Without knowing companies you cannot make the most of this opportunity to pick up quality stocks. Here’s where you should go for information you can trust.
There are many lessons to learn from the 2008 market crash. One of the most important is: understand a company before investing in it. If you do, the market is offering a good chance to pick quality stocks at reasonable prices. The problem is that without sound information, any investment decision would be based on weak reasoning and is unlikely to support your overall portfolio performance. But how do you know that the information you have is accurate? For that, you need to do your research well and look at the right place for the right information. Here are seven parameters you should look at and the places you can find information on them.
Market Capitalisation
What is it?
Market capitalisation (cap) is calculated by multiplying a company’s outstanding shares (paid-up equity capital divided by the face value) with the current market price (CMP). This indicates the worth of the company in terms of its shares. To calculate the market cap of, say, GlaxoSmithKline (GSK) Consumer Health-care, multiply the CMP—Rs 815 as on 13 May—with the 4.20 crore outstanding shares, which comes to Rs 3423 crore.
Where to look
- The financial results section or the company related page on stock exchange websites (www.nseindia.com or www.bseindia.com) give details of outstanding shares
- The quotes page on these sites give CMP
- Financial dailies publish market cap data of select companies
Trading Volumes
What is it?
It is the total number of stocks of a company traded at an exchange. It is a measure of the liquidity and also shows the level of market participation in the stock. This figure is especially important in the case of low-volume stocks (below 2,000 shares). During tough market conditions, liquidating low-volume stocks becomes difficult. The 2-week average quantity of Dabur India shares is around 2.2 lakh, which is a comfortable number. On the other hand, the number for MMTC is only 500-600 shares for the same period.
Where to look
- Stock exchange sites
- Financial dailies
Historical Price Data
What is it?
This information helps understand how a stock’s price has behaved over a period of time. Information on whether a stock is at a new peak or a new low helps evaluate the quality of the stock. For instance, if a stock has breached its yearly low, you should get into the reason behind it.
Where to look
- The quotes page or the stock reach page on the NSE and BSE sites share the yearly high and low data
- Use the ‘charting function’ of exchange sites for graphical representation. This will help you find whether the stock is trading at a new low or a new high. The co-movement option helps compare the performance of the stock with the index
- On www.nseindia.com, go to the equity, market information, historical data section. Click on the security-wise data section, get the security symbol and choose the dates for which you want information. On www.bseindia.com, go to the archives section
Company Developments
What is it?
Developments in a company such as a new product, capacity expansion or a new clientele can affect the stock’s performance. Find out what impact these developments can have on the stock. Also, find out about the company’s competitors, government regulations related to it, and their impact on its operations.
Where to look
- Financial dailies
- Corporate announcements on exchange sites have information about developments in a company
- Analyst meets or conference call updates on company sites throw light on the company’s future plans
- To understand the operations of a company, read its latest annual report. The director’s report and management discussion and analysis will give you a detailed perspective on the company’s current performance and outlook
- Follow the notes published at the end of the statutory advertisements that companies release to gather information on disclosures
- Investors can also become a member of online investment clubs. You will derive a lot of information which can, subsequently, be validated from a reliable source
Financial Data
What is it?
Before buying a stock, it is important to know about the company’s financial performance. Growth in sales and profit over the last four to five quarters will help you understand its performance in the light of the recent market scenario. Its growth rate in the last 4-5 years will give an insight into the pace of growth in the past. Look at the operating margin growth as well, especially so in the current tough operating environment.
Remember to look at the consolidated, and not the standalone performance. Consolidated performance includes the results of all subsidiaries, joint ventures and investments in associate companies. Its importance is evident from the impact it has on the performance of some companies.
Where to look
- Company website. Results and annual reports need to be read carefully. For example, in case of Dabur India, go to www.dabur.com, click on investor relations and get into financial presentations. You will get quarterly results, annual report, investor communications and analyst conference call transcripts there
- The financial results section on stock exchange websites
Balancesheet
What is it?
Many companies, especially those from the pharmaceutical and IT sectors, are under stress due to high debt and losses on foreign currency borrowings. Many investors ignored the foreign currency convertible bond (FCCB) details before the 2008 stockmarket crash.
FCCB is a type of convertible bond issued in a currency different from the issuer’s domestic currency. The mix of debt and equity instruments it has gives the bondholder an option to convert the bond into a stock.
Due to the sharp stockmarket dip, the companies are unable to offer the bondholders the option of converting the bonds into equity at a premium. Instead, bondholders had to exercise the debt option. Companies would now have to decide on how to service their FCCBs.
The balancesheet will also help you understand the financial leveraging capacity of the company. Calculate the debt-equity ratio to get this. It is arrived at by dividing the total liabilities by the stockholders’ equity.
Take the case of Aurobindo Pharma. It has outstanding FCCB of $260 million. A part of it will come up for redemption in the beginning of 2010. This stock got butchered when the FCCB issue became a major concern and is currently trading at more than 80 per cent discount to its FCCB conversion price.
Recent updates on the NSE website suggest that the company has plans to buy back its outstanding FCCBs in small lots. The company’s debt-equity ratio is 1.5. This should be considered before investing because high debt-equity (normally above one) suggests that the company has been aggressive in financing its growth through debt. If the company’s operation is under stress due to the economic environment and its balancesheet is debt-burdened, then it would be better to stay away from its stock.
Where to look
- Annual report and news releases on the company website
- Corporate announcements available on stock exchange sites
Basic Calculations
Deduct any preferred stock dividends from the net profit after tax and divide the balance by the number of outstanding shares. This will give you the earnings per share (EPS) of a company.
To assess a stock, calculate the trailing 12 months’ EPS (for the last four quarters). Then, calculate the price earning ratio (PE)—CMP divided by EPS.
For example, GSK Consumer’s EPS grew steadily from Rs 30 in December 2006 to Rs 51.30 in March 2009. The company follows the calendar year
and this data can be sourced from the exchange sites and also the company’s website, www.gsk-ch.in. The latest EPS and CMP (Rs 815) translate into a PE ratio of 15.9.
To evaluate whether a PE is high or low, compare it with the industry PE and index PE. This data is also available on exchange sites. Go to the industry index information to get the PE details of a particular industry. The BSE FMCG Index’s PE, for instance, as on 13 May is 23.54 while GSK Consumer’s PE is 15.9. This suggests a comparatively low PE for the company.
Where to look
- Profit & loss account on exchange sites or company website
- Quarterly or annual results published by the company also carry EPS information;
Source: money.outlook.com
Sunday, May 24, 2009
Get The Best Of Both Worlds
Hybrid accounts offer liquidity, high returns and capital protection. In these troubled times, they are a flexible in-out instrument for your funds
How To Get More
Maintain the minimum balance in respective accounts while opting for sweep-in or auto sweep facilities. This way you will not have to pay any service charges for them
In an auto sweep facility, keep a reasonable threshold limit. This will prevent frequent breaking of fds and you will get a higher rate of return from them
In a sweep-in facility, try not to link an FD that’s nearing maturity
***
While the equity markets are passing though a volatile period, banks look attractive as places to park surplus funds
"Smart use of facilities offered by hybrid accounts can make them flexible instruments for meeting longer-term as well as immediate needs"
Savings acc-ounts offer unparalleled liquidity, but returns of just 3.5 per cent a year. Fixed deposits (FDs) give higher returns and capital security, but are not as liquid as savings accounts. And, any premature withdrawal means losing out on interest. So what do you do?
Enter hybrid accounts. They offer liquidity, high returns and capital protection. Most banks offer them under different names (see Revolving Doors).
The use
Says Pune-based certified financial planner Veer Sardesai: "Hybrid accounts have been around for a while. They have gained prominence now because many banks have started offering such facilities."
Hybrid accounts can be used for long-term as well as immediate needs. For long-term goals, such as a child’s education or buying a house, you should move away from riskier asset classes 2-3 years before you need the money. If you know exactly when that need would be, it is better to invest in a bank FD of the same duration. But this rarely happens. In reality, one never knows when money would be required. Usually, if there is an unplanned money requirement, an FD is broken, especially if there is no other source.
Such a situation can be avoided with hybrid accounts with sweep-in or auto sweep facilities. These facilities can also be used to create an emergency fund. "We frequently advise people that everyone must keep aside 6-8 months’ living expenses as an emergency fund," says Sardesai. With a sweep-in facility, excess funds above a threshold limit in a savings account can be automatically transferred into an FD and earn a higher interest rate.
Mother of invention
Earlier, a person had a savings account for liquid money and FDs for investment. In such a situation, every time he had to issue a cheque in excess of the balance in the savings account, he had to visit the bank branch to give instructions to break his FD. Says Seshan Ramakrishnan, head, liabilities products, HDFC Bank: "This was an inconvenience that customers could do without. At the same time, the bank had to manually process all such requests within the agreed turnaround time."
Thus, a hybrid product was created that helped the customer earn higher interest and issue cheques of amounts more than in the account without any manual intervention from the bank.
The working
These accounts work in two broad ways. One is the sweep-in facility, where a savings or current account is linked with multiple FDs in the same bank. HDFC Bank’s facility is a typical example. You would need a savings or current account and FDs that are to be linked, in the same bank. Any deficit in your savings or current account will be met by a withdrawal of an exact value from your FD. Since deposits are broken down in units of Re 1, you will lose interest only on the actual amount withdrawn from the FD.
The second way is the auto sweep facility. ICICI Bank’s Auto Invest Account facility is an example. All you need to do is mention a threshold limit. Any amount above the limit will be converted into an FD in multiples of Rs 5,000. The linked FDs are by default of one-year period or you can go for a period of your choice. Interest rates are as revised by the bank from time to time. Maturing deposits are renewed for a year or for a period of your choice at the interest rate prevailing on the date of renewal.
Your choice. "Each individual needs to choose a hybrid product depending upon his need and cash flows," says Ramakrishnan. For example, try not to use the sweep-in facility for an FD that is nearing maturity since the loss of interest on breaking it would be higher.
In the auto sweep facility, if more than one FD is linked, the last deposit made under the scheme will be used first to meet the shortfall. If this isn’t adequate, then the deposit made prior to the last deposit will be used, and so on.
Costs. These facilities do not cost extra under certain conditions. For example, to availyourself of HDFC Bank’s sweep-in facility without charges, you will have to maintain Rs 50,000 or more in your FD. If the level goes below Rs 50,000, service charges applicable on a savings or current account are levied. ICICI Bank’s auto sweep facility requires you to maintain Rs 10,000 in the linked savings bank account. With Bank of Rajasthan’s Flexi Fixed Deposits, you will need to maintain a minimum of Rs 10,000 in the FD, failing which you would need to pay Rs 100per quarter.
Getting the most. Use these tricks to get the most out of these facilities.
With an auto sweep facility, make sure you keep a reasonable threshold limit in the savings account so that your FDs are not broken regularly and you continue to earn higher returns on them.
Also, as Sardesai points out, "it becomes a bit difficult for a lay person to understand the bank statement if there are excessive transactions between the multiple accounts". Another thing to remember is that interest earned on these accounts is fully taxable in your hands. So, plan in such a way that the FDs earn more interest than the savings bank account.
Other options
In an emergency, you can take an overdraft against your FD. However, make sure the overdraft is not more expensive than breaking the FD. Also, getting the overdraft takes more time due to the increased paperwork involved. Look for banks that provide an instant overdraft facility against the FD.
People with higher risk appetites can move towards liquid mutual funds for shoring up emergency fund requirements.
Source:money.outlook.com
How To Get More
Maintain the minimum balance in respective accounts while opting for sweep-in or auto sweep facilities. This way you will not have to pay any service charges for them
In an auto sweep facility, keep a reasonable threshold limit. This will prevent frequent breaking of fds and you will get a higher rate of return from them
In a sweep-in facility, try not to link an FD that’s nearing maturity
***
While the equity markets are passing though a volatile period, banks look attractive as places to park surplus funds
"Smart use of facilities offered by hybrid accounts can make them flexible instruments for meeting longer-term as well as immediate needs"
Savings acc-ounts offer unparalleled liquidity, but returns of just 3.5 per cent a year. Fixed deposits (FDs) give higher returns and capital security, but are not as liquid as savings accounts. And, any premature withdrawal means losing out on interest. So what do you do?
Enter hybrid accounts. They offer liquidity, high returns and capital protection. Most banks offer them under different names (see Revolving Doors).
The use
Says Pune-based certified financial planner Veer Sardesai: "Hybrid accounts have been around for a while. They have gained prominence now because many banks have started offering such facilities."
Hybrid accounts can be used for long-term as well as immediate needs. For long-term goals, such as a child’s education or buying a house, you should move away from riskier asset classes 2-3 years before you need the money. If you know exactly when that need would be, it is better to invest in a bank FD of the same duration. But this rarely happens. In reality, one never knows when money would be required. Usually, if there is an unplanned money requirement, an FD is broken, especially if there is no other source.
Such a situation can be avoided with hybrid accounts with sweep-in or auto sweep facilities. These facilities can also be used to create an emergency fund. "We frequently advise people that everyone must keep aside 6-8 months’ living expenses as an emergency fund," says Sardesai. With a sweep-in facility, excess funds above a threshold limit in a savings account can be automatically transferred into an FD and earn a higher interest rate.
Mother of invention
Earlier, a person had a savings account for liquid money and FDs for investment. In such a situation, every time he had to issue a cheque in excess of the balance in the savings account, he had to visit the bank branch to give instructions to break his FD. Says Seshan Ramakrishnan, head, liabilities products, HDFC Bank: "This was an inconvenience that customers could do without. At the same time, the bank had to manually process all such requests within the agreed turnaround time."
Thus, a hybrid product was created that helped the customer earn higher interest and issue cheques of amounts more than in the account without any manual intervention from the bank.
The working
These accounts work in two broad ways. One is the sweep-in facility, where a savings or current account is linked with multiple FDs in the same bank. HDFC Bank’s facility is a typical example. You would need a savings or current account and FDs that are to be linked, in the same bank. Any deficit in your savings or current account will be met by a withdrawal of an exact value from your FD. Since deposits are broken down in units of Re 1, you will lose interest only on the actual amount withdrawn from the FD.
The second way is the auto sweep facility. ICICI Bank’s Auto Invest Account facility is an example. All you need to do is mention a threshold limit. Any amount above the limit will be converted into an FD in multiples of Rs 5,000. The linked FDs are by default of one-year period or you can go for a period of your choice. Interest rates are as revised by the bank from time to time. Maturing deposits are renewed for a year or for a period of your choice at the interest rate prevailing on the date of renewal.
Your choice. "Each individual needs to choose a hybrid product depending upon his need and cash flows," says Ramakrishnan. For example, try not to use the sweep-in facility for an FD that is nearing maturity since the loss of interest on breaking it would be higher.
In the auto sweep facility, if more than one FD is linked, the last deposit made under the scheme will be used first to meet the shortfall. If this isn’t adequate, then the deposit made prior to the last deposit will be used, and so on.
Costs. These facilities do not cost extra under certain conditions. For example, to availyourself of HDFC Bank’s sweep-in facility without charges, you will have to maintain Rs 50,000 or more in your FD. If the level goes below Rs 50,000, service charges applicable on a savings or current account are levied. ICICI Bank’s auto sweep facility requires you to maintain Rs 10,000 in the linked savings bank account. With Bank of Rajasthan’s Flexi Fixed Deposits, you will need to maintain a minimum of Rs 10,000 in the FD, failing which you would need to pay Rs 100per quarter.
Getting the most. Use these tricks to get the most out of these facilities.
With an auto sweep facility, make sure you keep a reasonable threshold limit in the savings account so that your FDs are not broken regularly and you continue to earn higher returns on them.
Also, as Sardesai points out, "it becomes a bit difficult for a lay person to understand the bank statement if there are excessive transactions between the multiple accounts". Another thing to remember is that interest earned on these accounts is fully taxable in your hands. So, plan in such a way that the FDs earn more interest than the savings bank account.
Other options
In an emergency, you can take an overdraft against your FD. However, make sure the overdraft is not more expensive than breaking the FD. Also, getting the overdraft takes more time due to the increased paperwork involved. Look for banks that provide an instant overdraft facility against the FD.
People with higher risk appetites can move towards liquid mutual funds for shoring up emergency fund requirements.
Source:money.outlook.com
Saturday, May 23, 2009
Make The New Pension System Work For You
NPS scores over several other retirement products in many ways, check out how and why
After much delay and several near misses, we finally have a pension plan; a social security scheme for 89 per cent of India’s workforce that doesn’t have a formal retirement solution. The New Pension System (NPS), as it is now referred to, was fittingly launched on Labour Day, 1 May. Though there are some concerns, such as its taxability, NPS is superbly designed to help you save for your retirement. We feel it merits a place in your portfolio. The only question that remains is: just when should you sign up for NPS?
ABOUT NPS
It is a pure defined-contribution product. You can choose the fund option as well as the fund manager. You get a retirement corpus when you turn 60. Of this, you get 60 per cent in your hands, while the remaining goes into buying you an annuity plan (to ensure pension money) from an insurer. The system discourages early withdrawal by giving just 20 per cent in your hands and annuitising 80 per cent of the corpus.
Structure
NPS begins with a mandatory Tier I account and an annual contribution of at least Rs 6,000. A Tier II account, which would offer a withdrawal facility, is expected to be launched in another six months. You can invest in NPS in two ways.
Active choice. You can allocate your funds across three fund options: equity (E), in which a maximum of 50 per cent of the portfolio is allowed; fixed income instruments other than government securities (C); and government securities (G).
Auto choice. Under this, your funds automatically begin with a maximum equity exposure of 50 per cent till the age of 35 years, which tapers off to 10 per cent by age 55. This gives stability to your investment as you near the maturity line.
You can choose from the six designated pension fund managers (see 10 Common Questions Answered). Says Kartik Varma, financial planner and co-founder, iTrust Financial Advisors: “With time, fund performance could be a yardstick, but it is unlikely that fund performance would vary hugely since the funds would be invested in similar products.”
MechanismWhat makes NPS an excellent pension vehicle is its low cost and the ease with which an individual can invest for retirement. It hinges on a Central Recordkeeping Agency (CRA), which captures your data when you open your Tier I account and issues you a Permanent Retirement Account Number (PRAN). This number remains the same even if you change jobs or location. You would also be given Internet passwords for online transactions
NPS is the cheapest among retirement products, after the Public Provident Fund (PPF) and the Employees’ Provident Fund (EPF), both of which are charge-free. NPS has two sets of charges—flat and variable.
You would need to pay about Rs 470 as flat charges every year, but this is expected to come down as volumes go up. The variable charges are custodian charge of 0.0075-0.05 per cent of the fund value per annum and fund management charge of 0.0009 per cent of the fund value per annum. These are the lowest in the industry.
Challenges
Tax treatment. Though NPS scores in terms of cost and ease of handling, it loses out in terms of taxability. At present, the contributions get tax benefit under Section 80C. However, at the time of withdrawal, the lumpsum would be taxable as per your tax slab. Says Tarun Chugh, director, ICICI Prudential Pensions: “The currency of NPS is its low-cost structure. But what will pull the masses to this scheme is tax benefit. NPS needs a tax treatment similar to that enjoyed by EPF and PPF.”
Both EPF and PPF enjoy the EEE tax benefit, under which contribution, accumulation and withdrawal are all tax-free.
Volumes. For NPS to remain low cost, it is imperative for the volume of investment money to go up. Says Manish Sabharwal, chairman and co-founder, Teamlease, a staffing company: “Costs come down with large scales and not with regulatory intervention. At the current fund management cost, the crying need is for the volumes to go up. This can happen by bringing funds from PPF, EPF and other superannuation funds under the Pension Fund Regulatory and Development Authority (PFRDA), the interim regulator for NPS. The distinction of government NPS and non-government NPS needs to go, too.”
Distribution. The Points of Presence (PoP) or distribution agents of NPS will charge up to Rs 20 for every transaction. With four mandatory transactions every year, it comes to Rs 80. Compare this with what an insurer gives to its agents—7.5 per cent of the annual premium. Clearly, the incentive for distribution in case of NPS is much lower. Says Gautam Bharadwaj, director, Invest India Economic Foundation, a think tank involved in financial and pension policy analysis: “Low costs are great for customers, but NPS will struggle with distributor interest since banks and others will prefer to sell you an insurance or mutual fund product that pays much higher commissions. The solution, of course, is to bring down the high cost of buying financial services.”
HOW DOES IT COMPARE...
The numbers show that NPS is right at the bottom of the pyramid despite the low cost, and this is purely because it is taxable on maturity. However, we are confident that eventually NPS would have tax benefits in sync with EPF and PPF. Once that happens, NPS would become an attractive investment vehicle.
...with EPF. Contribution in the EPF enjoys tax benefit under Section 80C. Withdrawals, too, are tax-free. While your money grows at 8.5 per cent per annum, your employer matches your contribution to your fund. However, to rely on your EPF alone may be foolhardy—you may not stick around in a salaried job, you may withdraw your funds periodically, or the rate on the EPF may be reduced. Your EPF corpus may not be sufficient for meeting your retirement needs. NPS is linked to you rather than your employer. So, any change in your job won’t affect your investments. Also, NPS is completely portable and even allows you to invest in equity, which is a must for young investors.
...with PPF. PPF is also an excellent long-term vehicle to plan for retirement. It is government-backed and gives a guaranteed tax-free return of 8 per cent per annum. Says Maneesh Kumar, head (wealth management solutions), ASK Wealth Advisors: “For young individuals, NPS could be the best alternative after EPF and PPF. NPS lets you invest up to 50 per cent in equities, which outperform bonds over the long term.”
...with a mutual fund (MF). Here the comparison is at two levels: costs and fund management. On costs, NPS beats MFs, including the cheaper index funds, hands down. However, for those who wish to kick start their retirement portfolio with equity investment, index funds are a good bet. They are cheap, are not saddled with a fund manager and their maturity amount is tax-free. NPS is still awaiting that tax edge. On fund management, Pune-based financial planner Veer Sardesai says: “The best feature of NPS is that the equity component will be invested in index funds. This eliminates the uncertainty of who the fund manager will be, how long will he be there, will he really be able to outperform the benchmark indices. Being a pension product, consistency of management over the long term is very important.”
...with pension plans offered by insurers. These plans most closely resemble NPS’ structure. They have withdrawal penalties and ensure you get pension as they mandate annuitising 66.6 per cent of the fund value at the time of maturity. Also, they are much cheaper than unit-linked pension plans. Despite the low charge structure in pension plans, NPS scores on cost.
HOW DOES IT FIT
NPS is definitely the need of the hour and it scores over other products either in cost or in flexibility. But it needs the tax edge to make it comparable. There is merit in waiting. But if you wish to invest in NPS early, we would advise you keep it your third or fourth priority, after you have exhausted EPF and PPF limits.
You could adopt the age-old strategy. Invest more in equity in the beginning and temper down the exposure as you reach maturity. Adds Hrishi Parendekar, CEO, Karvy Wealth Management: “For a person under 35 years of age who has 20 years to go before retirement, equities would be a far superior product in terms of returns.”
Financial planners advise caution because of the tax treatment, while experts are skeptical of the sustainability of low costs. The stepping stone to dealing with this would be the EEE regime that the PFRDA is most certain to get. Once the tax benefits come through, volumes would certainly increase. Watch this space as the product evolves. It is very likely that this is where you would be parking a big chunk of your retirement funds.
Source: money.outlook.com
After much delay and several near misses, we finally have a pension plan; a social security scheme for 89 per cent of India’s workforce that doesn’t have a formal retirement solution. The New Pension System (NPS), as it is now referred to, was fittingly launched on Labour Day, 1 May. Though there are some concerns, such as its taxability, NPS is superbly designed to help you save for your retirement. We feel it merits a place in your portfolio. The only question that remains is: just when should you sign up for NPS?
ABOUT NPS
It is a pure defined-contribution product. You can choose the fund option as well as the fund manager. You get a retirement corpus when you turn 60. Of this, you get 60 per cent in your hands, while the remaining goes into buying you an annuity plan (to ensure pension money) from an insurer. The system discourages early withdrawal by giving just 20 per cent in your hands and annuitising 80 per cent of the corpus.
Structure
NPS begins with a mandatory Tier I account and an annual contribution of at least Rs 6,000. A Tier II account, which would offer a withdrawal facility, is expected to be launched in another six months. You can invest in NPS in two ways.
Active choice. You can allocate your funds across three fund options: equity (E), in which a maximum of 50 per cent of the portfolio is allowed; fixed income instruments other than government securities (C); and government securities (G).
Auto choice. Under this, your funds automatically begin with a maximum equity exposure of 50 per cent till the age of 35 years, which tapers off to 10 per cent by age 55. This gives stability to your investment as you near the maturity line.
You can choose from the six designated pension fund managers (see 10 Common Questions Answered). Says Kartik Varma, financial planner and co-founder, iTrust Financial Advisors: “With time, fund performance could be a yardstick, but it is unlikely that fund performance would vary hugely since the funds would be invested in similar products.”
MechanismWhat makes NPS an excellent pension vehicle is its low cost and the ease with which an individual can invest for retirement. It hinges on a Central Recordkeeping Agency (CRA), which captures your data when you open your Tier I account and issues you a Permanent Retirement Account Number (PRAN). This number remains the same even if you change jobs or location. You would also be given Internet passwords for online transactions
NPS is the cheapest among retirement products, after the Public Provident Fund (PPF) and the Employees’ Provident Fund (EPF), both of which are charge-free. NPS has two sets of charges—flat and variable.
You would need to pay about Rs 470 as flat charges every year, but this is expected to come down as volumes go up. The variable charges are custodian charge of 0.0075-0.05 per cent of the fund value per annum and fund management charge of 0.0009 per cent of the fund value per annum. These are the lowest in the industry.
Challenges
Tax treatment. Though NPS scores in terms of cost and ease of handling, it loses out in terms of taxability. At present, the contributions get tax benefit under Section 80C. However, at the time of withdrawal, the lumpsum would be taxable as per your tax slab. Says Tarun Chugh, director, ICICI Prudential Pensions: “The currency of NPS is its low-cost structure. But what will pull the masses to this scheme is tax benefit. NPS needs a tax treatment similar to that enjoyed by EPF and PPF.”
Both EPF and PPF enjoy the EEE tax benefit, under which contribution, accumulation and withdrawal are all tax-free.
Volumes. For NPS to remain low cost, it is imperative for the volume of investment money to go up. Says Manish Sabharwal, chairman and co-founder, Teamlease, a staffing company: “Costs come down with large scales and not with regulatory intervention. At the current fund management cost, the crying need is for the volumes to go up. This can happen by bringing funds from PPF, EPF and other superannuation funds under the Pension Fund Regulatory and Development Authority (PFRDA), the interim regulator for NPS. The distinction of government NPS and non-government NPS needs to go, too.”
Distribution. The Points of Presence (PoP) or distribution agents of NPS will charge up to Rs 20 for every transaction. With four mandatory transactions every year, it comes to Rs 80. Compare this with what an insurer gives to its agents—7.5 per cent of the annual premium. Clearly, the incentive for distribution in case of NPS is much lower. Says Gautam Bharadwaj, director, Invest India Economic Foundation, a think tank involved in financial and pension policy analysis: “Low costs are great for customers, but NPS will struggle with distributor interest since banks and others will prefer to sell you an insurance or mutual fund product that pays much higher commissions. The solution, of course, is to bring down the high cost of buying financial services.”
HOW DOES IT COMPARE...
The numbers show that NPS is right at the bottom of the pyramid despite the low cost, and this is purely because it is taxable on maturity. However, we are confident that eventually NPS would have tax benefits in sync with EPF and PPF. Once that happens, NPS would become an attractive investment vehicle.
...with EPF. Contribution in the EPF enjoys tax benefit under Section 80C. Withdrawals, too, are tax-free. While your money grows at 8.5 per cent per annum, your employer matches your contribution to your fund. However, to rely on your EPF alone may be foolhardy—you may not stick around in a salaried job, you may withdraw your funds periodically, or the rate on the EPF may be reduced. Your EPF corpus may not be sufficient for meeting your retirement needs. NPS is linked to you rather than your employer. So, any change in your job won’t affect your investments. Also, NPS is completely portable and even allows you to invest in equity, which is a must for young investors.
...with PPF. PPF is also an excellent long-term vehicle to plan for retirement. It is government-backed and gives a guaranteed tax-free return of 8 per cent per annum. Says Maneesh Kumar, head (wealth management solutions), ASK Wealth Advisors: “For young individuals, NPS could be the best alternative after EPF and PPF. NPS lets you invest up to 50 per cent in equities, which outperform bonds over the long term.”
...with a mutual fund (MF). Here the comparison is at two levels: costs and fund management. On costs, NPS beats MFs, including the cheaper index funds, hands down. However, for those who wish to kick start their retirement portfolio with equity investment, index funds are a good bet. They are cheap, are not saddled with a fund manager and their maturity amount is tax-free. NPS is still awaiting that tax edge. On fund management, Pune-based financial planner Veer Sardesai says: “The best feature of NPS is that the equity component will be invested in index funds. This eliminates the uncertainty of who the fund manager will be, how long will he be there, will he really be able to outperform the benchmark indices. Being a pension product, consistency of management over the long term is very important.”
...with pension plans offered by insurers. These plans most closely resemble NPS’ structure. They have withdrawal penalties and ensure you get pension as they mandate annuitising 66.6 per cent of the fund value at the time of maturity. Also, they are much cheaper than unit-linked pension plans. Despite the low charge structure in pension plans, NPS scores on cost.
HOW DOES IT FIT
NPS is definitely the need of the hour and it scores over other products either in cost or in flexibility. But it needs the tax edge to make it comparable. There is merit in waiting. But if you wish to invest in NPS early, we would advise you keep it your third or fourth priority, after you have exhausted EPF and PPF limits.
You could adopt the age-old strategy. Invest more in equity in the beginning and temper down the exposure as you reach maturity. Adds Hrishi Parendekar, CEO, Karvy Wealth Management: “For a person under 35 years of age who has 20 years to go before retirement, equities would be a far superior product in terms of returns.”
Financial planners advise caution because of the tax treatment, while experts are skeptical of the sustainability of low costs. The stepping stone to dealing with this would be the EEE regime that the PFRDA is most certain to get. Once the tax benefits come through, volumes would certainly increase. Watch this space as the product evolves. It is very likely that this is where you would be parking a big chunk of your retirement funds.
Source: money.outlook.com
Get the most out of fixed deposits
High volatility in stock markets combined with the easing inflation has again made fixed deposits an attractive avenue for investors, particularly those seeking assured returns. For, FD schemes of banks not only give assured returns but risk-free returns as well, and all one has to do is park one’s money in such a scheme and forget about it till maturity.
The best part of FD schemes are that they are one of the safe investment avenues and there is very little chance of losing you money as banks are closely regulated and monitored by the Reserve Bank of India. In the current turbulent times, investors are increasingly banking on such age-old investment tools.
Another advantage of FD schemes are that they can get you loans of up to 75-90% of the amount deposited with the bank.
Here are some tips to get the most out of FD schemes:
Do your research well
Take a look at the interest rates offered by different banks before going in for a scheme. You also need to decide the tenure of your deposit. The interest rates offered by different banks could vary. Also, the interest rates for different tenures are different.
Interests offered by banks are either calculated quarterly, half-yearly, yearly or at maturity. So, calculate which bank is going to get you the highest interest.
Suppose there are two banks -- 'A' & 'B'. Bank 'A' gives an interest rate of 10% p.a on a fixed deposit of five years and the interest is calculated on a quarterly basis.
Bank 'B' gives the same interest rate for the same period, but the interest is calculated on a yearly basis. In this case, Bank 'A' will get you more interest than Bank 'B'. The more frequently interests are calculated, the more interest you will get.
Split your FD investments
TDS (tax deductable as source) at 10% is applicable on fixed deposits if the interest earned exceeds Rs 10,000 in a financial year. The tax liability of TDS is determined at the branch level.
To avoid TDS, you can split your fixed deposits, that is, open fixed deposits in different branches of the bank, so that the interest earned does not exceed Rs 10,000 in a particular branch. You could also open fixed deposits in different banks to avoid TDS.
Splitting you fixed deposits has another benefit as well. If you are in need of urgent cash and need to withdraw money, you won't have to break all your fixed deposits.
You could get the money by breaking either one or two FD accounts while the remaining accounts would continue to earn you the predetermined interest.
Re-investing the interest earned
You have the option of either withdrawing the interest earned or reinvesting the same. If you opt for the withdrawal option, the interest earned will be credited to the savings account specified by you on a regular basis.
The interest you earn every year will be higher compared to the previous year if you keep reinvesting the interest. On the other hand, if you withdraw the interest, you will earn the same interest every year until maturity.
Let’s assume that you are planning to invest Rs 50,000 in a FD scheme for 5 years at the rate of 9.5% p.a. and the interest is calculated on a quarterly basis. If you reinvest the interest, your total interest earned will amount to Rs 29,955.49 in 5 years.
If you withdraw the interest, your total interest earned will amount to Rs 24,609.55. That is a difference of Rs 5,345.94. The greater the fixed deposit, the greater the difference will be.
Tax-saver FDs for better returns
Tax saver fixed deposits give you dual benefits. Apart from giving you an assured return, they are also eligible for exemption under Section 80C of the Income Tax Act 1961. However, TDS is applicable.
These fixed deposits have a lock-in period of five years and premature withdrawal is not allowed. You can’t use this deposit as a means to secure loan from the bank and the maximum amount you can invest in this instrument is Rs 1 lakh.
HDFC Bank at present offers 9.50% interest (calculated quarterly) on tax-saving FDs as well as on regular FDs for 5 years. ICICI Bank, on the other hand, gives 8.5% interest (calculated quarterly) on tax-saving FDs and 9.5% (calculated quarterly) interest on regular FDs for 5 years.
If you fall in the higher tax-slab, investing in tax-saver FDs will fetch you more return than a regular FD as tax-saving FDs are exempted under Section 80C.
Source:Economictimes.com
The best part of FD schemes are that they are one of the safe investment avenues and there is very little chance of losing you money as banks are closely regulated and monitored by the Reserve Bank of India. In the current turbulent times, investors are increasingly banking on such age-old investment tools.
Another advantage of FD schemes are that they can get you loans of up to 75-90% of the amount deposited with the bank.
Here are some tips to get the most out of FD schemes:
Do your research well
Take a look at the interest rates offered by different banks before going in for a scheme. You also need to decide the tenure of your deposit. The interest rates offered by different banks could vary. Also, the interest rates for different tenures are different.
Interests offered by banks are either calculated quarterly, half-yearly, yearly or at maturity. So, calculate which bank is going to get you the highest interest.
Suppose there are two banks -- 'A' & 'B'. Bank 'A' gives an interest rate of 10% p.a on a fixed deposit of five years and the interest is calculated on a quarterly basis.
Bank 'B' gives the same interest rate for the same period, but the interest is calculated on a yearly basis. In this case, Bank 'A' will get you more interest than Bank 'B'. The more frequently interests are calculated, the more interest you will get.
Split your FD investments
TDS (tax deductable as source) at 10% is applicable on fixed deposits if the interest earned exceeds Rs 10,000 in a financial year. The tax liability of TDS is determined at the branch level.
To avoid TDS, you can split your fixed deposits, that is, open fixed deposits in different branches of the bank, so that the interest earned does not exceed Rs 10,000 in a particular branch. You could also open fixed deposits in different banks to avoid TDS.
Splitting you fixed deposits has another benefit as well. If you are in need of urgent cash and need to withdraw money, you won't have to break all your fixed deposits.
You could get the money by breaking either one or two FD accounts while the remaining accounts would continue to earn you the predetermined interest.
Re-investing the interest earned
You have the option of either withdrawing the interest earned or reinvesting the same. If you opt for the withdrawal option, the interest earned will be credited to the savings account specified by you on a regular basis.
The interest you earn every year will be higher compared to the previous year if you keep reinvesting the interest. On the other hand, if you withdraw the interest, you will earn the same interest every year until maturity.
Let’s assume that you are planning to invest Rs 50,000 in a FD scheme for 5 years at the rate of 9.5% p.a. and the interest is calculated on a quarterly basis. If you reinvest the interest, your total interest earned will amount to Rs 29,955.49 in 5 years.
If you withdraw the interest, your total interest earned will amount to Rs 24,609.55. That is a difference of Rs 5,345.94. The greater the fixed deposit, the greater the difference will be.
Tax-saver FDs for better returns
Tax saver fixed deposits give you dual benefits. Apart from giving you an assured return, they are also eligible for exemption under Section 80C of the Income Tax Act 1961. However, TDS is applicable.
These fixed deposits have a lock-in period of five years and premature withdrawal is not allowed. You can’t use this deposit as a means to secure loan from the bank and the maximum amount you can invest in this instrument is Rs 1 lakh.
HDFC Bank at present offers 9.50% interest (calculated quarterly) on tax-saving FDs as well as on regular FDs for 5 years. ICICI Bank, on the other hand, gives 8.5% interest (calculated quarterly) on tax-saving FDs and 9.5% (calculated quarterly) interest on regular FDs for 5 years.
If you fall in the higher tax-slab, investing in tax-saver FDs will fetch you more return than a regular FD as tax-saving FDs are exempted under Section 80C.
Source:Economictimes.com
Wednesday, May 13, 2009
Government Backed Investment Options
Government backed options give the highest security. A new gameplan with old warhorses
3 Get-More Tricks
Besides secure returns, the safest investment options can be cleverly tailored to suit various requirements. Here are strategies that have been used for ages and can work wonders in these harsh times
Reinvest Monthly Income Scheme (MIS) Interest
Take a 6-year, 8 per cent per annum Mis. reinvest the monthly interest in a savings account (3.5 per cent interest per annum), which will give you an annualised return of 7.53 per cent after six years. reinvesting in a recurring deposit (7.5 per cent per annum) will give you an annualised return of 7.76 per cent.
Ladder National Savings Certificates (NSCS)
NSC is a 6-year instrument. assume that you buy nscs worth 24,000 in one financial year. instead, buy worth 2,000 every month till your retirement. renew every investment after six years and continue doing so until your retirement. finally, the matured will give regular income, which can be used as pension.
Use your Public Provident Fund (PPF)
PPf is a 15-year account in which you can put up to 70,000 every year. After the fifth year, make partial withdrawals for tax-free funds and contribute 70,000 as before from current income to get tax benefits.
***
It might seem ridiculous to talk about safe investments and sound returns at a time when the equity markets are down 34 per cent since last year and a tumbling real estate market is giving most of us sleepless nights. One thing that the glum developments of the last 18 months has taught us is that when things go wrong, it’s time to go back to the basics. When everything around us is crashing, the only comfort is in the simple and staid; like listening to an old song, or eating your mother’s cooking.
For our money lives, this new reality of volatile markets indicates the need to go back to old options and invest in products that our parents relied on, the ones we turned our noses up at as too cumbersome, or even too boring. These options, debt products with fixed returns mostly sold through post offices, are the safest possible as the government guarantees them. Although, theoretically, it is possible that the government defaults, in reality, it has never happened in India and is unlikely to happen in the future. Also, thanks to the lack of interest rate reforms, the returns on these products are higher than market determined rates. They also give tax benefits.
However, we are not suggesting that you move all your money into these products. If you are to meet your financial goals, you will need to have a decent mix of high-risk, high-growth options and assured return instruments. If you want to set aside Rs 5 lakh at today’s cost for your child’s higher education 15 years later, you will need Rs 10 lakh then after accounting for an inflation of 5 per cent per annum. If you invest only in debt products, you will have to save Rs 36,000 a year at 8 per cent interest per annum to build up that corpus in 15 years. Using equities over the same period and assuming 12 per cent annualised returns, the savings required would be a more modest Rs 24,000 a year.
So, what role can these embodiments of certainty and security play in your portfolio in a loss-ravaged year? While investing in these products will not be your short cut to wealth, it will certainly ensure that your downside is protected and your accounts are still in the green even as the world around you turns red.
THE RIGHT ONE FOR YOU
Assured return instruments have non-flexible features such as tenure, interest payment amounts and dates, taxability and liquidity. The basket of products with fixed and assured returns largely has nine instruments. Except bank fixed deposits (FDs), all these products are fully government-backed. We have classified them as tax-savers, regular income providers and others.
Bank Deposits
The eight post office products described in the article carry a sovereign guarantee. Bank fixed deposits (FDs), too, offer fixed and assured returns, but they are not backed by any government guarantee beyond Rs 1 lakh (principal and interest together) per bank per person. This leaves any amount over this susceptible to risk in case of a bank default. It is better to spread your fixed deposits over banks rather than invest a big sum in a single bank. FDs’ tenure varies from one month to 10 years. The interest income can be had monthly, quarterly, half-yearly or even yearly and is fully taxable. Among the banks offering high interest rates currently, over a 1-year period, Development Credit Bank’s rate is 9.25 per cent per annum and Tamil Nadu Mercantile Bank is paying 9.25 per cent for a 5-year tenure. Many banks offer senior citizens 0.5 percentage points more.
Investment in 5-year notified tax-saving bank FDs helps secure a regular income and save tax under Section 80C. The interest (fully taxable) on such deposits may be a shade lower than on non-tax deposits of the same duration. ICICI Bank and State Bank of India currently offer 8.25 per cent per annum. For senior citizens with annual incomes less than Rs 2.25 lakh, this is a decent option.
The Tax-savers
Public Provident Fund (PPF). Not only does PPF give tax exemption on deposits, but also gives you tax-free returns. Says Manish Jain, founder, Knowledgepartners.in, a financial planning portal: "For younger investors, especially those in the highest tax bracket, PPF is the best option. Being a 15-year product, it helps in achieving long-term goals."
Myth
Post office investments are absolutely safe
Reality Post office instruments are backed by the government. This makes them highly secure, but not infallible. Although it has never happened in India, governments of other countries have defaulted in the past
New investors. You can open a PPF account either in your or your child’s name. Combined contributions may vary between Rs 500 and Rs 70,000 each year. A separate minor account helps save funds earmarked for your child’s needs.
Existing investors. Use the partial withdrawal facility (available after five years) only if needed. You can choose to close the account on maturity or continue in blocks of five years indefinitely, with or without making fresh deposits.
Taxpayers. Tax exemption is available on contribution and returns. A PPF’s effective return currently works out to above 11.57 per cent for someone paying 30.9 per cent tax. Depending on your risk profile, PPF can be used judiciously with equity-linked savings schemes (ELSS) to bolster returns over the long term.
Retired. If you are retired and pay no or very low taxes, you could close your PPF account and move to products with higher yields, such as a bank FD, if available. Retired taxpayers may continue with or without fresh deposits.
National Savings Certificates (NSCs). If you want to save tax and are not looking at a regular income, NSC can be a good option. It is suitable for investors of any age as long as they don’t mind the long tenure. Taxpayers below 60 years of age can buy an NSC every month and build up a self-made pension plan.
The Regular Income Providers
Senior Citizens Savings Scheme (SCSS). This can be availed from a post office or a bank by anyone over the age of 60 years. Early retirees can invest in SCSS, provided they do so within three months of receiving retirement funds. It offers the highest post-tax returns among taxable products. The upper investment limit is Rs 15 lakh and the interest is payable quarterly.
Post Office Monthly Income Scheme (POMIS). If you want a regular monthly flow of income, POMIS is ideal. You should go for it, especially if the amount is more than Rs 1 lakh as bank deposits per bank are insured only up to Rs 1 lakh (see Bank Deposits). In POMIS, one may deposit a maximum of Rs 9 lakh under a joint account. If you exit before the term ends, you will have to forego 5 per cent bonus.
Myth
Bank fixed deposits are absolutely safe
Reality The Deposit Insurance and Credit Guarantee Corporation insures bank deposits up to Rs 1 lakh per bank per person. This includes the principal and the interest in all branches
8 per cent Taxable Savings Bonds. The alternative to POMIS is the 8 per cent Taxable Savings Bonds issued by the Government of India. These pay half-yearly interest and also have a cumulative option. They have no upper limit of investment.
Retired. If you are retired and are looking for an enhanced regular income, start with SCSS. Then move on to POMIS. Over and above this, invest the remaining retirement corpus in 8 per cent Taxable Savings Bonds.
Myth
Returns from Public Provident Fund (PPF) are fixed
Reality Every year in April, the government fixes the returns from post office products, including PPF. Any change in the interest rate will be applicable on PPF balances made after the announcement
Others
Kisan Vikas Patra (KVP). If you are not looking at a regular income, you could consider the post office KVP, which yields an annualised return of 8.41 per cent, the highest in this group. But, if you are in the 30.9 per cent tax bracket, your post-tax annualised return will be 5.81 per cent as interest is fully taxable. KVPs are ideally suited to supplement funds to meet long-term expenses such as children’s higher education.
Time deposit. Time deposits may be opened in a post office for 1-, 2-, 3- or 5-year periods. The interest is payable yearly and is fully taxable. You can claim a tax benefit under Section 80C on the amount invested in a 5-year deposit only. This is not a very attractive option since bank notified FDs that come with Section 80C breaks give higher rates.
Recurring deposits (RDs).
RDs in post offices provide an interest rate of 7.5 per cent per annum. These come for a period of five years, which can be extended. Investing Rs 1,000 a month into this scheme would yield Rs 72,890 on maturity. Avoid them as banks provide a better deal.
Myth
Assured return instruments give double tax benefit
Reality Apart from PPF, in which the contribution, returns and the final amount are all tax-free, all other post office products are variously taxed
THE ROADBLOCKS
The products mentioned above are simple and secure. But there’s a hitch. In order to deposit funds, redeem investments, withdraw interest, or even to update your passbook, you need to visit a post office. The notable exceptions are: PPF accounts in State Bank of India and bank RDs, both of which can be operated online, and interest payments from the 8 per cent Taxable Savings Bonds that can be routed electronically through banks. For people who are used to the air-conditioned confines of an advisor’s office, or the three clicks and invest mode of electronic transacting, this can be an unpleasant and frustrating experience. Also, since you will be tied to one particular post office, staying on top of these investments while changing residences or cities can turn out to be a nightmare.
Invest in these only if you either have a trusted and active agent or a friend who will do the running around for you, or if you have the time and patience to do it yourself.
DEBT IN YOUR PORTFOLIO
These income-generating products are ideal for people who are close to achieving their goals. "For them, it makes sense to switch to such products (from equity) to preserve capital and reduce their risk weightage," says Jain.
The biggest drawback of these products with fixed returns is that they are not the best hedge against inflation. Says Kartik Varma, co-founder, iTrust Financial Advisors, a Delhi-based financial advisory company, "Debt products may be good at times of low inflation and for those who, as far as risk-taking is concerned, do not have age on their side."
But interest rates and inflation cannot be predicted easily. We suggest a balanced approach while investing across debt and equity assets. You need to devise your portfolio based on your age, income and financial liabilities, and consider both short- and long-term needs.
REAL RETURNS MATTER
For most investors, the return from these products is only nominal. The interest income is added to your income and taxed as per your slab. So, if you are paying tax at 30.9 per cent, an 8 per cent bank FD would give you a post-tax return of 5.28 per cent (see The Cuts).
Myth
Life insurance endowment plans give assured returns
Reality Returns in the form of bonus are not assured and depend on the insurer’s profitability. However, once attached to a policy, they become assured
Building up a debt portfolio with fixed and assured return plans should be a carefully crafted process. A proper mix of products with varying maturities will help in maintaining liquidity and give higher returns. As with all things in life, even in your portfolio, balance is the keyword.
The Stabilising Influences
Strategies for effectively using highly secure investments
Public Provident Fund (PPF) If you don’t have one, start a PPF account for yourself, your spouse and kids. Use it as a tax-saving investment, while maintaining your portfolio’s debt-equity balance. If you are close to retirement, maximise your contribution. If you are retired, use tax-free money by way of partial withdrawals.
National Savings Certificate Use it only for saving tax if there is room after EPF and PPF. If you are nearing retirement or retired, create a periodic income flow in the future.
Kisan Vikas Patra Good for parking portions of lumpsums or windfalls such as bonuses, increments and refunds that might be earmarked for a goal, say, a gift on your kid’s 18th birthday.
Senior Citizens Savings Scheme (SCSS) Best for a regular retirement income, thanks to the highest rate of 9 per cent per annum.
Post Office Monthly INCOME Scheme (POMIS) SCSS investment can’t exceed Rs 15 lakh. Invest any amount in excess in POMIS, the next best option after SCSS for secure retirement income.
8 per cent Taxable Savings Bond If more regular income is needed after an SCSS and POMIS combination, opt for half-yearly option of this scheme with no upper investment limit.
5-year Time Deposit (with Section 80C) Avoid this post office offering since banks offer higher interest rates.
Other Time Deposits Avoid post office time deposits. You will get a better interest rate from banks.
Recurring Deposits (RDs) Avoid post office RDs as bank RDs offer better interest rates.
Source:money.outlook.india.com
3 Get-More Tricks
Besides secure returns, the safest investment options can be cleverly tailored to suit various requirements. Here are strategies that have been used for ages and can work wonders in these harsh times
Reinvest Monthly Income Scheme (MIS) Interest
Take a 6-year, 8 per cent per annum Mis. reinvest the monthly interest in a savings account (3.5 per cent interest per annum), which will give you an annualised return of 7.53 per cent after six years. reinvesting in a recurring deposit (7.5 per cent per annum) will give you an annualised return of 7.76 per cent.
Ladder National Savings Certificates (NSCS)
NSC is a 6-year instrument. assume that you buy nscs worth 24,000 in one financial year. instead, buy worth 2,000 every month till your retirement. renew every investment after six years and continue doing so until your retirement. finally, the matured will give regular income, which can be used as pension.
Use your Public Provident Fund (PPF)
PPf is a 15-year account in which you can put up to 70,000 every year. After the fifth year, make partial withdrawals for tax-free funds and contribute 70,000 as before from current income to get tax benefits.
***
It might seem ridiculous to talk about safe investments and sound returns at a time when the equity markets are down 34 per cent since last year and a tumbling real estate market is giving most of us sleepless nights. One thing that the glum developments of the last 18 months has taught us is that when things go wrong, it’s time to go back to the basics. When everything around us is crashing, the only comfort is in the simple and staid; like listening to an old song, or eating your mother’s cooking.
For our money lives, this new reality of volatile markets indicates the need to go back to old options and invest in products that our parents relied on, the ones we turned our noses up at as too cumbersome, or even too boring. These options, debt products with fixed returns mostly sold through post offices, are the safest possible as the government guarantees them. Although, theoretically, it is possible that the government defaults, in reality, it has never happened in India and is unlikely to happen in the future. Also, thanks to the lack of interest rate reforms, the returns on these products are higher than market determined rates. They also give tax benefits.
However, we are not suggesting that you move all your money into these products. If you are to meet your financial goals, you will need to have a decent mix of high-risk, high-growth options and assured return instruments. If you want to set aside Rs 5 lakh at today’s cost for your child’s higher education 15 years later, you will need Rs 10 lakh then after accounting for an inflation of 5 per cent per annum. If you invest only in debt products, you will have to save Rs 36,000 a year at 8 per cent interest per annum to build up that corpus in 15 years. Using equities over the same period and assuming 12 per cent annualised returns, the savings required would be a more modest Rs 24,000 a year.
So, what role can these embodiments of certainty and security play in your portfolio in a loss-ravaged year? While investing in these products will not be your short cut to wealth, it will certainly ensure that your downside is protected and your accounts are still in the green even as the world around you turns red.
THE RIGHT ONE FOR YOU
Assured return instruments have non-flexible features such as tenure, interest payment amounts and dates, taxability and liquidity. The basket of products with fixed and assured returns largely has nine instruments. Except bank fixed deposits (FDs), all these products are fully government-backed. We have classified them as tax-savers, regular income providers and others.
Bank Deposits
The eight post office products described in the article carry a sovereign guarantee. Bank fixed deposits (FDs), too, offer fixed and assured returns, but they are not backed by any government guarantee beyond Rs 1 lakh (principal and interest together) per bank per person. This leaves any amount over this susceptible to risk in case of a bank default. It is better to spread your fixed deposits over banks rather than invest a big sum in a single bank. FDs’ tenure varies from one month to 10 years. The interest income can be had monthly, quarterly, half-yearly or even yearly and is fully taxable. Among the banks offering high interest rates currently, over a 1-year period, Development Credit Bank’s rate is 9.25 per cent per annum and Tamil Nadu Mercantile Bank is paying 9.25 per cent for a 5-year tenure. Many banks offer senior citizens 0.5 percentage points more.
Investment in 5-year notified tax-saving bank FDs helps secure a regular income and save tax under Section 80C. The interest (fully taxable) on such deposits may be a shade lower than on non-tax deposits of the same duration. ICICI Bank and State Bank of India currently offer 8.25 per cent per annum. For senior citizens with annual incomes less than Rs 2.25 lakh, this is a decent option.
The Tax-savers
Public Provident Fund (PPF). Not only does PPF give tax exemption on deposits, but also gives you tax-free returns. Says Manish Jain, founder, Knowledgepartners.in, a financial planning portal: "For younger investors, especially those in the highest tax bracket, PPF is the best option. Being a 15-year product, it helps in achieving long-term goals."
Myth
Post office investments are absolutely safe
Reality Post office instruments are backed by the government. This makes them highly secure, but not infallible. Although it has never happened in India, governments of other countries have defaulted in the past
New investors. You can open a PPF account either in your or your child’s name. Combined contributions may vary between Rs 500 and Rs 70,000 each year. A separate minor account helps save funds earmarked for your child’s needs.
Existing investors. Use the partial withdrawal facility (available after five years) only if needed. You can choose to close the account on maturity or continue in blocks of five years indefinitely, with or without making fresh deposits.
Taxpayers. Tax exemption is available on contribution and returns. A PPF’s effective return currently works out to above 11.57 per cent for someone paying 30.9 per cent tax. Depending on your risk profile, PPF can be used judiciously with equity-linked savings schemes (ELSS) to bolster returns over the long term.
Retired. If you are retired and pay no or very low taxes, you could close your PPF account and move to products with higher yields, such as a bank FD, if available. Retired taxpayers may continue with or without fresh deposits.
National Savings Certificates (NSCs). If you want to save tax and are not looking at a regular income, NSC can be a good option. It is suitable for investors of any age as long as they don’t mind the long tenure. Taxpayers below 60 years of age can buy an NSC every month and build up a self-made pension plan.
The Regular Income Providers
Senior Citizens Savings Scheme (SCSS). This can be availed from a post office or a bank by anyone over the age of 60 years. Early retirees can invest in SCSS, provided they do so within three months of receiving retirement funds. It offers the highest post-tax returns among taxable products. The upper investment limit is Rs 15 lakh and the interest is payable quarterly.
Post Office Monthly Income Scheme (POMIS). If you want a regular monthly flow of income, POMIS is ideal. You should go for it, especially if the amount is more than Rs 1 lakh as bank deposits per bank are insured only up to Rs 1 lakh (see Bank Deposits). In POMIS, one may deposit a maximum of Rs 9 lakh under a joint account. If you exit before the term ends, you will have to forego 5 per cent bonus.
Myth
Bank fixed deposits are absolutely safe
Reality The Deposit Insurance and Credit Guarantee Corporation insures bank deposits up to Rs 1 lakh per bank per person. This includes the principal and the interest in all branches
8 per cent Taxable Savings Bonds. The alternative to POMIS is the 8 per cent Taxable Savings Bonds issued by the Government of India. These pay half-yearly interest and also have a cumulative option. They have no upper limit of investment.
Retired. If you are retired and are looking for an enhanced regular income, start with SCSS. Then move on to POMIS. Over and above this, invest the remaining retirement corpus in 8 per cent Taxable Savings Bonds.
Myth
Returns from Public Provident Fund (PPF) are fixed
Reality Every year in April, the government fixes the returns from post office products, including PPF. Any change in the interest rate will be applicable on PPF balances made after the announcement
Others
Kisan Vikas Patra (KVP). If you are not looking at a regular income, you could consider the post office KVP, which yields an annualised return of 8.41 per cent, the highest in this group. But, if you are in the 30.9 per cent tax bracket, your post-tax annualised return will be 5.81 per cent as interest is fully taxable. KVPs are ideally suited to supplement funds to meet long-term expenses such as children’s higher education.
Time deposit. Time deposits may be opened in a post office for 1-, 2-, 3- or 5-year periods. The interest is payable yearly and is fully taxable. You can claim a tax benefit under Section 80C on the amount invested in a 5-year deposit only. This is not a very attractive option since bank notified FDs that come with Section 80C breaks give higher rates.
Recurring deposits (RDs).
RDs in post offices provide an interest rate of 7.5 per cent per annum. These come for a period of five years, which can be extended. Investing Rs 1,000 a month into this scheme would yield Rs 72,890 on maturity. Avoid them as banks provide a better deal.
Myth
Assured return instruments give double tax benefit
Reality Apart from PPF, in which the contribution, returns and the final amount are all tax-free, all other post office products are variously taxed
THE ROADBLOCKS
The products mentioned above are simple and secure. But there’s a hitch. In order to deposit funds, redeem investments, withdraw interest, or even to update your passbook, you need to visit a post office. The notable exceptions are: PPF accounts in State Bank of India and bank RDs, both of which can be operated online, and interest payments from the 8 per cent Taxable Savings Bonds that can be routed electronically through banks. For people who are used to the air-conditioned confines of an advisor’s office, or the three clicks and invest mode of electronic transacting, this can be an unpleasant and frustrating experience. Also, since you will be tied to one particular post office, staying on top of these investments while changing residences or cities can turn out to be a nightmare.
Invest in these only if you either have a trusted and active agent or a friend who will do the running around for you, or if you have the time and patience to do it yourself.
DEBT IN YOUR PORTFOLIO
These income-generating products are ideal for people who are close to achieving their goals. "For them, it makes sense to switch to such products (from equity) to preserve capital and reduce their risk weightage," says Jain.
The biggest drawback of these products with fixed returns is that they are not the best hedge against inflation. Says Kartik Varma, co-founder, iTrust Financial Advisors, a Delhi-based financial advisory company, "Debt products may be good at times of low inflation and for those who, as far as risk-taking is concerned, do not have age on their side."
But interest rates and inflation cannot be predicted easily. We suggest a balanced approach while investing across debt and equity assets. You need to devise your portfolio based on your age, income and financial liabilities, and consider both short- and long-term needs.
REAL RETURNS MATTER
For most investors, the return from these products is only nominal. The interest income is added to your income and taxed as per your slab. So, if you are paying tax at 30.9 per cent, an 8 per cent bank FD would give you a post-tax return of 5.28 per cent (see The Cuts).
Myth
Life insurance endowment plans give assured returns
Reality Returns in the form of bonus are not assured and depend on the insurer’s profitability. However, once attached to a policy, they become assured
Building up a debt portfolio with fixed and assured return plans should be a carefully crafted process. A proper mix of products with varying maturities will help in maintaining liquidity and give higher returns. As with all things in life, even in your portfolio, balance is the keyword.
The Stabilising Influences
Strategies for effectively using highly secure investments
Public Provident Fund (PPF) If you don’t have one, start a PPF account for yourself, your spouse and kids. Use it as a tax-saving investment, while maintaining your portfolio’s debt-equity balance. If you are close to retirement, maximise your contribution. If you are retired, use tax-free money by way of partial withdrawals.
National Savings Certificate Use it only for saving tax if there is room after EPF and PPF. If you are nearing retirement or retired, create a periodic income flow in the future.
Kisan Vikas Patra Good for parking portions of lumpsums or windfalls such as bonuses, increments and refunds that might be earmarked for a goal, say, a gift on your kid’s 18th birthday.
Senior Citizens Savings Scheme (SCSS) Best for a regular retirement income, thanks to the highest rate of 9 per cent per annum.
Post Office Monthly INCOME Scheme (POMIS) SCSS investment can’t exceed Rs 15 lakh. Invest any amount in excess in POMIS, the next best option after SCSS for secure retirement income.
8 per cent Taxable Savings Bond If more regular income is needed after an SCSS and POMIS combination, opt for half-yearly option of this scheme with no upper investment limit.
5-year Time Deposit (with Section 80C) Avoid this post office offering since banks offer higher interest rates.
Other Time Deposits Avoid post office time deposits. You will get a better interest rate from banks.
Recurring Deposits (RDs) Avoid post office RDs as bank RDs offer better interest rates.
Source:money.outlook.india.com
Sunday, May 3, 2009
Decoding NPS( New Pension Scheme)
What is the New Pension System (NPS)?
It is a system where individuals fund, during their work life, their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).
A central record keeping agency will maintain all the accounts, just like a depository maintains demat accounts for shares. Six different pension fund managers (PFMs) would share this common CRA infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits.
These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their PRAs when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.
Where can people sign up for the NPS?
People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks — SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank of India — and four other financial entities, LIC, IL&FS, UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.
Is the scheme open to all?
NPS is available for people aged between 18 years and 55 years.
How often should a subscriber contribute to NPS?
The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.
How will the subscribers get the money back?
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyer would live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.
Is the scheme tax free?
Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised when the government was planning to move all long term savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at the time of contribution, exempt during the period when the investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET. However, the government could not muster the political courage to change the taxation regime of EET on several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case, the amount spent on buying an annuity would be exempt from tax.
What is the default allocation of savings towards different asset classes for those who do not make an active choice?
For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up. By the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.
How does the NPS compare with mutual funds?
Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.
What kind of returns would the NPS generate?
The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions.
Source :www.economictimes.com
It is a system where individuals fund, during their work life, their financial security for old age when they no longer work. All those who join up would get a Permanent Retirement Account (PRA), which can be accessed online and through so-called points of presence (PoPs).
A central record keeping agency will maintain all the accounts, just like a depository maintains demat accounts for shares. Six different pension fund managers (PFMs) would share this common CRA infrastructure. The PFMs would invest the savings people put into their PRAs, investing them in three asset classes, equity (E), government securities (G)and debt instruments that entail credit risk (C), including corporate bonds and fixed deposits.
These contributions would grow and accumulate over the years, depending on the efficiency of the fund manager. The NPS in this form has been availed of by civil servants for the past one year. Subscribers can retain their PRAs when they change jobs or residence, and even change their fund managers and the allocation of investments among the different asset classes, although exposure to equity has been capped at 50%.
Where can people sign up for the NPS?
People can subscribe to the scheme from any of 285 PoPs across the country. These are run by 17 banks — SBI and its associates, ICICI, Axis, Kotak Mahindra, Allahabad Bank, Citibank, IDBI, Oriental Bank of Commerce, South Indian Bank, Union Bank of India — and four other financial entities, LIC, IL&FS, UTI Asset Management and Reliance Capital. A subscriber can shift his pension account from one PoP to another. Subscribers can choose from six fund managers — ICICI Prudential, IDFC, Kotak Mahindra, Reliance Capital, SBI and UTI.
Is the scheme open to all?
NPS is available for people aged between 18 years and 55 years.
How often should a subscriber contribute to NPS?
The minimum amount per contribution is Rs 500, to be paid at least four times in a year. The minimum amount to be contributed in a year is Rs 6,000.
How will the subscribers get the money back?
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies. An annuity transforms a lump sum spent on buying the annuity into a steady stream of payments for the rest of the annuity holder’s life. Now, how long an annuity buyer would live is something that takes a life insurance company’s expertise to compute and that is how they come into the picture. Insurance companies offer flexible investment and payment options on annuities. A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.
Is the scheme tax free?
Long term savings have three stages: contribution, accumulation and withdrawal. The NPS was devised when the government was planning to move all long term savings to a tax regime called exempt-exempt-taxed (EET), standing for exempt at the time of contribution, exempt during the period when the investment accumulates and taxed at the time of withdrawal. So, NPS comes under the tax regime EET. However, the government could not muster the political courage to change the taxation regime of EET on several saving schemes. So, the pension fund regulator has taken up with the finance ministry the need to remove the asymmetry in tax treatment between the NPS and other schemes such as the PPF. In any case, the amount spent on buying an annuity would be exempt from tax.
What is the default allocation of savings towards different asset classes for those who do not make an active choice?
For a saver not yet 35 years of age, half the investments will go into asset class E, one-fifth into asset class G, and the rest into asset class C. Above the age of 35, the default proportion going to equities would come down and the proportion going to government securities, go up. By the age of 60, these investments will gradually be adjusted so that only one-tenth remains in equities, another one-tenth in corporate bonds and 80% in central and state government bonds.
How does the NPS compare with mutual funds?
Since the NPS is meant for post-retirement financial security, it does not permit flexible withdrawals as are possible in the case of mutual funds. Fund management charges are ridiculously low (0.0009% a year), as compared with mutual funds. The cost of opening and maintaining a permanent retirement account, and the transaction charge on changing address, pension fund manager, etc are around Rs 400 now.
What kind of returns would the NPS generate?
The NPS generated an average return in excess of 14% in the last financial year, the first one in which it operated, handling the corpus of civil service pensions.
Source :www.economictimes.com
Saturday, May 2, 2009
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