We recently saw few Non convertible Debentures coming into market like Shriram Transport Finance NCD, Muthoot Finance NCD and Manappuram Finance NCD. A lot of investors wanted to invest in these NCD’s and many did. But does each of the investors understand what NCD is and how it works? What are the risk factors associated with NCD in India? Let’s look at it…
To understand non convertible debentures, it would be a good idea to understand convertible debentures first. As the name says convertible debentures are those debentures which are converted to normal equity shares after a specified term. Till that time these debentures earn regular income in form for interest but once they are converted to equity shares, they are just like normal shares.
Hence non convertible debentures (NCD’s) are those debentures which are not convertible to equity shares. NCD in India more or less work like company fixed deposit, where you are lending a company to get some interest income and your money back after few years. You need to check the rating of that bond. Such debt bonds are normally rated by credit rating agencies like CRISIL. A good rating indicates reasonable assurance of safety and return of principal as well as interest.
Non convertible Debentures can be secured or unsecured
A NCD can be a secured NCD and unsecured NCD.
Secured Non convertible Debentures (NCD) are backed up by some assets which can be liquidated for paying off the bond holders incase something goes wrong. For this reason, the returns on secured NCDs are lower than unsecured NCDs. See a discussion on Tata Capital secured NCD on our forum
Unsecured Non convertible Debentures (NCD) are the ones which are not backed by any assets and incase company is in financial crunch, there can be an issue in paying back the bond holders. Only after the payment is made to every entity which has some security, the unsecured NCD bond holders have any chance of getting back their money. So that’s the reason why these NCD’s have high interest rates.
The transparency in NCD is another issue, a lot of companies have come up with NCDs to raise capital, but a common man does not have time and ability to study the NCD and how safe it would be. Look at the following comment:
Can an NBFC disburse all the money it raises? Investors also do not know how much the company has borrowed. The only document for analysis is a (dated) balance sheet. In addition to public offerings, NBFCs constantly tap the ‘private placement’ market for debt. So investors don’t know the total debt burden. There was a subsidiary of India Infoline which raised money through the NCD route. How could investors know that the proceeds were going to be utilised for a subsidiary? In the 1980s, there was a craze for fixed deposits from leasing companies, thanks to high interest rates and fancy incentives paid to investors and intermediaries. The lure was the promised rate of return and not credit quality. The same herd mentality is on display now. At some point, there will be some defaults. – via moneylife
Features of NCD’s
They are listed on stock exchanges. Hence, provides liquidity to holder.
The tenure of NCDs can be anywhere between 2 years and 20 years.
NCDs are rated by rating agencies such as CRISIL.
If you buy a NCD that pays interest then the interest will not attract TDS
The debentures are generally offered in four options: monthly, quarterly, annual and cumulative interest
Taxation on NCD
Taxation on NCDs is just like debt funds. If you sell your debentures before a year, the profits will be added to your income and you will pay taxes at the same rate as per your income tax slab. But for any profit made by selling it after a year, you will pay tax of 10%, if indexation is not done, or 20% if the indexation is done.
Did you invest in any NCD ? Did you knew how NCD worked ?
There is a new retirement plan in India designed through a mutual fund that is launched by Tata mutual funds called the ‘Tata retirement saving plan’. The company is trying to market it using a word 30-30 challenge which says that there are 30 yrs of our work life and then 30 yrs of retirement life and you need to plan for the next 30 yrs in the first 30 yrs. The plan is currently at NFO stage and will be open till 21st Oct 2011.
There have been some readers who enquired about this plan in our forum. Let me review the plan in this crisp article. Basically this plan has 3 different kinds of funds inbuilt which are called as 1) Progressive Plan, 2) Moderate Plan and 3) Conservative plan which all have different risk profiles (risky, balanced and safe). As per the asset allocation rules the investor’s money will be moved from one fund to another fund as per his age. So all investors who are below 45 yrs age will be in progressive fund (highest risk), then once they reach 45 yrs, their money will be moved to moderate plan and once they reach 60 yrs, they will be moved to the safest option called conservative plan. Once investor reaches 60 yrs of age, he will be getting pension from this plan in form of SWP (systematic withdrawal plan) which is nothing but a known way of withdrawing out of mutual funds systematically. There will be option of getting 1% of corpus monthly or 3% of corpus quarterly. Let’s see this auto switch and auto withdrawal options in a little detail.
Auto-Switch
There is an auto-switch facility in this plan, which means at each milestone you will be automatically be switched to the next fund without any exit load. So when a person reaches age of 45, he will be switched from Progressive plan to Moderate plan automatically and when he reaches age 60, he will be auto-switched from moderate plan to conservative plan. Note that one has to choose for auto-switch option at the time of buying the plan.
Switch between the funds manually
One can also switch between the funds manually whenever they want, but in that case if the switch is before 5 yrs from the date of enrolment, there will be exit loads applicable, but if 5 yrs has passed, then 3 exit load free switches will be allowed.
Auto systematic withdrawal plan (Pension)
A feature called Auto systematic withdrawal plan is there in this plan, which will start redeeming your funds and start giving you your money in the form of pension. There are two options in this. In the first option you can get 1% of your total corpus each month and in second option you can get 3% of your corpus each quarter, as decided by you. You will also have an option of not taking any pension amount through SWP route if you wish. So one can just leave his money in the fund and let it grow.
High Exit Loads
As this is a long-term investments tool, the early withdrawals are discouraged and the exit loads are high. There is no exit load if you withdraw your money after 5 yrs of investment, but if you withdraw your money before 5 yrs there are high exit loads. The exit load comes down by 1% each year till 5th year. So in first year, the exit load is 5%, in second year its 4%, in 3rd year its 3% and so on… At last after 5 yrs, there is no exit load.
Some other points
Minimum Investments for Lumpsum = Rs 5,000
Minimum Investments for SIP = Rs 500
There is only growth options under this fund , no dividend options
As per the plan mandate, fund manager can also take upto 10% positions in derivative products ,which can be quite risky.
Good points
These kind of plans are much better than regular pension plans as there is a good enough equity component which is good for long term.
The good thing about this plan as a retirement plan is that you get a known amount (in percentage terms) from your money, unlike the NPS
Not so good points
As this is a NFO , one can not be sure of its performance, features are ok, but the real thing would be the performance of the fund.
The exit loads are high in starting years, which makes exit not so attractive incase the fund performance is bad and one wants to get out of it.
The fund has features which will come into effect after many – many years. For a 25 yrs old, we are talking about 20-30 yrs from now when the auto switching will start happening. It’s quite early to comment on how it will turn out then, because there is not much history at the moment about the performance of mutual funds with such long durations.
For Jagoinvestor readers who are quite pro in themselves, the personal suggestion would be to make their own diversified portfolio and have a full control on what they can do with it. This fund look good from features point of view, but it’s mainly for non-DIY kind of investors.
What are pension plans and how do you identify the best pension plan in India? Is it the LIC pension plans or some pension plan policies from pvt companies or some unit linked plan from companies claiming to provide you with Rs. ‘X’ for ‘Y’ numbers of years once you retires? In this article we will see some of the disadvantages of pension plans in India and how they work.
A lot of investors think that retirement pension plans are the only way to go; and if they do not invest in these products today, then they will miss out on something. In this article let’s talk about pension products. Before I move ahead I would like to coin two terms used in Financial planning which are very easy to understand.
Accumulation Phase : Accumulation Phase is that period of your life, where you invest regularly each month and “accumulate” the Wealth. You start getting pension later in life. So when you invest your money in ULIP’s, Mutual funds, Direct Stocks or anything else you are into accumulation phase.
Distribution Phase : This phase refers to period when you start withdrawing money from your already accumulated wealth for consumption purpose. So at the time of your retirement or even before that, when you start taking out certain amount per month for next ‘N’ years, that’s called distribution phase.
Two major categories of Pension Plans
Let me start by taking about pension plans and their types. There are mainly two type of pension plans at broad level.
Deffered Annuity Plans : Most of the pension products in india are sold by LIC and all the private companies are deferred pension plans. These plans have accumulation phase inbuilt in itself and hence you first pay premiums for ‘X’ number of years. Once you retire, then you start getting pension income. You can see these types of plans all over the market. Some examples are LIC Jeevan Tarang, LIC Jeevan Nidhi, Bajaj Allianz Swarna Raksha ROC , New Pension Scheme (NPS)
Immediate Annuity Plans : These products are called immediate annuity plans because they start paying you the annuity right from day one once you make a lumpsum payment. So if a person wants a monthly pension and has huge lumpsum money, he can buy an immediate annuity plan and start getting pension. It’s a simple product which is not so much popular in India like deferred annuity plans. Some of the examples of immediate annuity plans are LIC Jeevan Akshay , ICICI Pru Immediate Annuity , HDFC Immediate Annuity .
4 reasons why you should not buy deffered annuity plans
Let me tell you 4 strong reasons why you should avoid buying pension plans in India .
1. There are better options for growth of your wealth
The accumulation of your wealth happens in a pension plan for many years, but it’s not the best way your money can grow, ultimately if you had to invest your money in equity (underlying asset class), you have simple and no-cost options like mutual funds, index funds. Also you can choose to put money in real estate. A regular SIP in an equity diversified mutual funds should give much better returns then accumulation in a pension plan (read unit linked products).
2. No predictable returns for annuity
The core function of a pension plan is to give you pension. But do you know how much returns you will get out of your pension plans when time comes for retirement? A lot of pension products do not give a clear idea on how much will you get at the end. What is the return earned is around mere 4%? What will you do? The same is true for NPS.
One major (I mean MAJOR) DRAWBACK is you have no clue what will happen once you finish the accumulation stage and go on to the withdrawal stage. Let us say you have accumulated Rs. 500 lakhs in a NPS account. They allow you to withdraw say 50% of the amount and the balance has to be invested BACK in an annuity. Let us say you ARE FORCED to invest Rs. 250 lakhs in an annuity which pays Rs. 11,000 per month as a pension…looks good? Well depends on what you are capable of doing with your own money!
At this point of time, the better alternatives would be old fashioned products like Post office monthly schemes , Fixed deposits with monthly payouts or even senior citizen savings scheme. these all give near inflation returns atleast .
3. Rigidness and no flexibiity
Almost all the pension products are rigid in taxation and what you can do with your money at the end. Under current laws you can withdraw only 1/3rd of your accumulated money tax-free, where as there is long term capital gains at the moment is 100% tax-free. Also it’s compulsory to buy annuity for the remaining money. What if I want all my money for some reason at the end? What if I don’t have a requirement for income later?
These problems won’t be there if you accumulate your money in plain vanilla mutual funds or PPF or other simple investment products.
4. High charges
Who does not know how ULIP’s and other similar products have charged so high costs for initial years without giving clarity to customers. These annuity plans also have high allocation charges many times and customers do not know about it and can’t do much later when he acknowledges it! So why do you want to pay high fees for these products?
Conclusion
It’s suggested that you invest in some instrument which does not have any rigidness on what can be done with your investments at some later stage, like Mutual funds, Direct Equity, PPF, Index Funds, Real estate or even old fashioned products like FD, NSC, KVP… You can create your own accumulation stage and when the time comes for “distribution phase” (pension), you can always buy some immediate annuity plans or create your monthly income through ways of renting out property, getting FD interest or plain dividends from stocks or any combination of these. I hope you have got a fair understanding of what are pension plans in India.
ICICI Prudential has launched their new online term plan called “I-Care”, which will replace its old term plan called the “i-Protect” (read iprotect review). This new i-Care term plan has some interesting features like no medical examination till the age of 50 and up to 1.5 crores of sum assured can be taken.
Features of I-Care Term plan
The biggest surprising feature of i-care term plan is that there is no medical examination for customers who are up to 50 yrs old. For all the health related information the company will depend on the declaration made by the customer as there won’t be medical tests applicable. This will make sure that the policy is accepted as soon as possible as there is no medical examination in between. Also there is something called “Policy acceptance” in i-care, which means that once you submit the application online and make the payment, it will be reviewed and finally it will be accepted, after which your insurance coverage will start. Some other features of i-care policy are as follows.
Additional features
There will be high cover available to those people who have active home loan in their name.
The premiums once declared will not be increased later, as there is no medical exam later.
Riders in i-care term plan
There is only one rider in i-care term plan just like iProtect had and its accidental death rider. So here are two options one can go for while buying i-care term plan.
iCare Option 1 – Sum Assured
If you take option 1, then you just have a basic sum assured cover which will be paid in case of death. Even if you die in accident you will still get the basic sum assured.
iCare Option 2 – Sum Assured + Accidental Death Benefit
In this option, if one dies due to accident, then the nominee receives extra money equal to sum assured (subject to maximum Rs 50 lacs). This means that; if a person has taken second option with sum assured of 80 lacs, then he will get 80 lacs on death if the death is due to anything other than by way of accident. But if the death is due to accident, then nominee will get Rs 1.3 crores (80 + 50)
Below are the indicative premiums for both the options.
Note : Please make sure you read the terms and conditions properly (mentioned in the 5th and 6th page of the embedded doc above).
Do you know how you can use Hindu Undivided Family (HUF) to reduce your overall tax liability? In this article I will give you tips and real life examples on how you can use HUF to save taxes legally.
Before that let’s understand what HUF is.
The concept of HUF says that apart from individuals there is another separate entity called “Family” which can also have its own assets and liabilities and even regular source of income, which should be taxed separately.
For example :
If an ancestral residential property is rented out, then the rent arising would be considered as Family’s income and not as income of individual. In real life this rent is shown as income of one individual and he pays the tax on it, however a HUF can be formed and the rent can be shown as the whole family income (HUF) and it can be taxed separately.
Until a few years, many Indians used to keep multiple PAN cards and used to show Income under different PAN cards and used these tricks to avail the benefit of slab rates by showing themselves as different persons. This however is illegal by law and is a punishable offence as one person cannot have more than 1 PAN Card.
But, one legal way of obtaining an extra PAN Card is to form an HUF. As the Income of an HUF is taxable in the hands of HUF and not in the hands of any Individuals, a separate PAN Card is issued for an HUF and the benefit of income tax slab rates can be availed on this PAN Card.
Formation of HUF
A false impression amongst people is that HUF needs to be created whereas the truth is that an HUF comes automatically into existence at the time of marriage of an Individual and no formal action needs to be taken for the same.
However, in case a person who wants to specifically register for creating an HUF, he can furnish a creation deed on a stamp paper (The Format of Creation Deed can be downloaded from here).
As HUF is governed by the Hindu Law and not by the Income Tax Act, individuals belonging to other religions are not allowed to form HUF except Jain’s and Sikhs who can create HUF even though they are not governed by the Hindu Law. Two entities are extremely important for you to know in HUF are the coparceners and members.
Coparcener is someone who has the right to demand the share of the property of family; coparceners are generally the Karta (Main decision maker of family, usually the Father, but Manmohan Singh had 5 years ago brought an amendment which stated that Females can become Karta & there can be an all female HUF as well), then sons & daughters, grandsons and great grandsons in order of their first right.
Wife of the Karta is not a coparcener or even spouse are not coparceners and hence can’t demand/ ask for any share in HUF, they are just merely members of HUF.
Example of Tax Saving by forming an HUF
As discussed above, the main advantage of an HUF derives from the fact that an extra PAN Card is issued for the HUF. We’ll explain this tax saving benefit with the help of following example.
Lets say there are 4 members in a family
Husband – Salary 9 lacs
Wife – Salary 7 Lacs
2 Children without Salary
Additionally, one ancestral property which fetches them an annual rent of 6 Lacs p.a
Now the Question is – In whose hands should this Rental Income of Rs. 6 Lakhs p.a. be taxed? In real life, the most sought after solution is to show the rent as income of wife or anyone who has no income or less income so that the tax liability is least. But is it the best solution?
Let’s see 3 different cases here in which this additional rental income can be shown and how tax can be saved!
Option 1 – If this Rental Income is shown in the hands of the Husband.
Option 2 – If this Rental Income is shown in the hands of the Wife
As this Income is arising to the family as a whole, the Govt has also extended this option of taxing this Income in the hands of the whole Family. Although very few people in India know this fact family income can also be taxed in the hands of the whole family by forming an HUF.
Option 3 – If this Rental Income is shown in the hands of the HUF
The above 3 options clearly indicate that Option 3 is the best option as the least tax would be payable by the family if the Rental Income is taxed in the hands of the HUF.
The tax saved by showing this income in the hands of the HUF is Rs.1,18,000 (i.e. difference between “tax paid if rental income is taxed in the hands of HUF” and the “tax paid if shown in the hands of the wife which is the 2nd best alternative”)
Please Note: For the sake of simplicity, Taxes have been computed without taking into account the “Deductions available under Section 80C“ and “Education Cess applicable on the Tax Payable”
Procedure to create HUF
These are the steps to create capital of a HUF.
First one should open a bank account with the name of Hindu undivided family like “AJAY HUF” with a stamp, ID Proof and the proof of the members of the family of HUF.
Important :- While opening a Bank Account in the name of HUF – Banks always ask for a rectangular stamp which states the name of the HUF and also the Karta who is signing it. A round stamp is not accepted as per RBI Circular. The same applies at the time of opening of bank account of Sole Proprietor as well.
Next is to apply for PAN (Permanent Account Number) of the income tax.
Now transfer money by gifts etc to HUF capital keeping in view the clubbing provisions and tax on gifts under Income tax act, Remember there is no Tax on gifts in kind though they may attract clubbing provisions in some cases.
3 real life tricks of saving taxes through HUF
1. Saving tax by getting gifts
One way of saving tax is by transferring the money received from strangers or family are taken as gifts in name of HUF. So if Ajay starts his HUF called “Ajay HUF” and he is getting some gifts from his father, friends or anyone else, he can ask them to give it to “Ajay HUF” and not Ajay itself.
That way the gift will be treated as income/asset of HUF and taxed separately.
One important point here, if some stranger is giving gift to HUF, there is a limit of Rs.50,000 on which no tax has to be paid, but actually it can go up to Rs 1.8 lacs as the taxable limit is that much, and if one also has to do investments of 1.2 lacs (total 80c limit), then one can afford to receive up to Rs.3 lacs of gifts in a financial year and there will be no tax liability at all.
2. Assign ancestral properties and wealth to HUF and invest it
If family is going to receive an ancestral property or any wealth, then it’s better to transfer it on HUF name so that whatever earnings happen in future in form of rental income or capital appreciation of assets becomes income of HUF itself and taxed in its own hands.
That way the total tax liability of family can be minimized.
3. Use HUF income for expenses and Insurance for Family
As HUF enjoys separate tax benefit under sec 80C, one can use the income of HUF for buying Life & health insurance for family and the permissible deductions can be availed for tax purpose in hands of HUF, so if the total premiums for insurance requirement of family is Rs.50,000 per year, then It can go from HUF income and also the individual can exhaust his 1 lac limit separately via PPF, ELSS and other tax instruments.
Also family day to day expenses can be used from HUF income and hence it will leave other members with more disposable income which one can use to service higher EMI’s if required.
Watch this video to learn more about HUF and Tax saving:
Some important Points you should know about HUF
For creating the HUF one need to get married, there is no need to have child or children for creating the HUF.
An HUF can recieve any amount in gift from bigger HUF’s (HUF of Father, HUF of Grandfather) or any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF , but stranger can gift HUF, not more than 50000 rupees.
Daughter also continues to be a Coparcener after her marriage of that family whether she also will be a member of HUF of her husband. So that way daughters can be co-parancers in two HUF’s 🙂
HUF can pay remuneration to the KARTA of family for the interest and expenditure to run the family business.
Be cautious with HUF creation
While all the above points excites people on opening a HUF account immediately and start taking tax benefit, there are some caveats and one has to be little careful. Remember that HUF is a separate entity and represents the whole Family. So once some assets is assigned to HUF, then it becomes part of HUF only and one can be suddenly take money from HUF for personal purpose .
If other co-parceners of HUF demand the partition of HUF only then one can get his/her share of the HUF. Otherwise it will not break. Also for taxation point, a lot of people mislead the tax department buy using fake HUF transactions and therefore, HUF is looked with high degree of scepticism.
If the HUF is not formed properly and if the assets are income are fudged for evading tax, it can get you in trouble, therefore it’s highly advisable to hire a good CA and create your HUF in the best possible manner with right advice. There is no harm in paying 10,000-12,000 to a CA if HUF can give you 5-10 times tax savings.
It would be a great investment, not an expense!
HUF property cant be mentioned in the WILL
Though HUF is very useful tool but one has to use it very judiciously and thoughtfully. Don’t look for tax benefits only , but practical problems also. Be aware that you cannot make a will out of HUF property. Once transferred to HUF, the assets /property becomes of HUF and you no longer have any individual right on it.
To explain with example –
“A”, who has 2 daughters and a son.He long back ago purchased a house in the name of HUF and put that house on rent, so that the Rental income comes to HUF and will not be be added in his or his spouses’s income .
But now , he ‘s retired and wants that this property should be transferred to his son after his demise. But this is not possible as that property belongs to HUF. He can’t even write a WILL for HUF property and with the huge rise in Real estate prices, none of daughter is ready to leave her share in it.
HUF will be extremely efficient for those people who have a higher income and high saving rate and some form of ancestral assets which can be marked as “Family Assets”.
Evaluate if HUF can really give you that kind of tax advantage or not for people who do not have high salary or who do not have a big enough family. So make sure you can get the maximum out of the HUF and understand the limitations of opening HUF before you go for it.
This article has been authored by CA Karan Batra who blogs on charteredclub.com (Content added by Jagoinvestor with inputs from Karan)
Can you share how was the article and did it help you in understanding Hindu undivided Family? Are you going to open a HUF account?
LIC online Term Plan is soon coming to markets ! . There is some good news for all those who would either like to take up a term plan or who are looking to upgrade (increase) their life insurance cover! It is recently disclosed by LIC that Term Plans will be sold online and offline and the premiums will be cheaper than the current rates offered.
I personally never thought that LIC would come up with online term plan because of its dependence on agents’ network for selling its products. But this is a good move from LIC as their share of term plan market is eaten away by private insurers from last few years. At the moment, a person has to pay a very high premium for term plan through LIC. For example, the premium for 25 lacs cover with LIC term plan at the moment is around 7,000 – 8,000, whereas it’s around 3,000-3,500 in companies like ICICI iProtect & Kotak e-preferred.
“We are in the process of designing a pure term product which would be sold through both online and through agents,” LIC’s ED- marketing S Roy Chowdhury. “The rates will be lower than what is charged at the moment,” he added.
LIC uses mortality table 1994-96 at the moment
Do you know why LIC premiums are higher? One of the reasons is that they follow old mortality tables which has older death experience ratio. A lot has changed in last 10-15 yrs and we have much better access to health care and lifestyle, which has changed the number of death. Most of the new companies in Life insurance use the latest mortality data but LIC is still using old data and that’s pushing their premiums. Now LIC is planning to revise the mortality rates based on the last 10-15 yrs of experience and hence the premiums would drop down from its current level.
Note that mortality experience are different for different age groups and classes, so it’s not necessary that mortality rates will go down it might happen that mortality rates for age group 25-35 goes up because of the bad lifestyle and new age ailments (stress, junk food, etc). So keep that point in mind. (9 most asked questions about Term Insurance)
How cheap will be LIC online term plan ?
LIC online term plan will be cheaper than the current term plan they offer but expect it to be 15%-25% lower than current premiums. Do not expect a very steep decrease like 50%-60%, because LIC is a very different ball game than other life insurance companies. LIC has accessed in each corner of India and the new online term plan they will launch will be targeted at a very big group and scattered across various cities. It will be offered online and also offline (through agents).
How will this impact Insurance Industry ?
With whatever little I know I can see that urban class will welcome this move with open heart and a lot of people who trusts LIC like anything and even a lot of people who are not big fan of LIC will wait and watch for this online term plan from LIC and would like to go for it only. This move will lead to more sales of LIC term plans in bigger cities and reduce the term plan selling of different other companies (to some extent).
What do you think about LIC online term plan . Are you going for it ? Are you waiting for it ?
Most of the people investing in mutual funds through agent offline have this question – “How to redeem mutual funds ?”. mutual funds investors often do not know what the procedure to redeem these mutual funds. I redeemed some of my ELSS mutual funds (HDFC tax saver , Sundaram Taxsaver, HDFC long term advantage Fund and SBI magnum taxgain fund) which I had bought some years back from an agent, so I thought why not let everyone know what is the simple procedure for redeeming the mutual funds.
Process to redeem Mutual Funds
if you have bought the mutual funds from an agent or from the AMC directly, then you will have to fill up the mutual fund redemption form. This form is available from the mutual funds AMC office (you can get its office address from internet). You will have to go to their office in person. You can also go to the nearest CAMS office and fill up the mutual fund redemption form directly from there. It’s much convenient to visit CAMS office and directly redeem more than one mutual funds in one go (this is what I did in my case).
The redemption form is very easy to fill and all you need to put is your name, folio number (make sure you put correct folio number, else it will create issue later) and the number of units (exact number or ALL) you want to redeem. Just give this form to the CAMS processing assistant and they will put up your request.
Important Points
1. NAV Applicable: If you give your redemption request before 3:00 pm, the same day closing NAV will be applicable, else you will get next day NAV. So make sure you do the redemption well before 3:00 pm if you want same day NAV.
2. Bank accounts: Where will you get the money when you redeem the mutual funds? You will get the proceeds in your same account which is registered with your AMC (which you used to pay at the time of buying). If that account is not active, then there are few run around like you will have to attach the cancelled cheque of your new bank account or copy of pass-book etc and if you don’t have that, then a declaration from the bank and sign of some bank manager etc. So this can be a little frustrating if you are in urgent need of money. In my case my old account was active so it was pretty easy for me.
3. CAMS do not handle all the AMC’s redemption: CAMS do not handle each and every Mutual funds transaction. It can happen that you will have to go to the AMC office itself for redemption. Like in my case I had to go to Sundaram AMC office to redeem my Sundaram Tax Saver proceeds. So check with CAMS which all mutual funds they handle, you can shoot an email to your city CAMS (their emails and addresses are there on CAMS website
4. How much time it takes to get money? : It generally takes 3-4 working days to get the money credited in your account. But in my case I got it in next 2 days itself. So if you redeem the funds on Monday or Tuesday, you can safely assume that you will get the money by the weekend. But if you have weekend falling in between, then it can take some time.
Process of redemption if have bought Mutual funds online
If you bought your mutual funds from your demat account or some online brokers or if you activated your online account after buying from agent, then you can redeem your mutual funds online itself just by following the procedure mentioned by your online account. Most of the people who buy tax saving mutual funds (ELSS funds) online can also redeem tax saver mutual funds online only.
Did you activate your online account with the AMC ?
If not, I would suggest you to do it, so that you can take the redemption action as and when required. What was your redemption of mutual funds experience? What point’s people should keep in mind while redeeming? I hope you are now clear on how to redeem mutual funds ?
Do you want to increase the SIP amount for your mutual funds ? Or you want to keep it constant always ? A lot of people start with a SIP amount at first and then look forward to increase SIP amount later. This is a very common of every investor and its “how to increase sip amount”
Increase SIP amount
When we say “SIP”, it generally means constant SIP, which does not increase every year. When we calculate SIP amount using any SIP Calculator – the SIP value is generally very high and does not look realistic and at times and such high investment can trigger affordability issue. However there is a clear solution for this, which is used by financial planners and that’s called “Increasing SIP”, where one starts the SIP with a lower amount and then gradually increases them year on year. This looks more realistic as one’s income also increase overtime and ability to invest increases. We see this situation a lot while working with our clients under financial coaching program.
Let me show you the example : Ajay wanted to accumulate 5,00,00,000 (5 crores) for his retirement which is 25 yrs away. When he calculates the SIP amount, it’s coming around Rs 31,000 (assuming 12% returns from equity). Now it’s not possible for Ajay to invest Rs 31,000 every month, as it’s a very high amount. Rather he is fine if he can start with a small amount today and then increase it every year as his income would also increase with time. This is called as Increasing SIP model. If Ajay is ready to increase his SIPs by 10% every year, then he has to start with just Rs. 13,500. This amount is much more convenient for Ajay to arrange, rather than Rs 31,000 per month.
Should you increase SIP amount or not ?
At the first look, a general conclusion which comes into mind is that Increasing SIP is better than Constant SIP because it is much convenient and looks logical that investment should rise as the income increases. But there are different angles through which both the options can be looked at. Let’s look at two important points one by one.
1. Investment required in case of Increasing and Constant SIP
One of the most important factor one can judge both the situation is the amount of investment needed. If we take the above example we just discussed, one would need to start SIP of 31,000 per month to accumulate 5,00,00,000 in 25 yrs assuming 12% return. Now this amount will be constant throughout the all 25 yrs. Where as one can choose to start his SIP with Rs 13,500 and then increase it by 8% per year, but in this increasing SIP model, his SIP amount would reach 50,000 in 18th year and 85,000 in 25th year, which might look very big in numbers, but years from now, it would be worth a small amount considering the purchasing power of money and the annual income one earns. So don’t get surprised by numbers.
One should opt for increasing SIP, when his situation really does not allow him to invest a big amount and he is very sure that he would be able to increase his investments in tune with his salary increase. Truly speaking I am in favour of Constant SIP if one’s situation permits because that way you are investing more in the start of your life and that would help you keep your SIP in check later on in life. Imagine after many years in life, you have to just invest the same amount where as your Income has risen 3X. Isn’t it a big relief and freedom to do whatever you want from your money at that time. Imagine your salary is Rs 50,000 per month and you do SIP of 10,000 and even after 10 yrs, when your salary has risen to say 1.5 lacs per month and you are still doing SIP of Rs 10,000 only. I would choose to pay a little more today and then get into that kind of situation.
Most of the people who are not able to go for constant SIP, because of high SIP amount is because they are very late in investments and now their goals are near and they have less time for compounding. These people have high expenses already in life. Had they started long back when they started earning they could be in a better situation now. Below is the table which shows the Increasing and Constant SIP amounts required for the example discussed above and shows you the ratio of increasing and constant sip. You can see how it started with 44%, but rose to 203% later after 25 yrs.
Conclusion
One should start his SIP’s early so that he can keep his SIP’s constant through-out the tenure. If you are late, then your SIP amount will be very high and will look unrealistic and then you will have to increase your Systematic Investment plan (SIP) amount in future if you want to reach the goals.
2. How the corpus will grow in case of Increasing and Constant SIP
The other major thing to look is how your over all corpus would grow in both the cases. Note that in constant SIP and increasing SIP, the final corpus is getting accumulated and they reach the same point at end, but in case of Constant SIP, the overall Corpus is always higher than the increasing SIP and it’s because you are investing higher amount in the start and that way the compounding factor is in your favour. See the chart below which shows, how the gap between the two narrows down at the end of the tenure and both the cases lead to same corpus.
If you look at the table below, you will see that the maximum difference between the two is 36,00,000 in 17-18th year and after that the difference starts coming down (not so clear in table , you need to calculate it) . As you are starting with lower amounts in increasing SIP, the overall corpus is obviously going to be less, but it’s very much above 50% all the time, so if you are saving for long-term, you should be interested in the final corpus.
Note that the example and charts above are assuming a 25 yr old tenure and equity returns of 12%. The numbers would change depending on tenure and the equity return, but the overall conclusions discussed above remains same. For a shorter tenure like 4-5 yrs, the constant SIP and increasing SIP won’t differ a lot; it would be a small number.
So the conclusion is that one should keep on increasing their mutual funds SIP amount as and when they can , preferably every year. So are you ready to increase sip amount ?
There are so many LIC policies with different names ? For example – LIC Jeevan Saral , Jeevan Anand , Jeevan Tarang and many more LIC policies. So almost every person in India holds some LIC policies, but majority of them do not know how these LIC policies works ?
How LIC Policies Work ?
Most of the investors just take things for granted and keep dragging the policies assuming it would be the best thing in their financial life. In this article I will show you how Life Insurance Corporation (LIC) policies work and talk about few aspects like LIC bonus, LIC premiums and different other aspects which will help you in understanding how these policies work.
Moneyback Plans or Non-Moneyback Plans
A lot of LIC policies pay you on a periodic basis like at the end of 4th, 8th and 12th year, and then finally at the end of the maturity period. These policies are Money back policies, the example can be LIC Jeevan Surabhi or LIC Komal Jeevan. A lot people get attracted to these moneyback plans because they get money “many” times in between and it looks attractive to them, but the premiums are generally higher for these policies.
Then there are LIC policies which do not pay you back periodically but only pays you at the end of the maturity period. They are generally termed as normal Endowment plans. Some examples are Jeevan Anand and Jeevan Tarang
LIC Bonus & Additions to your Policy
The biggest confusion I see is generally in Bonus by LIC. One thing which investors in these policies don’t know and don’t care for to find out is that there are different kinds of bonuses in LIC policies and they are calculated differently. Let’s see them one by one.
1. Simple Reversionary Bonuses
Generally when we say “Bonus”, it is this “Simple Reversionary Bonus”, which is declared per thousand of the Sum Assured on annual basis at the end of each financial year. This bonus is declared today, but is paid at the end of maturity period only or on death, whichever is earlier. So for example if you hold a policy of Rs 10,00,000 Sum assured and the bonus for this year is Rs 60 per thousand sum assured, then your bonus amount is Rs 60,000 for this year, but you will only get it at maturity (after many many years) or on death, but by then it’s worth would be much lesser than today (this 60,000 today and 60,000 after 20 yrs).
A very important point to note here is that, if you surrender the policy, you don’t get the actual accrued bonus because it’s the future value, you will only get its reduced amount in today’s term and its very less. Also note that you are eligible to get reduced Accrued Bonus only if your policy has completed 5 premium paying terms. (This thread on our forum discusses Jeevan Anand in good detail)
2) Final Additional Bonus (FAB)
There is another kind of bonus in LIC which is generally called as “FAB” or Final Additional Bonus and it’s paid to those policies which are of a longer duration and has run for more than 15 yrs (The premiums are paid for all 15 yrs). This is generally a token of appreciation for being with the policy for long duration. The FAB is generally not paid for policies which have “Guaranteed Additions” (explained below). Here is an indicative list of FAB.
3. Loyalty Additions
This is again a bonus which is declared for being loyal to the LIC and completing a longer tenure. Generally it’s declared at the end of the policy, but for some policies it might be applicable after completion of 5 or 10 yrs. For example – In Jeevan Saral, the policy holders will earn such additions after a minimum of ten policy years have been completed. This is usually an amount declared per thousand of sum assured depending on the corporation’s performance. Loyalty additions are totally non-guaranteed.
4. Guaranteed Additions
For a lot of LIC policies there is a term mentioned like “Guaranteed Additions”. These are assured sums which are given to policyholders for a specific period at start or end of some event along with the sum assured at the end of the term. Like for example, , Jeevan Shree-1 policy provides for the Guaranteed Additions at the rate of Rs. 50/- per thousand Sum Assured for each completed year for first five years of the policy. The Guaranteed Additions are payable along with the Basic Sum Assured at the time of claim.
Surrender Value
Most of the people who buy any Traditional Policies from LIC or any pvt companies’ don’t think a bit about terms and conditions on exiting the policy much before maturity. A general assumption is that they will at least get their paid premiums back with sum interest. I have seen so many cases like that where people are literally shocked to hear that they will get peanuts or nothing from their policy if they choose not to continue the policy. Surrendering of the policy works this way –
You will not get anything back if you stop your policy without paying for 3 years. Almost every traditional policy attains minimum surrender value after the policy has run for 3 yrs.
After 3 yrs, if you surrender your LIC policy, still you will only get a small fraction of your total paid premiums that too excluding first year premiums. So suppose you have a policy which has Sum assured of 10,00,000 for 20 yrs term with Rs 50,000 premium per year. If you have decided to surrender your policy after paying 5 premiums (you paid 2,50,000 in 5 yrs i.e. Rs 50,000 each year), then you will get around 30%-40% of 4 premiums paid (first year premiums are excluded), hence the total would work out to be only Rs 60,000 – Rs 80,000 only + proportionately reduced amount of accrued bonus if any (only because you completed 5 yrs, else you will not get this also).
A very important point to Note : A lot of people do not like to close their LIC policies after paying for 1-2 premiums because they will not get anything back for the 1-2 premiums already paid. They think that they will surrender the policy after completing 3 yrs, so that they will get at least something back. This is total emotional decision and not mathematical, because if you do maths you will see that surrendering the policy after 3 yrs is the worst decision if you have already realised that you should not continue with the policy. For example, if you are paying Rs 10,000 premium per year and completed 2 yrs, you paid Rs 20,000, If you close this policy now, you will lose all money (Rs 20,000), but you can save Rs 10,000 as third premium. If you choose to complete 3 yrs and then surrender, then you have paid Rs 30,000 and you will get back 30% of 2 premiums (first year premium not included), so you get back Rs 7,000 (loss of 23,000 as you paid 30,000 and got back 7,000). Do the math if you completed 1 yr only yourself, its more worst!
Note that surrender value is nothing but your future maturity value reduced to today’s value, so if the maturity value is Rs 10,000 after 20 yrs and if you want it before LIC will pay you the Net present value as per today’s term.
Paid up Policy
A lot of times when you have completed 3 yrs of policy, you might not want to get your money back immediately, in which case you can made your policy paid up (just stop paying premium and it becomes Paid up). When you do this, you can stop paying further premiums but you will get your total premiums paid + accrued bonus any at the end of the maturity period. This might work out better sometimes compared to surrendering if you were going to invest the proceeds in some debt instrument.
What are mortality charges
A lot of agents advertise these policies under the head “Free Insurance Cover“, But all the policies charge premium or charges for providing Insurance cover and it’s called “Mortality Charges”, these are the same charges which are there in Term plans and ULIP’s, but may be in a different way, so nothing is free, some part of premium goes in covering you and rest of it is invested in Debt instruments which can give you assured returns at the end of the maturity.
Loan on LIC Policy
You can also get loans at the time of crisis on your LIC policies, but the maximum loan amount available under the policy is 90% of the Surrender Value of the policy (85% in case of paid up policies) including cash value of bonus. The rate of interest charged on loans is at 9% to be paid half-yearly. Is there any other terms and conditions which you dont understand in your LIC policies ? We can all help you understand it in comments section .
Are you looking for surrendering your LIC Policies ?
By now you must have got a good understanding of your LIC policies and how they work. You can find out the return of your policies using the IRR method taught in this article. If you feel that you want to continue your Policies then well and good. But if you feel that you want to close your policies, do it soon because delaying the decision will cost you a lot in long run. I hope its clear to you how your LIC policy works for you .
Which Portfolio Management Softwares do you use ? Some of the Portfolio Management Softwares in India are MProfit, Perfios, Intuit and Investplus and we will see a detailed review of these portfolio trackers in detail. Portfolio Management & monitoring is an important part of managing a good financial life and if your financial life has different components like Real Estate, Loans, Life Insurance Policies, Mutual funds, stocks and ULIP’s. You can also track your portfolio using Excel and there are lot of templates also, but it can be a tedious task to monitor which part of your financial life is doing well and how much worth do you have at each level using an excel template for Portfolio management. Hence, you can use portfolio management software which suits your needs. There are tons of Free portfolio management softwares which you can start with
There are many paid as well as free portfolio trackers available in the market which you can use to track and manage your financial data. I really recommend using one of these so that you have all the data at one place and you don’t need to struggle every time to find out your own information. Once we put all the information at one place, we get a clearer and a complete picture, which we don’t get otherwise… We are amazed to see our clients find out that they are worth so much or worth so less once we start discussing with them their financial life data.
Some important features of Portfolio management softwares
Now we will discuss some of the most important aspects of portfolio management softwares in India . These points are top level concerns of customers.
Data Security of Portfolio Management Softwares
A very big concern which most of the people have is where will their financial data be (example) ? Will it be on their local computer or will it is at third-party server and this becomes a big blocking point for them to go for those products which stores their data at their end itself. Here I am not talking about the login & password, but the actual numbers of their financial details. A lot of people don’t want their info to reside on other servers. I personally don’t buy that argument, but that’s a big concern for a lot of people. In a survey done by JagoInvestor last month, the number one concern which people had was data security, ahead of pricing and features.
Regarding the security of login credentials, with the advancement in technology and strong security advancements, it has become virtually 99.999% secure if not 100%. A lot of solutions also give an option for users to link their bank accounts, credit card and other online accounts by providing the passwords. A lot of people do not know how it works internally…
An online money manager will work well only if you provide online access to banking accounts for a one-time setup. This raises security concerns, but here is how it works. The login username and password for individual online banking accounts is used to retrieve read-only data. The ‘transaction password’ for online banking should be different from the ‘login password’ for greater security. You don’t have to reveal your ‘transaction password’. Customers do not have to give any personally identifiable information, making the process safer. Moreover, the account is completely anonymous and requires only a username and password. All the banking accounts are linked to provide consolidated data. In the consolidation process, vendors will have access to your financial records on a read-only basis, but privacy policies of these entities should prevent abuse of information. – source : moneylife
Features provided
I was surprised to see that in our survey, most of the people voted for high features and less on simple features. I personally thought that most of the people will love to have something which provides them less, but rich data. But actually people look for lot of features giving them number of reports and graphs. It’s very important for someone using the software getting more analysis and suggestions on what one should do in their financial life rather than just getting some plain info which they would have done on their own. Most of the software providers give good analysis along with different type of reports and charts which you can download in excel formats.
Easy to use
It’s extremely important that the softwares are easy to use because no one would put a lot of time to feed the data at the start and on ongoing basis. A lot of players provide statement upload facility where you can just upload your Bank Statement, Credit card statement or other demat statements and the software will put out the information and feed it automatically, thus reducing your work. Some softwares like Perfios allow you to link your accounts with them so that they can pull your information and feed it themselves (read only).
Below is a comparison of 4 major Portfolio management software’s in India market and used by thousands of people (you can read their reviews on their website). They are Perfios, mProfit, Investplus and Intuit MoneyManager
Look at the above video done by me and Manish Jain from Mprofit .
Free and Trial versions
I would say you should take advantage of Free and Trial versions of softwares, Like Mprofit gives away a full functional 30 days trial, where as Perfios and Investplus have free versions which are good enough. If you don’t want to use any software, you can manage your finances at very basic level in an excel sheet, but you will have keep updating the values etc from time to time as the situation changes, which is not the case with softwares, as they auto-update the values.
Free tools for Portfolio management
A lot of people don’t go for advanced tools and use free tools available in market which does a good enough job. Tools like money-control tracker and Valueresearchonline tracker are used by lacs of people to track their mutual funds and stock holdings. But they do not give you all the functionalities which fully fledged software’s give to you. Below is the chart explaining Arthamoney, Moneycontrol , Valueresearch and Moneysights portfolio trackers. I hope liked this review of Portfolio management softwares !
I would say you should definitely try out some softwares which provide a free version and also explore the free options, there is lot they provide free of cost and all you need is to put your data there. Some other tools which you can use are rediff money (only for stocks and mutual funds, but I like the UI), myirisplus, yodlee and rupeex.com. Please share what more do you look from these softwares and what do you think about the value you get out of these management softwares?
6 Free Portfolio Management Software Licence from Perfios
Update 12 Aug : The 6 winners are selected and this giveaway is not valid now
Perfios is willing to give away 6 free Platinum licences to Jagoinvestor readers for the first year (worth 1499). The first 10 commentators who share this article on their Facebook profile will get those licences (just cc manish at jagoinvestor dot com) (to share it on Facebook, just “like” this article below and put your comment in the box which opens).
