Saturday, February 28, 2009
Friday, February 27, 2009
Thursday, February 26, 2009
1. Life time free credit card may not really be "Free"
Who wants to pay annual fees for a credit card? No one and hence the whole market is awash with credit cards which claim to be life time free i.e. no annual or renewal charges on the card. While this is true for some cards in the market , it may not be true for all of them. For instance, there are companies in the market who sell their "life time free card" with "spend based reversal system which essentially means that you will have to mandatorily spend a fixed amount on your card within specified time period to be able to attract no charges on the card else you have to pay annual fees on it. For example, SBI Credit Cards used to sell most of its credit cards on SBR only. Of course the agent selling you does not tell you this explicitly on its own . So you must check this.
Also , for those credit cards where there is no SBR, generally the rate of interest is higher as compared to same type of card where you have to pay annual and renewal charges. This is to offset the revenue losses due to annual fee and renewal fee waiver. But at the same time there are genuinely free cards as well. So do your research before signing on the application form.
2. 50Day interest free credit period - Misnomer
I bet the first time you take credit card is because someone told you that it offers you 50 day interest free credit. Wow!! sounds incredibly good isn't it? Well it is not entirely false but one needs to understand the conditions in which it applies. Let me explain
-Generally companies offer interest free credit period of 20 days from the day of billing. So for instance if your bill date is 1st of every month and if you buy a product lets say on 2nd of the month then you will get your next bill on subsequent 1st and from thereon you get another 20 days . So theoretically you do get 50 days free interest period. But then you would appreciate that it requires"timing" of sorts for that to happen.
- Also, the biggest secret that none of the companies explicitly tell you is that the interest free credit period is applicable ONLY IF you don't have any outstanding on your card at the time of purchase. And if you do have even a rupee as outstanding then you don't get any interest free credit period. Read it again to fully understand this. So for ex- if you buy something worth SR 10000 today and the outstanding on your card is lets say 0, then you do enjoy interest free period, but if your card had outstanding of even RS 1 , then no free money and you pay interest from day 1.
3. Cash limit + credit Limit = Credit Limit on the card.
Some people get confused between credit limit and cash withdrawal limit. Cash withdrawal limit is a part of total credit limit only and not over and above the credit limit. Generally its a fixed percentage of the total credit limit.
4. Watch out for insurance bundling
While Insurance is a great product and is a must in everyone's portfolio , one needs to buy it based on his needs on a standalone basis. These days lot of credit card companies bundle insurance (health,accident etc) on your card without really making full disclosures always. This is done generally at the agent level. Why he does it? Commission what else. Also it serves the company in 2 ways
- More fee income for the company from the insurance company.
- Since the premium is paid from the card , it helps them to increase spends per card thereby getting a kicker on the total interest income.
5. Add on card rather than 2 separate cards for spouse
Rather than having 2 separate cards for couples, I recommend combination of primary and add on card for couples for the sake of financial discipline. Add on cards help in maintaining financial discipline since the credit limit of both cards are same that of the primary card i.e add on card does not have any additional limit on its own thereby limiting chances of overspending and extravagance.
6. 2 card policy for people using them on net
Since more and more services are getting migrated to Internet platform, we all need to have a card which we can use to transact on net. Considering the risk of hacking on net, I recommend you to have 2 cards, one for offline purchases and other exclusively for Internet. This card should have a lower credit limit of say Rs 15-20000 only so that liability on any misuse is limited to that extent. You can always indicate your desired credit limit to the company while applying for the card.
7. Fill app form fully yourself and not just sign it
We all hear of horror stories of credit card fraud where the card gets issued in someones name and gets used up by someone else. This is primarily because we generally don't fill the detail on the app form ourselves. We just tend to sign on the form and leaving the job of filling the app form to the agent who might want to use it to his advantage. Remember to always fill your form yourself.
For more on this read other posts on http://moneyforinvestment.blogspot.com/.
Tuesday, February 24, 2009
40% of the investment in debt based instruments like FDs, DEbt MFs,Corporate Bonds, NSC, PPF,PF etc.
50% of the investment in debt based instruments like FDs, DEbt MFs,Corporate Bonds, NSC, PPF,PF etc.
Monday, February 23, 2009
Friends, since we are in what insurance guys dream about and call the JFM quarter , I thought it would be prudent to drop few tips to our readers on how to be safe while planning for their taxes this JFM. Why is JFM such a big thing for insurance selling fraternity? Simple, because it is during this qtr that they do most of their yearly business and hence a quarter full of excitement for them.But , in their excitement to garner maximum pie of the business on offer there are times when the agents selling these products try and shove the product down a customer throat without really understanding his needs. Why do they do it ??They do it coz they want to make the most of the JFM qtr and most fundamentally because insurance is a complex product where the sale has to be recommended basis the customers need and requirement. Also as per Philip Kotler, Insurance is an "unsought product" ie a product which people generally dont look to buy. All this makes it a tough proposition to sell. Hence , misselling.
Hence , its very important to understand the various ways in which an agent might try and mis sell an ill suited insurance product to you.
1. Mis-selling by overstating the benefits of the policy
The most common way of enticing customers into buying insurance is by overstating the benefits of the policy. They generally inflate the expected maturity amount or rate of return on the plan. For instance, in ULIPS as per IRDA the projected rate of returns for the 3 funds should as under(approx):
1. Debt Fund - 4-5%
2. Balanced Fund- 6%
3 Equity Fund -8%
All companies are required to have these indicative rates on their BI(Benefit Illustration), but agents sometimes inflate these rates . One should never trust them on rates coz no one can guarantee any rate of return on ULIPS. For traditional plans always refer the BI.
2. Mis-Selling by not disclosing the exclusions of the policy
Almost all policies have some exclusions to it.Insurance companies expect all the applicants to fully disclose any medical history. For example , none of the life insurance policies cover suicide by the policyholder in first year of the policy cover. But agents may not tell you about it and hence you may loose out on potential claim. Medical policies should be carefully bought post reading /checking all the exclusions.
3. Mis-selling by asking applicant not to disclose fully his medical/family history
Insurance companies want all the applicants to disclose their complete medical history in the proposal form. They also expect them to fully disclose his nature of job etc. This is done to fully assess the risk on the applicants life and accordingly either approve /reject his case. But since an agent will never want to loose out on any case, he sometimes may tell applicant not to disclose his medical history convincing him by telling him the ills of doing so. This way even though the policy gets issued the insurance company may not approve claim in future citing wrongful disclosure on your part. But guess what is the agent moaning about it ?? No , he would probably be watching movie on his home theater he bought from commission he made on your sale.
4. Mis-selling by repackaging the product
You would easily come across agents/brokers who would sell you ULIPs as an ideal investment product offering you benefits of both mutual fund and insurance. This is partly true in the sense that it does offer you the flexibility of investing in market like mutual funds while giving you insurance cover as well. What they don't tell you is that it charges you atrociously higher charges in the name of admin fee,fund management fee etc unlike mutual funds. So you end up paying huge part of your money towards these unnecessary and meaningless charges. Stay away from them.
5. Mis-selling on tenure
Some people want to save tax right , but don't want the lock in of 10-15 years that insurance funds have. To tap to this segment, agents sometimes give a spin to their pitch by presenting ULIPS as a product with a tenure of just 3 years (some plans) which is not the case in true sense. The ULIPS do have lockin on 3 years post which the premium may not be paid if one wishes so ,but the fund continues to deduct the mortality charges out of the residual fund value till the fund value is less than the mortality charges after which the policy might lapse.So invest in ULIPS for the long term not for the short term.
6.Mis-Selling by exploiting the Switch Option
Most of the ULIPS offer "switch"option where one can choose to switch between the various funds available under the same plan. For instance, ULIP having option of Debt Fund, Balanced Fund and equity fund offers its investors to choose any one of this at the time of getting into the fund and the same may be changed subsequently using the switch option . 3 switches in a year is free with most funds. When policyholder switches the agent does not get anything. So what he does is that he gets the old plan surrendered at surrender value and gets the client into a new plan itself. Why does he do so ?? Simple coz in a new plan the agent gets hefty commission coz its like a sourcing a new client for that plan. How is the client impacted. He is royally cheated. He gets minuscule amount as surrender value in the first fund and then out of this ends up paying huge commission to the agent . This is off course possible with unsuspecting clients only.
Sunday, February 22, 2009
Here the fund house pays the investor part of the profits made periodically as dividend. This ensures that the investor gets regular access to liquidity and also is able to reap the benefits of the investment periodically and regularly.It appeals to lot of people who have need for regular liquidity.
2.GROWTH or DIVIDEND REINVESTED
Here the fund house retains the profits made in a year and reinvests it for generating more returns next year. This continues till the investor exits from the scheme. This is done take the benefit of compounding of interest in long run by investing the profits made . This is good for people who don't require regular liquidity and are looking at wealth creation over a period of time.
So now lets attempt to answer the question as to which one is best??
I have no doubt in my mind that one should opt for Growth option as it offers you the opportunity to take benefit of the miracle of compounding interest resulting in wealth creation and that is the ultimate g0al of any investor. As far as the need for liquidity is concerned, one can always sell part of the portfolio to meet the liquidity requirement as and when required. So in effect you don't forgo the liquidity option as well. While under Dividend option you will get the dividend irrespective of the fact whether you need money or not thereby loosing out on an opportunity to have that money work for you by being reinvested by the fund house. And if this is not enough, the clincher offcourse is the superior tax benefits that you get under growth option (though the benefit is indirect only).
So, go for Growth option for all your schemes.
Saturday, February 21, 2009
So its imperative to analyse whether there are any loopholes or lacunaes in that premise as well. Whether we get the tax benefit that companies claim we get and if yes are there any exclusions??
Lets see the benefits/drawbacks from tax perspective only:
1. Premium upto Rs 100000 is deducted from gross income under Sec 80C and is completely tax free
While this is true in most cases what we need to remember is that for us to be able to get the tax benefit the premium paid on insurance should not be more than 20% of the sum assured on the policy becuase only 20% of the SA is tax free, rest is not.SO for instance if you pay RS 35000 as premium for policy of SA of 100000 you can claim tax benefit only till Rs 20000 and not for full SR 35000.
2. Minimum lock in of 3 years
To be able to claim tax benefit one needs to be invested atleast for 3 years else he /she will have to forego the tax benefit.
3. Only 33% of the maturity proceeds from Pension fund are tax free
Contrary to what most agents claim, only 33% of the maturity proceeds from a pension fund is tax free . Rest is taxable.
Good news is that for other policies , 100% of the maturity proceeds are tax free under Sec 10 10 d.
Freinds, I have discussed in my earlier post various options where we can save tax till Rs 1 lakhs under Sec 80C of the IT Act. But what if we want to save some more tax?? Can we do that?? Are there options which will helps us save tax beyond Rs 1 lakh in Sec 80C?? The answee to all this is an emphatic YES.
The IT ACT provides us with an opportunity to save tax by buying medical cover for self/spouse/family. We can save tax over and above Sec 80c if we invest some money in buying medical cover for self/spouse/family.
The limit exempted is as under:
Rs 15000 - If we buy mediclaim cover for self/spouse/family.
Rs 20000 - If the cover is bought for senior citizens.
So, go ahead and get yourself a medical cover(mediclaim) from a good provider and ensure yourself from any medical exigencies and also get tax benefit in the process.
My suggestion is to do your due dilligence on policy exclusions before you zero in on the medical policy. Most of the companies dont cover pre existing diseases for first few years. So do your research well.
Thursday, February 19, 2009
No. 5 Franklin India Taxshield
NAV : Rs. 174.1
Risk Rating : 3
Overall rating : 5
This is at number 5 pipping Sundaram BNP on acount of excellent Risk Rating.The fund has above 35,000 crore Avg. Mkt. capitalisation and equity exposure is more tha 97& of the assets. Top holdings include Reliance Industries, HDFC, L&T, ICICI Bank and Bharti Airtel. Financial Services, Technology and Energy are the top sectors where the fund is invested.
5 year returns -47%
3 year returns-37%
No. 4 Birla Equity
NAV : Rs. 76.47
Risk Rating : 5
Overall rating : 4
Birla Equity offers excellent returns from all parameters,but standard deviation of 24.42 , this growth comes with comparatively high risk. The fund has 9394 crorr of AMC with high exposure in Engineering, Services and Financial service sectors. Top holdings include ABB, TRF, Gammon India, Welspun Gujarat and Goodyear India. Top 5 holdings constitutes 20% of its portfolio.
5 year returns -54.%
3 year return - 40.3%
No. 3 HDFC Tax Saver
NAV : Rs. 179.05
Risk Rating : 4
Overall rating : 3
This fund was at No. 2 in the last year Top 5 funds ranking of Investment Guru. But has slipped to No. 3 this year. Well, the fund is second best in terms of 5 year return but scores poorly on 1 year return. Moreover, the Risk rating at 4 is the major reason for it slipping to No. 3 slot. So new filters had a impact on its ratings.With Avg. market capitalisation of Rs. 23204 crore, the fund has top holdings in Basic Engineering, Financial Services and Energy sectors. Top 5 holdings include ICICI bank, L&T, ITC, Crompton greaves and Reliance Industries.
5 year returns -55.7%
3 year returns - 40.1%
No. 2 HDFC Long term Advantage Fund
NAV : Rs. 114.99
Risk Rating : 1
Overall rating : 2
Well this chap has overshdowed its elder brother " HDFC Tax saver funds" and has emerged as the star performer from the HDFC stable. Top holdings include ICICI Bank, Reliance Industries, Blue Star, SBI and Crompton Greaves. But why, HDFC Tax saver fund has better 5 Year, 3 year and 1 Year retrun than this scheme, so why Long term Advantage fund at No. 2 ? Well in the year when investors are realising that saftey of investmnet is as important as the return, why would a fund that has got "THE BEST" risk rating should not stand at No. 2 in our rankings. With standard deviation of 19.84 this scheme has outperformed all the others in Top 5 by a big margin. So for those of us, who places safety as the utmost important factor, HDFC Long term Advantage fund offers the best place to invest. But wait, what if you are OK with second best in Safety and No. 1 in returns ......read on
No. 1 SBI Magnum Taxgain
NAV : Rs. 61.65
Risk Rating : 2
Overall rating : 1
The True leader in its class, SBI Magnum Taxgain has managed to remain at No. 1 even this year. With Standard deviation of 22.13 it has managed to be second best in terms of satefy of returns. In terms of performance it has beaten its nearest rival HDFC or any of the Other 4 Top picks by a big margin.With Avg. mkt. cap of above 27000 crore and with equity to debt mix of 88:12, the fund has Reliance Industries, JP Associates, Welspun Gujarat, Reliance Communications and L&T as its major holdings. The Top Three sector in which the fund has exposure are Energy, Financial Services and Diversified.My advice would be to go for SBI Magnum tax gain for claiming tax benefits under sec. 80 C of the Income Tax Act. The fund not only provides excellent safety in terms of "Low" risk but also offers highest return on all parameters among the Top 5 schemes.For those who want capital appreciation can go for Growth option. Those like me who are willing to get regular liquidity in form of tax free dividends, opt for Dividend Payment option.
Folks this is that time of the year once again when we frantically have to plan our investments with a view of saving taxes. Quite a few of us find this quite confusing and tiresome since they don't really have the adequate knowledge about the various products /tools which are available in the market for tax saving purpose. Most of us do the investments based on the recommendations of seniors or friends or colleagues without really giving it a serious thought. Most don't bother to invest with a view of building portfolio for wealth creation while investing as long as they manage to save the taxes to be paid that year.
This approach to investing is not correct as it does not help you get the max out of your hard earned money in the long run. So lets examine the various options for tax saving and then see which one is the best for us.
The various options available under Sec 80C are as under where you can invest upto 1 lakh and the same amount will be deducted from your overall income and hence wont be taxable.
5.Housing loan principal repayment.
6. Education loan
8 FDs over 5 year
9 NABARD bonds
10. Housing loan interest repayment
While investment in any of the above will help you save taxes to the same extent , they do vary from each other in the returns that they offer you at the end of the investment period. Basically there are 2 types of instruments
1. One that invest in debt/bond etc like PF,PPF,FD,Bonds,NSC etc
2. Other is where money is partly or fully invested in equities like ELSS,ULIP etc.
It is common knowledge that in long term equity offers the best return and hence is the most desirable investment class. The equity a an investment class will give you 12% returns over 10-15 years time frame, while debt funds will give at the most 8-9%. This with the effect of compounding will result in huge difference in the maturity amount. And as such it is always prudent to invest in equity based tools while deciding for tax saving investment. In this case I recommend people to invest in ELSS. This is a great toll as it offers you the option of equity,debt and balanced funds depending on your risk appetite . The fund has lock in of just 3 years which is minimum among other options available (ULIPS too have 3 years lockin but the returns dont compare at all due to high charges, hence not recommended).
After 3 years you may withdraw as well without any load or charges in the most funds available today. Also the maturity amount is free of tax.
Hence, to conclude, next time when you sit to decide your allocation of Rs 1 lakh, do these things:-
1. Find out your PF deductions. Since PF too forms part of Sec 80c any amount deducted for PF will automatically be deducted from overall income and hence be part of your 1 lakh under Sec 80c. For ex- IF your PF deduction is Rs 30000 pa then you need to invest only Rs 70000 additionally under Sec 80C to get max benefit.
2. See if you are running any Housing Loan. The principal part which gets repaid also forms part of Sec 80C.
3.Rest invest in good diversified equity based ELSS. Some of the good ones in India are
- HDFC TAX SAVER
- SBI MAGNUM TAXGAIN
In case you also want to invest in insurance plan to safeguard yourself against any eventuality while taking the benefit of tax saving, then I suggest invest in a combination of pure term plan and ELSS and NOT into ULIP.
Hope this helps settle some of your tax saving blues.
Monday, February 16, 2009
Today in this space I would like to deal with one of the most commonly held myths about investing. Even though the savings rate in our country is among the highest in the world (@30%) In India , quite a substantial portion from the overall investment bucket of the retail customer finds itself invested with the aim of saving income tax. This in itself is not bad at all , infact that’s the reason why such tax breaks are offered. But what is worrying is that most of the people don’t have clarity on rules regulations governing such tax breaks.
As per the current income tax guidelines, one can avail tax exemptions under section 80C of the IT ACT on the money invested upto Rs 1 lakhs in a financial year. Also the maturity benefits are exempted under Sec 10 10 D of the same Act. The various investment instruments/tools which will help you save tax under these guidelines are as under:-
Housing Loan (principal component repaid).
FDs with maturity in excess of 5 years.
School and college fees paid for your children
Now coming to the topic of our discussion, that most people think that all ULIPS (single and regular premium paying) offer same tax breaks under IT ACT. This is NOT true for single premium paying ULIPS. Let’s first examine the premise on which the single premium ULIPs are bought or sold. The salesman generally pitches the single premium ULIPs as a product where you can make one time investment without the hassles of paying at regular intervals while reaping the same tax and investment benefits. This is not true with respect to the tax breaks because in single premium ULIPS one can have minimum SA or life cover upto 1.1 times the premium paid. For example if you invested Rs 1 lakh in Single premium ULIP you need to have atleast 1.10 lakh ‘s life cover or SA on this. Since mostly people buy ULIPS for investment purpose and not for high cover they do go for such SA. Now what most people don’t realize is that under the IT ACT, tax exemption is given only to such policies where the premium paid is less than or equal
to 20% of the SA only. Here in the above example on a SA of Rs 1.10 lk, the exempted premium would be only 20% of Rs 1.10 lakhs i.e 22000 only and not the total Rs 100000 that you invested. Not only this , on maturity the proceeds too would be taxed. So overall you don’t save much tax under this instrument.
Also, understand that you could have invested the same amount under ULIPS offering regular premium payment option to save tax on the overall amount. So what are the takeaways from this. They are:
Invest in regular premium paying ULIPs for saving tax if you must..
Better still to invest in ELSS and term plan to get the same benefit with superior results.(explained in my earlier posts on this blog only).
Monday, February 9, 2009
Ensuring one’s future the insurance way.
Those of you who have read my posts on this blog would have figured out that I am not a big fan of traditional insurance plans (Endowment, ULIPs etc) as investment tool. However, just for the record sake let me also state that while I am not too fond of traditional insurance (read endowment etc) plans, I am of the firm opinion that one can NOT afford not to have insurance in his scheme of things. There are quite a few insurance plans which are very useful and a must for each and every one of us .There are few plans which we have to have to ensure that we are not exposed to the vagaries of uncertain life.
Let’s look at 5 such investment plans which in my opinion is a must for every individual worth his salt.
INVESTMENT NO 1-PERSONAL ACCIDENT INSURANCE
Personal accident insurance is a investment plan which provides cover against any financial damage/liability to the subject/policyholder in case of an accident. This protects the policyholder in case of accidental death or disability . This is particularly recommended for young people below age of 30 years who have just started earning. The reason is that during young age they are less likely to suffer from any disease etc and are exposed mostly to the risk of accidental death or disability. This provides cover against both death and disability due to accident coz disability for younger people is a bigger issue than death itself, financially. Also its one of the cheapest insurance cover available and acts as a good add on to the normal life cover as well.
INVESTMENT NO 2-TERM INSURANCE
Term insurance is plain life cover offered at very low premiums. This is recommended for everyone , mostly for people in the age group of 30 and above. This will protect you from any eventuality. Since each one of us has some earning capacity which is expected to continue for some period in future. The sum total of all that is our net value in simple terms i.e if we were to live our life then we would earn that much money. But if something were to happen to us we loose that sum which we would have earned and hence there is financial loss along with the emotional loss with death. To protect this we need to cover ourselves with a term plan. The amount of cover is generally arrived at a concept called Human Life Value concept, but simply one should atleast have term Plan with SA of 10 times his annual earnings as on date. All insurance companies in India offer this.
INVESTMENT NO 3-CRITICAL ILLNESS/MEDICAL COVER
All of us and our dependents are exposed to the medical risks at all points in time. The cost of medial care is going up with every passing day and the trend is likely to continue. Since medical emergencies can happen anytime to anyone, one needs to be prepared for it. Thus , I recommend everyone to have a floating medical cover for the family. For salaried, generally the employer does it for the employees, but for the others one needs to have it individually . One needs to have at least a floating cover of Rs 5 lakh for the family. Also there are plans where one can have policies to cover critical illnesses like kidney failure, heart bypass surgery etc which are very expensive in nature. These policies are offered by all general insurance companies in India.
INVESTMENT NO 4-HOME/CAR INSURANCE
Since the idea behind insurance is to cover all our risks which are financial in nature we need to have these covers as well. As you grow and go higher up in the ladder you accumulate assets which are of high ticket size . The replacement cost of these assets are steep and hence not easy to replace them easily. So its advisable to have these assets covered under general insurance plans offered by companies to give you peace of mind.
INVESTMENT No 5 -PENSION PLANS
Though this is not a typical insurance plan, I am discussing this here because in India we have pension plans sold by insurance companies only with partial life cover in it. This is very critical for all those who are not covered by the Govt Pension plan. Most of the Central and State Govt employees are covered under Pension plans run by the organization they work for, but for others there is no such safety net to take care of their expenses after they retire and grow old. Since we all will continue to need money even after retirement its necessary that we plan well in advance for such inflows . Most of the life insurance companies are offering pension plans which will guarantee pension on making small contributions regularly in their plan. I suggest all of you working in companies which don’t provide pension and also Self employed, please go and buy one for yourself .
So , above mentioned are the 5 plans that you need to have if you want to have future which is perfect and devoid of any unpleasant surprises for you and your near and dear ones.