Fundamental Analysis
Today I got a query from one of my reader that he wants to know about fundamental analysis, and then I thought of posting the same answer on my site, so that others will also get benefited.
Fundamental analysis is the key and very prominent factor while buying and selling of stocks and securities. This provides a complete analysis of the company, industry and economy related news to the investors. Fundamental analysis can be best compared with our cloths, because while purchasing our cloths we always look at the quality, price and outlook of the cloth; brand value, goodwill and popularity of the company and finally, we start thinking whether it suits to the current season or not.Fundamental analysis of shares and stocks is a conservative and non-speculative approach based on the “fundamentals”. A fundamental analyst always looks at a three dimensional analysis instead of analyzing what is happening in the Dalal street. The three important dimensional factors are:The EconomyThe IndustryThe CompanyThe Economy AnalysisThe Economy analysis is a major factor stands behind the success of any investor. Economic analysis includes the study and understanding of various economic indicators and their possible impact on the stock market. Following are the economic indicators which has impact on the stock market movements:
GNPPrice ConditionsEconomyHousing ConstructionEmploymentAccumulation of InventoriesPersonal Disposable IncomePersonal SavingsInterest RatesBalance of tradeStrength of the Rupee in Forex marketCorporate Taxation (Direct & Indirect)
The Industry Analysis
Every industry has to go through a life cycle with four distinct phases
i) Pioneering Stage
ii) Expansion (growth) Stage
iii) Stagnation (mature) Stage
iv) Decline StageThese phases are dynamic for each industry.
You as an investor is advised to invest in an industry that is either in a pioneering stage or in its expansion (growth) stage. Its advisable to quickly get out of industries which are in the stagnation stage prior to its lapse into the decline stage. The particular phase or stage of an industry can be determined in terms of sales, profitability and their growth rates amongst other factors.
The Company Analysis
There may be situations where the industry is very attractive but a few companies within it might not be doing all that well; similarly there may be one or two companies which may be doing exceedingly well while the rest of the companies in the industry might be in doldrums. You as an investor will have to consider both the financial and non-financial aspects so as to form a qualitative impression about a company. Some of the factors are
History of the company and line of business
Product portfolio's strength
Market Share
Top Management
Intrinsic Values like Patents and trademarks held
Foreign Collaboration, its need and availability for future
Quality of competition in the market, present and future
Future business plans and projects Tags - Like Blue Chips, Market Cap - low, medium and big caps
Level of trading of the company's listed scripts
EPS, its growth and rating vis-à-vis other companies in the industry.
P/E ratio
Growth in sales, dividend and bottom line.
Sunday, November 30, 2008
Children's Educational Planning/Educational Planning
Children's Educational Planning/Educational Planning
Children’s Educational Planning/Educational Planning is one of the key elements in financial planning, which helps many people to give better education to their Childs in the right time. Unfortunately, in India most of us have not realized the importance and benefits of proper and timely educational planning. This is all because of lack of awareness, huge debts, low income, improper financial planning and lack of need based investment solutions. Till today, most of us have the misconception that educational planning can be done only through insurance plans. But, in this modern era there are hundreds of investment tools which match an individual’s need of educational planning.I am writing this article with the sole purpose of creating awareness in people by giving certain examples and calculations, which proves the importance and need of educational planning. Through this article, I am trying to give you the clear picture of educational planning, the reasons to plan your child’s educational needs, the different investment tools which facilitate your child’s educational planning and the steps to be fallowed to make your educational plan effective.
Like every parent, you too must be overjoyed to watch your child grow. All parents want to give the best possible upbringing to their children. This includes good education and security, in case of any eventuality. Soon, your little bundle of joy will grow up, and it will be time to provide for his or her higher education and wedding.
The purpose of Children's Future Planning is to create a corpus for foreseeable expenditures such as those on higher education and wedding, and to provide for an adequate security cover during their growing years.
Children's Future Planning acquires added importance because children's education and wedding are high priority life goals, which can neither be postponed nor can there be a compromise on the amount.
Good education has always been the passport to a secure future. Today, career opportunities have grown manifold, and there are many professional courses that your child can aspire for. However, costs of higher education have also increased exponentially.
Like most parents, you might be saving regularly to ensure a safe tomorrow for your child. However, savings alone is no longer enough. For ensuring adequate funding of your child's education, you as a parent need to do two things:
1. Invest appropriate amount systematically and at regular intervals
2. Provide for a financial security blanket to cover any eventuality
It is never too early to start saving and investing for your child's future especially in today's context. For example, the cost of a professional degree today is approximately Rs 2.5 lakhs. If your child is one-year-old today, after 17 years when he/she goes to college, you may require a sum of Rs 6.3 lakhs, assuming an annual rate of inflation of 6%.
There are many products which your Financial Planner can use to achieve the above objectives. For example, he could suggest a Children's Future Plan offered by any good insurance company, to build a corpus for your child's higher education, and provide for a security cover in the event of the parent's unfortunate demise
The reasons for educational planning 1. To provide better and dreamed education to your child in the right time.2. To secure your child’s future even in case of any uncertainties like death, disability, loss of job etc.3. To accumulate required amount of money for your child’s education over a period of time through systematic and flexible investment plans.The reasons and needs which prove the importance of educational planning are many. But, it all differs from person to person depending upon you annual income, dreams and aspirations.The Different investment solutions to plan your child’s education better……The investment tools to plan your child’s education includes,
life insurance plans,
mutual funds,
long term equities,
debts
NSC
Bank deposits, etc.
You need to consider your present financial status, age, family status, expected growth in your annual income, age of your child, your plans and dreams on your child’s future before choosing the right investment tool or before allocating your assets in different investment tools.I have already discussed about all the above investment tools in my previous articles. Therefore here I am just giving you a brief idea of how these can be matched to your educational plan.In our country, mothers start accumulating jewellery for their daughters’ wedding from an early age. However, that is not necessarily the best way to use money.
These days, insurance policies play a key role in the financial planning activity revolving around the children. I mentioned earlier that insurance companies offer children’s plans which help parents fulfil their most important financial responsibility towards their children even in their absence – and that is financing their higher education. Children's insurance plans have several variants, the important ones being:
Policies that provide a certain percentage of the sum assured during the closing years of the policy, or a lump sum at its maturity, or the entire lump sum at the early demise of the person whose life is assured (the parent). Reversionary and terminal bonuses are paid at maturity.Children’s endowment insurance plans under which, the life of the child is insured, and the sum assured is paid out at maturity (for example when the child attains the age of 18, 21 or 24 under different plans). Generally, these plans aim to support the financial requirements for higher education or marriage.
Unit-linked insurance plans allow the policyholder (parent) to choose their premium payment and investment options. The premium is invested in different financial instruments by the insurance company, and the accumulated sum is paid at the time of maturity.In the event of premature death of the policyholder, the assured sum is paid to the child and the insurance company will pay the premiums and continue the investments on the policyholder’s behalf until maturity.
Children’s plans are offered by both public and private insurance companies. Although the policies of different companies vary in the details, most of them have some common features like:a. Aiming at securing the educational/marriage needs of the child.b. Term period of 10-25 years.c. The minimum sum required is around Rs. 50,000.d. Most have no maximum sum limit.e. This investment is tax exempted under Section 80C and Section 10 (10D) of the Income Tax Act, 1961.Do not liquidate your savings:If you have successfully built a corpus to secure your child’s future, don’t succumb to the temptation to liquidate it to tide over other expenses.Without adequate financial planning, you might be able to fulfill your children’s needs, but not their dreams. A bit of foresight can help you achieve both.
Children’s Educational Planning/Educational Planning is one of the key elements in financial planning, which helps many people to give better education to their Childs in the right time. Unfortunately, in India most of us have not realized the importance and benefits of proper and timely educational planning. This is all because of lack of awareness, huge debts, low income, improper financial planning and lack of need based investment solutions. Till today, most of us have the misconception that educational planning can be done only through insurance plans. But, in this modern era there are hundreds of investment tools which match an individual’s need of educational planning.I am writing this article with the sole purpose of creating awareness in people by giving certain examples and calculations, which proves the importance and need of educational planning. Through this article, I am trying to give you the clear picture of educational planning, the reasons to plan your child’s educational needs, the different investment tools which facilitate your child’s educational planning and the steps to be fallowed to make your educational plan effective.
Like every parent, you too must be overjoyed to watch your child grow. All parents want to give the best possible upbringing to their children. This includes good education and security, in case of any eventuality. Soon, your little bundle of joy will grow up, and it will be time to provide for his or her higher education and wedding.
The purpose of Children's Future Planning is to create a corpus for foreseeable expenditures such as those on higher education and wedding, and to provide for an adequate security cover during their growing years.
Children's Future Planning acquires added importance because children's education and wedding are high priority life goals, which can neither be postponed nor can there be a compromise on the amount.
Good education has always been the passport to a secure future. Today, career opportunities have grown manifold, and there are many professional courses that your child can aspire for. However, costs of higher education have also increased exponentially.
Like most parents, you might be saving regularly to ensure a safe tomorrow for your child. However, savings alone is no longer enough. For ensuring adequate funding of your child's education, you as a parent need to do two things:
1. Invest appropriate amount systematically and at regular intervals
2. Provide for a financial security blanket to cover any eventuality
It is never too early to start saving and investing for your child's future especially in today's context. For example, the cost of a professional degree today is approximately Rs 2.5 lakhs. If your child is one-year-old today, after 17 years when he/she goes to college, you may require a sum of Rs 6.3 lakhs, assuming an annual rate of inflation of 6%.
There are many products which your Financial Planner can use to achieve the above objectives. For example, he could suggest a Children's Future Plan offered by any good insurance company, to build a corpus for your child's higher education, and provide for a security cover in the event of the parent's unfortunate demise
The reasons for educational planning 1. To provide better and dreamed education to your child in the right time.2. To secure your child’s future even in case of any uncertainties like death, disability, loss of job etc.3. To accumulate required amount of money for your child’s education over a period of time through systematic and flexible investment plans.The reasons and needs which prove the importance of educational planning are many. But, it all differs from person to person depending upon you annual income, dreams and aspirations.The Different investment solutions to plan your child’s education better……The investment tools to plan your child’s education includes,
life insurance plans,
mutual funds,
long term equities,
debts
NSC
Bank deposits, etc.
You need to consider your present financial status, age, family status, expected growth in your annual income, age of your child, your plans and dreams on your child’s future before choosing the right investment tool or before allocating your assets in different investment tools.I have already discussed about all the above investment tools in my previous articles. Therefore here I am just giving you a brief idea of how these can be matched to your educational plan.In our country, mothers start accumulating jewellery for their daughters’ wedding from an early age. However, that is not necessarily the best way to use money.
These days, insurance policies play a key role in the financial planning activity revolving around the children. I mentioned earlier that insurance companies offer children’s plans which help parents fulfil their most important financial responsibility towards their children even in their absence – and that is financing their higher education. Children's insurance plans have several variants, the important ones being:
Policies that provide a certain percentage of the sum assured during the closing years of the policy, or a lump sum at its maturity, or the entire lump sum at the early demise of the person whose life is assured (the parent). Reversionary and terminal bonuses are paid at maturity.Children’s endowment insurance plans under which, the life of the child is insured, and the sum assured is paid out at maturity (for example when the child attains the age of 18, 21 or 24 under different plans). Generally, these plans aim to support the financial requirements for higher education or marriage.
Unit-linked insurance plans allow the policyholder (parent) to choose their premium payment and investment options. The premium is invested in different financial instruments by the insurance company, and the accumulated sum is paid at the time of maturity.In the event of premature death of the policyholder, the assured sum is paid to the child and the insurance company will pay the premiums and continue the investments on the policyholder’s behalf until maturity.
Children’s plans are offered by both public and private insurance companies. Although the policies of different companies vary in the details, most of them have some common features like:a. Aiming at securing the educational/marriage needs of the child.b. Term period of 10-25 years.c. The minimum sum required is around Rs. 50,000.d. Most have no maximum sum limit.e. This investment is tax exempted under Section 80C and Section 10 (10D) of the Income Tax Act, 1961.Do not liquidate your savings:If you have successfully built a corpus to secure your child’s future, don’t succumb to the temptation to liquidate it to tide over other expenses.Without adequate financial planning, you might be able to fulfill your children’s needs, but not their dreams. A bit of foresight can help you achieve both.
Indian Money Market
Indian Money Market
The market that borrows and lends short-term funds is called the money market. The instruments in the money market are short-term in nature and are highly liquid. Money market plays an important function of transferring funds to those economic units who have short-term requirements for funds. In money markets short-term debts instruments in particular are traded by individuals, corporations, government. The short-term instruments are with a maturity of one year or less is issued by those economic units that require short-term funds and lent by people who have surplus short-term funds. The need for money market arises due to the immediate cash requirements of people which do not necessarily match with their cash receipts.Participants in money market and their roles played
Government - Borrower/Issuers
Central Bank- Intermediary
Banks - Borrower/Issuers
Financial Institutions - Borrower/Issuers
Corporate Units - Issuers
MF’s, - lenders/Investors
Dealers - Intermediaries
Discount Houses and Acceptance House- Market makers
THE INDAIN MONEY MARKETThe Indian market can be classified into organized and unorganized sectors. The unorganized sector consists of money lenders, chit funds, and indigenous bankers. These people satisfy the credit requirement of a large section of the rural masses. The organized part comprises commercial banks in India both public sector and private sector banks and foreign banks. The Reserve bank of India the apex bank is the regulator of the money market in India. It regulates the flow of the credit and money in the economy. To influence the liquidity in the system the RBI intervenes in the money market from time to time either to augment or reduce the supply of credit. The open market operation of the RBI provides signals for other segments of the financial system regarding the future monetary and credit policy of the apex bank.
The weakness of the Indian money marketThe indigenous bankers and money lenders are still dominating the semi-urban and rural areas in India. In India the organized and unorganized money markets exist side by side. This is a major weakness to the Indian money market. The unorganized money markets follow its own rules and regulation of banking and finance so it does not come into the purview of RBI rules and regulations. In the recent days there are large number of Non-bank Financial companies (NBFC) have come up raising deposits from the public. These NBFC’s perform functions like lending, investing, hire purchase etc. these institutions are not effectively controlled by the RBI.There is an absence of a well-organized banking system. Though developed to some extent in the recent years their presence is insignificant in rural areas even today. The absence of banking facilities to the rural masses due to slow branch expansion in the country is a matter of concern.
The market that borrows and lends short-term funds is called the money market. The instruments in the money market are short-term in nature and are highly liquid. Money market plays an important function of transferring funds to those economic units who have short-term requirements for funds. In money markets short-term debts instruments in particular are traded by individuals, corporations, government. The short-term instruments are with a maturity of one year or less is issued by those economic units that require short-term funds and lent by people who have surplus short-term funds. The need for money market arises due to the immediate cash requirements of people which do not necessarily match with their cash receipts.Participants in money market and their roles played
Government - Borrower/Issuers
Central Bank- Intermediary
Banks - Borrower/Issuers
Financial Institutions - Borrower/Issuers
Corporate Units - Issuers
MF’s, - lenders/Investors
Dealers - Intermediaries
Discount Houses and Acceptance House- Market makers
THE INDAIN MONEY MARKETThe Indian market can be classified into organized and unorganized sectors. The unorganized sector consists of money lenders, chit funds, and indigenous bankers. These people satisfy the credit requirement of a large section of the rural masses. The organized part comprises commercial banks in India both public sector and private sector banks and foreign banks. The Reserve bank of India the apex bank is the regulator of the money market in India. It regulates the flow of the credit and money in the economy. To influence the liquidity in the system the RBI intervenes in the money market from time to time either to augment or reduce the supply of credit. The open market operation of the RBI provides signals for other segments of the financial system regarding the future monetary and credit policy of the apex bank.
The weakness of the Indian money marketThe indigenous bankers and money lenders are still dominating the semi-urban and rural areas in India. In India the organized and unorganized money markets exist side by side. This is a major weakness to the Indian money market. The unorganized money markets follow its own rules and regulation of banking and finance so it does not come into the purview of RBI rules and regulations. In the recent days there are large number of Non-bank Financial companies (NBFC) have come up raising deposits from the public. These NBFC’s perform functions like lending, investing, hire purchase etc. these institutions are not effectively controlled by the RBI.There is an absence of a well-organized banking system. Though developed to some extent in the recent years their presence is insignificant in rural areas even today. The absence of banking facilities to the rural masses due to slow branch expansion in the country is a matter of concern.
Money Market Instruments
Money Market Instruments
Money Market Instruments provide the tools by which one can operate in the money market. Common types Of Money Market Instruments are:
Treasury Bills: The Treasury bills are short-term money market instrument that mature in a year or less than that. The purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the full face value. The Treasury Bills are marketable, affordable and risk free. The security attached to the treasury bills comes at the cost of very low returns.
Certificate of Deposit:
The certificates of deposit are basically time deposits that are issued by the commercial banks with maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.
Advantages of Certificate of Deposit as a money market instrument are
1. Since one can know the returns from before, the certificates of deposits are considered much safe.
2. One can earn more as compared to depositing money in savings account.
3. The Federal Insurance Corporation guarantees the investments in the certificate of deposit.
Disadvantages of Certificate of deposit as a money market instrument:
1. As compared to other investments the returns is less.
2. The money is tied along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets out of it before maturity.
Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories. Commercial Papers have higher denominations as compared to the Treasury Bills and the Certificate of Deposit. The maturity period of Commercial Papers are a maximum of 9 months. They are very safe since the financial situation of the corporation can be anticipated over a few months.
Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable.
Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States. Since the Eurodollar market is free from any stringent regulations, the banks can operate at narrower margins as compared to the banks in U.S. The Eurodollars are traded at very high denominations and mature before six months. The Eurodollar market is within the reach of large institutions only and individual investors can access it only through money market funds.
Repos: The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight. Hence the Repos have terms raging from 1 night to 30 days. They are very safe due government backing.
Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
Federal Agency Short-Term Securities - (in the US). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.
Federal funds - (in the US). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
Municipal notes - (in the US). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.
Money market mutual funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.
Money Market Instruments provide the tools by which one can operate in the money market. Common types Of Money Market Instruments are:
Treasury Bills: The Treasury bills are short-term money market instrument that mature in a year or less than that. The purchase price is less than the face value. At maturity the government pays the Treasury Bill holder the full face value. The Treasury Bills are marketable, affordable and risk free. The security attached to the treasury bills comes at the cost of very low returns.
Certificate of Deposit:
The certificates of deposit are basically time deposits that are issued by the commercial banks with maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the Treasury Bills because it assumes a higher level of risk.
Advantages of Certificate of Deposit as a money market instrument are
1. Since one can know the returns from before, the certificates of deposits are considered much safe.
2. One can earn more as compared to depositing money in savings account.
3. The Federal Insurance Corporation guarantees the investments in the certificate of deposit.
Disadvantages of Certificate of deposit as a money market instrument:
1. As compared to other investments the returns is less.
2. The money is tied along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets out of it before maturity.
Commercial Paper: Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories. Commercial Papers have higher denominations as compared to the Treasury Bills and the Certificate of Deposit. The maturity period of Commercial Papers are a maximum of 9 months. They are very safe since the financial situation of the corporation can be anticipated over a few months.
Banker's Acceptance: It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable.
Euro Dollars: The Eurodollars are basically dollar- denominated deposits that are held in banks outside the United States. Since the Eurodollar market is free from any stringent regulations, the banks can operate at narrower margins as compared to the banks in U.S. The Eurodollars are traded at very high denominations and mature before six months. The Eurodollar market is within the reach of large institutions only and individual investors can access it only through money market funds.
Repos: The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight. Hence the Repos have terms raging from 1 night to 30 days. They are very safe due government backing.
Repurchase agreements - Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.
Federal Agency Short-Term Securities - (in the US). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.
Federal funds - (in the US). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
Municipal notes - (in the US). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.
Money market mutual funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors.
Tax benefits on Housing Loan
Tax benefits on Housing Loan
Loans are very important for all of us to realize some of our major dreams in time. We all look forward different kinds of benefits from loans we take. Of course it may be less interest rate, low processing fee, easy documentation, time taken to release the loan and finally, the very important thing we expect from a loan is Tax Benefit.
Tax benefits from loans are in different types and even it depends on the nature of loan taken. We take loan for personal use or to fund for our children’s education or construction of our house. We don’t get any tax benefit from the loan taken for our personal use. But of course we can claim tax exemption on the loan taken for education and house construction. As I have posted an article on Tax Benefits on Educational Loan, now I am giving you the complete details of tax benefits which can be availed on Home loan or the loan taken to construct a house.Nowadays, it is very difficult to fund the entire amount for your house construction, because of skyrocketing real estate prices and construction costs. Therefore, we all take home loans from different banks at different rate of interest. It is again very difficult to repay the loan, but if you do your financial planning and tax planning properly, you can save a huge amount legally by considering the prevailing tax laws.According to the income tax laws applicable, the interest paid on the capital borrowed for the acquisition or construction of house property is eligible for deduction up to the maximum limit of Rs 150000 per annum. You also get a 20% rebate on repayment of principal of the housing loan per annum. While this was earlier subject to a maximum of Rs 10,000, it is now Rs 1,00,000 and people can avail this benefit under section 80c of the income tax Act.Points to be considered:You should be residing in the home for which the loan is taken. If you are residing in a city but buying property in your home town to prepare for retirement, this will not be applicable. The property has to be acquired or constructed before April 1, 2003. The money should have been borrowed to construct or acquire property on or after April 1, 1999. If it was prior to this date, the deduction is only valid up to Rs 30,000.You may find it more convenient and cheaper to finance the property out of your own resources. But do remember, you would be losing the tax shelter on account of the deduction available as well as the tax rebate. You can claim a rebate for housing loan only on producing the interest certificate from the lending institution. Taking a loan from a family member or a friend, who may get you a loan at cheaper rate of interest, or no interest at all, but will not qualify for such deductions. Only loans taken and interest paid thereon, to specified financial institutions which offer housing loans, qualify for deduction under the Income Tax Act, 1961.If the loan is jointly taken by you and your spouse, you both are entitled to tax benefits. Since both will be claiming the deductions and rebate, you will have to approach the financial institution and ask for a certificate. This certificate will state how much of the loan is your responsibility and how much you are contributing towards the repayment. Your tax deduction and rebate can be calculated based on this amount.
Loans are very important for all of us to realize some of our major dreams in time. We all look forward different kinds of benefits from loans we take. Of course it may be less interest rate, low processing fee, easy documentation, time taken to release the loan and finally, the very important thing we expect from a loan is Tax Benefit.
Tax benefits from loans are in different types and even it depends on the nature of loan taken. We take loan for personal use or to fund for our children’s education or construction of our house. We don’t get any tax benefit from the loan taken for our personal use. But of course we can claim tax exemption on the loan taken for education and house construction. As I have posted an article on Tax Benefits on Educational Loan, now I am giving you the complete details of tax benefits which can be availed on Home loan or the loan taken to construct a house.Nowadays, it is very difficult to fund the entire amount for your house construction, because of skyrocketing real estate prices and construction costs. Therefore, we all take home loans from different banks at different rate of interest. It is again very difficult to repay the loan, but if you do your financial planning and tax planning properly, you can save a huge amount legally by considering the prevailing tax laws.According to the income tax laws applicable, the interest paid on the capital borrowed for the acquisition or construction of house property is eligible for deduction up to the maximum limit of Rs 150000 per annum. You also get a 20% rebate on repayment of principal of the housing loan per annum. While this was earlier subject to a maximum of Rs 10,000, it is now Rs 1,00,000 and people can avail this benefit under section 80c of the income tax Act.Points to be considered:You should be residing in the home for which the loan is taken. If you are residing in a city but buying property in your home town to prepare for retirement, this will not be applicable. The property has to be acquired or constructed before April 1, 2003. The money should have been borrowed to construct or acquire property on or after April 1, 1999. If it was prior to this date, the deduction is only valid up to Rs 30,000.You may find it more convenient and cheaper to finance the property out of your own resources. But do remember, you would be losing the tax shelter on account of the deduction available as well as the tax rebate. You can claim a rebate for housing loan only on producing the interest certificate from the lending institution. Taking a loan from a family member or a friend, who may get you a loan at cheaper rate of interest, or no interest at all, but will not qualify for such deductions. Only loans taken and interest paid thereon, to specified financial institutions which offer housing loans, qualify for deduction under the Income Tax Act, 1961.If the loan is jointly taken by you and your spouse, you both are entitled to tax benefits. Since both will be claiming the deductions and rebate, you will have to approach the financial institution and ask for a certificate. This certificate will state how much of the loan is your responsibility and how much you are contributing towards the repayment. Your tax deduction and rebate can be calculated based on this amount.
Home Insurance
Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of its use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home.
The cost of homeowners insurance often depends on what it would cost to replace the house and which additional riders—additional items to be insured—are attached to the policy. The insurance policy itself is a lengthy contract, and names what will and what will not be paid in the case of various events. Typically, claims due to earthquakes, floods, "Acts of God", or war (whose definition typically includes a nuclear explosion from any source) are excluded. Special insurance can be purchased for these possibilities, including flood insurance and earthquake insurance. Insurance must be updated to the present and existing value at whatever inflation up or down, and an appraisal paid by the insurance company will be added on to the policy premium.
The home insurance policy is usually a term contract—a contract that is in effect for a fixed period of time. The payment the insured makes to the insurer is called the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station, or if the house is equipped with fire sprinklers and fire alarms. Perpetual insurance, which is a type of home insurance without a fixed term, can also be obtained in certain areas.
The cost of homeowners insurance often depends on what it would cost to replace the house and which additional riders—additional items to be insured—are attached to the policy. The insurance policy itself is a lengthy contract, and names what will and what will not be paid in the case of various events. Typically, claims due to earthquakes, floods, "Acts of God", or war (whose definition typically includes a nuclear explosion from any source) are excluded. Special insurance can be purchased for these possibilities, including flood insurance and earthquake insurance. Insurance must be updated to the present and existing value at whatever inflation up or down, and an appraisal paid by the insurance company will be added on to the policy premium.
The home insurance policy is usually a term contract—a contract that is in effect for a fixed period of time. The payment the insured makes to the insurer is called the premium. The insured must pay the insurer the premium each term. Most insurers charge a lower premium if it appears less likely the home will be damaged or destroyed: for example, if the house is situated next to a fire station, or if the house is equipped with fire sprinklers and fire alarms. Perpetual insurance, which is a type of home insurance without a fixed term, can also be obtained in certain areas.
Reverse Mortgage
Reverse Mortgage
My dear readers, today I am discussing on a very interesting and a new concept in the Indian economy i.e. Reverse Mortgage. As a financial consultant, I faced many situations where my clients were very eagerly planning to build a house at least before their retirement or immediately after their retirement so that they can enjoy retired life in their own house. But, as the real estate prices are in boom and house construction materials are becoming costly, it is very difficult to construct a house. Every one between the age group of 30 to 55 or 60 always dream of owing a house at least at their retired age, but it is very difficult as they will have to procure funds for their retirement also. In today’s scenario, no one wants to depend on their children at their retired age.Therefore, people think hundred times before constructing a house by using all their lifetime savings. If they do so, they will not be having any income to live.Now, there are two options before them. One is either to construct house from their savings, other is to go for a pension scheme. At this scenario he can avail benefits of only one option. But, both are very important as they are very much related to his financial as well as emotional status.The solution for realizing both is “The Concept of Reverse Mortgage”.Reverse Mortgage can be well defined as “a scheme under which a bank or financial institution permits the owner of a house to leverage the future value of the asset in to a steady source of income”. Reverse Mortgage allows elderly people to have a steady stream of income by mortgaging self occupied property to banks or eligible financial institutions while continuing to live in and hold the title of the house till he is alive or sells the house or moves out.The Reverse Mortgage is aptly named because the payment stream is ‘reversed’. Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. In case of a regular mortgage, the borrower mortgages his existing property and uses the amount to finance the property or for any other purpose and is required to repay the loan amount in the form of Equated Monthly installments (EMI). The EMI would include the loan amount and the accumulated interest. The property mortgaged serves as a collateral security for the loan borrowed. In case of a regular mortgage the property is redeemed by repaying the loan amount within the permitted tenure during the lifetime, whereas in case of reverse mortgages the property finances a given tenure of life and is used to redeem the debt after the demise of the title holder.
In India, Reverse Mortgage is a new concept and hardly few people are aware of this. Recently, Union Finance Minister P Chidambaram in his Budget speech mooted the concept of reverse mortgage for people aged more than 60 years. This concept is new to India but quite popular in developed countries helping senior citizens to generate some cash flow. As a financial planner I personally recommend one to go for this. Because, it gives the satisfaction of living in the own house, moreover it helps to procure funds for retired life.
My dear readers, today I am discussing on a very interesting and a new concept in the Indian economy i.e. Reverse Mortgage. As a financial consultant, I faced many situations where my clients were very eagerly planning to build a house at least before their retirement or immediately after their retirement so that they can enjoy retired life in their own house. But, as the real estate prices are in boom and house construction materials are becoming costly, it is very difficult to construct a house. Every one between the age group of 30 to 55 or 60 always dream of owing a house at least at their retired age, but it is very difficult as they will have to procure funds for their retirement also. In today’s scenario, no one wants to depend on their children at their retired age.Therefore, people think hundred times before constructing a house by using all their lifetime savings. If they do so, they will not be having any income to live.Now, there are two options before them. One is either to construct house from their savings, other is to go for a pension scheme. At this scenario he can avail benefits of only one option. But, both are very important as they are very much related to his financial as well as emotional status.The solution for realizing both is “The Concept of Reverse Mortgage”.Reverse Mortgage can be well defined as “a scheme under which a bank or financial institution permits the owner of a house to leverage the future value of the asset in to a steady source of income”. Reverse Mortgage allows elderly people to have a steady stream of income by mortgaging self occupied property to banks or eligible financial institutions while continuing to live in and hold the title of the house till he is alive or sells the house or moves out.The Reverse Mortgage is aptly named because the payment stream is ‘reversed’. Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. In case of a regular mortgage, the borrower mortgages his existing property and uses the amount to finance the property or for any other purpose and is required to repay the loan amount in the form of Equated Monthly installments (EMI). The EMI would include the loan amount and the accumulated interest. The property mortgaged serves as a collateral security for the loan borrowed. In case of a regular mortgage the property is redeemed by repaying the loan amount within the permitted tenure during the lifetime, whereas in case of reverse mortgages the property finances a given tenure of life and is used to redeem the debt after the demise of the title holder.
In India, Reverse Mortgage is a new concept and hardly few people are aware of this. Recently, Union Finance Minister P Chidambaram in his Budget speech mooted the concept of reverse mortgage for people aged more than 60 years. This concept is new to India but quite popular in developed countries helping senior citizens to generate some cash flow. As a financial planner I personally recommend one to go for this. Because, it gives the satisfaction of living in the own house, moreover it helps to procure funds for retired life.
Asset Allocation
Asset allocation plays a very important role in the success of any Investors portfolio. Proper asset allocation is the key factor which keeps an Investor as an Investor even after years. My dear readers, today I am here with the detailed discussion on various key factors to be considered for the proper asset allocation, which leads an investor to the success.Asset allocation can be defined as an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.
In simple words, I can put it like this – Asset allocation is an investment strategy that seeks to balance risk and reward in your portfolio by spreading investments over several types of asset classes. The three main asset classes are equities, fixed-income, and cash and equivalents, and all have different levels of risk and return, so each will behave differently over time. I can call it as the primary tool for achieving an investor’s ideal balance of risk and rewards.
There is no simple formula that can find the right asset allocation for every individual. However, as a Financial Consultant, I can conclude asset allocation as one of the most important decisions that investors make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.
Asset-allocation mutual funds, also known as life-cycle or target-date funds are an attempt to provide investors with portfolio structures that address an investor's age, risk appetite and investment objectives with an appropriate apportionment of asset classes. However, critics of this approach point out that arriving at a standardized solution for allocating portfolio assets is problematic because individual investors require individual solutions.Strategies for proper asset allocation:As I discussed above we don’t have any standard rule for asset allocation, however as a financial consultant, I would like to give you the following suggestions out of my experience, which may help you to allocate your investments towards different asset classes successfully:-
Consider your investment needs as well as the amount can be invested.
Consider the term of your investments.
Consider the market movements and market research reports for that period as well as projections for the next few periods.
Understand the basics of different asset classes properly.
Look for long term and flexible asset allocation strategy.
Consult your financial consultant for more updates on the market and economy.
Finally, I would like to end up by saying asset allocation will yield you fruits if you review it on regular basis.
In simple words, I can put it like this – Asset allocation is an investment strategy that seeks to balance risk and reward in your portfolio by spreading investments over several types of asset classes. The three main asset classes are equities, fixed-income, and cash and equivalents, and all have different levels of risk and return, so each will behave differently over time. I can call it as the primary tool for achieving an investor’s ideal balance of risk and rewards.
There is no simple formula that can find the right asset allocation for every individual. However, as a Financial Consultant, I can conclude asset allocation as one of the most important decisions that investors make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.
Asset-allocation mutual funds, also known as life-cycle or target-date funds are an attempt to provide investors with portfolio structures that address an investor's age, risk appetite and investment objectives with an appropriate apportionment of asset classes. However, critics of this approach point out that arriving at a standardized solution for allocating portfolio assets is problematic because individual investors require individual solutions.Strategies for proper asset allocation:As I discussed above we don’t have any standard rule for asset allocation, however as a financial consultant, I would like to give you the following suggestions out of my experience, which may help you to allocate your investments towards different asset classes successfully:-
Consider your investment needs as well as the amount can be invested.
Consider the term of your investments.
Consider the market movements and market research reports for that period as well as projections for the next few periods.
Understand the basics of different asset classes properly.
Look for long term and flexible asset allocation strategy.
Consult your financial consultant for more updates on the market and economy.
Finally, I would like to end up by saying asset allocation will yield you fruits if you review it on regular basis.
Adjustable Life Insurance
Adjustable Life Insurance
I never sold any life insurance policy just because of doing some business but sold it with full of emotion and whole heartily as those policies are now securing the life of my clients.
Today, Insurance Industry brought lot of flexibilities to the people. One of such flexibility is Adjustable Life Insurance option. It is a type of insurance that allows the policy holder the flexibility to change the plan of insurance over the term of the policy. The policy holder, under adjustable life insurance can raise or lower the face amount of the policy, increase or decrease the premium and lengthen or shorten the protection period. The premium and length of time they are to be paid can be increased or decreased. Un-scheduled premiums can be paid on a lump sum basis. Premium paid on an adjusted basis can either lengthen or shorten the time of protection element will be in force as well as lengthen or shorten the period for making premium payments.
I never sold any life insurance policy just because of doing some business but sold it with full of emotion and whole heartily as those policies are now securing the life of my clients.
Today, Insurance Industry brought lot of flexibilities to the people. One of such flexibility is Adjustable Life Insurance option. It is a type of insurance that allows the policy holder the flexibility to change the plan of insurance over the term of the policy. The policy holder, under adjustable life insurance can raise or lower the face amount of the policy, increase or decrease the premium and lengthen or shorten the protection period. The premium and length of time they are to be paid can be increased or decreased. Un-scheduled premiums can be paid on a lump sum basis. Premium paid on an adjusted basis can either lengthen or shorten the time of protection element will be in force as well as lengthen or shorten the period for making premium payments.
The Power of Compounding
The Power of Compounding
Today I would like to share with you one of the interesting and heart breaking fact of investing. I am in financial Industry from quite a long time, and I have some good number of quality clients and their big accounts. When I met all these clients for the first time I shared with them the power of compounding. They were surprised and not ready to believe it at all, reason was the numbers.Now I will give you the same example, let me see whether you believe it or not:
If you start investing 20000 every year for the next 20 years, you will get 44, 80,511 at the end of 20th year, if your money gets compounded at the rate of 20% every year. The total investment is just 4 lac, but it has become 11 times of what you invested.Now tell me, Can you believe me?
Yes, little difficult but you have to, because this is the fact. You will get the clear idea if you go through the following illustration.
This illustration supports my example and now you have to agree with me.Investing – Make it a Habit:Investing is not a one time job, it is a continuous process and it requires your regular participation, contribution and review. You can’t assume anything in investing, because investing is one such job where assumptions, predictions won’t work. Therefore the only solution to become successful in investing is to become regular. The regularity in investing, tracking, evaluating and assessing the performance of different investments will help you to take the better decisions, which yields you better returns.Regularity doesn’t mean spend whole day for investing, it needs hardly 30 minutes to 1hour of your precious time. Of course, when you are spending whole day for earning some money, you have to spend at least 30 minutes to 1hour for the better management of your money. Even there are some wealth management firms and companies, who extend advisory and portfolio management services which really lessen your job a lot.Regularity in investment is very important, because the market up and downs (volatile nature) makes it very difficult to time the market. Nowadays, you can’t even think of choosing the right time to invest.Other factors support the power of compounding:You must be very careful while choosing the investment tools and even when assessing the performance of the same. You can become a successful investor by keeping the track of your investments and the market regularly.The Keys of Compounding:I would like to conclude this with; the compounding power of your investments is completely based on these 3 factors:
How much money you invest
How much time it spends growing
Its rate of growth
It's likely that the above example doesn’t reflect how you will actually do. You might start investing sooner or later. You might invest 10000 each year in your first two years, 30000 per year in later years, and more as you're able to. You might earn an average return of 15% over many decades, or perhaps your return will be 10% or 20%. You can't control every variable, but to a great degree, you can control how much you invest, how you invest, and how long you let your money grow.
One of the most important factors here is time, it's one thing that you always have to calculate, because you can invest more and expect better returns as well, but you can’t decide the time. You don't have to start investing today, or even this year. (And in fact, you shouldn't begin investing until you've got more knowledge under your belt.) But if you learn a few things now and get started soon, you can set yourself up to enjoy comfort and security for most of your life.Remember also that you can still enjoy your life while you're saving and investing. You can amass great wealth by regularly investing a portion of your income -- not all of it.
You can do it:
If you ever begin to doubt whether all this investing stuff is for you, remember these things:
You need a brain to do this -- and you have a brain.
You need time to do this, and you have time, too.
You won't have to sacrifice fun.
You won't have to save and invest every penny.
You won't have to spend hours and hours on investing every day, week or month.
You can take a small amount of money and make it a bigger amount in just a few years.
Try experimenting with compounding. You can do it the old-fashioned way, with paper and pencil, or the less old-fashioned way, with a calculator. You just start investing some money regularly that will be your spoon to taste the power of compounding.
Human Life Value
Human Life Value
Like every material object, human life also has an “economic value”. It varies from person to person depends on their individual profile. But, in India most of us have not realized or calculated our own value. Human life value is becoming more and more familiar to us with the rapid growth of insurance sector. As the competition in the insurance industry is very high, the insurance companies are using Human Life Value as one of the marketing tool.Human life value is the capitalized value of the net earning of an individual for the rest of his/her working span.
In short, Human Life Value is the present value of the total income of the individual, which is lost to the family in the event of his untimely death.Let us take an example, Mr. A aged 30, earning a gross income of Rs. 300000 today, will retire at the age of 60. Out of his monthly salary of Rs.25000, he uses Rs.5000 p.m for income tax and personal expenses.
So, his per month salary is 20000 and annual salary is 240000. Assuming a 10% growth in his income each year, he would have a net earning of Rs.1, 76, 40,000 in the next 30 years till his retirement.
The present value of this net earning discounted @8% is Rs.44, 54,884.
If he doesn’t return home today, his family will lose this amount forever. Therefore Mr. A’s human life value is Rs. 44, 54,884.Above is one way of calculating human life value, the other way of calculating Human Life Value is;Suppose, an individual earns Rs.20000 pm, his personal expenses are Rs.5000. The income he provides for his family is 15000 pm, and the annual income is Rs.180000.
What is the amount his family should deposit in a bank to earn an interest of Rs.180000, if he is not there to earn it for them?
If the family deposits Rs.22, 25,000 in a bank, they would get Rs.180000 p.a. at 8% interest. Therefore the present human life value of the person is 22, 50,000.Please note, however that I have not taken in to consideration the future income growth of the person in the second method. This is therefore, not an exact way of calculating human life value. This is only a representation to get a clear picture of human life value and its importance.Finally, my advice is to have enough life insurance cover which matches your Human Life Value.
Like every material object, human life also has an “economic value”. It varies from person to person depends on their individual profile. But, in India most of us have not realized or calculated our own value. Human life value is becoming more and more familiar to us with the rapid growth of insurance sector. As the competition in the insurance industry is very high, the insurance companies are using Human Life Value as one of the marketing tool.Human life value is the capitalized value of the net earning of an individual for the rest of his/her working span.
In short, Human Life Value is the present value of the total income of the individual, which is lost to the family in the event of his untimely death.Let us take an example, Mr. A aged 30, earning a gross income of Rs. 300000 today, will retire at the age of 60. Out of his monthly salary of Rs.25000, he uses Rs.5000 p.m for income tax and personal expenses.
So, his per month salary is 20000 and annual salary is 240000. Assuming a 10% growth in his income each year, he would have a net earning of Rs.1, 76, 40,000 in the next 30 years till his retirement.
The present value of this net earning discounted @8% is Rs.44, 54,884.
If he doesn’t return home today, his family will lose this amount forever. Therefore Mr. A’s human life value is Rs. 44, 54,884.Above is one way of calculating human life value, the other way of calculating Human Life Value is;Suppose, an individual earns Rs.20000 pm, his personal expenses are Rs.5000. The income he provides for his family is 15000 pm, and the annual income is Rs.180000.
What is the amount his family should deposit in a bank to earn an interest of Rs.180000, if he is not there to earn it for them?
If the family deposits Rs.22, 25,000 in a bank, they would get Rs.180000 p.a. at 8% interest. Therefore the present human life value of the person is 22, 50,000.Please note, however that I have not taken in to consideration the future income growth of the person in the second method. This is therefore, not an exact way of calculating human life value. This is only a representation to get a clear picture of human life value and its importance.Finally, my advice is to have enough life insurance cover which matches your Human Life Value.
FINANCIAL PLANNING
FINANCIAL PLANNING
Financial planning is the process of meeting life goals through a proper planning and management of finances. Financial planning helps us to translate our dreams and aspirations in to reality. It also helps us to provide meaning and direction to our financial decisions.
Financial planning has to be done in a proper way, so that it can be implemented effectively. The important steps to be followed while planning our finances are,
-Analyse your dreams and aspirations
-Establish the goals
-Analyse your financial status
-Analyse your emotional status
-Develop a plan for achieving the goals
-Implementing the plan
-Monitoring the plan
Analyse your dreams and aspirations
All of us have got lot many things to do in life, Moreover we are all dreaming of doing the same at the earliest .But normally we do not realise the possibilities of these dreams. In India most of the people have not analysed these dreams and the ways of realising the same.
Establish the goals
Now you have to translate your dreams and aspirations in to money. Define the time frame within which you should be able to realize your dreams. The time frame may depend on your personal goals or family goals or both together. If you think, it is difficult to meet all your goals within the specified time frame, prioritize your goals based on urgency and importance. All goals need not necessarily relate to wealth accumulation only. There could be protection goals as well.
Analyze your financial status
Analyzing financial status includes,
- An inventory of assets and liabilities (including securities holding, debts, insurance, etc)
- A description of the present arrangement for distribution of assets at death
- Estimates of your income and expenditure
- Details of your insurance coverage
Once you analyze all these relevant information of your own, you will come to know where you do stand and what your needs are.
Analyze your emotional status
Emotional status is very important, while designing a financial plan for you. It will decide your strength to take risk or not. It will throws light on your hopes, fears, values, attitudes, preferences, biases and non-financial goals.
Develop a plan for achieving your goals
The plan, which you design, should take your present financial situation to the achievement of the objectives. A comprehensive financial plan should contain an analysis of all pertinent factors relating to your financial status.
Components of a good financial plan
- your personal data
- your goals and objectives
- identification of issues and problems
- assumptions
- your balance sheet/net worth for the financial year
- cash flow management
- income tax planning
- risk management/insurance planning
- investments planning
- estate planning
A well drawn plan must be tailored to you specific goals, situation and circumstances. If additional expertise is required, you should consult with a specialist in that field to help you design the overall plan. There is more than one more way for your financial goals to be achieved. If you want to try with other ways, you can first analyze the advantages and disadvantages of each strategy. The plan should be specific. It should list what you have to do? When and with what resources?
The plan format should be such that you can easily understand and evaluate. Only once you decide that the plan well suits to your needs, you can go to the next step.
Implementing the plan
Merely designing a plan, no matter how sound, does not constitute financial planning. A financial plan is useful to you only if it is put in to action. You have to ensure that the implementation is carried out in the manner and in accordance with the plan designed.
Monitoring the plan
Periodic reviews are the best form of monitoring. Of course, you should keep flexibility for a review if circumstances warrant. Following are three aspects to look at in a review:-
- the performance of what has been implemented,
- changes in the personal and financial situation and objectives,
- changes in the environment (regulations, financial, economic)
If you are on track to meet your financial goals nothing else needs to be done. If that is not the case, a revision is necessary. Revision process will involve the same above discussed steps but will take lesser time.
Financial planning is the process of meeting life goals through a proper planning and management of finances. Financial planning helps us to translate our dreams and aspirations in to reality. It also helps us to provide meaning and direction to our financial decisions.
Financial planning has to be done in a proper way, so that it can be implemented effectively. The important steps to be followed while planning our finances are,
-Analyse your dreams and aspirations
-Establish the goals
-Analyse your financial status
-Analyse your emotional status
-Develop a plan for achieving the goals
-Implementing the plan
-Monitoring the plan
Analyse your dreams and aspirations
All of us have got lot many things to do in life, Moreover we are all dreaming of doing the same at the earliest .But normally we do not realise the possibilities of these dreams. In India most of the people have not analysed these dreams and the ways of realising the same.
Establish the goals
Now you have to translate your dreams and aspirations in to money. Define the time frame within which you should be able to realize your dreams. The time frame may depend on your personal goals or family goals or both together. If you think, it is difficult to meet all your goals within the specified time frame, prioritize your goals based on urgency and importance. All goals need not necessarily relate to wealth accumulation only. There could be protection goals as well.
Analyze your financial status
Analyzing financial status includes,
- An inventory of assets and liabilities (including securities holding, debts, insurance, etc)
- A description of the present arrangement for distribution of assets at death
- Estimates of your income and expenditure
- Details of your insurance coverage
Once you analyze all these relevant information of your own, you will come to know where you do stand and what your needs are.
Analyze your emotional status
Emotional status is very important, while designing a financial plan for you. It will decide your strength to take risk or not. It will throws light on your hopes, fears, values, attitudes, preferences, biases and non-financial goals.
Develop a plan for achieving your goals
The plan, which you design, should take your present financial situation to the achievement of the objectives. A comprehensive financial plan should contain an analysis of all pertinent factors relating to your financial status.
Components of a good financial plan
- your personal data
- your goals and objectives
- identification of issues and problems
- assumptions
- your balance sheet/net worth for the financial year
- cash flow management
- income tax planning
- risk management/insurance planning
- investments planning
- estate planning
A well drawn plan must be tailored to you specific goals, situation and circumstances. If additional expertise is required, you should consult with a specialist in that field to help you design the overall plan. There is more than one more way for your financial goals to be achieved. If you want to try with other ways, you can first analyze the advantages and disadvantages of each strategy. The plan should be specific. It should list what you have to do? When and with what resources?
The plan format should be such that you can easily understand and evaluate. Only once you decide that the plan well suits to your needs, you can go to the next step.
Implementing the plan
Merely designing a plan, no matter how sound, does not constitute financial planning. A financial plan is useful to you only if it is put in to action. You have to ensure that the implementation is carried out in the manner and in accordance with the plan designed.
Monitoring the plan
Periodic reviews are the best form of monitoring. Of course, you should keep flexibility for a review if circumstances warrant. Following are three aspects to look at in a review:-
- the performance of what has been implemented,
- changes in the personal and financial situation and objectives,
- changes in the environment (regulations, financial, economic)
If you are on track to meet your financial goals nothing else needs to be done. If that is not the case, a revision is necessary. Revision process will involve the same above discussed steps but will take lesser time.
Tax Benefits on Educational Loan
Tax Benefits on Educational Loan
I always think of saving my readers money to the maximum through all possible ways. So, today I am trying to give you the complete details of tax laws applicable for educational loan and the interest payable on it. As I have posted articles on Tax Planning and Tax rates for Individuals for the Financial Year 2007-08, here I am not discussing those things again. I will concentrate particularly on the tax benefits, which can be availed on Educational Loan.
Educational Loan means the loan taken for pursuing higher education. The term "higher education" would mean graduate or postgraduate course in engineering, medicine, management or postgraduate course in applied sciences or pure sciences, including mathematics and statistics.
The educational loan must have been taken from a financial institution or any approved charitable institution for the purpose of pursuing higher education, so that it will be eligible for tax benefit under prevailed tax laws.
You will get the tax benefit on an education loan only if the loan is in your name and is taken for the purpose of higher education of yourself, your spouse or your children. Loan taken for the higher education of siblings (brother or sister) are not covered in this regard.
You can claim tax benefit under section 80E of Income Tax Act of 1961. The Finance Act, 2005 has substituted Section 80-E, whereby only the interest on loan taken for higher education is eligible for deduction as against the earlier provision which allowed deduction in respect of repayment of loan.
The tax benefit can be availed only on the interest paid not on the principal. Earlier, the lesser of the two amounts were eligible for tax deduction: total amount (includes principal repaid and interest paid) paid during the year or Rs 40,000. But now it has been changed and you can claim only the entire interest paid on educational loan from your taxable income without any limit. These deductions are available only for a period of eight years starting from the year in which you start paying the interest.
Do remember that you cannot claim tax deductions if you have taken loan from your employer or family, or friends. You can get tax benefits only if the loan is from a financial institution, bank or approved charitable institution. Do remember, repayments on your education loan are NOT covered under Section 80C. As mentioned above, they are covered under Section 80E of the Income Tax Act.
You can utilise the benefit of tax exemption under this Act to the maximum, if your Financial Planning is effective.
For more details on the same, mail me on aman1675@hotmail.com
I always think of saving my readers money to the maximum through all possible ways. So, today I am trying to give you the complete details of tax laws applicable for educational loan and the interest payable on it. As I have posted articles on Tax Planning and Tax rates for Individuals for the Financial Year 2007-08, here I am not discussing those things again. I will concentrate particularly on the tax benefits, which can be availed on Educational Loan.
Educational Loan means the loan taken for pursuing higher education. The term "higher education" would mean graduate or postgraduate course in engineering, medicine, management or postgraduate course in applied sciences or pure sciences, including mathematics and statistics.
The educational loan must have been taken from a financial institution or any approved charitable institution for the purpose of pursuing higher education, so that it will be eligible for tax benefit under prevailed tax laws.
You will get the tax benefit on an education loan only if the loan is in your name and is taken for the purpose of higher education of yourself, your spouse or your children. Loan taken for the higher education of siblings (brother or sister) are not covered in this regard.
You can claim tax benefit under section 80E of Income Tax Act of 1961. The Finance Act, 2005 has substituted Section 80-E, whereby only the interest on loan taken for higher education is eligible for deduction as against the earlier provision which allowed deduction in respect of repayment of loan.
The tax benefit can be availed only on the interest paid not on the principal. Earlier, the lesser of the two amounts were eligible for tax deduction: total amount (includes principal repaid and interest paid) paid during the year or Rs 40,000. But now it has been changed and you can claim only the entire interest paid on educational loan from your taxable income without any limit. These deductions are available only for a period of eight years starting from the year in which you start paying the interest.
Do remember that you cannot claim tax deductions if you have taken loan from your employer or family, or friends. You can get tax benefits only if the loan is from a financial institution, bank or approved charitable institution. Do remember, repayments on your education loan are NOT covered under Section 80C. As mentioned above, they are covered under Section 80E of the Income Tax Act.
You can utilise the benefit of tax exemption under this Act to the maximum, if your Financial Planning is effective.
For more details on the same, mail me on aman1675@hotmail.com
Wealth Management - Make your money work for you
Wealth Management - Make your money work for you
India’s rapid economic growth with the support of IT, BT, Manufacturing and financial sectors has provided an immense opportunity to Indians for investing their money in profitable ventures and to earn high returns. Nowadays getting 30 - 40 % return on the investment has become very common. But, for all of us choosing the right investment avenue has become very difficult. It’s all about doing lot of research work to get the complete insight of the particular industry or company or a fund and to allocate the right percentage of assets in different sectors after considering the risk and return ratios of all the sectors.Choosing the Right investment avenue does not depend only on the risk and returns ratios, but also on the individual needs of ours. Our needs may be to built a new house, accumulate money for children’s education or marriage, buy a new car, going for vacation or accumulating money for retirement etc. Accumulating funds for all these important needs are a very critical job, where in we have to consider lot of constraints and barriers. The constraints and barriers may be like low income, less period of time, low returns, high inflation rates etc. Therefore, to plan our financial needs in the better way we must have the knowledge of effective wealth management or an expert financial consultant who can help us.Wealth management is a term that originated in US during 1990s. It can be regarded as a sophisticated form of private banking that provides various types of investment, banking and insurance services which suits our individual financial needs.Wealth management can also be classified in to advanced form of financial planning providing individuals and families with services such as private banking, estate planning, asset management, taxation advice and portfolio management. Accordingly, wealth management encompasses asset management, client advisory services and the distribution of investment products.
Wealth Management helps us through:
1) It help us to manage wealth in a better way,
2) We need not to spend much time in managing our wealth; we can take the help of an expert wealth manager.
3) An effective wealth management and an expert wealth manager avoid us from complicated transactions and a lot of paper work of the banks.
4) It provides proper planning of estate or investment of the assets based on our personal criteria and financial goals.
5) It helps to develop an appropriate strategy to achieve financial goals.
6) It helps to analyze our financial position, balances and asset allocation, which lead to maintain track and is positioned for success.
Conclusion:
As I have discussed in my earlier articles - Financial Planning, Investment Planning, Investment Products - wealth management or financial planning can be done with different investment tools and instruments available in the market, but it will give us the better yield only when it is planned and allocated in the right proportion. In our busy mechanical life, we may not be able to spend more time for managing our wealth. Therefore it is advisable to take the advice, guidance and support of an expert wealth manager who can help us with his new and potential research based ideas and techniques.
Investment products
Investment products
Investment products are the instruments, where one can invest his money to earn profits, interests, dividends and bonus depending upon the nature of the investment made. Investment products have got lot of demand in the market, because the inflation rate, GDP growth and economic growth of the country have made it a need of everyone.But unfortunately, most of us are not aware of all the investment products available in the market. I think this made the portfolio allocation improper. A portfolio will become effective and profit oriented, only when it considers all the investment avenues available in the market.
To give you a clear picture of different investment products available in the market, I am writing this article with lot of new stuffs and research I personally experienced.There are large numbers of investment products available for investment to you. These can be classified as:-a) Real Assets: bullion, real estate, paintings, antiques, gems etc.b) Paper Assets: equity shares, debt instruments, bank deposit etc.Following are the Investment products available in the market:1. Employee Provident Fund2. Public Provident Fund3. National Savings Certificate4. Long term Government Securities5. Bank Deposits6. Infrastructure Bonds7. Life insurance Products8. Pension Products9. Mutual Funds10.Stock Market11.IPO’s12.Commodity Market1. Employee Provident Fund (EPF):EPF take care need of fund for Retirement, Medical emergencies, House purchase, family obligations, education of children and buying an insurance policy. Your contribution in EPF scheme, which is 12% of basic salary generally, builds a fund available when you retire. The fund is available for some other specific purposes also like, purchasing land or house repaying loan for the same, children education and marriage etc. Employer contribution is also 12%, a part of which goes towards pension fund. An employee can contribute more than 12% also towards building up the fund.2. Public Provident Fund:Public provident fund or PPF offers good returns with safety and flexibility that is why it is one of the most popular tax saving product.PPF account can be opened with specified branches of post office or nationalized bank on self or family members’ name. Account has 15 years term that can be extended in the blocks of 5 years after completion of the term. It offers 8% per annum yearly compounded interest. Contribution can be minimum Rs.500 to maximum of Rs.70000 in a year; that can be deposited monthly or yearly.Apart from qualifying for section 80C, interest earned is free, maturity withdrawals are tax-free and it cannot be attached under the decree of any court of law.From PPF, Loan can avail from the third year to sixth year up to 25% of the amount available in the preceding second year. Partial withdrawals can be made once every year at any time after sixth year. The amount of withdrawal is limited to 50%of the balance at credit at the end of 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower.3. National Savings Certificate:National savings certificate (NSC) remains the on shelf tax savings product. Investment in NSC can be made at specified post offices, in denomination of Rs.100, Rs.500, Rs.1000, Rs.5000 and Rs.10000 without any upper cap on investment. The certificate matures in six years and pays 8% half yearly compounded interest. Maturity proceeds of NSC are completely tax free. Premature encashment of NSCs are not allowed, however these can be kept as security to avail loan from banks. Interest earned on NSC is also an investment under section 80C.4. Long Term Government Securities:Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments.Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. The salient features on T-Bills are:These are zero coupon bonds, which are issued at discount to face value and are redeemed at par.No tax is deducted at source and there is minimal default risk.The maximum tenure of these securities is one year.
The different types of Government Securities are:
a) Dated securities: These securities generally carry a fixed coupon (interest) rate and have a fixed maturity period. E.g., an 11.40% GOI 2008 G-sec. In this case 11.40% is the coupon rate and it is maturing in the year 2008. The salient features of Dated Securities are:These are issued at the face value.The rate of interest and tenure of the security is fixed at the time of issuance and does not change till maturity.The interest payment is made on half yearly rest.On maturity the security is redeemed at face value.
b) Zero coupon bonds: These securities are issued at a discount to the face value and redeemed at par. i.e. they are issued at below face value and redeemed at face value. The salient features of Zero Coupon Bonds are:The tenure of these securities is fixed.No interest is paid on these securities.The return on these securities is a function of time and the discount to face value.
c) Partly Paid Stock:In these securities the payment of principal is made in installments over a given period of time. The salient features of Partly Paid Stock are:These types of securities are issued at face value and the principal amount is paid in installments over a period of time.The rate of interest and tenure of the security is fixed at the time of issuance and does not change till maturity.The interest payment is made on half yearly rest.These are redeemed at par on maturity.
d) Floating Rate Bonds:These types of securities have a variable interest rate, which is calculated as a fixed percentage over a benchmark rate. The interest rate on these securities changes in sync with the benchmark rate. The salient features of Floating Rate Bonds are:These are issued at the face value.The interest rate is fixed as a percentage over a predefined benchmark rate. The benchmark rate may be a bank rate, Treasury bill rate etc.The interest payment is made on half yearly rests.The security is redeemed at par on maturity, which is fixed.
e) Capital indexed bonds:These securities carry an interest rate, which is calculated as a fixed percentage over the wholesale price index. The salient features of Capital Indexed Bonds are:These securities are issued at face value.The interest rate changes according to the change in the Wholesale price index, as the interest rate is fixed as a percentage over the wholesale price index.The maturity of these securities is fixed and the interest is payable on half yearly rests.The principal redemption is linked to the Wholesale price index.
5. Bank Deposits:Bank deposits are the most popular among fixed income investors. Safety, liquidity and convenience are being the prime reasons for gaining the investors confidence in banks; apart from safety of deposits. Bank fixed deposits are new entrants in 80C league. These form part of overall limit of Rs.100000 for deposits tenure of 5 years or more. However, interest on such investment is not tax exempted.6. Infrastructure Bonds:These bonds are offered by various financial institutions. Lock in period of three years is one of the attractions for investing in these bonds. Institutions like ICICI, IDBI have been issuing these bonds regularly.Infrastructure bonds are essentially for those who do not care to study better investment avenues and would be satisfied with bank fixed deposits. Moreover, they being issued by infrastructure companies (and not the government) are quite unsecured. Some study in the financial markets can be well worth the effort.7. Life insurance Products:Investing in life insurance has got a new look with the launch of ULIP’s (Unit Linked Life Insurance Plans) in the Industry. Yesteryear's we had the conception that insurance is all about life cover, risk cover, death benefit. But, now the rapid growth evidencing the entry of private players in to the market has created the wave of ULIP’s, which now has become one of the major investment avenues for Indian Investors.Following are the broad categories of insurance plans available in the market:1. Whole life policies2. Endowment Policies3. Term policies4. Money Back Policies5. Specialized Policies6. Single Premium Policies7. Unit Linked PoliciesThe tax benefit on investments in life insurance up to Rs.100000 can be availed in a financial years.8. Pension Products:A pension is a long term savings plan. Monies saved build up a retirement fund. This fund provides a source of regular money to live on in your retirement. It is one of the most tax efficient ways to save money.When people are investing for the long term, it's important you have the freedom to choose how and where to invest your money - and the option to change your choice of investments you need or want to.Most people need a pension because:People are living longer: retirement could make up a third of your life.They'll need money for their increased leisure time during retirement.9. Mutual Funds:A mutual fund is a trust, which combines the investments of various investors having similar financial goals. The trust issues the units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, according to the objectives of the scheme. The investment provides return in the form of dividends, interests and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds.Investment in mutual funds is advantageous for good number of reasons; Professional management of funds, diversification of investments, tax benefits, liquidity are few to mentioned here.When a new scheme is launched, funds are available to subscription at par value, known as NFO. Subsequent to NFO, units are available for selling and repurchase based on Net Asset Value or NAV. NAV is market value of all assets net of liabilities. NAV per unit is a common performance indicator of the fund.10. Stock Market:Actively investing in stocks is not as complicated or as expensive as it may seem. But it is not without its risks or its costs. It is not only the wealthy who can enjoy the benefits of investing in shares. In fact, you may already own shares indirectly through a unit trust, a life insurance policy, a retirement annuity or by being a member of a retirement fund. But if you have about R5 000 to invest, you can also invest directly in shares, in order to claim a stake in some of the wealth that is generated on our local stock market.The stock market can be a great source of confusion for many people. The average person generally falls into one of two categories. The first believe investing is a form of gambling; they are certain that if you invest, you will more than likely end up losing your money. Often these fears are driven by the personal experiences of family members and friends who suffered similar fates or lived through the Great Depression. These feelings are not ground in facts and are the result of personal experience. Someone who believes along this line of thinking simply does not understand what the stock market is or why it exists.The second category consists of those who know they should invest for the long-run, but don’t know where to begin. Many feel like investing is some sort of black-magic that only a few people hold the key to. More often than not, they leave their financial decisions up to professionals, and cannot tell you why they own a particular stock or mutual fund. Their investment style is blind faith or limited to “this stock is going up. We should buy it.” This group is in far more danger than the first. They invest like the masses and then wonder why their results are mediocre (or in some cases, devastating).Investing in stock market with long term vision and patience will always yield you the best.
11. IPO’s:In an IPO, or initial public offering, a company issues its shares to the public for the first time. Often the issuing companies are growing upstarts that have previously relied on venture capitalists to provide their funding.The investment bank managing the deal sets an offering price for the stock of the company. It then doles out almost all the available shares to institutions and other wealthy investors before the stock begins trading.Average investors have traditionally had a rough time obtaining parts of IPO allocations. They usually can't get in until the stock begins trading. And if the stock opens above its offering price, investors usually wind up buying the stock at the same time the institutions that originally received the stock are selling it.Investing in IPO’s is very profitable, if you have done enough research wok before buying an IPO of any company.
12. Commodity Market:Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized Contracts. Commodity market is one of the upcoming investment avenues for Indian investors. One can expect huge profit from commodity market, if he is doing sufficient research work before investing in any commodities.
Investment products
Investment products
Investment products are the instruments, where one can invest his money to earn profits, interests, dividends and bonus depending upon the nature of the investment made. Investment products have got lot of demand in the market, because the inflation rate, GDP growth and economic growth of the country have made it a need of everyone.But unfortunately, most of us are not aware of all the investment products available in the market. I think this made the portfolio allocation improper. A portfolio will become effective and profit oriented, only when it considers all the investment avenues available in the market.
To give you a clear picture of different investment products available in the market, I am writing this article with lot of new stuffs and research I personally experienced.There are large numbers of investment products available for investment to you. These can be classified as:-a) Real Assets: bullion, real estate, paintings, antiques, gems etc.b) Paper Assets: equity shares, debt instruments, bank deposit etc.Following are the Investment products available in the market:1. Employee Provident Fund2. Public Provident Fund3. National Savings Certificate4. Long term Government Securities5. Bank Deposits6. Infrastructure Bonds7. Life insurance Products8. Pension Products9. Mutual Funds10.Stock Market11.IPO’s12.Commodity Market1. Employee Provident Fund (EPF):EPF take care need of fund for Retirement, Medical emergencies, House purchase, family obligations, education of children and buying an insurance policy. Your contribution in EPF scheme, which is 12% of basic salary generally, builds a fund available when you retire. The fund is available for some other specific purposes also like, purchasing land or house repaying loan for the same, children education and marriage etc. Employer contribution is also 12%, a part of which goes towards pension fund. An employee can contribute more than 12% also towards building up the fund.2. Public Provident Fund:Public provident fund or PPF offers good returns with safety and flexibility that is why it is one of the most popular tax saving product.PPF account can be opened with specified branches of post office or nationalized bank on self or family members’ name. Account has 15 years term that can be extended in the blocks of 5 years after completion of the term. It offers 8% per annum yearly compounded interest. Contribution can be minimum Rs.500 to maximum of Rs.70000 in a year; that can be deposited monthly or yearly.Apart from qualifying for section 80C, interest earned is free, maturity withdrawals are tax-free and it cannot be attached under the decree of any court of law.From PPF, Loan can avail from the third year to sixth year up to 25% of the amount available in the preceding second year. Partial withdrawals can be made once every year at any time after sixth year. The amount of withdrawal is limited to 50%of the balance at credit at the end of 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower.3. National Savings Certificate:National savings certificate (NSC) remains the on shelf tax savings product. Investment in NSC can be made at specified post offices, in denomination of Rs.100, Rs.500, Rs.1000, Rs.5000 and Rs.10000 without any upper cap on investment. The certificate matures in six years and pays 8% half yearly compounded interest. Maturity proceeds of NSC are completely tax free. Premature encashment of NSCs are not allowed, however these can be kept as security to avail loan from banks. Interest earned on NSC is also an investment under section 80C.4. Long Term Government Securities:Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments.Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. The salient features on T-Bills are:These are zero coupon bonds, which are issued at discount to face value and are redeemed at par.No tax is deducted at source and there is minimal default risk.The maximum tenure of these securities is one year.
The different types of Government Securities are:
a) Dated securities: These securities generally carry a fixed coupon (interest) rate and have a fixed maturity period. E.g., an 11.40% GOI 2008 G-sec. In this case 11.40% is the coupon rate and it is maturing in the year 2008. The salient features of Dated Securities are:These are issued at the face value.The rate of interest and tenure of the security is fixed at the time of issuance and does not change till maturity.The interest payment is made on half yearly rest.On maturity the security is redeemed at face value.
b) Zero coupon bonds: These securities are issued at a discount to the face value and redeemed at par. i.e. they are issued at below face value and redeemed at face value. The salient features of Zero Coupon Bonds are:The tenure of these securities is fixed.No interest is paid on these securities.The return on these securities is a function of time and the discount to face value.
c) Partly Paid Stock:In these securities the payment of principal is made in installments over a given period of time. The salient features of Partly Paid Stock are:These types of securities are issued at face value and the principal amount is paid in installments over a period of time.The rate of interest and tenure of the security is fixed at the time of issuance and does not change till maturity.The interest payment is made on half yearly rest.These are redeemed at par on maturity.
d) Floating Rate Bonds:These types of securities have a variable interest rate, which is calculated as a fixed percentage over a benchmark rate. The interest rate on these securities changes in sync with the benchmark rate. The salient features of Floating Rate Bonds are:These are issued at the face value.The interest rate is fixed as a percentage over a predefined benchmark rate. The benchmark rate may be a bank rate, Treasury bill rate etc.The interest payment is made on half yearly rests.The security is redeemed at par on maturity, which is fixed.
e) Capital indexed bonds:These securities carry an interest rate, which is calculated as a fixed percentage over the wholesale price index. The salient features of Capital Indexed Bonds are:These securities are issued at face value.The interest rate changes according to the change in the Wholesale price index, as the interest rate is fixed as a percentage over the wholesale price index.The maturity of these securities is fixed and the interest is payable on half yearly rests.The principal redemption is linked to the Wholesale price index.
5. Bank Deposits:Bank deposits are the most popular among fixed income investors. Safety, liquidity and convenience are being the prime reasons for gaining the investors confidence in banks; apart from safety of deposits. Bank fixed deposits are new entrants in 80C league. These form part of overall limit of Rs.100000 for deposits tenure of 5 years or more. However, interest on such investment is not tax exempted.6. Infrastructure Bonds:These bonds are offered by various financial institutions. Lock in period of three years is one of the attractions for investing in these bonds. Institutions like ICICI, IDBI have been issuing these bonds regularly.Infrastructure bonds are essentially for those who do not care to study better investment avenues and would be satisfied with bank fixed deposits. Moreover, they being issued by infrastructure companies (and not the government) are quite unsecured. Some study in the financial markets can be well worth the effort.7. Life insurance Products:Investing in life insurance has got a new look with the launch of ULIP’s (Unit Linked Life Insurance Plans) in the Industry. Yesteryear's we had the conception that insurance is all about life cover, risk cover, death benefit. But, now the rapid growth evidencing the entry of private players in to the market has created the wave of ULIP’s, which now has become one of the major investment avenues for Indian Investors.Following are the broad categories of insurance plans available in the market:1. Whole life policies2. Endowment Policies3. Term policies4. Money Back Policies5. Specialized Policies6. Single Premium Policies7. Unit Linked PoliciesThe tax benefit on investments in life insurance up to Rs.100000 can be availed in a financial years.8. Pension Products:A pension is a long term savings plan. Monies saved build up a retirement fund. This fund provides a source of regular money to live on in your retirement. It is one of the most tax efficient ways to save money.When people are investing for the long term, it's important you have the freedom to choose how and where to invest your money - and the option to change your choice of investments you need or want to.Most people need a pension because:People are living longer: retirement could make up a third of your life.They'll need money for their increased leisure time during retirement.9. Mutual Funds:A mutual fund is a trust, which combines the investments of various investors having similar financial goals. The trust issues the units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, according to the objectives of the scheme. The investment provides return in the form of dividends, interests and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds.Investment in mutual funds is advantageous for good number of reasons; Professional management of funds, diversification of investments, tax benefits, liquidity are few to mentioned here.When a new scheme is launched, funds are available to subscription at par value, known as NFO. Subsequent to NFO, units are available for selling and repurchase based on Net Asset Value or NAV. NAV is market value of all assets net of liabilities. NAV per unit is a common performance indicator of the fund.10. Stock Market:Actively investing in stocks is not as complicated or as expensive as it may seem. But it is not without its risks or its costs. It is not only the wealthy who can enjoy the benefits of investing in shares. In fact, you may already own shares indirectly through a unit trust, a life insurance policy, a retirement annuity or by being a member of a retirement fund. But if you have about R5 000 to invest, you can also invest directly in shares, in order to claim a stake in some of the wealth that is generated on our local stock market.The stock market can be a great source of confusion for many people. The average person generally falls into one of two categories. The first believe investing is a form of gambling; they are certain that if you invest, you will more than likely end up losing your money. Often these fears are driven by the personal experiences of family members and friends who suffered similar fates or lived through the Great Depression. These feelings are not ground in facts and are the result of personal experience. Someone who believes along this line of thinking simply does not understand what the stock market is or why it exists.The second category consists of those who know they should invest for the long-run, but don’t know where to begin. Many feel like investing is some sort of black-magic that only a few people hold the key to. More often than not, they leave their financial decisions up to professionals, and cannot tell you why they own a particular stock or mutual fund. Their investment style is blind faith or limited to “this stock is going up. We should buy it.” This group is in far more danger than the first. They invest like the masses and then wonder why their results are mediocre (or in some cases, devastating).Investing in stock market with long term vision and patience will always yield you the best.
11. IPO’s:In an IPO, or initial public offering, a company issues its shares to the public for the first time. Often the issuing companies are growing upstarts that have previously relied on venture capitalists to provide their funding.The investment bank managing the deal sets an offering price for the stock of the company. It then doles out almost all the available shares to institutions and other wealthy investors before the stock begins trading.Average investors have traditionally had a rough time obtaining parts of IPO allocations. They usually can't get in until the stock begins trading. And if the stock opens above its offering price, investors usually wind up buying the stock at the same time the institutions that originally received the stock are selling it.Investing in IPO’s is very profitable, if you have done enough research wok before buying an IPO of any company.
12. Commodity Market:Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized Contracts. Commodity market is one of the upcoming investment avenues for Indian investors. One can expect huge profit from commodity market, if he is doing sufficient research work before investing in any commodities.
Investment products are the instruments, where one can invest his money to earn profits, interests, dividends and bonus depending upon the nature of the investment made. Investment products have got lot of demand in the market, because the inflation rate, GDP growth and economic growth of the country have made it a need of everyone.But unfortunately, most of us are not aware of all the investment products available in the market. I think this made the portfolio allocation improper. A portfolio will become effective and profit oriented, only when it considers all the investment avenues available in the market.
To give you a clear picture of different investment products available in the market, I am writing this article with lot of new stuffs and research I personally experienced.There are large numbers of investment products available for investment to you. These can be classified as:-a) Real Assets: bullion, real estate, paintings, antiques, gems etc.b) Paper Assets: equity shares, debt instruments, bank deposit etc.Following are the Investment products available in the market:1. Employee Provident Fund2. Public Provident Fund3. National Savings Certificate4. Long term Government Securities5. Bank Deposits6. Infrastructure Bonds7. Life insurance Products8. Pension Products9. Mutual Funds10.Stock Market11.IPO’s12.Commodity Market1. Employee Provident Fund (EPF):EPF take care need of fund for Retirement, Medical emergencies, House purchase, family obligations, education of children and buying an insurance policy. Your contribution in EPF scheme, which is 12% of basic salary generally, builds a fund available when you retire. The fund is available for some other specific purposes also like, purchasing land or house repaying loan for the same, children education and marriage etc. Employer contribution is also 12%, a part of which goes towards pension fund. An employee can contribute more than 12% also towards building up the fund.2. Public Provident Fund:Public provident fund or PPF offers good returns with safety and flexibility that is why it is one of the most popular tax saving product.PPF account can be opened with specified branches of post office or nationalized bank on self or family members’ name. Account has 15 years term that can be extended in the blocks of 5 years after completion of the term. It offers 8% per annum yearly compounded interest. Contribution can be minimum Rs.500 to maximum of Rs.70000 in a year; that can be deposited monthly or yearly.Apart from qualifying for section 80C, interest earned is free, maturity withdrawals are tax-free and it cannot be attached under the decree of any court of law.From PPF, Loan can avail from the third year to sixth year up to 25% of the amount available in the preceding second year. Partial withdrawals can be made once every year at any time after sixth year. The amount of withdrawal is limited to 50%of the balance at credit at the end of 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower.3. National Savings Certificate:National savings certificate (NSC) remains the on shelf tax savings product. Investment in NSC can be made at specified post offices, in denomination of Rs.100, Rs.500, Rs.1000, Rs.5000 and Rs.10000 without any upper cap on investment. The certificate matures in six years and pays 8% half yearly compounded interest. Maturity proceeds of NSC are completely tax free. Premature encashment of NSCs are not allowed, however these can be kept as security to avail loan from banks. Interest earned on NSC is also an investment under section 80C.4. Long Term Government Securities:Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments.Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. The salient features on T-Bills are:These are zero coupon bonds, which are issued at discount to face value and are redeemed at par.No tax is deducted at source and there is minimal default risk.The maximum tenure of these securities is one year.
The different types of Government Securities are:
a) Dated securities: These securities generally carry a fixed coupon (interest) rate and have a fixed maturity period. E.g., an 11.40% GOI 2008 G-sec. In this case 11.40% is the coupon rate and it is maturing in the year 2008. The salient features of Dated Securities are:These are issued at the face value.The rate of interest and tenure of the security is fixed at the time of issuance and does not change till maturity.The interest payment is made on half yearly rest.On maturity the security is redeemed at face value.
b) Zero coupon bonds: These securities are issued at a discount to the face value and redeemed at par. i.e. they are issued at below face value and redeemed at face value. The salient features of Zero Coupon Bonds are:The tenure of these securities is fixed.No interest is paid on these securities.The return on these securities is a function of time and the discount to face value.
c) Partly Paid Stock:In these securities the payment of principal is made in installments over a given period of time. The salient features of Partly Paid Stock are:These types of securities are issued at face value and the principal amount is paid in installments over a period of time.The rate of interest and tenure of the security is fixed at the time of issuance and does not change till maturity.The interest payment is made on half yearly rest.These are redeemed at par on maturity.
d) Floating Rate Bonds:These types of securities have a variable interest rate, which is calculated as a fixed percentage over a benchmark rate. The interest rate on these securities changes in sync with the benchmark rate. The salient features of Floating Rate Bonds are:These are issued at the face value.The interest rate is fixed as a percentage over a predefined benchmark rate. The benchmark rate may be a bank rate, Treasury bill rate etc.The interest payment is made on half yearly rests.The security is redeemed at par on maturity, which is fixed.
e) Capital indexed bonds:These securities carry an interest rate, which is calculated as a fixed percentage over the wholesale price index. The salient features of Capital Indexed Bonds are:These securities are issued at face value.The interest rate changes according to the change in the Wholesale price index, as the interest rate is fixed as a percentage over the wholesale price index.The maturity of these securities is fixed and the interest is payable on half yearly rests.The principal redemption is linked to the Wholesale price index.
5. Bank Deposits:Bank deposits are the most popular among fixed income investors. Safety, liquidity and convenience are being the prime reasons for gaining the investors confidence in banks; apart from safety of deposits. Bank fixed deposits are new entrants in 80C league. These form part of overall limit of Rs.100000 for deposits tenure of 5 years or more. However, interest on such investment is not tax exempted.6. Infrastructure Bonds:These bonds are offered by various financial institutions. Lock in period of three years is one of the attractions for investing in these bonds. Institutions like ICICI, IDBI have been issuing these bonds regularly.Infrastructure bonds are essentially for those who do not care to study better investment avenues and would be satisfied with bank fixed deposits. Moreover, they being issued by infrastructure companies (and not the government) are quite unsecured. Some study in the financial markets can be well worth the effort.7. Life insurance Products:Investing in life insurance has got a new look with the launch of ULIP’s (Unit Linked Life Insurance Plans) in the Industry. Yesteryear's we had the conception that insurance is all about life cover, risk cover, death benefit. But, now the rapid growth evidencing the entry of private players in to the market has created the wave of ULIP’s, which now has become one of the major investment avenues for Indian Investors.Following are the broad categories of insurance plans available in the market:1. Whole life policies2. Endowment Policies3. Term policies4. Money Back Policies5. Specialized Policies6. Single Premium Policies7. Unit Linked PoliciesThe tax benefit on investments in life insurance up to Rs.100000 can be availed in a financial years.8. Pension Products:A pension is a long term savings plan. Monies saved build up a retirement fund. This fund provides a source of regular money to live on in your retirement. It is one of the most tax efficient ways to save money.When people are investing for the long term, it's important you have the freedom to choose how and where to invest your money - and the option to change your choice of investments you need or want to.Most people need a pension because:People are living longer: retirement could make up a third of your life.They'll need money for their increased leisure time during retirement.9. Mutual Funds:A mutual fund is a trust, which combines the investments of various investors having similar financial goals. The trust issues the units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, according to the objectives of the scheme. The investment provides return in the form of dividends, interests and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds.Investment in mutual funds is advantageous for good number of reasons; Professional management of funds, diversification of investments, tax benefits, liquidity are few to mentioned here.When a new scheme is launched, funds are available to subscription at par value, known as NFO. Subsequent to NFO, units are available for selling and repurchase based on Net Asset Value or NAV. NAV is market value of all assets net of liabilities. NAV per unit is a common performance indicator of the fund.10. Stock Market:Actively investing in stocks is not as complicated or as expensive as it may seem. But it is not without its risks or its costs. It is not only the wealthy who can enjoy the benefits of investing in shares. In fact, you may already own shares indirectly through a unit trust, a life insurance policy, a retirement annuity or by being a member of a retirement fund. But if you have about R5 000 to invest, you can also invest directly in shares, in order to claim a stake in some of the wealth that is generated on our local stock market.The stock market can be a great source of confusion for many people. The average person generally falls into one of two categories. The first believe investing is a form of gambling; they are certain that if you invest, you will more than likely end up losing your money. Often these fears are driven by the personal experiences of family members and friends who suffered similar fates or lived through the Great Depression. These feelings are not ground in facts and are the result of personal experience. Someone who believes along this line of thinking simply does not understand what the stock market is or why it exists.The second category consists of those who know they should invest for the long-run, but don’t know where to begin. Many feel like investing is some sort of black-magic that only a few people hold the key to. More often than not, they leave their financial decisions up to professionals, and cannot tell you why they own a particular stock or mutual fund. Their investment style is blind faith or limited to “this stock is going up. We should buy it.” This group is in far more danger than the first. They invest like the masses and then wonder why their results are mediocre (or in some cases, devastating).Investing in stock market with long term vision and patience will always yield you the best.
11. IPO’s:In an IPO, or initial public offering, a company issues its shares to the public for the first time. Often the issuing companies are growing upstarts that have previously relied on venture capitalists to provide their funding.The investment bank managing the deal sets an offering price for the stock of the company. It then doles out almost all the available shares to institutions and other wealthy investors before the stock begins trading.Average investors have traditionally had a rough time obtaining parts of IPO allocations. They usually can't get in until the stock begins trading. And if the stock opens above its offering price, investors usually wind up buying the stock at the same time the institutions that originally received the stock are selling it.Investing in IPO’s is very profitable, if you have done enough research wok before buying an IPO of any company.
12. Commodity Market:Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodity exchanges, in which they are bought and sold in standardized Contracts. Commodity market is one of the upcoming investment avenues for Indian investors. One can expect huge profit from commodity market, if he is doing sufficient research work before investing in any commodities.
Investor Servicing – Who will do?
Investor Servicing – Who will do?
India being one of the fastest growing economies in the world has attracted even a tea shop vendor towards the capital markets and there are hundreds of investment options for each investor, moreover thousands of middlemen’s and brokers to go through. Of course it is not at all a bad sign, butAre they all investing in the right option? Are they all getting back their money in the right time? Are they all getting the expected returns on their investments? Are they all aware of the growth of their investments?
Every investor will think thousand times before investing even a single rupee as it is his hard earned money and he invests with a strong motive of creating wealth for his future and to accomplish all his personal and family goals.
An Investment Manager or a Relationship Manager has to give the maximum service to the client after the sales to keep him updated about his investments and its growth. I am in to the finance industry from quiet a long time and all my clients are happy with the services what I was providing and what my team is providing now.
After sales services for an investor is as important as medicines to a patient after operation. In Indian Investment market 95% of the business is happening through 5% of financial consultants and 5% of the business is happening through remaining 95% of the financial consultants.
I always feel that the mistake is not only from the sales people, even the investors are also the reason for this spoiling, baseless, futureless and misleading growth of the industry and for the growth of unprofessional finance people. Creating a rule takes years but breaking the same will not take even a minute as it can be started by even one individual.
This discussion can be continued in 100s of pages, but that will not give us the solution. All we need to do now is:
1. Investor Education and Awareness Programs has to be conducted
2. Manpower Management and Development Initiatives
3. Strengthening of Investor Grievance Cells
4. Strong Law and Order support to keep up ethics in the Industry
5. Initiatives has to be taken to increase transparency in all the transactions one does
6. Lot more has to be done to strengthens online investor support and compliance system
Above said things cannot be implemented by one or two. There should be a common Revolution by all the investors to kill the words like Miss selling, miss guiding and poor after sales services kind of activities. No body has to enter roads to do this; we can do this if we know how to face people. We spend 24*7 for money making but we don’t even spend few hours in a week to manage our hard-earned money effectively and profitably. Before making even a single investment decision, make sure that you are thorough with at least the basics of the concept/plan.
I wish you all the very best for all your future investments and I am open to receive your queries pertaining to investments anytime through
Mob – 09312958739
Email – aman1675@hotmail.com
CRR (Cash Reserve Ratio)
CRR (Cash Reserve Ratio)
Banks are more familiar to people these days than food malls, shopping malls as every activity of maximum number of people is been controlled by banks. Banks play a significant role in ones life and the contribution of banks to the nation and the economy is immense. There are hundreds of things about banks which a common man does not know. One such concept is CRR. We all read in the news papers that RBI has increased the CRR limits and the interest rate will go up. But what is the correlation between CRR and the interest rates? What is CRR? Why do they increase or decrease it? Like this, there are many questions. Here is a small article to answer all your queries relating to CRR.
Cash Reserve Ratio mandates that all commercial banks maintain a certain percentage of their total demand and time liabilities with themselves or with the Reserve Bank of India (RBI). This could be in the form of cash reserves or by way of a current account with the RBI. The objective is to ensure the safety and liquidity of the deposits with the banks. The percentage upper limit of the CRR is 15% while there is no lower limit. What is a liability (like in time and demand liability)? Here, a liability is simply a deposit account with a bank. What we call a deposit is called a liability by the bank as the latter would have to repay us. In other worlds, our deposit is our loan to the bank (and hence the interest paid by the bank)
There are two kinds of liabilities (i.e. deposits)
1 Time liability A time liability is a type of account from which you can withdraw your money only after a specified period of time. Since this kind of an account has a specified term, it is also called a ‘term liability’. An example is a fixed deposit account.
2 Demand liabilityA demand liability is an account from which you can withdraw your money on demand. Example : saving account and current account
Every bank has to keep a said percentage of such liabilities with RBI. The current CRR is 6.5%. The RBI uses the CRR as an effective tool to increase or decrease money supply in the economy. This way the central bank can also control inflation. How does this work?
CRR as a tool to control inflationLet us say the RBI increase the CRR. This would mean that banks would have to keep more money with the RBI. This, in turn, would reduce the money available with them, thus bringing down the money supply in the market. A lower money supply would lead to an increase in interest rates.
Now look at the other side. A reduction in CRR would put more money in the coffers of the banks. As the money supply rises, interest rates decrease.
What do we do when interest rates are high?
Well, common sense would dictate that when the interest rates are high, we save, and not spend, money.
On the other hand, lower interest rates act as a disincentive to save money. So, in this case we would spend, and save.
Lower interest rates often boost demand for goods and services. In the short run , this would result in inflation as supply may not be able to match demand. Currently, to control the steeply rising inflation, the RBI twice raised the CRR in the recent past.
I hope you got the idea. The reason why the RBI controls the CRR is that it is an effective and important tool to control inflation.
To put in a nutshell, a higher CRR would mean that there is less money available in the market. So there will be less money with people. This would mean that their demand for goods and services would be low. So the prices would be low.
Banks are more familiar to people these days than food malls, shopping malls as every activity of maximum number of people is been controlled by banks. Banks play a significant role in ones life and the contribution of banks to the nation and the economy is immense. There are hundreds of things about banks which a common man does not know. One such concept is CRR. We all read in the news papers that RBI has increased the CRR limits and the interest rate will go up. But what is the correlation between CRR and the interest rates? What is CRR? Why do they increase or decrease it? Like this, there are many questions. Here is a small article to answer all your queries relating to CRR.
Cash Reserve Ratio mandates that all commercial banks maintain a certain percentage of their total demand and time liabilities with themselves or with the Reserve Bank of India (RBI). This could be in the form of cash reserves or by way of a current account with the RBI. The objective is to ensure the safety and liquidity of the deposits with the banks. The percentage upper limit of the CRR is 15% while there is no lower limit. What is a liability (like in time and demand liability)? Here, a liability is simply a deposit account with a bank. What we call a deposit is called a liability by the bank as the latter would have to repay us. In other worlds, our deposit is our loan to the bank (and hence the interest paid by the bank)
There are two kinds of liabilities (i.e. deposits)
1 Time liability A time liability is a type of account from which you can withdraw your money only after a specified period of time. Since this kind of an account has a specified term, it is also called a ‘term liability’. An example is a fixed deposit account.
2 Demand liabilityA demand liability is an account from which you can withdraw your money on demand. Example : saving account and current account
Every bank has to keep a said percentage of such liabilities with RBI. The current CRR is 6.5%. The RBI uses the CRR as an effective tool to increase or decrease money supply in the economy. This way the central bank can also control inflation. How does this work?
CRR as a tool to control inflationLet us say the RBI increase the CRR. This would mean that banks would have to keep more money with the RBI. This, in turn, would reduce the money available with them, thus bringing down the money supply in the market. A lower money supply would lead to an increase in interest rates.
Now look at the other side. A reduction in CRR would put more money in the coffers of the banks. As the money supply rises, interest rates decrease.
What do we do when interest rates are high?
Well, common sense would dictate that when the interest rates are high, we save, and not spend, money.
On the other hand, lower interest rates act as a disincentive to save money. So, in this case we would spend, and save.
Lower interest rates often boost demand for goods and services. In the short run , this would result in inflation as supply may not be able to match demand. Currently, to control the steeply rising inflation, the RBI twice raised the CRR in the recent past.
I hope you got the idea. The reason why the RBI controls the CRR is that it is an effective and important tool to control inflation.
To put in a nutshell, a higher CRR would mean that there is less money available in the market. So there will be less money with people. This would mean that their demand for goods and services would be low. So the prices would be low.
Tax Saving – What are the ways?
Tax Saving – What are the ways?
March 31st is nearing; I have to make some investments somewhere. Do you know anybody, who can help me to invest in some investments?
This is what we hear in offices and houses in the time between October and March. We all work 24*7 to make money but we don’t even think of spending few minutes a day to manage our hard-earned money, which ends up with killing our own dreams and plans made for life. We shouldn’t invest our hard earned money just for the heck of doing it.
Tax saving helps us to reduce our tax liability up to certain limit only and proper tax planning help us to save considerable amount of money every year. We have different investment options which help us to save tax, but very few will help us to create wealth and have got less charge.
Below are the lists of few investment products which help us to save our tax:1. Employee Provident Fund2. Public Provident Fund3. National Savings Certificate4. Long term Government Securities5. Bank Deposits6. Life insurance Products7. Pension Products8. Mutual Funds9. ULIPs
1. Employee Provident Fund (EPF):EPF take care need of fund for Retirement, Medical emergencies, House purchase, family obligations, education of children and buying an insurance policy. Your contribution in EPF scheme, which is 12% of basic salary generally, builds a fund available when you retire. The fund is available for some other specific purposes also like, purchasing land or house repaying loan for the same, children education and marriage etc. Employer contribution is also 12%, a part of which goes towards pension fund. An employee can contribute more than 12% also towards building up the fund.
2. Public Provident Fund:Public provident fund or PPF offers good returns with safety and flexibility that is why it is one of the most popular tax saving product.
PPF account can be opened with specified branches of post office or nationalized bank on self or family members’ name. Account has 15 years term that can be extended in the blocks of 5 years after completion of the term. It offers 8% per annum yearly compounded interest. Contribution can be minimum Rs.500 to maximum of Rs.70000 in a year; that can be deposited monthly or yearly.
Apart from qualifying for section 80C, interest earned is free, maturity withdrawals are tax-free and it cannot be attached under the decree of any court of law.
From PPF, Loan can avail from the third year to sixth year up to 25% of the amount available in the preceding second year. Partial withdrawals can be made once every year at any time after sixth year. The amount of withdrawal is limited to 50%of the balance at credit at the end of 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower.
3. National Savings Certificate:National savings certificate (NSC) remains the on shelf tax savings product. Investment in NSC can be made at specified post offices, in denomination of Rs.100, Rs.500, Rs.1000, Rs.5000 and Rs.10000 without any upper cap on investment. The certificate matures in six years and pays 8% half yearly compounded interest. Maturity proceeds of NSC are completely tax free. Premature encashment of NSCs are not allowed, however these can be kept as security to avail loan from banks. Interest earned on NSC is also an investment under section 80C.
4. Long Term Government Securities:Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments.Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. The salient features on T-Bills are:These are zero coupon bonds, which are issued at discount to face value and are redeemed at par.No tax is deducted at source and there is minimal default risk.The maximum tenure of these securities is one year.
5. Bank Deposits:Bank deposits are the most popular among fixed income investors. Safety, liquidity and convenience are being the prime reasons for gaining the investors confidence in banks; apart from safety of deposits. Bank fixed deposits are new entrants in 80C league. These form part of overall limit of Rs.100000 for deposits tenure of 5 years or more. However, interest on such investment is not tax exempted.
6. Life insurance Products:Investing in life insurance has got a new look with the launch of ULIP’s (Unit Linked Life Insurance Plans) in the Industry. Yesteryear\'s we had the conception that insurance is all about life cover, risk cover, death benefit. But, now the rapid growth evidencing the entry of private players in to the market has created the wave of ULIP’s, which now has become one of the major investment avenues for Indian Investors.
Following are the broad categories of insurance plans available in the market:1. Whole life policies2. Endowment Policies3. Term policies4. Money Back Policies5. Specialized Policies6. Single Premium Policies7. Unit Linked PoliciesThe tax benefit on investments in life insurance up to Rs.100000 can be availed in a financial years.
7. Pension Products:A pension is a long term savings plan. Monies saved build up a retirement fund. This fund provides a source of regular money to live on in your retirement. It is one of the most tax efficient ways to save money.When people are investing for the long term, it\'s important you have the freedom to choose how and where to invest your money - and the option to change your choice of investments you need or want to.Most people need a pension because:People are living longer: retirement could make up a third of your life.They\'ll need money for their increased leisure time during retirement.
8. Mutual Funds:A mutual fund is a trust, which combines the investments of various investors having similar financial goals. The trust issues the units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, according to the objectives of the scheme. The investment provides return in the form of dividends, interests and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds.
Investment in mutual funds is advantageous for good number of reasons; Professional management of funds, diversification of investments, tax benefits, liquidity are few to mentioned here.
When a new scheme is launched, funds are available to subscription at par value, known as NFO. Subsequent to NFO, units are available for selling and repurchase based on Net Asset Value or NAV. NAV is market value of all assets net of liabilities. NAV per unit is a common performance indicator of the fund.
But in Mutual Funds only Equity linked savings schemes (ELSS) gives tax benefit.
Each of the above mentioned investment options have got their own advantages and disadvantages. But selecting the right one based on your needs and requirements are very important. I do not recommend one option as the best and the other as bad, But I suggest you to deeply analyse your needs before investing, so that the wealth creation process will be fruitful and profitable.
March 31st is nearing; I have to make some investments somewhere. Do you know anybody, who can help me to invest in some investments?
This is what we hear in offices and houses in the time between October and March. We all work 24*7 to make money but we don’t even think of spending few minutes a day to manage our hard-earned money, which ends up with killing our own dreams and plans made for life. We shouldn’t invest our hard earned money just for the heck of doing it.
Tax saving helps us to reduce our tax liability up to certain limit only and proper tax planning help us to save considerable amount of money every year. We have different investment options which help us to save tax, but very few will help us to create wealth and have got less charge.
Below are the lists of few investment products which help us to save our tax:1. Employee Provident Fund2. Public Provident Fund3. National Savings Certificate4. Long term Government Securities5. Bank Deposits6. Life insurance Products7. Pension Products8. Mutual Funds9. ULIPs
1. Employee Provident Fund (EPF):EPF take care need of fund for Retirement, Medical emergencies, House purchase, family obligations, education of children and buying an insurance policy. Your contribution in EPF scheme, which is 12% of basic salary generally, builds a fund available when you retire. The fund is available for some other specific purposes also like, purchasing land or house repaying loan for the same, children education and marriage etc. Employer contribution is also 12%, a part of which goes towards pension fund. An employee can contribute more than 12% also towards building up the fund.
2. Public Provident Fund:Public provident fund or PPF offers good returns with safety and flexibility that is why it is one of the most popular tax saving product.
PPF account can be opened with specified branches of post office or nationalized bank on self or family members’ name. Account has 15 years term that can be extended in the blocks of 5 years after completion of the term. It offers 8% per annum yearly compounded interest. Contribution can be minimum Rs.500 to maximum of Rs.70000 in a year; that can be deposited monthly or yearly.
Apart from qualifying for section 80C, interest earned is free, maturity withdrawals are tax-free and it cannot be attached under the decree of any court of law.
From PPF, Loan can avail from the third year to sixth year up to 25% of the amount available in the preceding second year. Partial withdrawals can be made once every year at any time after sixth year. The amount of withdrawal is limited to 50%of the balance at credit at the end of 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower.
3. National Savings Certificate:National savings certificate (NSC) remains the on shelf tax savings product. Investment in NSC can be made at specified post offices, in denomination of Rs.100, Rs.500, Rs.1000, Rs.5000 and Rs.10000 without any upper cap on investment. The certificate matures in six years and pays 8% half yearly compounded interest. Maturity proceeds of NSC are completely tax free. Premature encashment of NSCs are not allowed, however these can be kept as security to avail loan from banks. Interest earned on NSC is also an investment under section 80C.
4. Long Term Government Securities:Government securities (G-secs) or gilts are sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). The GOI uses these funds to meet its expenditure commitments.Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. The salient features on T-Bills are:These are zero coupon bonds, which are issued at discount to face value and are redeemed at par.No tax is deducted at source and there is minimal default risk.The maximum tenure of these securities is one year.
5. Bank Deposits:Bank deposits are the most popular among fixed income investors. Safety, liquidity and convenience are being the prime reasons for gaining the investors confidence in banks; apart from safety of deposits. Bank fixed deposits are new entrants in 80C league. These form part of overall limit of Rs.100000 for deposits tenure of 5 years or more. However, interest on such investment is not tax exempted.
6. Life insurance Products:Investing in life insurance has got a new look with the launch of ULIP’s (Unit Linked Life Insurance Plans) in the Industry. Yesteryear\'s we had the conception that insurance is all about life cover, risk cover, death benefit. But, now the rapid growth evidencing the entry of private players in to the market has created the wave of ULIP’s, which now has become one of the major investment avenues for Indian Investors.
Following are the broad categories of insurance plans available in the market:1. Whole life policies2. Endowment Policies3. Term policies4. Money Back Policies5. Specialized Policies6. Single Premium Policies7. Unit Linked PoliciesThe tax benefit on investments in life insurance up to Rs.100000 can be availed in a financial years.
7. Pension Products:A pension is a long term savings plan. Monies saved build up a retirement fund. This fund provides a source of regular money to live on in your retirement. It is one of the most tax efficient ways to save money.When people are investing for the long term, it\'s important you have the freedom to choose how and where to invest your money - and the option to change your choice of investments you need or want to.Most people need a pension because:People are living longer: retirement could make up a third of your life.They\'ll need money for their increased leisure time during retirement.
8. Mutual Funds:A mutual fund is a trust, which combines the investments of various investors having similar financial goals. The trust issues the units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, according to the objectives of the scheme. The investment provides return in the form of dividends, interests and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds.
Investment in mutual funds is advantageous for good number of reasons; Professional management of funds, diversification of investments, tax benefits, liquidity are few to mentioned here.
When a new scheme is launched, funds are available to subscription at par value, known as NFO. Subsequent to NFO, units are available for selling and repurchase based on Net Asset Value or NAV. NAV is market value of all assets net of liabilities. NAV per unit is a common performance indicator of the fund.
But in Mutual Funds only Equity linked savings schemes (ELSS) gives tax benefit.
Each of the above mentioned investment options have got their own advantages and disadvantages. But selecting the right one based on your needs and requirements are very important. I do not recommend one option as the best and the other as bad, But I suggest you to deeply analyse your needs before investing, so that the wealth creation process will be fruitful and profitable.
Who is a Broker?
Investing has become very easy in these days mostly because of Brokers. There are two different types of Brokers:-1. Stock Brokers2. Insurance Brokers
1. Stock Broker:
A stock broker is a person who is licensed from the concerned authority to trade in shares. Brokers also have direct access to the share market and can act as an agent in share transactions representing his clients. For this service they charge a fee (which is also called as Brokerage). They can also offer additional services like advice on shares, debentures, government bonds and listed property trusts and non-listed investment options (cash management trusts, property and equity trusts).
In addition to the above said services, a stock broker can plan, implement and monitor his clients’ investment portfolio, conduct research and help them optimize your returns.
2. Insurance Broker:An insurance broker acts as an intermediary between his clients and insurance companies. Clients may be individuals, small and medium commercial business houses and organisations. Brokers use their in-depth knowledge of risks and the insurance market to find and arrange suitable insurance policies for their clients based on the needs and requirements of them. Insurance brokers, unlike tied agents, are independent and offer products from more than one insurer, to ensure that their clients get the best deal.
There are two different types of Insurance Brokers:1. Direct Broker2. Composite Broker
1. Direct Broker: Direct Broker deals with Both Life Insurance and Non Life Insurance Products offered by all the companies.
2. Composite Broker: Composite Broker deals with Life Insurance, Non-Life Insurance and Reinsurance.
1. Stock Broker:
A stock broker is a person who is licensed from the concerned authority to trade in shares. Brokers also have direct access to the share market and can act as an agent in share transactions representing his clients. For this service they charge a fee (which is also called as Brokerage). They can also offer additional services like advice on shares, debentures, government bonds and listed property trusts and non-listed investment options (cash management trusts, property and equity trusts).
In addition to the above said services, a stock broker can plan, implement and monitor his clients’ investment portfolio, conduct research and help them optimize your returns.
2. Insurance Broker:An insurance broker acts as an intermediary between his clients and insurance companies. Clients may be individuals, small and medium commercial business houses and organisations. Brokers use their in-depth knowledge of risks and the insurance market to find and arrange suitable insurance policies for their clients based on the needs and requirements of them. Insurance brokers, unlike tied agents, are independent and offer products from more than one insurer, to ensure that their clients get the best deal.
There are two different types of Insurance Brokers:1. Direct Broker2. Composite Broker
1. Direct Broker: Direct Broker deals with Both Life Insurance and Non Life Insurance Products offered by all the companies.
2. Composite Broker: Composite Broker deals with Life Insurance, Non-Life Insurance and Reinsurance.
Mutual Fund - A complete Analysis
Mutual Fund - A complete Analysis
Definition:
A mutual fund is a professionally-managed firm of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.
Concept:
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
History:
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases
First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.
The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
Types of Mutual Funds:
On the basis of their structure and objective, mutual funds can be classified into following major types:
Closed-end fundsOpen-end fundsLarge cap fundsMid-cap fundsEquity fundsBalanced fundsGrowth fundsNo load fundsExchange traded fundsValue fundsMoney market fundsInternational mutual fundsRegional mutual fundsSector fundsIndex fundsFund of funds
Closed-end Mutual Fund
A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.
Open-end mutual fund An open-end mutual fund is a fund that does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value.Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.
Large Cap FundsLarge cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Different mutual funds have different criteria for classifying companies as large cap. Generally, companies with a market capitalisation in excess of Rs 1000 crore are known large cap companies. Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap stocks), because such companies are usually widely researched and information is widely available.
Mid cap funds Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no standard definition classifying companies as small or medium, each mutual fund has its own classification for small and medium sized companies. Generally, companies with a market capitalization of up to Rs 500 crore are classified as small. Those companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized. Big investors like mutual funds and Foreign Institutional Investors are increasingly investing in mid caps nowadays because the price of large caps has increased substantially. Small / mid sized companies tend to be under researched thus they present an opportunity to invest in a company that is yet to be identified by the market. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations.But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds.
Equity Mutual FundsEquity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time. Stocks are often categorized by their market capitalization (or caps), and can be classified in three basic sizes: small, medium, and large. Many mutual funds invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap funds.Equity fund managers employ different styles of stock picking when they make investment decisions for their portfolios. Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other, similar companies. Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole. Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks.
Balanced FundBalanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. But on the flip side, balanced funds will usually increase less than an all-stock fund during a bull market.
Growth FundsGrowth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing companies in the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation.In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets. Only aggressive investors, or those with enough time to make up for short-term market losses, should buy these funds.
No-Load Mutual FundsMutual funds can be classified into two types - Load mutual funds and No-Load mutual funds. Load funds are those funds that charge commission at the time of purchase or redemption. They can be further subdivided into (1) Front-end load funds and (2) Back-end load funds. Front-end load funds charge commission at the time of purchase and back-end load funds charge commission at the time of redemption.
On the other hand, no-load funds are those funds that can be purchased without commission. No load funds have several advantages over load funds. Firstly, funds with loads, on average, consistently underperform no-load funds when the load is taken into consideration in performance calculations. Secondly, loads understate the real commission charged because they reduce the total amount being invested. Finally, when a load fund is held over a long time period, the effect of the load, if paid up front, is not diminished because if the money paid for the load had invested, as in a no-load fund, it would have been compounding over the whole time period.
Exchange Traded Funds
Exchange Traded Funds (ETFs) represent a basket of securities that are traded on an exchange. An exchange traded fund is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index. The investment objective of an ETF is to achieve the same return as a particular market index. Exchange traded funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios.
Value FundsValue funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. They invest in companies that the market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry.Value stocks are often mature companies that have stopped growing and that use their earnings to pay dividends. Thus value funds produce current income (from the dividends) as well as long-term growth (from capital appreciation once the stocks become popular again). They tend to have more conservative and less volatile returns than growth funds.
Money Market Mutual FundsA money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free. Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.
International Mutual Funds
International mutual funds are those funds that invest in non-domestic securities markets throughout the world. Investing in international markets provides greater portfolio diversification and let you capitalize on some of the world's best opportunities. If investments are chosen carefully, international mutual fund may be profitable when some markets are rising and others are declining.
However, fund managers need to keep close watch on foreign currencies and world markets as profitable investments in a rising market can lose money if the foreign currency rises against the dollar.
Regional Mutual Fund
Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund's local region. A regional mutual fund generally looks to own a diversified portfolio of companies based in and operating out of its specified geographical area. The objective is to take advantage of regional growth potential before the national investment community does. Regional funds select securities that pass geographical criteria. For the investor, the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area.
Sector Mutual Funds
Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. These funds concentrate on one industry such as infrastructure, heath care, utilities, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favour.
Index Funds
An index fund is a type of mutual fund that builds its portfolio by buying stock in all the companies of a particular index and thereby reproducing the performance of an entire section of the market. The most popular index of stock index funds is the Standard & Poor's 500. An S&P 500 stock index fund owns 500 stocks-all the companies that are included in the index. Investing in an index fund is a form of passive investing. Passive investing has two big advantages over active investing. First, a passive stock market mutual fund is much cheaper to run than an active fund. Second, a majority of mutual funds fail to beat broad indexes such as the S&P 500.
Fund of Funds
A fund of funds is a type of mutual fund that invests in other mutual funds. Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds.Fund of funds are designed to achieve greater diversification than traditional mutual funds. But on the flipside, expense fees on fund of funds are typically higher than those on regular funds because they include part of the expense fees charged by the underlying funds. Also, since a fund of funds buys many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.
Advantages of Mutual Funds
The advantages of investing in a Mutual Fund are:
Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
Professional Management:Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.
Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.
Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.
Convenience:You can usually buy mutual fund shares by mail, phone, or over the Internet. Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index.
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated
Drawbacks of Mutual Funds Mutual Funds have their own drawbacks and it may not suit the investment needs of all kinds of investors because of its limitations and the drawbacks. Following are the few drawbacks of Mutual Funds:
No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.
Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.
Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
The Future
By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore.The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.
Some facts for the growth of mutual funds in India
1 . 100% growth in the last 6 years.
2. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.
3. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.
4. We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.
5. 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
6. Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.
7. SEBI allowing the MF's to launch commodity mutual funds.
8. Emphasis on better corporate governance.
9. Trying to curb the late trading practices.
10. Introduction of Financial Planners who can provide need based advice.
Growth or Dividend
Yesterday one of my Relationship Managers called me from his client place and he told me, “My client is confused whether to go for a growth or a dividend option, please speak to him”. I did speak to him, but he was arguing with me that dividends are something extra, which he can avail from a fund. Therefore my dear readers, today I would like to discuss on various things related to the growth and dividend option of a mutual fund, so that you will not get confused while investing in a mutual fund.
What is the difference between growth and dividends?A mutual fund generally offers two schemes: dividend and growth.
The dividend option does not re-invest the profits made by the fund though its investments. Instead, it is given to the investor from time to time.
In the growth scheme, all profits made by the fund are ploughed back into the scheme. This causes the NAV to rise over time.
How does it affect on the NAV?The NAV of the growth option will always be higher than that of the dividend option because money is going back into the scheme and not given to investors.
How does it affect on you?You don't gain or lose anything by selecting any one scheme. Either you make the choice to get the money regularly (dividend) or at one time (growth).
If you choose the growth option, you can make money by selling the units at a high NAV at a later date.
If you choose the dividend option, you will get the money time and again as well as avail of a higher NAV (though the NAV here is not as high as that of a growth option).
Say there is a fund with an NAV of Rs 24. It declares a dividend of 40%. This means it will pay 40% of the face value. The face value of a mutual fund unit is 10 (its NAV in this case is 24). So it will give you Rs 4 per unit. If you own 1,000 units of the fund, you will get Rs 4,000. Since it has paid Rs 4 per unit, the NAV will fall from Rs 24 to Rs 20.
If you invest in the growth option, you can sell the units for Rs 24.
If you invest in the dividend option, you can sell the units for Rs 20, since you already made a profit of Rs 4 per unit earlier.
What you must know about dividends?The dividend is not guaranteed. If a fund declared dividends twice last year, it does not mean it will do so again this year. You could get a dividend just once or you might not even get it this year. Generally, funds whose NAV is above 10 are in a position to consider a dividend. Remember, though, declaring a dividend is solely at the fund's discretion; the periodicity is not certain nor is the amount fixed.
Which should you take?This depends on your overall investments and income. If you are looking at a long-term investment and are not interested in money being given to you at various intervals, the growth option is meant for you. If you are keen on receiving an income at various intervals, opt for the dividend option.
The tax impactDividends from a mutual fund are not taxed. When you sell the units of a mutual fund and make a profit, it is known as capital gain, which will be taxed under the prevailing income tax laws.
NAV and the Myths
Net asset value represents the value of each unit in the portfolio. It is the book value. NAV of a mutual fund always varying depends on the market fluctuations. NAV of any portfolio can be calculated after deducting all liabilities from the total asset value of the portfolio. NAV helps an investor to measure the performance of his investments very easily. Nowadays NAV is becoming very familiar to us with the rapid growth and expansion of mutual funds and insurance industry.The general formula for calculating NAV is…….NAV = Total asset value – Total liabilities
Total no of units
Yes, this is all about NAV. But my dear readers, today I would like to discuss on certain myths and misconceptions around the concept of NAV.I started my career with selling of insurance and Mutual Funds, and I faced many situations where the clients were very particular about NAV. And of course, they were very keen on investing in low NAV funds. Many a times I did convince them but the misconception what many of us have sometimes ends up with low returns or loss on investments. Even I got many queries from my readers as well as from my clients that -“Is low NAV cheap?”Is a fund with lower NAV a better investment option than a fund with a higher NAV? Since you can buy more units, is it cheaper? Should mutual fund schemes with a higher NAV be avoided?These are some other questions I faced from my clients and readers. The answer to these questions is that it is irrelevant how high or low the NAV of a mutual fund or a ULIP plan is. And, whatever may be the NAV you invested with, the amount you invested remaining unchanged. Because, high NAV means less number of units and low NAV means more number of units. I can prove the same with ‘N’ number of examples.Let us take an example, where there are two investment options –- One with the NAV of 10 and- Other with the NAV of 100.Ordinary investors always look at first option as the NAV is very low when comparing to option two. But if you look at it with little practicality, you will understand it better that both the option will yield you the same if the investment strategies of both are same. Please go through the below illustration which proves the same-Let us take the initial investment as 10000 and the NAV value as above. Then, an investor will get 1000 units in case of option one and 100 units in case of option two. If both the investment options yield 30% at the end of year, NAV of option one will become 13 and the second will become 130.Therefore, the total fund value of option one has become 13*1000=13000 and the second has become 130*100=13000. And, if one sells those units in both the investment options he will get the same amount.If you still have doubts, I can give you some more reasons to avoid measuring the funds in terms of its NAV. One of them is, low NAV schemes may be new to the market and it is very difficult to predict the future performance of the same as there are no past records to asses. But in case of high NAV funds which are in the market from long time will have their own performance records which help us to measure the performance in a better way.Therefore, as a financial consultant my advice is kindly stop looking at NAV before investing; instead look at the quality and other performance records.
SIP - Systematic Investment Plan
Today’s world has offered us with lot of attractive things, which leave us empty handed at the middle of the month itself. We have lot of needs to take care of, lot many things to buy, different loans and EMIs to repay and many dreams to plan as well. But it is very difficult to plan and realize those needs and plans successfully, because we may not be able to procure funds for these things in time. Even if you start saving money to serve these things right from the day one you dreamt of, the inflation and sky rocketing price hikes will ultimately let you down.
Therefore, we need to plan our savings and investments in a more structured and profitable way. Obviously, there are different investment tools available in the market which gives you good returns and flexibility as well. But, these investment tools may not develop the habit of regular investment in us. One of my ex-colleague was telling me that have a habit of buying one gram gold every month. Of course that is a very nice idea but it won’t help us to serve our short term needs as keeping gold is little risky and returns are very less in the short term.Now, I would like to introduce you all a well-known investment tool called SIP (Systematic Investment Plan) with its unique features.The Systematic Investment Plan allows investors to save a fixed amount of rupees every month or quarter for the purchase of additional units in a mutual fund. SIP helps us to plan our retirement, childrens education, wealth creation and finacial planning as well.
SIP mainly helps us to get addicted to an investment principle –Income – Savings = Expenditure, instead of following the principle of –Income - Expenditure = Savings.Investing through SIP can offer the following benefits:It helps to Build Wealth over the Long term – “the compounding effect”The key to building wealth is to start investing early and regularly. These regular amounts of savings, however small they may be, can possibly grow into a substantial amount of wealth over the long-term. Therefore, if you have to save regularly, it makes sense to pay yourself first and that is the only way to increase your savings.Look at the following example and you may be pleasantly surprised at the benefits of investing systematically over the Long-term:-An investment of Rs. 1,000 per month in an instrument yielding a net compounded return of 12% per annum, over a period of 30 years, can grow to over Rs. 35 lacs.It will take only 33 years to achieve Rs. 1 crore, if invested Rs. 1000/- per month and money grows at 15% p.a.It will take only 28 years to achieve Rs. 1 crore, if invested Rs. 2000/- per month and money grows at 15% p.a.It will take only 25 years to achieve Rs. 1 crore, if invested Rs. 3000/- per month and money grows at 15% p.a.In the short run a 1% differential in the rate of return may not matter as much, but in the long run it can be significant.
Make the volatility of the market work in your favour – the rupee cost averagingSecurities markets (equities and fixed income instruments) can be volatile and it is rarely possible to predict the future and time the market. We can seldom accurately predict when a particular stock will move up or where the interest rates are headed. Since the amount invested per month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always give the benefit of investing when the market is rising, falling, or fluctuating. This concept is called Rupee Cost Averaging.Load StructureMost of the Asset management companies had waived off entry load in equity mutual funds if the investor is investing through SIPs.Other Advantages
Investor is forced to save some amount if he wants to achieve a certain target amountAsset management companies had tied up with few banks for direct debit in their account of the investment amountMinimum amount to start with SIP is as low as Rs. 500/- per month.Conclusion:I hope all my readers will start investing through SIPs regularly as it is considered as one of the most important and popular investment tool across the world. Warren Buffet tells that he purchased his first share when he was 14, but still he feels that he was late, therefore don’t wait anymore, and get started with one or more SIPs, so that you will only start finding it very easy to realize all your dreams and plans in time.
SIP and SWP
My dear readers, I discussed on SIP in my earlier article. Today, I would like to give you the complete picture of different benefits, which can be availed from proper planning of SIP and SWP.As I discussed in my earlier article on SIP, systematic investment plan allows investors to save a fixed amount of rupees every month or quarter for the purchase of additional units in a fund.
SWP or systematic withdrawal plan allows an investor to get back his investment amount plus its returns in regular intervals over a period of time. In simple, I call it as a tool to avoid spending money, because SWP restricts an investor from withdrawing all his investments at a time and thereby, it helps an investor to avoid unnecessary expenditures.SWP works well in case of ELSS SIPs. If you are investing in ELSS schemes through SIPs, you can take back your first investment amount only after 36 months, 2nd after 37th month from the date of commencement and 36th month from the date of investment and so forth. Therefore, the investment you made over a period of 36 months can be taken back in lump sum only after 72 months. But if you register for SWP, your investment amount plus returns of respective installments will be credited to your bank account in regular intervals soon after completion of 36 months from the date of investment of each installment.I observed many of my clients that they have the misconception of making profits from the market movements through SWP. I can say that, it helps you to reduce the risk of redemption only. SWP will not maximize the returns in any situation.SWP works as a pension plan, where one can invest certain amount of money in regular intervals while earning and he can take back through SWP in regular intervals after retirement. Therefore it is one of the better option for retirement planning also.
Definition:
A mutual fund is a professionally-managed firm of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.
Concept:
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
History:
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases
First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.
The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
Types of Mutual Funds:
On the basis of their structure and objective, mutual funds can be classified into following major types:
Closed-end fundsOpen-end fundsLarge cap fundsMid-cap fundsEquity fundsBalanced fundsGrowth fundsNo load fundsExchange traded fundsValue fundsMoney market fundsInternational mutual fundsRegional mutual fundsSector fundsIndex fundsFund of funds
Closed-end Mutual Fund
A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.
Open-end mutual fund An open-end mutual fund is a fund that does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value.Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.
Large Cap FundsLarge cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Different mutual funds have different criteria for classifying companies as large cap. Generally, companies with a market capitalisation in excess of Rs 1000 crore are known large cap companies. Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap stocks), because such companies are usually widely researched and information is widely available.
Mid cap funds Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no standard definition classifying companies as small or medium, each mutual fund has its own classification for small and medium sized companies. Generally, companies with a market capitalization of up to Rs 500 crore are classified as small. Those companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized. Big investors like mutual funds and Foreign Institutional Investors are increasingly investing in mid caps nowadays because the price of large caps has increased substantially. Small / mid sized companies tend to be under researched thus they present an opportunity to invest in a company that is yet to be identified by the market. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations.But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds.
Equity Mutual FundsEquity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time. Stocks are often categorized by their market capitalization (or caps), and can be classified in three basic sizes: small, medium, and large. Many mutual funds invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap funds.Equity fund managers employ different styles of stock picking when they make investment decisions for their portfolios. Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other, similar companies. Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole. Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks.
Balanced FundBalanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. But on the flip side, balanced funds will usually increase less than an all-stock fund during a bull market.
Growth FundsGrowth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing companies in the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation.In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets. Only aggressive investors, or those with enough time to make up for short-term market losses, should buy these funds.
No-Load Mutual FundsMutual funds can be classified into two types - Load mutual funds and No-Load mutual funds. Load funds are those funds that charge commission at the time of purchase or redemption. They can be further subdivided into (1) Front-end load funds and (2) Back-end load funds. Front-end load funds charge commission at the time of purchase and back-end load funds charge commission at the time of redemption.
On the other hand, no-load funds are those funds that can be purchased without commission. No load funds have several advantages over load funds. Firstly, funds with loads, on average, consistently underperform no-load funds when the load is taken into consideration in performance calculations. Secondly, loads understate the real commission charged because they reduce the total amount being invested. Finally, when a load fund is held over a long time period, the effect of the load, if paid up front, is not diminished because if the money paid for the load had invested, as in a no-load fund, it would have been compounding over the whole time period.
Exchange Traded Funds
Exchange Traded Funds (ETFs) represent a basket of securities that are traded on an exchange. An exchange traded fund is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index. The investment objective of an ETF is to achieve the same return as a particular market index. Exchange traded funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios.
Value FundsValue funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. They invest in companies that the market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry.Value stocks are often mature companies that have stopped growing and that use their earnings to pay dividends. Thus value funds produce current income (from the dividends) as well as long-term growth (from capital appreciation once the stocks become popular again). They tend to have more conservative and less volatile returns than growth funds.
Money Market Mutual FundsA money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free. Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.
International Mutual Funds
International mutual funds are those funds that invest in non-domestic securities markets throughout the world. Investing in international markets provides greater portfolio diversification and let you capitalize on some of the world's best opportunities. If investments are chosen carefully, international mutual fund may be profitable when some markets are rising and others are declining.
However, fund managers need to keep close watch on foreign currencies and world markets as profitable investments in a rising market can lose money if the foreign currency rises against the dollar.
Regional Mutual Fund
Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund's local region. A regional mutual fund generally looks to own a diversified portfolio of companies based in and operating out of its specified geographical area. The objective is to take advantage of regional growth potential before the national investment community does. Regional funds select securities that pass geographical criteria. For the investor, the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area.
Sector Mutual Funds
Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. These funds concentrate on one industry such as infrastructure, heath care, utilities, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favour.
Index Funds
An index fund is a type of mutual fund that builds its portfolio by buying stock in all the companies of a particular index and thereby reproducing the performance of an entire section of the market. The most popular index of stock index funds is the Standard & Poor's 500. An S&P 500 stock index fund owns 500 stocks-all the companies that are included in the index. Investing in an index fund is a form of passive investing. Passive investing has two big advantages over active investing. First, a passive stock market mutual fund is much cheaper to run than an active fund. Second, a majority of mutual funds fail to beat broad indexes such as the S&P 500.
Fund of Funds
A fund of funds is a type of mutual fund that invests in other mutual funds. Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds.Fund of funds are designed to achieve greater diversification than traditional mutual funds. But on the flipside, expense fees on fund of funds are typically higher than those on regular funds because they include part of the expense fees charged by the underlying funds. Also, since a fund of funds buys many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.
Advantages of Mutual Funds
The advantages of investing in a Mutual Fund are:
Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
Professional Management:Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.
Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.
Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.
Convenience:You can usually buy mutual fund shares by mail, phone, or over the Internet. Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index.
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated
Drawbacks of Mutual Funds Mutual Funds have their own drawbacks and it may not suit the investment needs of all kinds of investors because of its limitations and the drawbacks. Following are the few drawbacks of Mutual Funds:
No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.
Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.
Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
The Future
By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore.The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.
Some facts for the growth of mutual funds in India
1 . 100% growth in the last 6 years.
2. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.
3. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.
4. We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.
5. 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
6. Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.
7. SEBI allowing the MF's to launch commodity mutual funds.
8. Emphasis on better corporate governance.
9. Trying to curb the late trading practices.
10. Introduction of Financial Planners who can provide need based advice.
Growth or Dividend
Yesterday one of my Relationship Managers called me from his client place and he told me, “My client is confused whether to go for a growth or a dividend option, please speak to him”. I did speak to him, but he was arguing with me that dividends are something extra, which he can avail from a fund. Therefore my dear readers, today I would like to discuss on various things related to the growth and dividend option of a mutual fund, so that you will not get confused while investing in a mutual fund.
What is the difference between growth and dividends?A mutual fund generally offers two schemes: dividend and growth.
The dividend option does not re-invest the profits made by the fund though its investments. Instead, it is given to the investor from time to time.
In the growth scheme, all profits made by the fund are ploughed back into the scheme. This causes the NAV to rise over time.
How does it affect on the NAV?The NAV of the growth option will always be higher than that of the dividend option because money is going back into the scheme and not given to investors.
How does it affect on you?You don't gain or lose anything by selecting any one scheme. Either you make the choice to get the money regularly (dividend) or at one time (growth).
If you choose the growth option, you can make money by selling the units at a high NAV at a later date.
If you choose the dividend option, you will get the money time and again as well as avail of a higher NAV (though the NAV here is not as high as that of a growth option).
Say there is a fund with an NAV of Rs 24. It declares a dividend of 40%. This means it will pay 40% of the face value. The face value of a mutual fund unit is 10 (its NAV in this case is 24). So it will give you Rs 4 per unit. If you own 1,000 units of the fund, you will get Rs 4,000. Since it has paid Rs 4 per unit, the NAV will fall from Rs 24 to Rs 20.
If you invest in the growth option, you can sell the units for Rs 24.
If you invest in the dividend option, you can sell the units for Rs 20, since you already made a profit of Rs 4 per unit earlier.
What you must know about dividends?The dividend is not guaranteed. If a fund declared dividends twice last year, it does not mean it will do so again this year. You could get a dividend just once or you might not even get it this year. Generally, funds whose NAV is above 10 are in a position to consider a dividend. Remember, though, declaring a dividend is solely at the fund's discretion; the periodicity is not certain nor is the amount fixed.
Which should you take?This depends on your overall investments and income. If you are looking at a long-term investment and are not interested in money being given to you at various intervals, the growth option is meant for you. If you are keen on receiving an income at various intervals, opt for the dividend option.
The tax impactDividends from a mutual fund are not taxed. When you sell the units of a mutual fund and make a profit, it is known as capital gain, which will be taxed under the prevailing income tax laws.
NAV and the Myths
Net asset value represents the value of each unit in the portfolio. It is the book value. NAV of a mutual fund always varying depends on the market fluctuations. NAV of any portfolio can be calculated after deducting all liabilities from the total asset value of the portfolio. NAV helps an investor to measure the performance of his investments very easily. Nowadays NAV is becoming very familiar to us with the rapid growth and expansion of mutual funds and insurance industry.The general formula for calculating NAV is…….NAV = Total asset value – Total liabilities
Total no of units
Yes, this is all about NAV. But my dear readers, today I would like to discuss on certain myths and misconceptions around the concept of NAV.I started my career with selling of insurance and Mutual Funds, and I faced many situations where the clients were very particular about NAV. And of course, they were very keen on investing in low NAV funds. Many a times I did convince them but the misconception what many of us have sometimes ends up with low returns or loss on investments. Even I got many queries from my readers as well as from my clients that -“Is low NAV cheap?”Is a fund with lower NAV a better investment option than a fund with a higher NAV? Since you can buy more units, is it cheaper? Should mutual fund schemes with a higher NAV be avoided?These are some other questions I faced from my clients and readers. The answer to these questions is that it is irrelevant how high or low the NAV of a mutual fund or a ULIP plan is. And, whatever may be the NAV you invested with, the amount you invested remaining unchanged. Because, high NAV means less number of units and low NAV means more number of units. I can prove the same with ‘N’ number of examples.Let us take an example, where there are two investment options –- One with the NAV of 10 and- Other with the NAV of 100.Ordinary investors always look at first option as the NAV is very low when comparing to option two. But if you look at it with little practicality, you will understand it better that both the option will yield you the same if the investment strategies of both are same. Please go through the below illustration which proves the same-Let us take the initial investment as 10000 and the NAV value as above. Then, an investor will get 1000 units in case of option one and 100 units in case of option two. If both the investment options yield 30% at the end of year, NAV of option one will become 13 and the second will become 130.Therefore, the total fund value of option one has become 13*1000=13000 and the second has become 130*100=13000. And, if one sells those units in both the investment options he will get the same amount.If you still have doubts, I can give you some more reasons to avoid measuring the funds in terms of its NAV. One of them is, low NAV schemes may be new to the market and it is very difficult to predict the future performance of the same as there are no past records to asses. But in case of high NAV funds which are in the market from long time will have their own performance records which help us to measure the performance in a better way.Therefore, as a financial consultant my advice is kindly stop looking at NAV before investing; instead look at the quality and other performance records.
SIP - Systematic Investment Plan
Today’s world has offered us with lot of attractive things, which leave us empty handed at the middle of the month itself. We have lot of needs to take care of, lot many things to buy, different loans and EMIs to repay and many dreams to plan as well. But it is very difficult to plan and realize those needs and plans successfully, because we may not be able to procure funds for these things in time. Even if you start saving money to serve these things right from the day one you dreamt of, the inflation and sky rocketing price hikes will ultimately let you down.
Therefore, we need to plan our savings and investments in a more structured and profitable way. Obviously, there are different investment tools available in the market which gives you good returns and flexibility as well. But, these investment tools may not develop the habit of regular investment in us. One of my ex-colleague was telling me that have a habit of buying one gram gold every month. Of course that is a very nice idea but it won’t help us to serve our short term needs as keeping gold is little risky and returns are very less in the short term.Now, I would like to introduce you all a well-known investment tool called SIP (Systematic Investment Plan) with its unique features.The Systematic Investment Plan allows investors to save a fixed amount of rupees every month or quarter for the purchase of additional units in a mutual fund. SIP helps us to plan our retirement, childrens education, wealth creation and finacial planning as well.
SIP mainly helps us to get addicted to an investment principle –Income – Savings = Expenditure, instead of following the principle of –Income - Expenditure = Savings.Investing through SIP can offer the following benefits:It helps to Build Wealth over the Long term – “the compounding effect”The key to building wealth is to start investing early and regularly. These regular amounts of savings, however small they may be, can possibly grow into a substantial amount of wealth over the long-term. Therefore, if you have to save regularly, it makes sense to pay yourself first and that is the only way to increase your savings.Look at the following example and you may be pleasantly surprised at the benefits of investing systematically over the Long-term:-An investment of Rs. 1,000 per month in an instrument yielding a net compounded return of 12% per annum, over a period of 30 years, can grow to over Rs. 35 lacs.It will take only 33 years to achieve Rs. 1 crore, if invested Rs. 1000/- per month and money grows at 15% p.a.It will take only 28 years to achieve Rs. 1 crore, if invested Rs. 2000/- per month and money grows at 15% p.a.It will take only 25 years to achieve Rs. 1 crore, if invested Rs. 3000/- per month and money grows at 15% p.a.In the short run a 1% differential in the rate of return may not matter as much, but in the long run it can be significant.
Make the volatility of the market work in your favour – the rupee cost averagingSecurities markets (equities and fixed income instruments) can be volatile and it is rarely possible to predict the future and time the market. We can seldom accurately predict when a particular stock will move up or where the interest rates are headed. Since the amount invested per month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always give the benefit of investing when the market is rising, falling, or fluctuating. This concept is called Rupee Cost Averaging.Load StructureMost of the Asset management companies had waived off entry load in equity mutual funds if the investor is investing through SIPs.Other Advantages
Investor is forced to save some amount if he wants to achieve a certain target amountAsset management companies had tied up with few banks for direct debit in their account of the investment amountMinimum amount to start with SIP is as low as Rs. 500/- per month.Conclusion:I hope all my readers will start investing through SIPs regularly as it is considered as one of the most important and popular investment tool across the world. Warren Buffet tells that he purchased his first share when he was 14, but still he feels that he was late, therefore don’t wait anymore, and get started with one or more SIPs, so that you will only start finding it very easy to realize all your dreams and plans in time.
SIP and SWP
My dear readers, I discussed on SIP in my earlier article. Today, I would like to give you the complete picture of different benefits, which can be availed from proper planning of SIP and SWP.As I discussed in my earlier article on SIP, systematic investment plan allows investors to save a fixed amount of rupees every month or quarter for the purchase of additional units in a fund.
SWP or systematic withdrawal plan allows an investor to get back his investment amount plus its returns in regular intervals over a period of time. In simple, I call it as a tool to avoid spending money, because SWP restricts an investor from withdrawing all his investments at a time and thereby, it helps an investor to avoid unnecessary expenditures.SWP works well in case of ELSS SIPs. If you are investing in ELSS schemes through SIPs, you can take back your first investment amount only after 36 months, 2nd after 37th month from the date of commencement and 36th month from the date of investment and so forth. Therefore, the investment you made over a period of 36 months can be taken back in lump sum only after 72 months. But if you register for SWP, your investment amount plus returns of respective installments will be credited to your bank account in regular intervals soon after completion of 36 months from the date of investment of each installment.I observed many of my clients that they have the misconception of making profits from the market movements through SWP. I can say that, it helps you to reduce the risk of redemption only. SWP will not maximize the returns in any situation.SWP works as a pension plan, where one can invest certain amount of money in regular intervals while earning and he can take back through SWP in regular intervals after retirement. Therefore it is one of the better option for retirement planning also.
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