What are the factors we should look at before starting investing through SIP?

Curranty Systematic Investment Plans (SIPs) are one of the most favourite investment instruments advised by all the investment advisors. Many of us get confused that SIP is a product. So, before jumping on to understanding how to choose the best SIP, let’s first get some clarity on what SIP really means.

What is SIP

A SIP or we call as systematic investment plan is an investment method to invest at regular intervals (monthly, quarterly or annually) in specific mutual funds schemes, which in turn invest in the markets. Being a flexible instrument, SIPs help to build wealth and instil the habit of saving even we are normally undisciplined. The major benefit of investing in SIPs is the power of compounding. We earn compound interest on our investment, thereby, increasing our investment amount significantly over the long run.

How to Select the Best SIP

When we have to reach some place we need to select a right vehicle i.e. For 5 km distance the suitable vehicle can be a bike or car, for 500 we may prefer a train and for 5000 km we have to use aeroplane. What a bike can do a plane cannot similarly what a plane can do bike cannot. In investment also we have certain financial destinations like kids education, buying home, kids marriage or self-retirement hence Choosing the right fund to invest in via a SIP is very critical to earning high returns and also to get the money at the time it is required. Therefore we should keep in mind the following factors when deciding which SIP to invest in.

1.    What is my Investment Objective:

We should know the purpose of investment before starting the investment in a fund. We need to ask ourself two questions. 1) Are we investing for the short term or the long term? And, 2) what is my risk appetite? Our investment horizon and risk profile will help to determine which type of fund will best suited. For example if we are a risk-averse investor and want consistent returns, without a high up-down reaction, debt funds might be more your thing. If we are ready to take some risk and investment horizon is medium, balanced funds could be the answer. Or if we are in for the long haul and are comfortable with market volatility, equity funds can be the right option.

2.    What type of Fund should we invest in:

There are different type of mutual funds, and it is very important to know which type is suitable for our risk appetite. Let’s understand the basic types of mutual funds:

(i) Asset-based mutual funds

a)   Equity Funds – In these funds money is invested in equity shares. These funds are further categorised into various types: large cap, diversified, mid cap, small cap, sector specific and index funds.

b)    Debt Funds – In these funds money is invested in fixed income securities i.e. debentures, bonds and government securities, commercial papers, certificate of deposits etc. These funds can be further classified based on investment tenure: money market, income and fixed maturity funds.

c)     Balanced Funds – These are hybrid of equity and debt funds and try to capture the best of both worlds to an investor. They counter equity fund’s risky profile by simultaneously investing in debt instruments to ensure steady returns to the investor.

(ii) Structure-based mutual funds

a)    Open-ended – In these schemes an investor can enter or exit these funds at any time, without restriction.

b)   Close-ended – These funds are open for investment for a specific time during the scheme’s launch. Once the new fund offer (NFO) closes, no further investments can be made. These funds have specific maturity dates on that date either redemption can be made or money can be switched to other open ended funds.

3.    What are the Tax implications:

In mutual funds schemes we get certain tax benefits which should be kept in mind while investing.

For equity mutual funds, all dividend is tax free in the hands of investors and capital gains are tax free after one year of investment. For less than one year 15% is the tax rate on equity mutual funds. Balanced funds having equity part of 65% and more are treated as equity funds.

In debt funds an investor get indexation benefits after three years which comes under long term capital gain rules. For less than three years the short term capital gain is added to the income of investor and taxed according to the tax bracket he/she falls in. In debt funds the dividend is tax free in the hands of investor however there is dividend distribution tax paid by mutual funds which is in the range of 28.84%- 34.608%

Therefore it is very important to keep the tax implications in mind while deciding the investments.

4.    What are Entry or Exit load:

Few years back, while investing in funds we need to pay some entry charges called as entry load. However, Securities and Exchange Board of India (SEBI) has stopped funds from levying an entry load. So, now, the only time we pay is when we are exiting/redeeming a fund before a specific time this is called an exit load. The fee varies with scheme, investment tenure and amount. For example, there is a fund which has exit load of 1% if redeemed before one year and we have invested one lakhs rupees and it grows to 1.10 lakhs in ten months and we wish to withdraw now then we will actually get 108900 /- only (1.10 lakhs -1% of 1.10 lakhs). Exit loads too are regulated by SEBI and all the fund houses have to follow the directives.

5.    How the fund has performed in the Past:

Past performance of a funds many not necessarily be repetitive however still it makes lot of sense to analyse the historical performance of the funds vis a vis other funds.  Performance does not includes returns only but we should also analyse its volatility, excess returns earned by fund manager’s ability, returns compared to benchmarks and other peer schemes. A comparison of historical performance will tell us how strong or weak a fund is and whether it can withstand market volatility. We should avoid funds that perform strongly when the market is high but collapses as soon as the market also falls. When studying the trends, we should look more on long term, say 5 years and 10 years and avoid a myopic view.

6.    What are the expenses:

This expense ratio comprises management fee and administrative costs, and is essentially a fund’s annual fee which it charges to perform its duties. A mutual fund scheme which have higher assets under management usually have lower expense ratios, making them a go-to option. A difference of 0.5% in expense ratios of two funds may not look significant but should not be taken lightly. Consider Fund A with an expense ratio of 2.5% and Fund B with 2%. Now, for these two funds to give same returns, Fund A will have to outperform Fund B every single year. While this may seem possible, in the long term, maintaining this performance could be difficult. Simply put, a high expense ratio can pull down a fund’s performance, however we should also look at how much alpha (additional return) a fund manager is generating if the expense ratio is higher. If our research has filtered down to funds that are similar in nature, we can choose among them on the basis of expense ratio.

7.    Who is the Mutual Fund Company:

Every mutual fund company have its own systems, process, peoples etc. These factors impacts the overall performance of its various mutual fund schemes. A fund is as good as its fund house. The decisions taken by the mutual fund company shapes a fund’s return-yielding capacity and growth. If the fund house does not take the right calls, investors will end up losing money. Before investing, read about the fund house and the fund scheme you intend to invest in. We should get a copy of the scheme information document and key information document to get details about the fund house’s investment approach, number of schemes offered, funds/products designed with investors in mind, and more. Answers to these questions will enlighten us to decide which fund house will be able to help us reach your investment goals.

Finally, investment is not just a numbers game but an emotional decision. It is not just one time decision but a long term continuing process. Hence it is very important that we should consult an expert not just to understand what is it as of now but also to understand the future implications and how should we carry on so as to achieve our financial goals comfortably without any shocks and surprises.

Why should we file our Income Tax Return on time

Tax filing time is back again. Yes, it’s that time of the year when we have to file our income tax. For many of us, filing tax returns can be a tedious process. Although, the government has simplified the tax filing process making it much easier and less cumbersome for taxpayers to file returns many of us still find it difficult to understand.

It may be simple for few and complex for others however we should not delay it which can cost us dearly.

For this year government notified a simpler one-page form for filing your tax returns. Along with this, quoting Aadhaar number is now mandatory. Linking Aadhaar can now be completed in a few simple steps. By linking your Aadhaar, we can e-verify our returns, without having to send the physical return form for processing, thus, adding to the convenience.

Income Tax Filing Dates

July 31, 2017	Due date for filing annual return of income for the assessment year 2017-18
	for all assesse other than –
	(a) corporate-assesse or
	(b) non-corporate assesse, whose books of account are required to be audited
	or
	(c) working partner of a firm whose accounts are required to be audited or
	(d) an assesse who is required to furnish a report under section 92E
September 30, 2017	Due date for filing annual of income for the assessment year 2017-18 if the
	assesse is –
	(a) corporate-assesse or
	(b) non-corporate assesse (whose books of account are required to be audited)
	or
	(c) Working partner of a firm whose accounts are required to be audited).

Why we should file it on time, here we have outlined few major reasons to file our income tax return early –

1. Fast processing of IT returns

If we file our returns well before deadline dates, our files are processed much faster. As we approach closer to deadline dates the processing time increases due to increase in volume.  Further the servers also slows down due to due to heavy volume as the tax return deadline comes nearer. So it it always advisable to file the return well in time so as to avoid the rush and possible delays.

2. Reducing the chances of errors

If we start working on our returns early we get enough time to gather all the information and enough time to do it properly and error free. When we file in last minutes, in haste, we may forget to include certain incomes/exemptions resulting into a wrong information. Although we can file a revised return before the end of the next assessment year, which is March 31, 2019 for AY2017-18. But it is always advisable to file the things correctly at first time itself.  Further from next year the deadline for filing revised returns has been reduced, i.e. AY2018-19, the deadline for filing revised returns is March 31, 2019. So it’s better to start early so as to avoid errors and delays in processing.

3. Refunds are faster
Normally the IT refund processing takes more time than processing forms with a tax due. So If we file your claim in advance and have a tax refund, our return may get processed faster. As the time goes by, it may get delayed due to the rush. So if we get our refunds sooner we can put it to productive use early and reap earnings. The longer we delay, means missing out on the income which could be earned on that amount. Further, if our refund amount is greater than 10% of the tax payable, government pays an interest @6% p.a. calculated from the date of filing the return. We lose this benefit if the returns are filed after due date.

4. It gives sufficient time to get all documents in order

We need to collect all the required documents i.e. income details, home loan EMI details, various tax savings investments, accrued income, TDS certificates, Form 26AS etc. before filing our IT returns. By starting for our income tax preparation early, we will get enough time to gather all these documents from various sources. Although we are not required to attach these documents however there details are necessary to complete the returns so we need to have all the details with us before filing the returns.

5. This will avoid late payment and penal interest

As per Income tax Act if we file the returns after due date we are liable to pay interest and also penalty. Under Section 234F of the Income Tax Act) there will be two set of penalties, first, a Rs 5,000 penalty for belated returns filed on or before December 31 for that assessment year and Rs 10,000 for any other case. For small taxpayers whose total income does not exceed Rs 5 lakh, the penalty amount is reduced to Rs 1,000. Apart from this, under Section 234A, interest would be levied @1% per month, calculated from the due date. So there is another advantage of filing returns well in time so as to avoid this extra cost.

6. Your Tax Consultant will pay more attention

If you file the return through Chartered Accountant or some professional, by reaching them well before the deadline you will get sufficient time to discuss with them and they will give you good hearing. This will also give them enough time to examine your documents and eradicate errors and/ or be able to save you more tax.. In last moments they are also filled with lot of files and may not be able to pay as much attention.

7. Faster processing of loans, visa, credit cards

Currently IT return is compulsory for getting loans, credit cards and most of the financial services. Because income tax return acts is proof of the income we earn. Therefore, if we are planning to take home loan or any other financial services, it is pertinent to have all your income proofs ready. In addition, paying your tax on time adds to your credentials as a trustworthy and law-abiding citizen.

8. It gives ideas for future tax planning

When we file returns early, we may get ideas on how to save tax in the current financial year. As every year the tax rules changes; thus, filing returns early, may give ideas on how to save on tax for the current financial year. By tis we can optimise tax deductions available. In addition, we can negotiate with our employer to alter and optimise your salary structure to save more tax. 

9. It eliminate stress

When we do anything in last moment it increases our stress level and chances of mistakes are also high. So by filing the returns on time we can avoid the additional stress of missing the due date or being charged a late fee and penal interest. Stress has been known to adversely affect our health. By submitting our tax returns before the deadline, we will be happier with a host of benefits.

We should have a proper and well planned tax planning at the start if the year. Tax planning is not just tax saving or filing returns and paying taxes but a larger financial plan which should be taken into consideration after accounting for age, financial goals, ability to take risk, and investment horizon (including nearness to financial goals).

We must file your tax returns on time and should also ensure that taxes are paid before the due date. This will not only provide you with several benefits, but also defer additional costs in the form of penalties that can arise later.

What should we do when we default on our loans?

I have a friend  Amar (name changed to protect privacy) who took a loan in 2013, after that he got married, his wife was housewife and suddenly there was a large medical expenses and he lost his job at that time due to which he defaulted on his loan payments. What recourse does he have? The bank has now started harassing him.' 

Anyone of us can be in same situation like Amar’s. Imagine yourself in a situation where you have taken a loan, say a home loan, and you lose your job and have difficulty getting another job at the same salary. Or for whatever reason, are unable to make the regular EMI payments. Perhaps you don't even have insurance on your home loan amount.

The stressful nature of this situation can lead people to panic, or worse. 

But all is not lost! It is very much possible, with some discipline, to rectify the situation. In this post we will lay out some simple steps that can be taken in this kind of situation.

Step 1: Be Calm and don’t get panicked

For you it may be first time but this is not a rare situation. Banks have many customers who default on payments all the time.

So just relax you are not the only one. There's no need to feel like you have a great weight on your shoulders and you have to bear it by yourself. In fact, your bank will be the first entity willing to help you. Defaulting on your loan, even if it is a home loan, is not the end of the road. 

Step 2: Get your documents in Order and connect with the Lender

You should have all the documents at one place. If not that first create a file containing all your past EMI payment details, notices sent to you by the bank if any, details of the loan i.e. date of taking the loan, tenure, interest rate, EMI amount and so forth. Keep them handy when you talk to your lender. Tell your lender the genuine reason(s) that have rendered you unable to pay the EMIs, tell them that you would like to pay your loan back as soon as you can, and ask them what their options are.

Once you contact with the bank with the necessary details, you will get a call from your bank and can set up a meeting to calmly and rationally discuss your options. 

Step 3: Contemplate Your Options, in Dialogue with Your Lender

Can the bank repossess your asset i.e. your car or your home? Legally, yes they can. But there are a couple of reasons why you don't have to necessarily worry about this. 

Firstly, the repossession of assets procedure in India (and in fact elsewhere in the world as well) is very lengthy and there are steps along the way where you and the bank can work together to come to a satisfactory deal.

If you are a regular payer until now, the bank understands that you are a genuine borrower, and will take this into consideration when working together with you to find a mutually feasible solution. 'Genuine intent' to repay is the single largest thing that will work in your favour. Be sure to make it very clear to your bank that you do intend to repay and would like to work together to find a solution.
Genuine reasons that banks understand are loss of a job, illness, or an accident that may render you unable to work. You might also have multiple loans, and find yourself in too much debt to handle. 

Secondly, the banks are in lending business and are not interested to repossess your assets, it wants you to pay the money owed, or at least most or part of it. If you default, the bank's NPA ratio (Non-Performing Assets) goes up. This reflects badly on the bank. Also, they lose out on the money you would have paid them. So the bank will much prefer to cut you a deal. 

Here are what your options will likely be: 

a.      Refinancing the existing loans

If your problem is one very high monthly EMI, due to increase in overall interest rates, or an increase in your personal commitments to yourself, your loved ones, or any other matter personal to you that reduces your bank balance, or a combination of these factors and others, then what the bank can do is to restructure your loan. 

If you are currently paying Rs. 25,000 per month for 20 years, and this is too high, the bank might offer you an EMI less than to say Rs. 20,000 per month, for a little more than 20 years. So your EMI goes down, giving you some breathing room and the bank doesn't lose money because it will simply make it up from you over a longer period of time. Everybody wins on some level. 

However you should keep in mind that the payments you now make will eventually cost you more in terms of total money repaid, but if breathing room is what you need, this will provide it. However the extension in tenure will be small, so the change in your EMIs will also be small. Also, as a next step, the bank can opt for foreclosure by selling off the collaterals stated when you applied for the loan, by auction, with your co-operation.

Refinancing can be done for many situations. 

It is also the go-to option for people who find that their bank is not reducing floating interest rates in line with other banks. You can approach your bank to reduce rates, or you will shift to a more other lender who is willing to offer at lower rates. For credit card debt, you can also opt for balance transfer by shifting your existing debt onto a new card with a 0% interest rate for 6 months, and paying off as much as you can within these 6 months, however before transferring you should be clear about the terms and conditions. 

b.      Deferring Your current EMIs

There could be a different problem that currently due to loss of job or some reasons you can’t pay at all and are hopeful that once you get the job and things becomes normal you will be able to pay in normal way.  In this type of situation you can approach your bank for deferral of your payments. The bank can grant relief, giving you a window of opportunity to calmly seek ways to increase your cash flows. 

Once the time is over, your EMIs will restart (on either the same terms or your new negotiated terms), but will include late payment penalties, known as Delayed Payment Charges. These charges are applicable for payments made after their due date. In case some of your post-dated cheques (PDCs) have bounced due to insufficient funds, you will also be subject to cheque bounce charges.

c.      One time Settlements

One time settlement may not be feasible for a big loan like home loans, but it can work for a personal loan, credit card outstanding, or a car loan. On a case to case basis, banks are sometimes willing to go for one time or lump sum settlements of outstanding dues. They will waive some of the charges or some of the amount and charges, and you can pay the rest as a loan settlement. However, this will impact your credit score greatly in negative way. Getting a loan in the future, if you want one, will become either very difficult or very expensive, or both.

What happens if you still can't pay? 

Finally if you have no way out to pay off your dues, the lender will seek repossession of the asset. The asset will be auctioned off within 15 days (for a movable asset like a car) or 30 days (for an immovable asset such as a home). During this period, you still have the option of buying back your own property provided the funds are available to you.

At no time during the process will the lender not give you the option to pay, in bits and pieces or via a reduced lump sum, and maintain possession of your asset. 

Conclusion

As we understand, the best solution is that we should pay our dues on time and do not get into this situation in the first place. But once you are in it, remember that panicking will get you nowhere and your time would be better spent in dialogue with your bank, coming up with a feasible solution together. You can also contact credit counselling centres for guidance. 

One of the main tenets of financial planning is safety. This is done by way of a contingency fund. Remember, if you have EMIs, to include them in your contingency fund and have at least 6 months to 2 years of expenses set aside in a safe liquid fund, for use in case of emergency situations.

Also, we should plan our finances properly based on our future goals i..e buying homes, Retirement Planning, Kids education and marriage etc. For this the plan should be made through an experienced Financial Advisors keeping all the aspects and contingencies.