RBI surplus to Centre likely to impact economy markets and banks
RBI’s decision to transfer ₹991 bn to the government, while higher than expected, is still within the realms of keeping the contingency risk buffer at 5.5% of the RBI’s Balance Sheet. RBI has ensured that the additional liquidity that it’s bringing into the system through the government’s balance sheet is coming at a time when inflation is low. This is a huge positive for the Economy, as it gives levers for the government to front-end spending especially towards infrastructure growth, post addressing the spending on Covid. The additional amount would help the government offset the impact of lower tax collection due to on-going restrictions, and support the divestment program which slowed down due to Covid.
How big has the fall in Investments been in FY21
The poor figure of investments can be primarily attached to the lockdown imposed early in the pandemic to curb the spread of cases. New project announcements in India for the financial year 2020-21 to the lowest in at least 17 years. India saw new projects worth ₹5.18 Lakh Crore, the lowest since FY05. CARE said that for a revival of investments to take pace, there would need to be a surge in demand as factories are still not running at full capacity. This year, too, a recovery in investments is unlikely as many states have imposed lockdowns as deadly second wave ravage the country.
Japan Exports Surge as Global Trades show signs of rebounds
Japanese exports jumped again, climbing in April by more than a third from last year’s levels. Surging car and auto parts shipments helped power a 38% rise in Japan’s exports from a year earlier. Although the data give an inflated view of the strength of exports because they are based on a comparison with 2020’s low figures, the report still shows trade bouncing back. Shipments climbed almost 8% compared with 2019.
- Last month’s trade increase showed a broad-based recovery in the world economy. Shipments to the U.S. and Asia rose the most since 2010, while those to the EU climbed the most since 1980.
- Demand itself is very strong led by the U.S. and Chinese exports.
- A drop in the yen’s value gives Japan’s exporters another tailwind. The currency has fallen roughly 6% versus the dollar so far this year, increasing the value of repatriated profits for companies from Toyota to Hitachi.
Banks Likely to transfer about 80 Large NPA accounts to NARCL
National Asset Reconstruction Company (NARCL) is the name coined for the bad bank announced in the Budget 2021-22. Banks are likely to transfer about 80 large NPA accounts for the resolution which is expected to be operational by next month. The size of each of these NPAs accounts is over ₹500 crore and the banks have identified about 70-80 such accounts to be transferred to the proposed bank. It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realization. NARCL will pay up to 15% of the agreed value for the loans in cash and the remaining 85% would be government-guaranteed security receipts.
What is Risk Profiling? How to find your Own Risk Profile
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This step-by-step guide empowers you to take action by building a complete financial portfolio. This means that not only do you own diversified investments across different asset classes, but you also have fully-funded retirement accounts, own your home, are debt-free, have a six-month emergency cash reserve, and you invest in yourself. Ensuring that each of these areas is optimized will set you up for financial success.
1. Review Your Spending in 2020
There are plenty of good alternatives to review and check the spending patterns. Whatever tool you use, it’s important to review your spending over an entire year. It may reveal patterns that you miss when looking at a monthly budget.
The first thing is to review where our money went.
- Did we spend our money in ways consistent with our goals?
- Did we overspend in some categories, or perhaps underspend in others?
- Do we want to make any adjustments in the new year?
The second thing is whether there were any periodic or unexpected expenses in the past year that we weren’t prepared for. Sometimes that can happen for reasons beyond your control. In 2020 that was the case for a lot of people.
The third thing to look at is all of the subscription services that we’ve signed up for. The number of these services seems to grow every year. These services range from streaming video to credit monitoring to news outlets. Once a year, list out all subscriptions and confirm that we still want each service. If not, then cancel it.
2. Update Your Net Worth Statement
The very first thing to do at the end of every year is to update our net worth statement. A net worth statement represents a snapshot of your finances, listing everything that you own (assets) and everything that you owe (liabilities). The difference is your net worth (assuming the difference is positive!).
A net worth statement reflects every single financial decision you’ve ever made in your entire life. And it’s the most important financial document to track. It’s important to compare where you are now not only with goals you’ve set for the future but also with where you’ve come from in the past. Seeing the progress, you’ve made over the years can help motivate you to reach your goals.
We can track our net worth statement cash and those assets that go up in value over time. So we include all of our investments, all of our bank accounts and our home. We don’t include things that overtime depreciate, such as a car. For liabilities, we keep track of all of our debt.
3. Rebalance Your Investment Portfolio
The start of a new year is a great time to rebalance your portfolio. Particularly after the wild ride, we had in 2020, it’s likely that many portfolios have drifted substantially from the planned asset allocation.
Rebalancing may not necessarily mean that we have to divert the funds to multiple investment alternatives blindly. Just to give an example, if you are already invested in plain vanilla investments like PPF etc., it is time to jump into some action. You may want to invest in mutual funds or stocks to take leverage of the risk factor and gain an edge over the earnings.
4. Check Your Investment Expenses
What is the expense ratio of every mutual fund you own? Or what is the weighted average cost of all of the funds in your portfolio? If you don’t know the answer to these questions, it’s worth taking a few minutes to find out.
However, you do it, use this time to make sure you aren’t paying more than you should for your investments. Sometimes, it may so happen that administration cost for maintenance and operation would take away a huge chunk of your earnings. The expense ratio is a great perimeter to observe this gap in the case of mutual funds.
5. Check Your Retirement Contributions
The start of a new year is also a perfect time to reevaluate your retirement contributions. If you aren’t taking full advantage of an employer match, consider increasing your contributions. Even if the increase is small, at least you’re making progress in the right direction.
6. Simplify Your Finances
Finally, now is a good time to simplify your finances. Countless retirement accounts, bank accounts and financial apps can make managing our finances more difficult. So, create a list of all the accounts, apps and tools you have. Then go down the list one by one to determine if you really need each one. Consolidate investment accounts where it makes sense. Remove any apps you didn’t use last year. And in the process, streamline how you manage your money. It just may remove some of the stress money can sometimes create.
Portfolio management is not a day’s work. It is a disciplined and planned approach to handle the funds that you have to optimal and appropriate use. Always keep in mind as to what they say, “If you don’t make your money while you sleep then you will need to work till you die.”
The easiest way to make the money work while you sleep is to automate the investments and exercise full control over the finances. The pointers above may guide you to pave the way towards a better financial future with an optimal portfolio in the year 2021. Be tuned to read more such interesting articles. Till then, Happy Investing!
Though mutual funds are highly subject to market risks, despite it is one of the most lucrative investment avenues seen in the current market scenario. It can be seen that AMFI is highly promoting mutual fund investment through television commercials. When we talk about investment in mutual funds, the first & foremost thought that pops into our minds is SIP (Systematic Investment Plan). Even though, SIP is one of the safest and economical means of investment in a mutual fund; it is a tool for small players in the market. But if one has surplus funds lying idle, lump-sum or investment at once can prove to be a high yielding decision.
Factors to be considered before making lump-sum mutual fund investment
Parameter for Fund Selection
One of the most benevolent parameter as a reference for one-shot allocation of idle resources is the P/E (price per earnings ratio). Since equity mutual funds are a collection of shares, evaluation of funds on the basis of P/E ratio can be very helpful. P/E ratio is computed by dividing the market price per share (MPS) of the stock by its earnings per share (EPS). Suppose, MPS of stock A is Rs. 200 and EPS is Rs. 10, the P/E ratio is (200/10) = 20 i.e. stock A is trading at 20 times earnings.
P/E ratio of a mutual fund is the weighted average P/E ratio of all the stocks contained in the fund. The weights of the stocks are determined by their market values; let’s say, a fund consists of stocks of MN Ltd. worth Rs. 6,00,000 and PQ Ltd. worth Rs. 4,00,000, the total value of the fund Rs. 10,00,000, a weight of stock MN Ltd. is 60% and stock PQ Ltd. is 40%. If P/E ratios of stock MN Ltd. is 15 and stock PQ Ltd. is 10, then, fund’s P/E ratio is (0.6*15 + 0.4*10) = 13.
From the investment point of view, a lower P/E ratio is preferable. This implies that the average price of the shares in the fund as compared to the earnings of such companies comprising the fund is low. Lump-sum investment is favorable when the markets are at a low so that one can gain when the market starts improving.
Time the Investment
It is crucial to wait for the best opportunity to invest lump-sum in mutual funds in order to earn maximum returns. The best time for lump-sum investment in equity mutual funds is when the NAV (net asset value) of the fund is at its year’s low and there are probable chances to gain when the market takes an upturn. Investing when the NAV’s are low, larger units of a fund can be procured; this shall provide a broader base to earn when the fund makes an up-move.
Timing the market means how better one understands the market performance, predict the upcoming situation of the market, and allocate the resource when the best moment arrives.
The purpose of the investment should be to achieve the financial objective. If the investment is for the short term, it is better to invest in a liquid fund that is exposed to low risk and return and provides a hassle-free redemption option. Investment in a balanced fund is recommended for medium-term investment and for one having a long-term investment horizon, equity mutual funds can prove to be fruitful. Likewise, if the purpose is to save tax, then one can invest in ELSS funds which have a lock-in period of 3 years.
Must Read: – Top 6 things to avoid while investing in ELSS
Also, Mutual Funds require frequent monitoring to review whether the schemes are performing and attaining the determined objectives. Diversification of investment is necessary to reduce the risk that can arise from investment in a single fund if such fund starts deteriorating. Hence, funds churning and diversification ensures that the overall portfolio performs well despite any poor performance by a particular fund.
Consider the Tax Effect
Normally people invest in mutual funds by considering the return or yield capacity of the scheme, paying the least attention to the tax impact on the redemption of such fund. This can result in the drainage of a substantial portion of the gain made towards income tax. In the case of short-term investment; profit from investment in debt funds are subject to tax at the applicable slab rate and profit from equity-oriented funds are taxable @ 15%.
Profit from long-term investment, if the investment period is more than 3 years, debt funds attract a tax rate of 20% with indexation. However, Long-term capital gains from investment in equity-oriented funds are exempted from tax up to a gain of 1 lac. A realized gain of Rs. 1 lac and above in a financial year will attract a tax of 10%.
Systematic Transfer Plan (STP)
STP is a mix of SIP and lump-sum investment or a hybrid SIP. STP allows the periodical transfer of amount or units from one scheme to another of the same fund house, thus, helps in allocating funds at regular intervals.
One can target investment in an equity fund while remaining invested in a debt fund, thus ensuring high returns from equity funds and protection from part investment in debt funds.
The lump-sum mutual fund investment requires a cautious assessment of the factors affecting the market in which the investment is sought to be made. Resorting to these factors, you may be able to make a better investment decision.
Mutual Funds are one of the best investment avenues when it comes to creating wealth in the long term. In order to grow your wealth, your portfolio needs to beat inflation and mutual fund is an investment avenue which ensures that you beat inflation in the long term.
It seems quite convenient for those who do not want to jump into the market directly. Since mutual funds are professionally managed and fetch reasonable returns adjusted to risk appetite (as per the investment strategy of the fund), they have become investor’s favorite, be it conservative or be it, aggressive investor.
If you have made up your mind to invest in mutual funds, it is important that you know the tax implications of the same. You cannot ignore taxes while investing in mutual funds.
“How much tax I need to pay on mutual funds?”
You must have this question in mind. But the answer is not direct. The amount of tax that you need to pay depends on various factors. These are:-
- Type of Income
- Type of Mutual Fund
- Holding period of investment
- Type of transaction
Let us take this one by one
Type of Income
When do we pay income tax?
As simple as it may sound, we pay tax only when we earn income, right?
So what kind of income is generated when we invest in mutual funds?
There are two types of incomes generated through Mutual funds –
- Dividend Income
- Gain on selling mutual funds
These are the two instances where we gain out of mutual funds. Tax treatment is different in both instances.
Let us first focus on dividend income
- Dividend Income
Regarding dividend income, there have been recent changes in Budget 2020 on how dividend income needs to be taxed. The finance minister has proposed the abolition of DDT and made the dividend income taxable in the hands of the investor.
Now the question comes, how much tax you need to pay on dividend income.
The answer is simple. Dividend income from mutual funds is taxed as per slab rates.
- Gain on selling Mutual Funds
Apart from dividends, you can earn through capital Gains from mutual funds. Let me clear one point here, capital gain here refers to the gain you get when you sell your mutual funds and not on notional gains.
Thus, we can say
Capital Gain = Redeemed Value – Cost of investment.
Now the main question, how much tax needs to be paid on capital gains?
It does not have a one-word answer. It depends on what kind of mutual fund it is. This brings us to the next factor i.e. “Type of Mutual Fund”
Type of Mutual Fund
The amount of tax to be paid on capital gains depends on which type of mutual funds you had invested in.
As per Mutual fund scheme rationalization and categorizations, SEBI has provided the following classification of mutual funds namely-
- Equity Mutual Funds
- Debt Mutual Funds
- Hybrid Mutual Funds
- Solution oriented Funds
Each of the above categories has subtypes as well. For example, there are 11 different types of equity funds and 16 different types of debt mutual funds.
But don’t worry! From a tax perspective, all these funds are divided only into 2 categories. This means there are only two types of mutual funds that you need to consider to find out how much tax you need to pay. These are:
1.Equity Oriented Mutual Funds
All the types of equity mutual funds come under this category. Not only this, any mutual fund which has an equity exposure of 65% or above will become under this category. This implies that balanced funds where equity holdings are 65% or more will come under this classification.
All the funds which do not fall in the above category come in the “Other Category”. This includes all debt funds, Gold funds, real estate funds, any balanced fund where equity exposure is less than 65%.
Now once we know these two categories, it is simple to know the tax implication on these mutual funds. This is because the tax rate on Equity oriented mutual funds is different from all other funds.
However, there is one more step. This next step is to find out what is the holding period of these investments.
What does holding period mean? That is our next factor – Holding period of investment.
Holding Period of Investment
Holding period means that for how many months you hold on to that particular mutual fund before you sell. Based on this we have two types of gain i.e.
- Short term Capital Gain
- Long term Capital Gain
Short-term capital gain is when an investor receives gain by selling an investment in a short duration and long-term capital gain is when an investor receives gain by selling an investment in a long duration.
Now the question comes, how do we define short term and long term.
Short term and long term holding period differ for equity-oriented mutual funds and other funds. That is the reason we covered that part first.
The below chart explains the short term and long term holding periods along with the applicable tax rate.
Type of Transaction
Now that we are clear with all tax rules, I would now like to specify a few common transactions to make it clearer. In mutual funds we have the following transactions:-
- Lumpsum purchase
Related Article : Understanding SIP, SWP and STP
No income tax you need to pay when you are making an investment whether Lumpsum or SIP. However, if you are making this investment in an ELSS fund (Equity Linked Saving Scheme) then, you are eligible for an 80c deduction up to Rs. 1,50,000.
Transactions like SWP (Systematic Withdrawal plan), STP (Systematic Transfer Plan), Switch, Redemption are considered as selling units i.e. redemption only. So the treatment will be the same as described above. That is, first you need to check which type of fund and then holding period.
Securities Transaction Tax (STT)
Apart from income tax, you also need to pay STT. STT is to be paid on transaction value and not on gain amount.
How much STT needs to be paid?
An STT of 0.001% is levied by the government (Ministry of Finance) when you decide to sell your units of an equity fund or an equity-oriented fund. There is no STT on the sale of debt fund units.
To summarise, an investor first needs to check whether the income is through a dividend or capital gains. If it is capital gain, check the type of fund – Equity or other. Next check the holding period and tax rate applicable. This was a 360-degree view on tax implications on mutual fund investments. I hope it has given you a better understanding.
Investing is not everyone’s cup of tea. Some can manage on their own and some do not know the basics of investing. To invest, one has to first set their mind to it, so they can start saving. It’s very difficult for some to start saving, because they may not be earning that much also. But now, you don’t need to be rich to invest. The minimum amount starts from Rs. 500/- only. So you can start small and increase the amount little by little.
People realize very late the importance of saving and investing. Children should be taught to save from small. So, as they grow they realize the importance of it. Some parents give their children everything they ask for, sometimes things that are not even required. This makes the children dependent on their parents for everything and they don’t see the need to save.
Investing works step wise, as you can see below:
1st step: Earning
2nd step: Saving
3rd step: Invest
4th step: maturity fund (can be reinvested)
For beginners to start investing, it is a task, especially those who have no idea about investments. To get into the habit of investing, one has to start saving. The things that we want, well the list is never ending. So, trying to fulfill all our wishes, we forget that savings is also necessary. Once a person starts saving, it becomes a habit and their investments increase too.
One big advantage of paying taxes is that, people have to invest to save their taxes. This is a very good opportunity, because it will indirectly put in the habit of saving. It is always better to start early, since you can take risks at an earlier age. It is not so in the case of older people, they can’t take a risk with their money, as they are coming closer to retirement and they need all the funds, they can get.
Related Article : 8 Common Investment Mistakes You Must Avoid
Boosters that help beginners to start investing:
- Savings: It is hard to save when there are so many things that you want to buy. There’s a way you can balance both out. Make a list of things and write them priority wise. Then you can divide it in the coming months, according to when you want it. At the same time, the money that your saving from buying the other things, can be invested. You do not need to invest in complicated investments. You can start with investments in debt or equity mutual funds.
Future Goals: Investing helps one in the future. All of us have goals in life, most of them require money. It doesn’t mean that just because you don’t have goals, you don’t need to save. As your earning increases, your purchasing capacity also increases, which in turn increases your goals as well. So it’s always better to start saving early, so that it becomes easier to fund your future goals.
- Tax Benefit: If your earning a good salary at a young age, then you are bound to come in the tax bracket. This gives a boost to the people to invest in different tax saving avenues, which automatically in builds a saving habit. So if you invest the maximum amount and use the tax saving tools to the maximum, you can bring the tax to nil.
- Emergency Fund: No one ever realizes the importance of keeping an emergency fund. You never know what can pop up. For example, If a person looses his job, he will have to survive on some funds till he gets back on his feet. Another example is falling sick or getting diagnosed with a dangerous disease. So emergency fund is very necessary as it acts like a backup to fund unfortunate situations.
- No Begging And Borrowing: we all have experienced the feeling of not having money and then begging and borrowing. No one likes to beg or borrow. It’s another feeling altogether when you are earning and spending for your own needs. Start saving now and it will help you pay for your own expenses, so why be in debt of someone else, when you can fend for yourself.
- Financially Independent: Having your own savings and investments, reduces the financial burden for your family and it leaves you financially independent. This way you do not have to worry about funding your goals. No one likes to keep asking their parents for money again and again. It gives one a proud feeling to be financially independent.
It’s not at all difficult to start saving, it all depends on our mindset. If we put our mind to it, we can save. Investing has many benefits which youngsters don’t know about. At that age, life is all about enjoyment, which is true and one should enjoy life, but it is also important to plan for the future. So invest and stay financially healthy!
Turning 30 years just presses the panic button, as you know that 20’s are over. You are still earning and are married and some of you are blessed with kids also. This just underlines the need for financial planning which will carve your future finances. Here is how you will deal with financial planning which will place you in the most convenient position.
Early Financial planning
- You may think that you are quite young to save and invest. But, in fact, this is a perfect age to start saving for secured financial future. Inflation is your worst enemy who will eat up major chunk of your salary.
- Education is a highest rising cost, planning for the education of kids would be your major concern. Education costs are rising double as compared to rest of the wholesale inflation rate.
- Marriages are set in heaven, but spending is done by the parents mostly. So, you have to plan for this expenditure also.
- The key point to remember is that money need in the future should be discounted by a minimum of 6-8% inflation rate. You have to consider that at least 6-8% proportion of your future income and returns on the investment is going to be taken away by then prevailing inflation rate.
- So, try to estimate how much will be needed in future for marriage or education or both. This can be easily estimated by considering the current costs and adding up at least 10% over and above such costs.
- Always invest in any instrument which will not lock your money, when you need it most. So, if you are investing in PPF or Gold ETF etc. for securing kid’s education or marriage, it may not be worth it. Instead, try investing in equity and debt in 40:60 ratios depending upon your risk profile. Also, you need to maintain a flexible budget, because the core investment demand may change due to unpredictable reasons.
- If you buy a term insurance plan in your 30’s, you may be able to get lower premiums for the reasonable sum assured. Also at such young age, there are very few medical checks. In case you are yet to opt for health insurance too, pre existing diseases may create a horror in later life. Early stage health insurance policy would ensure wider coverage.
- Anyway, you will be at major risk till you opt for term insurance policy. This is because, sudden emergencies would not be covered and financial liability will have to borne by the family. So, it’s better to go for an Insurance policy at least at 30 years of age. This will ensure wider span for protection and will also entail lower payouts in terms of premiums.
- Points to remember are that term insurance should cover you till minimum of 60 years of age.
PPF (Public Provident Fund)
- PPF is a long tenure investment which has E-E-E tax pattern. This means investment in PPF will allow a tax deduction under section 80C. Contribution to PPF during the lifetime till maturity is tax free. Also the amount received on maturity along with interest is also tax free and is declared exempt.
- However, the lock in period is 15 years, which means that you have to invest in PPF and forget about it for a long time till you actually enter 5th year. Partial withdrawal is allowed from year 5 subject to certain conditions.
- Even though PPF gives you an attractive interest rate, you have to be ready to depart with liquidity with respect to amount invested. Primarily PPF investment aims of retirement planning, hence you should determine how much amount you require post retirement. There are several PPF calculators available online, which will help you arrive at the amount to be invested. The Only point to remember is that you should be okay with lower liquidity during the PPF lifetime of 15 years.
- You may think that your spending is very less but at the last week, you may wonder, where does all money go? There is an answer to this question – Expense tracker. Expense tracker actually counts each and every paisa of your hard earned money. Just like your father did, remember? You will have to be answerable to this tool and it works wonders. Now you may understand that you are spending almost half of your salary on clothes alone. These expenses may be in very less amounts, but will add up to larger amounts.
- So what are you thinking? Download expense tracker or any money managing app, and be relaxed that every paisa will be counted there.
- Once a wise man said that nothing in life is certain except death and taxes. So keeping in mind both, you have to plan for both. Financial planning has to be carried out by consulting your financial advisor who will consider the tax aspect.
- However, you have to keep in mind that life is full of surprises and you can’t be sure that you will always get a happy surprise. Ideally, you should invest money for emergency in any Flexi Fixed Deposit account, which gives an FD rate of interest on balance and at the same time acts as your savings account. Money can be easily withdrawn from this account using your debit card, after which there will be no interest on this amount. Alternatively, you can also invest in Liquid Mutual funds which may provide you with better returns along with liquidity.
Must read: Financial Planning amid COVID-19
- This was just a summing up on important pointers. However you would feel the need to consult your financial advisor who will help you out in financial planning. Everyone has independent salary structures and different financial goals. So it is actually imperative on your part, to lay down every income and every expense (at least major) and your expectations from financial planning to your consultant. He would be able to advise exactly where to invest your money in. Financial Planning may include investment in Equity, Mutual Funds, Debt Funds, Insurance etc.
Turning 30 is not scary, however it is the age where you have to start your financial planning. This would be the perfect age to implement your financial planning phases. So do not delay any further and start to take control of your finances.
Over the years, we have been hearing about the stories of people turning out to be the billionaires overnight, but is it really so? Who doesn’t want to be? Even I want to be one. Well! But the fact is that tycoons like Warren Buffett, have actually built their own empires with investments on buying right and sitting tight.
Having said that; let me ask you, what are your financial goals and what are you doing to achieve them? You keep a hold of a secured job with good salary package, commercial independence, but still more is needed. Sure! You must be doing savings on the earnings. So, what do you do more to grow the assets? If you have ever thought over investments, you must have surely heard about investing in SIP, i.e., Systematic Investment Plan.
“What is SIP?” It’s is the simplest, organised and a convenient way to fulfil your dreams.
The core behind this is that you invest a fixed amount every month or quarterly over a period of time in the mutual funds. However, the NAV (Net Asset Value) of the fund might vary each month; whereas, on the other hand, you can also increase with the committed amount along with the rise in your source of income to avail more benefits of when you invest in SIP.
Is your mind wondering whirls of questions about investing in SIP? Hold your thoughts! Here are the facts that will give you clear idea about it. Let’s have a look at that:
- Easy investment
“But I don’t know about mutual funds, so what do I do now?” you had this question in your mind. Didn’t you? Relax! If you are amongst those who cannot give full time attention to the stock market or the early investors who just have a vague knowledge about the finance and budgeting, you can undoubtedly invest in SIP. It is reliable. SIP doesn’t ask necessarily for big-time investment, you can start with a fairly small amount too.
- Better returns
Turning back the pages of market, when we look into the past decade, the average inflation rate has been about 7% p.a. and a couple of years back; which has gradually paced down. If we consider the capital market return, a person who is willing to invest in SIP can have CAGR (Compounded Annual Growth Rate) of around 15% p.a. in the long term i.e 5 years or more. It clearly shows that comparative to the other options to put the money in, investing in SIP has beaten the other asset classes. This is a good value for money.
- Investment in small chunks
Investing in lump sum is not what everyone can afford to do so. Also, when you are not sure about the market, where you never know if the market is running at its peak or trough. Thereby, when you invest in SIP, it turns out to be a life saver for you. As you cannot do large investment, devoting in small chunks overtime leads to good monetary benefits in long run. Of-course, it feels a bit stress free when you know that you will not lose the valuable amount if the market goes down.
- Don’t worry about the market
Even if you invest the regular amount that you had committed for the investment when the market is low, you are not adversely affected by it. Instead, many of the sources suggest doing more here – yes, invest in SIP. With this investment, you can also benefit from rupee-cost averaging. No worries about the inflation in market as the average investment shall balance out with the funds.
- Long term savings
If you have the habit of savings, and you invest in SIP, it will ultimately lead to good long term returns. It is like when you take a decision to make yourself fit and fabulous, you start the daily work out because you trust that you will undoubtedly see the good results in some time. Similarly, you shall definitely experience the power of compounding when you regularly invest over a period of time.
- Tax Benefits
Just like there are tax saving government securities, FDs, there are also tax saver mutual funds to cut down your tax bill, one of which is ELSS SIP’, i.e., Equity Linked Saving Scheme. However, the according to section 80C, the maximum limit of investment is up to Rs. 1.5 lakhs.
- Achieve your financial goals
We are living in a generation where our needs are increasing day by day. And to fulfil those, savings in bank will just not do. On the contrary, if you invest in SIP starting with a small amount, you take the advantage of the investment along with the dividends and capital gains too. Isn’t it a win-win situation for your short-term and long-term goals!
- Minimize risks
It is because you regularly supply a deliberate amount over a period time, the gross investment is averaged. And hence, reduces the risk factor of being unfavorable by the fluctuations happening in the market. If you still aren’t sure about long-term financial goals, do talk to your financial advisor about a proper plan. When you invest in SIP, it acts as a stepping stone for to reach your goals.
The below quotation of Warren Buffet fits rightly, when you have made a decision to invest in SIP.
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Indeed, I am investing in SIP. What about 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.
Sovereign gold bonds are government securities with prices linked to the value of the underlying asset i.e. gold. They are issued by the Reserve Bank of India on behalf of the government. In the current financial year 2020-21, RBI had introduced six tranches of the government’s sovereign Gold bond. The first issue happened in the month of April. Now the time has come for second tranche. You can check the details of all the six tranches in below table: –
As you can see from the table that series II will open for subscription from 11th May to 15th May. So Should you invest in SGB bonds?
Before moving ahead with understanding the features and advantages of SGB bonds, let’s first understand how gold is an investment option during a current volatile market.
Gold as an Investment
1. It is a safe haven at the time of crises. Gold has outperformed all the riskier assets in 2019 and it continues to do so in 2020 as well. In 2019, gold was up by 20-21%. Since the start of 2020, Gold has been performing well compared to the equity market.
2. It is used to hedge your portfolio because it has a negative relation with equity markets. So when the equity market is down, one can benefit by having gold exposure.
3. Uncertainty combined with the current low interest rate scenario boost gold demand leading to an increase in gold prices. We have seen in the past that gold performance increases in periods of moderate to low interest rates. So a lower interest rate scenario is always supportive to Gold.
4. We understand that when the economy is in stress, Gold moves up because of investment demand. This is happening currently. But that’s not the only case. Even during expansion, We see gold moving up due to jewellery demand. Currently, as per SPDR Gold trust, gold demand is at 2013 high.
5. It is convenient to invest in Gold as it is highly liquid.
6. It improves the overall portfolio performance as it acts as a hedge. It can be treated as an asset diversification strategy.
7. Gold performance in the 2008 bear market is similar to current movement. During the 2008 financial crisis, Gold dipped along with equity initially but later we saw a sharp rally in gold. Similar pattern we see currently in 2020. We are witnessing an upward trend in the Gold market.
So now we have enough reasons to make an investment in Gold. We have also understood that Gold has outperformed other assets amid the uncertainty caused by the Covid-10 pandemic. So we should definitely invest in Gold.
So the next question arises – How do I invest in Gold?
Gold is the only commodity where you have many different options to invest. These are:-
1. Physical Gold
2. Gold Mutual Funds
3. Gold ETFs
4. Sovereign Gold Bonds
5. Gold Derivative Market
Let us now see what are the features of SGB bonds and it’s comparison with other Gold investment avenues:-
1. Returns: You get higher returns in SGB bonds compared to all other options. This is because in addition to the capital gain, you also get interest of 2.5% p.a. payable half yearly. In all the other options, you are entitled to get only capital gain arising due to price movements.
2. Expenses ratio/charges – In Gold ETF and Gold Mutual Fund, there is a charge of approx. 1-1.5%. There are making charges in case of physical Gold. In case of derivatives also, there are some brokerage and transaction charges. SGB bonds are the only option where there is no expense or charges.
3. Liquidity – SGB bonds have a tenure of 8 years and there is a lock-in period of 5 years. After the completion of 5 years, you can trade these bonds in the market. Therefore, these are not liquid. All other gold investment avenues are highly liquid.
4. Tax treatment – If you hold the SGB bond till maturity i.e. 8 years, you will be exempted to pay capital gain tax. Interest income will be taxable as per your slab rates. So, SGB bonds have an edge over other options because of tax free capital gains. Capital gains are taxed at 20% with indexation benefit in all other cases.
5. Loan facility –These SGB securities are eligible to be used as collateral for loans from banks, financial Institutions and Non-Banking Financial Companies (NBFC). Also, in case of physical gold, you can apply for a Gold loan.
6. Availability – Apart from SGB bonds, you can invest anytime in any of the options. SGB bonds are available for investments as per notification from RBI.
From the above points, we can conclude that SGB bonds outshine in comparison to other alternatives. Liquidity is the only disadvantage so if you have at least 5-8 years in hand, you should definitely go for SGB bonds. But if you are a short term investor then you can opt for Gold Mutual funds or ETFs.
Also note that minimum investment that has to be done in SGB bonds is 1 gram of gold and maximum in case of individuals and HUF is 4 kgs.
It is recommended for long term investors to invest in SGB bonds for hedging purposes. One should atleast have an exposure of around 10-15% of the portfolio in Gold. You can invest one time or in a phased manner in every series till the month of September.