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Posted by VRIDHI on 24/02/2015
Starting early is the easiest and smartest financial lesson. Even leaders of the industry agree
Vivina Vishwanathan, Mint 9/2/15
Anyone who has just joined the workforce for the first time has a list of things to spend on—from clothes to gadgets, and more. Saving and investment rarely feature in this list. This may sound boring and even unimportant, but if you don’t want to be financially lost, you must plan your finances. Here are a few things you can do with your income in the early stages of your career.
When it comes to growing your money, the earlier you start saving and investing, the easier it will be to build a corpus. “You should understand the power of compounding. Unfortunately, people don’t understand it and how starting early will enable lower investment savings,” said Dilshad Billimoria, director, Dilzer Consultants Pvt. Ltd.
Say, you are 25 years old and plan to retire at 60. If your current annual expense is Rs.10 lakh, the expenses in your first year of retirement would be Rs.77 lakh, assuming annual inflation of 6%. So, you will need a corpus of Rs.10.7 crore at age 60, for which you need to invest Rs.28,000 per month till retirement age and earn return of 10% on it. If you delay and start investing only when you turn 30, you would need to save Rs.35,365 per month. So, the later you start, the more you need to save.
Identify goals later
You may be wondering, why invest when you don’t have goals. Imagining about retirement or any other kind of long-term goal is difficult when you are in your 20s. “Many financial commitments come in the form of events. The older you get, the more difficult it gets to catch up to the expenses. People don’t think about this in their 20s,” said Leo Puri, managing director, UTI Asset Management Co. Ltd.
How does one overcome this difficulty?
“It is a simple thing. Generally, your financial goals will include retirement, buying a house, marriage, children, their higher education and marriage, your higher education, travel and spending on gadgets or white goods. Even if none of these make into your list right now, they will soon creep in,” said Suresh Sadagopan, a Mumbai-based financial planner. Even if you don’t have a goal, keep a part of your salary aside to be used for future needs.
Once you have decided to save a certain portion of your income, the next step you may assume is to invest. It’s not. the next step should be buying health insurance so that medical liabilities are taken care of. “Life insurance can wait. But you should take medical insurance immediately. You may think that your employer will take care of it. But health issues can occur any time, say, when you are in between jobs. Consider taking health cover of at least Rs.3 lakh, which will cost you under Rs.4,000 per annum,” said Sadagopan. You don’t want to dip into your savings or investments when you have an option to hedge.
After health insurance comes investing. You must remember that over time, money loses value due to inflation and taxes. So, leaving all your money in a savings account is not prudent. Of course, that doesn’t mean that you invest in any product that gives you higher returns than a savings deposit. You should calculate the returns you get after factoring in inflation and tax. “People don’t understand the difference between real return and nominal return. They misunderstand nominal return to be the real return. Always remember to factor in inflation when you are investing,” said Vivek Dehejia, professor of Economics at Carleton University in Ottawa, Canada.
So, which product to choose? Since you have time on your side, you are in a better position to take risk.
“Equity-oriented products are a good option. But you should invest at least 40% of your money in lock-in products such as Public Provident Fund as it will help you build financial discipline,” said Sadagopan.
You can create a corpus by investing in short-term products such as debt funds or even bank fixed deposits. This will help build financial discipline.
Though you should save and invest regular, it doesn’t mean that you can’t indulge. “You can buy a new gadget or go for a vacation, but it doesn’t mean that you go overboard with you credit card and spend more than you can afford,” said Sadagopan.
If you have basic understanding of financial products and how they work, you will be able to make the right decisions about your money life. Doing so will earn healthy returns.
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Posted by VRIDHI on 23/02/2015
The Capital Gains Account Scheme helps you save on long-term gains tax; reason enough to befriend it
Ashwini Kumar Sharma, Mint 23/2/15
Selling a house results in you suddenly having a large sum of money. And unless you have already decided how it’s going to be used, chances are that it will either be put in a savings account, or it gets spent. And, of course, there is tax to be paid on the gains. Some of this can be avoided. If you had the house for at least three years before you sold it, the gains are called long-term capital gains (LTCG); if you held it for a shorter period, your profit is called short-term capital gains (STCG).
Tax on long-term gains can be avoided if you utilize the amount within 2 years and 3 years to buy a new property or to construct one, respectively. You can also invest the money in specified bonds. But the amount on which you can get tax benefit is limited to Rs.50 lakh, and you must invest in the bonds within six months from the date of sale.
Another way to save on the taxes is to use the Capital Gains Account Scheme (CGAS). This scheme is meant for those who are not able to re-invest the gain in a new residential property before the due date of filing tax return (typically 31 July). Parizad Sirwalla, partner-tax, KPMG, India, said, “As per domestic tax laws, an individual can avail an exemption from LTCG tax resulting from sale of house or agricultural land (i.e. after holding the same for specified period from acquisition date) by reinvesting the LTCG into another residential house or plot of agricultural land, as the case may be, within specified timeframes of sections 54 and 54B, respectively.”
Let’s take a look at the scheme and how to get the most out of it:
What’s on offer?
An account under the capital gains scheme, which was introduced in 1988, can be opened only with specified banks or institutions. “The deposit can be made in lump sum or in instalments at any time on or before the due date for filing the return of income,” said Rahul Jain, partner, Nangia and Co. Say, you sold a property on 15 January 2015, and are not able to use the gains by 31 July 2015. In such a situation, you should open a CGAS account and deposit the money in it by 31 July. You can deposit in cash, by cheque or by draft.
There are two types of accounts—account A, similar to a savings account; and Account B, which is like a term deposit. You can put your money in any of the two. Account A offers flexible withdrawals, but interest rate offered is similar to what that bank offers on its regular savings account. Account B offers higher interest, which would be similar to what the bank offers on its other term deposits, but withdrawal is not flexible.
If you plan to, say, buy a property after a year, choose account B. But if you plan to build a house soon, and would need money periodically, choose account A. Money withdrawn has to be used within 2 months.
You can withdraw from account B also, but would need to first transfer the money into account A. For such premature transfers, the interest rate will get adjusted.
Do note that “the interest earned on money deposited in CGAS is taxable in the hands of the taxpayer as ‘Income from other sources’,” said Sirwalla.
How much you can deposit varies across banks. At IDBI Bank Ltd, for example, the range of deposit can be Rs.10,000-100 crore. But at State Bank of India, the lower limit is Rs.1,000, and there is no upper limit.
Any gains arising out of property transaction or transfer attracts tax. Short-term gains are taxed at the normal income slab rate of the assessee. Long-term gains are taxed at 20% with indexation. For instance, the acquisition cost of a Rs.60-lakh house purchased in 2010 and sold in 2013, based on the cost inflation index (CII) for 2010 (632) and 2013 (1024) would be about Rs.97 lakh. If this house is sold for, say, Rs.1 crore, the owner makes a gain of about Rs.12 lakh, and this is the amount that she can invest in a CGAS account.
How to use the money?
The scheme has been made for a special purpose, and therefore, money can only be withdrawn for specific purposes. Jain said, “Money deposited in a CGAS account can be utilized only to buy or construct a new asset.” Typically, small sums of, say, less than Rs.25,000 can be withdrawn in cash; for anything more, you will get a crossed demand draft. Initially, to withdraw money, you will have to give an application mentioning the purpose. For subsequent withdrawals, you can use a specified form, in which you will mention details of how the earlier withdrawal was used. Banks may reject further withdrawal if required details are not given. Therefore, keep the bills for materials purchased, payments to contractor, and so on.
“The money must be utilized within 60 days of withdrawal. Any unutilized sum has to be re-deposited in a savings account immediately,” said Jain.
When closing it, the account holder will have to give a specific authority letter or certificate from an income tax officer. Closure would be allowed on terms mentioned in the letter of authority, which could also be a completion certificate or occupation certificate from the authorized government authority. If you are unable to use the gains from the house sold to buy or construct a new house, the amount will be treated as capital gain for the year in which the period of three years from the date of sale of the original house expires. In the example use earlier, if you sold on 15 January 2015, you must deposit the LTCG in a CGAS account by 31 July 2015. The deposited money should be used either before 14 January 2017 to buy a new house, or to construct one before 14 January 2018. If you are not able to do either of these, you will have to pay tax on the balance amount while filing your tax returns for FY2017-18.
Mint Money take
Since property buying and constructing is a long-term process, a CGAS account is handy for those who have long-term gains from the sale. While the scheme is useful, opening an account under it is difficult as all bank branches do not offer these.
To buy a property you have two full years. But if you are planning to build a house, don’t delay for long because you can use this account for only up to three years, and construction takes a lot of time. Also, do remember that the house will not be considered as complete till you get its occupation certificate, and that your claim for tax exemption is based on the completion of your house.
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Posted by VRIDHI on 24/01/2015
by Vivek Karwa, CPFA., CFPCM
150120: #IndianStockMarket has delivered fabulous returns in 2014. For the period 1-1-2014 to 31-12-2014 the frontline index #Sensex had given a return of 29.89% though the return was good it stood third in the list of global indexes.
The #BSE100 delivered a return of 32.27% while the #BSE200 and #BSE500 delivered returns of 35.49% and 36.97% respectively. The US market of which we are generally obsessed of, #DowJones delivered just 8.49% for the same period. We in this newsletter have always been bullish past one year and the #Bankex delivered highest return of 65.05% among the sectoral indexes.
If you note from the above mentioned returns the highest returns have been from the small and mid cap while the frontline stocks along with Sensex and Nifty have given lowest returns. Lowest in comparison to other indices, in absolute terms 30% returns can be termed as fantastic.
In spite of all cylinders pumping, the markets do not seem to be costly yet. The small cap and the mid cap stocks were beaten so badly that they ran anywhere between 50 to even 200% in certain cases. Such stocks even after such run up are still trading anywhere between 30 to 60% lower to their highest levels registered.
Even the Sensex and Nifty valuations do not look very bad. We registered 21000 in Jan’08 and crossed the level in this year and are now trading at 28300 approx. after 5 years! The valuations of companies have changed during the period and market is still to focus on this factor and re-rate the pe.
We this time have a stable government, not even a year is over hence it would be too early to say that they would perform very well, but the initial signals suggest that they are serious on reforms and may do many things which will improve the eps of the frontline companies. We post the end of this financial year, will start factoring in the future earnings. So at the current P/E of Sensex and the Nifty we are definitely costly, we are just at fair values.
The new government has also been cheered with the crude oil prices slump. The government which used to fund the fuel consumers by way of subsidies are able to garner more revenues in form of taxes in spite of reducing the prices nearly 10 times since assuming office! This will aid in controlling the subsidy burden.
Interest rates also have been cut for the first time by RBI after many years. We feel this is the start of the downtrend in the rate cycle. Lower interest rates will have positive impact on every sector in the economy. Banking sector may continue doing well in the future since they will now be able to recover the loans which have already been termed as NPAs.
So 2015 should be volatile but positive year. We will find huge supports at 25500 – 25000 and 24700 – 24300 Sensex levels. We may try to achieve 33600 – 35000 in 2015. Remain Invested.
This Article will be Printed in the Investors Digest Magazine of TamilNadu Investors Association (SEBI Recognized)
Disclosure:- It is safe to assume that the author may have interest in the sectors recommended in this news letter. Seeking personal advice from your Financial Advisor is recommended before acting on any of the substance given herein. The numbers, figures, etc., presented may have been taken from various sources.
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Posted by VRIDHI on 21/01/2015
The two clear lessons that one can draw while planning for retirement are: start early and invest in equities
Deepali Sen, 19/1/15 LiveMint
Life expectancy of people has gone up thanks to advancements in the field of medicine as well as consciousness towards fitness and wellness. We may very well end up pushing our individual envelope towards mid- or late-nineties. With most of us working from 25 years of age until we turn 60, surviving until 95 years of age would mean a proportion of 1:1 between our earning and post-retirement years. In these 35 years of earning, one has to plan for other goals besides retirement, such as for children’s education, their marriage, home, car purchase, funding expenses around fulfilling daily needs, whims and desires, and so on.
Retirement is Real
Retirement will hit all of us at some point in time. And it is much closer that it may appear. All of us would rather have our money outlive us than the other way round. Retiring from ‘working for money’ means that after retirement one has to live off assets accumulated during the pre-retirement or working years.
I have come across people (and they aren’t few in number) who are well in their 40s but are yet to start planning and building their retirement nest.
It is concerning to see people prioritize goals such as a lavish wedding for their daughter, for a house that is much bigger than what they need, or for spending unwarranted sums on vacations without a care for tomorrow over their retirement. This eventually means that in their post-retirement years, they will have insufficient funds, and may even have liabilities such as a home loan tenor ending just a few years before retirement, or not being able to pursue their dream of starting out on their own.
While most people strive hard to create or earn their money, not many are as careful about nurturing the money earned to keep it relevant in terms of its purchasing power.
Life after Retirement
Our retirement expenses are likely to balloon due to high inflation and our increased longevity. This, in turn, would mean that we would need to invest larger amounts of money, for longer periods of time at higher rates to accumulate the appropriate size of funds needed for retirement.
Let us take an example of two couples, one in their early 30s and the other aged 40 who haven’t started investing for their retirement yet. Inflation has been assumed at 7%; the pre-retirement distribution phase generates returns at 12% per annum and returns post-retirement are pegged at 8%. Also, it has been assumed that expenses during retirement will be 70% of today’s expenses (after being adjusted for inflation).
For someone currently spending Rs.6 lakh annually (Rs.50,000 per month at 30 years of age), she will require around Rs.32 lakh per year for her retirement at 60 years of age (this need will keep increasing at the rate 7% per year). Moreover, if she were to live-off her assets (which would grow at 8% per annum post-retirement) she must have at least Rs.9.5 crore at 60. For building a corpus of Rs.9.5 crore, she needs to invest around Rs.27,000 per month for the next 30 years at 12% per annum returns. In effect, while planning for her retirement, she would require an amount that is more than 50% of her current expenses.
For a 40-year-old spending Rs.1 lakh every month, she would need around Rs.32.5 lakh per year when she turns 60 at retirement. This would require a corpus of Rs.9.66 crore, which can be built by investing around Rs.98,000 per month. In this case, the monthly investment required for creating the required retirement corpus is nearly equal to her current monthly expenses.
In essence, if you start to save for your retirement when you are 30, you would require around 50% of your monthly expenses for investments; and at 40 you will need to invest nearly the same money as you spend per month at the moment.
Equity is a Must
The story gets murkier if you are building your retirement nest using just your Employees’ Provident Fund or Public Provident Fund corpus—returns in these instruments are currently 8.7% per annum. Equity is a must and has to find space in one’s retirement plan. From April 1979 until date, the S&P BSE Sensex has delivered returns close to 17% per annum (excluding the dividend earned).
The two clear lessons that one can draw while planning for retirement are: start early and invest in equities. Starting later in life might get too late to catch up, and avoiding equities could leave you with returns lower than inflation.
If you haven’t started walking on the road of retirement planning yet, do get on before it is too late.
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Posted by VRIDHI on 19/01/2015
Credit Cards, otherwise called as Plastic Money is an Unavoidable Deadly Friend in today’s world. Deadly, if you don’t use it sensibly, and a great Friend if you follow simple steps, procedures in using it. Since there are many advantages as well, I am not going to ask you the question: if you really require a card? We all do!
by Vivek Karwa, 18/1/2015
1. Applying for a new card: Most banks have both free cards and chargeable cards now days. Some cards are free while applying and also free from any recurring charges. Some cards come with application fee but no recurring charges and the other category is fee while applying with an AMC every year!
The features and the credit limits differ in each category and their sub-categories!
As a first timer it is better to apply for the basic, all free card. The same can be upgraded later. Take a copy of the features while handing your application to the bank or its agent.
2. Credit Limit: If you are an impulsive shopper, it is better to have a card with lowest possible limit. Self control over expenses is the first requirement in safe usage of cards. Say if your limit is Rs.10000/- every time you hit the limit you can pay and then use again. This method controls your spends. Keep in mind having large limit is not something prestigious! You can be smart even with very low limit. You can always call the customer care and get your limit decreased.
3. Secondary Cards: Many banks offer secondary cards with the main card. Meaning a spouse can have the primary card and give the secondary card to the other partner, you can have the primary and give the secondary to your children. Remember in such cases the liability of entire spend is on the primary card holder!
4. PIN and Passwords: Now days as an added facility all cards come with mobile password facility for very transaction done online. Always keep the PIN and your passwords with you alone. Never ever share the same to anyone calling you even though at times they may say that they are calling from the bank! Remember banks don’t require your PIN so they will never ask you.
5. Payments: Always pay in full. The banks give you minimum payment facility but then you are charged hefty as interest rates! Certain cards charge you 3.5% per month as interest! That’s whooping 42% per year! This is the reason in the above point I asked you to keep the limit low so that you would spend within limits. Paying in full keeps your CIBIL score strong!
6. Cash Facility: Never avail this facility. It sounds good in case of emergencies but even if you take it, pay it immediately within the due dates.
7. Credit Transfer Facilities: Banks will offer you to transfer other card dues to their cards at No Charge! Just ask yourself are Banks fools? Hope you got the answer hence never avail this facility!
8. Always Remember the Statement Dates: Every card will have their own billing cycle dates! Say today is 10th of the month and your statement is prepared on 12th of every month, then you can very well wait for two days and then spend on the card! This way the bank funds you for almost 40 days! Then pay on time! I have statement date written on every card of mine and always spend on the card which has farthest billing date! Actually banks lose every month due to me!
9. Be aware of all programs and benefits: Have you not seen shops offering special discounts to certain card holders? Every bank comes with unique offers! Know them and benefit out of them.
10. Spend only on Needs: Don’t spend just to avail an benefit! Avail the benefit when you are actually spending! Confused? I mean always spend on your Needs and not on Wants! Wants will always be there, just because a discount is running on a product, you need not go and buy it!
Cards are surely of immense use! You need not load your wallet and move around! Even if stolen the person may not be able to use it if you have activated the PIN. You just cannot avoid plastic ;)
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