are qualified as Equity Funds – so answer will be same as question 1.

6. I have purchased hybrid mutual fund(say HDFC Balanced) Rs. 10000 on 20-04-2011 and sold it on 20-10-2011 and Redemption money is Rs.11000. How much short term capital tax I need to pay in this year?

Ans. Same as Question 2”

Hope now you have clear idea about capital gains. Let’s see second part of income from mutual fund – that is Dividend Income.

Mutual Fund Dividend Taxation

Again this taxation will depend on which type of Mutual Fund you are investing in – Equity or Debt.

There is no dividend distribution tax on equity mutual funds & also the dividend received by investors is tax free. So, again a bonus for equity mutual fund investors.

Even in case of Debt Mutual Funds – dividends received by investor are tax free in their hand or they don’t need to show it as a taxable income. But there is dividend distribution tax paid by mutual funds to income tax department.

Dividend Distribution Tax on Debt Mutual Funds

Here there are many tax slabs depending on the investor category but we will only be talking about Individuals, HUF & NRIs.

This taxation further depends on type of Debt Funds:

Dividend Distribution Tax on Liquid/Money Market Schemes

Liquid/Money Market Schemes means Debt oriented funds which invest in money market instruments or in securities that have maturity of less than 90 days.

Here 27.038% tax (25% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends.

Dividend Distribution Tax on Debt Funds other than Liquid/Money Market Schemes

Here 13.519% tax (12.5% Tax + 5% Surcharge + 3% Cess) will be deducted from the dividends.

In equity mutual funds there is not much difference whether you invest in a growth or dividend option. (Leaving 2-3 special cases) In debt it is very important that investor should select dividend or growth depending on his time horizon & tax slab.

According to the Finance Bill 2013, the DDT applicable for debt funds has increased from 12.5 per cent to 25 per cent for individuals and HUFs. DDT applicable to any person other than an individual or HUF i.e. a firm, or a company, continues to be 30 per cent.

If you still have any query related to Mutual Fund Taxation – feel free to ask. If you think this article was helpful to understand this concept, must share it with your friends.

Which is the best ELSS Mutual Fund for 2012?

Hemant Beniwal

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November 29, 2011

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Which is the best ELSS Mutual Fund for 2012?

Which is the Mutual Fund for ELSS or which is the best Mutual Fund for SIP or which is the best term plan? This is the most common trick to ask secrets from Hemant. 🙂 And as usual my answer is “There is nothing called best – best comes after postmortem”.

If you don’t have much idea about Mutual Fund ELSS (Equity Linked Saving Scheme) – You should read ELSS the best instrument for saving tax.

Do you know “Average Equity markets in US have given return of 9.14% from 1991 to 2010 but what investor got was just 3.27%.”

Can you guess why this happened? Because people were looking for BEST FUNDS & not concentrating on other factors which are more important. Read Secret of achieving high returns.

But won’t you like to ask what happened if someone made investments when the sensex touched its highest point. If someone had invested Rs 10000 in ELSS Fund on 9^th January 2008 (Sensex 20800) & withdrawn it after 3 years on 10^th Jan 2011 (Sensex 19100).

Read – ELSS Vs PPF

So couple of funds have given negative returns in this period & if you notice in middle of this period funds even lost almost 50% of their value. Equity is the most volatile asset class & it always work like this – if you don’t have risk appetite or if you want that your investments should never go negative, please don’t invest in equity or equity related instruments. Read – Which is the best place to invest?

So we have seen a single period but this cannot be much helpful in any judgment. Let’s see what happened in all 3 year periods since ELSS came to existence – for that we have to understand rolling returns.

Definition of Rolling Returns: The annualized average return for a period ending with the listed year. Rolling returns are useful for examining the behavior of returns for holding periods similar to those actually experienced by investors.

3 year rolling return of ELSS

For example, the three-year rolling return for 1996 covers Jan 1, 1993, through Dec 31, 1996. The three-year rolling return for 1996 is the average annual return for 1993 through 1996.

So you can see there are couple of negative periods here – all 3 year period that are starting from a peak of bull market. Most sever, almost a 30% negative in 1997 because this is talking about investments done at the time of Harshad Mehta’s Scam (1993).

https://www.retirewise.in/2016/03/when-not-to-invest-in-equity-linked-saving-schemes-elss.html

5 year rolling return of ELSS

If we look at 5 year period there is no negative period but return in 1998 are almost close to zero & again thanks to Mr Harshad Mehta. If you do a Prima Facie observation – on an average investments has given more than 100% return or doubled in period of 5 years.

If you look both the rolling charts there are a two important learning:

First, with increase in investment horizon (3 to 5 years) volatility substantially reduces.

Second, investments done when actual returns were negative have generated a good return. (Check 3 year period)

But question is which fund to invest.

Best ELSS Mutual Fund for 2012

This is just a list of 10 tax saving mutual funds – you can take a decision with your own research. ()

Long term Performance of ELSS Funds (absolute return)

Year on year of ELSS Funds

Read – What will happen to ELSS after new direct tax code?

If you have any query relating to ELSS or tax saving – feel free to ask.

But please don’t ask which is the “Best ELSS Mutual Fund”. 😉

What will happen to ELSS after new Direct Tax Code (DTC) ?

Tax Planning

Hemant Beniwal

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November 26, 2011

36

What will happen to ELSS after new Direct Tax Code (DTC) ?

Good things do not last long… is an old saying. I think same is happening with the ELSS category of Equity Diversified Mutual Fund.

Last week I wrote “Simple Tax Planning Guide and ABC of Section 80 C” – where I have not missed a chance to write that ELSS (Equity Linked Saving Schemes) of Mutual Fund is undoubtedly is the best tax saving instrument. But again the same question echoed by readers – What will happen to ELSS after new Direct Tax Code (DTC)?

Read – PPF Vs ELSS

In last 1 year I have received 30-40 comments where readers have raised this concern. Some recent comments are:

Comment 1. After DTC comes into effect, probably by 2012 what will happen to my ELSS investment done this year? If I pay Canara Robecco equal installments (SIP) for next 5-6 months… what’s the future? Will there be a lock in after DTC also? Will the fund (ELSS) perform as well as it is performing now? What’s the future of ELSS post DTC?

Comment 2. What’s the best alternative of ELSS for next year when the proposed DTC kicks in? Right now I’m utilizing 100% 80C through ELSS but confused if there’s any such scheme will remain available post DTC except crappy ULIPS etc. any thought? I don’t want to dive into debt except mandatory EPF deductions through my employer.

Comment 3. Could you please tell me that if I invest 10000 this year in ELSS and lock for say 5 years from this year (2011), then should I pay 10000 every year till the fifth year? So for this year investment, I can get a tax exemption. But consecutive years what would be the case and how should I go about?

Check – When not to invest in Equity Linked Saving Schemes (ELSS)

So now there are lots of questions in these comments – let’s answer one by one:

Q1. Will there be tax benefit on ELSS after DTC?

According to last DRAFT of DTC, ELSS will not be counted as tax saving instrument. Here important word is DRAFT – so you never know final draft can give a positive surprise. Mutual Fund industry is trying hard that ELSS should be included in Section 66 (replacement of section 80C in DTC) so keep your fingers crossed.

What will happen to ELSS after new Direct Tax Code (DTC) ? Click to Tweet

Q2. When will DTC come into effect?

There is a high probability that it will not be introduced in April 2012. But this is also true that UPA govt. would like to bring this new code before parliament election so April 2013 should be a better guess.

Q3. After DTC comes into effect, what will happen to my ELSS investment done this year?

If you make investments in ELSS this year, you can claim this as deduction under section 80C. As ELSS is a onetime investment & you don’t need to make any regular payments like ULIP or PPF. I don’t know why people are worried.

Q4. Will there be a lock in after DTC implementation also?

Yes, you need to keep your funds locked in for coming 3 years.

Q5. What’s the future of ELSS post DTC?

If ELSS can’t get a chance to be a tax saving instruments – either these funds will be made open ended or will be merged with other funds. The decision lies with the individual fund houses.

Q6. What’s the best alternative of ELSS for next year when the proposed DTC kicks in?

If I talk about current available products NPS (New Pension Scheme) looks a better alternative. And it looks NPS is the biggest reason why ELSS is not part of DTC Draft. 🙁

Q7. Could you please tell me that if I invest 10000 this year in ELSS and lock for say 5 years from this year (2011), then should I pay 10000 every year till the fifth year?

First of all ELSS is having 3 years of locking period, secondly there is no compulsion of regular payments.

Bonus Question. Is it a good time to invest in ELSS fund?

Hey no one asked this! So what – I know most of you are having this question in your mind. I think this is a good time to invest in ELSS or any other diversified equity fund ‘IF’ your investment horizon is 5-7 years or your overall exposure to equity is low.

Go ahead and pick the last ripe fruit.

ABC of section 80C

Tax Planning

Hemant Beniwal

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November 23, 2011

24

For people Section 80C has become synonym to tax saving. Everyone jumps on one of the products which are available there for investment. In India tax saving & investment go hand in hand – some time it shocks me, when I hear people saying that their investment is only what they are doing for tax savings. Let me clarify in the starting of the article that if you are one of those who think that investing only for tax saving will be enough for you to achieve all your goals or a single goal like retirement – you are terribly wrong. And sooner you realize it is better as time cannot be substituted, in most of the financial products.

Always remember your tax saving should be result of your investment planning & not vice versa. This means first we make our goals, make a plan for it, then choose an investment strategy and after that we see that can any tax saving instrument can become part of overall strategy or not.

What is Section 80C

Section 80C provides you deduction upto Rs 1 lakh from once income. It is applicable for any individual or HUF and also for any income level. As this is a deduction this actually reduces your gross income for tax purpose. So if you have earned Rs 5 lakh in this year & you used 1 lakh limit of section 80 C – you have to calculate tax only on Rs 4 lakh.

ABC of section 80C Click to Tweet

Let’s understand it with example:

Mohan & his friend Sohan who joined IT company this year at same level & are going to earn Rs 10 Lakh. Mohan was enjoying his life at fullest & never thought that he has to invest any amount to save tax. So he actually planned to pay tax or we can say he was not having any choice but to pay tax. Sohan was a good saver & had some idea about tax saving – he kept aside some portion of his salary to invest in some tax saving instrument. Last week one of the insurance agents meets Sohan & told him about how he can save tax under section 80C by investing in their newly launched endowment policy. So Sohan invested Rs 1 Lakh in their policy & saved tax.

Let’s see how their finance looks:

Particulars	Mohan	Sohan
Salary	1000000	1000000
Interest Income	0	0
Taxable Income	1000000	1000000
Deduction U/S 80C	0	100000
Net Taxable Income	1000000	900000
Income Tax Liability
0-180000 @0%	0	0
180001-500000 @10%	32000	32000
500001-800000 @20%	60000	60000
800001 Above @30%	60000	30000
Total Income Tax	152000	122000
Education Cess @3%	4560	3720
Total Income Tax Payable	156560	125660

You must be thinking that how smart is Sohan he saved a tax of Rs 30900. But I think he was equally dumb because he forgot the basic principal “your tax saving should be result of your investment planning & not vice versa”.

Two Mistakes that Sohan did:

Invested in Low yielding expensive insurance policy.
Not considered his EPF contribution. This is deducted form you monthly salary @ 12% of your basic. Your employer also contributes the same amount. Your contribution qualifies the Sec 80C investment.

Various options available under section 80C & which one is suitable for you.

Instruments that don’t even need investment

Children’s Tuition Fees. This deduction is available for 2 children with total limit of Rs 100000. So for this the fee receipt that you get from school is the document that you need to furnish.
Home Loan Principal Payment: If you have taken a Housing loan and look at the payment schedule, it is bifurcated into two parts. One is you principal payment and second is your interest repayment. You can also contact the bank or the loan company for a certificate, which will describe your principal and interest payment outgo.

Instruments that need Investments. We can further divide into 2 parts

Debt Oriented: The instruments under this category are EPF, PPF, NSC, Bank term Deposit, Senior Citizen Savings Scheme and Post office Time deposit above 5 years. For complete details check table. Other than these there are Insurance policies which also come under these categories but we have not included them in table as our suggestion is don’t mix insurance with investment. There return varies from 4.5 to 6%.

Equity Oriented

i. ULIP: Unit Linked Insurance Plans are the insurance plans where a portion of your premium goes as an investment, similar to mutual fund. The returns of these plans are market linked. These plans are very complex & also expensive.

ii. ELSS: These are Diversified Equity mutual Fund schemes with lockin of 3 years. The returns are also linked to the performance of equity markets.

Read – ELSS: best tax saving instrument undoubtedly

You should think about the following criteria, before selecting your tax saving investments:

Liquidity: All these products have different lock-ins. Consider your requirement of funds before you invest.
Risk and Return: An ELSS can you give highest return but are volatile. So consider how much risk you can take.
Inflation protection: These product yield returns in wide range. So consider a product which at least beat inflation and suite you on risk parameter as well.

We can make this bit easy by suggesting instrument by age:

Young – maximum contribution in ELSS & with some portion in PPF.

Middle Age – Equal Contribution in PPF & ELSS.

Retired – Senor Citizen Scheme & Fixed Deposit will be better. Still consider some contribution to ELSS if your asset allocation is tilted towards debt.

Let’s assume that one person who is 30 years now & want to invest in tax saving instruments till his retirement. How much corpus will be build if you invest Rs 30000 every year in Endowment Plan(6%), PPF(8% – before change) & ELSS(12%) for 25 years.

Hidden Gem of Section 80C:

Term Insurance: Term Insurance is the cheapest policy available and hence hardly talked about by agents and even insurance companies never promote such cheap and low cost product. Term policy is insurance at its purest and simplest form. You pay premiums because there is a guarantee that if something happens to you, your family will be paid out the pre-decided amount, hence you have the peace of mind that even if you are not there, those loved ones you leave behind will not have to bear a financial loss. Term Insurance is protection against risk of life. You must buy it & also avail section 80C benefit on it.

Feel free to ask any question related to taxation or tax planning.

Simple Tax Planning Guide

Tax Planning

Hemant Beniwal

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November 18, 2011

52

If you are salaried the mail for your tax proofs must be on the way. Here we just list the basic tax reckoner for you so that you may save whatever you can. Tax planning should actually be considered in accordance with the overall asset allocation of our portfolios. After all, tax planning avenues will be either equity or debt. These are the simple avenues from which you can save taxes.

Income Tax Slab Financial Year 2011 – 2012

In case of a resident woman below the age of 60 years, the basic exemption limit is Rs 1,90,000.
In case of a resident individual of the age of 60 years to 80 years (Senior citizen), the basic exemption limit is Rs 2,50,000.
In case of a resident individual above the age of 80 years (Very Senior Citizen), the basic exemption limit is Rs 5,00,000.

We can divide our tax planning into 2 Parts Deduction under Section 80 C & beyond 80 C:

1) Deduction Under Section 80 C

Start by checking out Section 80C. According to this tax provision, an amount equal to the investment that you make in certain specified instruments or an expense that you incur reduces your Gross Total Income (GTI) by the same amount.

Broadly section 80 C deductions can be classified into two options Investment Oriented & Non Investment Oriented

A) Investment Oriented

Tax saving should be result of your Investment planning and not vice versa.

You should think about the following criteria, before selecting your tax saving investments for the year:

Liquidity
Risk and Return
Inflation protection

However, there is a limit of Rs 1 lakh. These specified instruments include: National Savings Certificate (NSC), 5-year Bank FD, ELSS, LIC, ULIPs, Pension Plan and EPF. If you are a salaried employee, 12 per cent of your salary is deducted every month and put into a kitty maintained either by the government or the company’s own trust. First deduct that amount from Rs 1 lakh to know how much more you have to save under this section.

From the balance, decide on your debt-equity allocation. If you are looking at equity, you can consider an Equity Linked Savings Scheme (ELSS). These are diversified equity mutual funds that offer a tax break under Section 80C.

Other Section 80 C instruments:

Check the Inforgraphic given in end of the article.

Don’t use insurance policies for tax saving purpose.

B) Non Investment Oriented (Expense Oriented)

Principal component of home loan repayment
Tuition fees paid for children’s education (maximum 2 children)

2) Beyond 80 C

For individuals whose gross total income exceeds Rs 280,000 pa, deductions under Section 80C may not be sufficient to reduce the overall tax liability. In such cases they can consider the following:

Health Insurance Section 80 D: If you spend up to Rs 15000/- on buying a mediclaim or a health insurance for your family. An additional deduction of Rs 15000 is available if you buy a mediclaim for your dependent parents. Senior citizens can claim Rs 20000/- as deduction.

Education Loan: If you have taken a loan for higher studies for yourself, spouse or child the interest payment can be deducted from the GTI. This is under Section 80 E.

If you are philanthropist by nature, get yourself benefited from your donations. Subject to 10% of your overall income you can get 50% or 100% of the deduction form your GTI. These donations to specified funds and charitable institutions are covered under Section 80 G.

Housing loans are very much useful while saving taxes. The principal amount repayment is covered under Section 80 C. Also the interest payment on home loan is covered under Section 24, where you can claim upto Rs 1.5 lakhs of the interest repayment for you self occupied house.

Then comes Section 80 DD. If you have a dependent who is disabled you can claim a deduction against expenses incurred over him. The limit for this is Rs 50000/- and if the disability is severe the amount limit is Rs 100000/-.

And the last one and not to miss this year. Under Section 80CCF, you can invest upto Rs 20000/ in infrastructure bonds and claim a rebate as per your tax slab. This limit is above the Rs 1 Lakh specified under Section 80 C.

If you don’t plan now some ads/agents will scare you & you will end up buying insurance policies that you don’t need.

Superb Infrographic by Manshu (OneMint) on Tax Planning

We are frugal at everything else, we know very well how to save money and spend as little as we can. Take this attitude to tax planning as well and plan your investments in a way that you end up paying the least amount of tax that is due under the law.

Finance for Young Techies

Financial Planning

Hemant Beniwal

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November 12, 2011

29

... You understand stack overflow, fails to understand compound interest.

Two interesting things happened in Kaun Banega Crorepati (KBC), last year one guy won 1 crore and lost at the next question. Second, Sushil Kumar won Rs 5 Crore but you can imagine he must be clueless about what to do with this money.

And yeah, you might want to pity on the first guy who lost at the last question, but wait, if you are going unplanned you should pity yourself more. There is tons of opportunity that you have lost already, and the time to act is now. ….. without participating in Bigg Boss or KBC.

Image: Shweta Tiwari won Big Boss 1 crore, had no idea what to do with it – so her interview with a financial planner was shown live on TV.

Here are some acting points for a basic idea of what to do

1. Employee Provident Fund:

EPF is an investment for your retirement, do not cut it. Not only it gets tax exemption, gives a guaranteed return on maturity, is far safe. You can also open a PPF (Public Provident Fund) account – this is best debt investments.

2. Insurance with Term Plan:

Who will cry if you die tonight? Well, may be many tonight! But if you are not insured or under insured may be your dependents will cry for a very long period.

The thing to understand with insurance is, it’s not an investment, it’s a well, insurance. Like a car/bike insurance, if you have paid some money this year as your vehicle insurance and it is not stolen, do you get a return on your insurance money? No. What instead you get is peace of mind, when parking your vehicle.

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Same applies to life or medical insurance, term plans, you pay for the insurance for the peace of mind of knowing that even though you would be irreplaceable, your dependents will get sufficient income to continue living the same standard.

It’s also advised now to take Medical and Accidental Insurance and not just term insurance.

3. Don’t Mix Insurance and Investment

Stay far away from ULIP or Endowment Plan, insurance linked investment. They are horrible, you are highly under insured, the return on the investment is terrible and there is no peace.

4. Debt is for short term, Equity is for long term

Debt based investments are for short term, if you have excess money lying in your saving or even worst current accounts, and you foresee a use of it in next few years’ debt is the way to go.

However, if the goal of your excess money is your new born child education, or your retirement, something that got enough time, equity gives a better return for long term.

5. Invest using SIP and STP

It’s highly impossible to time the market, and specially for techies watching the CNBC graphs is just not a nice idea. So the best way of investment in both debt and equity is using Systematic Investment Plans (or SIP), in a layman term, with SIP/STP your money is invested in regular interval and not in lump-sum. Like the Systematic Investment Plan (SIP) will invest in market every month, and hence on an average a profitable return can be measured avoiding the fluctuation of the market.

6. Stop misusing Credit Cards

Loans should be taken to help you in your need, a house loan, loan to launch a business. But most people these days are using the loans for monetary gratifications. As your good investments grows by Compound interest, so does the loans you take. Be careful when taking loans, it need to be repaid. And several times, much more than the principle.

Understand what is expense and what is investment, a land is an investment, a house is an expense. Gold is investment, car is expense.

7. Educate yourself about Finance

“Intelligence solves problems & produces money. Money without financial intelligence is money soon gone.” — Robert T. Kiyosaki

With technology now it’s very easy to learn, and it’s very easy to not learn. So give some better use to your television set, besides watching the reality shows, and listen to the investment programs.

Set Achievable Goal, and Celebrate

While your bankers will know you for the money you keep in your accounts, people will appreciate you only for the path, the right path, you have traveled to reach there. When you will achieve your Million dollar dream, you will realize it was never about the money, it was about seeding and nurturing something, and watching it become a big tree that gives fruit to so many people. And that feeling, is worth fighting for the next goal of making a Billions.

The idea is we celebrate every milestone. I do not believe that celebration should be done only on major achievement. To make a million, you need to make 10000 first, 100000 next, 1000k, 10000 then 100,0,00,000 comes. And enjoy each achievements, congratulate yourself, pat your shoulder and focus on next milestone.

This is a guest post by Zeeshan Alam – he is our Financial Planning Client from Jaipur. He runs Software Company based in India & United States. The views expressed herein are the author’s personal views.

Bond & Debt Fund Guide

Mutual Fund

Hemant Beniwal

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November 9, 2011

21

To understand Bond Funds lets revise the meaning of Bond in financial market. Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market.

What is Bond Fund

So essentially, a Bond mutual fund will be combination of these bond investments as per the scheme objectives. These are also called as DEBT funds. Investing into bond funds is somewhat different from investing into a bond or a debt security directly. Especially in India, where the debt markets are underdeveloped, debt funds are sometimes the only way to invest in the debt market. The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors.

007 types of Bond/Debt Funds

Since debt funds invest into many kinds of debt securities, they are classified accordingly. Following are the most common classes of debt funds.

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Liquid funds or Money Market Funds

Liquid funds are more suited for the investor with an investment horizon of about a month. In personal finance, ‘liquid’ means anything that is almost as good as cash. Money market funds or Liquid funds as they are commonly known as are one of the safest places to park your money for short periods of time. Typically, the funds invest into money market securities and debt securities that mature in 91 days.

Most companies and HNI park their short term money into these funds as liquid funds are more tax efficient than the interest one can get from the savings accounts.

Some of the benefits of parking money into liquid funds are, zero exit load on withdrawals, safety, low expense ratio and benefits of reinvesting the dividend.

Ultra Short Term Debt Funds

Ultra short term funds were earlier known as liquid plus funds and are slightly riskier in comparison to liquid funds. The funds invest into debt securities maturing in the next one year. Since ultra short term funds are riskier than liquid funds, they tend to give slightly higher returns in comparison to liquid funds.

Ultra short term funds share most of the benefits offered by liquid funds and suit investors who want to park their money for a few months.

Floaters or Floating Rate funds

Floating rate funds or Floaters invest into floating rate debt securities. Most of the debt securities in a floater fund will mature within a year. The main benefit of investing into a floater fund is that when the RBI increases the interest rates, the interest rates on floating rate debt securities also increase, thus when interest rates are expected to rise, floaters are better debt investments than other debt funds.

Floating rate funds invest 65% to 100% of their money into floating rate instruments and the rest in other debt securities.

Short Term Debt Funds

Short-term plans invest in shorter dated paper, i.e. debt paper with lower maturity. There is also significant chunk invested in cash/call money. This tends to insulate the fund from volatility in debt markets which impacts longer dated paper. Short term funds invest in debt securities that mature in the next 15 – 18 months. They invest mostly into AAA or AA+ rated debt securities and interest rate hikes mildly impact the returns. Short term funds are best suited for investors with an investment horizon of 1 – 2 years.

GILT Funds or Government Securities (G-Secs) Funds

GILT funds invest exclusively into debt securities issued by RBI on behalf of the Government of India or the state governments. Although there is no risk of default with G- Secs, they are not immune to the interest rate movements. Since G-Secs have no risk of default, they have a Sovereign (or SOV) rating.

G-Secs come with a wide range of maturities, from a few days to 30 years, so many GILT funds have short-term and long-term plans. Short-term plans invest money into G-Secs which mature in the next 15-18 months. Long-term plans invest into G-Secs which mature in periods up to the next 30 years.

Monthly Income Plans (MIPs)

Monthly Income Plans or MIPs are hybrid investment funds. They invest a minor portion (5% to 35%) in equities and the rest into debt securities. They aim to provide regular and periodic income. The income periods can be monthly, quarterly, half-yearly and yearly. But a point to be noted is that the income is not guaranteed. The fund will only be able to distribute income if it has surplus distributable income. These plans are suitable for people looking for regular income rather than capital appreciation.

Dynamic Bond Funds

Dynamic bond funds aim to bring active fund management into debt funds. They invest in debt securities with any maturity and invest across the yield curve, with the sole purpose of utilising any opportunity provided by inflation, changes in liquidity, changes in monetary policy, or government borrowing program factors. Apart from the earlier mentioned opportunities, dynamic bond funds also tend to use the inefficiency and volatility in the debt market to get better returns.

Do you know: There are more than 25 categories of mutual funds in India (you can check a few of them here – types of mutual funds) – but people think mutual funds just mean equity mutual funds.

White Collar Crooks (aka Wealth Managers)

Mis-Selling

Hemant Beniwal

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November 5, 2011

19

White Collar Crooks (aka Wealth Managers)

Watch out for the so called wealth management services offered by the banks. Your relationship manager from the bank will offer to do this for you. I often wonder how qualified these guys really are, they do seem to be smart guys and girls with MBA degrees, so I would assume they do understand what wealth management means.

I have obliged plenty of these wealth managers during my last 3 years of experience in dealing with banks and researching information about investments in general. But, not one of them has come close to helping me “manage” my “wealth”. All that they are interested in is peddling schemes and offers that result in big fat commissions for them. And they don’t hesitate in brazenly lying about the “features” of the scheme that they are selling. These are your white-collar crooks. I am amazed at how they twist facts with a straight face.

Here’s one example that I have overheard plenty of times. A new fund offer (NFO) from a mutual fund (read mis-selling tricks) company is a good buy because the NAV at launch is only Rs 10. Anyone with a little understanding of mutual funds would know that NAV of a mutual fund means nothing. The only purpose of NAV is to determine the number of units that you own and track the relative performance of the fund over time. Whether the NAV of a NFO is Rs 10, or Rs 100, or Rs 3.1416 is hardly relevant. In fact, common sense tells me that it is generally not a good idea to invest in a mutual fund of an NFO becuase they will probably be incurring much more initial costs (advertising, initial setup etc), which will come from the money that you are going to invest in it. Moreover, unlike an existing fund, there is no past data to judge how well the fund could perform. So, for all you know it may turn out to be a dud. Compare that with a mutual fund that has been around for 5 years, and has consistently delivered superior returns year-on-year. Why on earth would you prefer the NFO over the existing established fund (unless of course, the NFO has completely different goals which you believe in, and there is no existing fund doing that)?
But, the wealth managers will still pitch you every NFO that comes out for the simple reason that they have incentives to sell that which they don’t have with the existing mutual funds. With the entry loads abolished, selling existing mutual funds is not lucrative at all.

White Collar Crooks (aka Wealth Managers) Click to Tweet

Another common misleading pitch is about the ULIPs. They will tell you that the policies come with a lock-in period of only 3 years, and you can get your money after that. They very conveniently fail to mention the penalties incurred if you do that instead of continuing the policy for the full term of 10 or 15 years. Also, they very conveniently gloss over the fact that the fees charged in the first 3 years are much higher and the average fees charged comes even close to reasonable only if you at the entire policy period of 10-15 years. Moreover, they will tell you that you can easily get returns of 15% because these are linked to equities, without sharing with you the inherent risks of investing in equities over short periods of time. ULIPs may be reasonable investment avenues for at least a 10 year horizon (even though the fees are high, and should be rationalized further), but to pitch them as 3 year instruments is a crime.

One such rogue convinced my father to convert a fixed deposit (prematurely) into a ULIP policy. How can a ULIP be a replacement for a 1 year FD as an investment goal? I think such guys should be hanged to set an example. While-collar crooks!!!

Also Read: Banker’s are biggest Mis-Sellers

What you should do…

Here’s a quick summary of all that I have assimilated about personal financial planning over the years

Insurance: Don’t go for ULIPS or complex insurance plans, stick to simple term insurance, it is the cheapest method. Insurance cover should be about 10 times your income. Online only insurance policies will give you the best deal since they cut out the agent’s commissions. Between, you need insurance only if you have dependents, so no child insurance policies please. also, never lie on the insurance application, it’s a sure shot way of claim rejection.

Investment: Consider asset allocation to all the following asset classes – liquid, gold, equity, debt, fixed income, real estate

Emergency Fund: Keep aside some amount as liquid investment for contingency requirements – either in a savings bank account or some good liquid fund, expect returns of 4-6% p.a. on this. 6 months expenses is a good thumb rule for how much to set aside here

Gold: Consider keeping about 5-10% of your total portfolio as gold. Gold ETF is a good way to invest in gold, you need a demat account for that. If you don’t have that yet, consider opening a demat account and start purchasing gold ETF on monthly basis. GOLDBEES is a good one. Buying physical gold is not a great idea – banks charge a huge premium for certified gold coins, jewellary incurs huge making charges

Equity: Unless you have lots of spare time and interest in following the stock market, stay away from individual stocks. Instead, invest in established mutual funds. Don’t invest in a lump sum. Rather go in for STP or SIP (Systematic Investment Plan). Look for market dips to invest a little extra – diversified equity funds are the best choice. Index funds are good too, you can also invest in index ETFs through a demat account (QNIFTY), the management charges are usually lower. Invest for a long time frame, at least 10 years, and don’t be perturbed by market changes. If you don’t have money to spare for 10 years, don’t invest in equity, invest in debt.

Just do it, don’t wait – cost of delay is huge.

This is a guest post by Sandesh Goel – he is our Financial Planning Client from Delhi-NCR. He is Technical Leader in multinational technology company. He wrote this article in 2010 – the views expressed herein are the author’s personal views.

How I reduced Rs 20000 From Mobile and Internet bills

Hemant Beniwal

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October 25, 2011

37

How I reduced Rs 20000 From Mobile and Internet bills

The two important and expensive additions to the household budget of this generation have been the Mobile and Internet bills. You may not realize how much you spend on these utilities (yes – they are no longer luxuries – but utilities) but if you total up your bills at the end of each year, it will be a sizeable amount.

What I realized though earlier this year is that these telecom companies are one of the most ingenious organizations when it comes to fleecing money from their consumers. They are ever so quick to call you with their latest new scheme or an add-on card, but they will never call you if they have a scheme which can reduce your outgo.

Read- What is Insurance – Investment or Expense?

Earlier this year a simple 5 minute internet surf got me started on a journey where I will ultimately end up saving almost Rs 20,000 by the time this year ends. I am a self confessed internet addict and travel a lot, so a few years back I purchased the ultimate gizmo for the internet lover on the go – the “data card”. In my case it was Tata Photon. The speeds were really awesome. For those of us who used to jump in joy in the middle of the night seeing a 4kbps transfer speed on our dial up modem – you can probably understand what a 100kbps+ speed felt like. Like most over enthusiasts, I signed up for the best plan(in other words – most costly!) available – Unlimited internet surfing (read 10 GB per month) at 1299 only (when you got the bill you paid another 10% extra – service tax?? anyone). I was comfortably paying almost 1400 each month until that day when I decided to just browse if there were any new plans.

Eye Opener 1 – The same unlimited plan was now costing 1100 per month but I was still getting charged 1300 – so there was a daylight robbery of Rs 200 each month. This is what you get for being a loyal customer. They will pass on the rate increases but never rate decreases. When I spoke to customer care and asked them why they didn’t inform me or offer me new tariffs, they simply said- all tariff plans are posted on their website for consumers.

This discovery got me very annoyed and then I decided to dig deeper into my bills. For the first time in 3 years I really looked at my usage and what did I realize?

Read – Budgeting – The First Step to Financial Success

Eye Opener 2 – In the last 3 years I had crossed 2 GB of monthly usage only once. So how much did a 2 GB plan cost? – Rs 750 only. If you subscribed for an e-bill instead of a paper bill, you saved another Rs 25 each month. After adding taxes, the bill came to Rs. 800. A straight savings of Rs. 600 per month or Rs. 7200 annually.

Having gone through this experience, I then decided to look at my telephone bills. I was consistently paying between Rs 2000 to 3000 each month. I was in for more surprises here.