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
Sunday, April 18, 2010
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.
Saturday, March 20, 2010
Beware of highest-NAV schemes
Over the last few months, one after another, a number of insurance companies have launched ULIPs which promise to repay the investor on the basis of the highest NAV that the fund has achieved. The pitch is that these funds' NAV effectively does not drop. Once a level is achieved, then the investor is assured of getting at least as much, no matter what happens to the market. It's certainly a very attractive idea. From the way insurance companies are stampeding into launching such products, I'm sure investors must be putting down their money in good numbers-in just a couple of months, six ins
urance companies have launched such products. Any investor who is told of this concept will immediately start salivating at the thought. Imagine how rich you could have been had you been invested over the last ten years and had been able to lock your investments at the magical value that the markets achieved on the day when the Sensex touched 20,873!
Any investor thinking about this product would say, "What a wonderful idea!" Why don't all investment schemes-whether mutual funds or ULIPs or even portfolio management schemes offer this kind of a protection on all their products anyway. The answer to this obvious question is simple. There is no free lunch. These products don't actually offer what you think they are offering. That is, they do not offer equity returns that never fall. Instead, they offer an investment system with a very long lock-in (seven to ten years) in which protection is achieved by progressively putting your gains in a fixed income assets which will give returns far more slowly than a pure equity option. The lock-in and the non-equity assets make this a very different kind of investment than the equity-gains-without-losses dream that these funds' advertising seems to imply.
However, even that's not the real reason that these funds are useless. The real reason is that if you are willing to lock-in for seven to ten years, then practically any equity mutual fund would deliver this dream of equity-gains-without-losses. Seven years is a very long time. Over such a period practically any equity portfolio into which any kind of thought has gone would capture substantial gains. This is not mere conjecture. Since at least 1997 the minimum total return that the Sensex has generated over its worst seven is 12 per cent, which was over the seven year period from 6th July 1997 to 5th July 2004. The truth is that in a growing economy like India's it's extremely hard to lose money over a long period like seven years. If you are willing to lock in your money for seven years, then for all practical purposes, you have a guarantee of making a profit.
Of course, this is not a guarantee that is signed in a contract and legally enforceable, but it's the kind of guarantee that any thoughtful investor would be willing to believe in. Mind you, this is also not a guarantee that you will get the highest NAV achieved but again, that's the kind of thing that can't be attained if you want the gains of pure equity anyway.
The most instructive thing in this whole business of guaranteed highest NAV products is the contrast between the illusions spun by those peddling complex financial products and the reality of simple, straightforward investing. It just reinforces one's belief that financial products are being designed whose goal is nothing more than to create a marketing hype which can manipulate the psychology of the ordinary saver.
Source: valueresearchonline.com
urance companies have launched such products. Any investor who is told of this concept will immediately start salivating at the thought. Imagine how rich you could have been had you been invested over the last ten years and had been able to lock your investments at the magical value that the markets achieved on the day when the Sensex touched 20,873!
Any investor thinking about this product would say, "What a wonderful idea!" Why don't all investment schemes-whether mutual funds or ULIPs or even portfolio management schemes offer this kind of a protection on all their products anyway. The answer to this obvious question is simple. There is no free lunch. These products don't actually offer what you think they are offering. That is, they do not offer equity returns that never fall. Instead, they offer an investment system with a very long lock-in (seven to ten years) in which protection is achieved by progressively putting your gains in a fixed income assets which will give returns far more slowly than a pure equity option. The lock-in and the non-equity assets make this a very different kind of investment than the equity-gains-without-losses dream that these funds' advertising seems to imply.
However, even that's not the real reason that these funds are useless. The real reason is that if you are willing to lock-in for seven to ten years, then practically any equity mutual fund would deliver this dream of equity-gains-without-losses. Seven years is a very long time. Over such a period practically any equity portfolio into which any kind of thought has gone would capture substantial gains. This is not mere conjecture. Since at least 1997 the minimum total return that the Sensex has generated over its worst seven is 12 per cent, which was over the seven year period from 6th July 1997 to 5th July 2004. The truth is that in a growing economy like India's it's extremely hard to lose money over a long period like seven years. If you are willing to lock in your money for seven years, then for all practical purposes, you have a guarantee of making a profit.
Of course, this is not a guarantee that is signed in a contract and legally enforceable, but it's the kind of guarantee that any thoughtful investor would be willing to believe in. Mind you, this is also not a guarantee that you will get the highest NAV achieved but again, that's the kind of thing that can't be attained if you want the gains of pure equity anyway.
The most instructive thing in this whole business of guaranteed highest NAV products is the contrast between the illusions spun by those peddling complex financial products and the reality of simple, straightforward investing. It just reinforces one's belief that financial products are being designed whose goal is nothing more than to create a marketing hype which can manipulate the psychology of the ordinary saver.
Source: valueresearchonline.com
Friday, March 19, 2010
Home loan repayment reduces tax liability
You can reduce your income tax burden through the interest you pay on a home loan. Under Section 24 of the Income Tax Act, interest paid up to Rs 1.5 lakhs a year on a home loan can be set off against 'loss' from other heads for a self-occupied property.
In case the property has been acquired before April 1, 1999, interest up to Rs 30,000 a year can be set off. In case the property has been rented out, the entire interest paid is deductible from the taxable income after computing rental income. If the loan is taken for renovation, interest up to Rs 30,000 a year is deductible.
The pre-equated monthly instalment (pre-EMI ) interest amount (the interest amount paid during construction) is deducted under Section 24 of the Income Tax Act equally over five years from the year of completion of construction. It is to be noted that if you have taken a loan only for the land purchase, it is not eligible for any tax benefits.
In case you take a composite loan (for land and house construction), you will be eligible for income tax benefits only after the completion of the construction.
Tax benefits are available on loans to construct a residential property, buy a residential property, extend a house, and for major repairs or renovation of a house. The home loan is disbursed through a number of instalments as the construction progresses.
During the construction period, you have to pay pre-EMI interest every month. The entire pre-EMI interest paid is allowed as a deduction (under Section 24) equally over five years starting from the year in which the construction is completed.
However, for a selfoccupied house, the total deduction allowed towards interest on the home loan is Rs 1.5 lakhs a year. There is no limit for deduction on interest paid towards a second home loan, provided you add the rental income (annual rental value of your second house) to your income. The annual rental value will be the higher of actual rent received a year, municipal value, and fair rent fixed.
Out of the total annual rental value, there is standard deduction of 30 percent available towards maintenance charges and municipal taxes. The insurance premiums paid on the property can be deducted too.
The deduction in respect of principal loan amount repaid is restricted to Rs 1 lakh. In case you have taken a personal loan from a bank and used the money to purchase or construct a house, you can claim tax benefits on both principal and interest paid.
However, if the loan has been borrowed from a friend or relative, you can claim tax benefits on the interest paid only.
Co-owners can claim tax benefits separately, as per the shareholding in the property. If the shareholding is not mentioned in the purchase deed, they can execute an agreement on a requisite stamp paper, mentioning the shares in the property, and claim the benefits separately.
Both can claim deductions up to Rs 1.5 lakhs a year separately towards interest paid for a self-occupied house and the entire interest paid on a rented-out house, after computing rental income received, and also up to Rs 1 lakh towards principal repaid.
Under Section 80C of the Income Tax Act, home loan borrowers can claim a deduction of up to Rs 1 lakh from the taxable income on a loan repaid during the year, along with specified savings instruments.
Along with the other specified savings instruments, a home loan repayment amount, the amount spent on stamp paper and registration costs on registering a house, all up to Rs 1 lakh is deductible from the total income.
If you sell the property within five years from the year in which you started, you lose the tax benefits availed under Section 80C (on the principal loan amount) and the amount will be clubbed to the income of the year in which the property has been sold. However, you will not lose the deductions claimed on interest paid under Section 24.
source:economictimes.com
In case the property has been acquired before April 1, 1999, interest up to Rs 30,000 a year can be set off. In case the property has been rented out, the entire interest paid is deductible from the taxable income after computing rental income. If the loan is taken for renovation, interest up to Rs 30,000 a year is deductible.
The pre-equated monthly instalment (pre-EMI ) interest amount (the interest amount paid during construction) is deducted under Section 24 of the Income Tax Act equally over five years from the year of completion of construction. It is to be noted that if you have taken a loan only for the land purchase, it is not eligible for any tax benefits.
In case you take a composite loan (for land and house construction), you will be eligible for income tax benefits only after the completion of the construction.
Tax benefits are available on loans to construct a residential property, buy a residential property, extend a house, and for major repairs or renovation of a house. The home loan is disbursed through a number of instalments as the construction progresses.
During the construction period, you have to pay pre-EMI interest every month. The entire pre-EMI interest paid is allowed as a deduction (under Section 24) equally over five years starting from the year in which the construction is completed.
However, for a selfoccupied house, the total deduction allowed towards interest on the home loan is Rs 1.5 lakhs a year. There is no limit for deduction on interest paid towards a second home loan, provided you add the rental income (annual rental value of your second house) to your income. The annual rental value will be the higher of actual rent received a year, municipal value, and fair rent fixed.
Out of the total annual rental value, there is standard deduction of 30 percent available towards maintenance charges and municipal taxes. The insurance premiums paid on the property can be deducted too.
The deduction in respect of principal loan amount repaid is restricted to Rs 1 lakh. In case you have taken a personal loan from a bank and used the money to purchase or construct a house, you can claim tax benefits on both principal and interest paid.
However, if the loan has been borrowed from a friend or relative, you can claim tax benefits on the interest paid only.
Co-owners can claim tax benefits separately, as per the shareholding in the property. If the shareholding is not mentioned in the purchase deed, they can execute an agreement on a requisite stamp paper, mentioning the shares in the property, and claim the benefits separately.
Both can claim deductions up to Rs 1.5 lakhs a year separately towards interest paid for a self-occupied house and the entire interest paid on a rented-out house, after computing rental income received, and also up to Rs 1 lakh towards principal repaid.
Under Section 80C of the Income Tax Act, home loan borrowers can claim a deduction of up to Rs 1 lakh from the taxable income on a loan repaid during the year, along with specified savings instruments.
Along with the other specified savings instruments, a home loan repayment amount, the amount spent on stamp paper and registration costs on registering a house, all up to Rs 1 lakh is deductible from the total income.
If you sell the property within five years from the year in which you started, you lose the tax benefits availed under Section 80C (on the principal loan amount) and the amount will be clubbed to the income of the year in which the property has been sold. However, you will not lose the deductions claimed on interest paid under Section 24.
source:economictimes.com
Saturday, February 20, 2010
Strike a balance between different MF schemes
There was a time when investors preferring to invest in equity, had to focus merely on stocks as the portfolio performance depended largely on the market performance of the stocks. In the last decade and half, the options have grown manifold and investors have to choose between stocks and mutual funds (MFs).
Within the MF category, the choice of schemes too has grown substantially with over 1,000 schemes being available from over two dozen mutual fund companies. It goes without stating that the task of building a portfolio of mutual fund schemes is not an easy one.
While the choice is plenty, investors need not chase all stories or themes for their investments. In many cases, the difference between the investment principles of various schemes is very limited and hence investors can limit their options to a few schemes.
For instance, if an investor has decided to invest in a diversified scheme, it would not make sense for him to choose 6-8 diversified schemes though most feel comfortable when they have a bigger basket of instruments.
In reality, a smart mutual fund basket will focus on themes, investment strategy, the fund's ability to counter a downtrend, and most importantly, should have schemes which have a track record of good performance. Every downtrend makes this point increasingly relevant, and for longterm investors, this factor is even a necessity.
How does one go about the task of building an MF portfolio?
Start with a diversified fund as it requires minimum management and holds good for a longer period of time because of the investment being made across sectors. This could be as high as 70 percent of the portfolio if the risk appetite of the investor is low.
Over a period of time, the risk-taking ability generally comes down in line with the age of the investor. The risk capabilities also tend to come down when the corpus gets bigger and accounts for a large chunk of the investor's portfolio. Such investors will have to look at inclusion of debt in their portfolio.
In fact, allocation to debt has to increase over a period of time though it is not a bad idea to maintain debt allocation at all times. Not only will this help in better risk management but also allows investors to take the opportunities arising out of a market downtrend.
Take the case of an investor who had a good percentage of funds in debt funds in October 2008. He would have been one of the few who had the ability to take advantage of the steep market correction if his requirement of funds was not short-term.
Since volatility is an integral part of the equity market, investors, irrespective of their age, will benefit by allocating a portion in debt.
The biggest doubt many mutual fund investors have is whether they should opt for a balanced fund or strike a balance in the portfolio through allocation to debt and equity? The answer is yes and no.
A balanced fund invests up to 35 percent in debt and hence is a medium risk portfolio. This would be ideal for an investor who has earning years of more than 15 to 20.
On the contrary, a retired professional, who wishes to allocate a small portion towards equity, might end up with a higher risk portfolio even if he prefers a balanced fund. Hence, balanced fund should be considered a slightly lower risk option for equity investors, and hence should be viewed as a medium risk option for others. On the other hand, investors looking at striking a balance between various funds should stick to vanilla debt products for their debt allocation.
More importantly, an allocation towards a balanced fund is a good stepping stone for first-time investors who haven't had exposure to equity earlier.
Irrespective of the choice of schemes, one needs to build a portfolio of mutual fund schemes according to their risk-taking abilities and investment tenure as mutual funds, like other investment options, have volatility attached to them.
Source:economictimes.com
Within the MF category, the choice of schemes too has grown substantially with over 1,000 schemes being available from over two dozen mutual fund companies. It goes without stating that the task of building a portfolio of mutual fund schemes is not an easy one.
While the choice is plenty, investors need not chase all stories or themes for their investments. In many cases, the difference between the investment principles of various schemes is very limited and hence investors can limit their options to a few schemes.
For instance, if an investor has decided to invest in a diversified scheme, it would not make sense for him to choose 6-8 diversified schemes though most feel comfortable when they have a bigger basket of instruments.
In reality, a smart mutual fund basket will focus on themes, investment strategy, the fund's ability to counter a downtrend, and most importantly, should have schemes which have a track record of good performance. Every downtrend makes this point increasingly relevant, and for longterm investors, this factor is even a necessity.
How does one go about the task of building an MF portfolio?
Start with a diversified fund as it requires minimum management and holds good for a longer period of time because of the investment being made across sectors. This could be as high as 70 percent of the portfolio if the risk appetite of the investor is low.
Over a period of time, the risk-taking ability generally comes down in line with the age of the investor. The risk capabilities also tend to come down when the corpus gets bigger and accounts for a large chunk of the investor's portfolio. Such investors will have to look at inclusion of debt in their portfolio.
In fact, allocation to debt has to increase over a period of time though it is not a bad idea to maintain debt allocation at all times. Not only will this help in better risk management but also allows investors to take the opportunities arising out of a market downtrend.
Take the case of an investor who had a good percentage of funds in debt funds in October 2008. He would have been one of the few who had the ability to take advantage of the steep market correction if his requirement of funds was not short-term.
Since volatility is an integral part of the equity market, investors, irrespective of their age, will benefit by allocating a portion in debt.
The biggest doubt many mutual fund investors have is whether they should opt for a balanced fund or strike a balance in the portfolio through allocation to debt and equity? The answer is yes and no.
A balanced fund invests up to 35 percent in debt and hence is a medium risk portfolio. This would be ideal for an investor who has earning years of more than 15 to 20.
On the contrary, a retired professional, who wishes to allocate a small portion towards equity, might end up with a higher risk portfolio even if he prefers a balanced fund. Hence, balanced fund should be considered a slightly lower risk option for equity investors, and hence should be viewed as a medium risk option for others. On the other hand, investors looking at striking a balance between various funds should stick to vanilla debt products for their debt allocation.
More importantly, an allocation towards a balanced fund is a good stepping stone for first-time investors who haven't had exposure to equity earlier.
Irrespective of the choice of schemes, one needs to build a portfolio of mutual fund schemes according to their risk-taking abilities and investment tenure as mutual funds, like other investment options, have volatility attached to them.
Source:economictimes.com
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