Average salaries have shot up dramatically in the past few years. But other than government employees, most of us don’t have the luxury of pension support after retirement.
The fear many of us have is, who will support us in old age? The answer to all these is to have inflation linked guaranteed pension plans. It is part of prudent financial planning. It is best to start investing in a pension plan at an early stage in life, like 25-35 years, in order to get a s u b s t a n t i a l amount each year once you retire.
As the gap between the contribution period and the vesting period reduces, the amount of annuity will become smaller, and then it will be difficult to get a meaningful pension, which also beats inflation
Understanding a plan
There are two types of pension plans —
1) Stock Market linked and
The traditional plans would offer a return of around 7%-10% in line with other debt options. Market linked plans could give higher returns in line with the market, but would be volatile as well. The investor thus has the option to choose the risk-return combination he would like. But pension plans are taxable and this reduces the attractiveness of this option.
A pension plan has two phases —
1) Accumulation and
In the a c c u m u l at i o n phase, the corpus is accumulated through yearly investment. On vesting (the day the accumulation phase is over), the corpus is used to purchase an annuity plan, which pays pension. This is known as the annuity phase. Different annuity options will give different returns.
Annuity options include guaranteed pension throughout the life time and guaranteed pension for the first 10 or 15 years. In case of death, annuity can continue till spouse’s lifetime.
While choosing a plan, evaluate on parameters like minimum premium amount to be paid every year and number of years for which premium payment is mandatory. Look at the relative exposure to debt and equity of a plan and choose one that suits your risk appetite and look at the minimum and maximum accumulation period (considering the age of the investor).
Someone who doesn’t want to go for a pension plan can look at unit linked insurance plans (ULIPs). Young people could use a ULIP that would provide tax free returns and in later years a pension plan could also be considered since the mortality costs in a ULIP would be higher and would eat into returns,. Keep in mind that the withdrawal amount from ULIP is subject to the fund’s performance. One can plan for pension through other asset classes like mutual funds, monthly income schemes and post office senior citizen’s pension scheme. One can also look at investing in a property that gives rental income for part of the pension requirement.
How much money you need
Usually, the current lifestyle is the benchmark for pension requirement. If currently you need Rs 3 lakh per year, then the same is inflated at 5% or 6% (the assumed annual inflation rate) for each year from now till the retirement year and you arrive at the pension amount. Then you should do a reverse calculation and determine how much you should save every year to meet the requirement.
If a person is 30 years old and the retirement is planned at 60 years then an investment of Rs 30,000 per annum will give a pension of Rs 25,000 per month starting from the 60th year till the end of his life and also till his wife’s death, if the scheme is chosen suitably. (For this illustration, accumulation is taken at 10% and annuity at 6%, which is conservative)
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Wednesday, September 30, 2009
Average salaries have shot up dramatically in the past few years. But other than government employees, most of us don’t have the luxury of pension support after retirement.
Tuesday, September 29, 2009
You need to choose your insurance based on need and not just to meet tax deduction needs.
Life involves facing risks all the time. Everyone faces risks to life, health and belongings. The question you need to ask yourself is whether you have a back-up plan in the event of the unexpected happening to you. Insurance is the perfect answer. Insurance provides protection against the risk of financial loss. While there is growing acceptance that insurance is vital, often there is confusion on what kind of insurance one needs to take, and how much insurance is adequate.
There are three broad categories of risks for which a person would require insurance. Personal risk - unemployment, death, disability, illness or accident which could affect the income-producing ability of an individual is one. Property risk - something that may result in loss or damage of an individual's personal property such as fire, theft, flood, earthquake etc is the second. Liability risk - something that exposes a person to third party liability, especially relevant in case of professionals such as advocates, accountants etc is the third.
The first step in planning insurance is to identify risks that you are exposed to. For example, if you are the bread-winner of the family and have dependants, life insurance is of paramount importance. If you own a car, it is crucial to have a motor insurance to take care of damage or theft as well as third party liability. Once the risks are identified the next step is to choose an appropriate insurance product.
Personal insurance consists of insurance plans that are available to individuals for protection against financial loss.
There are three types of personal insurance:
Life insurance is a product which protects both against an early death as well as living a long life. Products like term insurance, whole life plans, endowment and investment-linked products can protect and shield the deceased's family from the financial consequences in case of unfortunate early death of the insured.
On the other hand, sometimes due to long life, one may outlive his economic resources. Pension plans and annuity schemes ensure that so long as the person is alive, he would have some source of constant income.
Accident and health insurance
An accident policy protects the insured against loss due to an accident which could lead to death or disability. This becomes extremely crucial, in case of disability, to take care of loss of income and well as burden of supporting the victim. A health policy is important not only for the income earner but also for the family. As medical expenses are usually high, an adequate insurance cover helps in availing uncompromising care and best of facilities.
Property and liability insurance
This protects the insured from monetary losses due to damage or loss of property. It covers house, car, valuables etc or a legal liability due to third parties - car insurance, householders' policy, directors' liability etc.
Once the right insurance products are chosen, it important to discuss it with your insurance advisor to figure out how much insurance is required. In case of life insurance, there are different methods to identify the insurance need such as life value, income multiple, need-based approach etc. The thumb rule says that you must at least be insured to the extent of 8-10 times your annual income.
Investment products such as unit-linked insurance policy (ULIP) should be understood carefully for its relevance, costs and benefits, and not taken just to meet tax deduction needs. Seek the help of your insurance advisor to understand the nuances of different types of policies and select the right products based on your need. Remember, insurance is not mandatory, but the cost of not having a cover is very high.
Monday, September 28, 2009
You can Widen income base & get tax relief
LOOKING at ways and means to split your identity for the purpose of better accounting and tax-saving provisions? Well, you could take a cue from the times when people lived in joint families and shared joint incomes. The same concept can help you save on income tax if you open a Hindu Undivided Family (HUF) account. In fact, the account — coming under the provisions of the HUF Act — can help you enjoy driving your brother’s or father’s luxury car and yet save some tax by claiming depreciation on the same in your business. The only thing required is to know the details of this Act and its implications in saving tax.
Unlike the name suggests, a HUF does not mean only a Hindu family but even Jains, Buddhist and Sikhs can form HUFs. Generally a HUF consists of at least two members, of which one must be a male, and are lineally ascended from common ancestors. But smaller partitioned families can also form HUF with only one male member. According to the Supreme Court (C.I.T. v. Veerappa Chettiar, 76 I.T.R. 467), an HUF can consist of only female members after the death of the last male members. Alternatively, lineal ascendants can also form a HUF by way of gifting assets for achieving an objective. A HUF further includes wives and unmarried daughters of the family.
As the nomenclatures go, the senior-most member is known as karta. The co-parceners are males, while females are known as members. A karta usually manages the assets of the HUF. Co-parceners enjoy the right to ask for partition, which takes place by distributing the assets of the HUF. In case of partition, members get only maintenance. The assets of a HUF include either gifts given by members/ karta or bequeathed assets or assets received on partition.
HANDY IN SAVING TAX
According to the Income-tax Act, an HUF is a separate entity and enjoys the same exemptions that any individual gets. It is eligible for a slab rate and 80C deductions. An income up to Rs 1.5 lakh is taxfree for the HUF, too, and it can earn money from different sources such as business property, capital gain and other sources, except salary. Since exemptions and deductions can be claimed twice, by creating a HUF, there can be a significant tax advantage. For instance, if the total income of an individual is Rs 3 lakh, he is liable to pay a tax of Rs 15,000 assuming no investment is made for tax deduction. But if the person is a member of HUF and half of the amount is taxable in hands of HUF and rest in his own hands, the person is not liable to pay any tax, as any income up to Rs 1.5 lakh is tax-free.
REAPING OTHER BENEFITS
Once the HUF is formed with some assets either received from ancestors or contributed by members, this asset base of the HUF can also be increased by borrowings and thereafter using the assets for business. The wealth earned by the HUF will be taxable only in hands of HUF and will not be clubbed with member’s earnings. Even if the business fails, the liability will not be with members. The liability of a HUF is limited to its assets. Hence, no liability lies with members on their individual capacity. Usually, an employer restricts an employee to run any business separately. So, an employee can use the HUF window to run business and also save on tax.
POINTS TO PONDER
A HUF is formed for the betterment of the whole family and thus, any business decision will require the consent of all members. One must think for a long-term viability of the HUF because otherwise, it may lead to an acrimonious situation in the family in future.
A HUF gives tax advantage but one must remember that once the income of a family is assessed as a HUF, it will continue to be assessed as a HUF income, until the HUF is partitioned completely. Moreover, since every member owns the assets of the HUF, these cannot be used only for individual interest. Importantly, the income earned by the HUF — from investments made in a partnership firm, managed either by the karta or other members — will be taxable in the hands of the HUF, but salary drawn by members will be clubbed with their own earnings. One can pass on one’s asset to the HUF but this usually does not give any tax benefits. Any gift to the HUF of more than Rs 50,000 is taxable in the hands of the HUF.
Sunday, September 27, 2009
When choices are many you could end up feeling confused; it could be over buying a cell phone or for that matter an ice-cream flavour!
So imagine, when your mutual fund (MF) agent throws an array of questions -- Which fund do you want to invest in? or Which MF option do you want? Chances are you might end up feeling confused.
A MF offers three options-- dividend payout, dividend reinvestment and growth. Each of this option has its own pros and cons. We at Wealth tip you off on what's best for you.
Let's understand the three options in detail.
A. Dividend payout:
Assuming you have 100 units in your MF and the net asset value (NAV) of the unit is Rs 10. Now, the fund house declares 50 per cent dividend (a dividend is the profit made by a MF that it distributes to its unit holders. These dividends are paid in cash and are a percentage of the unit value) on the scheme. So, for every unit you will get Rs 5 (50% of Rs 10), which makes it Rs 500 for 100 units.
You might rejoice at the thought of getting some extra moolah but the catch lies in the fact that the NAV of the unit will fall exactly by the amount of the dividend declared. This means, if the dividend paid out is Rs 5, the NAV will fall to Rs 10 from let's say Rs 15. In other words, your own money is paid back to you in a different way. It is called the dividend payout option.
When should you opt for it?
Tax implication: The dividends received in equity funds or balanced funds are tax-free.
However, there is a slight difference when it comes to debt funds. When a debt fun declares a dividend, the mutual fund house must pay a dividend distribution tax of 14.16 per cent. As a unit holder, you do not have to pay tax on the dividend. But eventually the dividend distribution tax has a bearing on the returns.
Best suited for: This option is best suited if you are looking for cash at intervals. But there is no surety if the MF will announce dividends, and even if it does, the next dividend payout is uncertain.
By choosing the dividend payout option, you may end up interfering with the returns in the long term. When you pull out a part of your money in advance, you deprive yourself of taking complete advantage of the bull market that could give you good returns.
B. Dividend reinvestment:
In this option, the dividend paid out by the fund is ploughed back into the same scheme. Let's understand this with the same example described above. If the dividend declared is 50 per cent on per unit priced at Rs 10; for the 100 units held, Rs 500 will be the dividend. Now, this Rs 500 will be used to buy new units at the old NAV ie at Rs 10. This means, you will have additional units in your fund.
Tax implication: Let's say, your equity linked saving scheme or ELSS declared dividend and you have earned Rs 500 on it. This amount will be used to buy new units and will be reinvested back into the scheme. This same amount ie Rs 500 will be considered as an additional investment under section 80C. However, as we discussed above, the declaration of dividends depends on the performance of the fund and these dividends are not guaranteed.
This benefit is applicable only on ELSS funds since only these funds offer a tax deduction under section 80C. Debt funds do not offer any such tax benefit. On the contrary, the amount of dividend reinvested would be less thanks to the dividend distribution tax.
Best suited for: If you are looking for tax benefits then you could consider this option. Like explained above it helps you to get additional tax benefits under section 80C, and also help you save! This means when the additional units are reinvested back into your scheme, you do not have to pay any entry load on it, which otherwise is applicable.
Unlike the payout or reinvestment, growth option doesn't pay you any dividends. So, if the dividend declared is Rs 5 on each unit priced at Rs 10, the NAV will appreciate to Rs 15.
Tax implication: In growth funds the important tax to consider is capital gains tax - that is the tax that is charged on profits from sale of the units.
In case of equity and balanced funds (where equity exposure is more than 50 per cent), there is no long term capital gains tax (that is there is no tax if you sell after 1 year). If you sell before 1 year, you will have to pay short term capital gains tax on the profits at the rate of 15 per cent.
In case of debt funds, long term capital gains tax is charged at 20 per cent and short term capital gains tax is charged at your regular tax slab.
Best suited for: If you have a long-term approach you can consider it. Since the NAV will move up in the long run, the growth option outperforms its counterparts—payout and reinvestment options. From the long term perspective, this option is ideal.
From the expert: If you are focused on getting profits, then you must stick to reinvestment or growth option. By choosing the payout option, you erode your returns that you are likely to get in the long run. If you take any long operating mutual fund, the difference of NAV between growth and payout option is really wide. Hence, it is advisable to choose a reinvestment or a growth option.
Saturday, September 26, 2009
In a volatile stock market, choosing a potential scheme is more challenging. Investors need to look beyond short-term returns
There has been plenty of talk about the falling returns from mutual funds with most funds posting negative returns for one year duration. In the case of systematic investment plans (SIP), the picture is no different, though investor gets to invest over different market periods. However, the negative returns from SIPs can't be blamed as they generally tend to offer handsome returns over the long run.
On the other hand, in a booming market environment, even SIPs tend to give excellent returns. Needless to say, many investors were used to such whopping profits from SIPs even over the short term, and hence, the current market environment has been a cause for worry.
In the present market scenario, choosing the right mutual fund has become more challenging as no scheme has managed to hold on to its leadership status beyond a few weeks. So, the time has come for investors to have a good combination of funds and schemes, which ensures stability for their portfolio as that is the only way to minimise losses or reduce rapid erosion from portfolio in the short term. 'Short term', because, mutual funds tend to outperform direct equity investments over the long term, but, during the short term, are prone to higher erosion. Unfortunately for many investors, mutual funds are expected to outperform stocks or the index even during the short term and hence jittery over their negative returns.
The fundamental principle of mutual fund investments should be a long horizon as history has shown that over a period of 7-10 years, funds have managed to post a better show. So an investor, at the time of investing, needs to be clear about his investment goals and opt for a portfolio according to his risk appetite.
SIP and long-term strategy for better returns
Though mutual funds themselves are diversified products, it is not a bad idea to for go for a combination of schemes.
Those who hate volatility and prefer sustained performance over the long term can allocate a larger percentage of the corpus to diversified funds. This can be as high as 80 percent in the current market scenario. The balance could be towards a combination of schemes like sectoral funds, fixed maturity plans and gold funds.
In the case of diversified funds, one needs to go in for a careful choice and stick to funds which have a long track record of performance. This fund or scheme may not figure among the top performers but you need to look at its investment principles and strategies rather than merely chasing returns. Though we have only a few funds with over seven years' performance track record, check out the performance of your fund over the last six months on a monthly basis. This will throw light on the fund's ability to manage volatility.
The good news for investors is that at present, the basket of diversified funds is big and even sectoral funds have an investment mandate for more than 2-3 funds. This can act as an additional advantage for those who want moderate risk from diversified funds. Besides diversified funds, allocate a small percentage of your corpus to sectoral funds such as infrastructure, entertainment and gold. Not only will this give the much-needed diversity to the portfolio but will help in improving the returns from the portfolio during market recovery.
Besides diversified funds, products such as fixed maturity plans can be used to protect the corpus as a debt option. In the last few months, gold and real estate have turned to be other options for low risk investors. While gold has been on an uptrend like equity in a short span of time, the returns tend to average out over the long term unlike equity. Hence, allocation to gold needs to be reviewed at regular intervals and a passive investment strategy may not help.
Friday, September 25, 2009
A hassled wealth reader enquired about Monthly Income Plans (MIP). His concern was that he hasn't been getting any monthly payments (income/dividends) from the fund he had invested in. He has already made huge loss in the fund and withdrawing from the plan would mean a greater loss.
Wealth takes this opportunity to tell you all you wanted to know about MIPs
A general misunderstanding about MIP among investors is that it is believed to offer regular monthly income. From the name you may infer that MIP gives you monthly returns, but that's not the way it functions. An MIP is generally mistaken for a regular income plan; but actually, it gives you returns based on market's performance.
What is MIP?
MIP is a hybrid investment that invests a small portion of its portfolio, around 15 to 30 per cent, in equities, and the remaining in debt and money market instruments. This plan is ideal for those who score low or medium on their risk profile.
What are the features?
MIPs are products that give you market-linked returns. This means when the equity market is performing well, it will give you moderate returns, thanks to the 30 per cent equity component. But when the tide turns, your returns are limited to the debt component. This fact comes out clear especially, in the current market situation.
MIPs score better on the tax front when compared with other debt instruments such as postal savings and bank deposits. The dividend income is tax free whereas interest from postal savings and bank deposits is taxable.
But there is no guarantee that it will give you assured returns like its counterparts. Investors in the highest tax bracket can add MIPs to their portfolios if they are looking better post-tax returns compared to bank deposits. It is a good choice provided you are not totally dependent on it. Since stock market is a volatile business, don't expect continuous income.
- Ideal for?
If you do not like taking much risk and are looking for better post-tax returns, then MIP would fit in your portfolio because 70 per cent is invested in debt. This lends security to your principal while the 30 per cent equity component can give returns a boost.
But if you are looking at regular flow of income, and are depending on that income for financial stability, MIP is not meant for you; it’s better to look for alternative.
- When to choose MIP
1. It is no harm to add MIP to your portfolio provided you are not expecting continuous flow of income. It can just be another variant of a debt fund.
2. If investing in MIP, check the dividend history and its past performance.
Wednesday, September 23, 2009
With the stock market showing little sign of any serious recovery, and inflation high, some of you are likely to be considering investing in gold. If you are, you need to know the pros and cons.
Experts differ widely on the matter. Some feel this is just not the right time to invest in gold, considering the commodity's price has risen sharply, and may soon do what the stock market did under similar circumstances --crash. The price of gold is already at its peak and even a gain of 5% at this level seems quite difficult. Investment is not advisable at this price.
But there are others who feel just the opposite. This is the right time to get into gold as forecasts suggest that the price is set to touch Rs 15,000 or more.
Wealth managers feel an investment portfolio with an allocation to gold improves the consistency of portfolio performance during both stable and unstable periods. It's also liquid in nature and can be easily converted into hard currency.
Since gold is likely to do well in the long term, investing in gold should do well. However, considering that the market is volatile and prices have run up substantially, the buying should be spread out over a period.
In international markets, investors move substantial investments into gold when the outlook on equities is negative.
Gold prices also tend to increase in times of inflation, rise in crude oil prices and a depreciating US dollar. But bullion markets also follow a cycle, and gold has been volatile lately. So one needs to be cautious.
The best way to invest in gold may be through monthly systematic investments into gold funds.
There are a few funds that invest in gold and precious metal mining companies. These are feeder funds (investing in another global fund), hence they have a good track record and the required expertise to enhance the scope of returns as they are not solely dependant on gold prices.
Another way to stay invested in gold is to buy gold exchange traded funds (ETF)s.
If the investment is for a short time, then it's better to buy gold exchange traded funds which track the price of gold. There are funds, which invest in gold mining companies, such as the DSP ML World Gold Fund and AIG Gold Fund.
THINGS TO KNOW:
The mode of investment is important. When one is buying gold biscuits, the re-saleability should be kept in mind. Some banks may sell gold biscuits with certification, however they may not buy it back and at the time of selling it to the local jeweller, you can incur various costs.
Gold has become volatile, hence it is useful to spread the risk. The long-term trend is positive and hence should deliver good returns. However, gold has normally delivered lower returns than equity, hence expectations over the long term needs to be lower.
What are Gold ETFs?
Gold ETFs are open-ended mutual fund schemes, which will invest the money in standard gold bullion (0.995 purity). The investor's holding will be denoted in units, which will be listed on a stock exchange. One needs to have a demat account to trade in ETFs.
Just as one would buy/sell any stock on the exchange, you can do that with ETFs. These are passively managed funds and are designed to provide returns by tracking the returns from physical gold in the spot market.
Tuesday, September 22, 2009
Almost all the investment advice that is given out to retired people is wrong. In fact, not only is it wrong, it is downright dangerous. Instead of securing their financial future, it tends to push them towards poverty. The longer a retiree lives, the more severe are the ill effects of such advice.
I know that's a very strong set of statements that I have started out with but if you bear with me for a few more minutes, I'll show you where the problem lies and why it is so serious.
The central premise of almost all the post-retirement investment advice I've ever heard is that retirees' money should always be entirely in guaranteed fixed-income instruments like post office deposits, RBI deposits, bank FDs etc. It is said that retirees should not have any stocks-based investment because they can't tolerate any risk.
The problem with such advice is that it completely ignores a big risk that retirees face, that of inflation. None of the fixed-return instruments provide returns that are adequate to cover real inflation, let alone actually give some returns. Some of them supposedly give returns of about one per cent above the official rate of inflation. However, the real rate of inflation that most of us personally face is always above the government's official rates. Over time, the effect of compounding ensures that the situation turns to complete disaster.
Here are some numbers that will show you what I mean. Take the case of someone who started retired life in 1985 with savings of Rs 10 lakh, a substantial sum in those days. Let us suppose that these savings are invested in conservative instruments that fetch 9 per cent a year. This retired person's monthly expenses were Rs 3000 in 1985 and these grow at a rate of 10 per cent a year. By 2006, when our retiree would be 84 years old, his money would have run out. The small differential of a mere one per cent between what his investment is earning and the pace at which his expenses are increasing would empty out his nest egg.
This is a hypothetical example. In reality, our friend would realise within five or seven years that his money would eventually run out. He would then start squeezing his expenses because he would be nervous about what kind of price rises the future would bring. Essentially, his golden years, when he should be free from financial worries, would be spent in mental stress.
All because his returns are one per cent short of the real inflation rate. Now let's see what happens if his returns are one per cent more than the inflation rate. In this case, the same age of 84 finds him happy, relaxed and richer. If his expenses grew at the same 10 per cent but his investments returned 11 per cent, then by 2006 his principal would have grown from Rs 10 lakh to Rs 36 lakh.
This example is a generalised one and real lives would be different. However, I personally know of several examples of both kinds, and the difference in happiness levels of the two kinds is amazing. The moral of the story is that in these days of ever-improving medical care, retired life is long. Over those long years, the compounding effect of inflation, as well as investment returns is massive.
Once you stop working, you will have to fight a continuous battle against inflation and the only thing that can help you win this battle is a little bit of equity. I'm not asking retirees to become day trading punters, but putting perhaps 20 to 30 per cent of one's money in equities through balanced funds is the safe decision. Over the long time periods retirees invest for, the ups and downs of equities balance out but low returns of fixed income investing eventually eat away one's savings in a guaranteed manner.
Monday, September 21, 2009
Investing for long term goals needs patience, commitment and more importantly, tenacity
Finding the right investment option is always a tough exercise. The challenge gets tougher when it comes to long-term investment planning. An investor needs to take into account a number of factors such as inflation, risk, liquidity and more importantly, needs to sustain the investment process over a long period of time. While such an exercise gets simpler when an investor has a long tenure at his disposal, it is not easy if the tenure is less than a decade.
While it may be wrong to use the word long-term planning in such a scenario, many investors end up thinking about long-term planning only when they have less than a decade at their disposal. The classic example is retirement planning which gains focus for many just prior to retirement.
Needless to say, the entire process of long-term planning turns easy when an individual starts thinking about it early in life. While long-term is a relative term, it is safe to assume it to be in the range of 15-20 years. Not only does it help the investor plan well, the element of risk too gets nullified over a long term. More importantly, an investor can plan resources to meet his goals when he has a couple of decades in hand.
Interestingly, some goals are long-term by default as the occurrence of the event does not happen in the short term. For instance, building the corpus for a child's education or marriage is a long-term goal if you start setting aside the money immediately after the child is born. In such a scenario, even a monthly saving of Rs 5,000 can help the parent build a corpus of a few millions thanks to the compounding effect. Because of the luxury of a long tenure at his disposal, the investor too can look at risky options such as equity as they have the potential to offer higher returns over a long term. Though equity carries an element of risk, it is not an issue when the investor has a long period at his disposal.
Returns through plan tenure:
While building a portfolio for the long term, it is not necessary to block the money completely, as even long-term investment products can provide regular returns. For instance, investors can opt for dividend plans even while building a corpus for long-term needs such as a child's education. The only disadvantage with dividend options is that an investor's corpus to meet the goal could come down to some extent if the dividend is not set aside in a careful way. The other way of looking at a dividend plan is that it allows profit booking in an indirect way and could prove a better strategy during a downtrend. Since dividends are tax-free (at least for the time being), investors need not worry about tax implications. Also, it provides liquidity even if the investor has committed his money for a long term.
The most significant element of long-term planning is sustenance, which is an integral component. An insurance plan or a pension plan signed up for 15-20 years needs to be serviced for the entire tenure even if the product offers the flexibility of discontinuance. By converting long-term investment planning into a short-term investment process, you would devoid yourself the potential of building a large corpus for long-term needs. Hence, commitment to invest is a crucial factor while choosing a long-term investment plan.
Sunday, September 20, 2009
THE idea of making money can make a man move mountains. If you tell a man to stop smoking for the sake of his lungs, he'll cheekily blow a smoke ring in your face but offer him a rupee for every cigarette he gives up, you'll cure him for life! So, it's no wonder that when well-wishers ask you to take a medical insurance for health reasons you'll smile at them vacantly. But if tell you that it's going to safeguard his/her savings and also take home some extra money through tax exemptions, you'll jump at it.
Whatever your reason - health or wealth, you have no choice but to take it given the greater vulnerability to stress related illnesses and escalating medical costs. And if the fringe benefit tax is going to hit the medical cover from your employer, you definitely need to look at an individual cover.
Why do I need it?
Health care is a serious concern for most people today. Escalating costs accompanied by the scare of new viruses being detected every other day makes us want to run for cover. This is where mediclaim steps in. It is an insurance that takes care of your medical expenses or treatment expenses.
How much mediclaim do I need?
This depends on several factors such as age, health condition, lifestyle, etc. Ideally, you would want to cover costs of the big surgeries and operations. An angioplasty, for instance, can cost anywhere between Rs 50,000 to Rs 1.5 lakh (150,000) depending on the hospital you choose. A heart valve replacement can cost up to Rs 2 lakh (200,000). So, in order to decide the amount of cover, you would have to take a good look at your medical history and check how vulnerable you are to certain patterns of illnesses.
How much does it cost?
For a person up to the age of 35, the premium per annum for a cover of Rs 3 lakh (300,000) would be between Rs 3,200 to Rs 3,800. Now, that may not be such a substantial sum considering that you would get cover for treatment when you were to need it.
What are the benefits of mediclaim?
Medical insurance covers almost everything right from the time you step into the hospital till the time you are discharged. The normal costs that are covered are room and boarding expenses, nursing expenses, fees for the surgeon, anesthetist, medical practitioner and consultant, fees for specialists, charges for anesthesia, blood, oxygen and the operation theatre, charges for surgical appliances, medicines and diagnostic materials and charges for X-rays, dialysis, chemotherapy and so on. Even medicines are covered.
What are the limitations of mediclaim?
The most important exclusions till recently have been pre-existing health conditions. If a person has had a heart attack previously or has been operated upon for some other condition, then cover will not be available for those conditions. There are several other exclusions such as dental surgeries, cosmetic surgeries for aesthetic purpose, HIV related conditions, etc. Further, when you take the policy for the first time, any illness that commences during the first 30 days of inception of the policy is excluded.
What is cashless facility?
Cashless policies eliminate the entire trouble of documentation. In a cashless facility, the insurer will settle your bills directly with the hospital and you will be discharged without paying single paise. However, remember that the insurer will settle your bills only up till the sum assured of your policy. Any expense over and above that limit will have to be borne by you. This is unlike traditional policies wherein you would have to pay the hospital first and then claim reimbursement.
If you've read the above carefully, you'd have realised that health insurance is not for your health at all. It's to safeguard your savings. It's actually there to ensure that your hard earned cash does not flow into hospitals. Maybe if they called it 'wealth insurance' instead of 'health insurance' it would find more takers!
Saturday, September 19, 2009
The insurance market is flooded with many policies and schemes. While each has its own benefit, not all are needed.
Insurance is possibly the best financial tool to protect yourself as well as your valuables from unforeseen circumstances. In fact, you owe it to your family to get the best cover you can afford. However, while it pays to be smart about insuring your family and your valuables, it is even wiser to make out which policies are truly worthwhile, and which ones are redundant.
You need to know that while each cover has its own benefits, not all of them are needed in normal circumstances. Also, there are lots of insurance policies that use scare tactics to lure you in, and have premiums that are overpriced. And paying too much for protection can be a financial strain in itself. Therefore, you need to be selective in choice.
Insurance is the best known form of financial protection to guard against major uncertainties or vagaries of nature. As a thumb rule, a person needs to have at least a basic cover to protect himself in the form of personal accident insurance — which is the cheapest cover for self protection or health insurance to cover hospitalization expenses with a minimum sum insured of Rs 1 lakh. Assets like vehicle or home, which may be prized possessions, are also depreciating and as such need adequate protection from risks like accidents or natural perils.
Thus, the insurance that’s worth it typically covers your life, your health, your earning power or the assets you’ve accumulated during your lifetime. Primarily the five main types of insurance everyone should take into account are:
PERSONAL ACCIDENT COVER
It basically covers the risk of accidental death and permanent total disablement, and is a good choice to supplement a life insurance policy. The best part of it is that it is the cheapest cover for self protection and can be taken even by those whose income is low or cannot qualify for life insurance due to medical issues. Personal accident cover is also recommended in the early stages of life when one has just started his/her career and there is no need of insurance cover as the likelihood of death from natural causes is way too low to require a financially unencumbered person to take on life insurance. The more compelling insurance need at that stage is for a personal accident cover which covers the risk of accidental death.
Persons below the age of 40 have a bigger risk from death and disability due to an accident compared to any other risk. Disability for a young person can be a bigger tragedy than death. Personal accident insurance provides an extremely low cost option of covering this risk.
Once a person crosses 35 years of age, the risk of diseases and ailments starts increasing. The person also becomes more prone to lifestyle diseases. Now it is not uncommon to hear of persons who have died of a heart attack at the age of 30 or 35. Hence it becomes important to cover the risk of death due to reasons other than accident. Term insurance is a no frills, low-cost option to secure financial security for the family, and therefore should preferably be there in everyone’s insurance portfolio.
Every human being has a quantifiable economic value for his dependents. Any amount of loan that a person has taken gets added to this value. Protection of this economic value is very important, especially in India which does not have a strong social security net. A term insurance is the cheapest way to cover oneself for one’s Human Life Value (HLV)
CRITICAL ILLNESS COVER
By opting for this cover, you can insure yourself against the risk of serious illness in much the same way as you insure your car and your house. Under this cover, a guaranteed cash sum is paid if the unexpected happens and someone is diagnosed with a critical illness such as cancer, stroke and kidney failure. The benefit amount is payable once the disease is diagnosed meeting specific criteria and the insured survives 30 days after the diagnosis.
This is, in fact, a very important cover for persons who have crossed 45 years of age. Although a health insurance policy covers hospitalization expenses, critical illness involves a lot of expenditure even when the person is not hospitalised. Expensive medicines and diagnostic tests, regular doctor visits, special diets etc. add up to a lot of money. A critical illness policy provides financial stability by providing upfront money to the insured for all the treatment.
Your home is not just your most valuable asset, it’s your safe haven from the world outside. However, while your home cocoons you and your family, it’s your responsibility to see that nothing untoward happens to the building and its contents. Therefore, insuring your home is as essential as ensuring that it has strong foundations.
A home insurance policy, also known as householders’ insurance, is the best bet to safeguard your house because it not only covers the structure of your home but also all its valuable contents from different kinds of perils such as earthquake, terrorism, flood, burglary and house-breaking all of us have observed that the weather has become very unpredictable and vicious in the last one decade. The unpredictability of weather, its extremes and increasing crimes in urban areas are reason enough to take this policy.
Retirement need arises when individual reaches such a stage in life when one does not anticipate future inflows and he/she has to provide for a regular inflow out of the money that a person has accumulated. So all your accumulated wealth has to ensure that you go through the golden years of life without any worry. A good retirement plan allows you to accumulate for your golden years in a systematic manner. You could consider single pay/short pay pensions or immediate annuities for such a need. A flexible unit-linked endowment structured with regular partial withdrawals could be suitable for such a need.
Thus, if you are unable to afford all types of insurance, just stick to the basics and you will be fine!
Friday, September 18, 2009
Many people today find that they are deluged with information about investing. News programs provide updates on the stock market several times a day. Through the Internet, individuals can check on the performance of their investments at the click of a mouse. But one of the key sources of investment information, and one that some investors may be tempted to overlook, is the Mutual Fund Offer Document.
A mutual fund offer document is a legal document that must adhere to standards set forth by the Securities Exchange Board Of India (SEBI), the regulatory agency that oversees the Indian Mutual Fund industry. The information contained in the prospectus is intended to help you understand what types of securities a fund invests in and the investment philosophy that the Investment Manager uses in selecting individual securities for the fund. The offer document will also provide information on the fund’s income and expenses, a review of historical performance, and information about your ability to purchase or redeem your units. In addition, the offer document will also outline any loads/sales charges that may apply to your investment transactions. By law, mutual fund companies are required to provide you with an offer document before you make an initial investment. Before investing, take the time to read this important document.
Questions to ask before investing
A mutual fund offer document can help you answer the following questions:
• In what does this scheme invest?
• Is the scheme seeking income or capital growth?
• What has been the rate of return?
• What are the options available in the scheme (Growth / Dividend)?
• Is the scheme an open ended / close ended scheme and if there is a lock-in period applicable?
Key Elements of a Mutual Fund Offer Document
The information contained in a mutual fund offer document is presented in several sections. As you read through these sections, you’ll want to evaluate how well the fund matches your investment objectives. Here’s a look at key elements that are contained in an Offer Document.
• Date of issue — A prospectus must be updated at least once in two years.
• Minimum investment — Mutual funds differ both in the minimum initial investment requiredand the minimum for subsequent investments.
• Investment objective — This section states the investment goal of the fund, from income tolong-term capital appreciation, and may state the types of investments that the scheme invests in, such as government bonds or common stocks. Be sure the scheme’s objective matches your investment goal.
• Investment policies — An offer document will outline the general strategies the Investment Manager will use in selecting individual securities. This section may provide further information about the securities in which the scheme invests, such as ratings of bonds or the types of companies considered appropriate for a fund.
• Risk factors — Every investment involves some level of risk. The scheme offer document willdescribe the risks associated with investments in the scheme.
• Fees and expenses — Sales and management fees associated with a mutual fund must be clearly listed.
• Tax information — An Offer Document will include information on the tax treatment ofdividend and capital gains, including information on deduction of tax at source
• Investor services — Unit holders may have access to certain services, such as automatic reinvestment of dividends, systematic investment plan (SIP), systematic withdrawal plans (SWP) and systematic investment plan for corporate employees. This section of the prospectus, usually near the back of the publication, will describe these services and how you can take advantage of them.
A prospectus generally ranges from 20 to 30 pages and includes a table of contents. The scheme offer document may be amended from time to time and attaching an addendum which highlights the changes e.g. change in load structure, introducing of a new facility etc. usually reflects this.
It is therefore important for investors to read the offer document in detail to be able to understand the features of the scheme and get the best out of the services offered by the Investment Manager.
Thursday, September 17, 2009
Here are outlines of rules governing NRI investments in India
Non-resident Indian (NRI) means a 'person resident outside India' who is a citizen of India or is a 'person of Indian origin'. Under the Foreign Exchange Management Act, 1999 (FEMA), a person who is not a 'person resident in India', as defined under Section 2 (v) of the Act is considered a 'person resident outside India'.
'Person of Indian Origin' (PIO) means a citizen of any country other than Bangladesh or Pakistan, if he at any time held an Indian passport; or, he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955; or the person is a spouse of an Indian citizen, or a person referred to in sub-clause (a) or (b).
An investment by a PIO in Indian securities is treated just as investments by non-resident Indians and requires the same approvals, and enjoys the same exemptions. NRIs can purchase existing shares or debentures of Indian companies by private arrangement. The Reserve Bank permits NRIs to purchase shares or debentures of existing Indian companies on non-repatriation basis. An undertaking about no repatriation is to be given.
NRIs can also obtain loans abroad against a collateral of shares or debentures of Indian companies. The authorised dealers have been permitted to grant loans or overdrafts abroad to NRIs through their overseas branches and correspondents against a collateral of the shares or debentures of Indian companies held by them, provided the shares or debentures were acquired on a repatriation basis.
An NRI or PIO can open a demat account with any depository participant (DP). He needs to mention the category ('NRI' as compared to 'resident') and the sub-type ('repatriable' or 'non-repatriable') in the account opening form collected from the DP. No permission is required from the RBI to open a demat account. However, credits and debits from the demat account may require general or specific permissions as the case may be, from designated banks. Further, no special permission is required by an NRI for dematerialisation or rematerialisation of securities.
Holding securities in demat only constitutes change in form and does not need any special permission. However, only those physical securities which already have the status as NR-repatriable or NR-nonrepatriable can be dematerialised in the corresponding depository accounts.
The securities purchased under repatriable and nonrepatriable category cannot be held in a single demat account. An NRI must open separate demat accounts for holding 'repatriable' and 'non-repatriable' securities.
As per Section 6(5) of FEMA, an NRI can continue to hold the securities which he had purchased as a resident Indian, even after he has become a non-resident Indian, on a non-repatriable basis.
In case a NRI becomes a resident in India, he is required to change the status of his holding from nonresident to resident. It is the responsibility of the NRI to inform the change of status to the designated bank branch, through which the investor had made the investments in the Portfolio Investment Scheme and the DP with whom he has opened the demat account. Subsequently, a new demat account in the resident status will have to be opened, and the securities should be transferred from the NRI demat account to the resident account, and then the NRI demat account should be closed.
NRIs are also permitted to make direct investments in shares or debentures of Indian companies, and in units of mutual funds. They are also permitted to make portfolio investments i.e. purchase of share or debentures of Indian companies through stock exchanges. These facilities are granted both on repatriation and non-repatriation basis.
Further, NRIs can purchase securities by subscribing to a public issue. The issuing company is required to issue shares to the NRI on the basis of specific or general permission from the RBI. Therefore, individual NRIs need not obtain any permission to receive bonus or rights shares.
Wednesday, September 16, 2009
AS the number of mobile phone users grows, Mobile Banking is getting a wider acceptance due to its convenience. However, it comes with its own share of risks. It is therefore important to be aware of the safeguards to enhance the security of your transactions.
Given below are some tips to ensure the safety of Mobile Banking:
• Use the phone lock function with a password which is difficult to crack. The password should be a combination of letters, numbers and symbols.
• Never disclose any personal information (like account number, date of birth, PAN number, debit card PIN) via text message. This could lead to identity theft.
• Update your mobile phone with the latest version of a reliable antivirus software regularly.
• Remember to delete all personal details from your phone before allowing anyone else to use it.
• Download files only from a trusted source. Make sure that Bluetooth is switched off when the phone is not in use, to avoid transmission of viruses.
• Mobile phones should be configured with a secure web browser and e-mail software. Use the ‘Help’ function of the software or the vendor’s website for configuration.
Tuesday, September 15, 2009
Credit cards don't just substitute for cash, they can also earn you reward points. And you, too, can tap the monetary value of the points collected on your card.
How to accumulate points?
Every time you swipe your credit card to make a purchase, you collect reward points. Typically, you get one point per Rs 100-250 spent. This, however, depends on the card and the bank. For instance, banks offer more points on co-branded cards. State Bank of India gives one point per Rs 40 spent on its Gold Card and eight points per Rs 100 on its co-branded Tata Card.
The value of each reward point also varies across credit cards and banks. The value of a point can be anywhere between 30 paise to a rupee and is also a function of the merchant partner in case of co-branded cards. For example, the value of one point on the SBI Gold Card is 70 paise, while it is Re 1 on the SBI-Tata Card.
The limitation with most accelerated reward points on co-branded cards, however, is that they can be redeemed only against products and services of the partnered establishment.
One also needs to remember that points get accumulated against spends (that too, not all of them), not for cash withdrawals.
How to redeem points?
What to redeem on. Earlier, banks offered a limited catalogue of products. Plus the prices were very high and one couldn't negotiate on them. But now there is a laundry list of what you can do with the points.
For starters, there is the conventional catalogue that includes apparel, gadgets, jewellery, luggage items, and the like. You can also encash your points against gift vouchers. For instance, with HDFC Bank's Gold Card you can get gift vouchers from Domino's, Cafe Coffee Day, Pantaloons, Westside, Lee, Music World and Landmark.
Going a step further, some banks have tie-ups with certain merchants where you can redeem points instantly. You don't have to contact the bank and get vouchers; you can pay using the points.
When the card is swiped, the reward points get reflected on the machine. So, if you have accumulated points worth, say, Rs 500 and you buy goods worth Rs 1,000, the merchant will offer you the choice of using your points for payment.
Some banks now offer air tickets on reward points, a feature that was earlier limited to co-branded cards. For instance, HDFC Bank has tied up with Jet Airways, Indian and Kingfisher Airlines to allow its card users to convert their reward points into air miles. The value of one air mile is usually equal to one reward point.
The air miles required to get complimentary tickets would depend on the airline and the travel sector
Some banks, like Bank of Baroda, also let you redeem your reward points against cash. That is, cash corresponding to your reward points are credited to your account. Deutsche Bank does the same on its Gold Card, but also offers a gift catalogue.
Procedure. You can redeem your points by filling up a redemption coupon which is there on banks' website. You could also use the phone banking option. For web-enabled credit card holders redemption can happen online. The banks can take anywhere between a week to a month to redeem the points.
How to bag the best?
With so many cards, each with multiple features, how do you know which one to pick. Of my five cards, I use HDFC Master Titanium card the most since I can pay the bills online and it gives me higher reward points for it. The card also offers many options to redeem my points
Figure out what you want. If you are a frequent air traveler, then an airline-bank co-branded card may work for you.
Another thing to note is the value of points. Points accumulated and their value is important, in addition to the wide choice of redemption options. For example, the co-branded ABN AMRO MakeMyTrip Go Card offers three reward points per Rs 100 spent. But, on purchases made on MakeMyTrip, the points range from 10 to 30. The reward points can be redeemed as cash back into your account.
Now, more cards are offering the cash-back option on reward points. Choose the card that offers you maximum cash-back on your frequent spends and offers an array of redemption choices.
- All banks display their products online and have compare tools to help you pick the best.
- Use these to compare the features and find the card that suits you best.
- Don't forget the expiry date. All your hard work would go waste if your points expire.
- However, most banks have started doing away with the expiry period.
- For the smart shopper, the credit card is worth more than just what it buys.
Monday, September 14, 2009
When you buy or sell a stock future, you're not buying or selling a stock certificate. You're entering into a stock futures contract -- an agreement to buy or sell the stock certificate at a fixed price on a certain date. Unlike a traditional stock purchase, you never own the stock, so you're not entitled to dividends and you're not invited to stockholders meetings. In traditional stock market investing, you make money only when the price of your stock goes up. With stock market futures, you can make money even when the market goes down.
Here's how it works. There are two basic positions on stock futures: long and short.
The long position agrees to buy the stock when the contract expires. The short position agrees to sell the stock when the contract expires. If you think that the price of your stock will be higher in three months than it is today, you want to go long. If you think the stock price will be lower in three months, then you'll go short.
Let's look at an example of going long. It's January and you enter into a futures contract to purchase 100 shares of IBM stock at $50 a share on April 1. The contract has a price of $5,000. But if the market value of the stock goes up before April 1, you can sell the contract early for a profit. Let's say the price of IBM stock rises to $52 a share on March 1. If you sell the contract for 100 shares, you'll fetch a price of $5,200, and make a $200 profit.
The same goes for going short. You enter into a futures contract to sell 100 shares of IBM at $50 a share on April 1 for a total price of $5,000. But then the value of IBM stock drops to $48 a share on March 1. The strategy with going short is to buy the contract back before having to deliver the stock. If you buy the contract back on March 1, then you pay $4,800 for a contract that's worth $5,000. By predicting that the stock price would go down, you've made $200.
What's interesting about buying or selling futures contracts is that you only pay for a percentage of the price of the contract. This is called buying on margin. A typical margin can be anywhere from 10 to 20 percent of the price of the contract.
Let's use our IBM example to see how this plays out. If you're going long, the futures contract says you'll buy $5,000 worth of IBM stock on April 1. For this contract, you'd pay 20 percent of $5,000, which is $1,000. If the stock price goes up to $52 a share and you sell the contract in March for $5,200, then you make $200, a 20 percent gain on your initial margin investment. Not too shabby.
But things can also go sour. If the stock price actually goes down, and ends up at $48 a share on April 1, then you have to sell the $5,000 contract for $4,800 -- a $200 loss. That's a 20-percent loss on your initial margin investment. If the stock drops considerably, it's possible to lose more than the price of the initial investment. That's why stock futures are considered high-risk investments.
When buying on margin, you should also keep in mind that your stock broker could issue a margin call if the value of your investment falls below a predetermined level called the maintenance level. A margin call means that you have to pay your broker additional money to bring the value of the futures contract up to the maintenance level.
Sunday, September 13, 2009
Investors can Exploit Cut-Off Timing To Make Fast Buck
MANY companies have perfected the art of making a quick, cool return from mutual funds (MFs) without investing anything. They do this by playing around with the cut-off timings set by fund houses for accepting cheques from investors.
It works like this: Companies and some high net worth investors give cheques to buy units of “liquid-plus” MF schemes just before the weekend, when there is no money lying in their current accounts. They enjoy a free return for two days, fund their accounts on Monday morning, stay invested for a few more days and then switch to a new scheme to play the game all over again. For mutual funds, it is like offering the net asset value (NAV) of the scheme to the investor without receiving any money from it. It is similar to a bank paying interest on a non-existent deposit. Fund houses know the game, but are unwilling to spoil their relationship with big investors.
Here is a typical sequence of events:
Friday, 2.30 pm: A corporate gives a cheque to invest in a ‘liquid plus’ MF scheme. At that point, there is no money in the company’s bank account.
Saturday: The investor gets Friday’s closing NAV (NAV roughly indicates the price of a mutual fund unit).
SUNDAY: Investor gets Saturday’s NAV that includes the accrued interest. The scheme invests in fixed income securities which carry a fixed interest coupon. This is why the NAV of such schemes inch up over the weekend.
Monday: The corporate investor funds its bank account so that when the MF presents the cheque, it gets honoured. Remember, the MF cannot deposit the cheque before Monday since high-value cheques are not cleared on Saturdays.
Tuesday & Wednesday: The firm stays invested in the liquid-plus scheme.
Thursday, 2:30 p.m.: Investor directs the MF to switch the investment from liquid-plus to a liquid scheme. (A liquid scheme invests in securities with less than a year maturity while a liquid plus has papers of more than a year as well).
Friday: The company gives a redemption order for the liquid scheme units, and almost simultaneously, gives another cheque for making a fresh investment in a liquid-plus scheme. Again, there is no money in its account.
Saturday, Sunday: Enjoys free NAV.
Monday: The money from the redemption order gets credited to the company’s bank account. This money also helps in honouring the cheque that was given on Friday for investing in the liquid plus scheme.
So, in the 11-day cycle, these investors enjoy a free NAV for four days. Their gains may vanish if there is a sudden decision like an interest rate hike, but otherwise, they can rotate the money week after week.
What makes this possible is the different cut-off timing rules. For instance, in a liquid fund, the investor can get the same day’s NAV if the money is available for utilisation on the same day. But, not so for liquid-plus schemes. Here, the investor can give the cheque by 3 p.m. and get the same day’s NAV even if the MF cannot use the money. This is a game where other investors may end up subsidising these smarter players while the fund house may end up investing in more high-risk securities to generate that extra return. According to a senior official with a large fund house, since most MFs are under pressure from their managements to grow their assets under management (AUM), they have no choice. Besides, the rules allow it. As long as an investor in a liquid-plus scheme gives the cheque before 3 p.m., the fund has to give the same day’s NAV. If the investor insists, it is difficult for the fund to say no.
Two years ago, SEBI changed the cut off timings for acceptance of investment by MFs. The guidelines helped to plug a few loopholes. However, under a stricter regime, clever investors have found a way to get around the rules. If a corporate finds that it will have a treasury surplus on Monday, it can benefit by placing a liquid-plus order on Friday afternoon. This is becoming a practice and some big corporate are doing it.
Saturday, September 12, 2009
If safety of your funds is what matters to you, try guaranteed life insurance products which offer assured returns too.
Lets check out the benefits:
IT’S a lesson that most people learn pretty early these days — there are no guarantees in life. Almost everything is a 50:50 game and to survive, you need to be ready for those days when the odds are weighed against you. But the irritation is much greater when the uncertainty involves money. With the stock markets still volatile, frustration and despair are becoming the predominant sentiment. Faced with the need to rekindle feelings of safety and security, life insurance companies have launched guaranteed insurance products.
Guaranteed return plans are what one would call a two-in-one treat. On one hand, they offer what a normal life-insurance policy would in terms of covering you against unforeseen incidents like death. In addition, they also ensure that you are entitled to a fixed sum of money at the end of the maturity period. This is made possible as the companies invest in a series of fixed income products such as government securities, infrastructure bonds, corporate bonds, debt and money market instruments. This combination of benefits makes a guaranteed return plan a very attractive investment product for those with a mid to long-term investment horizon. A number of companies have launched guaranteed return policies in the recent past such as Jeevan Aastha launched by LIC, another plan launched by Aegon Religare and the India Bond plan by Aviva Life Insurance.
COUNT THE POSITIVES
The first is no doubt the assurance of fixed returns, especially in a period when returns from stock markets are far from the expected levels and even insurance products like ULIPs have recorded poor performances. In a guaranteed return plan, returns are calculated on a compounding basis over a fixed period of time and generally range between 6% and 8%. The plans generally have a long investment horizon of about 5-10 years. Also, for those who hate the thought of having to dole out a huge sum as tax, it makes sense to know that you are exempt from paying tax on the maturity amount. These plans usually offer tax-free returns under Sections 80C and Section 10 D. In fact, at the higher tax bracket, the annual return is much higher than any popular ‘safe’ investment product.
While the specific details vary from company to company, it is generally observed that most guaranteed return plans are single-premium products. This gives one the ease of making a down payment at the beginning of the policy instead of having to pay a regular premium every month. Explaining the reasons for a single premium, The net reduction from the premium is lesser in a single premium plan as the costs involved are lower. This ensures that there is more money available for the company to invest and generate the returns promised by them Most companies also do not allow for premium below Rs 50,000. Notably, the time period for which the policy is available is generally limited to about 45 days. Experts say this decision has been taken to reduce the effects of possible fluctuation in interest rates. Maximum age also generally revolves around 45 years, in some cases extending to a maximum of about 60 years.
MAKING THE CHOICE
Experts feel that before jumping into a plan of this sort, an investor must evaluate what he actually wants to achieve via the plan. As far as coverage is concerned, the death benefits are seen to decrease with every year into the policy. Moreover, when it comes to investments, there are other options in the market, which are offering competitive rates of interest and are also tax-exempt. You should looking at buying the product if the sum of tax-free returns and the premium to be paid for your term insurance is less than the returns that are promised by the guaranteed return product. To save yourself of worry, you must also make sure that you buy the plan from a company you trust even if it means compromising on the returns, he adds.
Friday, September 11, 2009
What is an FMP?
FMP stands for Fixed Maturity Plan. These are essentially close-ended income schemes with a fixed maturity date i.e. that run for a fixed period of time. This period could range from one month to as long as two years or more. When the fixed period comes to an end, the scheme matures, and your money is paid back to you.
FMPs do not invest in equity. The portfolio is generally invested in debt and money market instruments maturing in line with the tenure of the scheme. The objective is to lock-in the investment at a specified rate of return thereby immunizing the scheme against market fluctuations.
In most open-ended mutual fund schemes, one can redeem one’s units anytime. However, the structure of the FMP does not lend itself to this kind of liquidity. Invest money you are more or less sure you are not going to need during the tenure of the plan. If you withdraw before the scheme closes, generally a steep exit load is imposed.
The reason for this steep load is to deter investors treating the FMP like a normal income scheme. Though income schemes invest in similar instruments as an FMP, being open-ended and not having a specific tenure based investment strategy, these are subject to interest rate risk leading to fluctuations in the NAV.
What is better --- A Bank Deposit or a FMP?
Lately the interest rates on bank deposits have increased leading many investors to wonder whether a simple Bank Fixed Deposit (FD) would serve better than having to go through the process of investing in an FMP. Though Bank FDs and FMPs currently offer a similar rate of return; the tax impact tilts the scales in favor of the FMP.
Interest on Bank FDs is fully taxable whereas the return from FMPs is either subject to the Dividend Distribution Tax (for the dividend option) or the capital gains tax rate (for the growth option). The Distribution Tax rate @14.16% or the capital gains tax rate @10% are lower than the income tax rate, especially in the case of investors in the higher tax bracket. Tax directly eats into returns, which is why FMPs have the edge over Bank FDs.
Are FMPs for you?
As I write this, stock markets are extremely choppy. Depending upon whom you talk to, either a severe correction is round the corner or the market is going to go up by a couple of thousand points more. Though no one has seen what tomorrow will bring, common sense indicates that a post tax yield of almost 9% is too good to ignore.
If you are looking for a fixed income avenue that yields a reasonable return with minimum risk, adequate liquidity and tax efficiency, FMPs will provide you with an effective shelter.
This article was about how short-term FMPs (of duration less than one year) can benefit investors. Next time, we shall examine how longer term FMPs (of over one year) which yield capital gains benefits instead of dividend income can also be used for investments that have a longer time horizon.
This time we shall see how a longer termed FMP (of over one year) has an even better edge than its shorter-termed counterpart. The reason is that for an FMP of over one year, the return is taxed as long-term capital gain and not normal income. Readers of these columns would know that the capital gains tax structure is much more beneficial than normal income tax.
In the case of an FMP, you have an option of paying tax on long-term capital gains either @20% after indexing cost or @10% on the profit (sale value – cost without indexation). While the option to adopt would depend upon parameters such as the duration of the investment, the return, the inflation rate etc., you would observe that both options are far superior to the fixed deposit investment.
Well, FMPs are for everyone. In fact, you can look upon FMPs as fixed deposits offered by mutual funds. Just like bank fixed deposits, FMPs too are of differing periods such as 30 days, 90 days, 180 days, 366 days and so on. Tax incidence differs as explained in these articles.
Also FMPs are extremely safe since the underlying investments are either money market instruments or rated paper. They have nothing to do with the Sensex movement and everything to do with interest rate movements. Before investing, the MF indicates the yield that you can expect from the scheme. The word used is "indicates" as against "assures" as SEBI rules do not allow mutual funds to assure returns. In any case, just like in the case of a bank fixed deposit, in an FMP too, investors would know beforehand what the return is going to be. And lastly, to choose an FMP, you should do just what you would do while choosing a fixed deposit......invest with a fund house with pedigree and reputation.
Thursday, September 10, 2009
Investing in gold may be a good option to hedge against inflation and extreme crisis. It can be done in two ways. One can either hold gold in physical form or can make investment in Gold ETF. If you are over cautious and always play on the safe side, then it would be better to keep physical gold but you have to bear the risk of purity and safety of gold.
There is a possibility that due to national calamity or extreme difficult condition of the economy, it may be difficult to liquidate Gold ETFs. But such an occurrence would be rare; you can enjoy the same benefits by investing in Gold ETF without taking the risk of the quality and safety of the physical gold.
Wednesday, September 9, 2009
Examine Sector Weightings and the Fund's Concentration:
The funds that have large stakes in just one or two sectors are expected be more volatile than the evenly diversified funds. A concentrated portfolio may also get more successful if its stocks are performing better. You may add a concentrated fund in your portfolio but mostly the concentration should be in a diversified fund which is more predictable.
Invest in a few funds and develop a Plan:
But it would not mean you should invest only in one fund. Even though the funds are diversified, many funds go though a few years of poor performance. When you invest in only one fund, you might lose heavily. On the other hand, investing in too many funds may lead to duplication of many securities and a portfolio with no focus. For the long-term financial goals, equities are the best option.
Keep It Simple:
To keep the selection of fund simple, you should stick with well diversified and well established equity funds, an index fund for equity exposure and a floating-rate bond fund for fixed income exposure. For long term perspective, equities are the best performing asset class. One should normally stay away from speciality and sector funds because they have a huge risk associated.
Know Your Portfolio & Ignore the hot stocks and funds:
Avoid going for impulsive purchase. It is wise to invest in a fund that invests in stocks that make up an index. This way, you will do no worse than the market. Since, in the long run, markets have a tendency to go up, even your investment will move the same way. But in case, you are a little more active, you can go for established `value' funds that invest in undervalued securities.
Investing a little bit of money each month is the surest way to reduce the risk of investing. Investing on a regular basis is the key to success. Irrespective of the fund you choose, the reality is that its value will be keep going up and down. One can expect a reasonable price in the long term by investing on a regular basis.
Diversification is suitable for many investors:
It is generally true that stocks perform better than any other liquid investment. So in case of long-term horizon and if you are comfortable with the risks associated with the stock market, you can think of investing in stock funds. But in case you are a slightly conservative, you may think of investing in different asset classes such as stocks, bonds etc. The key challenge is to choose the right fund.
Assess Performance Appropriately:
Past performance is not necessarily a good indicator of future results and this fact should be kept in mind every time one consider investing in any fund. Avoid investing in a concentrated fund and focusing on short-term returns. Generally while choosing a fund, one should look for above-average performance over a period of time
Tuesday, September 8, 2009
Here are some home loan terms it helps knowing
This is a process by which a lender evaluates the creditworthiness of the loan applicant. It involves assessing the borrower's past repayment history, establishing the sustainability of his current income and evaluating his capacity to repay. The applicant will be sanctioned a loan only after taking into account his savings, income, age, qualifications, period of employment and other outstanding debts.
EMI (equated monthly installment) is an unequal combination of two components - principal and interest. This is the amount of money the borrower owes the lender every month, through the tenure of the loan.
Also called down payment, margin money is typically around 10-15 percent of your loan amount. The bank does not disburse the entire cost of the property when you seek a home loan. It lends only around 85-90 percent of the project cost. The borrower is expected to bring in the remaining money. This is referred to as down payment or margin money.
HOME IMPROVEMENT LOAN
Some people may need money to repair, renovate, remodel or extend their home. Banks offer home improvement loans that you can use for making structural improvements, external and internal repairs, flooring, painting, improving plumbing, electrical work etc.
A loan applicant can apply jointly for a loan with his spouse or parents. This way he can club the incomes. This increases his loan eligibility.
This policy offers insurance for household belongings against fire, malicious damage, burglary and natural disasters like flood and earthquake. The householder's insurance policy is a comprehensive package that protects the house and its various contents against a variety of risks. It is a single policy that takes care of a number of contingencies.
Monday, September 7, 2009
RETURNS ON GOLD & ITS ETF’s RISE
WHILE most of the popular asset classes are going through bad times, the yellow metal shines on. In fact, in the last one year, gold has given a return of more than 25% and currently trades at Rs 14,695 per 10 gm. Even gold exchange traded funds (ETFs) have appreciated substantially. Gold Gold Benchmark Exchange Traded Scheme (BeES) and Kotak Gold ETF have given more than 25% returns each in the last three months.
Even as the equity markets have taken a hit with the Sensex losing around 46% in the last one year and real estate prices also witness a correction, investors’ preference has shifted to safe havens such as gold. On an average, most of the diversified equity mutual funds have fallen and real estate developers are offering discounts. Thus gold remains the safest bet.
The appreciation in the gold prices is mainly due to its safe haven status. The key reason for gold to go up is lack of other investment opportunity. There is also a risk in keeping the money in currency form as most of the currencies have depreciated against one another. Moreover, most of the countries are facing liquidity problems and the currency will further depreciate if they go in for printing money.
The historical trend proves that gold prices have a positive correlation with inflation and crude oil price. It is considered as the best hedge against inflation. But in the prevailing economic condition, gold prices have moved in the reverse direction from both crude oil price and inflation. Where crude oil prices have corrected from $146 a barrel in the last year to $60 a barrel now, gold prices have appreciated to Rs 14,695 currently from the lowest of Rs 10,653 last year. Thus while in the last year, the rising inflation rate and crude oil prices were buttressing gold, now it’s the uncertainty, which is pushing the price up.
There are several factors that impact gold prices. Crude oil price and inflation are a couple of factors. But the quantum of impact of each of these factors differs depending upon the economic condition. Currently, the impact of financial and economical uncertainty is driving gold prices up. The depreciating rupee has further helped the gold price to go up as major portion of the gold is imported.
WHY GOLD NOW?
Usually, during the time of any financial crisis gold gives good returns to investors. Since other asset classes are witnessing downside, one can look at gold as an investment opportunity. Moreover, in terms of diversification, it is always good to allocate a certain portion of the fund in gold, which generally provides higher returns without any substantial increase in the level of risk.
HOW TO INVEST IN GOLD?
There are several ways to invest in gold. One can go for either physical gold or electronic forms. Many of the banks sell gold in the form of coins of different sizes and weights. Commodity exchanges like Multi Commodity Exchange gives a platform to trade in future prices. Recently, several mutual fund companies launched gold ETFs and gold funds. The best way to put money in a commodity would be through commodity exchanges. ETFs are best suited for small clients.
ETF OR GOLD FUND?
- Gold ETFs are the most popular mode of investment in the gold among the investor community.
- Gold ETFs are like other mutual funds and get traded in the stock exchanges.
- Gold ETFs track the performance of gold and the money gets invested in the gold.
- Unlike gold ETFs, gold funds invest money into the shares of gold mining companies.
- Since the investment is made in different asset classes, performance of both kinds of funds differs significantly.
In the last three months, gold ETFs have given a return of around 27% while a gold fund like DSP BlackRock World Gold Fund and AIG World Gold Fund have generated more than 55% of returns. Similarly, in the last six months, on an average, these gold funds have appreciated by merely 10%, while gold ETFs have appreciated by 29%. According to a senior official of an asset management company, since gold funds invest money in the shares, any fluctuation in the stock market will also impact their performance. It is always better to go for gold ETFs. Apart from giving investment opportunity, it does not carry any risk of theft and also provides tax benefits.
OUTLOOK & KEY CONCERNS
Since it provides hedge against uncertain economic conditions, as long as uncertainty prevails gold is expected to appreciate. Commodity brokers are upbeat on gold prices. Around 30% upside in gold prices from the current levels is anticipated. There can be a short-term correction in gold price but in six months, he expects prices to go up considerably. Gold is attracting higher investments due to uncertain economic conditions. Any favourable change in the economic conditions may hamper the price appreciation.
Sunday, September 6, 2009
At a time when the equity markets are in choppy and interest rates are stabilizing, it is natural for investors to gravitate towards debt instruments. At the same time, there are a few who believe that the market has bottomed out. So neither do they want to miss on the upside, should the market take a U-turn. The AMCs have found a way out by introducing equity-linked fixed maturity plans (FMPs), which will invest in equity-linked debentures. Unlike a normal debenture, where the interest rate (coupon rate) is fixed, in these debentures, the interest rate depends on an underlying basket of stocks. These stocks could be a select few chosen by the fund manager or it could be an index. Depending on the performance of the stocks, the return on the debenture is fixed. So how is this figure arrived at? Simply by looking at the Participation Ratio.
Let's say that the debenture is linked to the Sensex at a 100 per cent Participation Ratio. Should the Sensex rise by 10 per cent, then the debenture issuer will pay the debenture holder 100 per cent increase of the underlying asset, which is 10 per cent in this case. But this rise is paid on a proportionate basis. For instance, if the Sensex rises by 10 per cent only in six months, then the interest will be paid solely for such a period. But there is also a limit to the potential upside. This is known as the knock-out level and the rate of interest paid at this level is known as the knock-out coupon rate.
For example, let's say the knock-out level for the Sensex, which is at 13,000, is fixed at 18,000 and the knock-out coupon rate is fixed at 30 per cent. During the tenure of the scheme, if the Sensex hits the knock-out level or even goes higher, the investor will only get 30 per cent during that period. But what if the Sensex falls below its initial level? The investors will get the principal amount back with no extra return.
So how does it work in an FMP? When an investor invests Rs 100 in an equity-linked FMP, Rs 78 is invested in an equity-linked debenture. If there is an upside in the market or underlying stocks, the investor will benefit. If not, he will at least get his principal amount back on maturity (Rs 100). Hence, the capital is protected. The balance Rs 22 (Rs 100- Rs 78) is invested in Options to generate the extra return.
An equity-linked FMP is neither a pure debt investment, nor a pure equity one. Theoretically, it sounds great for investors who are not clear about the stock market direction over the next few years but would like to participate in its upside potential, if any. But should the market stay flat or dip, the investor will suffer. And in such a scenario, a regular FMP or debt fund could well deliver superior returns.
Saturday, September 5, 2009
Indeed, mobile banking scams have become common these days. Here’re some precautions you need to take before you decide to reach your bank through your mobile phone.
- FIRST THINGS FIRST
- SAFETY MEASURES
Apart from the basics, you should be aware of the safety measures that you need to take. As is always prescribed, you should immediately change your password and destroy the password mailer after doing so. Disclosing your password to someone (including bank staff) and using obvious passwords like name, date of birth, etc, is the biggest folly. You should never ever store mobile banking PIN (m pin) in your cell phone memory and should also delete all messages that have your m pin information. If possible, disable the temporary storage. The bank accounts of mobile banking users can be manipulated very easily if they lose their phone or change their phone number or handset. If you do any kind of tampering with your phone or the number, then you should immediately inform your bank, get your mobile banking services blocked and request for a new m pin.
- FRAUDS! BUT HOW
If you think that mobile banking solutions are all about cutting down the number of times you run to your bank, think again. Mobile banking frauds have become very common these days and it can happen in a number of ways. If you have stored your m pin on sent messages or on the phone and the phone is lost, then in your account can be easily misused. Anyone can easily read your messages as they are sent in clear text. Other than that, if there is virus in your phone and the same has the capability to access your m pin details, then also you can be a victim of fraud.
Frauds can happen by way of cloning of websites. Although most banks have encrypted websites but if they are not then account users can be fooled by fake websites. One of the possible ways of identifying the cloned website is the http address at the top. The fake website can never have the same uniform source locator (URL) and therefore one must always check the address bar properly at the top
Modes of mobile phone banking solutions
1) Application based
Download an application on your handset from bank website or through bluetooth
2) SMS based
Interact with the bank’s SMS gateway from your handset using predefined SMS text codes
3) USSD based
Interact with bank using preset codes on USSD with your bank’s published gateways. USSD (Unstructured Supplementary Service Data) is a Global System for Mobile (GSM) communication technology that is used to send text between a mobile phone and an application program in the network.
4) WAP Based
Use GPRS services on your handset to access bank’s mobile banking site on your handset
Be informed about
• Handset is compatible with which of the above modes
• Bank Charges
• Telecom rates for messaging or connectivity
• Never store your m pin in the phone
• Delete all messages, which have your m pin information
• Check your mobile phone for viruses/ Trojans
Friday, September 4, 2009
Despite being around for more than a decade, Escorts Mutual Fund is a virtual non-entity. Though it holds a number of schemes, this fund house is one of the smallest players.
This is an AMC which seems to lack direction. A very small player, it showed no sign of even wanting to corner a bigger slice of the pie. During 2002 to 2004, the AMC did not launch a single scheme. But surprisingly, this year it has been quite aggressive with the launches of two FMPs and two equity funds, Escorts Leading Sectors and Escorts Power and Energy. If one looks at the returns of its two oldest funds, Escorts Tax Plan (March 2000) and Escorts Growth (March 2001), the performance has not been consistent. But neither has it been abysmal. In fact, at times it has quite impressed. The performance of the debt funds too has been noticeable. Escorts Opportunities and Escort Income Bond, both hybrid funds with a debt orientation, have been good funds. Escorts Income had a phenomenal run in 2003 and 2004 but has been an average player since then.
Escorts Asset Management is a wholly owned subsidiary of Escorts Finance, a non-banking finance company and SEBI registered merchant banker.
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