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PersonalFN provides Financial Planning, Investment Planning and Mutual Fund Research and Recommendation services for those looking to invest in India. The services are available on a personalized basis as well as online. PersonalFN provides research based FREE Financial Newsletters (Financial... More
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  • Tax Savings Investments - Small Savings

    Surprised to read about tax-planning in the month of April? Isn't tax-planning supposed to be an 'end of the financial year' exercise? Well, the answer is no! Tax-planning isn't an activity to be conducted in a rushed manner at the end of the year. Simply because, it forms an integral part of your financial planning activity. Tax-planning is as much about contributing to your financial goals as it is about reducing your tax liability. So, the right time to start thinking about tax-planning is now!

    Then, there is the need to objectively consider your risk profile (among other factors) while conducting the tax-planning exercise. For example, risk-taking investors could hold a portfolio dominated by market-linked avenues like tax-saving funds (also known as ELSS) and unit linked insurance plans (ULIPs); on the other hand, risk-averse investors should be predominantly invested in assured return schemes.

    Speaking of assured return schemes, the small savings schemes segment perhaps represents the most comprehensive pool of the former. More importantly, a number of small savings schemes are eligible for tax benefits under Section 80C of the Income Tax Act i.e. investments of upto Rs 100,000 per annum (pa) are eligible for deduction from gross total income. Traditionally, small savings schemes have formed the core of most tax-saving portfolios. In this article, we discuss the investment proposition offered by some small savings schemes that can also aid you with tax-planning.

    1. Public Provident Fund
    Investments in Public Provident Fund (PPF) are recurring in nature and run over a 15-Yr period. Annual contributions are mandatory to keep the PPF account active. The minimum and maximum investment amounts are pegged at Rs 500 pa and Rs 70,000 pa respectively. Only contributions of up to Rs 70,000 pa are eligible for tax benefits under Section 80C. Any amount invested over the aforementioned is returned without interest.

    At present, PPF investments yield a return of 8.0% pa. However, it should be noted that the returns are assured but not fixed. This is because the rate of return is subject to revision i.e. it can be revised upwards or downwards thereby impacting the returns.

    With no provision for a regular interest payout, PPF fares rather poorly on the liquidity front. Withdrawals can be made only from the seventh financial year. Furthermore, the amount that can be withdrawn depends on the balance in the PPF account in the earlier years.

    Apart from Section 80C tax benefits on the amount invested, interest income from PPF investments is exempt from tax under Section 10(11) of the Income Tax Act.

    Apt for...
    Given that investments in PPF run over a 15-Yr period and that annual contributions are mandatory, it is an ideal avenue to build a corpus for long-term needs like retirement and children's education. It will appeal to investors who accord higher priority to returns over liquidity.

    2. National Savings Certificate
    Investing in National Savings Certificate (NYSE:NSC) entails making a lump sum investment for a 6-Yr period. While the minimum investment amount is Rs 100, there is no upper limit. Presently, investments in NSC earn a return of 8.0% pa, compounded on a half-yearly basis. In other words, Rs 100 invested will grow to approximately Rs 160 on maturity. Unlike PPF, the rate of return in NSC is locked in while investing; as a result, the investments are indifferent to any subsequent change in rates.

    NSC scores poorly on the liquidity front. Interest income is received on maturity. Also, premature withdrawals are permitted only in specific circumstances like death of the holder, forfeiture by the pledgee or under court's order.

    Investments of upto Rs 100,000 pa are eligible for tax benefits under Section 80C. Furthermore, the interest accruing annually is deemed to be reinvested, hence it qualifies for deduction under Section 80C. However, the interest income is chargeable to tax.

    Apt for...
    Given its nature (lump sum investments), NSC is best suited for gainfully investing one-time surpluses and to provide for needs that will arise over a corresponding (6-Yr) timeframe. It will be apt for investors seeking returns over liquidity.

    3. Post Office Time Deposits
    Post Office Time Deposits (POTDs) are fixed deposits from the small savings segment. While investors can opt for 1-Yr, 2-Yr, 3-Yr and 5-Yr POTDs, only the 5-Yr ones are eligible for tax benefits under Section 80C. A 5-Yr POTD earns a return of 7.5% pa; the interest is calculated quarterly and paid annually. In other words, Rs 10,000 invested in a 5-Yr POTD will deliver an interest income of approximately Rs 771 pa. The minimum investment amount is Rs 200, while there is no upper limit.

    POTDs fare favourably on the liquidity front, thanks to the annual interest payouts. Premature withdrawals are permitted after 6 months from the date of deposit; however, the same entails bearing a penalty in the form of loss of interest. Finally, any excess interest paid is recovered from the principal amount and the interest payable.

    Investments of upto Rs 100,000 pa are eligible for tax benefits under Section 80C. The interest income is chargeable to tax.

    Apt for...
    The 5-Yr POTD can be utilised for generating an annual and risk-free income, alongside making a tax-saving investment.

    4. Senior Citizens Savings Scheme
    Unlike the other avenues that we have discussed so far, Senior Citizens Savings Scheme (NASDAQ:SCSS) is open only to a section of the investor community i.e. senior citizens. Individuals who are 60 years of age and above can invest in the scheme; those who have attained 55 years of age and have retired under a voluntary retirement scheme can also participate in the scheme, subject to certain conditions being fulfilled.

    The minimum and maximum investment amounts are Rs 1,000 and Rs 1,500,000 respectively. Investments in SCSS run over a 5-Yr period and earn a return of 9.0% pa.

    Given that SCSS is targeted at senior citizens, the liquidity aspect has been adequately addressed; interest payouts are made on a quarterly basis i.e. on 31st March, 30th June, 30th September and 31st December every year.

    Premature withdrawals are permitted after the expiry of 1 year from the date of opening of the account. In case of withdrawals made after 1 year but before the completion of 2 years, an amount equal to 1.5% of the initial amount invested is deducted. In case of withdrawals made on or after the expiry of 2 years, an amount equal to 1.0% of the initial amount is deducted.

    Investments in SCSS are eligible for tax benefits under Section 80C. The interest income is chargeable to tax and subject to tax deduction at source (NYSE:TDS) as well. Investors whose tax liability on the estimated income for the financial year is nil, can avoid TDS by furnishing a declaration in Form 15-H or Form 15-G as applicable.

    Apt for...
    Expectedly, SCSS is meant for senior citizens who wish to receive an assured income at regular time intervals. The tax benefits only add to the allure of the scheme.

    Looking for Tax Savings, Logon to PersonalFN provides Financial Planning, Investment Planning and Mutual Fund Research and Recommendation services to investors, who are looking to invest in India. PersonalFN also provides Financial Planning Calculators and Online Wealth Tracker Software to track your investments.

    Disclosure: Long Goog
    Tags: Tax Planning
    Aug 14 2:32 AM | Link | Comment!
  • Common Investment Dilemmas

    Getting into a dilemma while investing is a common phenomenon. It usually happens when investors are indecisive about two seemingly similar situations or investment avenues. If the dilemmas are not tackled early on, it could lead to a flawed investment decision, which can be disastrous for your finances.

    These dilemmas are usually a result of the lack of knowledge among investors about various investment options. This leads to confusion about which investment option is most suitable in a given situation. In a bid to simplify things, investors look for answers that may have worked for their friend or colleague in the past. However, since the situation varies across investors, there is no clear-cut answer or standard solution that will hold good for all investors. In this article we bring out 5 common investment dilemmas that investors grapple with regularly while investing. 

    1. Stocks vs Equity funds
    This is undoubtedly the most common investment dilemma faced by several investors, regardless of their investment expertise. This dilemma is rooted in the investor’s belief that investing in stocks and equity funds is one and the same thing. In reality they are quite different and suit investors with distinct profiles, although for a category of investors both options may prove viable.

    While investing in stocks, investors are required to do their homework (read research) pre-investment and post-investment. This involves understanding not just the company, but also the underlying sector. This is in addition to grasping the macro economic implications and its impact on the company under review. Having conducted the research pre-investment, the investor must continue doing so post-investment to ensure he is invested with the right company.

    With mutual funds it’s a little less complicated. You still have to do the basic research to select the right equity fund. But having done that, the rest of the research (that the investor in stocks has to do on an ongoing basis) is done by a team of experts (read fund managers).

     2. Hold vs Redeem
    This is the dilemma that a lot of investors grapple with. In fact, it won’t be wrong to term it as one of the most difficult investment decisions. Of course, in many cases, the investors are cornered in this situation because they are uncertain of their investment objectives. If there is clarity on that front, then the decision to redeem/stay invested is a relatively easy one.

    Investments are usually made to achieve a specific investment objective. Hence, ideally investments should be held until the set objective is reached. However, there could be situations where investors are left with no choice but to redeem their investments mid way. Usually, such situations arise if a particular investment fails to perform according to expectations making the redemption an obvious option.

     3. ELSS vs ULIPs
    Although this dilemma sounds surprising, yet it’s true. Many investors find it difficult to choose between ELSS (equity linked savings scheme) and ULIPs (unit linked insurance plans). It is obvious that they fail to appreciate that while both are tax-saving avenues, they are two very different investment options and cater to different investor needs and objectives. The best way to resolve this dilemma is by understanding their respective features and the objectives that they fulfill.

     4. FDs vs Liquid Funds
    Investors who wish to invest their monies for a short-term (say 40-45 days) have (broadly) two options at their disposal – Fixed Deposits (FDs) and Liquid Funds. Most investors are unable to discern which is the superior option. In terms of returns, both options are comparable. However, in terms of tax benefits, liquid funds are preferable for investors in the higher tax brackets, while FDs are favourable for investors in the lower tax bracket (as also for those who don’t have taxable income).

     5. Self-investing vs Financial Planner
    Whether to opt for the services of a financial advisor or not is another dilemma faced by investors. This dilemma has been heightened after SEBI (Securities and Exchange Board of India) has allowed investors to invest directly in mutual funds without paying entry load. Per se, investing on your own or through a financial planner is not a dilemma. It’s a decision that can be made easily based on whether you have the ability and time to define your investment objectives clearly with a financial plan on how to achieve them. Then you need access to research, which is necessary to help you select the right investment option in the right allocation. If you feel upto the task of making these decisions on your own and tracking them post-investment, then you can invest on your own. Else it is advisable to employ the services of a financial planner.

    Disclosure: PersonalFN
    Aug 04 7:42 AM | Link | Comment!
  • RBI’s first quarter review of Monetary Policy 2010-11 – A stride to tame inflation!

    The Reserve Bank of India (RBI) increased its key policy rates as the domestic economic recovery is firmly in place (GDP growth rate was 7.40% in fiscal year 2009-10) despite weak global economic outlook and insignificant contribution by the agriculture sector.

    The central bank increased the rates as under, thus narrowing down the Liquidity Adjustment Facility (LAF) corridor between repo and reverse repo rate to 125 basis points

    The Repo rate has been increased by 25 basis points, from 5.50% to 5.75% and

    The Reverse Repo rate has been increased by 50 basis points, from 4.00% to 4.50%

    However, the Cash Reserve Ratio (NYSE:CRR) is kept unchanged at 6.00%, taking into account the present liquidity situation.

    (PersonalFN's expectation was a 25 basis points increase, each in repo and reverse repo rate, thus placing them at 5.75% and 4.25% respectively. We forecasted CRR to remain unchanged at 6.00%.)

    The other highlights of the monetary policy are as follows:

    • Bank rate left unchanged at 6.00%.

    • Statutory Liquidity Ratio (SLR) has been left unchanged at 25.00%: SLR is that amount which a bank has to maintain in the form of cash, gold or approved securities. The quantum is specified in terms of percentage of the total demand and time liabilities of a bank.

    Reason for the rate hike:

    Inflationary pressures are becoming more exacerbated, as inflation remained in double-digit space for five consecutive months (since February 2010). Moreover, the deregulation of fuel prices (in the last week of June 2010), may also lead to headline WPI inflation for July 2010, sail in double-digits and thus be a cause of concern.

    (Source: Reuters website)

    But nonetheless, taking into account the progress of monsoon, (which will improve the chance of good harvest), and domestic macroeconomic scenario, the RBI expects headline WPI inflation to settle down to 6.00% by March 2011 (thereby revising its earlier projection of 5.50% as given in April 2010 policy review), and make it within the forecasted inflation range of 5.00% to 6.00% given by the Finance Ministry.

    (PersonalFN's forecast for inflation range is 6.50% - 7.00% by fiscal year end)

    We think that aggressive increase in reverse repo rate by 50 basis points, is a measure taken by RBI to suck the excess liquidity, thereby curb demand side inflation. However, in our opinion core inflation will continue to exist.

    What does the rate hike mean and its impact?

    The repo rate is the rate of interest charged by the central bank on borrowings by the commercial banks. A hike in the same means, an increased cost of borrowings for commercial banks. Hence as a reaction to such a move, cost of borrowing for individuals and corporates may become expensive, as the lending rates might move marginally upwards.

    Similarly, the interest rates on fixed deposits are also expected to start firming up. But, we think that interest rates on fixed deposit may become attractive (when above 7.50%) only after the next mid-quarter review of monetary policy, scheduled for September 16, 2010.

    The reverse repo rate is the rate of interest, at which the banks park their surplus money with the central bank. A hike in the same means, it will be more attractive for commercial banks to park their surplus funds with RBI, thus enabling the central bank to manage excess liquidity.

    The RBI believes that the stance taken in the monetary policy is intended to:

    • Contain inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures

    • Maintain an interest rate regime consistent with price, output and financial stability

    • Actively manage liquidity to ensure that it remains broadly in balance so that excess liquidity does not dilute the effectiveness of policy rate actions

    GDP estimate: RBI also expects a GDP growth rate of 8.50% for the fiscal year 2010-11, thus revising its earlier forecast of 8.00%, as revealed in April 2010 monetary policy review. This upward revision was made after factoring progress of monsoon and the prevailing global macroeconomic scenario.

    What should Debt fund investors do?

    Debt funds are not the ideal investments in a rising interest rate scenario. This is because the bond price and interest rates are inversely related to each other. In the current scenario, we recommend that investors stay away from pure income and government securities funds till September 2010.

    Investors with a short-term time horizon would be better off by investing in liquid and liquid plus funds for the next 2 months; while the medium term investors with an investment horizon of over 6 months can allocate their investments to floating rate funds.

    Investors should refrain from investing immediately in fixed deposits till a further increase in deposit rates is offered by banks. One year bank FDs would be attractive only above 7.50%. One year FDs are currently available at 5.00% to 6.50%.

    What to expect in the near future?

    We believe that RBI will continue adopting the calibrated exit path by raising policy rates by 25 basis points at each step to normalise policy rates and make it more relevant to the current high economic growth and spiralling inflation. Hence, RBI in its next mid-quarter review of monetary policy (scheduled for September 16, 2010), may increase the policy rates again by another 25 basis points, and maintain the narrow LAF corridor between repo and reverse repo rate.

    Further, it is noteworthy that we are yet below the peak of September 2008 (where repo rate was 9.00% and reverse repo was 6.00%). Hence there’s a comfortable space of 150 basis points (on reverse Repo) and 300 basis points (on repo rate) increase which cannot be ruled out.

    Disclosure: No Positions
    Tags: Repo rate
    Jul 30 2:16 AM | Link | Comment!
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