Tax Planning Time For Financial Year 2011-2012

January 2012 is over and there are just 2 more months left in the current financial year. It is time for us to plan for our Income Tax for this financial year.

Everyone is scampering around to make last minute investments to save taxes. Whenever we are in a hurry to do something, we get oblivious to the details and make silly mistakes. The purpose of this post is to give you some insight on the common mistakes people do during their quest to save taxes quickly.

First and foremost “Don’t treat Investments as Tax Saving Instruments”

Yes, you read me right. Investments is nothing but your hard earned money that you are using to buy something. Lets say, I were to come to you with a notebook with the image of Rajnikanth printed on it and ask you Rs. 1000/- for it, will you buy it? You’ll say “NO”. Ok, what if I say, if you buy this book, you will get Rs. 300/- as Tax Benefits and you may be able to sell it to another Rajnikanth fan in future. Would you be tempted? I am sure you would. But, did you really think someone will buy a notebook that is probably worth Rs. 50/- at max by paying so much?

This is what you will end up doing if you make investments with the Tax Saving part in mind. Never and I mean Never make an Investment just because it saves tax. Make an investment that will earn you money and profits. If it gives Tax Savings, then that is like killing two birds with one stone. Treat Investments with respect. After all, we all work hard to earn the money. No one is handing it over to us. Are they?

To know more about Lifecycle Based Tax Saving click here.

Plan your Tax Savings Ahead

According to experts, Tax Planning is not a one-time activity you can do in February for a few days. It is something that you must consider as part of your overall financial goals. You want to save money for your home, for your sons education abroad, your retirement etc. While trying to save tax, you end up investing Rs. 1 lakh or so every year. For someone who has a probably working career of atleast 30 years, imagine how much that would workout to, at even a 5% rate of returns per annum.

Get the picture? Always include your tax planning as part of your overall financial goals. Use this 1 lakh you invest to save taxes to achieve your financial milestones.

To know more about, how to save income tax click here.

Be careful with single-premium life covers

Does the title of this section sound familiar? In one of our earlier posts on Insurance, I had elaborated on this. Be cautious when you buy Single Premium Insurance Plans. You may be tempted to take up one single premium policy for 1 lakh and use it in one shot under Section 80C. unfortunately, the sum assured has to be atleast 5 times the premium you paid. Else, only 20% of the premium paid is eligible under Section 80C for tax benefits.

So, even if you pay 1 lakh for a policy, you can use only Rs. 20,000/- for tax benefits. Be cautious against insurance agents who may mislead you into taking such policies that don’t offer as much tax benefits as they propose.

To know more about Insurance policies and Income tax, click here.

Plan your PPF Investments

You might already know what PPF is and that investments of upto Rs. 70,000/- in every financial year are eligible for tax benefits under Section 80C.
The problem is, most of us invest the full amount in bulk during either February or March and claim tax rebates. Though this is easy and feasible, the money you invest into your PPF account earns an interest only if deposited before the 5th of every month. So, lets say you invest Rs. 50,000/- on 6th of February, you will be losing out on Rs. 333/- interest you would have got if you had deposited the same money on the 4th. A difference of 2 days cost you Rs. 333/- didn’t it?

Another important thing about PPF investment is that, investing Rs. 5000/- every month is much easier and earns you more interest in a year than Rs. 60,000/- invested in one shot. Not to mention, it is easier on your pocket too.

To know more about the various tax saving options available click here.

Make Use of Joint Home Loans

If you are a working couple, then this point is doubly beneficial for you. You already know that interest & principal paid on home loans are eligible for tax benefits with upper limits of Rs. 1.5 lakhs on the interest and Rs. 1 lakh for section 80C. What most people do not know is that, if a working couple take a joint home loan, they both can individually claim tax benefits on this Rs. 1.5 and 1 lakh respectively. This essentially means you are getting double the tax benefit by just taking a joint housing loan instead of an individual one.

Anyways, you and your spouse are going to pay the home loan EMI and plan your home expenses using both your salaries, then why not utilize the tax benefits it offers. Doesn’t it sound like a great idea?

To know more about buying a home, click here.

Don’t forget other Tax Saving Options

Everyone knows Section 80C and utilize the 1 lakh tax saving. But, many people forget the other tax saving options available to them. They are:

a. EPF and VPF Payments
b. House Rent Allowance (HRA)
c. Medical Expenses
d. Infrastructure Bonds
e. Children’s Education Fees
f. Your own Education Loan repayment
g. Etc

To know more about the Indian Income Tax Policies, click here.

We all work really hard to earn the money we get. So, it makes perfect sense to plan our taxes efficiently to minimize the tax we pay. The government has given us so many options to save taxes for a reason. It is perfectly legal to utilize all these tax saving avenues to reduce the taxes we pay. So, plan ahead and use the money wisely.

Happy Tax Saving!!!

Sectors That Will Outperform in 2012

The Indian Stock Market is comprised of thousands of stocks, each of which is divided into their respective Sector. For ex: ICICI Bank, HDFC Bank etc. will come under the BFS Sector (Banking & Financial Services). Similarly, there are numerous sectors in the Indian Stock Markets.

As with any stock market, stocks from one sector may outperform or underperform their peers in the same sector. Also, one sector as a whole may outperform or underperform when compared to the other sectors in the market. This year 2012, promises to be an exciting and challenging year for the Indian Stock Market. The purpose of this post is to provide an outlook about some of these sectors that may outperform the others.

Caution: This is just a Sectoral Performance Outlook. Some Stocks that fall in the below mentioned sectors may perform poorly when compared to its peers. This is not an investment advice. Please exercise caution before investing in any stock in any sector.

The Following Sectors Might Perform Well in the year 2012:

1. FMCG
2. Pharmaceuticals
3. Information Technology
4. Textiles

FMCG – Fast Moving Consumer Goods

The FMCG Sector offers the most conservative or defensive options in the current market scenario. The consumption demand for FMCG products continues to be strong in both local and international markets. Also, the domestic consumption is growing irrespective of the interest rate cycle and the domestic economic scenario. As a result, the FMCG sector is expected to do well in the future.

Trivia:

If you are thinking, how the FMCG Sector can grow in such a volatile economy, think about this. “Right from the moment you wake up to the time you go to bed, you use some or the other FMCG product. Toothpaste, Mouthwash, Soap, Shampoo, Deodorant, Mosquito Repellent etc. and etc.” The list is endless. With growing populations in India as well as around the globe, do you really think the demand for FMCG products will come down???

Pharmaceuticals

Emerging Markets like India and China are densely populated. Even with the rapid industrialization in both countries, the penetration of advanced health-care is still not as far-fetched as in developed nations like USA, UK etc. Major Healthcare Providers and Pharma Manufacturers are looking to expand in Emerging Markets to tap the huge growth potential in the Healthcare industry. As India grows to be one of the best Nations in the World for Medical Care, the growth of the Pharma Industry is expected to be in line.

Over the past couple of years, some of the large Pharma Players have remained stable despite the broader market correction. And, this is expected to continue in the year 2012 as well.

Trivia:

If you are thinking, how the Pharma Sector can grow in such a volatile economy, think about this. “Everyone Needs Medical Care. Newer Diseases are being discovered now and then. Newer medicines, high-tech machines are being used in medical care throughout the nation. In the past decade or so, with the advancement in Medical Care, the mortality rate has come down significantly. Everyone wants to live a long and healthy life and that is being made possible by Medicines.” Do you really think that the Pharmaceutical companies that manufacture these medicines will not do well???”

Information Technology

The IT Sector has been the darling of the Indian Stock Markets for over a decade, up until the economic crisis a couple of year ago, of course. The good thing about this IT Sector is that, it is not sensitive to the Interest Rate Movements in India. Also, the Indian Rupee has depreciated significantly against the US Dollar and other foreign currencies. So, the revenue is bound to rise just by the sheer movement in the value of the Rupee.

Moreover, the whole world is reeling under severe economic stress. With rising costs and the ever present need to reduce costs, Large Company’s worldwide are looking at lower cost outsourcing locations like India and China. So, the IT Sector is expected to continue to grow well in the year 2012.

Trivia:

The IT Sectors Growth comes with its fair share of challenges. Rising costs, Rising Attrition Rates, Visa Restrictions, Lower Profit Margins etc. However, IT Cos are finding out ways to cope up with the situation and continue to post good profits and grow well.

Textiles

The Textile Industry, which was in dire straits over the past few years, has started its reviving phase. The formerly lacklustre demand for quality clothing materials is now on a gradual rise. If we consider the rising demand in the local markets (esp. in Cities) the major industry players have entered into an expansion mode. With a bulk of their revenues coming from exports, the rupee depreciation has brightened their prospects even further. So, the Textiles sector is expected to continue to grow well in the year 2012.

Trivia:

If you are even tempted to think “Will the Textiles Sector do well?” just ask yourself this question “Can I live without clothes?” Of course, you cannot. Are you someone who lives in a major city like Chennai, Mumbai etc.? Have you visited one of those huge shopping malls? Have you seen the kind of crowd that the Textile Showrooms have? Now, go back to your doubt and think again “Will the Textiles Sector do well?” and you will answer it yourself “I Think YES”…

Some Final Words:

Even though, the Indian markets are looking to get back on the bulls back, these are the times when investors must be cautious. We must not get carried away by the fact that the markets have bounced back and we can start buying anything and everything. At such times Investors must follow an Accumulative Approach. This means, you must gradually buy fundamentally sound companies with a consistent track record. The impetus is on “Gradually”. If you play on buying 1000 shares of some company, don’t buy it in one shot. Instead, split it up into 250 shares and buy it 4 times over a period of 8-12 weeks. This will give you ample time to revisit your decision or take advantage of price corrections that are bound to happen in such turbulent times.

Last but not least, done expect to make quick bucks in this market. It would be suicide. The best way is to invest in good companies and let the investment grow over a period of a year or so and then try to reap the rewards…

Happy Investing!!!!!

Top 100 Company's of India

The past 1 year has been very difficult for the Stock Markets in India. Reliance Industries lost its No.1 Spot as the largest company in India and then regained its place. ONGC Gained that place and then lost it. Nonetheless, the top 100 company's in India have reshuffled themselves and gone up and down in the list. Below is the latest list of the Top 100 Company's in India.

Please note that the Market Capitalization is the criteria based on which the Top 100 are listed (In Descending Order). This list is as of the closing price of these shares in the Bombay Stock Exchange (BSE) as of Friday 27th January 2012. The order may change in future based on the price movement of their shares in the Exchange.

S.No	Company Name	Market Cap (In Crores)
1	Reliance Industries	2,67,733.3
2	Oil and Natural Gas Corporation (ONGC)	2,38,313.18
3	TATA Consultancy Services	2,17,026.45
4	Coal India	2,15,072.21
5	ITC Ltd	1,57,603.58
6	Infosys Technologies Ltd	1,56,222.05
7	National Thermal Power Corporation (NTPC)	1,43,264.94
8	Bharti Airtel	1,41,476.98
9	State Bank of India (SBI)	1,29,705.02
10	HDFC Bank	1,13,225.99
11	HDFC Corporation	1,03,081.91
12	Wipro Ltd	1,02,718.58
13	ICICI Bank	1,02,359.79
14	Larsen & Toubro (L&T)	84,532.45
15	Hindustan UniLever (HUL)	84,280.74
16	Minerals and Metals Trading Corporation of India (MMTC)	83,325
17	TATA Motors	76,142.78
18	National Mineral Development Corporation (NMDC)	72,494.83
19	Indian Oil Corporation	69,985.73
20	Bharat Heavy Electricals Ltd (BHEL)	66,978.57
21	Cairn India	66,960.02
22	Hindustan Zinc	56,513.64
23	Sun Pharma	54,771.93
24	Jindal Steel	49,476.08
25	Power Grid Corp	47,732.47
26	Gas Authority of India Ltd (GAIL)	47,345.92
27	Adani Enterprises	46,516.47
28	DLF Ltd	44,551.27
29	Bajaj Auto	44,510.44
30	Axis Bank	44,395.23
31	TATA Steel	44,003.96
32	Steel Authority of India Ltd (SAIL)	43,432.47
33	Mahindra & Mahindra	42,861.58
34	Nestle	41,305.46
35	Sterlite Industries	40,384.91
36	Hero Moror Corp	36,380.07
37	Kotak Mahindra	36,357.12
38	Maruti Suzuki	34,904.67
39	UltraTech Cement	33,684.84
40	Idea Cellular	31,175.53
41	Punjab National Bank (PNB)	30,771.96
42	Bank of Baroda	29,835.88
43	HCL Technologies	29,609.62
44	Adani Ports	29,530.03
45	Oil India Ltd	28,856.93
46	Asian Paints	27,986.99
47	Dr. Reddy's Lab	27,866.26
48	Cipla	27,680.71
49	Hindalco	27,662.46
50	Reliance Power	27,251.8
51	Hindustan Copper	25,781.2
52	Siements	25,690.56
53	National Hydro Power Corp (NHPC)	25,278.03
54	Ambuja Cements	24,803.08
55	TATA Power	24,691.82
56	Grasim	23,634.8
57	Bosch	22,952.6
58	ACC Cement	22,377.08
59	Power Finance Corp (PFC)	22,188.05
60	Lupin Labs	20,856.15
61	Bharat Petroleum Corp (BPCL)	20,844.71
62	Canara Bank	20,575.13
63	Reliance Communications	19,876.58
64	Rural Electrification Corporation (REC)	19,576.37
65	Bank of India	19,308.66
66	Infrastructure Development Finance Company (IDFC)	19,213.31
67	Ranbaxy Labs	18,727.66
68	Sesa Goa	18,577.04
69	Adani Power	18,345
70	Titan Industries	18,301.71
71	Abbot India	16,902.87
72	Dabur India	16,693.13
73	Oracle Financials	16,534.07
74	Glaxo Smithkline	16,514.55
75	National Aluminium Company (NALCO)	15,334.57
76	Jaiprakash Associates	15,055.15
77	JSW Steel (Jindal Group)	14,768.13
78	Neyveli Lignite Corp	14,721.9
79	Godrej Consumer Products	13,912.76
80	Reliance Infrastructure	13,892.74
81	Union Bank	13,688.18
82	Shriram Transport Finance	13,482.81
83	IndusInd Bank	13,462.75
84	Cadila Health	13,349.6
85	Colgate	13,270.18
86	Container Corp	12,452.35
87	Zee Entertainment	12,333.67
88	Petronet LNG	12,296.25
89	LIC Housing Finance	11,944.89
90	Cummins	11,760.21
91	Sun TV Group	11,722.05
92	Castrol	11,661.75
93	GMR Infrastructure	11,560.53
94	Bharat Electricals	11,498.8
95	YES Bank	11,471.16
96	Jaiprakash Power	11,325.83
97	Exide Industries	11,033
98	United Breweries	10,946
99	Divis Lab	10,851.13
100	Mangalore Refinery and Petrochemicals Limited (MRPL)	10,734.67

Lessons to Learn from the Stock Market to Make You a Better Investor

The Stock Market collapse over the past couple of years, the uncertain global economic scenario and the losses that Investors were forced to make have made investors shy away from the Stock Market. There is an inherent feeling of Panic and Fear when it comes to Investing in the Stock Markets. A Good Investor is one that doesn't get bogged down by such setbacks. We must take this opportunity to learn lessons that this stock market volatility has taught us and make ourselves a Better Investor.

Shall we get on with the topic?

Lesson No. 1:

History Does Not matter; what matters is what you do with your present.

This is a great lesson. Dont get unnerved or disappointed if some of your investment decisions were poor. Its ok. Everyone makes mistakes and especially when it comes to the stock markets, the number of people who make mistakes far outnumber the ones that are successful. So, a good investor is one that learns these hard lessons and uses those learnings to make wise investment choices in future. Don't buy stocks on an impulse or just because your colleague does so. Do your research, spend time finding out how good the stock is and then only invest.

Lesson No. 2:

Find yourself a mentor.

The best way to learn something is to find a good teacher/mentor. In all probabilities you may have a good colleage or friend who is a seasoned investor. Keep your eyes and ears open and learn from them.

Lesson No. 3:

If you are a Beginner/Novice Investor, Invest only in top-rated and successful companies/mutual funds.

A smart investor is one who can identify the best stocks or mutual funds. There are numerous stock market websites that rate the best performing mutual funds. Funds with an established track records usually perform better under difficult times and yield good profits. If you want to invest in stocks, select large company's that have years of history of profits under their belt and the chances are that you will make profits. Even if there are going to be losses due to economic events, they will be far lesser than what you will lose if you choose bad performing funds or junk stocks.

Lesson No. 4:

Stick with a few simple investment products in the early years.

Identify a few investment options that you easily understand and are comfortable with. Don't buy too many different financial products in the initial years of your investment. Only when you get a hang of the financial markets and have made some successful investments, should you consider investing in different products and upcoming companies. If you start with Futures/Options you will never become a successful investor.

Lesson No. 5:

Move to riskier and specialized products only after you become a reasonably successful investor.

This is a continuation of Lesson No. 4. Riskier investments like Derivatives and Commodities are extremely risky and are only for seasoned investors. There are numerous Novice Investors who are lured by super-duper profits and loose all their life's savings in get-rich-quickly kind of schemes. The likelihood of you too becoming a multi-millionaire would be determined by just how good you are at managing the resources you have. If you cant take wise investment decisions, the chances are that you will make very little profits.

Lesson No. 6:

Don't be GREEDY.

Good investments usually have a decent rate of returns which is around the 12-15% range. Any investment that promises exorbitant returns like Double your money in 2 years or Triple your money in 5 years is most probably a Bogus Propaganda. Practically speaking no investment can do that. Unless the stock market rockets upwards to 21000 in one year from its current 17000 levels, such kind of returns is impossible. Expect a decent rate of returns from your investments. A Good Stable investment that offers a good chance of 15% returns is on any day than a scheme that promises a 50% returns at a high risk. Remember the age old saying "A Bird in Hand is better than Two in the Bush"???

Last but not the least "Have a Positive Attitude". Someone who is level-headed and has a positive attitude towards investments has a better chance of success than one who is careless and impulsive.

Being Successful in the Stock Markets is not easy but it isn't Impossible Either. Be Wise and you will make profits easily!!!

Cheques Validity Cut Short

We all know what a cheque is and how to use it. You can revisit the post titled “Using a Bank Cheque” to know more about the same. To revisit the post click here

Ok, coming back to topic, as you might already know, Cheques have a validity period after which it is worthless. Such a cheque is called a STALE cheque or an EXPIRED cheque. If you had read my previous post, you will know that cheques are valid for 6 months or 180 days from the date of cheque issue. However, with a recent RBI Ruling, this is set to change.

Reduction in a Cheques Life-Span

Starting 1st April 2012, all cheques and drafts issued by banks in India will be valid only for 3 months. This essentially means that, you can cash cheques or drafts only for 90 days from the date of issue (date on the cheque) and beyond the 3 month duration, the cheques are considered stale and would be worthless.

Why this sudden ruling?

The Reserve Bank of India (RBI) has said that, some people were taking undue advantage of this long (180 day/6 month) validity period and floating/circulating these instruments in the market like cash. So, in the interest of public safety, the RBI has reduced the validity of such instruments to 3 months from the date of issue.

From When is this Validity Ruling Effective?

All cheques and drafts issued in India dated 1st April 2012 or later will have this validity ruling. Banks will also have to mention this 3 month validity condition in all cheques and drafts issued by them.

How does this affect us?

If you are someone who uses cheques for making payments on your credit card or for an occasional transaction with a friend or a relative, this ruling has no effect on you. In almost all cases, we usually cash the cheque as soon as we get it. However, for people who accept post dated cheques for loan repayments or for any other reason, this ruling comes as a huge blow. They have to closely track the expiry date of these instruments and cash them on time in order to receive the payment.

Happy Using Cheques!!!

Get a 2 Crore Pension by Investing Rs. 8000/- per month

The title sounds cool, doesnt it?

Yesterday, i received an email from an online Insurance Quotation website that said “Get Rs. 2 Crore Pension for just 8K pm“. As always, i was curious and opened the email.

Part of the email looked like below:

I clicked on the “Know More“ buttons for either option. Wouldnt you? As salaried individuals, A Crore is a hugeeeee sum of money and the prospect of becoming a Crorepati was more than Inviting. When i clicked on the buttons, the first shock hit me...

The Page which opened on clicking the “Know More“ button for the 1 Crore Pension said Total Returns = Rs. 66 lakhs

The Page which opened on clicking the “Know More“ button for the 2 Crore Pension said Total Returns = Rs.1.36 crores

Now tell me, wasnt the title totally misleading? The advertisement has offered a Return of 1 and 2 crores respectively, while the actual policy mentions projected returns as 66 lakhs and 1.36 crores respectively. The best part is, there is a disclaimer which says, the actual returns may not be that much. Where is 1.36 crores and where is 2 crores? The best part is, in either cases the 66 lakhs or 1.36 crores can be achieved only if we invest in the full Equity orinted fund option which is extremely high risk. If you chose a balanced or a debt oriented fund profile, the returns would be much lower than what is projected in the ad.

This is the kind of mis-selling of Insurance policies that I have always talked about. It was even one of our Financial Resolutions for 2012. To know more about the resolution click here

Ok. As the usual curious cat that I am, I proceeded to read the policy details to really see if the fund can atleast return the amount as promised in the website (I forgot the advertisement email)...

Both of these pension options were for the same Unit Linked Insurance Plan offered by a prominent Insurance Company.

Note: Guys, I am not taking either the name of the Insurance website or the Insurance company in this post. I dont want to criticize anyone. As Investors it is upto us to be vigilant and cautious. If someone fools us, it is our fault and not the other guys. If we were careful, it wouldnt have happened in the first place. Wouldnt it?

Lets take the 2 Crore Advertisement and Analyze it. The Plan is as follows:

1. I Invest Rs. 1 lakh per year for 5 years making a total investment of 5 lakhs
2. I can select from a variety of investment options that range from fully debt oriented to fully equity oriented (The Returns in the examples in the policy advertisement are based on a full equity oriented option which is extremely high risk)
3. I get an Insurance Coverage/Sum Assured of around 30 lakhs - In case anything happens to me in the next 30 years, my family will get a guaranteed amount of 30 lakhs or the existing Fund Value, whichever is higher
4. Partial Withdrawals are allowed after a full 5 years of paying the premium
5. Tax Benefits under section 80C for upto Rs. 1 lakh (Assuming you have no other investment that will give you benefits under section 80C)

At the outset, if I see, I am investing a total of 30 lakhs over a period of 30 years and at the end of which, they are projecting (Not Promising) Rs. 1.36 crores.

Below is a table that would show how our investment would progress if the Rs. 1.36 crores is to be reached by this policy.

Year No.	Invested Amount (In Rupees)	Rate of Interest(%)	Interest Earned this year (In Rupees)	Fund Value at the end of the year (In Rupees)
1	100000	12.5	12500	112500
2	212500	12.5	26562.5	239062.5
3	339062.5	12.5	42382.8125	381445.3125
4	481445.3125	12.5	60180.6640625	541625.9765625
5	641625.9765625	12.5	80203.2470703125	721829.223632812
6	721829.223632812	12.5	90228.6529541016	812057.876586914
7	812057.876586914	12.5	101507.234573364	913565.111160278
8	913565.111160278	12.5	114195.638895035	1027760.75005531
9	1027760.75005531	12.5	128470.093756914	1156230.84381223
10	1156230.84381223	12.5	144528.855476528	1300759.69928876
11	1300759.69928876	12.5	162594.962411094	1463354.66169985
12	1463354.66169985	12.5	182919.332712481	1646273.99441233
13	1646273.99441233	12.5	205784.249301541	1852058.24371387
14	1852058.24371387	12.5	231507.280464234	2083565.52417811
15	2083565.52417811	12.5	260445.690522263	2344011.21470037
16	2344011.21470037	12.5	293001.401837546	2637012.61653792
17	2637012.61653792	12.5	329626.57706724	2966639.19360516
18	2966639.19360516	12.5	370829.899200645	3337469.0928058
19	3337469.0928058	12.5	417183.636600725	3754652.72940653
20	3754652.72940653	12.5	469331.591175816	4223984.32058234
21	4223984.32058234	12.5	527998.040072793	4751982.36065513
22	4751982.36065513	12.5	593997.795081892	5345980.15573703
23	5345980.15573703	12.5	668247.519467128	6014227.67520416
24	6014227.67520416	12.5	751778.459400519	6766006.13460467
25	6766006.13460467	12.5	845750.766825584	7611756.90143026
26	7611756.90143026	12.5	951469.612678783	8563226.51410904
27	8563226.51410904	12.5	1070403.31426363	9633629.82837267
28	9633629.82837267	12.5	1204203.72854658	10837833.5569193
29	10837833.5569193	12.5	1354729.19461491	12192562.7515342
30	12192562.7515342	12.5	1524070.34394177	13716633.0954759

As of Now, the rate of returns, this policy would have to give in order to achieve the 1.36 crore target is 12.5% per year.

Do you reall think, any Investment can generate a nearly 12.5% rate of returns consecutively for 30 years? The Stock Market is known to offer returns in excess of even 20% or 25% but, consecutively for 30 years? Practically not possible isnt it?

Ok, lets get down to further details.

Fee’s Associated with the Policy:

The following Fee’s are applicable on the policy:

1. Premium Allocation Fee - 6% for the 1st year, 4% for year 2 to year 5, 0% from year 6 onwards (If premium is less than Rs. 1 lakh, there is a 2% premium allocation fee from year 6. But, in our case, we are going to pay premium only for 5 years. So there is no fee.)
2. Fund Management Charges – 1.35% of the fund value per year
3. Policy Administration Charges – 0.1% of Premium or Rs. 400 whichever is lower. In our case Rs. 100 every month.
4. Mortality Charges – Around Rs. 1.4/- for every Rs. 1000/- Sum Assured per year. In our case the Sum Assured is around 30 lakhs. So, this fee works out to Rs. 4200/- per year
5. Plus other fee related to Riders that you may choose
6. Service Tax and Educational Cess

So, if we factor in all the fee that we may have to pay for this policy, the net returns our policy has to generate will go much higher than the initial 12.5%.

Coming back to the title “ Can you Really Get a 2 Crore Pension by Investing Rs. 8000/- per month?“

No.

Even if we assume that the full1 lakh we invest is invested, the fund has to generate a returns of nearly 15% every year, without fail for 30 full years to achieve the elusive 2 crore pension mark. Unfortunately, there is a host of fee that will eat atleast 2-3% of your investment every year which means, your fund has to earn that much more extra interest to achieve the 2 crore mark.

Realistically speaking – any good fund manager will be able to generate an average returns of around 9 - 10% if we consider the market ups and downs. When the equity markets are good, the returns may go up to even 25% and when the markets are bad, the returns may fall to even 0% or worse, generate losses.

Are you thinking this? “Anand, in the initial paragraph, you have mentioned that there is an Insurance Coverage/Sum Assured of around 30 lakhs. So, what kind of returns must the policy generate to meet that number?“

Well, in the previous paragraph, I have mentioned that the realistic rate of returns we can expect is around 9 - 10%. In order to achieve the 30 lakh sum assured, the fund would have to generate a return of around 7% every year. This is a realistic number and quite possible if the equity markets perform well for atleast 15 of the 30 year investment period.

As a whole, the policy looks like a decent investment if we consider the realistic returns of 10%. At such a rate, this policy will grow to around 60+ lakhs at the end of 30 years. Considering that you only invest 5 Lakhs in the first 5 years, this is very good returns. But, if you are someone who dreamt of the 1 crore or 2 crore pension after seeing the Advertisement, this policy is not for you.

Some Last Words:

As I have always said, being vigilant and cautious should be your NUMBER ONE RULE when it comes to making investment/insurance decisions. Be Cautious, Do your Homework, Ask Experts and Expect Realistic Returns from your investments to avoid Disappointment...

Happy Investing Folks!!!!

Save Tax Through Infrastructure Bonds

With the dawn of the new year, Saving Tax is something that is running on the minds of every individual in India. People are scrambling around to make investments to avail tax benefits under the various sections of the Indian IT Laws. Sec 80C is one of the most widely used tax saving section which offers tax relief on amounts of upto Rs. 1 lakh every financial year. To know more about the various investment options under which you can save tax using this sec 80C click here.

One of the less known and lesser used sections of the Indian Tax System is Section 80CCF. This section offers tax benefits for investments of upto Rs. 20,000/- every year in qualified Infrastructure Bonds. Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

What are the Current Infrastructure Bond Issues that are open now?

Currently there are 3 Infrastructure Bond IPO’s that are open. They are:

1. IDFC Infra Bonds
2. REC Infra Bonds
3. L&T IFC Infra Bonds

IDFC Infra Bonds:

IDFC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 5000/- with a minimum investment of Rs. 10000/- or 2 bonds. The issue is open between 11th January 2012 and 25th February 2012. They are offering an interest rate of 8.7% per annum. The lock-in period is 5 years, after which there is a buy-back option and the maturity period is 10 years. To know more about this issue click here.

REC Infra Bonds:

REC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 5000/- with a minimum investment of Rs. 5000/- or 1 bond. The issue is open between 19th December 2011 and 10th February 2012. They are offering an interest rate of 8.95% & 9.14% per annum for bonds of tenure 10 years and 15 years respectively. The lock-in period is 5 years for 10 year bonds and 7 years for 15 year bonds, after which there is a buy-back option. To know more about this issue click here.

L&T IFC Infra Bonds:

L&T IFC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 1000/- with a minimum investment of Rs. 5000/- or 5 bonds. The issue is open between 10th January 2012 and 11th February 2012. They are offering an interest rate of 8.7% per annum. The lock-in period is 5 years, after which there is a buy-back option and the maturity period is 10 years. To know more about this issue click here.

All the above issues offer tax benefits under section 80CCF and hence are great opportunities to save an extra amount of tax this financial year.

Happy Tax Saving!!!

Larsen & Toubro Long Term Infrastructure Bonds: 2011 – 2012 – Tranche 2

L&T IFC – Larsen & Toubro Infrastructure Finance Company Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between January 10th and February 11th of 2012. The purpose of this post is to raise awarness among people on these Infrastructure Bonds and the tax benefits they bring to us.

What are Infrastructure Bonds?

Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

Coming back to the topic, lets focus on these new Infrastructure bonds issued by IDFC now.

Details of the Issue:

Issue Start Date: January 10, 2012
Issue End Date: February 11, 2012
Issue Size: 570 Crores (Max)
Bond Face Value: Rs. 1000/- per bond
Minimum Purchase Amount: Rs. 5,000/- (5 Bonds)
Type of holding: DEMAT (You can only Apply online through your DEMAT website like icicidirect)
Rate of Interest: 8.7% p.a
Interest Payment Options: Annual or Cumulative
Maturity Date: 10 years from the Date of Allotment
Maturity Amount: Rs. 2303.01 per Bond at the end of 10 years
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years One day from the Date of Allotment and at the end of 7 years and One day from the Date of Allotment

First things first – What are the Tax Benefits of Investing in these Bonds?

These long-term infrastructure bonds are useful to claim tax relief of up to Rs. 20,000/- under the Section 80CCF of the Indian Income Tax. i.e., If you buy 20 bonds of Rs. 1000/- each, that Rs. 20,000/- you invested in these bonds is exempt from your taxable salary.

So, for people in the highest tax slab the tax benefit they get is: Rs. 6,180/-

About L&T IFC Ltd:

Larsen & Toubro (L&T) is one of India’s largest Infrastructure & conscturctions. L&T IFC is a part of the L&T group and finances the funding of Infrastructure Projects around India. It was established in the year 2006 with their head office in Mumbai India. It is one of the Fast growing Infrastructure financing company’s in India.

About this Bond Issue:

This Bond Issue by L&T IFC has been rated as “AA+“ by ICRA and CARE India. As you might already know, AA+ is a very good rating any Issue can get and this Infra Bond’s issue by L&T IFC has got the same. So, this makes it an Excellent Investment Option.

Interest Payment Options:

This Bond Issue has two modes of Interest Payment.
1. Annual Interest Payout
2. Cumulative Interest Payout

In the Annual option, the Interest amount earned in the year (Rs. 435/- on a Rs. 5,000/- Investment) will be paid out every year to the Investor. At the end of 10 years, your initial investment of Rs. 5000/- will be returned.

In case of the Cumulative option, the Interest is compounded every year and the total cumulative amount will be paid out at Maturity. The amount in this case for a Rs.5000/- Investment would be Rs. 11,515/-

About the Buy-Back Facility:

L&T IFC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day or 7 years and 1 day from the date of allotment of the bond completes. At that time, L&T IFC will buy-back these Bonds at the below mentioned prices if you are willing to sell.

Cumulative Interest Payout Option: Rs. 7587.85/- per bond at the end of 5 years
Cumulative Interest Payout Option: Rs. 8965.55/- per bond at the end of 7 years

Annual Interest Payout Option: Rs. 5000/- per bond

Dont forget the fact that L&T IFC has paid you an Interest of Rs. 435/- every year whereas for the Cumulative Interest Payout Option, nothing was paid to the Investor. So, his amount is bound to be highers than the amount for the Annual Interest Payout Investor.

Note: The amount above is if you surrender your bond for buy-back at the end of exactly 5 years and 1 day or 7 years and 1 day. If you wish to surrender anytime later, the amount might vary based on the duration.

Salient Features of the Issue:

1. Investments of upto Rs. 20,000/- are exempt from Income Tax under Sec 80CCF thereby saving Rs. 6180/- for Investors who fall in the highest tax slab of 30%. For someone in the 20% tax slab it would be Rs. 4120/- and for someone in the 10% tax slab the tax saving would be Rs. 2060/- respectively
2. Interest Rate of 8.7% applicable for both annual and cumulative interest payout options
3. Buy-Back available after 5 years & y years. So, if you have better investment opportunities at the end of 5 or 7 years, you can sell them to L&T IFC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 5,000/-
5. AA+ rated Issue which means very good Safety & Security.

Some Questions that Might Arise in your mind about this issue – Answered:

1. Is the Annual Interest Payout better or the Cumulative one?

I would say Cumulative because, the total interest earned in case of the cumulative payout (due to the interest compounding) will be superior to the annual payout option

2. How Safe is my Money if I invest in this scheme?

Your money is very safe. As per the bond issue details, the company (L&T IFC) will maintain an asset cover of atleast 75% of the outstanding bonds in the market up until all the bonds are fully redeemed. So, even in the case of the company going bankrupt, the Supervisory bodies will have assets to liquidate and payout atleast 75% of the money to all the investors. That is why the AA+ Rating. However, considering the size of the company and the size of the issue, the chances of this are very low.

3. What will this money be used for?

The money raised through this bond IPO will be used to fund and finance Infrastructure Projects in India.

4. Is Buy-Back the only option for me to sell these bonds after the lock-in period of 5 years?

No. The bonds will be listed in the BSE at the end of 5 years and can be bought and sold in the exchange

5. Can NRI’s Invest in these Bonds?

No. This issue is available only for Resident Indians. NRI’s cannot invest in these Bonds

Final Verdict:

In terms of the Issue, it is AA+ rated, so safety is not a big problem. It is issued by one of India’s large financial institutions that is backed by one of India’s largest Infra company‘s. So, it looks like a sound investment decision. But, The Final Verdict depends on which Tax Slab you are in.

For someone in 30% Tax Slab: Excellent Opportunity to Save an Extra Rs. 6180/- Tax and enjoy good returns that work out to roughly 15% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So STRONG BUY.

For Someone in 20% Tax Slab: Great Opportunity to Save an Extra Rs. 4120/- Tax and enjoy good returns that work out to roughly 12% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So GOOD BUY.

For Someone in the 10% Tax Slab: Good Opportunity to Save an Extra Rs. 2060/- Tax and enjoy good returns that work out to roughly 10% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So BUY.


Happy Tax Saving!!!

REC Long Term Infrastructure Bonds: 2011 – 2012 – Tranche 2

REC – Rural Electrification Corporation Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between December 19th 2011 and February 10th of 2012. The purpose of this post is to raise awarness among people on these Infrastructure Bonds and the tax benefits they bring to us.

What are Infrastructure Bonds?

Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

Coming back to the topic, lets focus on these new Infrastructure bonds issued by REC now.

Details of the Issue:

Issue Start Date: December 19, 2011
Issue End Date: February 10, 2012
Issue Size: 100 Crores (Max)
Bond Face Value: Rs. 5000/- per bond
Minimum Purchase Amount: Rs. 5,000/- (1 Bonds)
Type of holding: Physical & DEMAT (You can Apply online through your DEMAT website like icicidirect)
Rate of Interest: 8.95% p.a for 10 year Bonds and 9.15% for 15 year Bonds
Interest Payment Options: Annual or Cumulative
Maturity Date: 10 years from the Date of Allotment or 15 years from the Date of Allotment
Maturity Amount: Rs. 11,783/- for 10 year Bonds and Rs. 18,592/- for 15 year Bonds
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years One day from the Date of Allotment for 10 year Bonds and at the end of 7 years and One day for the 15 year Bonds

First things first – What are the Tax Benefits of Investing in these Bonds?

These long-term infrastructure bonds are useful to claim tax relief of up to Rs. 20,000/- under the Section 80CCF of the Indian Income Tax. i.e., If you buy 4 bonds of Rs. 5000/- each, that Rs. 20,000/- you invested in these bonds is exempt from your taxable salary.

So, for people in the highest tax slab the tax benefit they get is: Rs. 6,180/-

About REC Ltd:

Rural Electrification Corporation Ltd (REC) is one of India’s largest institutions. It is fully owned by the Government of India and is responsible for electricity transmission throughout the country. It is listed in the NSE and BSE exchanges.

About this Bond Issue:

This Bond Issue by REC has been rated as “AAA“ by ICRA, CARE and CRISIL India. As you might already know, AAA is the best possible rating any Issue can get and this Infra Bond’s issue by REC has got the same. So, this makes it a Prime Investment Option.

Interest Payment Options:

This Bond Issue has two modes of Interest Payment.
1. Annual Interest Payout
2. Cumulative Interest Payout


In the Annual option, the Interest amount earned in the year will be paid out every year to the Investor. At the end of 10 years, your initial investment of Rs. 5000/- will be returned. The interest paid will be as follows:

Rs. 447.5/- per Rs. 5000 Invested in the 10 year Bond
Rs. 457.5/- per Rs. 5000 Invested in the 15 year Bond

In case of the Cumulative option, the Interest is compounded every year and the total cumulative amount will be paid out at Maturity. The amount in this case for a Rs.5000/- Investment would be Rs. 11,783/- for 10 year Bonds and 18,592/- or the 15 year Bonds

About the Buy-Back Facility:

REC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day from the date of allotment of the bond for the 10 year Bonds and after the day when 7 years and 1 day for the 15 year Bonds. At that time, REC will buy-back these Bonds at the below mentioned prices if you are willing to sell.

Cumulative Interest Payout Option: Rs. 7677/- per bond for the 10 year Bonds at the end of 5 years
Cumulative Interest Payout Option: Rs. 9231/- per bond for the 15 year Bonds at the end of 7 years

Annual Interest Payout Option: Rs. 5000/- per bond for both 10 and 15 year Bonds

Dont forget the fact that REC has paid you an Interest of Rs. 447.5/- & 457.5 every year respectively for the 10 and 15 year bonds whereas for the Cumulative Interest Payout Option, nothing was paid to the Investor. So, his amount is bound to be highers than the amount for the Annual Interest Payout Investor.

Note: The amount above is if you surrender your bond for buy-back at the end of exactly 5 years and 1 day or 7 years and 1 day. If you wish to surrender anytime later, the amount might vary based on the duration.

Salient Features of the Issue:

1. Investments of upto Rs. 20,000/- are exempt from Income Tax under Sec 80CCF thereby saving Rs. 6180/- for Investors who fall in the highest tax slab of 30%. For someone in the 20% tax slab it would be Rs. 4120/- and for someone in the 10% tax slab the tax saving would be Rs. 2060/- respectively
2. Interest Rate of 8.95% for 10 year Bonds and 9.15% for 15 year bonds applicable for both annual and cumulative interest payout options
3. Buy-Back available after 5 years & 7 years. So, if you have better investment opportunities at the end of 5 or 7 years, you can sell them to REC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 5,000/-
5. You can hold the Bonds in both Physical as well as DEMAT form
6. AAA rated Issue which means superb Safety & Security.
7. Interest rate offered is very good and if we club the tax saving we get out of this investment, the returns are the best in the markets for debt instruments

Some Questions that Might Arise in your mind about this issue – Answered:

1. Is the Annual Interest Payout better or the Cumulative one?

I would say Cumulative because, compounding of the Interest earned during each year increases the net effective returns and thereby making the cumulative option better

2. How Safe is my Money if I invest in this scheme?

Your money is fully safe. The Company is fully owned by the Government of India and hence our money is fully secure. That is why the AAA Rating.

3. What will this money be used for?

The money raised through this bond IPO will be used to fund and finance Infrastructure Projects in India.

4. Is Buy-Back the only option for me to sell these bonds after the lock-in period of 5 years?

No. The bonds will be listed in the NSE or BSE or both at the end of 5 years and can be bought and sold in the exchange

5. Can NRI’s Invest in these Bonds?

No. This issue is available only for Resident Indians. NRI’s cannot invest in these Bonds

Final Verdict:

In terms of the Issue, it is AAA rated, so safety is not a problem. Also, the rate of interest offered is higher than the other Infra Bonds available at the same time. It is issued by one of India’s largest company‘s. So, it looks like a sound investment decision. But, The Final Verdict depends on which Tax Slab you are in.

For someone in 30% Tax Slab: Excellent Opportunity to Save an Extra Rs. 6180/- Tax and enjoy good returns that work out to roughly 15% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So STRONG BUY.

For Someone in 20% Tax Slab: Great Opportunity to Save an Extra Rs. 4120/- Tax and enjoy good returns that work out to roughly 12% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So GOOD BUY.

For Someone in the 10% Tax Slab: Good Opportunity to Save an Extra Rs. 2060/- Tax and enjoy good returns that work out to roughly 10% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So BUY.


Happy Tax Saving!!!

IDFC Long Term Infrastructure Bonds: 2011 – 2012 – Tranche 2

IDFC – Infrastructure Development Finance Company Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between January 11th and February 25th of 2012. The purpose of this post is to raise awarness among people on these Infrastructure Bonds and the tax benefits they bring to us.

What are Infrastructure Bonds?

Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

Coming back to the topic, lets focus on these new Infrastructure bonds issued by IDFC now.

Details of the Issue:

Issue Start Date: January 11, 2012
Issue End Date: February 25, 2012
Issue Size: 4400 Crores (Max)
Bond Face Value: Rs. 5000/- per bond
Minimum Purchase Amount: Rs. 10,000/- (2 Bonds)
Type of holding: Physical & DEMAT (You can Apply online through your DEMAT website like icicidirect)
Rate of Interest: 8.7% p.a
Interest Payment Options: Annual or Cumulative
Maturity Date: 10 years from the Date of Allotment
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years One day from the Date of Allotment

First things first – What are the Tax Benefits of Investing in these Bonds?

These long-term infrastructure bonds are useful to claim tax relief of up to Rs. 20,000/- under the Section 80CCF of the Indian Income Tax. i.e., If you buy 4 bonds of Rs. 5000/- each, that Rs. 20,000/- you invested in these bonds is exempt from your taxable salary.

So, for people in the highest tax slab the tax benefit they get is: Rs. 6,180/-

About IDFC Ltd:

Infrastructure Development Finance Corporation Ltd (IDFC) is one of India’s largest financial institutions. It was established in the year 1997 and got listed in the Indian Stock Exchanges in August 2005. RBI classifies IDFC as an Infrastructure Financing Company and they are one of the premier institutions that finance Infrastructure Growth in India.

About this Bond Issue:

This Bond Issue by IDFC has been rated as “AAA“ by ICRA and Fitch India. As you might already know, AAA is the best possible rating any Issue can get and this Infra Bond’s issue by IDFC has got the same. So, this makes it a Prime Investment Option.

Interest Payment Options:

This Bond Issue has two modes of Interest Payment.
1. Annual Interest Payout
2. Cumulative Interest Payout

In the Annual option, the Interest amount earned in the year (Rs. 435/- on a Rs. 5,000/- Investment) will be paid out every year to the Investor. At the end of 10 years, your initial investment of Rs. 5000/- will be returned.

In case of the Cumulative option, the Interest is compounded every year and the total cumulative amount will be paid out at Maturity. The amount in this case for a Rs.5000/- Investment would be Rs. 11,515/-

About the Buy-Back Facility:

IDFC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day from the date of allotment of the bond completes. At that time, IDFC will buy-back these Bonds at the below mentioned prices if you are willing to sell.

Cumulative Interest Payout Option: Rs. 7590/- per bond
Annual Interest Payout Option: Rs. 5000/- per bond

Dont forget the fact that IDFC has paid you an Interest of Rs. 435/- every year whereas for the Cumulative Interest Payout Option, nothing was paid to the Investor. So, his amount is bound to be highers than the amount for the Annual Interest Payout Investor.

Note: The amount above is if you surrender your bond for buy-back at the end of exactly 5 years and 1 day. If you wish to surrender anytime later, the amount might vary based on the duration.

Salient Features of the Issue:

1. Investments of upto Rs. 20,000/- are exempt from Income Tax under Sec 80CCF thereby saving Rs. 6180/- for Investors who fall in the highest tax slab of 30%. For someone in the 20% tax slab it would be Rs. 4120/- and for someone in the 10% tax slab the tax saving would be Rs. 2060/- respectively
2. Interest Rate of 8.7% applicable for both annual and cumulative interest payout options
3. Buy-Back available after 5 years. So, if you have better investment opportunities at the end of 5 years, you can sell them to IDFC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 10,000/-
5. You can hold the Bonds in both Physical as well as DEMAT form
6. AAA rated Issue which means superb Safety & Security.

Some Questions that Might Arise in your mind about this issue – Answered:

1. Is the Annual Interest Payout better or the Cumulative one?

I would say Cumulative because, the total amount earned at the end of 10 years for a Rs. 5000/- bond in case of Annual payout is Rs. 9350/- (Including the 10 time payment of Rs. 435/- every year) whereas in case of Cumulative payout it is Rs. 11,515/- As you can see, in case of cumulative payout the amount earned is high (due to compounding of interest)

2. How Safe is my Money if I invest in this scheme?

Your money is fully safe. As per the bond issue details, the company (IDFC) will maintain an asset cover of atleast 100% of the outstanding bonds in the market up until all the bonds are fully redeemed. So, even in the case of the company going bankrupt, the Supervisory bodies will have enough assets to liquidate and payout all the investors. That is why the AAA Rating.

3. What will this money be used for?

The money raised through this bond IPO will be used to fund and finance Infrastructure Projects in India.

4. Is Buy-Back the only option for me to sell these bonds after the lock-in period of 5 years?

No. The bonds will be listed in the NSE or BSE at the end of 5 years and can be bought and sold in the exchange

5. Can NRI’s Invest in these Bonds?

No. This issue is available only for Resident Indians. NRI’s cannot invest in these Bonds

Final Verdict:

In terms of the Issue, it is AAA rated, so safety is not a problem. It is issued by one of India’s premier financial institutions. So, it looks like a sound investment decision. But, The Final Verdict depends on which Tax Slab you are in.

For someone in 30% Tax Slab: Excellent Opportunity to Save an Extra Rs. 6180/- Tax and enjoy good returns that work out to roughly 15% if we include the Tax Benefit earned along with the 8.7% interest offered by IDFC. So STRONG BUY.

For Someone in 20% Tax Slab: Great Opportunity to Save an Extra Rs. 4120/- Tax and enjoy good returns that work out to roughly 12% if we include the Tax Benefit earned along with the 8.7% interest offered by IDFC. So GOOD BUY.

For Someone in the 10% Tax Slab: Good Opportunity to Save an Extra Rs. 2060/- Tax and enjoy good returns that work out to roughly 10% if we include the Tax Benefit earned along with the 8.7% interest offered by IDFC. So BUY.


Happy Tax Saving!!!

Do Insurance Policies Really Help Save Tax?

The title is misleading, isnt it? We all know that Insurance Policies help us save tax. You might be wondering, hey Anand, what silly question is this???

Well my dear readers, there is a purpose to this post. Lets take a look at the synopsis of an email I received from one of the readers of my blog a few days back.

Hi Anand,
I had taken a LIC Policy in 2011 in the name of my Minor Brother who is dependent on me. However, the finance department in my office refused to accept the premium paid against the policy for tax deductions under Sec 80C. Can they do that? Please help.

Regards,
Victor

So tell me, was the finance department correct in refusing the premium receipt submitted by Victor on a policy he had taken on his brothers name?

Unfortunately, the Finance Department was correct and Victor mis-understood the Indian Taxation Laws.

Now, go back and read the title again. Does it make sense?

The purpose of this post is to throw some light on the “*Conditions Apply“ aspects of Insurance Policies with respect to the Indian Income Tax Laws.

In my earlier post in “Insurance & Indian Income Tax“ we had taken a look at how Premium paid on insurance policies can provide tax benefits under section 80C. Unfortunately, the whole situation isnt all black and white. There are few catches on the tax benefits you can get from policy premium paid.They are:

1. Name of the Person on whom the Policy is Taken
2. % of Premium Amount that is Eligible for Tax Deduction
3. Mandatory Holding Period

Lets take a look at them one by one in detail.

Name of the Person on whom the Policy is Taken

As per the Indian IT Laws, Premium paid against Life Insurance Policies are eligible for tax deduction only if the policy is registered in the name of:

a. The Tax Assessee (You)
b. Spouse & Children (In case of Married People)
c. Parents (Only if both Mother & Father are Retired/Unemployed/Have No Income)

Premiums Paid in the below cases are not eligible:

a. For a Brother or Sister – Even if they are not earning any income
b. For Parents (If either the mother or the father is still earning)
c. For Uncles, Aunts, In-laws etc

As you can see from the above list, Mr. Victor did not know that premium paid on a policy taken on his Brothers name, eventhough the brother is a Minor and dependent on Victor, he is not eligible to claim tax deductions on that payment.

% of Premium Amount that is Eligible for Tax Deduction

You might be thinking, section 80C has an upper limit of 1 lakh. So, any insurance premium paid upto Rs. 1 lakh is eligible for Tax Deductions. Whats the big deal about it?

Did you really think that?

Unfortunately my friend, its not that simple. The actual premium paid is considered fully for tax exemption (with a higher limit of 1 lakh, of course) only if the amount does not exceed 20% of the Policy’s Sum Assured.

This is something, many of us do not know. In one of my earlier posts, I had written about Insurance Agents mis-selling policies. You may want to be cautious if an Insurance agent tells you something like below:

An Insurance Agent is telling his client that, he has this great One Time Premium policy, wherein if he pays 75000 this year, he will get 2 lakhs at the end of 5 years. Since he can use the full 75000 for tax rebate @ 30% tax rate, he is effectively paying only Rs. 52,500/- and getting 2 lakhs in 5 years. Which is 4 times the money invested.

You must remember that, if the Sum Assured (Maturiy Amount) is 2 lakhs then, the maximum premium you can pay and claim tax rebate in a single financial year is only 20% of it, which is Rs. 40,000/-. The remaining Rs. 35,000/- is not eligible for tax calculation purposes.

Curious Cat Kind of Question:
My Agent tells me that LIC declares a loyalty bonus for all policy holders when the policy matures. So, if i consider a nominal loyalty bonus addition to the policy maturity amount, my premium falls under the 20% slab. Can i claim the whole amount for tax rebate?

Answer: No. The IT Laws do not consider any loyalty bonus or any additional amounts your insurance company could pay you at maturity. Since such amounts are not guaranteed, the IT Laws only consider the policy maturity amount and nothing more.

Mandatory Holding Period

As per the Indian IT Laws, any Tax Payer, who claims tax deductions under Sec 80C using life insurance policies, is expected to pay his/her insurance premium for a minimum period of 2 full years. For a single premium policy if the contract is terminated within two years of the commencement of insurance then the benefit already taken would have to be reversed. The consequence of not fulfilling the holding period is that there is no benefit for the current year for the premium paid and all the previous benefits are reversed with the amounts being considered as income.

For ex: Lets say Mr. Sharma used his premium paid receipts to avail tax benefits in the financial year 2010-11 and for some reason, missed his premium payments in the whole of the year 2011, the IT Department has the right to revoke the tax benefits he claimed in the financial year 2010-11 and ask Mr. Sharma to pay the tax applicable on the deducted amount.

So, if you are someone who is in the habit of forgetting Insurance Payments, do remember that if you miss your payments and the policy lapses, you may end up paying extra taxes on the amounts you claimed tax rebate...

Curious Cat Kind of Question:
For Annual Premium Payment policies, if I pay 2 premiums (2 years) would that suffice?

Answer: No. Since the first premium is paid while taking the policy, you have to pay the annual premium atleast twice (two years) in order to satisfy the mandatory holding period. This means, you must pay a total of 3 premiums, the first while taking the policy and two more in the subsequent two years in order to avail tax benefits.

Since the Jan-March period of the year is considered the “Save Tax“ quarter where people scramble to invest money in tax saving instruments, it would be a nice idea to remember the above mentioned points while taking Insurance Policies that are aimed at saving tax.

Happy Insuring & Tax Saving!!!

Company’s that Comprise the NSE Nifty

The NSE Nifty or Nifty as it is more commonly called is one of two premier Indices in India. It is the index that depicts the movement of the National Stock Exchange or NSE. In one of our earlier posts, we had taken a look at what the NSE is. To read that post, “click here”.

In this post, we are going to take a look at the 50 company’s that comprise this Nifty Index.

To Recap:

Nifty is the weighted average of the price movement of the 50 largest company’s that are listed in the National Stock Exchange. This list of company’s may change from time to time and the Exchange will always release the news of replacement of any company in the Nifty to the public beforehand.

Below is the list of 50 company’s that comprise the NSE Index along with their Industry and Weightage.

Note: A company with 1% weightage will have to increase twice as much as one with a 2% weightage in order to move the index up or down by the same number.

Company Name	Industry	Weightage
ACC	Cement - Major	0.64
Ambuja Cements	Cement - Major	0.71
Axis Bank	Banks - Private Sector	1.18
Bajaj Auto	Auto - 2 & 3 Wheelers	1.26
Bharti Airtel	Telecommunications - Service	3.87
BHEL	Engineering - Heavy	1.99
BPCL	Refineries	0.56
Cairn India	Oil Drilling And Exploration	1.95
Cipla	Pharmaceuticals	0.83
Coal India	Mining/Minerals	6.62
DLF	Construction & Contracting - Real Estate	1.02
Dr Reddys Labs	Pharmaceuticals	0.86
GAIL	Oil Drilling And Exploration	1.44
Grasim	Diversified	0.69
HCL Tech	Computers - Software	0.84
HDFC	Finance - Housing	3.06
HDFC Bank	Banks - Private Sector	3.35
Hero Motocorp	Auto - 2 & 3 Wheelers	1.09
Hindalco	Aluminium	0.78
HUL	Personal Care	2.58
ICICI Bank	Banks - Private Sector	2.77
IDFC	Finance - Term Lending Institutions	0.48
Infosys	Computers - Software	4.52
ITC	Cigarettes	4.92
Jaiprakash Asso	Construction & Contracting - Civil	0.39
Jindal Steel	Steel - Sponge Iron	1.43
Kotak Mahindra	Banks - Private Sector	1.07
Larsen	Engineering - Heavy	2.19
Mah and Mah	Auto - Cars & Jeeps	1.3
Maruti Suzuki	Auto - Cars & Jeeps	0.86
NTPC	Power - Generation/Distribution	4.18
ONGC	Oil Drilling And Exploration	6.77
PNB	Banks - Public Sector	0.86
Power Grid Corp	Power - Generation/Distribution	1.44
Ranbaxy Labs	Pharmaceuticals	0.6
Reliance	Refineries	7.3
Reliance Comm	Telecommunications - Service	0.55
Reliance Infra	Power - Generation/Distribution	0.33
Reliance Power	Power - Generation/Distribution	0.76
SAIL	Steel - Large	1.16
SBI	Banks - Public Sector	3.44
Sesa Goa	Mining/Minerals	0.49
Siemens	Electric Equipment	0.75
Sterlite Ind	Metals - Non Ferrous	1.06
Sun Pharma	Pharmaceuticals	1.62
Tata Motors	Auto - LCVs/HCVs	2.02
Tata Power	Power - Generation/Distribution	0.7
Tata Steel	Steel - Large	1.22
TCS	Computers - Software	6.48
Wipro	Computers - Software	3

The list above is ordered Alphabetically based on the company name :-). Also, the list above is correct as of 15th January 2012. If there are any updates to the Index, I will try to update this post accordingly...

Company’s that Comprise the BSE Sensex

The BSE Sensex or Sensex as it is more commonly called is one of two premier Indices in India. It is the index that depicts the movement of the Bombay Stock Exchange or BSE. In one of our earlier posts, we had taken a look at what the BSE is. To view that post "click here".

In this post, we are going to take a look at the 30 company’s that comprise this Sensex Index.

To Recap:
BSE Sensex is the weighted average of the price movement of the 30 largest company’s that are listed in the Bombay Stock Exchange. This list of company’s may change from time to time and the Exchange will always release the news of replacement of any company in the Sensex to the public beforehand.
Below is the list of 30 company’s that comprise the BSE Sensex along with their Industry and Weightage.

Note: A company with 1% weightage will have to increase twice as much as one with a 2% weightage in order to move the index up or down by the same number.

Company Name	Industry	Weightage
Bajaj Auto	Auto - 2 & 3 Wheelers	1.51
Bharti Airtel	Telecommunications - Service	4.63
BHEL	Engineering - Heavy	2.38
Cipla	Pharmaceuticals	0.99
Coal India	Mining/Minerals	7.91
DLF	Construction & Contracting - Real Estate	1.22
GAIL	Oil Drilling And Exploration	1.73
HDFC	Finance - Housing	3.66
HDFC Bank	Banks - Private Sector	4
Hero Motocorp	Auto - 2 & 3 Wheelers	1.3
Hindalco	Aluminium	0.93
HUL	Personal Care	3.09
ICICI Bank	Banks - Private Sector	3.32
Infosys	Computers - Software	5.41
ITC	Cigarettes	5.87
Jindal Steel	Steel - Sponge Iron	1.71
Larsen	Engineering - Heavy	2.61
Mah and Mah	Auto - Cars & Jeeps	1.55
Maruti Suzuki	Auto - Cars & Jeeps	1.03
NTPC	Power - Generation/Distribution	4.99
ONGC	Oil Drilling And Exploration	8.1
Reliance	Refineries	8.73
SBI	Banks - Public Sector	4.11
Sterlite Ind	Metals - Non Ferrous	1.27
Sun Pharma	Pharmaceuticals	1.94
Tata Motors	Auto - LCVs/HCVs	2.41
Tata Power	Power - Generation/Distribution	0.83
Tata Steel	Steel - Large	1.45
TCS	Computers - Software	7.75
Wipro	Computers - Software	3.59

The list above is ordered Alphabetically based on the company name :-). Also, the list above is correct as of 15th January 2012. If there are any updates to the Index, I will try to update this post accordingly...

Participants in a Derivative Market

In our previous articles on Derivatives, we learnt “What Derivatives Are?” and “The Derivative Categories”. In this post we are going to take a look at all the entities/people who would be involved in a derivatives market.

Derivatives have a very wide range of application in business as well as in finance & banking. There are four main types of participants in any Derivatives Market. They are:

1. Dealers
2. Hedgers
3. Speculators and
4. Arbitrageurs

A point to note here is that, the same individuals and organizations may play different roles under different market circumstances. Let us take a look at each one of them in detail…

Dealers:

Derivative contracts are bought and sold by dealers who work for banks and other security houses. Some contracts are traded on exchanges while others are OTC Transactions.

In a large investment bank, the derivatives function is now a highly skilled affair. Marketing and sales staff speak to clients about what they want. Experts help to create solutions to those customer requirements using a combination of forwards, swaps and options. Any risk the bank assumes as a result of providing such tailor-made products is managed by the traders who run the banks derivatives books. In the meantime, risk managers keep an eye on the overall level of the risk the bank is running. Mathematicians, also known as “Quants” devise the tools required to price the new products created by the experts.

Initially large banks tended to operate solely as intermediaries in the derivatives market, matching the buyers and the sellers. Over time, however, they have assumed more and more risk themselves.

Hedgers:

Corporations, investors, banks and governments all use derivative products to hedge or reduce their exposure to market variables like interest rates, share prices, bond prices, currency exchange rates, commodity prices etc (We have covered almost all categories of assets over which derivatives can be placed, haven’t we??)

A simple and classic example would be a farmer who sells a futures contract to lock into a price for the crop he will deliver in a future date. The buyer might be a food processing company that wishes to fix the price for taking delivery of the crop in the future or a “Speculator”

Another typical case is that of a company due to receive a payment in a foreign currency on a future date. It enters into a forward contract to sell the foreign currency to a bank and receive a predetermined quantity of domestic currency. Or, it purchases an option which gives it the right but not the obligation to sell the foreign currency at a set rate.

Speculators:

Derivatives are nicely suited to speculate on the prices of commodities and other financial assets or on market variables like interest rates, market indices etc. Generally speaking, it is much less expensive to create a speculative position using derivatives than by trading the underlying commodity or asset. As a result, the potential returns are that much greater.
A classic case is the trader who believes that the increasing demand or reduced supply is likely to boost the price of oil. Since it would be too expensive to buy and store actual oil, the trader buys exchange traded futures (ETFs) contracts agreeing to take delivery of oil on a future delivery date at a fixed price. If the oil prices rise in the market, the value of the futures contract will also rise and they can be sold back into the market at a profit.

In fact, if the trader buys and then sells a futures contract before they reach the delivery date, the trader never has to take any delivery of actual oil. The profit from the whole trade is realized in cash without buying anything.

Arbitrageurs:

An Arbitrage is a deal that produces risk-free profits by exploiting a mispricing in the market. A simple example is when a trader can buy an asset cheaply in location and simultaneously arrange to sell it at another location for a higher price. Since such opportunities are unlikely to exist for a long time, and since arbitrageurs would rush to buy the asset in the cheap location, the price gap will close very fast.

In the derivatives business, arbitrage opportunities typically arise because a product can be assembled in different ways out of different building blocks. If it is possible to sell a product for more than it costs to buy the constituent parts, then the risk free profit can be generated. In practice, the presence of transaction costs often means that only the large market players can profit from such opportunities.

In fact, many of these so called arbitrage deals constructed in the financial markets are not entirely risk free. They are designed to exploit differences in the market prices of products which are very similar but not completely identical. For this very reason, they are also called as “Relative Value” Trades

As an ending note to this post, Derivatives are complicated financial products and are partly responsible for the global economic crisis. Of course, you can’t blame the bomb for a blast and must actually blame the person who placed it in the first place. Similarly, derivatives were used inconsiderately and carelessly and the end result is for all of us to see. So, novice and risk averse investors must stay away from derivatives. Though the prospects of profit are very high, the chances of losses are also equally high.

Documents Required by an NRI for Buying a House

Buying a House is an important decision both for Resident Indians and Non-Resident Indians or NRIs. There is a lot of clarity about the documents required by Resident Indians for buying a house. Since they are India, they can easily make multiple trips to the bank branch where they are requesting the loan and sort out the problems. But, for an NRI things are not so easy.
The purpose of this post is to throw some light on the basic documents that Banks would ask from NRI’s when they apply for a home loan with them. A Copy of all the below mentioned documents need to be submitted to your bank when you apply for a home loan.

This article is split into Two sections depending on what the NRI is actually doing abroad.

1. Salaried Individuals
2. Self-Employed Individuals

One type of Document that all categories of home buyers will need to submit with their respective banks is “Documents related to the Property”. The Builder will provide a full booklet that you can submit to your bank while you apply for the loan.

For Salaried Individuals

Almost 95% or more of the NRI’s would fall into this Category and they would comprise a huge chunk of the population that apply home loans from banks in India. The documents required would be:

1. Employment Proof – Offer Letter or Contract Letter or Agreement Letter
2. At least 3 months’ Salary Slip (Some banks may ask for up-to 6 months’ payslips)
3. At least 6 months Bank Statement – Statement from the bank where your employer credits your salary
4. Latest Foreign Identification Copy (Ex: NRIC in Singapore and equivalent identification for other countries)
5. Passport (All non-blank pages)
6. VISA/Work-Permit
7. Residence Address Proof in the Country of Residence/Work – Electricity/Gas Bill, Telephone bill etc
8. Passport Size Photographs (The number may vary from bank to bank. They will atleast ask one photo)
9. Latest Credit Bureau Report (Wherever applicable. For country’s like US, Singapore etc this will be required)
10. A Cheque favouring your bank for the Processing Fee

For Self-Employed Individuals

The remaining small % of people who conduct their own business abroad will require the following documents while applying for a home loan:

1. Company Profile, Brochure and Registration Details
2. Last 3 years Income Tax Assessment
3. Bank Statements for the last 6 months (The official bank account that is used for transactions)
4. Latest Credit Bureau Report (Wherever applicable. For country’s like US, Singapore etc this will be required)
5. Latest Foreign Identification Copy (Ex: NRIC in Singapore and equivalent identification for other countries)
6. Residence Address Proof in the Country of Residence/Work – Electricity/Gas Bill, Telephone bill etc
7. Passport Size Photographs (The number may vary from bank to bank. They will atleast ask one photo)
8. Passport (All non-blank pages)
9. VISA/Work-Permit
10. A Cheque favouring your bank for the Processing Fee

Note: The above is a list of the most common & important documents that banks ask from NRI’s while they apply for a Home Loan to buy property in India. However, banks alter their processes from time to time and may ask for extra or fewer documents as compared to the list above. The list is only an indicative list of documents that you will need before you apply for the loan. It is not a complete or exhaustive list. Please contact your respective bank to get a full list of the exact documents they will require to grant you a loan.

Happy Home Buying!!!

Indian Real Estate Market Outlook for 2012

Real Estate is one of the most buzzing words in India for every man. Yes, you read it right. Any man, even one who has just got an offer letter from a company, dreams of buying a home someday. A home which will shelter him and his family.

Buying a home is probably the single biggest decision (Financially) that a Man takes in his life. Buying a home is not an easy decision. It not only involves a lot of time and effort in short-listing a prospective house but also involves a huge investment. With real estate prices booming over the past 5 to 10 years in India, especially in cities like Chennai, Mumbai etc. buying a house involves an investment that runs into Lakhs. Believe me or not, for most people in the working class (you and me of course) lakhs is still a large sum of money. I wouldn’t blame you if you are saying “Come on man, I am not a politician to treat crores like hundreds!!!”

Ok, coming back to the topic, this article is about the Market Outlook for the Real Estate Sector (Residential Properties) in India.

The year that has been – 2011:

2011 has been a significant year for the Residential Real Estate Market in all aspects. All of the below aspects have increased:

a. Cost of Land
b. Cost of Construction Materials (Cement, Sand, Iron etc)
c. Cost of Loans (Rate of Interest)
d. Cost of Labour

Because of this four-fold pressure, cost of residential property has gone up significantly in 2011. However, the looming world financial crisis, Eurozone problems and inflation have struck a dent in this growth towards the second half of 2011. Though prices of properties by top realtors in prime locations haven’t come down, prices in other localities have corrected by around 5% or so towards the last quarter of 2011.

Outlook for the year – 2012:

2012 promises to be an exciting year and property prices (esp. residential properties) are expected to go up this year too. The following are some reasons why the residential property prices will head northwards this year too…

1. Demand for Affordable Housing
2. Growth in Tier II and Tier III Cities/Metro Suburbs
3. Interest Rate Movement

Demand for Affordable Housing

Owning a House is still a dream for a majority of the working class population in our country. With rapid industrialization and growth throughout the country, the demand for houses is bound to increase. Realtors who can build cost-effective homes in good localities are bound to reap big rewards in terms of high customer interest. Everyone needs a house to stay and owning a house is a decision everyone wants to make, provided they get a good deal. So, the demand is going to be there and whenever there is a demand for a certain product, its price is bound to go up. Isn’t it???

Before we begin, by Tier II and Tier III cities I am referring to the cities like Coimbatore, Vishakapatnam, Kochi etc that have been growing at a very rapid pace over the past few years. Though they are not metros, industries have been favouring these cities due to lower costs (in all aspects) than Metros. By Suburbs I am referring to the areas surrounding a Metro City and not the actual city itself.

Growth in Tier II and Tier III Cities/Metro Suburbs

With cost of land sky-rocketing in Metros Real Estate Developers are turning their attention to Tier II & III Cities and also Suburban areas of Metros. This is because, the cost of land in these areas is comparatively cheaper than Metros and prime locations in Cities. Also, most home buyers look for cost-effective homes and cant really afford property at the heart of the city. So, this is the area where the real estate buyers market is and that is what the construction company’s are trying to tap into.

With Major Industries and company’s opening up offices in Tier II & III or Suburban areas, the demand for residential properties in the surrounding areas is bound to rise.

A simple example: In Chennai, when I was in School, areas like Guduvanchery, Urappakkam etc were considered remote places. At that time, price of one ground (2400 sq feet) land there was only as much as what realtors expect us to pay for a single square feet now. That is the kind of growth property prices has seen.

Interest Rate Movement

Loan Interest Rates have been altered by the RBI numerous times since 2012. To be exact, the RBI has changed it 13 times since March 2010. That is roughly once every two months and most of these have been a Northward Movement (Increase). But, over the past few months the rates haven’t changed much and experts forecast that the Interest rates are expected to have a Southward Movement (Decrease). A decrease in interest rates will ease the liquidity condition of not only buyers but also the builders. This will definitely help the housing demand.

Overall, the year 2012 is going to be an interesting and exciting year for the Residential Market in India. If you are someone who has been wanting to buy a home “Now is the Time, my Friend”…

Happy Home Buying!!!

Where to Invest our Money Now?

With Stock Markets reeling under a lot of volatility, and the Indian Rupee depreciating against most major foreign currencies (esp against the US and Singapore Dollars) the outlook for the Indian Markets is not so green right now. As of now, the big question that is in peoples minds is “Where can I Invest my Money Now?“ Should I take a risk with the stock market or should I go for bank deposits? If you are someone who has had these questions pop-up in your mind over the past few months, this article is just for you...

Before We Begin

Before we begin answering the question, where to invest our money, we have to decide a few key aspects...

1. Decide How Much You Can Invest
2. Decide When you want the Money Back

Rationale: With the knowledge of when you want the money back, a wise decision can be taken

Point No. 1 is just a technicality to try to understand how much money we have to invest. It is not going to affect our investment decision much. But, Point No. 2 is going to be the key player in our decision.

The rest of this article is going to be about where to invest based on the timeframe as to when you want your money back. The details are split into four sections:

1. Ultra Short-Term (Less than 6 months)
2. Short-Term (6 months to 1 year)
3. Medium-Term (1 to 3 years)
4. Long-Term (More than 3 years)

Ultra Short-Term (Less than 6 months)

When you need your money back in the immediate future i.e., within the next 6 months, safety and security of the money invested takes highest priority. Lets say, you have some money that you have saved up for your Son’s Engineering College Admission in June of 2012 (It is January 2012 now) the most important consideration for you is, will the money be available for me when it is time to pay my Son’s college admission and fees. So, at such a scenario, investing in the stock market would be suicide and you may or may not be able to pay his fees using this money. So, the best Investment Options for an individual who plans on using the invested funds in the near future are:
1. Liquid Cash in your Savings Account – This is a wise choice if you need the money in a time period of less than 3 months. The whole hassle of opening a fixed deposit, breaking it a few days before you need the money, paying a penalty for premature withdrawal etc can be avoided. You can withdraw the money anytime you want. The Rate of Interest you earn is only going to be around 4%.

Justification: Even though your money is earning only 4% interest, your money is fully secure and available whenever you need it. So, this is the best choice for someone who needs cash in the immediate future.

2. Bank Fixed Deposits – This is a wise choice if you need the money in a time period of anywhere between 3 to 6 months. Your Money does not stay idle. With the current high interest rates offered by banks on fixed deposits, your money is going to earn a good income eventhough the duration is only around 6 months or lesser.

Justification: Your money is going to be safe because, banks in India are very safe and strictly regulated by the RBI. Moreover, your deposits will earn an interest of around 6-8% which is very good considering the kind of returns the stock market has offered over the past few years.

Short term (6 months to 1 year)

When you need your money in a time duration of between 6 months to 1 year, your choices of investment are a bit more diverse because, apart from capital preservation, the rate of returns the instrument earns is going to be a key criteria (unlike the ultra short-term where capital preservation was our main goal)

1. Fixed Income/Debt/Bond Mutual Funds – These days, there are a whole bunch of Debt and fixed income MF’s that are available in our market. These are MF’s that invest only on debt instruments (like bonds) and so, the principal invested is almost 100% safe. Moreover, since they invest in bonds from Corporations & other large organizations, the rate of returns is going to be greater than what is offered by Bank Fixed Deposits of equal tenure.

Justification: Even though these MF’s invest only in Fixed Income/Debt Instruments, default risk is a very real probability. But, the chances of that are less than 1 or 2%. Since as an investor you are bearing this 1 or 2% risk, the returns are usually an equivalent 1 to 2% higher than what Fixed Deposits yield us. So, this is a good choice for people planning to invest their money for a duration of between 6 to 12 months.

To know more about Debt Mutual Funds Click Here

2. Bank Fixed Deposits – The rates of interest offered by banks these days for deposits between 6 to 12 months timeframe are in the range of 6 to 10%. To add on, the deposits are 100% safe.

Justification: Safety, combined with good returns of around 8% makes these a very good choice. This is for the totally risk averse investor. If you are someone willing to take a small risk for a better reward, then option no.1 would be a better choice.

Medium term (1-3 years)

When you need money in a time duration of between 1 to 3 years, you have the opportunity to take a decent amount of risk to take advantage of the good returns offered by the Stock Market. Even if the markets remain volatile in the short term, they will recover and once they do, the returns will definitely be better than the other asset families.

1. Balanced Mutual Funds – These are Mutual Funds that Invest in both Debt and Equity Instruments. Well managed balanced funds move their assets between equities and debt to provide the best possible returns to the investor. They usually invest around 60% of their assets in debt instruments to provide capital preservation and invest the remaining 40% in the equity markets to provide far better returns than traditional debt instruments like bank deposits or debt MF’s.

Justification: Though Balanced MF’s have lost some value (In NAV) over the past year due to the turbulent markets, they havent done as bad as the Equity Diversified category of funds. This is because of the healthy allocation to debt instruments. So, if you are an investor with a medium term timeframe of 1 to 3 years, these would be a good bet. Even if the markets remain turbulent in the near-time future, it will definitely recover over the next few years and you can reap the benefits of the equity allocation of such funds.

Trivia: Last month we had taken a look at one of the best Balanced Mutual Funds in India "HDFC Prudence Mutual Fund". To know more about this fund Click Here

Long term (3 years or more)

When you are planning for a long term investment, you have the opportunity to take calculated risks to take advantage of the good returns offered by the Stock Market & Other Asset Classes. Even if the markets remain volatile in the short term, they will recover and once they do, the returns will definitely be better than the other asset families.

1. Diversified Equity Funds – These are Mutual Funds that invest directly in the Equity/Stock Markets. They invest predominantly in blue-chip or large cap stocks and also select a few good mid-cap or small-cap company’s to provide the best possible returns to the investor.

Justification: Diversified Equity MF’s have taken a significant beating over the past year due to the volatility in the stock markets. Experts suggest that, this is the best time to enter the market due to the cheap valuations. Fund Managers of well managed funds are using this opportunity to rejig their portfolio to best suit the investors. Considering our timeframe of 3 years or more, equities are our best bet and as always, no other asset class has outperformed equities on overall returns over the past decade. So, investing in Equities is a wise choice for the long-term investor.

2. Gold – Gold, the shining yellow metal has been increasing in value for the past few years and is expected to do so in the future as well. Though, the price may be volatile in the short term, overall the price of gold will only go upwards because of the supply-demand parity. So, gold too would be a good addition to your long term investment portfolio

Tip: If you decide on investing in Mutual Funds (Balanced or Equity Diversified) Systematic Investment Plans (SIP) are the best way to go. Since the markets are very volatile these days, investing regularly helps average out the high’s and low’s of the market and get the best returns

There have been numerous articles in my blog about investments & forming an investment portfolio. You can read them by clicking here

Happy Investing!!!