Category: Knowledge and Concepts

Is Gold worth Buying ? A shocking Study

Posted on by Jagoinvestor

To understand this Study, we have to go back to years when human civilization started. Surprised! But yes, lets go back to those times where human civilization just started. Those days, economic activity was bare minimum and there were few trades between humans. For example, if a farmer wanted to build a home, he used to give some quantity of grain to carpenter, plumber etc and that system was called BARTER SYSTEM. So goods itself were basically used as currency.

Economic activity grew and then emerged an alternative currency which was in the forms of coins and we had what is called ASHRAFIYA. We had gold, silver and copper coins which were used as currency and it was Emperor who used to control the currency system. Then economic activity picked up further and since there was a limitation to the amount of gold, silver and copper we had, Paper currency emerged and till date such currency is the main form by which we all trade. Though now-a-days, we are witnessing another form of currency which is called Plastic Card Currency/ Credit Currency which if not used judiciously, can be a disaster. In fact,the entire US came to a halt in 2008 as credit currency was mis-used to unimaginable extent.

Today also, each emperor (so called Government) produces and controls their own currency as DOLLOR, Rupee, Dinar etc. But internationally, gold still remains the purest form of currency as it cannot be manipulated. Now in paper currency world over, Dollar became the most acceptable currency as US economy is still the biggest and almost all countries trade with US. After US dollar, the most acceptable form of currency is GOLD. If you have gold and you are not carrying dollar, you can still buy items in any country of the world but you cannot do so with Indian Rupee. Hence, in economic terms, gold is a currency.

 

 

Gold in relation to Dollar

Gold is a recognized international currency and currently Dollar is the most recognized Paper Currency. Hence gold is valued in terms of Dollar and not in Rupee. Now if we go back in the history, in the year 1976-81, gold had a dream bull run. From $100 per ounce in 1976, it had gone as high as $850 per ounce. That rise took place as people feared that US economy would collapse and $ would have no value. That time, US was in war with Vietnam & then came Iranian Revolution – inflation in US was at very high levels and in a way, there was hyper-inflation.

Once the war was over and inflation eased out, Gold came crashing down. In the year 1990, it was $400 per ounce and in the year 2000, it was close to $250 per ounce. That means the effect of bubble was so big that even in 20 years, the gold could not recover its original price and was languishing at less than 1/3 of its peak price. So please don’t be surprised if you will be able to buy gold again at levels of Rs 10000-12000.

 

Gold Price Chart from 1975 to 2010

Now, Dow Jones was at 10000 in the year 2000 and today also it is at same levels. The US economy is in bad shape and in last 10-12 years, it has not really made any significant progress, rather its debt is so much so high, that there is a fear that US would only have to print further paper currency i.e., dollar either to repay the loan or to keep in the economy going. The moment any government print notes without significant growth in the economic activity, the currency loses its value because of high inflation as same quantity of goods and services are being chased by more money. Anyway, US government is printing billions of dollar just to keep the economy afloat.

 

So, the rise in Gold is happening on the background that the most recognizable international currency is loosing its value. If US economy further goes down and government there keeps printing notes, again gold may rise in dollar terms. Such fear exist, even in 1979-80. We don’t know what lies ahead as we are not astrologers.

Dollar in relation to Rupee

In the year 1980, $1 was equal to Rs.8 and today as we are writing this article, $1 = Rs.46. Dollar has appreciated more than 5½ times in last 30 years. In the year 1991, there was a time, when Indian government was literally bankrupt and they had to devalue INR more than 25% in just a single day, just to repay the debt we had. That was the time, India was liberalized and government opened their economy and allowed foreign companies to do businesses. Since then, India has grown dramatically. The fact of the matter is that in the year 1991, sensex was close to 1000 and today it is at 18000.

As Indian economy keeps rising and US economy keeps doing down or at the max stands where it is, the likelihood is that dollar should depreciate. In the year 2007, dollar had depreciated to as low as Rs.37.

Gold with relation to Rupee

Gold was Rs.1450/- in the year 1980 and today it is Rs.18800/-. The rise of 13 times in last 30 years @ 9% p.a. But 5½ times of such rise is on account for Rupee depreciation in terms of dollar. So if we were to analyse the rise in gold price in relation to rupee alone without taking dollar factor, it is only 2.35 times. You see, even in terms of dollar, gold has risen only 1.5 times in last 30 years.

What can happen in future?

As we have said, we are not astrologers, so we can’t predict future. Though we can give some options that may happen:

  1. If dollar in comparison to INR were to stay at the same level of 45-46, then there is a likelihood that gold may rise further.
  2. If due to the sheer strength of Indian Economy, dollar flows to India by way of FDI, FII etc continues, rupee would strengthen and that would mean that even if gold were to rise in dollar terms, it will still decline in rupee terms. In fact, as it happened from 1980 to 2000 that gold kept going down in dollar terms but since the rupee was depreciating in dollar terms, the gold kept rising in Rupee terms. The reverse can happen now and gold may decline in rupee terms.

Basically, the price of gold depends on currency movements; for example,  in Yen terms (Japan) gold have moved 240% & in Pound terms (Britain) 390% in the same period (Check below Chart).

And you already know about Gold price in Rupee term. So what do you feel – whether India will grow & its currency will appreciate or economy will slow down & our currency will depreciate further? We don’t know what lies ahead, but looking at the history, we are not bullish on gold as much as we are bullish on Indian Equities. As long as world keep rising, gold will not give much return. Here we would like to add a recent quote of  legendary investor Warren Buffet – “We live in a world where 80 years out of 100 will be good. But we don’t know which 20 will be bad.”

We always used to suggest investors that gold is not an investment, it is an insurance which would save you in case the entire financial markets were to tumble down. The live example is that of Zimbabwe where, paper currency has lost its value and if you are holding paper currency, it is depreciating at a rate which is unimaginable. You have to carry crores of Zimbabwe currency just to buy a loaf of bread. Now if you are holding gold, you can actually buy or barter goods there. At least, you can go to neighboring country South Africa and buy what you want as gold is recognized everywhere.

Now, if an average Indian household were to look at their asset allocation, they already hold more gold in the form of jewelry or otherwise than they hold Indian equities. In fact, Indians are the biggest consumer of gold. One must consider gold as part of asset allocation tool and over-boarding on it may not be that a great idea. It may happen that in short run, gold may give better returns but mind you, it is Indian equities that will create a long lasting wealth for investors.

One more important point to note

It is often said that Gold is a Hedge against Inflation. But if you were to look at the graph below, you would find that gold has not kept pace with rising inflation. The blue line shows the actual price of gold and the red line shows the price which gold should have carried in order to match with inflation

In October 2009 when Gold was $ 1072, Bloomberg made this statement “While bulls say gold is cheap, the inflation-adjusted price is 15 percent above its 30-year average, Bloomberg data show.” First time in 100 years gold has touched it’s inflation price – what will happen next?

What they meant is that it is for the first time that gold price is above its inflation-adjusted price which clearly states that gold is over-priced as it is a sheer currency and nothing else.

Research on investor psychology

The following are Google trend charts. It analyzes a portion of Google web searches to compute how many searches have been done for the terms you enter, relative to the total number of searches done on Google over time. This clearly shows that people start searching for investment which have gone higher in recent past. Check 2nd Graph of Mutual funds which peaked in December 2007 when equity markets were also at their peak. No one was searching for Mutual funds in the end of 2008 or start of 2009 when actually it was the best time to invest. Upto 2007 end when it was best time to invest in gold but no one was searching for it but when price went up, the number of searched went up.

Few points that we would like to leave open for discussion:

  • What will happen if Indians were to start selling gold as it is at its highest price
  • Why IMF sold gold when it was at $ 1045 per ounce
  • Today experts are saying – Buy Gold. why did not they said when gold was at Rs.5000
  • Gold has appreciated 13 times in last 30 years and sensex has appreciated 140 times. Still why Indians love gold more than sensex

But the problem is “The markets can stay irrational longer than you can stay solvent…“. So never try to time the markets/assets & keep a proper asset allocation.

 

This is a guest article by Hemant Beniwal & Ashish Modani. They both are CERTIFIED FINANCIAL PLANNERCM & writes at The Financial Literates.

What is Reverse Mortgage ?

Posted on by Jagoinvestor

What is Reverse Mortgage ?

Simple! Reverse Mortgage is the exact opposite of a Home Loan. Anyone, who has a fully owned House can get a loan. The way, this works, is that his loan money will be divided in chunks (EMI’s) over many years and given to him every month. This can easily act as Monthly income. At the end of the loan tenure, the Bank stops paying the monthly income. If one of the spouses dies, the other can still continue living in the house. If both die, the bank gives their heirs two options – settle the overall outstanding loan and retain the house or, the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs. For people who don’t know – “Mortgage” means “Loan” 🙂

Reverse Mortgage Loan in India

How is the loan paid ?

With a reverse home mortgage, no payments are made during the life of the borrower(s). Which means the loan has to be paid only after both the borrower and spouse die.  Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas, where the appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.

When both, the borrower and spouse pass away, the ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remains. Read about Real Estate returns over last 10 yrs .

Example :

Mr Ajay is around 62 yrs old, and his wife is 60 yrs old, they live and own a house in Karvenagar, Pune which is worth Rs 1 crore now . They have a daughter and son who are their legal heirs (50:50) . The old aged Ajay and his wife do not have a monthly income source, so they decide to go in for a Reverse Mortgage loan. The Bank is ready to loan upto 60 lacs to them, which means they will be paid Rs 35k per month for next 15 yrs (just an example.)

Now, they start getting monthly income of 35k per month for next 15 yrs, & they continue to live in the same home. After this point, their children support them financially and then Ajay dies at age 79. After this, his wife still continues to live in the house. Sadly she too, passes away at age 85. By this time the total loan outstanding becomes Rs 1.1 crores (It was 60 lacs at the end of 15 yrs, but after that, it starts growing.)

Now the loan has to be paid off. The son and daughter does not have money to pay to the bank, so the bank decides to sell off the property. At that time, the price of the house is Rs. 3 crores. The bank sells the house and get total 3 crores, out of which 1.1 crores is taken by the bank and rest is paid to legal heirs, which they split amongst themselves. Look at EMI Calculator

Which Banks Offer Reverse Mortgage ?

  • National Housing Bank (NHB)
  • Dewan Housing Finance Limited (DHFL)
  • State Bank of India (SBI)
  • Punjab National Bank (PNB)
  • Indian Bank
  • Central Bank of India
  • LlC Housing Finance
  • Andhra Bank
  • Corporation Bank
  • Canara Bank.

Tip from Hemant : “Star Union Dai-ichi offers annuity cover with reverse mortgage . When a person approaches the bank for a reverse mortgage loan on house property, the bank, after assessing the value of the property and sanctioning the loan, will approach the insurer and buy an annuity plan for the borrower. The annuity will be passed on to the borrower’s account on a monthly, quarterly or annual basis. The installments will depend on the purchase price, age and whether the insured person opts for a lower or higher lifetime annuity. “

Important Points in Reverse Mortgage

  • Reverse Mortgage is available to Senior Citizens only. Any house owner over 60 years of age is eligible for a reverse mortgage. If wife is a co-applicant, she  should be above 58.
  • The maximum loan is up to 60 per cent of the value of the residential property subject to maximum of Rs 50 Lacs.
  • The maximum period of property mortgage is 15 years with a bank or a HFC (housing finance company.) Minimum tenure will be 10 years. Some banks like Punjab National Bank offer RML for 20 years also.
  • The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
  • The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
  • The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. How to do last moment Tax Planning ?
  • Reverse mortgage rates will vary according to market conditions depending on the wheather borrower has choosen Fixed or Floating interest rate.
  • Processing fee for the loan would be between 0.15 per cent and 1.50 per cent of the loan amount.
  • One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.

How do I apply for Reverse Mortgage?

  • Decide to pledge your house for reverse mortgage.
  • Go to the branch of the bank, who you have a banking relationship with, and provides Reverse Mortgage
  • Fill up the necessary form, the bank offers for reverse mortgage
  • You need to furnish your personal and financial details like: the property, your legal heirs, and so on.
  • Proof of ownership; you will also need to furnish property papers and a proof that the house that you are pledging is your residence.

When to consider taking Reverse Mortgage ?

Even though Reverse Mortgage seems like a nice idea, it should not be the primary tool to fund one’s retirement expenses. It shouldn’t be used to fund the shortfall in the retirement income if any. A valid reason can be – if one does not have any legal heirs or leaving money to/for them after death, is not high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income. One can use reverse mortgage in that case. In India, Reverse mortgage isn’t very popular yet, because of bad/negligible marketing and our mentality, where we dont take loan on our most valuable and most emotional asset “Home” 🙂 Another reason could also be that there are old / aged people who own 100% of home and are living alone with spouse are few & far between. These products might become very popular in coming decades .

Comments? What do you feel about Reverse Mortgage Products? Do you think it’ll become more popular & successful in the coming decades?

Impact on Direct Tax Code on various products

Posted on by Jagoinvestor

Direct Tax Code is the new proposed bill for changing the tax rules in India. If it comes into effect from April 1, 2011, it will change the whole taxation system and will change the way our taxes are calculated from years . The new tax code will have impact on Insurance Policies, Home Loans, PPF, Ulip, Mutual Funds, Shares and Taxation slab. A common man has to understand whats there in future for him so that he can plan accordingly. However the Direct Code tax is still in draft and might come into effect, but there is no guarantee. Experts feel that it can not come in its original form. Lets see what are the impacts on different investment products if DTC comes into effect .

Effect on Endowment/Moneyback insurance policies

As per Direct tax code, any amount you receive at maturity from an insurance policy (including bonus) will be taxed. However this rule will not apply for policies where;

  1. In any given year , premium paid in a year is less than 5% of Sum Assured , and
  2. The policy runs till maturity.

So if you have anyEndowment Policy or Moneyback Policy and in any year if you paid or will pay more than 5% of Sum assured as premium or make your policy as paid up in between, all the money you receive in the end will be taxed at the time of maturity. For policies where premium paying term is lesser than the total tenure, still all these rules will apply. For example , if you have a policy where sum assured is Rs 5,00,00;  then there can be two cases where you will be taxed at the end.

  • First : If you pay more than 25,000 as premiums .
  • Second :  Even if you pass this 5% rule , but you do not run your policy till maturity.

Effect on ULIP’s

The same rule applies to ULIP also. The first point is exiting before 10 yrs will badly hurt you from cost point, as all the Ulip’s are heavily front loaded and exiting before 10 yrs means the total cost is (commissions) turns out to be too much for you. Only if your total premium per year is less than 5% of the Sum assured, you can save yourself from getting taxed. But most of the Ulip plans in the country will not meet that criteria as majority of the policyholder’s pay much more than 5% of sum assured as premiums. A big number of policies have sum assured as 5 times of the premium, as it’s the minimum requirement of a Ulip policy . Read about recent war between SEBI and IRDA over ULIP control

Effect on PPF

For PPF account any amount you have accumulated till 31 Mar 2011, will be tax free in any year of withdrawal. However any new contribution made after 31 mar 2011 will be taxed in any year when its withdrawn . All these rules will apply to existing as well as new accounts. One important point you should consider here is that PPF will still remain one of the best debt product, because this “tax on maturity” rule will be applicable on all the products, so from that point , PPF will still have one of the best returns in debt segment. This whole rule applies to your EPF as well . (Tip : Read Why you should open a PPF account even if you dont need it right now)

Strategies

  • Deposit more this year (2010-2011, so that amount becomes tax-free at the end .
  • Invest in your child who is below 3 yrs, so that you get benefit of tax on amount contributed for next 15 yrs, and after 15 yrs , when your child is age 18 , he/she will get that amount and it will be considered as his/her income , but at that time the tax outgo will be lesser as they will not have any other source of income , so the tax outgo will be less . This will not be a significant, but still 😉 (Read Clubbing Rules of Income tax)
  • Dont withdraw big partial chunks in between. Better withdraw smaller amounts so that in any particular year your taxable incomes remains low

Effect on Home Loans

Self occupied house

The tax benefits on self occupied home loans will be withdrawn once DTC comes into effect . At present Rs 1 lac is exempted for principle repayment and Rs 1.5 lacs for the interest repayment. After DTC comes, you will have not get tax benefits (Report on Returns from Real Estate in India)

House given on Rent

1.5 lacs interest deduction will be applicable for the home loans where the house is the second one and is given on rent. You might want to reconsider taking home loans if tax break was one of the major deciding factor .

In true sense tax break on home loans should always be secondary factor while deciding the purchase of house, because if you look back in your home loan documents, it’s clearly written that tax benefits are always as per the applicable rules of the year. So dont feel cheated and yell on govt for this.

Effect on Mutual Funds & Stocks

DTC does not differentiate between short-term and long-term capital gains, which means that any withdrawal after 31st Mar 2011 will be taxed in the year of withdrawal.  Currently any profit earned after 1 yrs of investment is tax-free in Equity mutual funds and Stocks , this will not remain so . So if you have any Equity mutual funds or stocks with you, better sell them just before 31st Mar 2011 , so that current tax rules apply to that part of your investments .

Effect on Kisan Vikas Patra(KVP)/NSC/Tax Saving FD

All of these will loose the tax benefits

Effect on Income Tax Slab

The following tax slab will be applicable

 

Income Level Tax
Upto 1.6 Lacs NIL
1.6 – 10 Lacs 10%
10 – 25 Lacs 20%
25+ Lacs 30.00%

 

Effect on 80C

Sec 80C will be replaced by Sec 66 and limit will be raised from 1.2 Lac (20k for Infa bonds) to 3 lacs . Have a look at following classification of profucts from taxation point .

Direct tax code Effects on different financial products

What do you feel about Direct Tax code ? Are you Happy about it ? Do you think it would be easy for Govt to bring Direct tax code without much fuss ? Share your thoughts

Agents commission in Insurance Policies ?

Posted on by Jagoinvestor

In this article we will see the commission structure of Insurance Policies . We will look at Endowment/Moneyback/ULIP plans and how much commission an agent earns per year out of those policies.

As per Insurance Act, 1938, The insurance companies are allowed to pay a maximum commission of 40 per cent of the first year’s premium, 7.5 per cent of the second year’s premium and 5 per cent from there on. The commission paid is limited to 2 per cent in case of single premium policies. In case of pension plans, the commission is limited to 7.5 per cent of the first year’s premium and 2 per cent there on. Currently most of the policies are very much paying these kind of commissions . Let us quickly look some of the facts on Life Insurance .

  • Average sum assured of the insured Indian is around Rs 90,000
  • 1 trillion worth of policies lapsed in 2008-09 , this is mostly because investors have discarded their old policies to buy new one’s , thanks to agents who tell people about another “hot” plan in market. Another reason is that investors buy policies which have higher premium than what they can afford in reality and later feel that its time to stop it .
  • India Insurance penetration is around 7.5% of global numbers . i.e: 0.16% of the GDP, which is , against a global average of 2.14
  • As per IRDA report 2008-09 , Insurance Industry had 29.37 lakh agents by the end of Mar 2009 , out of which 13 lakh agents were added during 2008-09 .

Life Insurance Commission Example

 

Policy Type Premium Paying Term Upfront Commission (1st Year) Trail Commission (2nd & 3rd yr) Trail Commission (from 4th yr)
Endowment / Term Plans 15+ yrs 25% – 35%  * 7.5% 5%
Endowment / Term Plans 10-14 yrs 20% – 28%  *
 7.5% 5%
Endowment / Term Plans 5-9 yrs 14% 5% 5%
Endowment / Term Plans Single Premium 2% 0% 0%
Money Back 15+ yrs 15% – 21%  *
 10% 5%
ULIPs Regular Premium
 20 – 40% 2% 2%
ULIPs Single premium 2% 0% 0%

 

Note : Some of the numbers are in range, which means the commission can lie between that range . Mostly its minimum commission + Bonus if any

Example

  • Policy Type : Endowment Policy
  • Premium Paying Term : 20 Yrs
  • Premium/Year : Rs 1 Lacs

Agents Commission

Year
 Commission Amount
 Method
1st Year Rs 35,000 1 X 35%
2nd Year Rs 15,000 2 X 7.5%
4-20th Year Rs 85,000 17 X 5%
Total Rs 1.35 Lacs 6.75%

Q: So are you imaging which is more costly ? Mutual funds or Insurance Policies ?

Read subramoney’s article on this topic.

How to use this information ?

Agents have to make sure that they follow-up with clients and track the premium payment, this leads to overheads and regular feedback from agents side , apart from that there are operational expenses incurred by agents , so we should not forget those points . As a customer , you should be knowing how much an agent is making out of you , this should form the basis of the quality service for you . An agent should help you understand your Insurance requirement and provide you the best solution , He should assist you in buying the Policy and over the years he should update you/ help you with all the changes .

Hot discussion topic

As per a govt-appointed committee , Insurance commissions should totally be removed by 2011 . “Immediately the upfront commissions embedded in the premium paid (to agents by insurance companies) be cut to no more than 15 per cent of the premium. This should fall to 7 per cent in 2010 and become nil by April 2011”, said the consultation paper prepared by Committee on Investor Awareness and Protection. (Link) .

What do you feel about removing the commissions from Insurance products totally ? Will it impact the Insurance Industry , how much ? Do you think it will lead to fall in premium payments or new policy getting issued ? I personally feel YES . What are your views ?

Are Company Fixed Deposit Safe ?

Posted on by Jagoinvestor

Today we will talk about Company Fixed Deposits. There are many investors who are very much impressed by the Corporate fixed deposits and feel like they are as good as Bank Fixed deposits, but one has to understand that if company deposits offer higher interest rates, It is bound to be more riskier than normal Fixed Deposits offered by Banks. Most of the investors think that Company fixed deposits are safe just because the company which is offering these Deposits are very famous one’s and very big in Size. But that is not true ! .  How to Find cheapest Fixed Deposit in India

What are Corporate Fixed Deposits

Corporate fixed deposits are normal fixed deposits offered by Companies. The interest rates  offered are generally higher than Bank interest rates and can be in range from 9%-16% . Higher the interest rates offered higher are the risks involved. Why do companies have these deposits? when companies have cash crunch and require money, they can offer deposits at attractive rate of interest to common public, one of the reasons for this can be that they do not want to raise the additional capital by issuing shares.  Corporate Deposits are governed as per Section 58A of Companies Act, however these are “unsecured” loans (we will talk about it) .

Risks with Company Fixed Deposits

There are two main risks associated with Company Deposits , they are :

A) Default Risk : These Company deposits carry a risk called Default Risk, which means, at maturity they might not be able to return your maturity amount and default in the payment. It can happen that company is out of cash at that time or does not have sufficient money in their hand to pay back , this can happen for many reasons like their business might not be going good that time or because of recession .

MUMBAI, MAY 19: The beleaguered CRB Capital Markets has failed to submit its plan for settlement of Rs 180-crore liabilities to fixed-deposit holders. Reserve Bank of India (RBI) is now free to move court seeking the winding up of the non-banking finance company (NBFC).

Prudential Capital Markets Ltd., based in Calcutta was one of the biggest and successful NBFCs. But their reputation came under a lot of flak the moment they began to default in the payment of interests and the matured amounts. When flustered investors started queuing up to withdraw funds invested in Prudential, the company managed to stave
them off by stating that it would repay 40% of the funds within a year and the remainder a year later. In some cases the cheques were issued but if they thought they were lucky, they were in for a shock for their cheques bounced.

B) Unsecured Deposits : Bank Deposits are secured by RBI up to 1 lacs rupees per branch, which means that if bank does not return you the money or goes bankrupt, RBI will pay you up to 1 lacs of deposits. There is no such Insurance on Company Deposits, hence they are totally unsecured . Link

Update from Rakesh : We have very bad experience with Midwest Iron & Steel company. My parents had invested in this company in mid 90’s and the company was defaulted in 1997. SEBI had included it in its list of vanishing companies. Its been over 13 years we have still not received any money nor do we know any status of it. I had written to SEBI but not update yet.

Caution Points

Premature Exit from Company FD’s are not that simple like Bank FD’s. You might have to run from one place to another and send loads of letters and some times even give reasons for Premature Withdrawals .

One such investor, Vidyadhar Radhakrishna Lad, a senior citizen and shareholder of the company, had subscribed for the fixed deposit scheme of Jaiprakash Associates by investing Rs 1 lakh. Despite writing to the company and running from pillar to post for two months, Mr Lad has still not received his fixed deposit receipt (FDR). Link

Make sure you also consider the credit ratings given by CRISIL and ICRA for that FD .  (Understand CRISIL Ratings and ICRA Ratings)

Refer to the article below to read about Panjon Pharma Fraud in Fixed Deposits (Credit : Hemant Beniwal)

Fixed Depoits fraud from Panjon Pharma .

Should you invest in Corporate Fixed Deposits

There is nothing good or bad , some companies which offer Fixed Deposits are very established and are highly reputed, however you can’t take it at face value and ignore the risks involved. If you want to park money for short-term and are comfortable with the risks which come with corporate fixed deposits, these Corporate fixed deposits can be a good products for you. The point here is awareness. It’s not recommended that you put a big sum in same company. If you want to invest 2 lacs in company fixed deposits, then better invest 1 lacs in 2 different company, that would diversify your risk to some extent. Also if you are investing for some very important goal, then better settle with Bank Fixed Deposits and not Corporate deposits,  it’s better to settle with 2-3% less returns then take unneccessary risk . Here are some words of caution while choosing Company deposits .

Which Company Fixed Deposits you should avoid

  • Companies which offer interest higher than 15%.
  • Companies which are not paying regular dividends to the shareholder
  • Companies whose Balance Sheet shows losses
  • Companies which are below investment grade (A or under) rating.
  • Pvt limited Companies and Partnership firms as its very difficult to judge their performance.

List of Corporate Fixed Deposits

 

Company Name 1 yr 2 yr 3 yr
Ansal Properties and Infrastructure 11.5 12 12.5
Ansal Housing & Construction 11 11 12
Ind Swift Ltd., 11 11.5 12
Ind Swift Lab Ltd., 11 11.5 12
Jai Prakash Associates Ltd 11 11.5 12
Surya Roshni Ltd. 11 11.5 12
Shri Ram – Subhihska (62 Months) – – 12
Mukund Ltd/ Mukund Eng. Ltd(Plan B) 10.5 11 11.25
Jagatjit Industries 10 10.5 11
Jindal Stainless Ltd., 10 10.5 11

 

See Full List of Corporate Fixed Deposits

Other Important Points

  • Generally Corporate fixed deposits come for least tenure of 6 months .
  • No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year.
  • It would be wise to check company performance and movement in share prices half-yearly at least . This is for a review .
  • Companies generally provide a very high commission to brokers in order to push their Fixed Deposits.

What is Systematic Transfer Plan (STP)

Posted on by Jagoinvestor

Imagine a scenario when you want to invest a big lump sum amount in stock market ? As markets are volatile and can go up or down very soon , there is always risk of loosing a big chunk of your investment (Learn about Stock Markets) . Take a case where you want to invest 10 lacs in Equity Mutual funds and suddenly market crashes for next 2 months, In this case a big chunk of your investment will be lost, on the other hand if market moves up pretty fast, you can make a good profit. Here you have to decide your main focus. If it’s minimizing risk and getting good decent returns in long-term, You should use something called Systematic Transfer Plan (STP) .

What is STP (Systematic Transfer Plan)

You should first understand SIP . SIP is way of investing in Mutual funds monthly, where a fixed amount of money goes from your Bank Account to Mutual funds, so if you do a SIP of 1,000 for 1 yr, it means that every month on a fixed date (chosen by you) 1,000 will be invested in a Fixed Mutual fund you choose. Lets understand STP now, In STP we invest a lump sum amount in some Mutual Fund and then a fixed sum is transferred  from that mutual fund to another mutual fund .

How does Systematic Transfer Plan works (STP)

For Example : If you have Rs 6 lacs lump sum to invest and you want to invest in HDFC Top 200 , The steps you will have to follow are :

  1. Choose a good Debt fund or Floating Rate Mutual Fund from HDFC , which allows STP to HDFC Top 200 .
  2. Invest all the money in the Debt Fund .
  3. Now you can start a 10k/20k/30k  per month STP from HDFC Debt fund to HDFC Top 200 .

Why and When to use STP

When will it work : STP will make sense from DEBT -> EQUITY when markets are mayvery volatile and you dont want to take risk with your money in a short span of time, If you invest through STP in markets and markets fall or have lots of volatile moves, then this situation will be better than the one time investment option. This is still better than putting money in Bank and doing a SIP, because at least you money is earning some returns on debt part in STP .

When will it not work : Incase markets are already at the end of a Bear market and markets can starts it upmove anytime, in that case STP will not deliver the best returns like SIP, one time investment is a good choice in that case. But then you never know that when will markets start go up. Given that a retail investor does not have all the tools and time to research the markets, it’s not advisable to invest lump sum in any case. It’s better to get 4-5%  less returns than to see a huge downside of your money in short time, Smart investors think about returns, Smartest one’s take care of risk first .

Understand How to time markets using Nifty PE analysis

Difference between SIP, STP and SWP

  • SIP : The way SIP works that your money is in your Bank Account and every month a fixed sum is taken away from your Bank and invested in a Mutual fund .
  • STP : The way STP works is, all your money is actually invested in a Mutual funds itself (probably Debt) and units are sold every month and its invested in another Mutual fund (probably Equity) or vice versa .
  • SWP : However If you redeem your units in mutual funds every month and get it deposited in your Bank accounts , it’s called SWP (systematic Withdrawal Plan) , which is recommended to liquidate your mutual funds corpus after you see a good bull market to protect your investment .

Difference between SIP and STP

4 advantages of STP

STP has 4 advantages and works in 4 ways for you . They are :

Works as SIP : You can invest in a Debt funds and from there you can start a STP to an Equity Fund , so it works like a systematic Investment Plan (SIP) .

Works as SWP : So STP can also work like SWP, because with some funds you can do transfer from Equity funds to Debt Funds, so when markets look risky to you, you can start a STP from Equity -> Debt funds, which will act like SWP .

Liquidity : Generally one does STP from Debt -> Equity funds, so your money is invested in Debt fund. This means you can sell it anytime if you want. Hence it works like a Emergency Fund also. Incase you need money urgently, it can act like a liquid asset (at least for the time being in the start when you have more money in Debt fund)

Growth in Money : Not to forget that your money is invested in Debt funds, so your money is also growing at debt returns , at least the part which is lying in the debt funds .

Some Helpful Tips

  • Invest in ELSS , If you want to invest in ELSS schemes and have lump sum money , better put it in a debt funds and do a STP .
  • Rebalance your portfolio, Use STP as a tool to rebalance your asset allocation, when your equity part goes up , start STP from Equity-Debt for 6 months or 1 yr, and bump up your debt part and if your Debt part goes up, do Debt -> Equity STP . Power of Asset Allocation and Portfolio Rebalancing
  • Take advantage of market condition , If markets have gone too high now and every other person on the road is talking about Stock and stock markets are more famous than “Saas Bahu” Serials, immediately start your STP from Equity to Debt (literally Rush) . On the other hand when markets are deep down and “Why don’t you buy stocks” is feels abusive and everyone face looks like some body has died at home when you mentions stock markets, know that it’s a time to start a STP from your Debt – > Equity (Literally rush again) . You don’t need to see any indicators to predict the markets, the two real life scenarios I have described here are enough, try to remember markets around 2007 End(bull market) and Jan 2009 (markets lowest point) . STP can be used as switching mechanism in ULIP , though it’s very restrictive and with less choices .
  • Using STP when an important goal is near, If you are saving for some important goal like Child Education , Buying Home or Retirement and your goal is approaching near by , don’t wait till target date , you don’t want to see your Money dip by 40-50% within 6 months or so if markets suddenly crash , start moving your money out of equity and transfer it to Debt now through STP .

Two types of STP

There are two types of STP plans , Fixed and Capital Appreciation. In Fixed Plan means a fixed sum will be transfered to the target mutual funds , on the other hand in Capital Appreciation , only the amount of capital which is appreciated gets transferred , that was the original lumpsum amount invested in the start is protected . Capital Appreciation choice is only with Growth Plan and not dividend plan . Here is the list of all the STP Plans as of now .

 

STP Information

View more presentations from The Financial Literates.

 

Important Points

  • Typically, a minimum of six such transfers are to be agreed on by investors in STP , just like SIP
  • Generally most of the mutual funds allow Debt -> Equity STP and not reverse , Only handful of Mutual Funds like Kotak allows it .
  • STP is a facility for convenience , when the transfer happens from one mutual funds to another its still considered as selling of mutual funds and then buying another one , so tax rules applies in the same way .
  • Most of the funds allow only Monthly and Quarterly STP , some allow weekly and fortnightly also .
  • There can be some minimum amount requirement for starting an STP like say at least 1,00,000 needs to be invested in Debt funds to start a STP to Equity . Some restriction like this will be there .
  • There can be additional Switching Charges for availing STP facility
  • Entry load and Entry load may still apply while buying and selling of mutual funds through STP.
  • Securities Transaction Tax @ 0.25% will be deducted on equity oriented funds at the time of redemption or switch to another scheme in STP .

How do Highest NAV Guarantee Plans work ?

Posted on by Jagoinvestor

Now a days, we are seeing a new “Innovative” product in the market. They’re called Highest NAV Guaranteed Plans .These products have come in, after the recent crash in the market, and companies are taking advantage of the fact that Investors are looking for some kind of a safe investment equity product. Hence, they’ve launched these Highest NAV Return ULIP’s which confuse investors and make them (the investors :)), believe that they are going to get the highest return from the Stock market in long run – generally the tenure is 7 yrs, for these plans .

In this article, we look at how Highest NAV Guarantee ULIP’s work, and you will understand, how any Guarantee product can be created by simple methods . The simple catch, here is that these schemes, are structured in such a manner, that the collected funds can be invested either in equities, debt instruments or in money-market instruments in proportions varying from zero to 100%

How Highest NAV Guarantee Policy Works ?

These plans use strategies like Dynamic Hedging and CPPI (Constant proportion portfolio insurance), which are advanced strategies used in Derivatives world. But, let me explain a simplified version of the whole process.

Supposing a policy starts today and is guaranteed to give highest NAV in next 7 yrs  and we can control how money moves to debt and equity, its pretty simple.

In the beginning, let’s assume a NAV of Rs 10, and the Asset allocation is 100% in equity and 0% in debt . Now suppose, the market moves up and NAV goes upto Rs 15 by the end of the first year, at this point, try to understand what Insurance company has to provide – they have to make sure, that they provide at least Rs 15 as the return after 6 yrs . Now in order to achieve this, all they have to do is keep X amount in debt instruments which will mature in next 6 years and provide Rs 15 at the end of 6 yrs, so assuming the debt return at 7%, they need to put around Rs 10 in Bonds , so that the maturity of the bond is Rs 15 at the end of 6 yrs .

=>  10 * (1.07)^6
=>  15.007

They can now invest the rest Rs 5 in Equity as Rs 10 is allocated to Debt . So, now they’ve made sure that whatever happens to the market, they get Rs 15 for sure at the end of 6 yrs. Now, there are two possibilities

Case 1 : Market Goes down : If market goes down, the NAV will go down correspondingly, but as per the strategy, the maturity value will be at least Rs 15.

Case 2 : Market Goes up again : If market goes up at this point and the NAV rises above 15, for example say to Rs. 18, now again they will pull out money from Equity and allocate such an amount to debt, that the maturity at the end of total 7 yrs would be Rs 18 and so on…

Note :

  • These highest guaranteed schemes do not provide wide range of product categories, such as equity-oriented growth funds, balance funds and debt funds.
  • Guarantee on highest NAV is available only if you survive the term. If you die during the term, your nominees will get the prevailing value of the fund. This is inferior to even a regular debt product because of the high cost structure involved.

Following is a pictorial description of how the Guaranteed NAV plan works with assumption of a 7 year tenure.

How does a Highest NAV guarantee plan works

How Investors get Confused

You have to read in between the lines; Investors need to understand that these schemes guarantee the “Highest NAV”,  READ AGAIN! , it’s Highest NAV and not “Highest Returns” .  Normal Investors don’t give much thought before buying these products and normally assume that the returns will be linked to the Equity Markets .

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Returns from Highest NAV Guarantee Plans

So, what are the return expectations of these funds? We know, that long-term equity returns, are normally in the 12-15% range while, debt returns turn out to be 6-7%. So, considering the fact, that these products will shift most of their money to debt, by the end of the tenure , we can expect the returns to be in range of 9-10%. We do get some equity upside in these products, but that will be limited. After a point, this product will turn into a debt oriented fund with a major portion in debt . Also if you factor in costs, like premium allocation charges , fund management charges and other yearly charges, the returns will not be what you actually expect.

You will be amazed to know, that the returns expected from these schemes, may be lower than the returns offered by equity-oriented Ulips. The reason being, that the basic objective of protecting the previous high NAV of the fund, may constrain the fund manager’s ability to take risks while allocating funds. So if the market has fallen down, the fund manager can’t take the risk of shifting the money from Debt to Equity to gain from the potential upsides in future , because they have to provide the “Guarantee.”

Read : Important Questions you should Ask an ULIP Agent ?

Source :  LiveMint Research

Current Products in Market with Highest NAV Guarantee

  • ICICI’s Pinnacle
  • Birla Sun Life Platinum Plus-III
  • Bajaj Allianz Max Gain
  • SBI Life Smart Ulip
  • Tata AIG Apex Invest Assure
  • LIC Wealth Plus
  • Reliance Highest NAV Guarantee Plan.
  • AEGON Religare Wealth Protect Plan

Controlling your emotions with these products

Let’s talk about mistakes from the investors point of view. We, as investors, don’t think with inquisitive, susceptive minds. Getting good returns from stock markets is anyways a tough thing in itself. So when these companies come up with plans like these, which say “highest NAV in 7 yrs”, we have to ask, “How is this possible?” . Dont say it’s not possible at all, just ask how? How do they achieve it? Stop seeing dreams of getting high returns without looking at the risk involved, and try to find out – what is the strategy they’re using , Is there something in between the lines ?

We all want to get great returns, but we have to shed this belief that, companies come up with plans specially for us. All the companies out there exist to earn money, and their motive behind every product is to make money, & generate profits for their companies, so that they keep their shareholders happy. So next time a product like this comes up , you have to control your emotions before getting in and first investigate. The worst part of this whole business, (of guaranteed highest NAV products) is the timing and how it gives naive investors, high illusions about the product. Products like these, take major advantage of psychology of the ordinary saver. Many Investors in smaller towns have broken their Fixed Deposits and taken some loan to invest in products like these, especially SBI Life Smart Ulip and LIC Wealth Plus because of the trust factor with LIC and SBI . See How Agents are Misselling LIC Wealth Plus

Why you should be “Pissed off” At these Insurance Companies

  • Do you Know that, The Securities & Exchange Board of India (SEBI) , the stock market and mutual fund regulator, does not allow mutual funds to guarantee returns. Therefore Mutual funds can not provide guaranteed products which are related to stock markets, but IRDA can approve things like these and all these insurance companies come under the ambit of Insurance Regulatory and Development Authority of India (IRDA). So any Insurance Company can come up with a new Plan , link it with market and start providing “Guaranteed products” . You have to understand that “equity markets” and “guarantees” are a very risky idea together , so please stay away.
  • Do you observe when do all these “Innovative” products come up in Market ? The answer is around end of the year, which is a premier Tax Investment time (Jan , Feb , Mar) . Is innovation in Finance space limited to End of the year ? Why dont these products come through out the year? Why ? The answer is simple , if it comes after anytime other than last 4-5 months of the Financial Year (ie Dec , Jan , Feb , Mar) , no body will bother to invest in these, because no body is bothered to “invest” at all . Companies very well understand investors psychology and their helpless ness at the end of the year because they have to provide investment proofs for Tax exemption as soon as possible . This is not just limited to these products , its true for NFO’s , IPO’s in booming markets , More Sales calls at the end of the year, and other new products .
  • The so-called “Guarantee” is a marketing gimmick and is implicitly a result of the way the investment is structured . what it means is that the strategy they use itself is such that it will provide you the highest NAV , even we can create our own Plan and do what they are doing . But they make sure that Investors  feel like they have done years of research and came up with these amazing plans .
  • You have to understand that there is nothing “Innovative” in this product , the fact that 7 companies have come up with the same product proves that its not “innovation” because Innovation is unique . Aegon Religare has gone ahead in this stupidity and introduced their Guaranteed Plan which guaranteed 80% of the Highest NAV , Looks like they think that it makes them look different from others .

Who should Invest in These Products ?

If you are looking for modest returns, like 8-10%, you can invest in these policies. The return of these policies may be high in the beginning, if market does well; but when market starts performing badly, the returns can take a hit and then be in a tight range. Your NAV will be protected for sure, but the returns wont be, since over time the CAGR return will go down. Remember, if your NAV is 10 today and you highest NAV is 20, for a 2 year period, the return is a good enough 41%, but by the 4th year it’s just 18.9% and by the end of 7th year it’s a measly 10.4%. So what you really need, is protection of returns, not the NAV which is just a fixed number.

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Do’s & Dont’s for filing your Income Tax Returns

Posted on by Jagoinvestor

With the tax-planning season about to end, most individuals are rushing around to make investments to minimise their tax liability.

And although, the last date for filing income tax returns is just a few months away (July 31), some of us are still unaware about the procedure and guidelines. Have a look at recent changes in the Income tax slab and how it affects the common man.

Income tax return

Q. I have a Permanent Account Number (PAN). Do I still need to file my tax returns?

A. Just having a PAN number does not mean that you have to compulsorily file your tax return. As per the Income Tax Act (1961), you are required to file a “Return of Income”, if your taxable income exceeds Rs 1.60 lakh for the financial year 2009-10 (Rs1.90 lakh in case of women and Rs2.40 lakh in case of senior citizens).

However, you need to have a PAN in order to file income tax returns. Read more

Q. What are the benefits of filing income tax returns (ITR)?

A. Filing ITR is really beneficial for an individual. Apart from the legal obligation, it is mostly required for purposes like:

  • Availing any kind of loan, like home, personal or education.
  • Visa and immigration processing
  • Income proof / net worth certification
  • Refund claims (in case of excess taxes paid)
  • Applying for a higher insurance cover
  • and ultimately, “Peace of mind!”

Q. How does one plan for better investments under section 80C ?

A. Section 80C is the most important provision under the Income Tax Act (1961). Making use of the available tax deductions can go a long way in helping individuals accumulate wealth.

Benefits of tax planning (for FY 2008-09)

Income (Rs) Tax Rate (%) Maximum tax savings

after 80C deductions (Rs)

Savings invested

@ 8% pa for 20 years (Rs)

Savings invested

@ 15% pa for 20 years (Rs)Upto Rs 1.50 lakh

Nil ———Rs 1.50 lakh to Rs 3 lakh101030048008168575Rs 3 lakh to Rs 5 lakh202060096016337151Rs 5 lakh and above 3030900144024505726
The amount saved in turns can be invested in various, in order to gain maximum benefits. Prime examples:

Case in point: Consider an individual, in the highest tax bracket, with a gross total income of Rs 6 lakh. If he chooses to ignore the tax sops available under Section 80 C, his tax liability will amount to Rs 87,550 (for AY 2009-10).

Conversely, if he chooses to make eligible investments/contributions of Rs 1, 00,000 under Section 80 C, his tax liability will be Rs56,650 i.e. a saving of Rs 30,900.

Look before you leap – Tips for better and effective planning of your investments:

Every tax saving investment scheme has inherent advantages and disadvantages; & each individual has to decide his investment strategy based on:

  • Lock-in period and safety of the investment
  • Return, before Tax / Return, Post Tax / Tax Free returns
  • Whether interest will be treated as fresh investment under Income Tax Act
  • Age and risk appetite
  • Liquidity, surrender charges etc.

Some tips to plan your finances better:

  • One should by default set aside 10% of his/her income;  Start living with your 90% of salary
  • Avoid waiting to invest a lump sum, at the last minute, as most of the times we tend to run short of money, resulting in a loss of tax benefit, besides the savings and long-term capital appreciation.
  • Last minute decisions mostly result in investing in unwanted and futile schemes
  • Use ECS / Direct Debit facility offered by the bank for investments; this will help you invest, without fail, regularly.
  • Invest monthly or quarterly as it provides long term capital appreciation
  • Monthly or systematic investments also provide a check against market volatility

Watch this video to learn everything about Income tax return:

Q. Since tax is already deducted from the salary well in advance as a TDS, then why does one need to file Income Tax Return?

A. Although tax has been deducted and there is no further liability to pay tax, an employee has to compulsorily file his/her income tax return if he/she exceeds the maximum amount, not chargeable to tax.

It is, in essence, a declaration to the income tax department that you have derived only income from salary and not any other source (if you do have income from other sources, then the same needs to be incorporated).

Note. Many a times, employees do not include the interest that they receive on their savings bank account. The entire interest earned on the savings bank account is taxable.

Q. Can you please explain the complete procedure to file ITR?

Step 1: Gather all the necessary documents.

These are:

1. Form No. 16: This is issued by the employer, stating your income from salary, and tax deducted by your employer from salary income.

Form 16

2. Form No. 16A: This is received from all the payers, who have deducted tax, while making payment to you, during the year. For e.g. banks and companies.

Summary of all bank accounts operated during the year: This summary will give an idea about all the interest income earned during the year.

Details of property owned during the year: If you have bought some property during the year and put it on rent, then you will need details of rent received and receipts of municipal tax paid during the year.

In addition to this, if you have bought such property through a loan, do carry the loan details and a copy of certificate of interest paid during the year.

Sale & purchase bill/documents/contract note in respect of shares transactions during the year: You will also need purchase documents corresponding to the sales made during the year. In case of a large number of transactions, it is advisable that you prepare a statement of sale and corresponding purchase of these investments and arrive at the amount of profit or loss, before actually calculating your taxable income.

Details of tax payments made during the year: This is required only if you have made advance tax or self assessment payment during the year.

Step 2: Select the proper income tax return form i.e. ITR, which is based on the nature of income earned.

FOR INDIVIDUALS: Form No. Applicability

ITR 1 Meant for Individuals, who have

a) Income from salary
b) Interest income
c) Family pension

  • ITR 2 Individuals/HUF not having any income on account of business or profession
  • ITR 4 Individuals/HUF having income from a proprietary business or profession

Step 3: To file your tax returns:

You can file your returns either Manually or Electronically.

Electronically: The Income Tax Department has introduced a convenient way to file these returns online. The process of electronically filing your Income tax returns, through the Internet, is known as e-filing of returns. This is a really convenient facility, since it saves you the hassle of traveling all the way to the IT office.

This facility is available round the clock and returns could be filed from any place in the world. It also eliminates reduces ‘friction’ between the assessee and tax officials.

Manually: For manual/physical filing, the individual takes a print out of the respective ITR form , from the income tax site, along with the acknowledgment form, and after duly filling it, files it with the respective income tax office. Forms are available free of cost too

Q. What are the documents required, which has to be attached with returns of income?

A. Under the new procedure, be it is electronic or physical filing, individuals do not have to attach any documents or enclosures with the return of income. However, one should preserve the supporting documents as they can be called for, at a later stage by an income tax officer to check the accuracy of the claims made.

Some of the documents are:

  • Detailed calculation of taxable income and amount of tax payable/refundable
  • Form No. 16/16A (original)
  • Counterfoil of all the tax payments made during the year
  • Copy of documents, concerning sale of investments and properties
  • The Copy of bank statements
  • Copy of proof for all the deductions and exemptions claimed in the return of income

In case of a refund, the bank account details needs to be filled in accurately. In case the refund is opted to be received via ECS direct into the bank account, adequate care should be taken to correctly fill in the MICR code.

PRECAUTIONS THAT ONE NEEDS TO TAKE

Filing returns at the eleventh hour often lead to a lot of inconvenience. Also Filing online, very close to the last day, is risky, as the peak load on the servers of the e-filing website during the last few days may make the whole online filing quite frustrating, causing needless delay.

Filing return after the due date, may lead to empty the pockets of the taxpayer who have incurred losses; which he wants to carry-forward to future years. Under the tax laws, some losses are not allowed to be carried forward for being set-off against future income, unless the return has been filed by the due date, even though all the taxes have been pre-paid.

Similarly, if a paper return is filed, the acknowledgement slip should be preserved carefully.

SOME TIPS TO AVOID LAST MINUTE RUSH

  • Step 1: Select and get the appropriate forms from the Income Tax site or offices
  • Step 2: If a professional is handling your taxes, meet him and make an appointment early before your accountant’s schedule gets completely booked. If you’re preparing your own taxes, set a day aside on your calendar for preparing taxes.
  • Step 3: Review your tax documentation before  submission
  • Step 4: You can file your returns offline or online. However, before doing so, check whether you still have a tax liability. If you are still to pay taxes, do so through Internet banking or through cash/cheque at any bank along with Form 280. In both cases, you have to furnish challan details in the income tax return (ITR) form.
  • Step5: Prepare your taxes. Now that you have all of the necessary forms and documentation, you can prepare your taxes without waiting for the last minute.

PENALTY FOR FILING RETURNS LATE

For details , you should look at the article  “How to miss your tax return filing deadline and still Enjoy”

Conclusion:

A little extra care, planning & precaution on the part of taxpayers can help them avoid committing mistakes, while filing the tax return and keep away, unwelcome visits from the taxman.

It was a guest post by Rishabh Parakh, who is the director of Money Plant Consulting

https://www.jagoinvestor.com/2010/01/how-to-miss-your-income-tax-returns-itr-deadline-and-still-enjoy.html

Review of LIC’s Wealth Plus

Posted on by Jagoinvestor

If you were to hear about an investment plan with 17% p.a. returns i.e. if you invest Rs. 1lac today, it would become Rs. 3.5  lacs  in next 8 years time, wouldn’t you get greedy?And what if it is told to you that such Highest  NAV Guaranteed ULIPs are guaranteed by one of the biggest financial institution LIC of India, it would be Icing on the Cake and a “Never Miss Opportunity”. But everything sounds so good, if looked deeply may reveal something else. Someone rightly said “the big print give it and the fine print take it away”. Such is the case with LIC’s new insurance plan- Wealth Plus.

Game Started in 2007

Every year during the last quarter of Financial Year, insurance agents find new ways to misguide people and make them invest in policies based on false assumptions and promises. Let us take example of year 2007 when LIC launched one of its most famous policy “Money Plus”.

During the launch, pamphlets were distributed in all the nook and corner of the country showing high returns. Eg. Invest Rs. 1 lac for next three years and get Rs.3.38 crores after 20 years at a return of 25% p.a. Based on such exuberant returns printed on a pamphlet and false promises made by agents, thousands and lakhs of investors across India invested their money. Not only did people invested their savings but there were many instances where smaller households sold their jewelry and other personal belongings believing what they were told by the agents that LIC is guaranteeing such high returns.

What LIC have to say

Later when the news of misguided selling of this policy was brought to the notice of LIC management. LIC states that such assumptions are unrealistic and totally false. Investors should not be misguided in the name of LIC. On a letter dated February 12, 2007 to all the Zonal Manager and Sr. Divisional Managers,  Managing Director of the LIC Mr. Mathur himself writes that “The unethical practice of circulating such pamphlets to misguide the public and get business is betraying the trust we built-in the last 50 years.” See the Letter Below (Click to read in bigger Size , recommended)

LIC Zonal officer letter for misselling in LIC Wealth Plus ULIP Policy

Though efforts were made to stop agents to use such pamphlets to increase their business but since the agent community is so big and scattered not much could be done. It was quite amazing that all over India similar pamphlets were distributed and hence it is clear that without the help of Development Officer of LIC such work was not possible. D.O. of LIC also gets commissions or incentives when his agents gives more business to LIC. See the pamphlets Below:

Pamphlets showing returns with Term 3 yrs and investment 25,000

LIC Wealth Plus Misselling Pamphlets

Pamphlets showing returns with Term 1 yr and investment 1,00,000

LIC Wealth Plus ULIP policy misselling pamphlets

Another template with LIC Logo

LIC Wealth Plus Guaranteed NAV ULIP Misselling

What other Govt bodies have to say

Ministry of Consumer Affairs, Food and Public Distribution through “Jago Grahak Jago” also acknowledged that such misleading things are taking place and hence warned investors to refrain themselves from such high return promises.

D Swaroop (PFRDA Chairman) committee on investor awareness & protection states that “The chief cause of mis-selling is the incentive structure that induces agents to look after their own interest rather than that of the customer. If that were not true, the average sum assured of the insured Indian would be higher than the current Rs 90,000.”

 

Now when a income earner of an average Indian family dies untimely, do you think his family will survive for the rest of their life with less than Rs. 90,000? Insurance is meant to cover risk of untimely death first and investment and tax savings are secondary criteria. But we Indians, have been taught Insurance as an investment first, tax savings second and then somewhere in the last we talk of insurance as well. Now again such practice of miss-selling has emerged and agents are targeting with LIC’s new product Wealth Plus.

What is LIC Wealth Plus Product

This product of LIC which was launched on February 9, 2010 (Table 801) states that LIC will guarantee the highest NAV to the investor in the first 7 years and product will mature after 8 years. It nowhere guarantees the return. In it’s official web-site, LIC states that the minimum guarantee will be of Rs. 10 NAV as Rs. 10 will be the starting point. Actually that means that they are not even guaranteeing that you will get your entire money back as there will be certain charges in the policy itself. They have nowhere written that they will guarantee any amount of return to the investor. Nor they have mentioned that your money will be invested 100% into equity.

Now what Agents are telling

  • LIC is giving guarantee on HIGHEST RETURN. (LIC is saying Highest NAV)
  • Now what is highest return? Based on past performance of LIC’s ULIP policy (Bima Plus), you will get 17%-18% return on investment.
  • Lumpsum Rs. 1 lac invested today will become Rs.3,45,693/- or give Rs 25000 for 3 years & get Rs.2,14,690/- after 8 years.
  • You should switch all your  earlier product (on which agents have already made huge commission) into this product as this is something which is as good as KOHINOOR DIAMOND.

To generate such high returns, the money has to remain in equity but LIC nowhere states that. In almost all ULIPs it is clear how much money will go in equities and how much money will go in debt but this policy is silent on the allocation percentage and hence you may land up getting return that of endowment or money back (nearly 6%-7%).

Bima Plus of LIC was a ULIP where it was mandatory for the fund manager to remain invested in Equities in a pre-decided proportion. It was launched in 2001 when the markets were trading at 3000 sensex levels and later sensex touched even 21000. Is it a right approach to compare such high returns which were made during Bull Market and making investor believe that such returns will be now guaranteed by LIC. Now if you go to a small shopkeeper, a carpenter or a young executive and show them that you will get such high return, why he/she will not invest and that too if they are told that guarantee is done by the India’s biggest financial institution, LIC.

We feel sorry to say but such agents who are misleading people do not even think twice before selling such policies in a wrong approach. The fact of the matter is that the money is just not invested in policies but gets invested in someone’s kids higher education, someone’s retirement, some dreams which common man look to achieve.  We believe that

Insurance agents have sold to Indian everything other than Insurance.

Comment from a Reader who is an LIC Agent

Thanks Manish for bringing up this burning issues today. As a agent I can confirm you that these pamphlet actually circulated by LIC office. If you have any doubts go to any LIC branch ask any sales manager or BM they will tell you same. Actually agents sell the product because they are misguided by Senior LIC officials but unfortunately when debate arise agents are vindicated and punished. The projection shown in the phamphlet, circulated to us at the time product launch meeting. For a wealth plus policy LIC given extra incentive to us. But yes you are absolutely true we should think about our client not LIC/BM/DO. It is not true that agents always think about their pocket,they bound to sell product sometime otherwise they face a painful situation. Ask any Insurance company/agent how many term insurance they sell, they wont tell you the truth. IRDA also not interested about selling pure term insurance product otherwise they also issue circular to increase the term insurance sales growth. If this is the situation what will a agent do? Either he has to terminate his agency or keep continuing same practice as Big agents/Insurance Company/IRDA like to do. ( Original Comment )

What is IRDA guidelines says

As per IRDA, agents and Insurance companies are mandated to show return either at 6% or 10%. But the pamphlet distributed have no regards for Regulatory guidelines. Let’s Compare return according to pamphlet & IRDA Guidelines:

Regular Premium Single premium
Premium 25000 100000
Paying Term 3 years 1 Year
Pamphlet 214690 345639
As per IRDA guidelines
6% 87549 118442
10% 114306 161697
  • Figures are approx

Innocent Investors ?

We believe even investor is at fault and not all the blame should be transferred to the Agents alone. It is always “Buyers Beware”. We take well thought decision before we buy even a fridge in our house. We do research which fridge is best for us and look at least 4-5 shops before we finalize. But when it comes to financial products, we don’t really do our home work and at times decision is taken not even going through the pros and cons of the policy.

Now what investors should do?

If you have already taken the policy

  • Cancel the policy if bought under false promises and high projection. The policy can be returned within 15 days of the receipt of the document without any charges under ‘free-look’ option.
  • If 15 days are over, nothing much can be done.

If Not Taken

  • Take your well thought decision before jumping on to this product.
  • Tell your friends about the same.

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Comments ? would love to here your views on Wealth Plus from LIC . Please share what do you feel about it ?

This is a guest article by Hemant Beniwal & Ashish Modani. They both are CERTIFIED FINANCIAL PLANNERCM & writes at The Financial Literates

Regular Premium

Single premium

Premium

25000

100000

Paying Term

3 years

1 Year

Pamphlet

214690

345639

As per IRDA guidelines

6%

87549

118442

10%

114306

161697

Floating Rate Mutual Funds – How, When and Why?

Posted on by Jagoinvestor

Let us say you have 1 Lac rupees and you want to invest for the term of 1 to 1.5 years that can earn a decent interest rate. You thought of investing in fixed deposit in a bank for 1.5 year @ 6% per annum. Just after one month, bank increased it’s FD interest rate by 0.5% and again after 6 months interest rate is increased by 1%. But you cannot avail this benefit since your FD carries fixed interest till 1.5 years. Is there any investment instrument that could work to handle this situation? Of course YES, Mutual fund industry does offer floating rate debt mutual funds to invest in.

Basic Definitions you should know

  • Coupon rate: The stated interest rate on a bond or other debt security when it’s issued.
  • Benchmark rate: A rate used as a yardstick for measuring or setting other interest rates.
  • Expense ratio: A measure of what it costs an investment company to operate a mutual fund.

What are Floating Rate Mutual funds?

These are the Debt mutual funds which invests about 75% to 100% in securities which pay a floating rate interest (bank loans, bonds and other debt securities) while the rest is in fixed income securities. See List of best Debt Oriented Mutual funds

There are two kinds of floating rate funds– long term and short term. The portfolio of the short-term fund plan is normally skewed towards short-term maturities with higher liquidity and the portfolio of the long-term plan is skewed towards longer-term maturities. However, even the longer-term funds are positioned more on the lines of short-term funds and are not very aggressive in nature.

Floating Rate securities vs Traditional bonds

As you may know, that most bonds have fixed interest rates which are set when they are first issued, either by a government or a corporation. That rate of interest doesn’t change for the life of the bond. A floating rate security on the other hand, has a variable interest rate. That means it’s interest rate will go up and down, or “float” to reflect changes in current market rates.
Depending on the particular floating rate security, the interest rate may change daily, monthly, quarterly, annually, or at another specified interval. The rate is generally changed to keep it in line with a particular interest rate benchmark, which is often called the “Reference Rate.” Among the benchmarks used to set the interest rate on floating rate securities are the MIBOR (Mumbai Interbank Offered Rate). Hence, each time the benchmark rate fluctuates; the coupon rate is adjusted accordingly.

Note

The MIBOR rate is the weighted average of call money business transactions done by 29 institutions, including banks, primary dealers and financial institutions. This rate is calculated and disclosed by FIMMDA-NSE.  [ Ignore If you dont understand ]

Credit Quality and Risk/Return spectrum

Credit quality is the measurement of a bond issuer’s ability to repay the debt it undertakes. Investment into AAA and equivalent rated instruments, call money market and government securities are the safest and most liquid instruments, while below AAA and equivalent rated instruments reflect downgraded quality and lower liquidity. However, their lower quality results in better returns, albeit at a higher risk.

All about floating rate mutual funds in india

Example analysis

Let us compare the floating rate, fixed rate debt fund and liquid funds over the years to understand the performance.

 

HDFC Floating rate Income fund long term plan (G) HDFC Floating rate Income fund Short term (G) HDFC High interest (G) HDFC Liquid fund (G)
Category Debt: Floating Rate Long-term Debt: Floating rate short term Debt: Medium-term Debt: Ultra Short-term
1 month 0.35 0.35 -0.65 0.3
3 month 1.20 1.06 -0.4 0.95
1 year 7.68 5.0 5.53 4.68
3 year 8.58 — 8.2 7.17
5 year 7.48 — 5.98 6.77
Expense ratio 0.25 0.75 2.25 0.5
Exit load 3% within 18 months Nil 0.5% within 6 months Nil

 

 

Why, When & How

Why to opt for floating rate funds

  • The primary advantage of these funds is that, they are less volatile than other types of debt funds. In case of fixed rate bonds, when interest rates in the economy change, the price of the bond adjusts to make up for the fixed coupon of the bond.
  • Looking at the performance table over different time frames, floating rate funds have delivered outstanding performance over the years and more importantly, with considerable consistency.
  • A look at the performance table also reveals a better consistency in delivering higher returns when compared to other type of funds.
  • Credit quality of floating rate funds’ category is more or less similar to liquid funds and ultra short-term funds. Average maturity does not play a very important role in case of floating rate funds as they invest in instruments, that have a variable coupon rate.

When to opt for floating rate funds

  • Floating rate funds make better choice when interest rates are set to rise.
  • Floating rate fund can be considered to establish emergency fund. In the above case of HDFC Floating rate Income Long term plan (G), one can slowly build up emergency fund and once 18 months are over, you can redeem any time.
  • If investment period is 1 to 2 years and liquidity is a concern, then one can look at floating rate funds over fixed rate debt funds. Now banks are coming up with recurring deposits with quarterly revision of floating rates. Always look for alternatives as per your investment period, returns, risk and liquidity.

How to select floating rate funds

  • Long term floating rate funds are better than short term considering performance, less expense ratio.
  • Select a fund which has proved its performance over a period. (This shows the effectiveness of the fund house in mobilizing the assets under management).
  • Select the fund which invests significant % of asset in companies/securities with highest credit rating.
  • Select the fund with low expense ratio.

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Floating rate funds in India

The primary reason for their lack luster presence in the mutual fund industry has been investor ignorance of the nature of floating rate funds. There is a shortage of sufficient long-term floating rate instruments. Due to this, fund managers divert certain portion towards fixed interest securities. In the present situation of Indian economy money market and higher inflation situation, interest rates are set to rise in near future. Always consider floating rate funds over liquid/ultra short term/debt funds.

List of Top Floating Rate Mutual Fund

Long Term

Short Term


Comments! Do you think you can add these to your Portfolio for some short term goals?

This is a guest post from Srinivas Girigowda who is one of the best contributors on this blog :), Kudos to him. Check out his finance blog Here