Monday, January 26, 2009

Equity Linked Savings Scheme (ELSS)

With March just around the corner, people have started worrying about saving Income tax. Usually people throng investment options during February and March and try to save as much tax as possible. To know about the Indian taxation laws pls Click Here

As per our Indian IT laws every tax payer is eligible for savings under section 80C for amounts up to Rs. 1,00,000/- To know about the various options that we have to save tax under section 80C pls Click Here

This article is about Equity Linked Savings Scheme (ELSS). ELSS schemes are one the best tax saving instruments that have been offering great returns for our investor public over the years.

What are Equity Linked Savings Schemes?

An ELSS is a kind of Mutual Fund and is similar to any diversified equity mutual fund in many ways. An ELSS gives a tax benefit and comes with a lock in period of 3 years. Investment avenues of an ELSS are a mix of various asset classes such as equity, debt, gold and real estate.

Some advantages of ELSS are

* The 3 year lock in period prevents withdrawals and thus allows your money to grow over a period of time. Long term investment in equities gives better returns than any other investment instrument.
* It gives tax benefits (Up to 30% for people in the highest tax slab)
* Gives the flexibility to invest small amounts through a Systematic Investment Plan (SIP)

As an ELSS investor, your interests will be safeguarded by two separate market bodies. The Association of Mutual Funds in India (AMFI) and the Securities and Exchange Board of India (SEBI)

Let me explain the returns on an ELSS with an example:

Lets assume you invest Rs. 1 lakh this year in an ELSS scheme and you are in the highest tax bracket.

Invested Amount = Rs. 1,00,000/-
Income Tax saved = Rs. 30,000 (30% tax slab)

Net amount Invested = Rs. 70,000/- (I have deducted the 30,000 because you get it back up front after your investment as income tax benefit and you effectively invested only Rs. 70,000)

Let us assume your equity investment grows at the rate of 15% per annum.

Investment value at the end of the First year = 1,15,000/-
Investment value at the end of the Second year = 1,32,250/-
Investment value at the end of the Third year = 1,52,087/-

Assuming you encashed your investment at the end of the 3rd year you will get Rs. 1,52,087/-

Profit you realized = Rs. 82,087/- (You invested only Rs. 70000 effectively :) remember the tax saved)

Profit percentage = 117% (For 3 years together)

Returns % per year = 39%

A Returns of 39% per annum is something we cannot expect in any other form of investment. Thus ELSS schemes make one of the best investment options.

How is your ELSS Money Invested?

This is a very common question that people have. The asset allocation is pre-determined and is in accordance with SEBI guidelines. Between 60% to 100% is invested in equities, cumulative convertible preference shares and fully convertible debuntures and bonds of companies. Money market instruments account for anything between 0% to 20% The asset allocation shows a tilt towards equities which has the scope for providing good returns for us. The choice of industries and allocation to mid-cap and large-cap companies depends on the individual scheme & its fund manager. As an investor, we must first understand the objectives of the fund and also go through the offer document before investing.

Difference between an ELSS fund and a Equity Diversified Mutual Fund

Both ELSS and Diversified equity schemes have the same risk profile. Both are high risk - high return investment avenues. The major difference lies in the fact that an ELSS scheme has a lock in period if 3 years and a diversified equity scheme comes with no such conditions.

It is always advisable that Equity investments be made for the long term to help the fund outperform other asset classes. The lock in period for ELSS supports this view and also allows the fund managers to plan a strategy that would be beneficial in the long term. On the face of it, the 3 year lock in stipulation might be a deterent to investors, but it has its own advantages.

* By forcing us to wait 3 years, it makes us take a long term view of the market, which induces investing discipline to a certain extent
* The real potential for returns from equities can be realized only if we stay invested for at least a few years
* The fund manager knows that the investment would not be encashed in the next 3 years and hence they can plan and devise a strategy that can help us benefit. The manager can choose the sector and stock bets with freedom that he does not get in regular equity schemes

The performance of an ELSS and a diversified fund may also vary.

The difference in performance usually arises from the differences in managing styles and the market rewards for a particular style at a given time. ELSS schemes may have a small & mid cap bias. Fund managers may like to take advantage of the lock in period to exploit value stories in these sectors. Many diversified equity funds tend to have a large cap and growth bias. Therefore, during periods when growth stocks and large caps dominate, diversified equity funds would outperform ELSS Schemes.

But if we calculate the returns of ELSS schemes including the tax benefits we get out of it, they would outperform the diversified equity class.

Sunday, January 18, 2009

Post Office Saving

In turbulent times like these, safety of the investment is of utmost priority among people. For ages we have been hearing/seeing/using the post office for sending letters, documents etc. What the current generation does not know about the post office is the fact that, it has been an investment heaven for our fathers and their fathers. Ask somebody who is in their sixties, one of the top 3 choices for investment would be the Post Office.

Since the post office is owned by the Government of India whatever money we invest in it is totally 100% safe and secure. Whats more they give us competitive rate of interest on our investment as well.

Post Office Saving Facts:

Post Office Saving is the best form of savings schemes which provide substantially higher rates of interest and pose relatively lesser risks of suffering losses. Therefore, they are widely accepted among the different sections of the Indian society and among the different age groups.

The Indian postal sector has started numerous Post Office Saving schemes like:

* Post Office Time Deposits
* Deposit Scheme for Retiring Government Employees
* Post Office Monthly Income Scheme
* Post Office Recurring Deposits
* Deposit Scheme for Retiring Employees of Public Sector Companies
* National Savings Scheme
* National Savings Certificates
* Postal Life Insurance
* Public Provident Funds
* Kisan Vikas Patra

Let us look in detail about some of the best investment options using the Post Office.

Post office time deposits:

The post office time deposits scheme fall under the category of fixed deposits and are available at all the post offices throughout India. The investors are not entitled to receive any amount towards interests on a monthly basis but receive a lump sum amount as interest when the scheme matures. The interest rate in case of these schemes is directly proportional to the tenure of the scheme. The minimum amount required to start the post office time deposits scheme is only Rs. 200 but there is no set limit for the maximum amount. The scheme allows nomination facility and the tenure of the scheme ranges from 1-5 years. The rate of interest varies according to the tenure of deposit. For example, the interest rate for the post office time deposits scheme of 1 year is 6.25% per annum, 6.50% for 2 years per annum, 7.25% for 3 years per annum, and 7.50% for 5 years per annum.

Though banks today offer a much higher rate of interest on term deposits, post office being owned by the government of India safety is 100%

Post office monthly income scheme:

The monthly income scheme also falls under the category of fixed deposits and the tenure of this scheme is 6 years. The post office has made it a rule to accept only a single deposit in an account and the monthly income schemes are available in all the post offices in India. The minimum amount required to be submitted to start this scheme is Rs. 1,000, a maximum amount of Rs. 3 lakh in case the account is held by a single individual and Rs. 6 lakh in case it is a joint account. The rate of interest has been fixed at 8% per annum and the investors are entitled to receive monthly interest payments. The investors are also entitled to a bonus amount of 10% on the total loan amount which is paid when the scheme matures. The investors have the facility to get income tax relief in accordance with Section 80L of Income Tax.

Kisan Vikas Patra:

Kisan Vikas Patra certificates are secured by the backing of the central government of India which makes it the most effective post office saving. The best thing about Kisan Vikas Patra certificates is that the deposited amount doubles itself after the completion of stipulated period and the rate of interest offered by the post offices for these certificates remain same throughout the loan period. The tenure of Kisan Vikas Patra certificates is 8 years and 7 months. The face value of Kisan Vikas Patra certificates range from Rs. 100 to Rs. 50,000.

Post office recurring deposit:

The tenure of the post office recurring deposit accounts is 5 years which comprise of 60 equal monthly deposits of at least Rs.10 towards each installment. Default of at the most 4 payments are considered and forgiven by charging a minimal default fee. As the post office recurring deposit scheme matures, the investor of Rs. 10 denomination account is paid a sum of Rs. 728.90.

Public provident funds:

The public provident funds can be started with a sum of Rs. 500 and can extend to Rs. 70,000 and the account can be shifted from a post office to another post office or from a post office to a bank or from one bank to another. The interest change varies every year and is entitled to income tax rebates under Section 88 of Income Tax Act.

Happy Investing..

Tuesday, January 6, 2009

Real-Estate as an Investment

Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is stationary, or fixed in a particular location. Real estate is often considered synonymous with real property (also sometimes called realty).

So much for the technical definition of Real-Estate. In layman's term Real-Estate is nothing but "Buying a house"

Buying/Owning a House is the dream of every individual who is earning or who has just found a job or even someone who has been earning for years. It is a significant change in a Man's life the moment he owns a house. Believe it or not, almost everyone in this country dreams of owning a house. Owning a property that reads his/her own name. There are millions of Indians who are fortunate enough to have already had their dream come true but at the same time there are millions more who are working hard everyday to achieve their dream.

How important a decision is Buying a house?

Buying a House/Property is a big decision that any earning individual has to make. It is not a matter of a few hundreds or few thousands of rupees. It involves a commitment to pay huge sums of money. Investing in real estate is much more difficult because of the sum involved when compared to other investment options like shares, Mutual funds etc.

Only rarely do people buy property and settle the entire amount using surplus cash in their hands. In most cases the cash is met out by some form of debt. A home loan from a bank or a loan from a family member etc. In almost 80 - 90% of cases where property is being bought, the source of money is a home loan.

This is the reason why buying property is a very important decision in an earning individuals life. A home loan is nothing but a commitment to repay a huge sum of money every month for the next 10 - 20 years to realise our dream of owning a house. For example if you take a home loan of 10 lacs you may have to repay atleast Rs. 10,000/- every month for the next twenty years. This is not a simple task.

So Before you buy a house, make sure that you have worked out your monthly cash flow and ensured that you would have enough cash to meet out the home loan EMI after making all your routine monthly expenditure like electricity bill, gas, petrol, groceries, school fees etc. Also make sure that you can keep aside a small sum of money every month in a kitty to take care of your emergency expenditure. This is a very good habit considering the fact that you are going to enter into a commitment that is going to eat away a significant portion of your income and you do not want to be in a position where you are stuck and do not have sources to pay off unexpected expenditure.

Things to consider before buying a house:

Before investing your hard earned money you have to ensure the following:

1. Financial Credibility of the promoter/builder.

2. professional Capability of the promoter/builder to deliver the Project in time.

3. Past Projects delivered by the Promoter/Builder.

4. Ownership title of the Project.

5. Necessary Government approvals to start the project.

6. Names of the Banks which have approved the project for Loan Purposes.

7.Exit Clauses (That is in case, you wish to sell your property before completion of Project)

Not forgetting to go through the clauses of "Buyer Seller Agreement" with the Builder and if required take an Expert’s opinion before finalizing the deal.

If you are going for a home loan, usually the bank would do all kinds of checks on the property before granting you the loan, but still it is better to double check all points ourselves before investing our money. After all it is our hard earned money.

Why is Real-Estate such a lucrative investment option?

This is a question for which everyone knows the answer. The answer is simple, appreciation in cost. Land in my area, that was being sold at Rs. 500/- per square foot 10 years ago is being sold at Rs. 4500/- per square foot. This is the appreciation that has happened in the past 10 years. The cost of land and property is going up at a pace which far outpaces the rate at which our salaries increase. Most importantly a house is part of the 3 basic needs of man Food, Clothing & Shelter. The amount of land that we have is limited but the population is growing at a good pace. Everyday the number of people who need a house is increasing but the amount of land still remains the same. So as per the demand & supply theory, the cost of property would keep going up no matter what.

If you do not own a house, plan to buy one soon. If you own a house and can afford another, don't think much, buy :)

Also, buying a home using a home loan gives you tax benefits of upto Rs. 2.5 lacs per annum which is a straight tax saving of Rs. 85000 (Approx) every year. Who would want to miss out such tax benefits when you know that you would also be owning a house on your name if you take this loan.

Because of significant capital appreciation and also because of significant Income tax benefits, Buying a house has been one of the prime investment options for us in the past years.

Things to do before buying a house:

1. Take a pure term life insurance policy which is worth as much as the home loan you are taking. This policy would eat a small amount of your income but will give your family the much needed protection. In case of the unfortunate event of your demise, your family and dependents need not pay the remaining EMI's. They can use this policy to repay the home loan. Even if you are not present with them, your home would be.

2. Take sufficient Medical insurance for you and your family. The medical insurance should cover both critical illness cover for everyone and disability benefits for you (The earning member) Medical expenses form bulk of the unexpected expenditure that we face in our family life. It is better paying an insurance premium of a few thousands from our pockets than paying lacs of rupees when any serious illness happens.

The above mentioned points do not mean that something negative would happen to us, but a home loan involves a commitment of a significant portion of our salary and we may not have the liberty of spending on certain things that we were used to. So it is always better to be safe than sorry.

The Last Million Dollar Question:

With the sub prime crisis causing a recession in the world economy, is this the right time to buy a house?

If you ask me, my answer is a YES. The price of property around the big cities has come down marginally. This has been done by the builders to increase the buying of their property. This would be the right time. In a few months the steps taken by the government world over would start showing results and the economy would again be back on its feet. Then as usual the price of property would go up the way it did during 2006-2008.

Buying a house is a one time investment, think wisely and buy your dream home...

Happy Investing.
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