You Inc.: The Big Picture
Vision This is what a company wants to be in the future. Prominent companies have one. Infosys’ vision is to be a “globally respected corporation that provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people.” Like a successful corporate you need to have a vision statement. Yours could be achieving financial freedom or something comparable. Vision will be shaped by your values
Values Your values would be a reflection of your financial attitude. Here issues such as these are important: What do you want your money to do for you? How long do you want your values to shape and influence your finances? At what point will the values of your wife or children take over from yours? How much risk are you willing to take to achieve your goals? What kind of risks do you see impacting your money in the future? How important is tax-efficiency for you?
Mission Each company needs a mission with a vision. A mission statement mentions things that are actionable; things that it is already doing and in many cases is good at. ITC’s mission is: “To enhance the wealth generating capability of the enterprise in a globalising environment, delivering superior and sustainable stakeholder value.” Wealth creation needs to be your mission.
Goals These are tangible targets of the company, such as being number one in terms of market share or profitability. In your case, they will be financial goals such as acquiring a home, children’s’ higher education and retirement.
Realising Your Goals hree essential things to do to ensure you hit the bull’s-eye and on time
List your goals Figure out an order of decreasing importance—in other words, prioritise
Create the infrastructure for the pursuit of goals. This involves, among other things, selecting the tax advisor, financial advisor, financial planner, ECS mandates for EMIs and SIPs.
Periodically review the progress made towards towards goals (annually for long-term and quarterly for short-term).
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What makes a company valuable? Smart marketing with popular brands, manageable levels of debt and expenses, consistently high growth of income and profitability, well-managed risks to assets and income, and wealth creation. Like them, can you, too, become more and more valuable and see your share price soar in the stockmarket of life? Of course, corporates create wealth, thanks to the large number of employees who manage the different aspects of their operations. While the top management charts out the growth path and strategy, the marketing section creates and develops brands. The risk management arm works out ways to deal with risks. However, if you were to be the CEO of your own financial outfit—call it You Inc.—you are mostly alone except for tax and financial advisors that you might engage. Despite this apparent lack of organisational muscle, you can run yourself and your finances just as well as successful corporates do.
As with them, creation of wealth through assets, including stocks, equity or other mutual funds, and others will create a large future income. With this you can meet large future expenses, be it admission of your kids to professional courses or regular retirement income. If you do it properly, you can achieve your coveted financial freedom. This edition, coinciding with India’s 63rd Independence Day, provides you a route-map to becoming a wealth creator like a successful company by following some of their essential principles and functions.
The Corporate You: Big Picture
Develop the vision of a CEO... The starting point has to be with you taking over as the chief executive officer (CEO) of You Inc. Like any CEO, you need to have a vision for your organisation. You need to visualise in which direction you want your financial life to head. In short, you will need a vision statement like those of companies. Take the case of much-admired IT major Infosys Technologies that has the vision of being a “globally respected corporation that provides best-of-breed business solutions, leveraging technology, delivered by best-in-class people.” Another FMCG major, Hindustan Unilever (HUL), aims “to earn the love and respect of India by making a real difference to every Indian.” Your vision could be to achieve financial freedom, or something comparable.
...Shaped by your values. What and where you want to be in the future to a great extent is determined by your values, that is, what you think is right or wrong, good and not-so-good, and so on. You will have to grapple with many important questions. What would you want your money to do for you in the future? Should it be about achieving financial freedom? At what point of your life will the values of your wife and children take over from yours? How much risk are you willing to take? These will determine the choice of investment vehicles such as equities, equity mutual funds, balanced funds and gold, among other things that you invest in and the amounts that you are comfortable with. Then, there is the issue of the kind of anticipated risks that impact your finances. This will determine the risk-mitigating tool such as insurance that you take up to manage risks. For instance, if you have a family history of heart attacks, you will need to have adequate health cover early on in life.
Then, there is the issue of the importance of tax-efficiency for you. Would you like to save the last penny you can on taxes, no matter how it impacts other parameters such as returns and liquidity, or are you flexible on that front? You can see that your preferences will impact your vision of your financial future.
...Then a mission. Like corporates, you too should have a mission along with a vision. A mission statement for corporates typically states things that are actionable. What should be the mission statement of You Inc.? We suggest that it be “creating wealth on a sustainable basis”.
Formulate your goals. By having financial goals, you can translate the vision and mission you have into actionables. Companies have different goals, such as securing top market share or profitability in the industry. For You Inc., financial goals can be anything from the acquiring a house in a few years, to securing your kids’ higher education and marriage and your retired life. Once you have goals, you can work out the time when you will need the money along with the amount you will need, you can then work out what you need to do regularly to reach there.
Thereafter, you will need to prioritise them according to proximity and importance. You might feel that acquiring a home is more important than retirement at the moment and, therefore, requires an investment contribution. In some cases, you might have to scale up or scale down your goals. If a three-bedroom apartment looks difficult to buy with rising real estate prices, you might consider buying a smaller apartment at the moment and upgrading it later. After this, you will have to create the arrangements to ensure that you manage to pursue these goals. This would mean working out arrangements, such as having systematic investment plans (SIP) for your equity mutual fund investments. That’s not all. You will need to review the progress towards your goals periodically, maybe once or twice a year.
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Nuts & Bolts
The different roles that you have to don in You Inc.
Be your own Chief Marketing Officer (CMO) Ensure that you market yourself well in the job arena and build up your brand carefully.
Be a Chief Financial Officer (CFO) Like corporates, make meaningful expense allocations and control outflows.
Be a Chief Risk Officer (CRO) Manage risks, not only through insurance but also by providing funds for uninsurable events, just as corporates do.
Be a Chief Investment Officer (CIO) Deploy surpluses into assets to create wealth by balancing of key parameters.
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Being a CMO, CRO, CFO and CIO
To create wealth like corporates, you will also need to supplement your vision by carrying out major corporate functions such as marketing and budgeting, as well as expense, risk and investment management. To make your income grow at a faster clip than your expenses, you need to become You Inc.’s Chief Marketing Officer (CMO) and ensure that you market yourself well in the careers space. You need to build and develop the brand called “You”. The idea is to have the same effect as companies with strong brands and marketing functions that benefit from them with higher-than-average increase in revenues.
Not only does your income have to grow briskly, but your expenses have to be kept as low as possible without you leading a deprived life. This is where you need to be the Chief Financial Officer (CFO) of You Inc. where, like corporates, you make meaningful allocations to current or maintenance expenses while keeping enough away for capital expenses. In your case, capital expenses will be the outflow to create future wealth via investments. A critical function here would be to control fixed costs or outflows, such as loans.
Without managing risks to your life, health, income and assets such as your house, even the best-laid out plans can come to nothing. You will then have to dip into your investments before time. You will need to manage risks like a Chief Risk Officer, who not only manages insurable risks through insurance, but also with provision of funds for uninsurable ones such as a dental surgery.
You need to also be like the Chief Investment Officer (CIO) of your corporation, deploying surpluses meaningfully into assets to create wealth. This can be done through a balance of investment returns, risks, tax efficiency and liquidity.
Source:money.outlook.india
Saturday, August 28, 2010
Wednesday, May 26, 2010
Know the benefits of living in rented house
House rent allowance, or HRA, is a major component of your salary. This is given by an employer to an employee to meet the cost of renting a home.
As a salaried employee you can claim a tax exemption on such an amount. But there are certain conditions that you need to understand to claim such exemptions.
The tax exemption on HRA is computed as the minimum of following three conditions: i) Actual HRA as per you pay slip; ii) 40%/ 50% of your basic salary; iii) The rent amount minus 10% of the salary
If you stay in a metro — Mumbai, Kolkata, Delhi or Chennai — your HRA would be 50% of your salary. In other cities/towns, it would be 40% of salary. For example, if your salary is Rs 40,000 and you live in Mumbai, HRA would be Rs 20,000 (50% of the salary). Let's assume that you pay a rent of Rs 15,000. The amount of rent paid minus 10% of the salary is Rs 6,000. The least of these is Rs 6,000, which would be taken as the HRA exemption. Hence the balance (i.e. rent minus HRA exemption) Rs 9,000 will be taxed.
You can claim exemption on rent given to parents. For example, you live with your parents and pay them rent. This would technically make your parents the landlords. In such an case, one of your parents should declare the rent paid by you in his/her personal income tax return to prevent litigation in future. However, you cannot claim exemption on rent paid to your spouse. Tax experts say that the relationship between a husband and wife is not commercial in nature and they are supposed to stay together.
You should provide your employer with accurate rent information so that the company can credit you with the eligible amount of relief before deducting tax at source. Another alternative is that you can also claim such exemption when you file the tax return and seek a refund.
If you receive HRA for the period during which you were not occupying a rental accommodation, then you can’t claim any tax exemption. In all cases it is advisable for you to maintain rent receipts as they are the only proof for rent payments.
According to Section 195, all Indian income of an NRI is subject to TDS. This rule applies to rent too.
Any resident Indian is subjected to TDS for rents of over Rs 1.20 lakh per annum. “But if you have rented a house from an NRI landlord, the onus is on you to deduct tax at source and pay it to the government.
The TDS is a flat 30.9%,” says Vaibhav Sankla, executive director, Adroit Tax services.
If you have taken a home loan to buy a house, say, in Mumbai, but you reside in another city, you can get tax benefits on your housing loan.
If you have bought a house but stay in a rental accommodation in the same city because your house is not ready for possession, you are entitled to tax benefits on HRA. “You can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete for possession, the HRA benefit stops,” explains Mr Sankla.
However, if you have bought a house by taking a home loan and stay in a rented accommodation after giving you house on rent, you will be entitled to all the tax benefits mentioned above.
The government had announced the new perquisite rules in December 2009, which are effective retrospectively from April 1, 2009. The value of the perquisite determined in case of furnished accommodation is 10% per annum of the cost of furniture if owned by the employer. In case of hotel accommodation, the perquisite value is to be determined as 24% of the salary paid or payable or actual hotel charges paid by the employer, whichever is lower, for the period during which such accommodation is provided to the employee, explains Vikas Vasal, executive director of KPMG.
So under the new rules, should one opt for rent-free accommodation or claim exemption on HRA? “You should take a decision keeping in view your requirements, salary level, perquisite value and the tax impact,” adds Mr Vasal.
source:economictimes.com
As a salaried employee you can claim a tax exemption on such an amount. But there are certain conditions that you need to understand to claim such exemptions.
The tax exemption on HRA is computed as the minimum of following three conditions: i) Actual HRA as per you pay slip; ii) 40%/ 50% of your basic salary; iii) The rent amount minus 10% of the salary
If you stay in a metro — Mumbai, Kolkata, Delhi or Chennai — your HRA would be 50% of your salary. In other cities/towns, it would be 40% of salary. For example, if your salary is Rs 40,000 and you live in Mumbai, HRA would be Rs 20,000 (50% of the salary). Let's assume that you pay a rent of Rs 15,000. The amount of rent paid minus 10% of the salary is Rs 6,000. The least of these is Rs 6,000, which would be taken as the HRA exemption. Hence the balance (i.e. rent minus HRA exemption) Rs 9,000 will be taxed.
You can claim exemption on rent given to parents. For example, you live with your parents and pay them rent. This would technically make your parents the landlords. In such an case, one of your parents should declare the rent paid by you in his/her personal income tax return to prevent litigation in future. However, you cannot claim exemption on rent paid to your spouse. Tax experts say that the relationship between a husband and wife is not commercial in nature and they are supposed to stay together.
You should provide your employer with accurate rent information so that the company can credit you with the eligible amount of relief before deducting tax at source. Another alternative is that you can also claim such exemption when you file the tax return and seek a refund.
If you receive HRA for the period during which you were not occupying a rental accommodation, then you can’t claim any tax exemption. In all cases it is advisable for you to maintain rent receipts as they are the only proof for rent payments.
According to Section 195, all Indian income of an NRI is subject to TDS. This rule applies to rent too.
Any resident Indian is subjected to TDS for rents of over Rs 1.20 lakh per annum. “But if you have rented a house from an NRI landlord, the onus is on you to deduct tax at source and pay it to the government.
The TDS is a flat 30.9%,” says Vaibhav Sankla, executive director, Adroit Tax services.
If you have taken a home loan to buy a house, say, in Mumbai, but you reside in another city, you can get tax benefits on your housing loan.
If you have bought a house but stay in a rental accommodation in the same city because your house is not ready for possession, you are entitled to tax benefits on HRA. “You can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete for possession, the HRA benefit stops,” explains Mr Sankla.
However, if you have bought a house by taking a home loan and stay in a rented accommodation after giving you house on rent, you will be entitled to all the tax benefits mentioned above.
The government had announced the new perquisite rules in December 2009, which are effective retrospectively from April 1, 2009. The value of the perquisite determined in case of furnished accommodation is 10% per annum of the cost of furniture if owned by the employer. In case of hotel accommodation, the perquisite value is to be determined as 24% of the salary paid or payable or actual hotel charges paid by the employer, whichever is lower, for the period during which such accommodation is provided to the employee, explains Vikas Vasal, executive director of KPMG.
So under the new rules, should one opt for rent-free accommodation or claim exemption on HRA? “You should take a decision keeping in view your requirements, salary level, perquisite value and the tax impact,” adds Mr Vasal.
source:economictimes.com
Wednesday, May 12, 2010
Tax exemption on profit from home sale
Many a time, due to family requirements or due to re-location, a person intends to acquire a new residential house by investing the sale proceeds of his existing house property.
Is the capital gain arising from the sale of the earlier house taxable or can one claim tax exemption?
Who can claim the exemption
In case of an individual or a Hindu Undivided Family (HUF), the capital gains arising from transfer of a long-term capital asset — buildings or lands appurtenant thereto and a residential house — could be claimed as exempt under the provisions of the Act if such capital gains are invested in acquiring another residential house (new residential house).
Time period
The new residential house should be purchased within one year before or two years after the date on which the earlier house is transferred.
Similarly, the new residential house could also be constructed within a period of three years from the date of transfer of the original house.
Exemption limit
The amount of the capital gains that is invested to purchase or construct a new residential house is exempt from tax.
In case the amount of the capital gain is more than the amount of the cost of the new residential house then the balance amount of capital gain would be liable to tax.
Capital gains account scheme
In case the capital gains arising from the sale of the house is not utilised for the purchase or construction of a new residential house, then the tax payer may still claim exemption by depositing such capital gains in a specified account with any bank or institution as per the provisions of the Act. It is pertinent to note that such amount must be deposited under the capital gains account scheme before the due date of furnishing the return of income by the tax payer to claim the necessary exemption.
Further, the amount so deposited in the bank must be utilised for purchase or construction of new residential house within the time period specified above else the balance amount that is not so utilized shall be chargeable to tax in the financial year in which the period of three years from the date of transfer of original house expires.
Caution, if new house is transferred
If the new residential house for which an exemption as has been claimed as above is transferred within a period of three years from the date of its purchase or construction then for the purpose of computation of the capital gains arising from the transfer of the new residential house, the cost of such house shall be reduced by the amount of the capital gains to the extent an exemption has been claimed earlier.
Thus, say if the capital gains arising from the sale of the earlier house were equal to the cost of the new house, and an exemption was claimed for the entire amount of the capital gains. Now, when the new house is transferred within three years, then its cost will be taken as Nil. Therefore, the entire amount of capital gains arising from the sale of the new asset would be liable to tax.
Beneficial provision
If due caution is taken in respect of the time lines for purchase / construction of the new house, deposit of money into capital gains scheme and also in respect of the transfer of the new residential house, the capital gains amount from transfer / sale of the residential house could be claimed as exempt.
Is the capital gain arising from the sale of the earlier house taxable or can one claim tax exemption?
Who can claim the exemption
In case of an individual or a Hindu Undivided Family (HUF), the capital gains arising from transfer of a long-term capital asset — buildings or lands appurtenant thereto and a residential house — could be claimed as exempt under the provisions of the Act if such capital gains are invested in acquiring another residential house (new residential house).
Time period
The new residential house should be purchased within one year before or two years after the date on which the earlier house is transferred.
Similarly, the new residential house could also be constructed within a period of three years from the date of transfer of the original house.
Exemption limit
The amount of the capital gains that is invested to purchase or construct a new residential house is exempt from tax.
In case the amount of the capital gain is more than the amount of the cost of the new residential house then the balance amount of capital gain would be liable to tax.
Capital gains account scheme
In case the capital gains arising from the sale of the house is not utilised for the purchase or construction of a new residential house, then the tax payer may still claim exemption by depositing such capital gains in a specified account with any bank or institution as per the provisions of the Act. It is pertinent to note that such amount must be deposited under the capital gains account scheme before the due date of furnishing the return of income by the tax payer to claim the necessary exemption.
Further, the amount so deposited in the bank must be utilised for purchase or construction of new residential house within the time period specified above else the balance amount that is not so utilized shall be chargeable to tax in the financial year in which the period of three years from the date of transfer of original house expires.
Caution, if new house is transferred
If the new residential house for which an exemption as has been claimed as above is transferred within a period of three years from the date of its purchase or construction then for the purpose of computation of the capital gains arising from the transfer of the new residential house, the cost of such house shall be reduced by the amount of the capital gains to the extent an exemption has been claimed earlier.
Thus, say if the capital gains arising from the sale of the earlier house were equal to the cost of the new house, and an exemption was claimed for the entire amount of the capital gains. Now, when the new house is transferred within three years, then its cost will be taken as Nil. Therefore, the entire amount of capital gains arising from the sale of the new asset would be liable to tax.
Beneficial provision
If due caution is taken in respect of the time lines for purchase / construction of the new house, deposit of money into capital gains scheme and also in respect of the transfer of the new residential house, the capital gains amount from transfer / sale of the residential house could be claimed as exempt.
Sunday, April 18, 2010
Some factors that investors need to track
The annual results season is here and the results from large companies will start coming in from next week. The results reason is crucial as the economic conditions have improved, and the government and Reserve Bank of India (RBI) have started getting out of the economic stimulus schemes. The foreign institutional investors (FIIs) have invested close to 20 billion dollars during the last one year and their confidence in the domestic economy and companies have grown with time.
These are some of the major factors investors should track during the coming results season:
Inflation
The inflation rate has gone to alarming levels during the last couple of months. The RBI has started tightening the monetary policy to control the situation. However, the changes in the monetary policy show an effect with a time lag of a few quarters and therefore it is important to analyse the performance of interest rate sensitive sectors and companies with extra care.
Currency appreciation
The currency has appreciated sharply against the major foreign currencies - dollar, euro, British pound etc. Analysts believe that further appreciation cannot be ruled out as FII inflows are quite robust, and the RBI is not planning to intervene in the Forex markets. Investors should evaluate companies that have exposure to Forex transactions.
Recovery
Most of the developed global economies have come out of recession but the recovery is still quite slow and not convincing. It would take a few more quarters before a clear picture emerges on the global economic front and investors are bound to get some negative news. Therefore, it is important to keep this fact in mind while analysing the results and making buy or sell decisions in the markets. These are some of the significant factors investors should analyse:
Compare performance
The first and most basic strategy is to compare a company's performance with its previous year's performance as well as with its previous quarter's performance. This gives a quick overview of the company's performance and generates questions to help further investigate the results. Investors can compare the results of a company with those of its peers and competitors. This helps in getting a quick feel of the general sector performance, apart from a comparative performance analysis. If the results are unusually good or bad, investors should try to find out the reasons. Investors should discount any one-time issues factored in the company's results that are reflected in its overall results.
Check ratios and parameters
Investors can also look at various parameters and ratios to analyse a company's financial health. For example , the order book, inventory levels, sales numbers etc. Some general information on various ratios and parameters is easily available. Also, follow the quotes of the company's top officials. This helps in getting a sense of what is happening inside the company.
Analyse macroeconomic conditions
Investors with a deeper understanding of economics can look at analysing the impact of various macroeconomic events and the current economic conditions on a company's performance. This will help in identifying and understanding the business-specific and sector-specific challenges.
Markets poised delicately
The domestic markets are at a crucial junction at the moment. They are trading almost near a 24-month high. The expectations from the coming results are very high, fueled by the improvements in the general economic conditions globally. But on the other hand, there is some apprehension on the inflation rate and the way the RBI will handle the current alarming situation. The valuations in the markets are no longer cheap and further upside movements will depend on a company's performance, global economic developments and flows from FIIs.
Source:economictimes.com
These are some of the major factors investors should track during the coming results season:
Inflation
The inflation rate has gone to alarming levels during the last couple of months. The RBI has started tightening the monetary policy to control the situation. However, the changes in the monetary policy show an effect with a time lag of a few quarters and therefore it is important to analyse the performance of interest rate sensitive sectors and companies with extra care.
Currency appreciation
The currency has appreciated sharply against the major foreign currencies - dollar, euro, British pound etc. Analysts believe that further appreciation cannot be ruled out as FII inflows are quite robust, and the RBI is not planning to intervene in the Forex markets. Investors should evaluate companies that have exposure to Forex transactions.
Recovery
Most of the developed global economies have come out of recession but the recovery is still quite slow and not convincing. It would take a few more quarters before a clear picture emerges on the global economic front and investors are bound to get some negative news. Therefore, it is important to keep this fact in mind while analysing the results and making buy or sell decisions in the markets. These are some of the significant factors investors should analyse:
Compare performance
The first and most basic strategy is to compare a company's performance with its previous year's performance as well as with its previous quarter's performance. This gives a quick overview of the company's performance and generates questions to help further investigate the results. Investors can compare the results of a company with those of its peers and competitors. This helps in getting a quick feel of the general sector performance, apart from a comparative performance analysis. If the results are unusually good or bad, investors should try to find out the reasons. Investors should discount any one-time issues factored in the company's results that are reflected in its overall results.
Check ratios and parameters
Investors can also look at various parameters and ratios to analyse a company's financial health. For example , the order book, inventory levels, sales numbers etc. Some general information on various ratios and parameters is easily available. Also, follow the quotes of the company's top officials. This helps in getting a sense of what is happening inside the company.
Analyse macroeconomic conditions
Investors with a deeper understanding of economics can look at analysing the impact of various macroeconomic events and the current economic conditions on a company's performance. This will help in identifying and understanding the business-specific and sector-specific challenges.
Markets poised delicately
The domestic markets are at a crucial junction at the moment. They are trading almost near a 24-month high. The expectations from the coming results are very high, fueled by the improvements in the general economic conditions globally. But on the other hand, there is some apprehension on the inflation rate and the way the RBI will handle the current alarming situation. The valuations in the markets are no longer cheap and further upside movements will depend on a company's performance, global economic developments and flows from FIIs.
Source:economictimes.com
Saturday, April 10, 2010
Rebalance your portfolio occasionally for better gains
You may find that I correlate investments to driving often, but I do seek simple ways of explaining financial concepts. Portfolio rebalancing can sound complicated, but needs to be done regularly to ensure that one’s investments do not carry risks which are not proportional — neither too high, nor too low — to what one can bear.
So, imagine that while driving a car on the highway at 80 km per hour, you see a red traffic light 200 metres away. You can continue speeding with the slender hope that the traffic light will turn green by the time you reach, and risk a sharp brake if it does not.
Alternatively, you can move to a lower gear, reduce speed and come to a gradual halt as you approach the traffic light.
Rebalancing is the process of restoring your portfolio back to its asset allocation targets. This may become necessary since some of the allocations may fall out of alignment with the original target percentage allocations for various reasons.
By following a disciplined approach to rebalancing, you will find that your portfolio does not overemphasise or de-emphasise one or more asset categories of your portfolio.
When is rebalancing required?
Rebalancing may be required when:
a) positions have become too large or too small;
b) your financial goal(s) have been achieved;
c) your financial objective(s) have changed;
d) your time horizon has changed.
Is there a marked difference?
Let us study an example of a portfolio where you have decided to invest 50% in equities, 40% in debt, 5% in gold and 5% in real estate. You have also decided to rebalance the portfolio at the end of every year. In the past 10 years starting January 2000, your portfolio would have earned you 14.1% pa compounded annually (see table).
It was possible to book some profits in December 2007 and also take the plunge into equity in January 2009 when most others dreaded to tread. Instead of rebalancing, had you invested Rs 100 in January 2000 and stayed put, your portfolio would have grown to Rs 295, or a cool 20% lower than the rebalanced portfolio.
We are not saying that an annual rebalancing is essential: we are highlighting the benefits of this process. So, as you approach the traffic light at a slower pace, and the light turns green, you get the advantage of revving up your car from second gear itself instead.
You do realise that this gives you a headstart to reach your destination faster, with less tension and definitely better fuel efficiency.
So, imagine that while driving a car on the highway at 80 km per hour, you see a red traffic light 200 metres away. You can continue speeding with the slender hope that the traffic light will turn green by the time you reach, and risk a sharp brake if it does not.
Alternatively, you can move to a lower gear, reduce speed and come to a gradual halt as you approach the traffic light.
Rebalancing is the process of restoring your portfolio back to its asset allocation targets. This may become necessary since some of the allocations may fall out of alignment with the original target percentage allocations for various reasons.
By following a disciplined approach to rebalancing, you will find that your portfolio does not overemphasise or de-emphasise one or more asset categories of your portfolio.
When is rebalancing required?
Rebalancing may be required when:
a) positions have become too large or too small;
b) your financial goal(s) have been achieved;
c) your financial objective(s) have changed;
d) your time horizon has changed.
Is there a marked difference?
Let us study an example of a portfolio where you have decided to invest 50% in equities, 40% in debt, 5% in gold and 5% in real estate. You have also decided to rebalance the portfolio at the end of every year. In the past 10 years starting January 2000, your portfolio would have earned you 14.1% pa compounded annually (see table).
It was possible to book some profits in December 2007 and also take the plunge into equity in January 2009 when most others dreaded to tread. Instead of rebalancing, had you invested Rs 100 in January 2000 and stayed put, your portfolio would have grown to Rs 295, or a cool 20% lower than the rebalanced portfolio.
We are not saying that an annual rebalancing is essential: we are highlighting the benefits of this process. So, as you approach the traffic light at a slower pace, and the light turns green, you get the advantage of revving up your car from second gear itself instead.
You do realise that this gives you a headstart to reach your destination faster, with less tension and definitely better fuel efficiency.
Infrastructure bonds: To invest or not to invest?
One of the fresh tax reliefs that have come as an outcome of the budget 2010 is the deduction allowed for investing up to Rs 20,000 in infrastructure bonds. While the FM is stressing on the advantage of the same, the benefits are not neutral for all individuals. Here is a take on the pros and cons of investing in infrastructure bonds for tax saving purposes.
Tax groups post budget 2010.
Tax group 1: Taxable income Rs. 1.6-5 lakhs
Tax group 2: Taxable income Rs. 5-8 Lakhs
Tax group 3: Taxable income above Rs. 8 lakhs.
To understand the pros and cons of tax saving investments we need to look at 4 major parameters:
Parameter 1 : Actual tax saving (let’s take the highest saving possible)
Parameter 2 : Returns from the investment (during the lock in period)
Parameter 3: Opportunity cost (what if you had invested the same money elsewhere?)
Parameter 4: Effect of inflation on the returns on investment (what would the worth of your investment when you redeem/encash it?)
Assumptions
For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios—3 year and 5 year lock-in
Let’s assume the rate of return on infrastructure bonds is 5.5 per cent per annum and overall rate of inflation is 8 per cent.
For people in the 1.6- 5 lakh taxable income group:
As per the new norms the income will be taxed at a rate of 10 per cent for this group.
Parameter 1:
Actual tax saving: 10 per cent of Rs 20,000 = Rs 2000
(If you invest Rs 20,000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10 per cent benefit)
Parameter 2:
What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20,000 would fetch an income of Rs. 3484. When added to the tax saved you'll get an effective return of Rs 25485 (Rs 20000+3484+2000) on your investment
Parameter 3:
If this same amount were to be invested in a market instrument that fetched a return of 15 per cent, you would get an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15 per cent per annum for 3 years)
Parameter 4:
What would be the minimum amount required to counter inflation at 8 per cent? The amount would be Rs 25, 194.
Thus for a person in the slab of 1.6-5 lakh the benefits of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.
Similarly we can calculate the benefits for each segment as well as for a scenario where the lock in period is 5 years as given in the table below.
Slab - 30%
Tax savings - Rs.6,000
Effective Returns(3 yrs/5 yrs) - Rs. 29,485/ Rs.32,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 21,292/Rs. 28,159
Slab - 20%
Tax savings - Rs.4,000
Effective Returns(3 yrs/5 yrs) - Rs. 27,485/Rs. 30,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 24,334/Rs. 32,182
Slab - 10%
Tax savings - Rs.2,000
Effective Returns(3 yrs/5 yrs) - Rs. 25,485/ Rs. 28,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 27,376/Rs. 36,204
Required returns to counter inflation effect - Rs. 25,194/ Rs. 29,387
Bottom-line
If you fall under the Rs 8 lakh taxable income slab, it makes sense to opt for the infrastructure bonds as a tax saving instrument.
If you are under the 5-8 lakh bracket it is advisable to invest in infrastructure bonds only if the period of investment is 3 years, not five years.
If you come under the 1.6-5 lakh bracket it is an absolute no-no to invest in infrastructure bonds for tax saving purpose.
Tax groups post budget 2010.
Tax group 1: Taxable income Rs. 1.6-5 lakhs
Tax group 2: Taxable income Rs. 5-8 Lakhs
Tax group 3: Taxable income above Rs. 8 lakhs.
To understand the pros and cons of tax saving investments we need to look at 4 major parameters:
Parameter 1 : Actual tax saving (let’s take the highest saving possible)
Parameter 2 : Returns from the investment (during the lock in period)
Parameter 3: Opportunity cost (what if you had invested the same money elsewhere?)
Parameter 4: Effect of inflation on the returns on investment (what would the worth of your investment when you redeem/encash it?)
Assumptions
For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios—3 year and 5 year lock-in
Let’s assume the rate of return on infrastructure bonds is 5.5 per cent per annum and overall rate of inflation is 8 per cent.
For people in the 1.6- 5 lakh taxable income group:
As per the new norms the income will be taxed at a rate of 10 per cent for this group.
Parameter 1:
Actual tax saving: 10 per cent of Rs 20,000 = Rs 2000
(If you invest Rs 20,000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10 per cent benefit)
Parameter 2:
What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20,000 would fetch an income of Rs. 3484. When added to the tax saved you'll get an effective return of Rs 25485 (Rs 20000+3484+2000) on your investment
Parameter 3:
If this same amount were to be invested in a market instrument that fetched a return of 15 per cent, you would get an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15 per cent per annum for 3 years)
Parameter 4:
What would be the minimum amount required to counter inflation at 8 per cent? The amount would be Rs 25, 194.
Thus for a person in the slab of 1.6-5 lakh the benefits of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.
Similarly we can calculate the benefits for each segment as well as for a scenario where the lock in period is 5 years as given in the table below.
Slab - 30%
Tax savings - Rs.6,000
Effective Returns(3 yrs/5 yrs) - Rs. 29,485/ Rs.32,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 21,292/Rs. 28,159
Slab - 20%
Tax savings - Rs.4,000
Effective Returns(3 yrs/5 yrs) - Rs. 27,485/Rs. 30,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 24,334/Rs. 32,182
Slab - 10%
Tax savings - Rs.2,000
Effective Returns(3 yrs/5 yrs) - Rs. 25,485/ Rs. 28,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 27,376/Rs. 36,204
Required returns to counter inflation effect - Rs. 25,194/ Rs. 29,387
Bottom-line
If you fall under the Rs 8 lakh taxable income slab, it makes sense to opt for the infrastructure bonds as a tax saving instrument.
If you are under the 5-8 lakh bracket it is advisable to invest in infrastructure bonds only if the period of investment is 3 years, not five years.
If you come under the 1.6-5 lakh bracket it is an absolute no-no to invest in infrastructure bonds for tax saving purpose.
Saturday, March 27, 2010
Go online,buying MF units was never this easy
With increased internet penetration , most financial transactions have gone online. Not only online transactions take less effort, they are also easy to organise. Furthermore, a search for a history of transactions is easily possible. These advantages and more are available when you buy mutual funds online.
RESEARCH AVAILABILITY
With several hundred mutual fund schemes on offer, which one to buy is a tough question . Most websites facilitating purchase of mutual funds online offer live research support , which means you can check out the topperforming funds in each category for different time periods.
Comparisons can be done right up to the last NAV. In-house research teams also advise investors based on their individual investment horizons.
This apart, there are readymade asset allocation models you can use to construct your portfolio based on your age and risk appetite, and if you want to keep it simple, you can just mimic these model portfolios. You are also supported with various calculators.
PORTFOLIO TRACKER
Your portfolio is updated on a daily basis. Your entire mutual fund portfolio — be it in equity or debt — is consolidated and can be viewed on a single screen. “The customer’s portfolio is updated daily with the latest NAV and he can also see our research recommendation against the schemes,” says Vineet Arora, head (products and distribution), ICICI Securities. This helps the investor take decisions about his portfolio quickly and with minimum delay.
INTEGRATED PAPERLESS APPROACH
In the physical route, investors are burdened with paperwork and movement of paper. With online, they get the ease of transacting from any corner of the world at any point of time. You can just go online and invest. As internet banking spreads, the integration of your banking account with your mutual fund account also ensures seamless transactions and instant confirmation of transactions.
“When you transact online, you do not have to wait for paper to know whether your cheque is cleared, or something is missing in your form,” says Rajesh Krishnamoorthy, managing director, fundsupermart.com, a website where investors can transact in mutual funds.
INVEST IN SIP/SWP Investing in a systematic investment plan or a systematic withdrawal plan is a pleasure when you do it online. In the case of an emergency , even at the last moment, one can stop a payment. In the physical mode, one would have to fill in forms and send it to registrar, which would require a minimum of two days. An added advantage is automatic reminders that inform you when your SIP gets over.
BUY THROUGH BROKERS With stock brokers now being allowed to buy and sell mutual fund units through the exchange , you can also buy mutual funds by logging on to your trading account. However, it is yet to catch investors’ fancy.
QUERIES
Some websites give you an opportunity to build communities where you can interact with other investors. The communities provide a platform to clarify doubts on investments in mutual funds, financial planning and such other related areas
WHY ONLINE MUTUAL FUNDS ARE CATCHING ON
SEBI abolished entry load on mutual funds in August 2009. Prior to this, whenever investors invested in an equity mutual fund, they were charged an entry load of 2.25%. This amount was deducted from the investor’s investment by the asset management company (AMC) and passed on to the distributor as fees.
However, this has changed after August 2009. Now, distributors can charge an advisory fee from investors for their services and earn a trail fee of 0.5% from the AMC. The reaction of distributors to this move has been mixed. While some distributors charge an advisory fee for their services, others do not. Hence, this has reduced distributor margins.
For example, if a customer wants to invest Rs 10,000 in an equity fund today, a distributor may earn only Rs 50 as trail fees plus advisory fees charged if any, compared to Rs 225 which he earned as entry load plus the trail fees. Fall in margins makes industry players invariably look at boosting business volumes.
As a result, more distributors are going online because it helps to reduce costs and maintain their margins. For example if a customer invests online, he does not interact with an advisor, nor does the advisor have to physically complete the transaction for the customer. This saves valuable manpower cost and other servicerelated costs for the distributor which makes up the biggest component of distribution cost.
RESEARCH AVAILABILITY
With several hundred mutual fund schemes on offer, which one to buy is a tough question . Most websites facilitating purchase of mutual funds online offer live research support , which means you can check out the topperforming funds in each category for different time periods.
Comparisons can be done right up to the last NAV. In-house research teams also advise investors based on their individual investment horizons.
This apart, there are readymade asset allocation models you can use to construct your portfolio based on your age and risk appetite, and if you want to keep it simple, you can just mimic these model portfolios. You are also supported with various calculators.
PORTFOLIO TRACKER
Your portfolio is updated on a daily basis. Your entire mutual fund portfolio — be it in equity or debt — is consolidated and can be viewed on a single screen. “The customer’s portfolio is updated daily with the latest NAV and he can also see our research recommendation against the schemes,” says Vineet Arora, head (products and distribution), ICICI Securities. This helps the investor take decisions about his portfolio quickly and with minimum delay.
INTEGRATED PAPERLESS APPROACH
In the physical route, investors are burdened with paperwork and movement of paper. With online, they get the ease of transacting from any corner of the world at any point of time. You can just go online and invest. As internet banking spreads, the integration of your banking account with your mutual fund account also ensures seamless transactions and instant confirmation of transactions.
“When you transact online, you do not have to wait for paper to know whether your cheque is cleared, or something is missing in your form,” says Rajesh Krishnamoorthy, managing director, fundsupermart.com, a website where investors can transact in mutual funds.
INVEST IN SIP/SWP Investing in a systematic investment plan or a systematic withdrawal plan is a pleasure when you do it online. In the case of an emergency , even at the last moment, one can stop a payment. In the physical mode, one would have to fill in forms and send it to registrar, which would require a minimum of two days. An added advantage is automatic reminders that inform you when your SIP gets over.
BUY THROUGH BROKERS With stock brokers now being allowed to buy and sell mutual fund units through the exchange , you can also buy mutual funds by logging on to your trading account. However, it is yet to catch investors’ fancy.
QUERIES
Some websites give you an opportunity to build communities where you can interact with other investors. The communities provide a platform to clarify doubts on investments in mutual funds, financial planning and such other related areas
WHY ONLINE MUTUAL FUNDS ARE CATCHING ON
SEBI abolished entry load on mutual funds in August 2009. Prior to this, whenever investors invested in an equity mutual fund, they were charged an entry load of 2.25%. This amount was deducted from the investor’s investment by the asset management company (AMC) and passed on to the distributor as fees.
However, this has changed after August 2009. Now, distributors can charge an advisory fee from investors for their services and earn a trail fee of 0.5% from the AMC. The reaction of distributors to this move has been mixed. While some distributors charge an advisory fee for their services, others do not. Hence, this has reduced distributor margins.
For example, if a customer wants to invest Rs 10,000 in an equity fund today, a distributor may earn only Rs 50 as trail fees plus advisory fees charged if any, compared to Rs 225 which he earned as entry load plus the trail fees. Fall in margins makes industry players invariably look at boosting business volumes.
As a result, more distributors are going online because it helps to reduce costs and maintain their margins. For example if a customer invests online, he does not interact with an advisor, nor does the advisor have to physically complete the transaction for the customer. This saves valuable manpower cost and other servicerelated costs for the distributor which makes up the biggest component of distribution cost.
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