Prajna Capital - An Investment Guide

When Budget 2014 raised the deduction under Section 80C from `1 lakh to `1.5 lakh, it also hiked the annual investment limit in the Public Provident Fund (PPF). Risk-averse investors can now sock away more in this ultra-safe scheme. The PPF scores high on safety, taxability and costs, but the returns are not so attractive and liquidity is not very high. The scheme will give 8.7% this year, but don't count on it in the following years. The interest rate on small savings schemes like the PPF is linked to the government bond yield and it is likely to come down in the coming years. Though it is a 15-year scheme, the money isn't locked for this period. You can make partial withdrawals from the sixth year or take a loan. The interest rate on a loan is 2 percentage points higher than the prevailing PPF interest rate . For 2014-15, the rate will be 10.7%. Besides, the lock-in period depends on how long ago you opened the account. For those who started investing i...

  For a lot of people, Ulip is still a four-letter word. However, investors need to wake up to the new reality. After Irda capped the charges and introduced new rules for Ulips in 2010, these plans have become more customer-friendly. An ordinary Ulip is still a costly proposition, but the online avatar of these market-linked insurance plans is a low-cost version far removed from the one mis-sold to investors a few years ago. The Click2Invest plan from HDFC Life , for instance, charges only 1.35% a year for fund management. The only other deduction is mortality charge for the life cover, while the rest of the premium is invested. The iGrowth plan from Aviva Life Insurance charges 1.21% a year for a 20-year policy with an annual premium of over `1 lakh. While the low charges are a big advantage in the long run, experts say one should not go by cost alone. Don't buy a Ulip only because it has low charges. The performance of funds should also be taken into cons...

More than five years after it was thrown open to the public, the New Pension Scheme (NPS) is yet to become a popular choice. Despite very low charges, the scheme has not attracted investors in droves because of the complex procedure involved in the opening of an account. You have to literally beg the post office staff to get the paperwork done. In bank branches, the investor himself has to guide the staff on the basics of the NPS. However, the investors who have managed to cross these barriers have found it rewarding. The NPS funds have not done badly in the past five years. The returns from the E class funds are in line with those from the Nifty, the benchmark index they are supposed to follow. It is the corporate bond funds that have been the best performers in the past five years. Even the gilt funds have given reasonably attractive returns (see graphic). Some financial planners believe that the NPS puts the investor in a strait jacket. The exposure to E ...

  ELSS funds are the showstopper this year, scoring 28 out of 30 points. Being equity schemes, they are low on safety, but score full points on all other parameters. The returns are high, the income is tax-free , the investor is free to alter the time and amount of investment, the lock in period of three years is the shortest among tax-saving investments and the cost is only 2-2.5% a year. The liquidity is even higher if you opt for the dividend option, and cost is even lower if you go for the direct plans of these funds. Don't look at ELSS funds as one broad category. Within these, there are schemes with a large-cap orientation, making them more stable than others. Some have a midcap skew, which can be riskier than large cap funds but also have greater potential. The funds that have lined their portfolios with small and mid-cap stocks will be riskier, but can outperform by miles if the small-caps turn out to be multi baggers. The Reliance Tax Saver fund ha...

  The Senior Citizens' Saving Scheme (SCSS) is an ideal tax-saving option for senior citizens above 60. The money is safe, while the returns and liquidity are reasonably good. There is an investment limit of `15 lakh but it is sufficiently high. However, the interest income from the scheme is fully taxable . The other problem is that even if you have a large amount to invest, the maximum deduction will be `1.5 lakh a year. You can stagger your investments across 2-3 financial years to make full use of the deduction under Section 80C . You can open an SCSS account in a post office or designated branches of public-sector banks. The interest is linked to the government bond yield. It is 1 percentage point higher than the 5-year government bond yield . Unlike the PPF , the rate remains unchanged till maturity. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP...

  Investors love the PPF because they get a tax deduction on the amount they invest. There is no tax on the interest earned and withdrawals are also tax-free . The only glitch is the annual investment limit, which has now been hiked. However, another instrument gives almost the same returns and tax benefits without imposing any investment limit. Salaried taxpayers who are covered by the Employees' Provident Fund can put more than the mandatory 12% of this basic in the Voluntary Provident Fund (VPF). The VPF is an ideal saving instrument for high-income earners looking to build a tax free corpus. Unlike the PPF , there is no limit on how much you can invest. The contributions to the VPF are eligible for tax benefits that the Provident Fund enjoys. They also earn the same interest (8.75% for 2014-15). Unlike the PPF, its returns are not linked to the market but decided by the Central Board of Trustees of the Employee Provident Fund Organisation in consult...

Bonds over FDs If you are a debt investor content with putting money into fixed deposits ( FDs ), this might be a good time to consider duration funds. The Reserve Bank of India ( RBI) surprised the market last week by cutting the repo rate by 25 basis points (bps) to 7.75 per cent. If interest rates fall further by about 50 to 75 bps, as is widely expected, long duration bond funds will rally. That's because bond prices rise when interest rates fall, meaning bond investors will benefit from capital gains in addition to interest income. The longer the average portfolio maturity of a bond fund, the higher the capital appreciation when rates fall. Bond funds score over fixed deposits in two ways: tax treatment and superior returns. If the holding period is three or more years, bond investors are taxed at 20 per cent with indexation, whereas interest for FD investors is added to their income and taxed in line with their individual slab rates of 10, 20 or 30 ...