Five reasons to invest in Debt Mutual Funds

Ramya R Iyer, 26/6/13 Economic Times

source: http://articles.economictimes.indiatimes.com/2012-06-25/news/32409087_1_debt-fund-fund-house-maturity-plan

While debt mutual funds offer several advantages, very few small investors put their money in these instruments. Here is the list of the reasons that make these funds a better investment choice than other options in the fixed income space.

1) More liquid than FDs

A debt fund is very liquid—you can withdraw your investments at any time and the money is in your bank account the next day. Unlike a fixed deposit, the fund house does not levy a penalty for exiting too soon. Some funds have an exit load if the investment is redeemed within 3-6 months. However, most debt funds don’t levy a charge if the investment is redeemed after one month. Besides, you can make partial withdrawals, without having to break the entire investment. Also, the procedure for breaking a fixed deposit requires more paperwork than a click of a mouse.

2) They are more tax efficient

In the long term, debt funds are far more tax efficient than fixed deposits. After one year of investment, the income from a debt fund is treated as a long-term capital gain and is taxed at either 10% or at 20% after indexation. In indexation, the cost of investment is raised to account for inflation for the period the investment is held. The longer you hold a debt fund, the bigger is the indexation benefit. There is also no TDS in debt funds. In fixed deposits, if your interest income exceeds Rs.10,000 a year, the bank will deduct 10.3% from this income.

If you are not liable to pay tax, you will have to submit either Form 15H or 15G to escape TDS. The other problem is that the income from fixed deposits is taxed on an annual basis. You may get the money after the deposit matures 5-6 years later but the income is taxed every year. In debt funds, the tax is deferred indefinitely till the investor redeems his units. What’s more, the gains from a debt fund can be set off against short-term and long-term capital losses you may have made in other investments.

3) You don’t lose even a day’s growth

You don’t lose even a day’s growth when you invest in an open-ended debt fund. If you invest in a fixed deposit or a closed-ended fixed maturity plan, you get a lump sum amount at the end of the term. Hectic work schedules and busy lifestyles mean you may take some time to encash the fixed deposit and then reinvest the proceeds. In some cases it could be even a month or two before the money is redeployed. That can be a drag on the overall returns. Besides, there is no telling what the prevailing rate of interest is when the investment matures. In a debt fund, there is no such problem because the investment never stops growing till you redeem it.

4) Your returns can be higher

The pre-tax returns from debt funds are comparable with those from other debt options such as fixed deposits and bonds. But if there are changes in interest rates, your debt fund could give higher returns. Short-term debt funds are not affected too much by rate changes. Generally, their returns are aligned with the prevailing fixed deposit returns and the investor gains from the accrual of interest on the bonds in the fund’s portfolio. But funds that invest in long-term bonds are more sensitive to changes in interest rates. If interest rates decline, the value of the bonds in their portfolio shoots up, leading to capital gains for the investor. While the average short-term debt fund has given 9.5% returns in the past one year, many long-term bond funds have risen by more than 12% during the same period.

5) They offer greater flexibility

Debt funds are also more flexible than fixed deposits. You can invest small amounts every month by way of an SIP or whenever you have surplus cash. Can you imagine opening a fixed deposit every time you have an extra Rs 2,000-3,000 in your bank account? Similarly, you can start an SWP to withdraw a predetermined sum from your investment every month. This is particularly useful for retirees who want a fixed income every month. You can also change the amount of the SWP whenever you want.

Another key advantage is that you can seamlessly shift the money from a debt fund to an equity fund or any other scheme from the same fund house. If you have a substantial amount to invest, put it in lump in a debt fund and then start a systematic transfer plan to the equity scheme you want to buy. Compared to the 4% your money would have earned in the savings bank account, it has the potential to earn 9-10% in the debt fund. The icing on the cake is that there is no penalty if the STP stops due to insufficient money in your debt fund.

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Want a better lifestyle? Go for Riskier Investments

B. VENKATESH, Business Line, 11/4/2013

source: http://www.thehindubusinessline.com/money-wise/want-a-better-lifestyle-go-for-riskier-investments/article4606142.ece

There are two ways by which you can achieve your aspirations – increase your active income or your passive income or do both. By active income, we mean the income you earn from skill-based work. Passive income refers to income from investments. In this article, we discuss how you can invest to generate passive income to meet your aspiration needs.

Aspiration needs

A typical individual has the urge to continually improve his standard of living. The reason is, what psychologists call, hedonic adaptation. It refers to your tendency to quickly adapt to changes, good or bad, so that you maintain a stable level of happiness.

Suppose you earn Rs 1.5 lakh a month and you want to increase your active income to Rs 2 lakh a month. Within six months, you find a job that pays Rs 2 lakh a month. Will you be satisfied with your achievement? Psychologists argue that it is a matter of time before you revise your aspiration to Rs 2.5 lakh or even more! This continual need for a higher standard of living means that you cannot achieve your aspirations with only your active income. What should you do?

You should strive to improve your passive income as well. You can do so by setting aside not more than 15 per cent of your total investments every month to achieve your aspiration needs. Aspiration needs include all needs other than your current lifestyle requirement such as buying a house, saving for retirement and building a corpus for your children’s college education. Examples of aspiration needs are buying a vacation home or a luxury yacht. The question is: How should you invest to achieve your aspiration needs?

Alternative investments

Remember, you are aspiring to achieve a significantly better standard of living. This means that you should either have substantial initial capital that can be invested in moderately risky assets or small initial capital invested in very risky assets to achieve your objectives. It is typical for most of you to have small initial capital to pursue your aspiration needs; for most of your investment capital will be consumed by lifestyle needs. You should, hence, consider high-risk high-return alternative investments.

For the purpose of our discussion, alternative investments include commodity derivatives, private equity, currency derivatives and direct investment in small- and- mid-cap stocks.

Now, investing in such securities requires caution. For one, trading in commodity and currency derivatives requires you to have short-term view on the prices. You could, for instance, have a view that gold is likely to decline further. Based on your view, you could set-up a short position in gold futures. For another, you should manage your risk efficiently. That is, you should be willing to take losses quickly and close your position if your view turns wrong.

Needless to say, trading derivatives or trading directly in mid-cap and small-cap stocks requires market-timing skills. If you do not possess such skills, you should seek the help of your broker or investment adviser, who could also help you with your private equity investments.

Conclusion

Investing for aspiration needs, unlike investing for lifestyle needs, requires more effort, given the nature of investments. You should have a disciplined approach to trading. Otherwise, you should consider outsourcing the investment decision to your stock broker or investment advisor.

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Brace for harsher interest rate cuts on small savings

Sanjay Kumar Singh, Economic Times, 1/4/2013

source: http://economictimes.indiatimes.com/personal/finance/savings/centre/analysis/Brace-for-harsher-interest-rate-cuts-on-small-savings/articleshow/19290154.cms

If you are disappointed by the recent cut in interest rates on small savings, get used to the feeling because a harsher cut is in store next year. This is because interest rates are linked to the yields of government securities in the previous calendar year.

The various small savings schemes offer interest rates that are 25-100 basis points more than the yield of government bonds with similar maturities. The mark-up varies from 100 bps for the Senior Citizen’s Savings Scheme (SCSS), 50 bps for the 10-year National Savings Certificate (NSC), and 25 bps for others, including the all-time favourite Public Provident Fund (PPF).

The government bond yields were high in the first quarter of 2012, but fell after the RBI cut interest rates. For instance, the yield of the 10-year bond spiked to 8.7% in April 2012, later dropped to 8.2%, and has stayed below 8% in the past three months.

The RBI has cut the repo rate by 50 bps this year, but there is no certainty if this trend will continue. At the policy review meeting on 19 March, the RBI governor indicated that there was little room for further cuts. The central bank is concerned about the divergence between the Wholesale Price Index (WPI), which has softened to 6.84%, and the Consumer Price Index (CPI), which remains stubbornly high at 10.91%.

Even if the central bank pauses for some time and there is no further policy action during the year, investors should brace themselves for harsher cuts next year. Assuming that the 10-year bond yield stays put at 8%, the rate for the 10-year NSC will be scaled down by 30 basis points from 8.8% to 8.5%. By the same assumption, the PPF rate could recede by almost 45 basis points to 8.25% in 2014-15.

The new interest rates announced for the NSC, SCSS and term deposits are only for fresh investments. In other words, you can lock in at the current rates and enjoy the same rates till maturity. However, this does not apply to the PPF and the new rate announced every year applies to new as well as existing investments.

Despite the rate cuts, small savings are good bets for risk-averse investors who want to put money in government-backed instruments. The 9.2% offered by SCSS is lower than that given to senior citizens by most banks. However, the quarterly payment of interest is useful for retirees. The tax-free status of the PPF still makes it an attractive option, especially for those in the high income bracket.

Says Veer Sardesai, chief executive of Pune-based financial planning firm, Sardesai Finance: "The lower interest rate offered by small savings instruments must be seen in the context of the zero risk they offer, since they are sovereign-backed instruments. Among them, the PPF remains the most attractive product." Before the interest rates were linked to G-sec yields in 2011, their PPF investment fetched a return of only 8%. It was raised to 8.6% in 2011-12, and then to 8.8% in 2012-13. The annual investment limit was also raised from Rs70,000 to Rs 1 lakh.

What should you do?
The risk-averse investors who want the safety of government-backed instruments have little choice but to grin and bear these cuts. However, those with a moderate or high risk appetite should use this occasion to build a diversified debt portfolio that earns them attractive risk-adjusted returns. Here’s how to do it.

Step one: Build a laddered debt portfolio. Says Vishal Dhawan of Mumbai-based financial planning firm, Plan Ahead Wealth Advisors: "The different instruments in your debt portfolio should mature at different points of time. If all do so at the same time, especially when rates are low, your portfolio will bear the brunt of reinvestment risk." In other words, all your funds will have to be reinvested at a low rate.

Step two: Have a blend of instruments with fixed and variable rates in your portfolio. "While fixed-rate instruments will allow you to lock into current rates and provide predictability to your portfolio, those with variable rates will enable you to take advantage of interest rate movements," advises Dhawan.

Step three: Look out for the launch of inflation-indexed bonds, as announced by the finance minister in the Budget. "If they are structured right, they are likely to become an important part of investors’ fixed-income portfolios in the future," says Dhawan.

Step four: Choose products based on your investment horizon. As this increases, your options go up. So, if you want to invest for 15 years, you could pick tax-free bonds of this duration, but you can also invest in equity. Despite the their short-term volatility, equity will give returns that beat inflation in the long run.

Step five: If your risk appetite permits, allocate a portion of your debt portfolio to mutual fund products, such as income funds and dynamic bond funds. They are not only tax-efficient, but if you hold them for more than one year, the capital gain is taxed at 10% without indexation and 20% with indexation. For investors in high tax bracket, this is better than being taxed at the marginal rate. Besides, you can invest in these instruments to take advantage of the likely decline in interest rates over the medium term.

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Investing Ideas Across Asset Classes

Investing ideas for next Samvat across asset classes

Here are some time-tested simple principles of early and regular investment

Nilesh Shah, Mint 13/11/2012

source: http://origin-www.livemint.com/Money/TcuODmKqofc8v9a7gDTuqJ/Investing-ideas-for-next-Samvat-across-asset-classes.html?ref=related

Earning money the right way is an important part of our culture and the festival of Diwali emphasises the concept. Here are some cues to investing in the next Samvat year; of course, these are over and above the basic principle of early, regular and disciplined investment.

Real Estate

Real estate has given fantastic returns to investors over the last decade-plus. A part of Mumbai sells garages at a price with which, in other parts of the world, you can get a nice apartment. At some point of time, the law of averages will catch up with such over-valuation. Though I doubt it will happen next year, I will recommend you to apply the following two principles for your real estate investment.

One, it will be rewarding to invest in real estate, where the cost of construction is around or above the cost of land. While there are locations where this is not possible, it should be used as a thumb rule to check the extent of over-valuation.

Two, a majority of gains in real estate comes when one can predict the expansion of a city. In Mumbai, the commercial centre has moved from Nariman Point, Ballard Estate and Fort to BKC and Lower Parel area. In Ahmedabad, the city centre has moved from Relief Road to Ashram Road to CG Road to satellite Road to SG Road over the last few decades. Try to buy property where the city is likely to expand and it will be rewarding over a period of time.

Gold

Like real estate, gold has given pretty impressive returns over last decade-plus. The yellow metal provides diversification in bad times. While there is no scientific way to value gold, it should form part of everyone’s portfolio for the protection it provides against inflation and massive printing of money. My recommendation will be to invest in gold via gold exchange-traded funds (ETFs) rather than physical gold to save on wealth tax (which one has to pay on physical gold), income-tax (ETFs have concessional rate of tax), transaction cost, safe keeping and ease of averaging.

Fixed Income

Notwithstanding the fact that real interest rate in India has been generally against the saver, allocation to fixed income is warranted for the safety and regularity of income. India has one of the highest nominal interest rates in the emerging markets. The debate has now shifted from if the interest rates will be cut to when will rates be cut to support growth. My recommendation will be to add duration on your debt portfolio and lock into the longest tenor bank deposits if you are not a taxpayer and tax-free bonds if you are a taxpayer. The next few months will see a couple of initial public offers of tax-free bonds.

I will also recommend one to invest in a property in an upcoming area and put it on rent around current debt yields to get the best of fixed income as well as real estate. I will recommend tax-paying investors looking for regular income to consider investing in hybrid funds such as monthly income plans through systematic withdrawal plans for optimizing post-tax return.

Equities

The Sensex delivered marginal returns in last Samvat year or even in the last four years. One cannot invest in equities in the hope that the law of average will catch up with equities and next Samvat year will compensate for the past. Next year looks volatile as the US fiscal cliff, pre-election budget, slowing growth, supply of paper through divestment and MPS and global financial crisis put a cap on the upside. The downside seems to be protected by valuation, the reform process initiated by the government and global liquidity.

My recommendation will be to build a portfolio of bluechip stocks across sectors such as pharmaceuticals, resources, private sector banks and mid-caps. Invest through mutual funds if you can’t manage market volatility. While equities at current valuation can be invested for long-term wealth creation, regular monitoring and buying when markets are falling and selling when markets are rising on marginal portfolio will enhance the overall return and ensure a good night’s sleep even when markets are falling.

International Assets

I don’t have any expertise on international assets but will recommend investors to use trustworthy experts’ service to create diversification as well as better returns. Common sense suggests that US properties and select emerging market equity may provide bargain opportunity.

I received a wish this Diwali that goes something like this: “may goddess Laxmi bless you so much next year that even Rajnikant can’t count your wealth!” This transformation in wealth will take a miracle, something my mundane advice is not. What I have are some time-tested simple principles of early and regular investment and disciplined asset allocation. These will for sure create prosperity for you in the long run.

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Set Goals first then Plan your Investments

Nikhil Walavalka, Economic Times 12/4/2012

source: http://economictimes.indiatimes.com/quickiearticleshow/12631571.cms

All of us know we have to save and invest if we want to achieve our financial goals. We diligently penny-pinch to save money and invest in various financial instruments like bank fixed deposits, company deposits, bonds, mutual funds, stocks and so on.

However, according to financial pundits, most of these ‘invest-as-you-go’ portfolios don’t really deliver the goods. It is mainly because the portfolio is nothing but a host of stuff put together – mostly at the advice of some friends or colleagues or on the basis of the market performance – without a proper thought.

Worse, most people don’t even bother to track their investments regularly or restructure or rebalance the portfolios accordingly.

"Such portfolios typically include too many products which are difficult to track. There is also no thought behind most of these portfolios and these may not be helpful in achieving the financial goals of investors," says Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

Articulate your financial goals

However, this is not to suggest that if you have invested your kitty in such a portfolio you are doomed. You can always take stock of the situation and take remedial measures. Of course, it indeed comes at a cost, and most importantly the lost opportunity cost.

"Make a list of investments you have in your existing portfolio and articulate your financial goals in money terms along with time lines," says Uday Dhoot, deputy chief executive officer at International Money Matters.

The first step of taking stock of investments can be done by going through your investment records. For the purpose of quantifying the financial goals you can either use an excel sheet (if you are savvy enough to use it) or use financial calculators offered by various websites.

Once you have goals and the time to achieve them on paper, tally them with your investments to make sure that you have the right investments to meet your goals. For example, fixed deposits and relatively safe investments, such as short-term bond funds and fixed maturity plans, can be used to achieve short-term goals.

Diversified equity funds with good track record can be aligned with long-term goals. This process will ensure that you switch to goal-based investments from random investments.

Take stock of the situation

Okay, now that you know the details of your investments, it is time to check how they have performed. Don’t look at numbers in isolation, always compare products within the same category and relevant benchmarks to get a complete picture.

"You have to judge each product against the relevant benchmark to ascertain if it has delivered," says Vishal Dhawan. For example, if you have a large-cap oriented fund in your portfolio, you have to compare its performance with indices such as BSE Sensex or BSE-200.

Make sure that you are not making wrong comparisons. For example, you may be currently facing a situation where a fixed deposit with a nationalised bank is offering better returns than a diversified equity fund over one year.

Resist the temptation to hit the sell button on equity investments and transfer all money into fixed deposits. Remind yourself that these products are strictly not comparable, and they have different roles to play in your overall portfolio.

The whole point of the exercise is to get rid of the products that did not deliver against their relevant benchmarks, not all products. You don’t have to necessarily sell everything in your existing portfolio to build a new vibrant portfolio.

Get rid of dud stocks

While selling the underperforming investments, have a look at the charges associated with the exit. For example, most insurance policies have surrender charges – the longer you hold, the lower the charges.

One can also wait for some weeks in case of short-term bond funds, if he is keen to avoid the exit load. In case of equity products, however, you have to be careful.

On many occasions, investors want to hold on to equity investments for some months to make it long-term capital gains. But that may be rather risky.

"An underperforming equity fund can lose money as you wait for the long-term tax-free profits," says Ranjit Dani, a certified financial planner with Nagpur-based Think Consultants.

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ELSS better investment option than PPF, NSC: Crisil

Business Standard 27/3/12

source: http://www.business-standard.com/india/news/elss-better-investment-option-than-ppf-nsc-crisil/161624/on

“Our analysis shows that ELSS gave 26% and 22% annualised returns over three and 10 years, respectively, vis-a-vis 8-9% offered by traditional tax saving investment products such as PPF and NSC” : CRISIL

Investments in an Equity-Linked Savings Scheme (ELSS) of a mutual fund have yielded higher returns compared to other instruments like PPF and NSC in the last few years, a report by Crisil has said today.

"Our analysis shows that ELSS gave 26% and 22% annualised returns over three and 10 years, respectively, vis-a-vis 8-9% offered by traditional tax saving investment products such as public provident fund [PPF] and national savings certificates [NSC]," Crisil said.

Crisil added that interest on employees provident fund (EPF) for 2011-12 was slashed to 8.25% from 9.5% in the previous year and thus ELSS can act as a strong alternative to investors.

Though the traditional debt products are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns in the long run.

The PPF accounts fetched 8.12% over the last 10 years and in the similar period, the NSC gave an interest of 9.10%. The average inflation over the past 10 years stood at 6.05%.

"ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed the Nifty 500 across three and 10 years. With average inflation around 7% over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14%, which is significantly higher than returns offered by other tax saving products," Crisil’s senior director Mukesh Agarwal said.

The rating agency, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.

"Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns.

Further, investors must choose funds that have performed well both in good and bad times," Crisil head for Funds and Fixed Income Research Jiju Vidyadharan said.

It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.

VRIDHI’s view: We generally start planning for Tax Saving in Dec – Mar every year. One of the product with shortest lock-in is ELSS. Markets are on the lower end rite now. This is an opportunity for investors to plan Tax saving this April itself for the financial year 2012-2013 and use the low valuations for better returns. Approach VRIDHI today and we will be able to help you plan. 

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PF withdrawal before 5 yrs on the job is taxable

Sanjiv Chaudhary, Financial Chronical 6/2/2012

source: http://www.mydigitalfc.com/personal-finance/pf-withdrawal-five-years-job-taxable-023

In India, employees’ provident fund (EPF) is a benefit scheme for salaried individuals for their old age after retirement. Under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (PF Act), employers are required to contribute 12 per cent of their salary towards provident fund (PF) as specified, with a matching contribution by the employees.

In case of employees not being ‘international workers (IW)’ (typically foreign employees coming to or Indian employees going out of India on work, subject to conditions), the employer is mandatorily required to contribute towards PF, if the total number of employees earning salary up to Rs 6,500 per month is 20 or more in the establishment. However, employees earning monthly salary more than Rs 6,500, can voluntarily choose to contribute towards PF. The tax treatment of such amount at the time of contribution into a recognised PF and early withdrawal has been discussed below. The tax implications for IWs has not been discussed.

Salary for the purpose of PF: Salary for the purpose of PF would include basic wages, dearness allowance (including cash value of any food concession) and retaining allowance.

Basic wages means all emoluments which are earned by an employee while on duty /leave / holidays, according to the terms of employment and which are paid or payable in cash. This does not include house-rent allowance, bonus, commission, overtime allowance or any other similar allowance.

PF contribution by the employer: If the employer’s contribution to PF is up to 12 per cent of the salary, then the same is exempt from tax as per the income tax laws. A portion of the employer’s contribution is necessarily to be contributed by the employer into the pension scheme which is restricted to 8.33 per cent of Rs 6,500 per month (that is, Rs 541).

PF contribution by the employee: An employee can claim a deduction from salary up to a maximum of Rs 1,00,000 per annum under Section 80C of the Income-tax Act, 1961, on his contribution towards PF from his taxable income.

It should be noted that the contribution of the employee shall be equal to the contribution payable by the employer. However, the employee may at his option contribute an amount exceeding 12 per cent, subject to the condition that the employer shall not be under an obligation to contribute over and above his contribution payable under the PF act.

Interest on PF contribution: The employee earns interest on the PF amount that is contributed, both by him and his employer. Such interest is exempt from tax.

Transfer of PF: In case of change in employment, the employee is required to transfer his PF balance under the new employer’s account. Such a transfer does not entail any tax implications on the employee.

Withdrawal of PF: A member of the PF scheme shall be entitled to withdraw the PF amount standing to his credit on retirement from service after attainment of 58 years; retirement on account of permanent and total incapacity for work due to bodily or mental infirmity; termination of service in the case of mass or individual retrenchment; after two months of resignation in case of no employment. Under any of the above circumstances, the employee is not taxed on the PF withdrawal.

Taxability in case of premature withdrawal: In case the employee has rendered less than five years of continuous service, the employer’s contribution and interest, thereon, would be fully taxable as ‘salary income’ in the hands of the individual. Further, the employee’s contribution would be taxable to the extent of deduction claimed under Section 80C, if any, under the Income-tax Act,1961 and the interest earned on employee’s total contributions would be taxable as ‘income from other sources’ in the hands of the employee.

In short, PF can be considered as a tax planning measure in addition to being an avenue to provide safety and stability to the employee as well as his family.

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