Best Investment alternative for the increased 50K Limit under Section 80C

Generally we all get confused when it comes to investing for tax purposes between PPF and Tax saving Mutual Funds.This budget brings happiness for most of salaried individuals who actually believes in investing. Union budget has increased the investment limit under section 80C from Rs. 1Lakh to Rs. 1.5Lakh. At the same time they have also increased the PPF limit from Rs. 1Lakh to Rs. 1.5Lakh. It means you can simply invest all of your 1.5Lakhs into PPF and enjoy the benefits of tax deduction along with the 'Guaranteed Returns' (This is what PPF is meant for).

Let me ask you one simple question: Is it really a good investment planning to park your complete 1.5Lakh into PPF? Are you able to beat the inflation with this tactics?

The answer to both the questions is NO. Many individuals avoid any equity investments and prefer PPF as they prefer the safety and guaranteed returns of PPF over volatility and uncertainty of stock markets. I have come across many such persons in my life who wants to invest for their future but are not willing to take risk. In this article I will share some number crunching that act as an eye opener for you. Seeing this you can seriously consider ELSS as one of the best option under 80C category and take this additional 50K limit as an opportunity to shed away your fear and get associated with equity market.

Now I will show a comparative chart of PPF and ELSS (I have chosen HDFC Tax saver for this purpose) for 15 year period. Consider an investor invested Rs. 5000 per Month in PPF and ELSS.

Investment Chart for PPF

Investment Chart for ELSS:

It is clearly evident from the above table that while an investment of 5000/ Month in PPF grows to Rs. 20 Lakh 69 Thousand, the same investment in ELSS grows to approximately Rs. 67 Lakhs.

Here are some of the key considerations that can be inferred from the above tables:

• In the quest of not losing money, which led the investor to park money in PPF, he has actually lost Rs. 60 Lakhs of additional gain that he would have got in ELSS
• At no point in the last 10 years, when the market has gone through all its gyrations, has the ELSS corpus been less than the PPF corpus.
• Even in March 2009, when the Sensex was at its lowest at 9000 levels, the ELSS corpus was more than twice the value of the PPF corpus.
• Even now, if the market were again to drop 50% like it did in 2008-09 (which nobody believes it will), the ELSS corpus would still be higher than the PPF corpus, even after a 50% drop.
• Apart from the returns aspect is the liquidity aspect. ELSS gives you liquidity after 3 years while PPF remains relatively illiquid for 15 years.

If you seriously read all these key points, you will understand the importance of equity investments. PPF are meant for long term investment, if you are ready to park your money for 15 years then why can’t you do the same with equity investments and enjoy the long term benefits associate with it.

Do give it a thought before making final decision to park that additional 50K…..!!!!

Important Financial lessons that can be learned from FIFA 2014

You must be surprised after reading the title of this article as there could not be any relation between your finances and FIFA world cup until and unless you are into betting. Still there are many lessons that can be learnt if you analyze the complete situation of the current FIFA world cup. Here are some of the insights that I have analyzed and want to share with you all.

Never rely on Past performance:

Everyone is betting heavily on Spain's performance this world cup as they are the defending champions. Now the result is in front of all of us, they are not even able to clear the first round and are out of the world cup.

Same goes with our investments as well. Some plan does well in past does not guarantee its performance in the future. Past performance is always one of the criteria to consider one particular stock or mutual fund or any plan, but it’s not the only criteria. Always have a thorough study of the plans you want to invest into before actually making any investment decisions. 

Don’t let your emotions overpower your decisions:

In the match between Germany and Portugal, one of the Portuguese players – Pepe got carried away and head butted one of the German players. This resulted into his exit followed by a RED card. There was no need to do so and the 10 player Portugal team ended up on losing side.

Similarly in case of making any investment decisions, don’t let your emotions overpower you. As a human we have a tendency to remember our bad moments for the life time and forget the good ones very quickly. Same logic follows in our financial life as well and we refrain ourselves from taking a look to those plans again which haven’t delivered good returns in the past. This is a dynamic world and things keep on changing every other day. Lot of regulatory agencies constantly trying to protect investor’s interest and thus companies have to adhere to these changes and they keep on implementing the same to their products as well. Thus if most of us had burnt our hands with ULIP plans in the past it does not applies same for today as well. Always make your decisions based on facts and not on sentiments.

Don’t get carried away with success:

In the match between Netherlands and Spain, Spain was the one to score first goal of the match. There won’t be any good start for the defending champions to this tournament. They got carried away after that and lost the match with a score of 5-1.

Similarly if one of your investment results into very good results it does not mean you don’t look at other avenues and start investing in that particular plan only. As the famous saying goes, don't put all your eggs in one basket. For example, if you have invested in Gold in early years it would have delivered you huge profits but if you keep continuing this investment even in the year of 2013-14, you have ended up with loses.

One good stock pick won’t make any one an expert. If you don’t have sufficient time and expertise, Mutual Fund is the best way to proceed forward.

Consistency is the KEY:

As we know Germany is one of the consistent performers in all the big tournaments, they have won 3 world cup titles and 3 European championships. They are doing well in this world cup as well.

Similarly in the financial field if a stock or a particular Mutual fund is performing well over its peer in the long term than it’s surely one of the safest best for you to invest into. Always try to track the last 10 year performance of any Mutual fund or stocks before actually investing in the same. Never get carried away by the schemes which promise to make you rich quicker. Choosing consistent performer over rising star is always a better bet especially for someone having low risk appetite and limited income.

Time to realize realities of Life

In today’s era Money has become one of the most important part of our life, without which we can’t imagine our existence. But are we always practical in our approach when it comes to matters related to money? Consciously or subconsciously we keep telling ourselves some lies related to money matters. Some of these are due to ignorance and laziness and some are legacy of the past.

In this article I will highlight some of the key points about which we need to start thinking positively and start accounting for them.

I do not need additional health cover as I am covered by my employer:

Generally, working personals are covered of their medical expenses from their employer, but is it enough for an individual or not is something you need to evaluate. Generally Health Insurance from employer has many strings attached to it and do not provide sufficient cover to the entire family. One biggest point is that while you are between switching jobs, you and your family is without any cover. Also once you retire you will end up without any cover and at that time buying any health cover will be too costly for you. Also, you should keep in mind that there are certain diseases for which health insurance companies provide cover only after certain period of time. For example, BP or sugar related diseases are covered from 3^rd year onwards. Therefore, once you switch job your association with new health insurance provider starts with zero which might impact you and your family.

I am young enough to start thinking for Retirement:

Planning for new smart phone, foreign holidays, new car are some of the choices prevalent among the young ones rather than to save for their retirement. All of us generally believe that it’s just the start of our professional career and retirement is way ahead to think of it from now. As one of the famous idioms goes – ‘The sooner the better’, same is the case with retirement planning as well. The early you start, the more benefits you can reap on retirement. Below is an example to explain things better.

A and B both invest Rs 5,000 per month through SIP in a diversified equity fund till they are 50 years of age. However A starts at the age of 25 years and B starts at the age of 30 years investing a total of Rs 15 lakhs and 12 lakhs respectively. With the additional investment of Rs 3 lakhs and the power of compounding of returns, A is able to earn Rs 8,802,617.84 more than B! (The return is assumed at 14.45% annually)

Source: www.eksipkikahani.com

  

Why to buy mutual fund if I can choose the winning stock:

Investing directly into equities can definitely gives you better return in comparison to investing into equity mutual funds, but that needs in depth analysis and thorough understanding of equity market. When market is in upswing mood, as they are currently, they have the potential to give you better returns but newbie generally ends up with their hands burnt. They do not have the requisite expertise and they go with the sentiments and ends up with losses.

Thus the expertise of Mutual fund manager and their diversified portfolio ensures that your investment won’t go off the cliff. You can still buy equities directly from the market but investing a part of your money via mutual fund gives you the requisite diversification to your portfolio. As the expert saying goes: if your stock return beats the Mutual fund returns over the long term, you are in the wrong profession J.

Buying Term plan is waste of money:

Many individuals believe that buying term plan is completely waste of money and it’s better to invest in life policies having maturity value. For us it’s very difficult to get convinced on a product in which we are not getting anything on maturity against the premium paid. Thus we prefer to invest in endowment plans. Term plan is the pure unadulterated form of life insurance and thus charged very low premium and gives high risk cover. I will suggest buying a pure term plan with a combination of SIP in debt fund and you will get much better returns than an endowment plan.

Bank Fixed Deposits are the safest Instrument:

Many of us still believe that Bank FDs are the safest instrument to invest in. This in fact is not true. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insure deposits of up to `1 lakh per customer across all branches of a bank. This means that any deposit amount higher than `1 lakh with a bank is at risk in the event of default by the bank. Most importantly, they are not the tax efficient instrument. The return from FD is clubbed to individual’s income and taxed accordingly. Thus for a person in 30% bracket, the effective return from 9% FD will be 6.3% after tax. Hence you have to look out for other investments similar to bank FD’s. One of them is tax free bonds issued by government undertakings. From safety perspective they are comparable to that of bank FD and the return from them are completely tax free in the hand of investor. Similarly FMP from mutual funds are other investment where yield is not fixed but they give the advantage of indexation in the hand of investors. (In my another article, I will explain in detail about indexation)

I do not need to draw up my will:

Many of us never give importance to writing up will or majority of us still believe that it’s something for super rich people only. This is completely baseless and we have to change this mentality. If something happens to you, your loved ones have to do lot of running to prove they are the only legal hires. If you want to save your loved ones from all of this hassle and want to ensure that they can take advantage of the wealth that you have created for them, please make sure to have your will on time.

SIP or VIP?

Every one of you must be aware of the concept of SIP which is called as ‘Systematic Investment Plan’. Under this you will keep on investing a fixed amount on a particular date of every month into the Mutual Fund plan of your choice. This will definitely give you advantage of rupee cost averaging. As you are making purchases at regular interval at varying prices, it will give you better returns in the long term.

Irrespective of the market conditions, the same amount will be deducted from your account periodically and will be invested into the market. But have you ever thought that your returns would be maximized if you can invest more money when market is down and less money when market is up. Every person wants this kind of control over their portfolio, but in practice this is not possible.

What if I say that you can have this control over your investment while doing SIP only? Yes, you read it correct. Here comes the term called VIP which stands for ‘Value Averaging Investment Plan’. This approach goes one step forward to SIP.

So what exactly happens in this approach? Here is the brief description of the same:

Some Mutual funds allow you to start a monthly SIP in the debt schemes of your choice. So let’s say you have started a SIP of 1000 Rs. in a particular debt scheme. Now the fund house calculate the market condition based on all the valuation tools available in the market and classify the market into 3 broad categories:

1.  High – Market is at its peak.
2.  Low – Market is at its low.
3.  Medium – Market is somewhere between High and low.

After deciding the market condition, they will transfer a certain amount from that debt fund into one of the equity fund of your choice on 10^th of every month. Now the question which might arise in your mind is- what is that specific amount?

That amount is calculated as follows, for 1000 Rs. SIP:

• Rs. 1500, when market is Low
• Rs. 1000, when market is Medium
• Rs. 500, When market is High

This will help you maximize your returns further. As it will take in account the rupee cost averaging effect as well as it will help you to time the market that too without putting any stress on your mind.

Thus, I would personally recommend you to have at least one VIP plan, which really helps you to generate wealth in the long term.

If you need any help regarding the same, please do not hesitate to bother me. I will put in my best efforts to explain you the things further in detail.

Is Prepayment of Home Loan a good option?

These days the prices of Real estate are so high that home loan becomes an obvious thing, if you are planning to buy your dream home.

But have you ever think that prepayment of home loan is a good idea or not and whether it would be beneficial to you in the long run?

Here in this article, I will explain various scenarios based on which you will be able to realize that prepayment will surely leads to huge benefits in the long run.

Scenario:

Let’s take an example where Mr. A has taken a loan of 60Lakhs for his home at a floating rate of 11% for 20 years tenure. His monthly EMI would be Rs.61,931. Thus he would end up paying Rs. 1,48,63,440 at the end of 20 years which include the interest payment of Rs. 88,63,440.

The below chart shows the Principal and Interest payment over next 20 years. The green portion of the chart represents the Interest payment and blue represents the principal payment.

Now what will happen to your loan if you prepay 1Lakh at the end of one year? This will reduce the amount outstanding to Rs. 5835274 and thus the total interest paid by you now will be 76,07,880.  Thus you end up saving a whopping 12Lakh Rs. just by making prepayment of Rs. 1Lakh

Whenever you make a prepayment, you have two options:

1.    Keep the EMI same and reduce the Tenure,
2.    Keep the tenure same and reduce the EMI.

So which one is better out of these two? Let’s consider our earlier example only and evaluate the scenario.

·        -  If you keep the EMI same and reduce the tenure, the effective tenure would now be 18 Year and 1 Month. The total interest paid till the end of loan tenure is 76,07,880.

·        - If you keep the tenure same and reduce the EMI, your new EMI would be Rs. 60,383. The total interest paid till the end of loan tenure in this case would be 86,41,920,  means a saving of Rs. 2Lakh.

Thus it is always advisable to keep your EMI same and reduce the loan tenure to reap the extra benefits.

There is one more scenario – whether to prepay on a regular basis or to prepay a minimum amount (keeping the EMI same)?

Let’s suppose you continually prepaying 1Lakh for 5 years and in another case you prepay 5Lakh at the end of fifth year. Now which one would be better?

·       - In first scenario where you will be prepaying on a regular basis, the total interest paid by you till the end of loan tenure will be 60Lakhs.

·       - In the second case where you prepay 5Lakh at the end of Fifth year, the total interest paid by you till the end of loan tenure will be 64Lakhs.

Hence it is obvious that making regular prepayments is much more beneficial than making lump sum payment.

Therefore, it is always favorable to make prepayment of your home loan whenever you have surplus cash available with you and to maintain the EMI at the same time. Since Interest is always calculated on outstanding loan amount, repaying will reduce the same and therefore lowering the interest amount payable.

Hope this article will make some changes in your financial life and will help you to understand the benefits associated with Prepayment.

Best place to park your idle money - Liquid Fund!!

Have you ever think of generating returns on your liquid cash that is lying idle in your bank’s savings account?
You all must recall the ad of Kotak bank where ‘Vinay Pathak’ is promoting 6% interest rate as 50% extra on your savings bank account money. This surely raises some interest in you and you must have considered opening an account with Kotak bank.

But what if you come across an alternative that gives you around 100% extra on your savings money and provide the same liquidity and same security as that of savings bank account. How will you react to this option?

Yes, you have read it correctly. There is a way by which you can earn 8% or even more than 8% on your money lying idle with the bank and at the same time without compromising on the liquidity and safety.

So how to get the same and what is the plan I am emphasizing about? It’s Mutual Fund. Now, whenever any person talks about Mutual fund, the first thing come to your mind is Equity and the risk associated with investing in equity market.

Let me first clear one thing over here that there are varieties of Mutual fund available in the market. They are broadly classified into two categories:

1. Mutual Funds investing into Equities,

2. Mutual Funds investing into Debt.

Debt is further classified into various categories. I will not go into too many details and will directly come on to the product which I am talking about. It’s called Liquid Mutual fund / Ultra short term Mutual fund. As the name suggests these are the funds which invest your money into short term debt instruments having maturities from 1 day to 1 year, such as T-Bills, CPs, CDs etc. 

Advantages of Liquid funds over Savings account:

1. High returns than savings bank: Liquid funds offer returns in the range of 8 – 9.5% which is more than double then that of bank’s rate. These funds do not charge any entry or exit load. Thus you can invest your money today and redeem it tomorrow and enjoy the interest for one day. Reliance mutual fund also provides an ATM card to withdraw money from any ATM machine and that too without any cost.

2. Tax Efficiency: The tax treatment on the interest earned from these funds is one of the things that make them more preferable over bank deposits. The short term tax calculation is similar to that of bank’s deposit but in long term for more than a year tax will be calculated as 10% without indexation and 20% without indexation.

Below graph shows the return comparison between few liquid funds and banks rate over 1Month, 3Month and 1Year period.

When it comes to investment, who does not want higher returns. The below graph depicts the difference if you invest 5,00,000 Rupees in Templeton fund and on the contrary if its lying idle in the bank.

You can yourself evaluate the scenario from the graph. As rightly said action speaks louder than words!! 
In the short term these figures might seems to be very small, but if you judiciously start using your idle money it will bring huge profit to you in the long run. Thus act smartly and choose wisely :-)

Introduction - About ME and 'OUR' Blog!!

Hi, Welcome to my blog.

As much as I would like to control it, I breathe, eat and sleep finance and nothing excites me as much as seeing a new high performance fund or coming up with methods to save/make money which eludes everyone else!!

I have been accumulating this knowledge over the last 5-7 years however it always struck me that the articles on internet were mostly complicated, used confusing finance terms and assumed reader to be aware of these terms. 

These days we are so busy with our routine life that we tend to ignore one of the most important aspects of our life, i.e. 'Personal Finance'.

You all must be wondering that money is the most important thing that you all care about. But on the contrary, its one thing we are not taking seriously on majority of the times.

Effective and thoughtful utilization of our hard earned money will help us to create wealth over long term.

You all must be thinking that every other person vouches the same, so what's different here?

The main difference lies in the objective of this blog. Here my main intention is to provide us all with a platform wherein we can discuss all our queries related to different Investments and Finances. Here, I will learn from your experiences and you will learn from my experiences.  

We are not intend to promote any product per say.

Keeping this in mind, I have decided to create a blog which demystify such complex jargon and present it in a manner which is easily digestible by everyone.

Here is a glimpse of the forthcoming blogs which I will be publishing in the near future:

1. I will show you how to save up to 8 lakh rupees on your 50Lakh loan by simply prepaying 1 Lakh!!

2. How to generate up to 8% or even more return on your money lying idle in the saving’s bank account without compromising on safety and liquidity.

The success of this blog completely depends on our combined efforts and not on any individual.

It’s the start of the financial year and it would be the best time to start such a blog. Since we have sufficient time to plan for our investments, we can make well informed decisions.

Hope that you join me in this journey of financial enlightment and towards a more secure future.

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