We all want to make that extra money on the side, and if you really put your mind to it, you can make your ends meet. Do you think, the beggars on the road have no choice to make a living for themselves? They do have a choice. We gave them money, when they come to beg, is only encouraging them more, to continue begging. Even the roadside vendors, may not have their shops registered or may not even pay income tax. Two main reasons could be literacy and corruption. Literacy because, they wouldn’t know the importance of declaring their income and getting themselves registered and corruption because, if they get caught, they pay bribes to be let off the hooks. One way you can’t really blame them, because that is their only source of income and that is how they make their ends meet, they don’t have much of a choice. So basically everyone has needs, but what we are willing to do, to fulfill those needs, is what separates us from the beggars. Salary is not enough to make ends meet, as our demands keep on increasing. So what other choices do they have?
Well, there are many more ways to earn that extra income, it can be done through investments. You invest a certain sum of money in any investment instrument and give it time to grow through the interest earned, in other words, your invested capital is being appreciated, this capital appreciation is also known as capital gains. We all know, where there is income, there is tax, some investments have more advantages over the other investments. Also, the duration is one more important factor that decides,’ how much tax you pay’ and also if you have incurred a long term or short term capital gain. The longer the investment kept, the better it is for you, since you save more tax. Let us now look at how a short and long term investment is categorized:
- Short term investment in case of Equity, debt, and real estate: For equity, if the investment asset is held for less than 12 months and attracts gain, then it is considered as short term capital gain and will be taxed at a flat rate of 15% + educational cess at 4%. For debt, real estate, and physical gold, gold ETF, the short-term capital gain will arise, only if the asset is held for less than 36 months and will be taxed according to their slab rates + educational cess at 4%.
- Long term capital gain in case of Equity, debt, and real estate: For equity, if the investment is held for more than 12 months, the amount withdrawn will be tax-free in the hands of the investor up to a realized gain of 1lac and 10% tax will be levied on any gains above this threshold of 1 lac. For debt, real estate, and gold, the long term capital gain will arise, only if the asset is held for more than 36 months and will be taxed at 20% with indexation benefit + educational cess at 4%.
One more term that we need to understand before we move ahead is ‘Indexation Benefit’. What is the indexation benefit? Say Mr. Paul bought a house 5 years back for Rs. 60 lakhs, he wants to sell his house now for Rs. 1 Crore, what will be the capital gain he earns? Now, I’m sure many of you will say Rs. 40 lakhs. But that’s wrong because, in those 5 years, the value of the house has also appreciated saying Rs. 80 lakhs, so Mr. Paul has made a capital gain of only Rs. 20 Lakhs. So indexation is a technique to adjust the income payments, through a price index and the benefit is given, just to maintain the purchasing power of the people, after taking inflation into consideration.
As you can see for yourself, investing for a longer term is better than investing for a shorter term. Now let us look at the 5 categories, where you can incur long term capital gain and as we have already seen you can save maximum tax when your capital assets are long term in nature:
This is a very risky type of investment, as it has direct exposure in the market. Under equity, there are again numerous instruments in which you can invest, namely shares, mutual funds, etc. Since the risk is very high, the tax implication on equity investments is also very lenient. In fact, a person can save more tax, if they invest in equity and it could be tax-free if these investments are held for more than 12 months and the gain amount is less than 1 lac. However, there is only one equity mutual fund, which is known as Equity Linked Saving Scheme, which is available for deduction under section 80C. This fund’s lock-in period is for 3 years, as it is the only fund available for deduction.
For example, If a person has invested in 100 shares for Rs. 50000/-, he now wants to sell off those shares for Rs. 80000/-, within 6 months from the date of purchase, he has attracted short term capital gain, so now he has to pay 15% + 4% on that profit of Rs. 30000/-. Let us say he has kept it for 12 months and wants to sell it now at Rs. 100000/-, the whole amount of Rs. 50000/- will be tax-free in the investor’s hands.
This is a safer option as compared to equity funds in terms of risk, so the tax levied on debt instruments is also more as compared to equity investments. But the same logic of the holding period of the investments is applied here as well, the longer the investment held, more of your tax gets saved. Unlike equity investments, after 36 months of holding the investment, the amount withdrawn will not be tax-free, but the person will get the indexation benefit. So once the indexation benefit is deducted from the sale consideration, 20% + 4% will be levied on the remaining amount.
This is another asset, held by an individual, which can attract capital gains. If a person sells his house, the profit that he makes on the sale of his property will be taxed on, for how long he has held that property. Again if it is a short-term capital gain, it will be taxed as per the individual’s slab rate. On the other hand, if it is a long term capital gain, then tax will be charged at 20% with indexation benefit + 4% educational cess. Now, an exemption on the long term capital gains is available under section 54. But to claim this deduction, the following has to be fulfilled:
- To claim this exemption, a residential property must be bought, it could be either old or new or to be constructed.
- To claim this deduction, only two house property can be bought and it should be in the name of the seller too.
- This property has to be situated in India, this deduction available cannot be claimed for properties bought or constructed out of India.
- The seller should purchase a residential house either 1 year before the date of sale or 2 years after the date of sale. In case the seller is planning to construct a house, he will have to construct the residential house within 3 years from the date of sale.
Please keep in mind that, in the long term capital gains are not invested in a new house property, before the date of tax filing or 1 year from the date of sale, then the same amount can be deposited in a Capital Gains Account, as per the Capital Gains Account Scheme, 1988. Also note that, if the property bought is sold before the completion of 3 years, then the exemption will be reversed and now the gains acquired from the sale will be taxed as short-term capital gains. So like equity, in real estate also, there is a chance for your long-term capital gains to be tax-exempt.
This is a completely different category and the long-term gains taxed, is also different from the rest. So if these bonds or debentures are sold before the completion of 12 months, then it falls under short term capital gains and will be charged as per the individual’s slab rate. However, if it’s sold after the completion of 12 months, then it is taxed at a flat rate of 10%. So again here, you have long term gains having the upper hand.
There are different ways in which people can invest through gold. Buying gold is a common way of investing in it. It is, however, more of an asset than an investment. For gold, only after the completion of 36 months, will it be considered long term and will be taxed at 20% + 4% with indexation benefit. If it doesn’t complete 36 months, then it will be charged according to the individual’s slab rate. It is better not to hold gold physically, it is a safer option to buy paper gold. The Government has proposed that Sovereign Gold Bonds, issued by the Reserve Bank of India, will be exempt from capital gains tax which makes it one of the best ways to invest in Gold. Another exemption that has already come into force, since April 2016 is, under Gold Monetisation Scheme, the deposit certificates issued, will also be exempt from capital gains tax.
Related Article : Sovereign Gold Bonds – Should you invest?
Note: In the case of SIPs, in mutual funds, each of your SIP has to complete, the relevant months to fall into the long term capital gain category. For example, SIPs in equity mutual funds, have to complete 12 months individually to be tax-free. So if I invest Rs. 1000/- every month, starting from January 2020, then the SIP of January 2020 ONLY will complete 12 months in Jan 2021 and that amount plus the interest earned on it will be tax-free (i.e. Rs. 1000 + interest amount ). So February’s 2020 SIP will be tax-free only in February 2021 and so on. In the case of the Equity Linked Savings Scheme, each SIP will have to complete 3 years.
So it’s very clear now, that the longer you stay invested, the better it is for you. It is very easy to dream, but the hard part is putting that dream into action, you have the above options to guide you also, what are you waiting for? We all crib about how we have to pay tax for all the incomes we earn; well now we have a choice to reduce that tax payment.
Now that this year is approaching the end, it is time to take a count of what was to be done, what is done, and what needs to be done if we wish to stay ahead. This applies to your investment portfolio same way as in case of your life goals. So, stay tuned as we present to you most important pointers to raise equity investment in coming year 2021.
Past is the teacher as far as financial markets go. If you wish to understand the impact of the investment decisions (consider stocks, mutual funds etc.), then it is imperative that you look at your investment portfolio. This is an important step before diving into next year’s investment decisions, as it will give an adjustment chance if you need one.
For e.g. if you have been following your portfolio goals considering your kid’s higher education as mid- long term goal for all these years, and the next year is going to be the first year of college for your little one, then what? You will need to rearrange your portfolio to make way for liquid funds for admission and tuition fees, if your child opts for an expensive course.
You are not sheep
Yes, following the herd blindly and imitating every other move of any “favoured” group is something sheep do! So, avoid basing your investment decisions and ideology on any of your friend, relative or colleagues. Even if they are making profits based on any tip given by any broker or trader or any other so called insider source.
It may happen that bull market trend may turn into bear rally, once these sources achieve profit. This may cause a big setback if you have purchased the stock which is not so fundamentally strong in bull market and wait to see if it rises even higher. Ultimately, you might face the loss which may be huge enough to hamper the investment portfolio.
Warren Buffet has introduced the concept of value investing or value stocks, which refers to investing pattern where the investor seeks to invest in undervalued but which possess the high growth potential in coming years. Such stocks must be researched and can be traced after deep technical and fundamental analysis. In brief, invest in a company and not in the stocks, which will make you seek for sound financial fundamentals and not fall for any hype for high-low or stop loss.
It also comes along in another way. You should always understand the business of the company in which you are going to invest. Think of the stocks as businesses and not as merely stocks. By this way, you will be inclined towards investing in fundamentally sound and potentially progressive but undervalued stocks in the market. Even you can hire financial planner for managing your financial portfolio.
Timing the market is a myth
If any investor boasts of timing the market, be it with technical analysis or just with gut instinct, it is just not true. This is because stock market is volatile and contains short term fluctuations. Ideally, stock market starts bull trend once investors start buying irrespective of any reason. It might be based on a tip or just looking at bullish trends. However, seldom people will know that such bullish trends may turn into bearish market anytime and again start selling the stocks at loss with a fear of incurring losses.
It is better to hold the stocks for a while since stock market corrects itself many a times, meaning that market reverses its trends and the stock prices may become lucrative if you hold them for a while. Speculation and day trading are hence, to be avoided if you are doing it based on certain tip or insider quotes. You may lose your money while squaring it off at the end of the day by selling it at loss, just because you may not have sufficient funds for clearing off the liability.
We have always heard of the saying, “Do not keep all eggs in one basket”. This applies to your investment portfolio. Those investors who had invested their hard-earned money in one sector only, had to bear exorbitant losses. Only if they could diversify and invest in other sector and industries also.
Study and understand the various sectors which possess potential to grow and are trading at discount right now. Apportioning the portfolio investments to such weighted investing will increase the returns and reduce the risk magnitude.
Expecting more and more
Even if you have invested in value stocks and have held it for long enough, earning more than 12-15% would be just superficial and may happen rarely. It is just not right to have unrealistic expectations from equity markets, since these markets have their reversal trends. There may be some Mid or small cap stocks which have rallied almost 150% in one year, however, it will be imperative to invest in such stocks only after thorough understanding and analysis to avoid huge losses as they are already trading at premium now.
Take out your Piggy bank
Since the stock market can’t be timed and can’t be beaten with any strategy or idea, it is best to invest only surplus funds. Market has mind of its own and hence you really can’t predict the market ups and downs, so it is best to invest the money which is left after all appropriations for necessities and other secure investments. Needless to say, that this investment may also rise up in favorable conditions.
Discipline pays you
Emotion clad investing is another example of panic investing which may further fuel the bull market and may signal bear market coming through. It is always seen that the investors just see the momentum of the stocks and dive into them if they are rising, where they fail to understand that stock prices may reverse and all calculations may go wrong.
Disciplined and systematic investing always discourages such panic investing and thus you stay away from bouts of enthusiasm, and encourages investing in right shares and for longer time.
Related Article : Things To Know Before Starting An SIP – The Seven Step Guide
Where interest rates are heading?
Even if you don’t understand the whole dynamics of interest and stock market, be sure to check the interrelationship of the two. Any change in interest rates may bring down the stock markets, especially banking stocks.. Keep a look on RBI rate cuts, which may result in bout of panic in markets. However, you should be calm and not dive into such rush investing as you follow systematic investing approach.
Long term investing always helps
Last but not the least, long term time-frame generally results in value appreciation and reduces the risks of loss due to panic trading. Even where, the stocks are under performing or are undervalued, you should hold them long enough to receive desirable price for them. However, there is a condition that these stocks are fundamentally sound and you do not trade on any tip.
So these were the Top 10 tips to raise investment in equity markets. It is always recommended that you get in touch with a financial advisor to consult before making investing decisions. Investing in the stock market ensures long term wealth creation.
Start investing today !
The drastic changes that we have seen in the world economy due to the global spread of COVID-19 need no introduction. You would have already witnessed the volatility of the market. As we all have seen in news reports, around 25% of the workforce have lost their jobs and many others have witnessed pay cuts. Country Lockdown has caused some small businesses to shut down permanently and others have witnessed a fall in business. All this has led you to have an indepth look at your own investment portfolio.
As coronavirus continues to spread and there is no vaccine that is being invented yet to cure this disease, it is crucial that we take steps to keep our personal finances in place. You might be having a question as to how we need to do it? In this blog, we will discuss all those important steps that you need to take, to make sure you are securing yourself for the coming months and also for the years to come.
Let us discuss these steps in detail.
1. Manage your cash flow – First and most important step is to revisit your cash flow. When I say cash flow, I mean income and expenses. You need to review your current income and also estimate your future income for at least 2 years. Put some thought on how the lockdown has impacted your current income and till when this effect will last.
It is suggested that you try to explore more sources of income. For example, if you are good in maths, you can start teaching maths to students. Explore your talents and start monetising it. It is always good to have more sources of income rather than depending on just one. Apart from income, put some serious efforts in reducing your expenses, if possible to the extent of a pay cut, if any.
2. Create an Emergency Fund – Next step would be to create an emergency fund. It is important to be prepared for any uncertainty which may come. If you had an emergency fund and you used it already during current lockdown owing to pay cut or job loss then refill it at the earliest.
The amount in the Emergency fund should be equal to 6 to 12 months looking at current uncertain times. This fund can be created by utilising the money from non performing funds. Also, you can utilise your vacation fund for this purpose.
3. Protect yourself and family from this novel Coronavirus – Another important aspect of financial planning is having adequate health insurance policy. If you already have one, check if that amount is adequate if anyone or all the family members become COVID-19 positive. While selecting a health insurance plan, it is important to check inclusions and exclusions in the policy.
4. Protect your family’s expenses from future uncertainties – Not only health Insurance but also you should have an ideal life insurance cover. This is because your family’s goal like children’s education should not be affected in your absence. There are multiple types of life insurance policies, you should choose the one that suits your needs the best. If you have a limited budget, then term insurance would be the best bet.
5. Debt Management – If you have too many loans and most of your income is going towards your EMIs, then now is the time to streamline your debt. Do not take any more loans until and unless it is the only option left. Start creating a plan to pay off your high interest loans.
6. Short term Goals – After doing all of the above, you should be focussing on short term goals first which are critical. For e.g, if your child’s education is 2-3 years down the line then you should be focussing on how to create that fund or refill that fund before jumping in for long term goals. It is highly recommended that you review all of your short term investments.
7. Delay Discretionary goals– It is suggested that you keep all your discretionary goals at hold for some time till this COVID-19 situation eases out. Postpone your goals like buying a second home, vacations, buying a Car etc. Instead, if you have already invested some amount towards these goals, you can utilise this corpus either towards emergency corpus or short term goals.
8. Long term Goals – Long term goals will be the last to review. You should also know that the investment you made for these goals are long term in nature so no need to worry about short term volatility. You can get help from a financial advisor to get your portfolio reviewed.
9. Organise your finances – Last but not the least, you should organise your paperwork. You may update nominee details in banks, insurance plans, Mutual fund investments etc. If you have not linked your aadhaar with PAN, you may do it now. It is further suggested to switch to digital platforms wherever possible so that your time is saved.
Read More :- Importance of Insurance amid COVID-19
So these were some of the pointers that you should keep in mind while doing your Financial Planning amid this pandemic. If you are one of those who make active decisions to review their investments, there’s something you definitely need to double-check based on the above points. You can always consult a financial planner to make this process easier for you.
Tax planning refers to the sum of all activities which help in bringing down the overall tax liability and adding up to your savings. The ultimate goal of a tax planning drive is to create an estimate of your total holdings and make wise financial choices by accounting for all exclusions, exemptions, allowances, deductions etc.
A little bit of tax planning today can be of considerable help in adding to your savings bundle in days to come. Today, we are going to discuss the basic principles of tax savings which can be of exceptional help for all beginners whether they belong to the salaried or non-salaried category.
1. Age factor
Age has a big role to play in deciding on the choice of financial instruments as younger people are mapped against riskier options. As a prudent tax planning principle, you need to opt for market-linked tax saving funds such as ELSS, NPS and ULIP.
On the other hand, if you are middle aged and risk appetite is low then you should opt for low risk investments such as Endowment policies, 5 year Fixed Deposit etc.
The willingness to take risk remains high amongst young investors and they can also be seen opting for home loans during this phase as the repayment tenure is pretty long. It is also imperative to note here that starting with investments early and continuing the same for a longer tenure can help in mitigating short term fluctuations.
2. Goal based Factor
The tax planning exercise is also considerably influenced by the financial goals of an individual. If you are planning on retiring within the next 5 years, then your tax saving investment portfolio needs to be less inclined towards the market-linked tax saving options. The main reason behind this is that you are pretty close to your goal and all sources of regular income is bound to cease soon.
On the other hand, if you have a significant number of years left for your retirement, then the maximum amount of funds should be allocated towards equity linked investments and less towards debt options.
3. Risk Appetite
Willingness of risk taking usually bears a direct relationship with our income level. Individuals having sufficient annual gross total income can segregate a lion’s share of their funds towards investment in equity oriented schemes. These funds have higher growth potential which in turn can add up to your corpus. Tax saving investments providing assured returns are advised to risk averse investors. They can easily go ahead with 5-year bank deposits, PPF, NSC, Senior Citizens Savings Scheme and 5-year post office deposit.
A maximum of INR 150,000 can be claimed as deduction u/s 80C by investing the same in a variety of instruments ranging from fixed deposits to public provident funds. Donations made on philanthropic grounds to charity like the National Relief Fund can also be claimed as deduction u/s 80G of IT Act. Various organisations have been pre-specified by the Finance Ministry to which donations can be made by a taxpayer for enjoying tax deductions. However, it is imperative to note here that only cash and cheque donations are eligible for deduction under this section of Income Tax Act.
Your tax planning needs to be in sync with your overall financial planning. You should thus ask yourself whether a particular tax planning tool can assist you with the fulfilment of financial goals. You also need to enquire if it coincides with your desired asset allotment after considering your investment perspective and risk appetite. Instances are not rare when the accompanying lock-in period of a particular financial instrument ends up causing an acute liquidity crisis for the investor.
A proper analysis needs to be carried out between the risk and rewards associated with investing in a particular instrument. Equity Linked Savings Scheme is usually suggested to young investors who can bear the instability of the equity market. They also have a small lock-in period of just three years for catering to your liquidity needs which might arise suddenly.
Before jumping directly to understand what Arbitrage Funds are, let us first understand the basic meaning of “Arbitrage”.
In simple words, arbitrage means buying in one market and selling in another market. For example, I buy a T-shirt in one market for say Rs. 700 and I sell that T-Shirt in another market where the demand is more at a price of Rs. 850. I have instantly made a profit of Rs.150.
So what have I done? In order to make profit, I buy in the market where the price is low and sell in the market where the price is high. This situation of having different prices in different markets gives me an opportunity to make profit. This is called Arbitrage.
Now let’s see how it works in the finance world. In this context, the markets are nothing but the stock exchanges. We have two prominent markets i.e. Bombay Stock Exchange and National Stock Exchange. Ofcourse, there are other stock exchanges as well but for simplicity sake, we are considering these two. If you notice there is always a slight difference in the prices of stocks listed on these stock exchanges. For instance, Stock A has a price of Rs.50 in BSE and Rs. 50.40 in NSE. As an investor, I can buy this stock in BSE at Rs. 50 and sell it in NSE at Rs. 50.40 and book a profit of Rs. 0.40.
You may say it’s just a small amount. Why will we invest?
This is just one stock and usually these transactions happen in huge volumes. So the profit amount is sizable.
I hope you have now understood what is an Arbitrage? Now, let us proceed to understand Arbitrage Funds.
Arbitrage funds is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the fluctuations of the asset. The arbitrage fund consists more of equity. There is no lock in period as such, but if the amount is withdrawn before 1 month, there is an exit load. It varies from scheme to scheme.
Many of you must be wondering, how can a fund that is invested in equity have less risk. This is because of the magic of the market differentiation. When one invests in an arbitrage fund, the fund collected is invested in certain avenues across equity. The fund holds more of an equity portfolio, than debt. So if the funds invested in the equity portion are not performing well, they sell off the share and shift it to an equity avenue, that’s in favor of the market. Hedging is used in an arbitrage fund. This way it minimizes or makes up for the loss.
Let’s look at an example, to understand hedging in a better way. Mr. Lavish invested Rs. 800/- in gold in India, now the prices of gold is reducing, which is causing a loss for Mr. Lavish. However on the other hand, in the US, the price of gold has increased to Rs. 1000 (after conversion into rupees). So Lavish sells the gold in the US, making a profit of Rs. 200.
There are 2 types of arbitrage funds:
- Growth:This is used for capital appreciation
- Dividend: There is another option, if a person wants regular income.
An arbitrage fund can also be considered as a liquid fund. It has easy liquidity compared to other funds. If a person needs the funds immediately, then this would be a good option to invest in. Returns generated are also in line with liquid funds. For example, the arbitrage fund category is offering around 5.79% in the last one year, whereas the liquid fund category is offering around 5.68% during the same period.
We have all heard of debt funds and equity funds and the different options available under those funds. Arbitrage funds are less spoken of. When it comes to mutual funds, everyone goes to check for debt funds, equity funds and balanced funds, no one has really heard of arbitrage funds or looks for different options under these funds. This could be due to reasons like, people who don’t want to take risk, think that since equity is involved, risk is automatically associated with. Some may not understand how the fund works or it is too complicated to understand.
We shall now compare and see how an arbitrage fund has an advantage over other funds:
- Arbitrage funds were always compared with liquid funds, since their returns are similar. Arbitrage Fund has an advantage over Liquid Fund because of its taxability. Arbitrage funds are taxed as per Equity Funds where after a year, the income on such arbitrage funds are exempt upto 1 lac. This change has made liquid funds look less attractive since it is taxed as per debt fund.
- Equity funds have risk, that’s the reason why people don’t want to invest in equity. In this case, arbitrage funds are used for hedging, this way there’s hardly any risk involved. This fund works best when the market is volatile, as there are many options available.
So to conclude, Arbitrage Fund is a good fund to invest in, not the whole amount but at least 10% to 15% of your portfolio should consist of these funds. They do not qualify as long term investments but you can park your money for the short term. So if you do not want to take a risk and have your money, anytime you want, arbitrage funds are the funds for you and the bonus is tax-efficient. If you too want to park your money in an Arbitrage Fund, you can download the Fintoo app and do it easily online.