Finance Minister Pranab Mukherjee on Friday announced revised tax slabs for individual tax payers and also said that the New tax rates would offer relief to 60 per cent of taxpayers.
But looking at the below comparison between the tax payable last year and the proposed one it seems that the so called “Aam Aadmi”, the middle class would not be gaining so much tax benefits as there are absolutely no tax savings for the person earning up to Rs. 3 lakh p.a. and those who are earning up to Rs. 4 lakh would end up saving only Rs. 10,000.
New tax slabs would benefit greatly to the higher middle class as compared to the Aam Aadmi, though the additional investment of Rs. 20,000/- in the infrastructure bonds would provide some relief especially to those who are interested in traditional savings tools.
Introducing Saral-2 form back is a good initiative and would make it more Saral for the tax payers to file their IT returns without hassle as the current ITR are not easy for the taxpayers to prepare & file on their own.
In order to make tax compliance process more efficient two more CPCs (Centralized Processing Centre) are proposed to be set up apart from extending “Sevottam” a pilot project at Pune, Kochi and Chandigarh to four more cities in the year. Sevottam provides a single window system for registration of all applications including those for redressal of grievances as well as paper returns.
Long awaited increase in the limits for turnover over which accounts need to be audited is also enhanced to Rs. 60 lakhs for businesses and to Rs. 15 lakhs for professionals as compared to the existing limits of Rs.40 lakh and 10 lakh respectively.
Tax Slabs for 2010-2011
The basic threshold limit for income tax exemption will remain at Rs.1.60 lakh. Under the new proposal, 10 per cent tax will be levied between Rs.1,60,001 and Rs.5,00,000, 20 per cent on incomes between Rs.5,00,001 and Rs.8,00,000 and 30 per cent above Rs.8,00,000.
Apart from this you also get Rs 20,000 additional Tax benefit if you invest in long term Infrastructure Bonds.
Tax Slabs
OLD
NEW
TAX RATE
Upto Rs.1.6 lakh
Upto Rs.1.6 lakh
NIL
Rs.1.6 – 3 lakh
Rs.1.6 to 5 lakh
10%
Rs.3 – 5 lakh
Rs.5 to 8 lakh
20%
ABOVE Rs.5 lakh
ABOVE Rs.8 lakh
30%
Tax Slabs
OLD
NEW
TAX RATE
Upto Rs.1.6 lakh
Upto Rs.1.6 lakh
NIL
Rs.1.6-3 lakh
Rs.1.6 to 5 lakh
10%
Rs.3-5 lakh
Rs.5 to 8 lakh
20%
ABOVE Rs.5 lakh
ABOVE Rs.8 lakh
30%
Exemption Limit for Women : 1.9 Lacs
Exemption Limit for Senior Citizen : 2.4 Lacs
How Much do you Save because of New Tax Slab?
Income
Old Slab
New Slab
Your Savings
60,000
0
0
0
3,00,000
14,000
14,000
0
4,00,000
35,020
24,720
10,300
5,00,000
55,620
35,020
20,600
6,00,000
86,520
55,620
30,900
7,00,000
117,420
76,220
41,200
8,00,000
148,320
96,820
51,500
9,00,000
179,220
127,720
51,500
10,00,000
210,120
158,620
51,500
What are your comments on New Tax Slab ? How is it going to Impact you?
This is a guest article written by Mr. Rishabh Parakh who is a Chartered Accountant and Director at MoneyPlant Consulting he had been contributing to leading newspapers like DNA & NavBharat (Money Plant Consulting is a premier outsourcing & a financial services provider which aims to offer solutions for all your financial needs and queries.)
Investment in how many mutual funds is enough? Though it depends on individual needs and situation, we can always arrive at a number or a range which should be optimal for a large chunk of mutual funds investors. Many a times Investors invest in a large number of mutual funds which does not add any additional value to their portfolio most. They have to understand that investing in every new mutual fund coming into the market will not help them in any ways because after a point they have their investment in most of the companies in stock market. In this article lets see how many mutual funds a common man should invest in general.
We invest in Mutual Fund because we have money to invest but we dont have the expertise to invest in Stock Market. We do not want to spend time to manage the investments directly in different stocks and we want to make sure that we diversify our investment across a number of different companies.
Statistics on Number of Mutual funds in a portfolio
I conducted a Poll on this topic and we have some interesting results .
Facts
63% people invested in less than 6 Mutual funds
84% people invested in less than 10 mutual funds
50% people invested in 1-6 mutual funds
The maximum number of investors were in the optimal range of 4-6 .
Total Vote : 225
Average number of Mutual funds : 5.57
If you look closely the graph results mimic binomial distribtution (Ignore this if you don’t understand), which shows that law of numbers apply even to this phenomenon and somewhere the average number of mutual fund converges to the most logical number by default .
Why it does not add much value when you invest in more mutual funds?
Each mutual fund on an average invest in at least 50-60 companies. If you buy 3-4 mutual funds then you are anyways going to invest in close to 100 companies overall (considering there will be some overlaps). So If you buy any equity diversified mutual funds, your money is going to be invested in some of the best companies probably 50-100 of them. Now when you buy another Equity diversified mutual fund there are high chances that the money is going to be invested in almost same set of companies in some proportion, so you are going to invest in same set of companies again. Buying 2nd mutual fund of same category will obviously increase your reach to some companies which were not part of the 1st mutual fund. But now as and when you add 3rd, 4th or 5th mutual fund, you will actually be invested indirectly to same set of companies. The price movement of these companies share prices will be same for all the mutual funds (most probably).
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So what you have to understand is that after a certain point, adding more mutual funds of the same category is of no much value for the portfolio. Adding more number of mutual funds leads to another problem which is tracking problem if you are a kind of investor who buys a mutual funds and just looks at the NAV to find out if you are in profit or loss then you are not doing right thing. Mutual funds investing is very much close to Share investing where you track the instrument, see how it’s performing, what’s going inside the fund, how is fund manager doing, how are they churning the portfolio etc etc. So if you have too many mutual funds in your portfolio, it will be too tough to track them and your portfolio will be very cluttered.
You have to understand that investment of 1 lac in 20 mutual fund will roughly behave in the same way as investment in 5 mutual funds because finally the investment has happened in shares of top companies (roughly the same number of shares), so the investment value is result of the underlying share prices movement and not the number of mutual funds in the portfolio.
Thumb rules:
You can ask two basic questions to yourself to find out if your portfolio size is too big for yourself:
Can you name all the mutual funds in your portfolio and a 2-3 line explanation about what the fund does?
Can you guess roughly how does the movement in stock market affect your corpus in general? If stock market is going to drop or increase by X%, so you have a rough idea of what will happen to your portfolio at a high level?
Example of a Portfolio of Mutual funds
Let’s create a sample portfolio of mutual funds. We will consider ETF’s as a mutual funds for this example:
2-3 Equity diversified Mutual Fund (Tax + Non-Tax saving): See the List
Note that 2-3 Equity Diversified Mutual funds will cover almost all the big companies in your portfolio. Some ETF or index fund will give index level exposure and make sure you invest in top companies. Debt funds will add exposure to Debt part and no-correlation with Equity.
Most of the people do not invest in the same old fund they have bought, they feel that buying every other mutual funds in market will some way help them earn extra returns which is far from truth. Consistency in investment and faith in one of the good funds you have chosen is the right way to invest in mutual fund.
How having more than one Mutual fund in portfolio reduces the risk?
You have to understand the concept of standard deviation, it’s nothing but risk and return potential from mutual funds point of view. So a single mutual fund has the highest standard deviation and the risk and return can be very high. Adding more funds will help in reducing the standard deviation of the portfolio. As per Morning Star Research (Many thanks to Hemant Beniwal for sharing this)
After 4 funds, the effect of adding another fund diminished. It’s still noticeable, but not so dramatic. After 7 funds, things have mostly leveled out and after 10 funds, a portfolio’s standard deviation stays nearly the same regardless of how many funds you add. Thus, once you own between 7 and 10 funds, there may be no need for more. In fact, the more funds you own, the more likely you are to own at least a couple that do practically the same thing. That could be a drag on your returns because if you have multiple funds doing the same thing, one is likely to be better than the others. Focus on the superior fund and you’ll get better returns .
How do you Buy Mutual Funds? [POLL]
Comments, Please comment on what do you think is the optimal number of mutual funds?
Can some one force you to buy ULIPs when you take a loan from the bank? I am seeing very unethical things going on in financial world these days in India. Lot’s of people are complaining that many companies are selling junk things like Endowment plans or ULIPs (which make big commissions) along with big loans or something big where a small ULIP might look like “Ok, let’s take this small thing for that big thing”. But this is not right! This is breaking the faith and such practices are against the principal of utmost good faith! Let’s see some real life cases:
Force Selling along with Loan Approval
I had to take this policy without knowing any details about this, as the Barclays finance company said this is mandatory for approving any loan , not sure how far it is correct. But as I was running out of time, i opted for it.
Force Selling along with Locker Facility
I requested for a locker in ICICI Bank in Hydderabad, VIdyanagar Branch, and they said there is lot of people in queue for lockers so they cant give me. But if I invbest in ULIP or make a FD of 5-10 Lakhs he said they will consider my Locker request on priority. This is forced selling and I told them straightaway that making investments for a locker is ridiculous reason and stayed away. I wish I could complain this to somebody but there is no written proof of they asking for investing in ULIP as it was verbal conversation.
Force Selling along with Home Loan
I thought banks like SBI would be straight in their clauses. I had a difficult experience recently with my loan.
Pre-Processing Blues:
The loan agent who works in my office, did not have any clue on the terms and conditions on loan. He was a retired officer from SBI and used his position to leverage the file movement. One fine day, he asked for payment against the services rendered (It was a shock to me). I guess, he would be getting some service fee on my loan from Bank already. I gave some required papers for gaurantor to him which was not in my file. I think he lost them. I reduced my loan amount during processing, for which I had submitted the request letter. Upon my loan approval, I noticed that there is a 1.9 Lakh additional loan sanctioned for me and added to the loan amount. I had declined the insurnace cover for the loan as I had planned to cover it on yoy basis. I discussed this with the manager and he agreed to waive it.
Next, the gauranor must be present when you go to sign the papers. I managed to get the gaurantor to accompany me during early morning hours.
Forcibly Selling SBI-Insurance with the Loan
I saw that Insurance cover has not been removed and the SBI person would not agree to waive it even when i told that i would buy SBI insurance policy. I was told that I need to go to branch where I applied for loan and get the approval from bank manager and then it will again go for approval in the loan processing center. After a lot of persuation with the sanctioning office and Chief manager, I managed to convince for a year on year insurance cover which I had to buy for this year on the spot.
Further, I was told that my this year loan is fixed for 8% ( I was happy that I was wise in choosing SBI) then I was updated that my loan is fixed at 9.75% for next 4 years. No one had told us this clause until we went for signing. We had asked this question from clerk to Manager level. No one had a clarity on it but the clause was there in the documents and I had no option but to sign it. In the recessionary situations, I understand that the rates will look further south but I will be stuck at 9.75 for next 4 years.
Otherwise, I am kind of satisfied with the pace and professionalism of officers but I feel that more transparency in the terms and condition is must.
Moral of the story: Read all the clauses before you go to sign and do not be satisfied if you do not get an answer. Private or Public banks – every one has clauses in fine prints that suits the bank and there is no one to tell you about them.
Link to original comment
Force selling along with Opening NRE Account
About a year ago, a 70-year-old non-resident Indian (NRI) woman went to one of the largest private sector banks in the country to open a non-resident external (NRE) account. While opening the account, an executive from the bank lured the lady into buying a co-branded insurance product under the pretext of ‘mandatory’ rules. He also told her that she will have to pay the amount of Rs10 lakh only once. With no option left for opening the account, the lady obliged and left for her overseas home.
“When that lady returned after 12 months, she was asked to pay one more premium for the insurance plan. Since the bank would not return the money which she had paid for the first premium, she was again forced to pay the second instalment for the insurance policy that was forced upon her,” revealed an independent financial advisor (IFA). Read full article
Another Case of force selling along with transfer of loan
I also also seen a case where one guy wanted to transfer his Home loan (ICICI Bank) from Pune to Delhi and just for this , he was being forced to buy an ULIP from the officials who would be helping him in the paper work , other wise his work was stuck . At last when he approched Delhi branch , his work was done smoothly . So in this case the officials were forcing the unsuitable product.
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How to Complain for the Force Selling
To tackle such increasing fraudulent cases, the Reserve Bank of India (RBI) introduced a banking ombudsman scheme under Section 35 (A) of the Banking Regulation Act, 1949. The Act is in effect from 1995. A customer can register a complaint with an ombudsman if no reply is received from the bank within one month or if the bank rejects the complaint, or if the customer is not satisfied with the reply given by the bank. If a complaint is not settled within one month, the banking ombudsman may pass an award up to Rs10 lakh or to the extent of the losses suffered by the customer up to Rs10 lakh, whichever amount is lower. Between the years 2002-06, the banking ombudsman has settled around 36,000 complaints.
Conclusion
This is nothing but a form of corruption happening in Financial world these days. Sellers are thinking that loans are critical things for everyone and in order to let them happen smooth they can force people by miss-selling them, they feel like people in India are anyways frustrated with other things, what will they do? They will enquire a bit and then finally they will lose the patience and just buy the products and that happens. But please don’t let this happen. Raise your voice, ask explanation, demand proof and evidence, threaten them to complain and take matter higher to banking ombusdsman and consumer court etc. I am sure they will budge after some time.
Even on this blog which discussing PPF account opening at SBI we came to know that SBI bank officials sometimes force PPF account openers to start a Saving Bank account at SBI, which is a form of force selling.
Comments, please share some live examples you know of? Has this happened to you? What can be done to solve? Come unite and share ideas, you can leave a mark!!
“An ounce of prevention is worth a pound of cure” I see that most of the people these days have bought wrong products like ULIPs, ULPPs, Endowment Policies and unsuitable Mutual funds (which they are not aware of most of the times) and then when they do come to know about it, they don’t have much choice left.
They either have to live with it or they have to lose a lot of money to correct the situation.
In this article we will see some thoughts on why we should focus more on “Prevention” and not “Solutions” for a bad situation from Financial planning perspective.
A Small Story
There once was a little boy who had a bad temper. His Father gave him a bag of nails and told him that every time he lost his temper, he must hammer a nail into the back of the fence. The first day the boy had driven 37 nails into the fence.
Over the next few weeks, as he learned to control his anger, the number of nails hammered daily gradually dwindled. He discovered it was easier to hold his temper than to drive those nails into the fence. Finally! The day came when the boy didn’t lose his temper at all.
He told his father about it and the father suggested to the boy that he should now pull out one nail for each day that he was able to hold his temper. The days passed and the boy was finally able to tell his father that all the nails were gone.
The father took his son by the hand and led him to the fence and said, “You have done well, my son, but look at the holes in the fence. The fence will never be the same. When you say things in anger, they leave a scar just like this one. You can put a knife in a man and draw it out.
It won’t matter how many times you say “I’m sorry”, the wound is still there. A verbal wound is as bad as a physical one. Friends are very rare jewels, indeed. They make you smile and encourage you to succeed.
They lend an ear, they share words of praise and they always want to open their hearts to us.”
The Story is encouraging and gives an important message. We all make decisions in life. Some of these decisions can prove very unhealthy. We make mistakes and then when we come to know about it, we try to figure out ways to fix the problem.
Making mistakes is not a wrong thing, we all do it at some point in life and taking measures to cure it is another great thing. But it will some times have drastic impact on you and your money.
Watch this video of 4 biggest financial mistakes related to personal finance that every investor should avoid :
ULIPS
A lot of readers of this blog were sold ULIPs (they didn’t bought it, it was sold to them) without telling them the costs involved and sometimes promised with wrong returns (it was just an illustration and dependent on market condition, agents just said it was guaranteed).
Now when they come to know about it, they stop the premium payment and get out of it at right time, this getting cure for the problem but the damage has happened. You might not realise it, but the damage is big, some people have lost close to 80,000 – 1,00,000 in premiums or in costs.
One of the person I know has paid 4-5 lacs in premium and 60% was the cost in first year. Now he stopped the policy, that’s a loss of 2.5 lacs. If that same money is invested in some good Mutual funds for next 20 yrs and if we expect a return of 12%, it’s 24 lacs at the end.
This is opportunity cost. RS.2.5 lacs might look like a small or “chalta hai” kind of amount, think again, it’s opportunity you have lost. The amount can differ for different people but the lesson remains same.
Insurance
Another case can be of Insurance, most of us are still under-insured, even now!! Even after we know that Term Insurance is what we should take, still we are underinsured, that’s the risk. Once the disaster happens, it will be too late, you will never get the chance to cure it.
In fact you will not be there in this world to cure it and the outcome will be very horrible which you might not want to imagine.
Endowment Plans
Same with Endowment Policies, Investors who have taken Endowment Policies and are paying 50,000 per year for next 25 yrs. They do not realise what they are missing. You get 5-6% returns, that’s all! forget what agents promised or what was told to you. Endowment and money back plans are world-famous for “not able to beat the inflation” kind of returns.
So you are missing long-term equity returns of 12% at the least. So you are loosing 6% worth of returns. That’s loss of 45 lacs for the example I just gave you in long-term, what is the reason you lost that much, just simple laziness of not taking the action of “change” and restricting your mentality of “Equity is Risky”, that’s incorrect at least for long-term.
Late Investing
No matter what you always have some money to invest when you start. If you don’t want to invest, there will always be enough reasons to not have savings. Almost 99% of the people can live with their 90% of salary, whether they believe or not. Earning less is not a crime, it’s part of life, save what ever you can save, even Rs 100 is ok, but do something.
Some people can save more than 30-40% of their salary, but they are not doing anything about this! Don’t underestimate the power of early investing, Early investing is so powerful that it can compensate for big mistakes in investing later in life. If you are a 25 yr old person who needs 2 crores at retirement at age 60.
Assuming 12% return, you just need to invest Rs.6,000 per month to reach your retirement target. Imagine what happens if you feel that you can do a little late, how does it matter and all and actually start 5 yrs late, with the same saving of 6,000 per month, you will have just half of your retirement target, that’s 2 crores.
Imagine the cost of saving late by 5 yrs, You have to but down each of your retirement thing by 50%. That can be a big hit!!
What is the Solution
Taking measures to fix your messy situation is worth appreciation and we all should do it if we get into it. But on the first hand why to get in a messy situation. You don’t need to do fancy things to be in healthy financial condition.
Want to buy a mutual funds which has given 105% return in 2009? Go ahead… How do most of the people choose a mutual fund? Let us try it once! Go to Valueresearchonline.com and find Top 10 funds across all the equity funds with 1 yrs performance. Below is the example of the page I got. So all these funds have given more than 100% return over the last 1 yr. Now it’s pretty simple to choose them, right? Just pick any of them and you have done your “Investment Planning”!!…… Far from the truth! Most of the mutual funds starts advertising their mutual funds “great” performance just after a strong market. They will claim that their fund has 1st rank in some blah blah category and they have the unique way of investing and what not. Let us see in this article, how we should look at short-term performing mutual funds and evaluate them on different parameters.
How Mutual Funds are marketed
Let’s take a case of “JM Emerging Leaders” Mutual Fund. Try to look at the points which a Mutual funds company can use to attract customers and What is the reason for each of them.
Its one of the 10 funds on the return parameter out of thousands of Mutual funds in this planet. Its 1 yr return is 144%.
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True! But what are the reason for this? The fund is extremely risky, risky to the extent you can’t imagine! The fund portfolio looks like this:
Mid Cap: 56.18%
Small Cap: 43.82%
(as of Feb 7, 2010)
Now what else do you expect from a fund which has all 100% of its money in Either Mid cap or Small Cap companies which moves like crazy after a big bear market? If the fund is so great in 1 yr parameter, what is the reason its overall return since it came in existence is -5% (negative return in last 5 yrs)? The answer is simple, the fund is exposes to too much Risk. In order to get extremely high returns, it’s exposing itself largely to risk that the returns over long-term will be unstable and probably low.
The fund beats it’s benchmark and category average returns by huge margin
This happens for the same reasons we talked above. Benchmark is an Index and it’s returns are not based on some one’s judgement or decisions, but mutual fund returns are!! Fund manager decides how aggressively they want to invest, so if today the fund has beaten it’s benchmark or Category in positive side, tomorrow when there will be disaster, it will beat it’s benchmark by huge margin on the negative side and the performance will be much lower than the benchmark, it’s called Beta
NAV more than doubled in 1 year
Again an idiotic comment, it’s all about return, the fund has made 105% return in 2009, but what is NAV value? Ans: 7. something % . It’s 5 yrs in existence now, started from NAV of 10 and still its at 7.something. At one time in 2009 the NAV went down to Rs 2.9, this 144% year in last 1 yr has helped it come back to 7.something levels now and still the returns are the marketing factors. I am wondering how it manages to get so much of investment (Fund has 262 crores of Net Asset Value as of 31/01/2010). Who is putting all the money in this?
What are the Two important factors you can look at and make a quick opinion
Lets talk about two main things
Mean
Standard Deviation or Volatility
Mean: Mean is nothing but the average of returns over a particular time. It tells us how much can we expect over a period from the mutual fund. It’s important to look at Mean (average) of Mutual funds return so that we have an average expectation. For some period we can get 20% return, for some period we can get 10% and for some we can get -15% also. But we have to concentrate on the average. Look at average return from Equity in Long run from Indian Markets
Standard Deviation : Now this is some thing we never see, what is this? Looks like a scary term from our school maths, but dont worry, it’s very easy thing to understand. Its nothing, but how much deviation you can expect from the average. To clear the point, understand that (10,12) and (1,21), both have average of 11 but standard deviation of (1,21) is high because both the values are at much distance from their average of 11. In that same way if we have two mutual funds say Mutual fund A, which has given returns of 20% and 30% in 2 yrs and we have mutual fund B, which has given return of -10% and 60% in 2 yrs, both of them have average of 25% (simple average), but the second mutual funds B has higher standard deviation compared to A. What it means is that its more risky, the return range of B is higher. This is directly related to risk/reward. It’s very risky and very rewarding compared to mutual fund A. So it does not suit general investors who need high and consistent returns.
So over a long term, we have to choose funds which are higher in Return and Lesser in Risk . That mean is there are two Funds X and Y, we have to look which has higher Mean and lower Standard deviation in returns. This is not true for investors who have extremely high risk appetite and want to take extra risk, in that case this will not be very much recommended.
Make sure you dont calculate these things on just 2-3 data points, make sure you have enough (at least 10-12 numbers) so that its more accurate. In the Table Below I have taken two funds which I consider BAD and 2 Funds which are GOOD and their quarterly returns from Q1 2006 – Q4 2009 (16 quarters) and finally calculated the Standard Deviation and Mean.
So you can see the Standard deviation and mean of returns for 2 Bad Funds and 2 Good funds and their mean return and mean standard deviation in a single quarter. So you can see that Bad funds have given return of around 3.77% per quarter on average (simple average , not compounded one) and the standard deviation is 27.07%, which means that it can deviate up to 27.07% on the upside or downside with 68% chances. (forget the maths, you have to go into probability and normal distribution and all those things, interested people can look for this link to get more insight on this. Similarly the good funds would return on an average 6.84% every quarter with deviation of 18.39% on upside or downside with 68% probability.
Conclusion
So, the conclusion of this whole mind boggling exercise is that we should understand that short-term performance of mutual funds is not where we should aim! We should properly evaluate the fund performance with different parameters. We should also concentrate on volatility and risk exposed by the mutual fund.
POLL (please vote, It will help me write a new post)
Comments please. Please share your views on how do you feel about Mutual funds with short-term performance ?
Most of us want to open a PPF account, but keep postponing it just because we don’t know the requirement of doing so? It seen that majority people open their PPF account with State Bank of India. Let us see 3 easy steps of opening a PPF account in SBI branch. The whole process does not take more than 30-45 minutes if you prepared in advance and go with all the documents that are required and there are no road blocks in between. The biggest advantage of opening the PPF account with SBI is the online transaction facility you can use to deposit in your PPF account online and dont have to rush to the branch every now and then. Read why you should open a PPF account in SBI even if you dont need it right now.
3 Steps of Opening a PPF Account in SBI Bank
1) Choose a SBI branch which is authorized to go government business.
Usually any ‘large’ branch with lots of customers should be able to this! Usually newer and smaller branches may not have this clearance facility. One doesn’t need to have a Saving Bank account in that branch. Locate your nearest SBI Branch using this
2) Procure and submit PPF account opening form and Identity/address Proofs
It would only 3 minutes to fill. Choose a nominee and get a witness signature. Now you have to submit anyone of following Proofs.
Passport
Pan card
Driving license
Voter id
Ration card
Two Passport Size Photographs
Any government issued identity card or address proof should work. Keep originals for proof in hand to simplify the verification if needed. That’s it. The bank should now be able to open the account. Usually it may take about 20 minutes or so.
3) Get PPF Passbook
A pay-in slip needs to be filled and the initial subscription needs to be credited into your account. A passbook similar to a Saving Book passbook will be issued with your photo affixed and the nominee’s name stated. PPF rules can be found on the back. This is all, your PPF account in SBI is opened now.
How to Link your Online SBI Account to SBI PPF account for Online Transaction
If you have an online SBI account, you can add the PPF account as a third party account for transferring money directly. As mentioned above the PPF account can be in any SBI branch. There are no processing charges for doing this transfer. When you do this online for the first time, go to the bank and update your PPF passbook and check if the transaction has occurred correctly. This has to be done since you cannot look at the amount in the PPF account as yet in SBI. This is a major drawback of SBI-PPF (and post office) accounts.
Rarely there maybe system failures and the standing instruction may not get honoured. So you need to check if it has occurred.
You cannot subscribe a lower amount if you need the cash for emergency use (this situation wont arise if you had an emergency fund )
You need to go to the bank to cancel the standing instruction .
There are only 12 credit transaction allowed per year. So take care of this before issuing a standing instruction.
How to Transfer your PPF account from One Bank to Another
Go to the branch where you want to transfer your PPF account and deposit an application with your PPF passbook
takes 10-15 minutes
How to Submit Proof for Tax
Take xerox of the PPF passbook updated with all transactions and get it attested in the branch. (not sure if the attestation is really required) [ Update 5th Feb, thanks for Mithilesh ]
Other points to Consider
Subscriptions must be made before the 5th of every month for the amount to taken into account for interest calculation for that month. If you want to open a PPF accoun in the name of a minor in addition to yours, the total PPF investment limit is Rs. 1,00,000. The total tax benefit is also the same. This is a new rule and is not yet printed in the PPF passbooks! See Here, Here and Here for more detail
Comments please. Are you going to Open a PPF accoun this year? Do you feel one should open a PPF account at Post Office?
Are you looking for Financial Planner? If you are, you should go through this article that talks about almost all the necessary information you need before hiring a financial planner. Most of the clients are confused on simple things like, where to find a good financial planner, what they should expect from financial planner and most importantly they do not understand the financial planning environment in India and how it operates. There are lots of myths and misunderstanding around the financial planning field and this article will give you most of the basic information you need to be aware of while hiring a Financial Planner.
What is a Financial Planner and what is the Certification for Financial Planning
A financial planner is a professional who helps his clients to deal with various personal finance issues through proper planning. Just like we have a doctor for our physical problems, we have Financial planners for our Financial problems. Just because you know “what is a Mutual fund” or some “Tax laws” or can buy and sell stocks on Stock market, it does not mean that you don’t need a Financial planner. Financial Planners are professionals who have done the certification, have learned strategies and have gone through in-depth knowledge to understand how to restructure a common man’s financial mess and come up with a sound long term plan which will help a client achieve his/her financial goals in future.
Just like CA, MBA, CS and other professional certifications, there exist a certification course for Financial Planning which is called CFP (Certified Financial Planner). Read more about CFP Here. CFP is regarded as the top most certification in Financial Planning and it is recognized worldwide in majority of the countries.
The 6 steps of Financial Planning which every Financial Planner has to go through are
Step 1: Setting goals with the client
Step 2: Gathering relevant information on the client
Step 3: Analyzing the information
Step 4: Constructing a financial plan
Step 5: Implementing the strategies in the plan
Step 6: Monitoring implementation and reviewing the plan
Who is not a Financial Planner:
A lot of CA’s, CS’s, MBA (finance), CFA, ICWA and other Finance related professionals feel that they are the right professionals to do Financial planning for individuals. Just because “Financial Planning” or “Personal Finance” has “finance” word associated with it; does not mean that any one from different finance field can be a Financial Planner. Financial Planning is very different from what CA, CFA or a MBA Finance does.
Financial planning deals with individual personal finance, his future financial goals, the risk taking appetite. Having CFA or MBA (finance) as qualification will definitely help at some level and may be some CA’s, CFA’s or MBA (Finance) have a great understanding of Financial Planning, but it’s not true for everyone in general. In the same way, any ULIP Agent, Insurance Adviser or Mutual funds agent, Wealth Manager, PMS guy is not a Financial Planner. These people are there to assist a Financial Planner to sell the products. In the analogy of Medicine field, Financial Planner is a Doctor and all these agents, Wealth managers etc. are like Compounders.
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Where to find a Financial Planner (Important)
There are two ways of hiring a Financial Planner for your self:
1. Hiring a CFP
In case you want to hire a CFP (which is recommended) you can get a list of CFP’s in India at FPSB website link, Click here. You can find out CFP based on
Name/Company
City/State
Nature of Employment
Tip: You should search for CFP’s who are “Independent Financial Planners” or “Self Employed”. Read further to understand the reason.
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2. Hiring a non-CFP
You can also Hire a non-CFP but you have to be very careful while doing that. Before CFP certification came to India, we had excellent planners in the Industry who understood the financial planning process subconsciously and still practice that but without having the CFP certification. These people can be from various backgrounds but can have sound financial planning knowledge. They are rare species. Some of them who I can think of are people like P V Subramanyam.
The biggest problem one faces in hiring a Financial planner is the “Trust”. So you need to have some level of trust with Financial planner and for that you need to interact with him, spend time with him, get references from family and friends and once you are satisfied you can then hire him/her. A financial planner at the end is someone who is also interested in educating you and not just making money from you. Just imagine a doctor who gives you medicine, but does not tell you the preventive measures to take, so that you are not ill next time. Would you like to visit him again and again? He should be interested in educating you up to a level where you can take informed decisions yourself. Only then you can call him a good doctor, the same applies to a financial planner.
Current Status of Financial Planning Practice in India
There are two ways a Financial Planner makes money
By pure consulting and advising (by making the financial plan)
Through Commissions (from products sold to clients)
Combination of 1 and 2
In India people dont value consulting and hence Financial planners are having a hard time getting clients whom they can charge on pure consulting basis. Therefore what has happened is most of them make money through commissions from selling the products. Based on this fact most of the agents, wealth managers etc have completed CFP certification just because they can get the tag of “Financial planner” and then make a financial plan and finally sell products to them and make good commissions, hence at present the current status is that 8 out of 10 CFP’s in India are associated with some mutual funds or Insurance company as either of
Analyst
Asset manager
Branch manager
Accountant
Vice president
Adviser
Senior manager
Wealth manager
They are still doing the same old work with a new certification in hand called “CFP” because they know that in coming days CFP’s is what everyone will prefer to hire for their Financial planning and similar services. These so called just for name sake CFP’s make the financial plan and when you buy the products, they will make majority of their money through commissions.
So what you have to look for while hiring a financial planner is that He/She should be independent Financial planner and should not be associated with some Mutual funds or Insurance company and has no compulsion of executing the plan through him. There should be freedom in Clients hand that he/she can execute the plan from anywhere he/she wants. As an additional service Financial planner can give an option to have financial plan executed through them, but it should never be compulsory because otherwise there will always be some level of biased attitude while recommending products to you.
The biggest problem with Financial Planning is that still “Financial Planning” is confused with “Investment Planning”. The moment I tell someone I am a Financial Planning writer, they start asking me stupid questions like
I have 5 lacs spare cash, how should I invest it so that I get maximum returns?
No one talks anything other than investment. Financial Planning is more than just investment planning, it’s much more than that. Read more to understand what is the goal of Financial planning.
Why to Hire an Independent Financial Planner
Do you know how a Financial Plan is made? No you don’t! Here are the problems with the Financial Plans:
1 No Personal Touch
What most of the Financial planning company or professionals do is that they have automated Financial Planning software in which they just stuff your data and create a Financial Plan automatically with a single click. This can take just minutes. While there is nothing wrong in creating the basic template of Financial Plan with help of a software but what really matters is how much of that is customized to a client’s needs personally? So a financial planner should give enough time to tweak the financial plan to suit a clients need, which is more though for Financial planners working for big organisations especially mutual funds and Insurance companies because they have to stick too much to the template they use and not to much of customization is done or recommended.
An Independent Financial Planner has more liberty and flexibility to make a financial plan which will be more suitable for you. So if he wants to add some extra part to financial plan or want to restructure something totally, it’s possible with independent financial planner but it’s rigid with non-independent financial planners.
2. Lack of quality
Everyone like beautiful pictures, we are attracted to beautiful people no matter what crap they are from inside. Some of the best looking things in the world are totally shit. Same is true for Financial Plans, that most of the financial plans I have seen has beautiful pictures, amazing color schemes, beautifully designed tables and great back ground but when it comes to content and the quality of Financial plan they suck big time! There is nothing great about them. But clients like them because we are visual animals and we assume a clean and beautiful thing literally at face value. I do not say that all clean and beautiful financial plans are crap but most of them really are. A simple analogy is a dish you get at 5 star hotels and some authentic but not so well known eating place, the food you get at 5 star hotel will look great and there will be too much time spent on making it beautiful but at the end it can taste very average or some time even foul, but the food you get at home or some less known place may taste better and may be more healthier but then it might just look okay and not “beautiful”.
A financial planner who is independent and takes limited clients does not have time and energy to work on beautification of financial plan, he mainly works on making financial plan better and not the looks of financial plan. So if you watch a financial plan from an Independent financial planner, it might not look as beautiful as from other planners.
What to Look into a Financial Planner
You should watch out for following things in Preference
Competence or Knowledge
Confidence
Your level of Trust and comfort with Financial Planner
Frankness
What to not look into a Financial Planner
Promise of Returns
Magic (financial planner is not some magician who will fix all your problems and will make a financial plan which will try to achieve all you want)
Instant Performance
How much to Pay to a Financial Planner
This is a debatable topic, still let’s try to understand and find out how much do Financial Planners deserve.
Financial Planners in US and Australia gets as much as $150 to $200 per hour. (that’s close to 7.5k – 10k per hour). Financial Planners in India cannot and should not ask for that kind of money for two reasons:
They will not get it 🙂
FP is new in India and there is still not standard procedure or standards to create a financial plan. So what they can expect is not more than $30-$40 max per hour.
Now in India people will literally laugh if a Financial planner asks money in per hour basis, it’s just not what Indians can imagine. Imagine doctors asking per hour fees here or lawyers or anyone. We Indians like to pay one time fees or lump sum fees, that’s the model India runs on. A good financial plan takes around at least 10-12 working hours (strongly focused and distributed across several days). From that stand point a price in range of 10k – 25k looks reasonable for a Financial plan. Anyone who is charging less than Rs 10,000 is undervaluing it and working more for less money. Other point is, you have to understand that all financial planners differ from each other and the amount of detail and care they take while creating it.
Comments, Please share your views on what are the other issues you guys face/ will face while choosing a financial planner. In case you know of a good Financial Planner, feel free to share here.
Let us first understand what is 80/20 Rule? It means that 80 percent of your outcomes come from 20 percent of your inputs! It’s also called “law of the vital few” or Pareto principle. This rule applies to almost all the areas of life, even though it’s called 80:20 rule the main idea of this principle is that a large part of outcomes are result of a few number of actions and 80:20 was the best fit for most of the things. A very simple example of this rule is that 80% of the world Wealth is owned by 20% of population. Let us see some example to understand this rule:
Look back at your exams, 80% of your marks came from the studies you did on 20% of the days 🙂
If you are coder, you will accept that 80% of the execution time is taken by roughly 20% of the code.
Even on this blog, 80% of the comments are written by roughly 20% of the readers 🙂
Also 80% of the total comments are from 20% of the total articles.
80% of the recognition you get is for a small amount of work (20%) that you do.
80% of sexual satisfaction comes out of 20% of total time spent.
Most of our worries (80%) are a result of small number of problems (20%).
80% of the Assets under management is with 20% Mutual funds.
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Some Examples from Financial Life
The same 80:20 rule applies to our Financial Life as well…
80% of the good returns we get is from 20% of good investments we make or 20% good decisions that we took.
80% of the money lost or opportunities lost are result of the 20% small things we didn’t took care of.
80% of the money we could have made in Stock markets are due to those 20% of the times we didn’t take risk.
There are many small things in our financial life which looks very small but we don’t concentrate on them neither do we appreciate the impact it can have on our financial life. Some of the 20% things which we don’t take care of are:
These are 20% part which if taken care properly can greatly improve the performance or your returns (at least mental satisfaction) by great deal . We concentrate mostly on things like strategies , “finding best funds” , “finding cheapest plans” , “finding the easiest way to maximize the returns” , but these are 80% part of process which accounts for less than 20% of the success .. Just ask yourself
Did you miss your deadline for filing the tax return by 31st July? Most of us pay the taxes before the deadline of 31st Mar, but when it comes to filing the return we are lazy people and many times we make mistakes in hurry. However very less people know that even if you have missed the deadline to file your Income Tax Returns, there is no need to panic, as when it comes to filing of your income tax returns, tax laws are not so stringent. In this article, tax implication will be explained considering all the scenarios. You being a salaried person may have missed the filing of your tax returns if you have an income on which all the taxes have been deducted or have been deposited by way of advance tax, no need to panic. There should be no additional penalty or interest for not filing the return by July 31, 2009, provided you act now. You still have the time to file your return of income for the assessment year 2009-10 till March 31-2011.
See the basics of how tax is calculated.
Rules
However, persons who have any Business or Capital loss to be carried forward may have a cause to worry as the said loss would not be allowed to be carried forward to next year if the return of income is not filed before the due date.
If you still have any outstanding taxes to be paid (after deducting TDS and Advance taxes paid, if any) you would be liable to pay simple interest @ 1% per month or part of the month, on the tax payable commencing from the date following the due date till the date of filing the return.
Some Basics
TDS: TDS is tax deducted at Source, Generally Employers deduct our taxes in advance and pay to govt in advance. TDS in detail
Previous Year: Previous Year means the year when we earn Income.
Assessment Year: Assessment year is the year when we actually pay tax for the income earned for previous year.
Example: So if we earn income in year Apr-2008 to Mar-2009, 2008-09 is our Previous Year and 2009-10 is our assessment year.
The Implications of not filing the income tax return on time and the steps to correct the situation
Scenario 1# You do not have outstanding tax liability
In case you have already paid your taxes before 31 March, 2009, but could not file the return within the due date, you may file a return at any time before the end of one year from the relevant assessment year, simply put; for the financial year 2008-09 return can be filed at any time before 31st March 2011, however you may invite a tax penalty of Rs 5,000 u/s 271F of income tax act even if all your taxes have been paid if the same return is furnished after 31st March, 2010.
Scenario 2# You do have some Outstanding Tax liability
If you do need to pay any balance tax, there is some financial implication. The basic principle remains the same: The income tax return for a given assessment year can be filed any time till the end of that assessment year without any penalty. If it is filed after the end of the assessment year, there may be a lump-sum penalty of Rs. 5,000. On top of this, there is a penalty of 1% per month on the net tax payable u/s 234A.
Example:
Say, your income tax liability for the year is Rs. 40,000. You have TDS (Tax Deducted at Source) of Rs. 20,000, and you have paid an advance tax of Rs. 6,000. Thus, the remaining tax payable by you is:
Net Tax Payable = Income tax liability for the year – TDS – Advance tax paid
Now there are two cases, which we have to consider
Case 1: File income tax return before the end of assessment year
Say you file your income tax return on 17th September, 2009. In this case, you would be filing your return 2 months late (partial months are considered as full months).
Final Amount = Net Tax Payable + Interest for 2 months at the rate of 1% per month Amount payable ,
Case 2: File income tax return after the end of assessment year
Say you file your income tax return on 4th June, 2010. In this case, you would be filing your return 11 months late (partial months are considered as full months). On top of this, you would be filing the income tax return after the end of the assessment year for which you are filing the return. So, in this case,
Final Amount = Net Tax Payable + Interest for 11 months at the rate of 1% per month + Lump sum penalty of Rs. 5,000
You have losses that you need to carry forward. This applies irrespective of whether you have any net tax payable or not. If you do not file the income tax return for a year by the due date, a loss for that year can not be carried forward. The only exception to this rule is loss from house property– this loss can be carried forward even if the IT return is not filed in time. Thus, if you have a loss from any of the heads of income (except for the head “Income from house property”) and you file your income tax return late, you would not be able to carry forward your losses. Thus, you would lose the benefit of set off of these losses against the income of the next year.
Conclusion
Not filing a return on time does have financial implications, especially if you have a net income tax payable and/or if you have losses to be carried forward. This can really hurt especially if the losses to be carried forward are significant. Therefore, your best option is to ensure that you file the income tax return by the deadline.”Better late than never” is the best policy when it comes to income tax return filing.
Notes from Manish:
Disadvantages of filing a late return
As per Income Tax Department of India : “Aa tax return may be furnished any time before the expiry of two years from the end of the financial year in which the income was earned’. This means that if you earned your income during FY 2009-10, you may file a belated return anytime before 31st March, 2012 ” . But there are some disadvantages if you dont file your returns on time . They are
You will not be able to carry forward your Business loss (Speculation or otherwise) , capital loss , loss due to owning and maintaining of race horses.
Loss of Interest on refund : You may loose interest on refund u/s 244A specially in case if you are claiming a Major amount as refund.
You cannot revise your return.
NOTE: Dear Friends, the above article does not mean to encourage people for filing late return but only to make taxpayers aware about the provision of IT act and help them taking informed decision.
This is a guest article written by Mr. Rishabh Parakh who is a Chartered Accountant and Director at Money Plant Consulting
Buyers Beware. This is the mantra one has to follow in Indian financial markets. From last many years agents and so-called “Financial Advisors” are using fancy words and tactics to lure investors and sell them inappropriate products like wrong Mutual funds, ULIPS, ULPP’s and Endowment Policies.
In this article we will see what are the common tactics used by agents and how we should handle them and demand logical explanation.
Note that this is not an exhaustive list and there are many more miss-selling techniques which is not covered here. Lets see them one by one.
1# High Dividends declared by Mutual funds.
This is very common tactic used by agents. Even the mutual fund companies advertise about big dividend payout to lure investors.
Investors who do not how mutual funds with dividend options work fall in the trap thinking that dividend is something extra which they get apart from growth, where as the reality is that dividend is your own money which comes back to you and then NAV goes down by that much quantity.
This is a very effective statement because every investor wants “no trap” investment option, hearing that we just have to premiums for 3 yrs and still our insurance cover and policy will keep running makes us interested in these products.
The other thing is that advising paying premiums just for 3 yrs is wrong thing as ULIPs are long-term products and should not be used for short term. This is against the basic principle of any equity related product.
3# This fund has returned 36.6% annual return in last 4 years
Last 4-6 yrs have been extremely good for Indian markets and performance of every mutual funds, ETF or Equity linked product has been great. This single most fact has been used by agents and they have been advertising about the “great performance” of their respective ULIP’s and mutual funds.
What one has to really look at are the returns a product has provided over and above its benchmark or other peers. If Nifty has given 40% return and a mutual funds with bench mark as Nifty has given 41%, there is nothing great in this1p..
This is not true! Any Unit Linked product does not come with Guaranteed returns. Agents some times just say this to attract customers and moreover their Greed! There might be the case that there is some guarantee for initial years premium or over all but then it will be so low that its not even worth considering.
A simple thumb rule is that anything beyond Bank FD returns will always carry some level of risk otherwise why will someone buy FD at all if they can get some guaranteed returns. Nothing comes free in this world, there is always some risk involved.
Watch this video and don’t get fooled by the agents selling ULIPS plan:
5# This is regarding 180% – 250% guaranteed return plan Sir.
Now a days I can see this strange thing with most of the products, that they have started giving “guaranteed returns” with first year premiums.
This has two reasons, people in India like words like “guaranteed” and “secure” especially at times when markets are doing bad, second reason is that they can use these words at the time of promoting their products, I get a lot of calls which start with “Hello sir, this call is regarding 250% guaranteed return plan sir, Can i explain it to you?”
I can sense that sense of pride in the caller’s voice clearly when they say this even though they dont know whom they are talking too.
My first question to them is “Just tell me the IRR of this policy” and then starts the process of “wait sir, let me transfer the call to my senior” and then “wait sir, Let me transfer the call to the regional manager and CEO” who have no idea what is IRR!!! Finally
6# I will give you 10% of Cash back on premiums paid.
ULIPs and an endowment plans have very high commissions in the first year [See a case of miss-selling in ULIP]. So agents lure customers by giving back some part of their commissions back, in this way they get more clients and more money overall.
Don’t fall in trap of this. Many agents also offer to pay your premiums for 1 yr so that you fall into the trap and take the policy.
7# Money doubling in three years
This is again based on past performance, ask for the average rate of return over long term and anything above 15-16% should look unrealistic. Many agents tell the illustration by taking 20% or as high as 30% as return, they will show your last 5 yrs data when this has actually happened, but its not a right thing for 2 reasons.
First reason is that as per IRDA they are supposed to show you illustration with 6% and 10%, nothing other than this. Ask the agent to explain why they are showing you anything other than 6% or 10%. The other reason is that 20% and 30% are not realistic returns from equity in very long run, you should not expect more than 12-15%.
“Free”, we love this word. You can see that even I have used this word at the top of the page right hand side of this page to lure visitors to subscribe to this blog. It works in most of the cases.
There is nothing called as “Free Insurance”, most of the investors do not understand how insurance works and what are the terminologies, they don’t know that there is something called as “mortality charges” which we have to pay as cost of Insurance.
Apart from this agents also stress on tax saving part which is not something which is unique to those products. We have tax savings on different products anyways.
9# These are most bought product in the market and have good returns.
Now this is vicious circle, ULIPs are around 70-80% of the products sold by Life insurance companies these days, the reasons are simple. They are explained by agents in such a way that things looks so rosy that customers feel its a worth buying product.
So agents pitch these products to other investors and then they feel “if everyone is doing it then it should be right thing“, far from the actual and real truth. Common sense is not common, so don’t do what others are doing just blindly, think about it yourself, evaluate it.
You should rather be doing what very less people do. Buy Term Insurance which is not even 1-2% of policies sold 🙂 .
10# Low NAV of a NFO from mutual funds
Most of the NFO’s pay very heavy commissions to agents. This is the reason agents tell investors that they should invest in this mutual funds because they will get more units. Even Investors confuse NAV of mutual funds as share price of a company.
At the end its fund performance which should matter and not NAV number, truly speaking we should request IRDA to ban publishing NAV numbers. Some agents also lure investors saying that they should buy low NAV mutual funds because they will get more units and then more dividend as dividend is paid per unit basis.
This is true but again at the end investor will not benefit as dividend is nothing but their own money.
11# Readers Contribution
Add a comment telling how agent tried miss-selling a product to you and I will add it here :). You can also share any incident small or big.
Readers Tip, How to reduce Misselling: One of the readers “Jagbir” has suggested an excellent idea for IRDA to curb miss-selling: As per Jagbir, “Agents must get commission only after customer feedback, If customer is not satisfied with the agent suggestion or his way of selling, they can give the feedback and then agent commission will not be paid “.
What do you guys think about this ? Please comment ..
Conclusion
India financial markets have two main issues
High commissions for agents:
Because of high commissions, agents tend to go beyond limits and start unethical selling. Apart from this lot of sales pressure, pressure of meeting targets force agents to achieve the target by hook or crook. IRDA should finally come up with some rule where they remove the commissions on the products.
Low awareness and understanding from investors:
Finance Industry has very smart people at higher level, CEO, Relationship managers, advisers and everyone. they are smart people. they understand human psychology. They know Indian public more than Indian public knows themselves. They know what words to use when and how to divert our minds, our thinking.
Why do they come up with “Guaranteed return products” when markets are low?
That the the perfect and the most right time for everyone to enter Equity, but companies know we are afraid of losing, we don’t like losses, we have lesser risk appetite and then all the Jeevan Astha and Jeevan Nishchay and other Secured products like RGF will pop up.
Most of the NFO’s will come in the bull markets and when markets are already up because that is the time we are charged up and ready to bet our home on anything, that is the time when we have to avoid those things.
So finally avoid the trap, ask questions, doubt everything!!
I would like to hear if anything like this has happened with you did some agent every tried some tactic to missell a product to you. Please share your experience and let others know what happened with you.
You have to understand the real goal of financial planning first and then identify the areas you really need to concentrate on .
This is not true! Any