Mutual Funds are not just Right, they are Better also

There are various options available for investments but why mutual funds stands out as compared to insurance products, let's understand it in more detail.

1. Mutual Funds are not an insurance but an investment product. Here our money is invested in market securities so that we get a better and inflation hedged returns which can meet our future financial requirements/goals.

2. Insurance means if something happens to the policy holder then his family/nominee will get a pre-defined lum-sum money. Although no one can fill the gap of that person emotionally however this money helps the family members to get financial support.

3. In Insurance only the cover amount is fixed not the bonus amount. Bonus is declared every year based on the company’s returns like in case of mutual funds.

4. In Insurance to cover your risk tem insurance products can be taken, where the premium amount is much less as compared to normal insurance policies.

5. For example if a 30 Year old person wants one crore coverage. Then if he takes normal policy of Jeevan Anand (with 35 years coverage) then he has to pay a premium of ₹2,99,434 (₹2,86,540 premium +₹12,894 tax). The same one crore coverage can be taken by LIC’s term insurance policy Jeevan Amulya where the premium will be only ₹32,096 (₹27,200 premium+ ₹4,896 tax). Please also note that in case of Jeevan Anand, policy holder has to pay a tax of ₹12,894 every year in which he did not gets any returns.

6. In mutual funds there is no tax at the time of investments and your whole money is invested in the scheme without any deduction. Whereas in case of Insurance approx. 4-5% of total premium goes to tax. Yes it is 4-5% of the total premium in which you do not get any returns. Since your investment amount is reduced so only because of this reason the total returns on investments comes down by 4-5% (actually it will be much more but for simple calculation let’s assume that only).

7. However no Insurance agent tells about term insurance, why? Because in term insurance schemes the commission to agents is very low which makes it unattractive from selling point of view. And the argument given is “You don’t get any return on term insurance”. Do you get any returns in Mediclaim policy or car insurance if there is no claim? then why do we need returns in life insurance? If we take term insurance and invest the remaining amount in a good return products then we can get multiple time returns as compared to normal insurance products. As well as our life is also covered by right product.

8. For example as mentioned in point no. 5, if we take term insurance instead of Jeevan Anand and invest the remaining amount ₹ 2,67,338  in a mutual fund with expected 10% P.a. then we can get almost ₹ 7.97 crores in 35 years.  And remember this money is additional to the insurance cover of one crore.

9. It is said that mutual funds invest in share market where your all money can be wiped out. Let’s understand this more.

(i) First thing mutual funds also invest in bond/debt market. In fact almost 60% of total mutual fund money is invested in Debt market, yes this is the same market where LIC also invests.

(ii) Secondly mutual funds have various different type of schemes wherein a person can invest for a week to a year or 5-10-20-30 years.

(iii) Mutual funds have schemes which invest only in bond/debt market and not a single penny is invested in equity shares. A person can invest in different schemes based on his/her financial goals, risk appetite and investment horizon.

(iv) There is no binding for investment in mutual funds, if due to some reason someone wants to stop the investments it is possible without any penalty whereas in case of insurance if we stop the policy in between it can lapse or forfeit.

(v) In mutual funds you can start investments with as low as ₹500.

(vi) In mutual funds you can increase, decrease the amount any time. You can stop the investment and also can restart as per your convenience.  All these facilities are not available in Insurance.

(vii) Share market goes ups and downs, it is volatile and this is the fact, but if we invest our money for long term like we do in insurance then chances of losses are very rare.

(viii) Share market is a reflector of the country’s economy. If economy is growing and getting stronger then share market also goes up. For example in 1979 BSE Sensex was 100 points which is today at 33000+. This is true that it goes down in between but it also comes back from its lows and goes up again.  Like our incomes is growing similarly as the companies make more profits then there share prices also goes up.

10. Mutual fund companies provides all details where the investor’s money is invested, Insurance Company’s do not provide these details.

11. All the portfolio details of each and every schemes of mutual funds are provided at the website of the company on monthly basis as well as other websites also. Whereas Insurance Company do not provide any details where they have invested the money this itself shows who is more transparent and honest.

12. “Mutual Funds are subject to Market Risk” this warning is given by mutual funds so that if a person is investing he/she should be aware about the risks involved and invest only after having full information. Mutual funds give back all returns (after deducting expenses) and do not keep a single penny with themselves. Insurance company do declare bonuses but it is discretionary and not necessary that they pass on all the profits.

13. The NAV (Net Asset Value) of mutual funds are declared everyday which is not the case for insurance; therefore Funds Mangers have to very actively manage and perform in case of mutual funds this is also one reason that their returns are better as compared to Insurance products.

14. Fund Manager of Mutual funds knows that if I do not perform then investor can take out his money whereas in insurance company they knows that once the investor has taken a policy he will most probably continue as otherwise it will get lapsed/forfeited therefore they do not have pressure to outperform. This is also a reason that most of the mutual funds do better than insurance products.

15. Insurance companies are legally bound to pay the insurance cover amount only. How much bonus is to be paid depends on performance of their investments and surplus money which is not guaranteed. And as mentioned at point no. 5 for life cover we can take term insurance then why should we buy normal insurance product by paying 9.5 times more for the same guaranteed amount?

16. In mutual funds there is very small commission as compared to insurance products.

17. Insurance products are generally sold by creating fear (what will happen to your family if you are not there) and emotional blackmail which is a negative marketing. Mutual funds are sold to meet your future financial plans/goals when you and your family both will be there and can enjoy the money which is a positive marketing.

TAKE INSURANCE FOR LIFE COVER AND INVEST IN MUTUAL FUNDS TO MEET YOUR FUTURE GOALS

FMP’s a better alternative to Fixed Deposits

FMP stands for Fixed Maturity Plan. These are essentially close-ended income schemes with a fixed maturity date i.e. that run for a fixed period of time. This period could range from one month to as long as three years or more. When the fixed period comes to an end, the scheme matures, and your money is paid back to you.

Some of the FMPs do invest a small portion of portfolio in equity which are called dual advantage fund. The portfolio is generally invested in debt and money market instruments maturing in line with the tenure of the scheme. The objective is to lock-in the investment at a specified rate of return thereby immunizing the scheme against market fluctuations.

Liquidity

In most open-ended mutual fund schemes, one can redeem one’s units anytime. However, the structure of the FMP does not lend itself to this kind of liquidity. In FMP Invest money you are more or less sure you are not going to need during the tenure of the plan. If you withdraw before the scheme closes, generally it is not permitted however you can sell it in the secondary market as all the closed ended scheme have to be listed in stock exchanges although finding a buyer for these securities is bit difficult. Though income schemes invest in similar instruments as an FMP, being open-ended and not having a specific tenure based investment strategy, these are subject to interest rate risk leading to fluctuations in the NAV.

What is better — A Bank Deposit or a FMP?

Lately the interest rates on bank deposits have fallen leading many investors to wonder whether a simple Bank Fixed Deposit (FD) would serve better than having to go through the process of investing in an FMP. Though compare to Bank FDs , FMPs currently offer a little higher rate of return; the tax impact tilts the scales in significant favour of the FMP.

Interest on Bank FDs is fully taxable whereas the return from FMPs is either subject to the Dividend Distribution Tax (for the dividend option) or the capital gains tax rate (for the growth option). The capital gain is calculated after adjusting with Cost Inflation Index. The Distribution Tax rate @28.84% or the capital gains tax rate @20% are lower than the income tax rate, especially in the case of investors in the higher tax bracket where income tax on interest will be at 34.60% (30%+12% Surcharge and Education Cess). Tax directly eats into returns, which is why FMPs have the edge over Bank FDs.

Are FMPs for you?

If you are looking for a fixed income avenue that yields a reasonable return with minimum risk, adequate liquidity and tax efficiency, FMPs will provide you with an effective shelter.

Let’s see how a longer termed FMP (of over one year) has an even better edge than a Fixed Deposit. The reason is that for an FMP of over one year, the return is taxed as long-term capital gain and not normal income. The following table summarizes the advantage that an FMP has over a fixed deposit.

In the case of an FMP, you have an option of paying tax on long-term capital gains @20% after indexing cost while for interest income you have to pay the tax as applicable to your tax bracket.

S. No.	Particulars	FMP of Mutual Funds	Fixed Deposit
A	Investment Amount	100,00,000	100,00,000
B	Post Expense Indicative Yield	7.50%	7.50%
C	Maturity Value after three years	124,22,969	124,22,969
D	Gain = C-A	24,22,969	24,22,969
E	Expected Annual CI Index	5.00%
F	Index Value for three years	1500000	0
G	Net Gain After Indexation (D-F)	9,22,969	24,22,969
H	Tax Payable @20%/ 30%	1,84,594	7,26,891
I	Total Income Cash Flow (D-H)	22,38,375	16,96,078
J	Maturity Value after three years	122,38,375	116,96,078
K	DIFFERENCE IN TOTAL CASH FLOW	5,42,297
	Additional return in % (K/A)	5.42%

As we can see from the table given above that the net return in FMPs can be as high as 5.4% compared to FDs when we expect the returns from both the instruments will be same although FMPs give little higher returns than FDs.

Are FMPs for Corporates/ Entities who are at higher tax bracket?

Well, FMPs are for everyone those who are looking a fix kind of returns. However the favorable tax structure makes it more attractive for those who comes under highest tax bracket. Corporates, Association of Persons and High Net worth Individuals. In fact, you can look upon FMPs as fixed deposits offered by mutual funds. Just like bank fixed deposits, Tax incidence differs as explained above.

As compared to other fixed income products like Bonds, Corporate Fixed Deposits FMPs fair better due to long term capital gain tax benefits as compared to interest which is fully taxable.

Also FMPs are quite safe since the underlying investments are either money market instruments or rated paper. Before investing, we can get an idea about the indicative yield from the scheme based on the current market scenario. The word used is “indicates” as against “assures” as SEBI rules do not allow mutual funds to assure returns. In any case, just like in the case of a bank fixed deposit, in an FMP too, investors would know beforehand what the return is going to be. 

And lastly, to choose an FMP, you should do just what you would do take a right advise through a professional Advisor.

Loans: Is it Good, Bad or Ugly ??

When I was very young my grandfather was planning to buy a house, as loans were not easy to get so the State Govt had come out with a scheme in which a person can buy the home and pay in instalments for next 15-20 years and the final ownership of the house is transferred after making full payment. However my grandfather decided to buy the house with full payment as taking a loan was something he call as “Shaan Ke Khilaf” i.e. bad for the Self Reputation.

Yes that was time when taking a loan by a middle class person was considered as “Daag” a blot in self-respect.

Time has changed a lot since then and now most of the people in 30s may have one or two loans. Yes we are in consumerism. We want to enjoy everything today whether we have money or not, does not matter as we can get loan for everything right from home to cars to electronic gadgets, for holiday’s and even weddings & other petty things also.

So few questions comes to our mind especially among young earners who find it tough to fit their expenses into their incomes:

1. Is it good to be debt free?

If we can control our expenses and don’t get carried away with other’s life style it is possible to live completely debt-free. However it is not necessarily a very smart way of living life. There are certain assets which requires a lot of money to buy like House, Car and college education, and very few people earn enough money to pay full cash for them on upfront basis. So in today’s world it may not be very smart decision to be totally debt free while denying ourselves some basics which can be paid back comfortably later on.

2. Should we borrow as we are getting it easily?

Now the next question comes should we borrow as someone is offering it. Now days most of use to get dozens of calls for personal loans, credit card etc. Does it mean that should we take it just because someone is offering it and use to buy the things which may not be otherwise bought? Nothings comes free and we should always remember it. If we have taken the loan we need to pay back along with the interest.

3. So what is Good Loan?

Good loan is something which is used to buy an asset that will grow in value or generate long-term income. Let’s understand it more.

A home loan to purchase a home for living is usually considered good loan. Home loans generally have lower interest rates than other loans, plus that interest is tax deductible.

Education loans to pay for a college education is another example of good loan. First of all, education loans typically have lower interest rate compared to other types of loans. Secondly the interest paid on education loan is fully deductible from the income and thirdly, a college education increases your value as an employee and raises your potential future income.

An auto loan is another example of good debt, particularly if the vehicle is essential to doing business. Unlike homes, cars and trucks lose value over time, so it's in the buyer's best interest to pay as much as possible up front so as not to spend too much on high-interest monthly payments.

4. What is Bad Loans?

Bad loan is a loan incurred to purchase things that quickly lose their value and do not generate long-term income. Bad loan carries a high interest rate, like credit card debt and there will be no tax benefits as such. The general rule to avoid bad debt is: If you can't afford it and you don't need it, don't buy it.

Loan for expense which can be avoided like wedding, electronic gadgets and fancy items whose value erodes quickly are considered as bad loans and should be avoided.

Taking Loan for a new start up can turn out to be a bad idea. Starting our own business can often be a life changing experience. However, we should avoid taking a personal loan for the investment. This is because there are plenty of better options such as roping in co-investors or angel investors, or choosing asset-based loans, small business loans, etc.

And the UGLY

Taking loan for Investing in stock market is risky, although there are people who may have made a fortune from their investments. However, if you want to invest in stock market by taking a personal loan be careful as it can easily end badly. Companies go bankrupt all the time, and if your money is on one then you could end up paying EMIs for a loan that dissolved completely. It can be further worse if you take a loan for derivative trading as then the liabiliites goes beyond the loan amount due to leverage trading.

Credit card is worse for undisciplined spenders. As we do not hesitate to swipe a card, since the brain is unable to process the pain of parting with money, while we focus on the joys of spending. Outstanding amounts are charged usurious interest rates since the unpaid balance is an unsecured loan to the cardholder. The minimum amount due seems small and convenient, but instantly converts the unpaid balance into a high cost loan.

5. So, why we should not overburden ourselves with loans?

Indebtedness is not just a financial burden but also emotional burden.  It can create resentment in our life and may affect our family and office work. People who carry huge debts face anxiety and depression. People start living in denial and lie through their debts, creating a façade of well-being while avoiding the calls from creditors, or stashing unopened mails about overdue debt away from sight. Indebtedness makes us less capable of being a better version of ourselves. It also affects our self-respect and we try to avoid people or places from where we have taken loans. It is always better to take loan which we can comfortably reply.

6. So, what is the thumb rule while taking Loan?

1. First thing we should know that will this loan have a direct and measurable positive impact on future income? If the answer is yes, we may go for it. Like Crop loan when sowing is good or an education loan for a course in a reputed institute could be a good idea.

2. Is the loan small enough for me to pay without impacting my other regular expenses? Rather than looking how much finance company give me we must look at our own cash flow position to ascertain that how much EMI I can afford to. There is an old saying “ Pair utne hi failana chahiye jitni lambi chadar ho” We should spread our legs only as much as the length of the sheet.

3. Is the loan creating an obligation whose value is too risky given the size of your assets? For example in derivative trades the obligation goes beyond the purchase amount and can put a huge obligation for the investor and hence doing derivative trading by taking loan can be a very dangerous idea.

Few Final Words

Loan is a commitment to pay from our future income for the things which we want to have right now. Yes we may take some of the things in advance by loan but we should be careful to manage them in case the future income does not comes as per our expectations. We should also remember that our loan EMI’s should not result into the curtailment of the current necessary expenses.

Warrant Buffet has once said: “If we buy the things we actually don’t need then in future we would be selling the things which we actually need.”

My opinion published in 28/03/2018 Mint News Paper

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.

Women are special so do their Financial Requirements

Generally money, finance and investments are called as man’s domain and in most of the houses the man of the house take care of these matters. However in today’s world when women are leading in every aspect of life, the involvement of women in financial decision and also to cater their specific needs is very important. Working women often juggle responsibilities in their careers and at home, together. The investment and financial needs of women are, to a degree, different from those of a man. In this article at the time of Women’s day let’s discuss what are the important aspects a women should keep in mind to plan her personal finances.

1. Plan for healthcare: It’s very important

Health care expenses can rise with longer life, which is a big concern when planning for retirement. There are many complicated disease which can eat a substantial part of our savings if we have not covered our self against them. If we have not taken a health insurance at the early stage of life then purchasing a mediclaim later on is not only costly but may not cover all the ills, So it is always better to take mediclaim at the young age.

There is also another reason to buy a health insurance as we get the income tax benefit upto Rs. 25000/- (Rs. 30,000 for Senior citizens which has been raised to Rs. 50,000/- in last budget). You can also take health insurance for the parents as they grow older they may need it more, further the tax benefits are also available for mediclaim taken for parents. While buying a health insurance, we should check the exclusions in the policies carefully. Sometimes we may get a policy at a lower premium compared to others but it may exclude certain illness so be careful.

2. Plan for Retirement: It’s crucial

As our life standard are improving, we are living longer. It means that we need to plan for a long life, and a long retirement and also have to deal with all the challenges of aging. Life expectancy for women is higher than men in any cases and changing social fabric also indicates to be self-dependent at older age.

Inflation, is a tax on capital and it slowly eats away our portfolio. Inflation causes a gradual decrease in your purchasing power because a fixed amount of assets buys less. If we take 7% inflation per year It compounds to 7.6 times in 30 years.” Which means if our monthly expenses are 25000/- today at the age of 30 then by the time we retire it will ballooned to 1.90 lakhs per month.

As the economy is growing with demand for various items rising, fixed investments such as Cash, Fixed Deposits and Bonds may not keep up in an inflationary environment.

For any financial planning and especially which are for long term; Inflation must be taken into account. If you are a single women it’s better to take the advice of an expert and if you are married it’s better to discuss the retirement plan together and chart out the priorities and investments to meet the future cost of living.

3. Plan for Kid’s future: They matter a lot

Every mother wants to give their kids the best, and yes it needs proper planning so that money should not come in a way for their bright future. In today’s world the education cost is rising very fast and for extracurricular activities also we need lot of money. If your kid wants to become a sportsman or an artist there also we need to send him/her at good training canter’s which requires lot of money. So planning for their future career needs to be done at the early days.

Now days, teenagers and young adults tend to focus on lifestyle spending and they don’t mind taking loans for fulfilment of their needs, rather than saving. As a mothers we should not just save for the kids’ future but also guide them to develop better financial habits. We should stick to predefined budgets and pocket money so as to make them realise the value of money and importance of savings.

4. Plan for unplanned: Yes that can happen too

There are many things which comes in life without any intimation, it can be some emergency requirements, a break from the work or a separation form spouse or something else. So it’s always better to have some funds in kitty for any kind of emergencies and unplanned things in the life. If you are planning for a break in your work, its better to plan for a break by first calculating the money required during that time and start investing at least 2-3 years (depending upon the duration of break) in advance for that so as to save sufficient amount to meet the expenses during that time. You should also work on a Plan B to generate some side income so as to keep yourself mentally and physically engaged.

5. Need a Loan: Ladies are preferred borrowers

Many banks offer lower interest rates on home loans if a woman is applying for it or if she is the first applicant for a joint loan. There are some banks that offer special rates for women customers for gold loan, education loan, personal loan, etc. For women entrepreneurs, banks offer loans on easy terms and lower interest rates.  The interest rate is offered at .05% to .2% lower than normal rates. Further to this interest rate benefit, there are several states in India which offer discounts on stamp duty charges to women buying homes.

Take this benefits if you are planning to buy a home or car or want to start a business. Although the difference may not be much but it still matter especially if the tenor of the loan is very long.

Finally:

There is a famous quote by Benjamin Franklin    “If you fail to plan, you are planning to fail!”  

Money is a very critical factor for living a comfortable life so the financial planning is always a very crucial factor. Avoiding any serious missteps can help to provide a better chance for a long-term financial future and eventual retirement that meets your desire. It’s always better to take a professional’s help to keep your finances in a shape based on your specific requirements.