Different Types Of Mutual Funds In India

 

As a first time investor, it can be a daunting task to select the right type of mutual fund to invest in. The first step to accomplishing this is to have an investment objective. That in itself is a dilemma as you will now be thinking about how you should determine an investment objective when investing in mutual funds.
An investment objective can be simply defined as what you expect to achieve from a mutual fund investment in terms of growth and dividends. This objective is based on parameters like the investment term and your risk taking appetite.

Mutual Fund related terms that you should know

Assets: These are the market instruments like stocks, bonds etc. that a mutual fund invests in.
Asset Management Company: This is a company that comprises of a fund manager and financial experts who manage the assets of the mutual fund that you have invested in.
Corpus: The combined total investment of all the investors in a mutual fund.
Exit Load: The cost that you need to pay to withdraw your invested capital from a mutual fund.
Investment Portfolio: This portfolio is the collection of the assets in which an AMC invests. The asset allocation is based on the mutual fund’s investment objective.
NAV: Net Asset Value is the price at which investors can buy or sell their units and is measured by this simple formula –

Net Asset Value =                Market value of assets–Liabilities
                                       Total number of asset units in the mutual fund on a given day

Here, the market value of assets (or securities like shares,bonds etc.) is the value that your securities in a mutual fund hold on a given day while the liabilities refer to the charges that the Company takes for managing mutual funds.

Types of Mutual Funds

While the wide array of options in mutual funds make for a selection headache, it is also beneficial as it makes it easier for you to find a mutual fund that is in line with your investment objective.
Let’s have a look at the types of mutual funds you can invest in: –

Equity Funds

Equity funds comprise of the largest part of the financial market investment. These funds invest primarily in stocks and have a high risk-return ratio. This ratio implies that shares with higher risk are capable of fetching higher returns.
The stock investment can be in small, mid or large cap companies which can be focused on an individual sector or diversified among different sectors. If you have a high risk-taking appetite and a long-term outlook, investment in equity mutual funds can be very rewarding as the long term capital gains from them are exempted from tax.

Debt/Income Funds

Debt funds invest primarily in corporate or government bonds and securities. Well suited for a less risk taking investor, debt funds are a good option to generate a fixed income as well as fixed returns. The ability of your asset portfolio to counter any unforeseen risk plays an important role. Investment in these funds can be made from a short-term as well as a long term objective. A welcome characteristic of debt funds is that you can avail indexation benefits on long-term investments to save on tax.
Indexation benefits are a measure to safeguard returns on long-term investments from the rise in inflation. The indexation benefit for an investment is calculated using the Cost Inflation Index (CII) value and once applied, gives investors the benefit of paying lower amounts of tax on returns from investments.
A very prominent type of income fund is the Liquid Fund. These are short term funds where the risks are low and the returns are easily liquefiable i.e. can be received in the form of cash.

Balanced Funds

These are the hybrid funds that incorporate equity as well as debt investments. The intent is to generate high income from the equity portion and get steady returns from the debt portion. Moreover, the presence of debt instruments also helps to balance out any losses that you may face from the equity investment.
However, here, the asset allocation is primarily based on different objectives. For example – a Monthly Income Plan is a type of balanced fund where a large percentage is allocated to debt instruments and the remainder to equity instruments. This allows fixed returns at a low risk and a decent exposure to get gains that can be achieved through stock investments.
Other forms of balanced funds might focus more of equity instruments as the objective there would be higher gains, even if the risk level increases a bit.

Index Funds

Index funds are designed to replicate the portfolio of a particular market index like the NIFTY or the S&P BSE 500 Index which expands to Standard & Poor’s Bombay Stock Exchange 500.
Before we go any further, the difference between active and passive management requires explanation. With the market fluctuations involved, most mutual funds are actively managed i.e. constant buying and selling is required to stay on course to attain the objective of the fund.
Now since the index fund follows the pattern of a market index, they do not need to be aggressively monitored and hence, are passively managed. The risks involved are in proportion to the fluctuations of the index it is following.

Gilt Funds

These Funds invest exclusively in government securities where there is null risk by default. However, the values of these fund units are dictated by market volatility and the risk-return ratio for these funds can be seen in the same vein as equity funds.

Global Funds

Global Funds invest in debt and equity instruments in a number of countries across the globe and is an additional layer to the domestic diversification of your capital. These funds are meant for those investors who have a good reading of international markets and an understanding of the country-specific risks involved.

Fund of Funds

This type of fund invests in mutual funds instead of assets. In other words, your investment is diversified among mutual funds rather than market instruments. Here, the performance and returns of the Fund of Funds will be affected neither by the best performing nor the worst performing fund, but the average of all the funds within the portfolio.
As is evident, there is no dearth of options as these different types of mutual funds cater to different investment objectives. So if you are thinking of investing in a mutual fund, ensure that you understand the market risks as well as the fact that the mutual fund selected is in tune with your objective of investing in it.

Now that we have understood different types of mutual funds in India.

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What Are Balanced Funds & Its Advantages

 

The intent to get aggressive returns is what drives you to invest in equity and equity-oriented mutual funds. On the other hand, if you believe in taking lower risks then it is very likely that you will opt for debt-oriented investment options to have predictable returns and fixed income.

But if you want to draw the maximum out of your investment and yet not take high risk, then going for a Balanced Fund makes perfect sense.

Balancing your investment

A Balanced Fund (or a Hybrid Fund as it is known sometimes), gives your capital an exposure to both equity and debt instruments in good measure. By combining these two classes of investment, a Balanced Fund combines the best facets- low risk and higher returns. A Balanced Fund can be primarily of two types based on asset allocation –

Equity Balanced Fund

In this type of fund, the majority of the capital (generally 70-75%) is invested in equity instruments with the rest for debt instruments. The higher risk that the equity investment holds is balanced out by the percentage invested in debt instruments.

Debt Balanced Fund

Here, the motive is safer investment while still taking advantage of returns from the stock market. The equity-debt ratio here is practically the opposite of an equity-oriented Balanced Fund.

Advantages of a Balanced Fund

• A Balanced Fund offers the best of both worlds – the potential of higher returns from the equity component and stability of the debt component. This makes Balanced Funds less volatile.
• The returns that you get from Balanced Funds are risk-adjusted. This factor is governed by how Fund Manager allocates the assets. By selecting small cap and mid cap stocks, the gains that the equity component can give are much higher and the associated risk is well taken care of by the debt investment.
• If your Balanced Fund is equity focussed and for the long term, then the major part of your investment is exempt from long term capital gains tax and the debt component comes with indexation benefit for holding periods beyond a year. That makes Balanced Funds a good tax saving investment as well.

From a broader outlook, Balanced Funds tick all the boxes for a Conservative investor who wants to benefit from the stock market as well as fixed income options and it represents a very sensible long-term investment option that can give steady yet promising capital appreciation and provide respectable returns for the later phase in life.

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Long Term Vs. Short Term Equity Investments

 

For a salaried or working individual, it is very important to invest to get capital growth on their money. Investing in a timely manner plays a key role in accomplishing that objective as it ensures that your hard earned income is accumulated periodically for good returns and a more fruitful utilization when required.
At present, there are numerous investment opportunities available and each one of them is suited to a separate investment profile as well as saving capabilities.
Based on time-frames, investments can generally be classified into two types: –

1)      Short-Term Investments (3 months-5 years)

As the name suggests, these are investments that can be made in the short term with considerable appreciation of your money in mind. Some of the prominent short-term opportunities are:

• Bank Fixed Deposits

  Considered conventional and very safe, Fixed Deposits is a good option if you have fixed and guaranteed short term returns in mind. With a lock-in period of 1-3 years, different banks offer returns ranging from 6-9.5% annually.

• Non-convertible Debentures/Corporate Deposits (NCDs)

Unlike Fixed Deposits, there is a need for a better financial understanding and having a risk taking appetite while investing in NCDs owing to uncertainty in returns. With that said, the prospective returns are higher than Fixed Deposits and the lock-in terms can be as low as 6 months.

Fixed Maturity Plans (FMP) – With no constraint in the lock-in period, you can invest in FMPs from 3 months to 5 years. These are investment schemes floated by mutual funds and are closed-ended. The assets that a fund households in its investment portfolio for such schemes have similar maturity periods which can give you decent returns with less exposure to market risks. An additional benefit from the tax saving angle is the indexation benefit that you get in FMPs.

• Short Term and Ultra Short Term Mutual Funds

  The investment portfolio in this type of mutual funds is predominantly in fixed deposits and other short term investment assets. Lock-in term is the standard 1-3 years with returns of up to 8%.

2)      Long-Term Investments (Beyond 5 years)

Long-term investments play a crucial role in the bigger scheme of things wherein you might need accumulated amounts; for e.g. for education or buying property. Therefore, it is imperative for you to have a cohesive know-how of the kind of investment option that you are opting for. Here’s an overview of the most common long-term investment options: –

• Employee Provident Fund/Public Provident Fund

Provident or pension fund is a savings scheme offered by a company to an employee in which a small portion of the employee’s monthly salary is deducted and diverted into his Provident Fund which can be withdrawn by an employee on retirement. Apart from this, an employee can also put up to 1 Lakh a year in Public Provident Fund.

 For self-employed individuals, Public Provident Fund is the universal option.
With an interest rate of 8.75% for EPF and 8.7% for PPF for Financial Year 2013-14 , EPF/PPF presents not only a good savings and tax rebate tool, it is also a sensible retirement planning investment.

• National Savings Certificate

  An offering by the Post Offices in India, it is one of the traditional investment tools and highly preferred by senior citizens and those who are looking to invest small amounts for longer lock-in periods. You can invest anywhere from 100/- to 1.2 Lakhs with a 6-year maturity term. The annual interest rate on NSC’s is 8% and not subject to market fluctuations. Also, the interest is not tax-free at the time of payment at maturity.

You can purchase physical NSC’s in denominations of 100, 500, 1000, 5000 and 10,000 and some post offices also have the option of offering them in a Demat form.

• Bonds– Bonds are debt instruments issued by companies and the Government to fund their functional and infrastructural needs as well as fund development initiatives. The inherent risk involved is lesser than equity investments. A good example of a Bond as a long term investment option is the Indian Government 10 Year Bond which is currently giving an interest rate of 8.86% since January 2014.
• Real Estate – Investment in real estate is a very smart investment option as the appreciation in the value of real estate has been very encouraging in the recent years. As an investment option, it represents good growth and is also a substantial asset to have for the later phase of life.
• Equity Shares – Investment in a company/equity entitles you to shares as well as voting rights as a shareholder but this long term investment is a calculated risk. Looking at it from a hypothetical perspective, a company that you invest in might flourish ensuring a high return on equity or might fold up resulting in a major loss. Simply put, it is a long-term single entity investment option that is entirely dependent on a company’s profitability.
• Mutual Funds – The inclination towards mutual funds investments in India is low at the moment and a major reason behind it is the lack of awareness amongst the masses. Mutual Funds are subject to market risks but with investment in a very diverse asset portfolio and professional fund management of your investment, returns on mutual fund investments are favorable more often than not.

Attaining a Balance
As an investor, it is important to achieve a balance in the ratio in which you make short-term and long-term investments. A good understanding of the available options as well as realistically determining your financial needs in the next few years can really help you to allocate your money in short-term and long-term investment options sensibly. That way, you will have sufficient capital for your short-term needs as well as steady growth on your capital in the long term.

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Important Principles Of Financial Planning

 

So, how should you conduct your financial life in the New Year? Read on to know the path that you must follow…

Well, another year has just rolled over. We, at Axis Bank wish that all your dreams are fulfilled in the coming year. Bearing this in mind, to ensure that the New Year keeps you financially healthy indicated below is what Budget could have in store for you and how you should adapt yourself to it…

• To begin with, it is NOT the time to replace your financial plan with a brand new one as you would do with a calendar. It is important to maintain continuity even while making small adjustments and course corrections to your existing plan.
• Your income may not witness the same jump in 2013 as it has over the past few years, simply, because corporate India is still reeling under the slowdown that our country has been witnessing off-late. So, you may need to tone down your expectations on income growth.

• On the expenditure front, the double digit inflation at the consumer level still remains a disturbing reality. You would do well to wisely tighten your belt even while hoping for some respite.

• Your savings plan may have taken a hit recently due to the unrelenting price rise. It’s time for you to put it back on track by curbing expenditure. The lethal combination of low income growth and high expenditure growth could adversely affect your future financial health. Maintaining your target savings rate should be the top priority. Remember, financial prudence demands that you pay yourself first.

• Your investments could need a bit of tweaking. Interest rates are likely to drop in the New Year. You would do well to lock into fixed deposits now at attractive rates. Gold has been on an uptrend for the past decade and may justify some caution. Equities have gone nowhere since 2007. Its recent performance has been inspiring and could well throw a pleasant surprise in 2013. Make sure you have sufficient exposure so that you do not miss the bus. Real estate prices have remained at uncomfortable levels recently and so may be the case in 2013.

• Borrowing costs are likely to come down in 2013 in tune with the general fall in interest rates. However, this should not stop you from trying to repay your loans and striving to become debt free at the earliest.

• Your current insurance could need some review to account for major changes in your family/professional circumstance and in your income/expenditure pattern. Any increase in liabilities should also be taken into account. And, do remember to pay your premium in time to keep your policies alive.

The fundamental principles of finance remain unchanged as ever. Just a bit of dynamism is what would be required to tide over the temporary circumstances. And, here’s wishing you the best of financial health in 2013!!!

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Should You Prepay Your Mortgage Or Invest?

Home loan

The home loan not only offers tax benefits but also helps build an asset that has the potential to appreciate in value – property. The tax benefit is not only available for interest payments but also for principal repayments. Besides, if Rakesh is a first time home buyer, he gets an additional tax benefit of Rs 1 lakh on the interest paid on the home loan. In other words, the home loan should be left untouched. Rakesh should continue to pay the EMIs as and when they become due.
The tax benefit is not only available for interest payments, but also for principal repayments.

Car loan

Unlike a home loan, a car loan does not help build an asset that will appreciate in value. In fact, once the car is purchased and starts being used, it will only depreciate in value. Besides, car loans are expensive. Clearly, Rakesh should repay the entire car loan. If the bank levys a prepayment charge on Rakesh, he should negotiate this with the bank and either have it reduced or cancelled. In any case, even if there is a prepayment charge, he should pay this off and repay the entire loan.

Invest the balance

Now Rakesh will be left with Rs 11 lakh (Rs 15 lakh – Rs 4 lakh used to repay the car loan). He should invest this money. In fact, this money will provide Rakesh security that in case of any unfortunate circumstance due to which he is unable to repay the entire home loan, he can use these funds to do so. Rakesh should invest this money based on his risk-taking capacity and tolerance (either invest in gold, debt, equity, or partly in each of these options).
Endnote
Not all loans are bad. If a loan helps you build an appreciating asset and offers you tax breaks on capital repayments and interest payments, it’s worth holding on to it. However, repay loans that are pure expense loans with no tax breaks.

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Securing Your Child’s Financial Future

 

How much life and medical cover is required for you and your children were some of the topics discussed in this week’s personal finance call-in show Smart Money. Host Vivek Law, editor, Bloomberg TV India, and Monika Halan, editor, Mint Money, also talk about strategies to build corpus in the long term. Edited excerpts from the show aired over the last weekend:
Vivek: Monika, when you have a child, how do you plan for the child’s future?
Monika: Most people get really worried when there is a child in the family and they start knee-jerk investment plans and unfortunately they all end up buying child plans. But I think we need to look at it a little differently. Step back and look at what is the purpose of financial planning for the child and it is always not about the products that you are buying. Financial products really come at the end of the process. So I would like to break it up into two parts. One, you look at protection, and the second, you look at products. So when we look at protection, the first thing is to insure your life and not that of the child. When you buy a child plan, you end up insuring the child’s life and if you as the breadwinner is not there, then the child and the family has the money to go on for education and the other goals. So in protection that’s pretty much the first thing.
Vivek: That would mean you take a basic term cover for yourself as a parent?
Monika: Yes, basic term cover which should be 8-10 times the annual income. The second of course is a medical cover. You are protecting not just the child’s medical bills but also your savings which gets depleted due to an emergency.
Vivek: So how much should that cover be? I know lot of parents who have Rs.1-2 lakh medical cover from their employer and they think it is enough.
Monika: Per child, I would say have between Rs.2-3 lakh. If you do not have your office giving you an additional cover, I think it makes sense to take a family floater on top of that, maybe another Rs.5-7 lakh. So that in case there is an emergency, you are prepared. One more very important thing which most of us don’t do is to write a will. It is a very scary process when you sit down with your partner. We have been through the process, it really makes you think of what will happen to your children when you are not there to drive the money which may come as a large corpus. So actually simulate it and then build that plan, write that will, put down very detailed plan of when that insurance money comes how is it to be used, what kind of investment products are to be used and then only make that plan.
Vivek: What about the whole process of corpus building? It will take 15-20 years. What’s the best way?
Monika: The Public Provident Fund is a really fantastic tax-free instrument. Exhaust the limit of Rs.1 lakh. You also need equity exposure. You have large-cap and balanced funds for that. Since you are looking at 15-20 years, you can have mid-caps if you have risk appetite. And I wouldn’t go against a 5-10% exposure in a gold fund. So these are your three basic building blocks. The second part is in whose name is the money? I am going to take a fairly radical view here and say do not buy it in the child’s name. Are you sure what your child is going to be at 18 or 20 years of age? What if he wants to blow it up in a start-up and you want him to study further? So its not that you want to hold him back but possibly that maturity may not be there to deal money. So make the investments in your own name.
Vivek: So there should be four categories—large-cap, balanced, mid-cap and gold funds. However, the number of schemes could vary depending on the amount of investment or should it be no more than 6-8 anyway.
Monika: That’s right. No more than 6-8 funds because you don’t need that much diversification.
Audience queries
Vivek: Sreekar, you seem to have bought a lot of mutual funds?
Sreekar: There were a lot of recommendations from family friends. Hence, I put lot of money in different funds.
Vivek: Right, but I think way too many funds, isn’t it?
Monika: What we see in your portfolio is something that we see in a lot of other portfolios. Sreekar, I have looked at your SIPs and it seems that you are a very high-risk investor. Do you see yourself as one?
Sreekar: Yes, you are right because I do not have dependants. But I am getting married soon.
Monika: You will have to cull out two of the mid-cap funds and buy a large-cap fund, even maybe a balanced fund so that there is more balance in the portfolio. Look at funds as a part of your diet. You can’t just have proteins. You will need the moderating influence of carbohydrates. Don’t just go fully into one part of the market. Spread it out and when markets are doing well and when mid-caps are doing well, it’s very attractive to buy those extremely high-return funds but that’s where portfolio diversification is important and in times like this, if you had two large-cap funds, your portfolio wouldn’t be in the red today. I think that really is one of the big changes that you need to make. You have another question on systematic transfer plan. What exactly is your need?
Sreekar: There is a lump sum in my savings account. I want to move it to an account so that it can take care of my SIPs and I am also planning to buy a flat.
Monika: For people who may not know, a systematic transfer plan is a way to make your lump sum get invested slowly into an equity product and not at one shot. You buy a debt fund and then slowly transfer that money at periodic intervals into equity. It’s a way of averaging out the price. In your case, you seem to be in the 20% tax bracket. The fund for you is a ultra short-term debt fund.
You will pick the growth option and you have to remember that you will buy the ultra short-term debt fund from the same fund house whose equity plan you want to transfer the money to.

Courtesy: www.livemint.com

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Factors You Should Consider For Prudent Asset Allocation

 

While all of us aspire to create wealth for ourselves and for the comfort of our families, in today’s time of rising cost of living, it is imperative to understand a host of factors before one binges into a risky asset class such as equities to achieve one’s life goals. Although, equities appear the best investment option to make the most of in a stock market rally, it is not very wise to nest all eggs in one basket. This is sometimes comprehended by people only in conditions of adversity (such as a sharp decline in stock market), when investors have parked a large portion of their corpus in a particular asset class (in this case, equities).

It is vital for you to understand that not all assets move in the same direction at the same time. If equities are witnessing a bear market, it is unlikely that other asset classes such as gold, debt instruments, real estate will also be witnessing a down-turn at the same time or vice-versa. Hence it is best to invest in more than one type of instrument to improve your chances of achieving your long-term goals with minimal turbulence. You see, planned asset allocation acts as a shield to protect your wealth during uncertain economic conditions and market volatility.
Allocating your hard earned money wisely…
Well, here are some factors which one must take while you intend to allocate your assets – hard earned money wisely, as they provide a comprehensive picture.

• Your Age:

Your age is an important factor that you must consider while deciding your asset allocation. If you are a young investor of say 20-30 years, you can consider allocating a large percentage of your portfolio in risky assets, such as equities. Being young gives you ample amount of time and opportunities to recover from any possible setbacks in the value of the portfolio. If you belong to the middle age group (30-55 years), you must aim to create a moderately risky portfolio and should not invest your entire savings in equities. On the other hand, aged investors, nearing their retirements (55 years & above), should follow a highly conservative approach when planning their asset allocation and prefer debt or fixed income instruments so as to preserve the principal amount.

• Your Income:

The amount you invest is a function of the amount of income you earn. Any appraisal in earnings, will impact your discretionary income and hence the amount of investment. If you are into service or employment, drawing a fixed salary every month, you can allocate your savings systematically to both risk and safe instruments depending on your age. However if you are in the business industry, your profits and losses are not fixed in nature. While higher profits will lead you to expand your business or invest in various financial instruments, a year of losses will have a direct bearing on your ability and capability to invest. Hence, it is imperative for you to allocate your assets keeping in mind your future income growth potential.

• Your Expenses:

In order to keep your financial health in pink in the long-term, it is important that you live within means and curtail your unnecessary expenses. It is this strategy which will enable you save a large portion of your monthly earnings, which can be deployed in suitable asset classes (depending upon your age, income, risk appetite and nearness to goal). We recognize that while certain expenses such as loan repayments, rent, grocery bills etc. cannot be avoided; you can always stream line few of your unnecessary and extravagant expenses. This will enable you to increase the net free cash available for asset allocation, which in turn if invested wisely can enable you to create more ‘wealth’ and fulfil your financial goals.

• Nearness to your financial goals:

Your nearness to your financial goal is also relevant while doing financial planning. If you are many years away from the financial goal, you should ideally allocate maximum allocation to the equity asset class and less towards fixed income instruments. So, say you have a financial goal of getting your daughter married well after 20 years from now; it would be prudent to invest in equities (either through the direct route or through equity mutual funds). It is noteworthy that the concept of allocating funds to different asset classes based on your nearness to goals helps not only to diversify risks across different asset classes but also in rebalancing your portfolio when you are closer (in terms of number of years) to the achievement of your financial goals. When you are drawing nearer (3 years) to your financial goal(s), you must shift your corpus to fixed income instruments to safeguard and avoid risk asset classes to preclude wealth erosion.

• Your Risk Appetite:

Your willingness to take risk which is a function of your age, income, expenses, nearness to goal, will be an important determinant while framing your financial plan. So, if your willingness to take risk is high (aggressive), you can skew your portfolio more towards the equity asset class. Similarly, if your willingness to take risk is relatively low (conservative), your portfolio can be skewed towards fixed income instruments, and if you are a moderate risk taker you can take a mix of equity and debt respectively.

• Your Liabilities:

If you as an investor have high liabilities, then even though you may be willing to take high risk, your financial condition would not allow you to take high risk. You would be a risk-averse investor. Irrespective of age, willingness to invest, nearness to his goals, risk tolerance or any other factor, you will be forced to only make safe investments as you cannot afford to let your investments suffer any setbacks due to market swings. Also, you must avoid investing borrowed money in risk assets such as equities as any losses endured here might worsen your financials.

• Your Assets:

As an investor, it is imperative to first analyse your existing portfolio before allocating funds further. For instance, if a huge chunk of your portfolio is dominated by real estate, then you must diversify your assets in a manner that reduces your allocation to risk assets such as real estate or equities and increase investments in safe instruments such as debt, fixed deposits and cash.

Diversification of assets gives you a lee way to counter market uncertainties and acts as a stabiliser for your portfolio when a particular asset class crashes. Broadly an effective asset allocation offers the following 4 benefits which are:

1. Lowers your investment risk
2. Reduces your dependency on single asset class
3. Protects your investments during turbulent times
4. Makes timing the markets irrelevant for you

What should be your Ideal asset allocation?

Under ideal circumstances…

Investors whose objective is to achieve long term capital appreciation and have an aggressive risk appetite can invest upto 70% in risk assets such as equities and related instruments, and the remaining 30% in safer asset classes such as debt, fixed deposits and cash instruments.

Moderate Investors, who aim at providing some stability to their portfolio along with capital growth, must invest upto 60% in equities and balance (40%) in debt, fixed deposits and cash.

Conservative Investors’, who prioritize the protection of their capital must upto 70% in debt, fixed deposits and cash, while the rest can be diversified by investing in quality equity instruments.

However, before you follow this ideal asset allocation, be cognisant about the aforementioned facets which we discussed. Asset allocation safeguards the overall value of your portfolio from the misfortune of any particular asset class. It is not a one-time process and you must keep reviewing your asset allocation from time to time to ensure it is in line to achieve your financial goals.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing.

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Importance Of A Financial Advisor

 

Creating a financial plan is not everyone’s cup of tea. Sometimes you may not have the time; sometimes you may not have the required skill set and most often, you may not have the inclination to undertake such an exercise. So, how can you go about acquiring a suitable plan? Simple; delegate the job to an expert!

At present times, the financial markets are flooded with a variety of financial instruments with varied characteristics and maturity periods. Previously you had to be content with bank fixed deposits and investments in gold, real estate, insurance products and equities. But at present times, you also have the choice of mutual funds, ULIPs, insurance products with riders, gold ETFs and SIPs. Even though these instruments are easily available, it is difficult to choose appropriate instruments and construct a portfolio which matches and meets your unique needs.

Enter financial advisor

Keeping this in mind, you need the services of a professional financial advisor who is qualified to suggest investments in suitable financial instruments. Financial advisors construct your financial portfolio by considering your income, age and other parameters. Moreover, they also give you valuable advice on how to revisit your portfolio when there is a change in market conditions, your income levels or responsibilities. They help you invest the spare/excess cash available with you in a productive manner so as to reduce your tax liability and maximize gains. The advice given by a financial advisor also helps you to negotiate salary components with your employer which will indirectly help in reducing your tax burden. In case you are earning in foreign exchange, the services of financial advisors will help you deploy those funds into the most suitable investment avenues.

Lastly, the services of professional financial advisors become imperative because one size does not fit all; your income levels, expenditure and tax liabilities are likely to be different from those of your friends and acquaintances.As a result, what has worked for them may not work for you as well.

Conclusion

While choosing a financial advisor, be sure to go by good references and not the lowest price tag. Then, once you have chosen a financial advisor and are convinced that his or her advice is based on scientific principles and sound experience, you must trust his or her advice. Most importantly, remember that for your financial planning exercise to be successful, even if it constructed with the help of the best financial advisor, you must have patience and perseverance. Some financial goals take relatively long to materialize.

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How To Create A Personal Financial Plan

 

Today, it is imperative to supplement your savings with a sound Investment Strategy which is why financial planning is a must! For many of us, creating a financial plan may seem like a daunting task and leaves us unwilling to even start. However, the truth is – it’s simple as well as beneficial! Its All About Money throws light on 8 easy steps – starting from goal planning, investment planning, risk management, retirement planning, and so on; that will help you create your financial plan from start to finish.

FOLLOW THE STEPS BELOW TO CREATE YOUR OWN PERSONAL FINACIAL PLAN

STEP 1. GOAL PLANNING

• Identify your goals & prioritize them
• Assign a value to each goal
• Save for emergencies

STEP 2. INVESTMENT PLANNING

Make a monthly budget where you divide your income into three parts
• Savings
• Expenditure
• Investment
Your investment plan depends on below factors:
How much risk you can take depending on your demographics such as Age, Income, Number of dependants, etc.
• How much risk you are willing to take
• How much time you can spend on monitoring the investment
• Your purpose for investing

STEP 3. RISK MANAGEMENT (INSURANCE)

There are many allied benefits of getting insured if you plan carefully, such as below:
• Your dependants are secured in case of your sudden demise or in case of an accident that leaves you unable to earn
• You can insure an asset that you have purchased (Your Home) using loan
• In case of hospitalization or critical illness, the cost will be taken care of through insurance
Note: It is advisable to start Insurance planning early, as the premium rates are higher when you are older

STEP 4. RETIREMENT PLANNING

One must start laying foundations for one’s retirement from the start of one’s career. Long term investment options are best suited
Equity Investment helps you build serious wealth over the long term. Besides, the risk in equity investing considerably reduce if one stays invested over a long term.
Other retirement investment options are –
• Pension Plans
• Provident/Gratuity/Superannuation
• Public Provident Fund
• National Pension Scheme

STEP 5. CREATING THE FINANCIAL PLAN

Planning your cash flow: Keeping an account of your current and future cash flow will help you plan your investments, stay liquid and deal with emergencies comfortably
An Organised Budget: The numerous, one-time, small expenses add up to land a giant blow to our financial health.
A budget serves three purposes:
• Gives a detailed itinerary of your expenses
• Shows where you can cut down expenses
• Helps you spend and save wisely
• Regulates your expenses
Loan Management: Managing your loan involves –
• Allocating funds for EMI
• Planning large repayments

STEP 6. TAX PLANNING

• Invest in tax-saving investment options
• Make the investment early to enjoy the interest for the entire year
• Compute your taxable income for planning your cash flows
• Use all possible tax deductions that you are eligible for, in order to minimise your tax burden

STEP 7. REVIEWING YOUR PLAN

Financial Planning is an ongoing process and you must review your plan regularly, because the circumstances in your life change. Any major changes in your life such as marriage, children, education & job change must be accounted for to consider altered circumstances.
This is because as per your life situation:
• Your risk capacity changes
• Your asset allocation gets altered
• Insurance needs will arise or get altered
Review your plan every six months or annually and monitor your investments regularly to protect yourself against sudden shocks.

STEP 8. ESTATE PLANNING

• Create a list of all your assets
• Get familiarised with the estate devolution rules to avoid disputes later
• Create a Will after discussing it with your family and friends
• Place your Will with someone or somewhere that can be accessed easily by your family
In the end, it is your wealth that you will be giving away, so plan for it wisely and generously.

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Different Types Of Investment Opportunities

 

Every day brings a new twist to the sentiment of Indian investors. If one day the stock market is up 500 points, the next day, it is down by nearly the same amount or even more! Doesn’t this confuse you? Not only this, there are a number of aspects that would be on your mind.

Some of these are –

• The equity market has gone nowhere in the last 5 or 6 years. Even long term investors are losing patience and starting to question the usefulness of equities.
• Gold prices have had wild swings much to the dismay of the average Indian investor who always believed in gold as the “safest” investment.
• Debt mutual funds’ performance took a sudden nasty turn just when investors had loaded up on long term funds in anticipation of the interest rates sliding. This has shaken investor confidence.
• On top of all these woes, investors had to contend with Ponzi schemes and blatant frauds in the commodities spot market.
• Real estate prices have remained unaffordable and even unbelievable in some cases putting them out of the average investors’ reach.

Well, investors are having it tough no doubt. It’s a storm out there with literally no place to hide.

Sticking to investment fundamentals

As with everything else in life, investments too will have their ups and downs. It is the reality after all. There will be good periods and also the bad ones. In this scenario, using a sensible approach is the only way out. Disciplined savings habit, wise investments with adequate diversification and a clearly defined asset allocation pattern based on a financial plan aren’t just bookish gyan to be brushed aside. Just as sound technique is essential for success in cricket, a strong commitment to fundamentals is the secret of investment success.

Investment opportunities

Here are some attractive investment opportunities that you can consider at this point in time.

1. Fixed Maturity Plans (FMP):

   When everyone expected interest rates to fall, it surprisingly rose! This has given an unexpected but excellent investment opportunity. Since interest rates are considered to be at or near the peak now, this is a good opportunity to lock into these attractive rates through FMP. As FMPs have a fixed maturity date, invest for the full tenure of the FMP; this will help you get the prevailing high interest rate for the term of the fund. Depending on your investment horizon, you may choose FMPs with tenure of up to 5 years.

2. Short term funds:

   Bond funds come in a variety of investment terms. There are long term and short term funds depending on the tenure of the bonds that they hold. As short term interest rates spiked recently in response to the RBI measures to stabilize the rupee value, short term mutual funds have been offering attractive returns. Since low tenure bonds and funds experience lower volatility due to interest rate movements, these are good options for a 12 to 18 month investment period.

3. Long term funds:

   Bond funds that invest in relatively longer term bonds would benefit tremendously when interest rates fall. The current high interest rates are expected to fall in the near to medium term. By investing in these long term funds, you not only get higher interest but also an attractive capital gain when interest rates start falling (market prices of bonds rise when interest rates fall). If you can remain invested for more than 3 years and are comfortable with short term price falls and rises, you can consider these funds

4. Equity SIP:

   Most successful equity investors invested when everybody preferred to stay away from equity. There is very little enthusiasm for equity shares among investors now and hence their prices are at an attractive low. By investing regularly in equity funds now, you have the potential to earn attractive returns when the market does turn around eventually in the near future. Systematic Investment Plans are an automated way of investing a fixed sum at fixed time intervals. All it takes is a standing instruction to your bank through the mutual funds scheme and your money would start flowing into the scheme without any further effort. Investing bit by bit through this period of gloom, you not only reduce your investment risk but also enhance your return potential. You may start and more importantly, continue an SIP in a good equity fund.

To conclude, don’t despair! There will always be some investment avenues that would make sense in a given situation. Happy investing!

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Gold Investment In India & Its Benefits

 

Gold prices have been moving southward; should you consider this as an opportunity to invest in gold?

Everyone appears to believe that the bull market for gold has come to an end. Further, they believe that gold prices will ‘keep falling’. The reasons forwarded are primarily that after a tumultuous period where European sovereign defaults were anticipated and sputtering of the US economic recovery, after several initiatives by respective governments both seem to have stabilized and a calmer future is now foreseen. A calmer economic environment is supposed to bode well for financial investments leading to lower dependency on traditional forms of hedging viz. gold. Gold has hence lost value and continues to be in a downward trend.

For that to be true, certain things have to fall in place. The last bull market in gold ended when the US Federal Reserve (Fed) changed its policies in 1979. Monetary policy was significantly tightened. Interest rates, which trailed inflation rates, were hiked up significantly allowing investors to have very decent real rates of return (interest rate minus inflation rate). Not only this, inflation was also kept in check to maintain real returns.

 In this situation, bonds became more attractive than gold (due to high interest rates and falling inflation). By contrast, gold prices fell nearly 70% during the period 1980 to 1999 reaching US$ 250 per oz.

In order to address slowing GDP growth in late 1990’s, US monetary policies were loosened leading to lowering of interest rates. This was coupled with the attack on World Trade Centre in New York in 2001 which led to questioning the US status quo on global military dominance. Both these events hastened the weakening of the US dollar and strengthening of gold prices.

This lasted till 2012 and since then, gold prices have started falling again. What is the reason? Is the US planning to enact similar monetary policies it had during the 1980s? No!

In fact, the truth is that governments across the world are printing more and more currency notes resulting in inflation only moving one way – up. In fact, nearly every major country in the Western world is running a big deficit. Central banks and central governments are committed to a particular course of action. Does it lead to more valuable paper money? Does it lead to price stability? Does it lead to sustainable growth?

Or does it lead to bubbles, crises, booms, busts, and possibly an eventual blow up? Clearly, the value of paper money looks to be increasingly precarious. In this situation, the only real value will reside in GOLD!

Key Gold FactAccording to the US Geological Society, gold mine supply would exhaust in 12 years.

30-year gold price history in INR per gram.

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National Pension Scheme vs. Employee Provident Fund

 

It is important to first understand that NPS (National Pension Scheme) and EPS (Employee Provident Fund) are as different as chalk and cheese. Although both cater to the post retirement needs of a person, the tax benefits, rate on investment, etc. are very different.

In order to understand what exactly makes NPS different from EPS, it is important to get a clear and broader understanding of the benefits and shortfalls of both and which one supersedes the other.

What is NPS?

Just like the commonly known Employee Provident Fund, the National Pension Scheme too is a retirement plan, which is open to all the Indian citizens. It caters not only to employees of organizations but also to the wage workers and is available in 3 forms:

1) Tier I – wherein premature withdrawal is not allowed. The holding is up to retirement.
2) Tier II – Premature withdrawal is permitted in case of genuine reasons.
3) Swavalamban account – Here the government shall pay Rs. 1,000 for 4 years into the account as its contribution. The main objective of this account is to encourage savings among the wage earning category.

What is EPF?

An Employee Provident Fund is specifically for the salaried. It is a dear scheme that covers majority of the working class. Here the employee and employer both contribute 12% + Dearness Allowance each into the EPF account.

Thus, while an NPS account can be opened by any Indian, an EPF account is available only to a salaried person.

Return on Investment

As mentioned before both are retirement plans, however the return on investment which can be earned by the two differs greatly. The EPF interest rate for the year 2014-15 was 8.75%.

However, in case of NPS there is no specific interest rate as NPS is a market-linked product. The money is not with the government but with designated fund managers, which you can choose between. You can also choose between different funds as investment options, some of which invest in fixed income but others invest in equities. Up to 50% of your assets can be in equities. Equity investments are the great advantage that the NPS has. While equity investments can be volatile over the long horizons of a typical NPS investment, they are likely to generate much higher returns than fixed income securities.

Can you take a loan of any of these?

In case of EPF, an application for loan to a maximum extent is allowed thus making EPF nearly liquid. However NPS offers no such option so it is literally a long term holding with no exit route.

Perks of planning for retirement

For EPS your employer is obligated to match up to your 12% + DA contribution and this gets added to your retirement savings. So you save twice by saving once. Unfortunately for NPS there is no such obligation on the employer to contribute.

What about Tax?

EPF – Tax deduction is available Up to Rs.1 lakh under section 80C and taxable as per applicable tax slab if withdrawn before 5 years of service.

NPS – Section 80CCD of income tax act provides deduction under the section 80CCD(1) in respect of contribution made by the employee, and a deduction under the section 80CCD(2) in respect of contribution made by the employer to the New Pension System (NPS).

Contribution made to the pension scheme under section 80CCD (2) (employer’s contribution) shall be excluded from the limit of one lakh rupees provided under section 80CCE.

So, if you’re genuinely looking for retirement saving, then keeping the tax dimension aside, NPS is far better structured and should deliver more satisfying returns because it is designed as a very methodical retirement savings plan, whereas EPF is something to channelize long-term savings into safe fixed income.

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5 Tips While Buying Insurance Online

 

Purchasing insurance online has become a quick, convenient and economic way to purchase insurance products.

The trend of purchasing insurance online is gradually gaining pace in India as it is becoming popular with today’s tech-savvy generation. With the advent of online insurance, you do not need to go to an insurance company’s office or visit an insurance agent. Rather, you can purchase any type of insurance policy online through the internet – be it health, motor, travel or life covers. Besides online insurance companies, which directly sell their products through their web pages, there are websites like Insurancepandit.com, Bimadeals.com, Policy-bazaar.com, etc. which display insurance products from different insurance companies. Such sites help you to compare the features of the different insurance plans thereby enabling you to make informed decisions while you buy insurance cover.

 Here are 5 smart tips you may consider while buying insurance online:

• Amount of insurance -

  You should buy only as much insurance as you need. The general thumb-rule is that you should buy a life cover which is 10 times of your annual income to protect your family in case any untoward incident happens to you. However, there are more accurate ways of gauging how much insurance you need. One popular method is by calculating your Human Life Value (HLV). To do this, all you have to do is go online and find a couple of HLV calculators. Fill in the requested fields and submit and they will give you an idea of how much insurance you should buy.

• Selecting an insurance company -

  This is one of the most essential steps in your insurance-purchasing exercise. Your decision to purchase a policy should never be dependent on how good the website of the company is or, for that matter, how easily or how fast you can purchase a policy through its website. Also, don’t select the company simply because it is the first one that appeared during your search on the internet. Rather, you should check its claim settlement ratio, its pedigree and its history within the insurance fraternity, before zeroing in on the company.  Also make sure that you find out about the customer service policies, location of offices, etc.

• Product:

  Once you have identified the quantum of insurance you want to purchase, based on your requirements and the company from which you plan to purchase insurance, it’s time to choose the type of policy that suits you best. You should check the features of the policy such as the term of the policy, the premium-paying term, the date of maturity, the charges and benefit structure. Benefit illustrations under different return rates are available with all ULIPS. They also disclose charges and your would-be investment status on a yearly basis.

• Performance of the fund -

  While purchasing a ULIP (which is an insurance policy which doubles up as an investment vehicle), you can check the company’s past performance. Details of the performance of all funds of life insurance companies can be easily accessed online. Stability is an important factor that needs to be considered here. A company that has a good track record is more likely to have a stable fund performance over time and hence is less risky.

• Security of the insurance company’s website -

  This is the most important of all tips for purchasing insurance online. While you are ready to pay, check if the website is Verisign protected or not. Also check whether the browser of the company’s website displays the term ‘HTTPS’ or just ‘HTTP’. If it is the latter, you should refrain from using the website for payment because the ‘S’ in ‘HTTPS’ denotes secure access.

Once you follow these tips, most of your key concerns will have been met. However, if you still feel unsatisfied after buying the insurance policy online, the ‘free look’ facility, allows you to return the policy within 15 days of purchase.

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Types of Insurance & Which type of insurance should you buy?

 

With so many types of insurance products available it could become difficult to decide what type of product is best suited for you. Here’s what you need to know to help you decide what to buy, based on your financial needs or life stage…

Technically, insurance should be sold based on the needs of the person who is to be insured. But sadly, we often come across overzealous insurance agents who oversell expensive insurance products, in some cases to earn fat commissions. Now, become a proactive buyer by educating yourself about different types of insurance products designed for various life stages.

Term Insurance Plans:

The sum assured of such plans is paid to the beneficiaries (family, parents or children) only if the policyholder dies within the policy term. This type of product is designed for 100 per cent risk coverage. Hence, the premiums for this type of life insurance policies are the lowest amongst the entire insurance category.

Suitability: Single or Married with or without Kids

Whole Life Plans:

The policyholder enjoys life coverage throughout his or her entire life. On the death of the insured, the validity of this life insurance policy expires and the corpus is paid to the family.

Suitability: Single or Married with or without Kids.

Endowment Plan:

In this type of plan, if the insured dies during the term of the plan, the beneficiaries receive the sum assured. If, however, the insured survives the term of the plan, he or she receives a lump sum of money. Such plans help you to accumulate funds over a longer period of time enabling you to meet future obligations such as buying a flat or an annuity policy.

Suitability: Ideal for individuals who wish to save for the future and at the same time purchase insurance cover.

Money-Back Plans:

With such plans, the insured regularly receives a percentage of the sum assured at regular intervals throughout the policy term. The periodic payouts of Money Back Plans are useful for meeting financial obligations from time to time such as children’s higher education or marriage, foreign tours, etc.

Suitability: Ideal for those looking for a 2-in-1 product – insurance cover plus savings.

ULIP:

This category of insurance combines the advantages of risk coverage with the benefits of mutual funds. A certain percentage of the premium is invested in listed equities, debt funds and/or bonds, depending on what options you choose, and the balance meets insurance and fund management expenses.

Suitability: ULIPs are a good option for investors who would like to get involved in managing their investment cum insurance funds.

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Importance Of Life Insurance & Its Advantages

A life insurance policy is a contract between an insurance company and you as a policy holder. By paying a pre-decided premium amount every year to the company for a fixed term, your family members get a protection cover in events of critical illness or death.

Through Life Insurance, you ensure that your family stays financially independent in case of an unexpected eventuality. That objective itself makes it an integral component of life planning.

An insurance policy covers you as the insured and ensures sustenance of your beneficiaries- the individuals you have enlisted under the policy to be looked after in case of any unforeseen circumstances.

It provides financial support and assistance to your dear ones including spouse, children, aging parents or even your business partners and employees.

How Much Life Insurance Cover Do You Need?

How much coverage you should have on your insurance policy is a difficult figure to determine because you would want to make sure that your coverage is adequate. That is because excess coverage can affect your finances due to higher premium payments and being underinsured is never ideal. To make matters easier, a very elementary thumb rule is that your life cover should be 10-12 times your annual income.

The best way to figure out the perfect policy coverage option is to let an insurance consultant conduct a Financial Needs Analysis for you. This gives you the estimated coverage you’ll need to ensure a secure future for your loved ones. Insurance is a ‘prevention is better than cure’ adage applied to real life.

Features of Life Insurance Policy

Life insurance policies have a number of features that make them a much needed life-planning tool.

• You get to choose the best coverage option, payable in affordable premiums.
• Based on your lifestyle, needs and preference, you can select from a variety of life insurance options ranging from pure insurance to hybrid insurance products like ULIPs and endowment plans where you get maturity benefits.
• Life insurance provides financial security of your dependents in case of any eventuality.
• Additionally, you also enjoy tax benefits on different types of policies under different sections of the Income Tax Act, 1961.

Asserting the point

By now, it must be evident how important a life insurance is for you to ensure your family’s financial independence. Depending on the type of insurance you choose, you are either building a corpus that you will get on maturity or you are simply insuring yourself and your loved ones to sustain their financial

independence in case of an emergency or an eventuality. In either case, having life insurance allows you to live a life free from financial worries as far as your future is concerned.

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What Is A Health Insurance & Its Advantages

 

A health insurance policy is a type of insurance which covers for the medical expenses incurred by the insured. It insures you against medical expenses incurred during the treatment of illnesses and guarantees a financial stability in case you fall sick and require medical attention. Without a proper health insurance, an unexpected medical condition can leave you and your family financially weakened.

The advancement in medical treatments and technology has increased the average life expectancy. However, this improvement in technology comes at a higher cost in terms for treatment expenses. Add to that the new illnesses coming into picture, health insurance is now an integral part of how you plan your finances.

Health insurance is your safeguard against unforeseen illnesses or accidents where high expenses like hospitalization, tests and operations are required.   A health insurance helps you out by providing cover for medical care or may compensate you for the amount spent as medical expenses.

ADVANTAGES OF HEALTH INSURANCE

There are a number of reasons that make it important for an individual to have health insurance.

1. You get healthcare facilities at an affordable rate.
2. You do not need to delay any immediate medical expenses.
3. You have access to an extensive network of hospitals and treatment centers provided by the insurance company where cashless facility is available.
4. Any medical conditions that you have at present also get included within the policy.
5. Peace of mind if any unforeseen illness or accident occurs.

Considering the rising cost of medical equipment and treatments, not having health insurance cover can result in you spending a high amount of medical expenses which can disrupt your finances.

WORKING OF HEALTH INSURANCE

Just like any other insurance type, a health insurance works on a pooling mechanism. When you buy a health coverage policy, you actually join a group of individuals who sign up for health insurance coverage. Health insurance coverage is based on the pooling manner so as to combine a group’s premium resources to cover for the whole group. Thus the premiums you pay help in covering the whole group rather than just an individual.

The insurance company analyses overall risks involved with healthcare along with your likeliness to be affected by a risk and the cost of coverage you might require to develop a finance structure and determine your premium costs.

The premiums collected from every individual of the group is pooled and used to pay for health coverage claims made by others. Thus your healthcare expenses are spread out and coverage assured by the insurer. The healthy customers help pay for the medical care required by the ill individuals, knowing that the same will be provided in case they need help.

COMPONENTS INVOLVED IN A HEALTH INSURANCE

There are a number of components involved with your health insurance coverage policy which needs to be understood and read before obtaining one.

1. Premiums:  The periodic payments you make to keep your health insurance policy active is defined as premium. The premium payments you make towards your health insurance policy pays for the coverage. These premiums collectively are used by the insurer to provide cover to the claimant.
2. Deductible: A certain amount that you have to pay out of your pockets is referred to as deductible. An insured is supposed to pay deductibles in the different types of insurances. The range of deductible depends upon how much you would like to pay out. The higher the deductible the lower your premium cost would be.
3. Co-insurance: A percentage of the expense incurred on medical care is to be paid by you and the rest is guaranteed by the insurer. Generally in a co-insurance arrangement, an 80/20 split is made between the insurer and the insured to pay for the expenses.
4. Co-payment: Also referred to as co-pay is the amount you must pay out of your pocket before the health insurer pays for the coverage.

HEALTH INSURANCE COVERAGE: WHAT’S COVERED & WHAT’S NOT

A number of health insurance policies are available which covers loss or expenses incurred due to medical care. The insurance plans cover your expenses in case you need to be hospitalized. Your insurance cover pays for the hospital rooms, ICU charges and other treatment charges.

Health insurance also covers medical expenses, which may not require 24 hours hospitalization but a simple visit to a medical center.

Your insurance policy provides coverage against critical illness such as heart attack, organ transplants, stroke, kidney failure etc.

However there are certain exclusions which might not be covered within your health insurance policy.  Medical condition or expenses incurred by indulgence in any act of war, terror, criminal activity, attempted suicide, participation in defense activities, mental disorders, abuse of drugs and alcohol, expenses arising from HIV or AIDs related diseases, infertility treatment, laser treatment etc are amongst some of the various exclusions which are not covered under health insurance policy.

While having a health insurance policy is important, it is equally important that you extensively analyze the available health insurance products before buying. The analysis and comparison should be based on:

• The amount of medical facilities and illnesses that a policy covers.
• Its hospital network where cashless facilities are available.
• Quality and swiftness of claims resolution. This is one of the most important factors one should consider.
• The amount of premium you pay towards a policy should be value for money in regard to keeping you properly insured without putting a strain on your finances.

Buying your health insurance after proper research ensures that the health expenses are covered as per your own requirement and allows you to have peace of mind if any unforeseen illness occurs.
Now that we have understood the importance of health insurance, let’s read more on why everyone one should have a life insurance.

You may also like to read which type of insurance you should buy while financial planning.

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Importance Of Filing Income Tax Returns

 

Complete Guide to Online Income Tax e-filing

Importance Of Filing Income Tax Returns

If you have earned Rs. 5 lakh or more during the financial year 2012-13 i.e. the year starting from 1 April 2012 and ending on 31 March 2013, you will need to file your returns electronically. The income tax authority i.e. the Central Board of Direct Taxes is responsible for the diktat.

And as usual, you need to file your return before 31st of July, 2013. Well, this task may seem a little daunting at first glance as we are all so used to the paper mode of filing returns, but don’t despair since the process is quite simple and easy. Read on to know more.

Steps for e-filing returns

The e-return can basically be filed in two ways as detailed below:

1. Directly on the website: If you have only salary and interest income, you may simply visit https://incometaxindiaefiling.gov.in/, register yourself if not already done, and key in the details online in Form- ITR 1, prepare the return and submit it. You would then have to print the acknowledgement, sign it and send it to the central processing unit.
2. By downloading the excel utility: Here, you have to log on to the above site, select the applicable return form. You then need to download the excel utility, fill in all the details offline and then upload this as an XML file. On successful submission, an acknowledgment in ITR V would be mailed to your email address. If you have digitally signed your return, then the process is completed. If not, you would have to sign and send the printed acknowledgement to the central processing unit.

Which form is applicable to you?

The Pros and Cons of E-filing:

As with everything else in life, there are both advantages and disadvantages in this method of filing income tax returns. Here’s a look.

Advantages:

• Tax calculation is accurate and simplified as it is done automatically by the software based on your inputs.
• Possibility of quicker refunds since the e-return is processed centrally at the central processing unit at Bangalore. You would be spared of the hassles of following up on your refund with your income tax office as is the practice now.

Disadvantages:

• You may now need to seek professional help if you wish to do this process offline, and this may cost money.
• Given the rather poor internet connectivity in most parts of India, the process could be quite time consuming.

However, the online process if far more efficient than the offline one, and in the long run, it will only help smoothen the filing and refund process.

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How to Calculate Income Tax

 

For any tax paying individual, to have a working knowledge of how income tax is calculated can only make life simpler. It not only helps you assess the amount of tax you have to pay in a financial year but also gives you a clearer idea on how to save tax.

Income Tax is tax levied on the income of an individual by the Government. Computing your Income Tax for a year might seem like a complex process but you will see that it is easy, if you are aware of the income tax slabs of that particular year and know the mathematical calculation.

Knowing Taxation amount as per the Income Tax Slabs

The first step to understand the workings of Income Tax in India is to be aware of the taxation slabs released each financial year by the Indian Government. The taxation slabs for the financial year 2014-15 for General tax payers and Women: –

Slab	Income Slab (Rs.)	Income Tax Rate
0	0 to 2,50,000	NIL
I	2,50,001-5,00,000	10%
II	5,00,001-10,00,000	20%
III	10,00,001 and above	30%

If you fall in Slab I, tax will be deducted on the amount that exceeds Rs. 2,50,001/- . Similarly, tax for Slab II and Slab III will be calculated for the amount that exceeds Rs. 5,00,001/- and Rs. 10,00,001/- respectively. The same principle also applies to the tax slabs for senior citizens (Aged 60 years but less than 80 years):-

Slab	Income Slab (Rs.)	Income Tax Rate
0	0 to 3,00,000	NIL
I	3,00,001 to 5,00,000	10%
II	5,00,001 to 10,00,000	20%
III	10,00,000 and above	30%

India Income tax slabs 2014-2015 for very senior citizens (Aged 80 and above):-

Slab	Income Slab (Rs.)	Income Tax Rate
0	0 to 5,00,000	NIL
I	5,00,001 to 10,00,000	20%
II	10,00,000 and above	30%

Deductions available for saving tax

To opt for saving the maximum amount of tax, examine the deductions defined under different sections of the Income Tax Act, 1961.

The available deductions are:–

• Investment under Section 80

This section includes: –

• Mediclaim insurance premium (u/s 80D)
• Donations with 100% benefit (u/s 80G)
• Interest repayment for education loans (u/s 80E)
• New Pension Scheme for a maximum of 10% of the basic salary (u/s 80CCD)
• And Rajiv Gandhi Equity Savings Scheme (u/s 80CCG).

The Investment limit for the deduction under Section 80C of the Income-Tax Act, 1961 was raised from Rs 1 lakh to Rs 1.5 lakh as per the budget 20014-15. This will result in a maximum saving of Rs. 15,450 to investors in the 30% tax bracket. The most common investments fall under this section: –

• Life Insurance policies
• Employees Provident Fund/Public Provident Fund
• National Savings Certificates or Interest accrued on old NSCs
• ULIPs (Unit Linked Insurance Plans)
• Repayment of home loan for principal amount only.
• Pension Funds u/s 80CCC
• Tax saver Mutual Funds  – ELSS: Equity Linked Savings Scheme
• Tuition fees of children’s education.

• Housing Rent Allowance u/s 10(13A).This is an allowance you get as a company employee for paying house rent. Deduction available on House Rent Allowance is an amount which is the least of the following parameters:–

Actual HRA received

OR

Actual rent paid by you minus 10% of your basic salary and other allowances (excluding HRA)

OR

50% of your basic salary

In cases where the last two parameters determine the deduction amount, and turns out to be less than the HRA paid by your company, the excess amount is considered as a part of your taxable income.

• Home Loan Benefit u/s 24. This gives you deduction for the interest that you pay on your home loan and the maximum deduction limit has been raised (as per 2014-2015) to Rs. Rs.2,00,000 for a self-occupied property. For a property that is not self-occupied, there is no upper cap on the deduction limit.

Calculating your Taxable Income and Income Tax

In order to do the calculation, it is imperative to understand how income tax is deducted. If your income falls within a certain slab only, say Slab I (as per the tax slabs mentioned above), then the calculation is simpler. But if your salary falls in more than one range, the income tax is the sum of the tax calculated from each slab as per the designated tax rate of the said financial year.

In other words,

Income tax for income in Slab II = 10% of Slab I + 20% of slab II

Income tax for income in Slab III = 10% of Slab I + 20% of Slab II + 30% of Slab III

Here’s an example* of the income tax calculation of a person earning Rs.10 lakhs, and a comparison of how he will fare with this year’s budget rules as opposed to those of last year’s –

 

As shown in the examples above, tax calculation is not as complex an affair as it is made out to be. You just need to be aware of the tax slabs for the financial year in question, the deductions available and how taxable income is determined. Once you have clarity on these three aspects, calculating your income tax becomes very simple.

*sourced from – http://www.jagoinvestor.com/2014/07/budget-2014-highlights-and-download-income-tax-calculator.html

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