What we need to do as the Financial Year is coming to an end

FY 2018 is almost complete and being the financial year we need to do certain things on or before the financial year as well as also start planning for the next financial year in a much better way so as to avoid the mistakes which might have incurred this year. So what are important things which should be taken care of before this year’s ends and what we need to start at the earliest in the coming year? Let’s understand them more.

1 File tax returns for previous years

Government has withdrawn the facility of filing income tax returns for two financial years. From this year onwards we need to file the tax return in the assessment year itself. Which means 31 March is the deadline for filing returns for 2015-16 and 2016-17. Although we can file tax return till 31 March, but it is always better to file the return by due date i.e.  31 July. Further is there is any losses to be set off we have to file the tax return on time. Otherwise, we can’t carry forward the loss to the next financial year.

2. Review the Investments

We need to review our portfolio on basis  so as to have the idea what is going on, and if required to book losses or capital gains so as to get the benefits on that particular year. The reintroduction of LTCG tax on equities is also another reason the review the portfolio on every year. Review should not only just check the returns but also consider the portfolio allocation on various asset classes and whether it matches with our current financial goals. In equity funds one year performance may not be sufficient to remove any investments but we should find out the reason for its underperformance. As certain value funds may underperform in a bull market however they may do well over a period of time hence it’s not a good idea to sell them just because they did poorly in one year.

3. Keep all the documents in order

As we need to file a return in next four months so we should now keep all the papers ready like documents related to tax exemptions i.e. home loan account statement, Investment made under 80C, Mediclaim, Capital Gain/loss details. We also need to check the TDS deducted by Banks/Companies so as to account them in our tax returns. We should also get our all accounts/passbook updated so as to have clarity what is there or if something is missing.

4. Invest in PPF account before 31^st March

If we have a running PPF account then every year a minimum of Rs. 500 to be invested to keep it running. So if we have forgotten to invest we still have few days to invest so as to avoid the penalty.

5. Start for the Next Year right Now

Most of us do our tax-saving investments only when our HR asks the proofs for the investment in the month of March. However it is always wise to start the investment at the starting of the year itself so as to plan in a more systematic way. Rather than investing Rs. 1.50 lakhs in ELSS in the March it is always better to do SIP of Rs. 12500/- Per month. This helps us to average out the cost of investments and also saves us from market volatility. Before starting any tax saving investments we should first consider all expenses & investments which qualifies for Section 80C tax deductions i.e.—tuition fee of kids, principal component from housing loan EMI, EPF deductions, annual premium on existing insurance policy, etc. After that we should decide the amount still left which can be invested under Section 80C. Then further we can distribute this investments (depending upon an individual’s risk appetite) in equity and debt instruments. For equity investments, starting an SIP in an ELSS fund is the best strategy and for debt PPF could be a good option.

6. Submit documents to avoid TDS

We need to submit 15G and 15H (for Senior Citizens) forms to Banks and Companies where we have invested in Fixed Deposits and interest component is more then Rs.10,000 (Rs.5000 in case of Company FDs), The tax free interest limit for senior citizens has now been raised to Rs. 50,000.  We should submit these forms at the start of the year i.e. April itself so as to avoid any inconvenience later. However please remember this exemption is only for those who do not come under income tax payable limits. If you pay tax then you should not file or else the IT Department can take action against you.

6. Plan for the year in advance

We should also plan for our budget and investment at the start of the year based on previous years’ experience. Like we may plan to buy certain items, planning for the holiday next year or have some other goals in mind. Keeping those things in mind we may be required to invest more or if our investment is concentrated into one type of assets then it needs to be diversified properly. All those things should be reviewed at the start of the year so that we can avoid the mistakes and last minute anxiety.

Planning for everything is very important and when it is about money we need to be extra careful so that it should make our life easy not to increase the tension. By planning at the start of the year and final review before completion of the year will help us more peace of mind and also not to make last moment mistakes.

What we should not do When Investing in Tax Saving Mutual Funds !!

We have just two two months left for this financial year and many of us might already have made all the tax saving investments. But many others may be still waiting to completely utilise the tax-saving exemptions available under Section 80C.

We have many tax-saving avenues available, such as Public Provident Fund (PPF), Tax-saving Bank Deposits, National Savings Certificates (NSC) etc., many are flocking to tax-saving mutual funds also known as Equity Linked Saving Schemes (ELSSs). With the falling interest rates on fixed income products and high growth in equity mutual funds, investors are flocking to the equity market in the quest to earn higher returns.
 

PPF, which has a 15-year lock-in (with partial withdrawal after 6 financial years) and bank FDs or NSCs that have a 5-year lock-in while investments in ELSSs are locked in for three years only. This makes it more liquid than other options.

ELSS could be a prudent choice as compared to other fixed income products however as applicable to all market linked investments, there ELSS also has a risk. We should not just get carried away by the double-digit past returns but do it systematically through a well-defined process.

Here are few things which we should not do when investing in ELSS.

 

1.     Investing lump sum rather than in staggered manner:

Many of us invest suddenly wake up for tax saving when the HR of company asks for the proof and then invest full amount at one go in ELSSs. This is not the right way for equity investments as lump sum investments in equity mutual funds might expose our self to a high-volatility risk. Hence, even if we wish to invest lump sum the better way is to invest in a staggered approach is prudent.

The best approach to is to opt for Systematic Investment Plans (SIPs) which helps us to sail the tides of market volatility.  This helps us to accumulate more units when markets go down. It will be best way to start a SIP in an ELSS at the beginning of the financial year. This will help average out the cost as well as will not put all burden in the last months of the year.

   

2.     Not understanding the real risk:

We all heard about this famous tagline in every mutual fund ads “Mutual Fund Investments are subject to market Risk Pease read all scheme related documents carefully”

However still we get carried away with the past performance with the belief that it will continue. Mutual funds returns are not fixed and while investing we should always keep this in mind. Further the returns also depends upon portfolio where the scheme has invested. Therefore it is always better to understand the particular scheme and its portfolio details before making an investments just based on past performance.

3.     Not Matching financial goals with the investments:

It is very important to be clear on our financial goals and select the right investment based on the goals. Making investments without goals is like starting a journey without knowing the destinations. If we don’t know the destination we may not be able to select the right vehicle i.e. whether a car is good or train or a plane and may end up selecting a wrong vehicle which may either not take us to the destination or not within our timeline.

Similarly investment should also be made based on financial goals, investment objectives, investment horizon, and risk profile which will help us to select right investment option and make our investment journey easy and enjoy full.

4.     Not selecting the right option:

 
Mutual funds have two options; growth and dividend. Growth is for those who don’t need money now and want to grow wealth for long duration to achieve financial goals later on. While dividend is for those who need money on regular basis may be to meet their regular expenses.

We should select the right option based on our specific needs so that we get the benefits as desired. Since dividend is paid out of the investors own money, just for the sake of getting money on regular basis does not serve purpose if we actually don’t need it.

 

5.     Following the tips rather than the professionals: 

One person cannot do everything. Doctor are good for advising medicines, Lawyers are good for legal matters similarly Financial advisors are required to get the right advise for our achieve our financial goals.

Some time we just get influenced by some friends/relatives or do our own research in internet to buy financial products. It is like taking medicine by searching on google will that cure or no is a big question mark.

It’s always better to take professional advice so that we are more comfortable and sure that what we are doing is right and make our financial wellness better.

6.     Over diversification:

It’s good to diversify but if it’s too much it may actually not help. Like in food if we have 5-6 items we may enjoy it but if the items are 50-60 we may not be able to enjoy them in fact get confused or eat something which may not be good for us. Diversification is must and is the core principal for investing in mutual funds, however adding too many schemes to the portfolio, especially on the equity side, adds no value. It will lead to over diversification and reduce the potential of your portfolio to generate superior returns.

It is better to invest only in few selected consistent performers tax saving schemes which offer exposure to the entire spectrum of the markets. It is also important to review the portfolio every year and replace the bad performers.
 

7.     Investing in close-ended long term funds:

ELSS schemes have lock-in period of three years, t there are schemes which have tenure up to ten years. It is good to invest for long term however investing in long term close ended schemes reduces our flexibility to take out the funds when it is not doing well.

We should invest for the long term, but opt for an open-ended scheme. The performance of different schemes keeps on changing due to various reasons so it is always better to have control in our hand so that we can shift from one scheme to other if it is not doing well.

To Conclude

Tax saving schemes helps us to save tax and also inculcates a habit of savings for long term which is very good and required for every individuals. However last minute tax planning, that also only for the sake of saving tax can lead to lower savings and inefficient investments. It is always better plan for taxes at the start of the year, to see where we stand and make adjustments later on if required. We should know the various routes to save tax on your income and a professional’s advisor can add value in our investments. 

Mutual funds: The Myths and The Reality

Mutual Funds are in India for decades however still there are lot of doubts in the minds of the investors. In this post we have tried to sort out various myths and the reality about them.

1 – SIP is the name of an investment product

Many people think that “SIP” is the name of some investment product other than mutual fund. We heard people saying – “I want to invest in SIP”. However SIP means SYSTEMATIC INVESTMENT PLAN, which means a way to regularly invest into mutual funds. Wherein a fixed amount is automatically debited from our account and gets invest in mutual funds on a pre-defined date.

2 – SIP is only on monthly basis

Generally people make investment on monthly basis however an SIP can also be done even on a weekly, fortnightly or quarterly basis. While monthly SIP is the most suitable for all (we all get monthly income), but at times if we want to invest on different frequency that can also be done.

3 – Just SIP and forget it

Many investors think that once they have started a SIP investment or even lump sum investment then just forget it for next 10-20 yrs. However a wise way is to constantly review (once in a year or so) the performance of the schemes and take corrective decisions. But we should not over do it and start looking at weekly and monthly returns.

4 – Once started we can’t stop the SIP in between

Many investors think that after starting SIP for X yrs, then it is a commitment and we can’t break in between and if we break then will face some penalty. However the truth is that once we start the SIP, we can anytime stop the SIP in between it may take one month normally. So we shouldn’t worry while starting the SIP as it can be stopped the day we want to stop it.

5 – Once SIP is done we can’t increase, decrease or add lum sum in same scheme

Many investors have misconception that if they have started an SIP in a fund ABC, then they can’t add additional money in the same fund under the same folio or they can not increase or reduce the SIP amount. However the truth is that we can add additional SIP in the same scheme even in same date or we can cancel the existing SIP to start lesser amount SIP. We can also add lum sum amount in the same scheme any time as per our own convenience.

6 –Once started We can’t skip any SIP payment

Many people get worried that what will happen if they skip the SIP. Mutual funds units are allotted on the current dates NAV basis, so if we do not have sufficient money in account the units will not be allotted on that day. For that Mutual funds company do not charge any fine or penalty for this, but our bank can levy a some ECS retun charge for this like Rs 200/300. However we can still invest same amount through online or physically for one time purchase after that. However it is better to be disciplined enough to make sure that our SIP’s go on time, but also does not hurt badly in case of emergency

7 – We should stop SIP when markets are down

SIP is a better and disciplined way of investing. Unless we are expert in understanding markets and how they will behave which actually no one knows, it does not make a lot of sense to time SIP’s . Its better to let them run in all kind of markets and focus on your long term goals.

Many investors stop their SIP’s when markets tank which is not right. Infact, this is the best time when we should accumulate more Mutual funds units in our portfolio, so that when markets are up, we can reap the benefits.

8 –When stock markets is high we should avoid starting new SIP

Although it’s better to wait when market is high but nobody knows that market will go up further from here or will go down. So its better to keep on investing regularly rather then trying to guess about the market.  Its better to continue withr SIP’s irrespective of market conditions. And when markets do down, it’s time to increase your SIP amount

9 – SIP is always better than Lump sum Investments

Actually we can’t say which is better. When market is more volatile SIP’s can outperform the onetime investments. SIP’s however are more suitable for a common man as it’s a monthly commitment and averages the risk of market’s volatility. But when market is continuously rising lump sum investments can give higher returns then SIPs.

10 – Lower NAV is better than higher NAV

This is a very confusing and interesting myth among investors. Many people think that a smaller NAV mutual fund is a better deal compared to a higher NAV mutual fund.  Due to this reason people rush to new fund offers just because the NAV is at Rs. 10/-.

The fact is that in case of mutual funds NAV has no significance. It’s ZERO !

Mutual funds appreciation is directly related to percentage growth in the NAV not in absolute numbers. For example if we have invested  Rs 1 lacs in a fund with NAV of Rs 10, and if the mutual fund performs great and in next 5 yrs it doubles in value, then the NAV will rise to Rs 20 hence the fund value will rise to Rs 2 lacs. However if the NAV was Rs 100 per unit, still the effect would be same as the NAV would have increased to Rs 200 and investment value will increase to Rs 2 lacs. Same in earlier case.

11 – Dividend in mutual funds is better than Growth option

All the Mutual fund schemes have both options i.e. growth and dividend. Many investors think that dividend option is better because they are getting “extra dividend or extra money” . However it’s not true.

Dividends is not extra ! , Once dividend is paid from the scheme, the NAV comes down by that margin. Further  if the fund is not an equity fund, a dividend distribution tax is first paid by AMC, which lowers the return of investor. However in case of growth option, the money remains in the fund itself.

For example, ABC fund with NAV of Rs 50 declares a dividend of Rs 5

·         Now in case of dividend option , Rs 5 will be paid to investor and NAV will come down to Rs 45.

·         However in case of Growth option, nothing is paid to investor , but the NAV is Rs 50.

12 – Mutual funds means Investment in Stock Market

Another common myths is that mutual funds are highly risky because they invest in stocks. However this is half true. Mutual funds have different schemes i.e. Debt Funds, Balanced funds and equity mutual funds. Only Equity and Balanced mutual funds invest in stocks and are risky or volatile. Debt funds invest in debentures, bonds and Government Securities which are not related to equity market. Infact some of the debt schemes i.e. Liquid funds are quite safe and can be considered as substitute to saving/current account.

13 – Mutual funds do offer guaranteed returns

Mutual funds do not offer a guaranteed return like a fixed deposit.  Returns of mutual funds are based on market value of the basket of securities in that scheme. The returns vary depending on the type of schemes i.e. debt or equity based schemes. Although the returns are not guaranteed they can be predicted based on historical returns, fund manager’s expertise, securities in the scheme portfolio and investment horizon. This is one of the main reason that many investors who want assured returns shy away from investing in mutual funds.

14 – Past returns indicate future returns for the mutual fund scheme

People think that if Scheme A has given good return in past it will continue to give that kind of return in future. But this is not true. Although past returns can tell that the fund did well in past and there is some probability due to legacy that it will perform well. But it’s not which can be 100% sure. The fund’s performance depends on the securities it has at that point of time and what decisions fund manager takes in future.

15 – More Mutual funds means Better Diversification

Normally a single mutual fund scheme invests in 50-70 stocks. So when we invest in an equity mutual fund, our money is already well diversified across sectors, types of companies etc.

When we add other mutual funds of same category, many of the stocks could be same hence giving hardly any further diversification. If we further add other similar schemes we may not be doing any diversification actually.

That is why it’s of no use to invest in 10-20 mutual funds of same category. 2-3 funds of a similar category are the fine for an investors perspective  if we want to invest more we can invest in the same schemes thorugh lum sum or SIPs.

16 – Tax saving under 80C is not possible through mutual funds

Many people who are investing in PPF and Insurance for many years think there is no alternative or better way to save tax. However mutual funds do offer 80C benefits. ELSS or Equity linked saving scheme is the category of mutual funds which gives 80C benefits up to Rs 1.5 lacs with lesser lockin period of three years.

17 – In ELSS all money can be withdrawn after 3 yrs if one is doing SIP

Many investors have this belief that is that if they are doing SIP in ELSS (tax saving mutual funds), then after 3 yrs, they can withdraw all their money. However that is not true. Each investment in ELSS is locked for 36 months from the date of investments. Which means that the first SIP which goes in 1^st April 2017, will be unlocked only in 31^st March 2020, Similarly the SIP made on 1^st May’17 can be redeemed only on 1^st May 2020.

18 – Mutual Funds means big Investments

Many small investors don’t enquire about mutual funds thinking it needs lot of money to invest. Hence they stay away from mutual funds and stick to recurring/fixed deposits and other products. The truth is that we can start monthly investment of even Rs 1,000 per month in most of the funds and for onetime basis, it can be Rs 5,000 .

19 – Mutual funds mean long term investments

Mutual Funds are the investment products where we can invest for as short as one week to as long as ten-twenty years. Liquid mutual funds are for short term i.e. a few week to equity funds where we can invest for decades. There are other products in between for short to medium term time horizon.

20 – We will lose all our money if Mutual Fund company goes bankrupt

Mutual Funds are governed by SEBI and have five tier structure. There is a Sponsor,  trust, an Asset management Company, Custodian of Securities and Registrar. The way it’s designed and regulated that it’s almost impossible for investors to lose money due to a scam or AMC going bankrupt. Sponsor sets up a mutual fund, Trustees are responsible to regulate the mutual funds and ensure it to adhere to the regulations, AMC manages the funds, Custodian keeps the securities and Registrar is responsible for registering the sale/purchase transactions and keeping the investors data. Since the mutual funds units does not lie with AMC (it just takes decision of buying and selling) but with custodian and hence they are highly secure.

21 – Investment in Mutual Funds needs demat account

Many people think that demat account is compulsory for investing in mutual funds. However it is not true, we can invest in mutual funds without Dmat account as well as through existing Dmat Account, but it’s not mandatory.

22 – Mutual funds investments needs lot of formalities

Mutual funds investment needs one time KYC formalities like we need to do for opening Bank Account. After that we can buy/redeem mutual funds in a very simple one page form or also through online. We do not need to provide all KYC documents every time we invest/redeem form the mutual funds. However selecting schemes based on goals and time horizon could be little difficult for a new person and its better to take guidance from some experts.

23 – In Mutual funds only humans can invest

Actually any one can invest in mutual funds be it individuals, HUF, Companies, Partnerships firms, trusts or societies.  All we need to do it so provide the required KYC, and then investment in mutual funds can be made. For companies who have current account money can be invested in liquid or debt funds and redeem them anytime by which we can earn money in the idle money.

24 – Mutual Funds are for young and not for retired investors

As mentioned above Mutual funds have various types of schemes which can cater the requirements of all class of investors be it a young office goes to a Middle aged executive to a retired person. A person can select debt schemes if he wants more security of his funds he can also invest in a debt oriented mutual funds, which can have some equity component for some return kick! Few schemes offer monthly or quarterly dividends (equity/balanced fund offers tax free dividend) which can be a better option for those who don’t have regular cash inflows. One can also go for Systematic Withdrawal Plan (SWP) and withdraw a fixed amount each month.

25 –In Mutual funds our money gets locked

There is another misconception that in mutual funds their money gets locked for a specific period. But the truth is that in case of mutual funds, most of the funds are open ended funds, which means that we can invest anytime and redeem anytime. Although there is some exit penalty in many of the mutual funds which ranges from 3 months to a year. However in ELSS funds (which comes under 80C) and close ended funds (which specifically tell you the duration for lock in) there are lockin.

26 – Mutual funds can’t be a substitute to FDs

Although in India Mutual funds are just 15% of total FDs, In US, mutual funds are already several times bigger than Fixed deposits with more than 67% of the population invest in them. It is also going to happen in India. Currently Indian mutual funds have around 18 lacs crore, which has doubled in last 4 yrs, and set to grow very fast in the next decade. So if someone thinks that mutual funds are some alien concept, he has to rethink. It’s very popular now in India and one of the standard investments products.

27 – Mutual fund redemption is complicated

Redemption in mutual funds is very easy and now through online apps we can do it by sitting at our home without  visiting mutual funds or registrars.This does not need any approval from anyone.

28 – TDS is applicable when mutual funds are redeemed

In mutual funds, there is no Tax deducted. We get the full amount in our bank account and then we need to calculate the tax amount and pay it later. However in debt mutual funds Mutual fund companies need to pay dividend distribution tax but the dividend in the hand of investors is tax free. For Equity schemes the capital gain is tax free after one year. But in case of NRI’s, if they redeem their debt funds, then TDS is applicable.

29 – I can’t invest in mutual funds as I can’t get money when I need it

Mutual funds are highly liquid and we can get our money ranging from instant redemption to 3-4 days depending on the fund type. In fact Liquid/ultra short term funds can be used as a substitute to Saving/Current Accounts as they can provide instant or liquidity within one day.

30 – We can’t withdraw a part of investments from mutual funds

Actually we can redeemed  any amount from Mutual funds as per our convinience. We can either chose specific number of units or the amount we want to redeem (in that case it will calculate the units accordingly). So that way, it’s a great product as unlike FD or RDs wherein we can invest and redeem any amount as per our convenience.

31 – We can’t switch from one scheme to other

There is another misconception that we cannot move from one scheme to another across the same fund house. We can switch from one scheme to another in same fund house without selling. However from one fund house to another we need to redeem from one scheme to other.

32 –Bigger and well-known brand’s Mutual funds are always better

A lot of first time investors in mutual funds investors want to go with trusted brands like LIC, SBI, or ICICI etc. The truth is that the Mutual funds are totally separate entity hence they may not reflect the same quality of performance as of their parent companies. We should not confuse with LIC mutual funds as LIC insurance or SBI mutual funds as SBI bank.

Mutual funds are totally different and specialised business, and it needs asset management expertise. A small fund can also have high quality funds and should be considered.

Mutual funds are very good investment options however they should be used wisely based on the investor’s specific needs, financial goals, time horizon and risk appetite.

What we should not do in tax planning !!

Last quarter of the financial year is known for tax planning. Salaried employees get the notices from their HR and deadlines to submit the proof of tax saving and we all rush to invest in tax saving instruments. In this urgency, sometime we just focus on tax saving without understanding the long term implications of that particular investments. Tax planning is very important as it helps to pay less income tax. Something everyone wants. But smart tax planning will help you boost your portfolio. The actual tax strategy will have a different meaning and emphasis depending upon an individual's personal circumstances.

1) Have a holistic picture not in isolation

Generally we think tax planning in isolation and not from an investment point of view. Hence the approach is often to grab up investments that will give them the tax break, irrespective of whether or not it will help them reach their financial goals or fit into an overall investment strategy.

Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals.

Most investors in a crazy dash to meet their Section 80C requirement will opt for unit linked insurance plans, or ULIPs, and endowment plans and often end up with products that do not suit their need.

Life insurance should never be bought with the intention of saving tax. Tax saving is just one of the benefits that come along with it. The main benefit is the provision of finances in the case of death of the policy holder.

Approach tax saving with a holistic mindset. For instance, if your portfolio is heavily tilted towards debt, it would not be wise to opt for an investment in National Savings Certificate, or NSC. Instead, think of an equity linked savings scheme, or ELSS.

2) Tax saving is not just by fixed-return instruments.

Individuals tend to look at the Senior Citizen Savings Scheme, or SCSS (current interest rate 8.5%), 5-year deposits, National Savings Certificate (NSC) and Public Provident (PPF) (current interest rate 8%) as the tax-saving investment avenues. Looking at the current interest rate scenario where the interest rates are expected to fall further fix interest rates offering options are going to become further unattractive and investor should look at other options which can offer better yields.

Under section 80C we can also invest in an equity linked savings scheme, or ELSS. These are diversified equity mutual funds that offer a tax benefit under Section 80C. They have the lowest lock-in period of just three years. As of January, 2017, the ELSS category average delivered an annualised 3-year return of 18.5%.  Scheme wise the highest return was 27% while the lowest was 12%.

However we should keep in mind that these are equity funds which means, the return is not guaranteed. So select a good fund that has shown consistent performance and stick with it over the long haul. Don’t be in a tearing hurry to sell the investments just because it has completed the mandatory three years. Exit from the fund when the market is rallying or you actually need the money so you walk away with a profit. If this means hanging on for a few more years, do so.

3) Its not just 80 C, Don’t ignore the big picture.

Tax saving is more than just investments and goes beyond Section 80C.

If you have made a donation to a charity that offers a tax deduction under section 80G, avail of it. If you are paying premium on a medical insurance policy for yourself and dependents, be sure to claim the deduction under section 80D.

Also, if you are servicing a home loan or an education loan, you are eligible for income tax deductions. Under Section 80C, you can even show the expenses of your child’s education to avail of a deduction under section 80E and interest on home loans can get exemption under section 24E.

When deciding how much to invest to max your deduction under Section 80C, take into account children’s tuition fees, principal repayment on home loan, contribution to employees provident fund (EPF), and any life insurance premium you are paying and then decide the remaining amount to be invested and plan it accordingly.

Finally

As an investor/tax payer, by smart investment planning we can convert the tax savings compulsions to wealth creation opportunities. For that we have to just go beyond the traditional option and look at all the options with the clear objective in mind.