Long term call update

Market is falling from 4 weeks.Most of the stocks hitting  52 week low daily.

By Gods grace our long term call Guj Fluro made new high. Till now 60% returns.
 

PPF as a tax saver and investment option

1. What is the difference between EPF and PPF?

Where Employees Provident Fund serves all salaried employees, the Public Provident Fund serves everyone - the employed, the unemployed, even children and housewives. The access to the fund is also quite easy as any post office and some State Bank of India branches can help you open the fund. The purpose of a provident fund is to provide individuals some form of savings for their retirement years. Naturally, the EPF and PPF are for long term savings.

2. What kind of income can I one expect from PPF?

The returns from the fund is in the form of interest paid. The interest rate currently is 8% compounded annually. The interest however is not paid out but is compounded (like a bank recurring deposit) till the maturity or withdrawal. With the current levels of inflation real and stated, the returns from the PPF fund could be low. This is a typical asset class mismatch.

3. Is there any capital appreciation?

Being a typical debt investment, there is no capital appreciation for the investment.

4. What is the risk involved with this investment?

There is hardly any risk for the capital or the returns from the PPF deposit. The risk however is with inflation which could possibly reduce the value of the returns in the long term and the other disadvantage is the long lock-in period of 15 years.

5. How about liquidity of the investment?

The PPF gives very little liquidity too. The fund, as mentioned earlier, is for a minimum of 15 years. This can be extended for a further period of 5 years each indefinitely.
The liquidity is in the form of withdrawals that can be made from the fund from the 7th year onwards. The withdrawal value is however limited to a maximum of 50% of the average of the last 3 years’ fund values. After the 7th year, one withdrawal can be made every year, based on the same condition.

6. What happens in the case of the death of the account holder?

In case of death of the account holder before the maturity of the account, the fund will be paid to the nominee/ legal heir.

7. How is PPF treated for tax?

This is where the PPF scores very high. The PPF comes under the Exempt- Exempt- Exempt category currently. This means that the amount invested gets tax benefits, the interest is not taxed and this applies for the final maturity amount as well.

The investment gets benefits under Section 80C of the IT Act. The investment however is limited to a maximum of Rs.70,000/- per year per person. This limit of Rs.70,000/- includes the deposits made in the name of any dependent children.

8. Are there any other specific benefits that I need to know?

Some other unique benefits from the fund are:

1. There is no wealth tax on the value of the fund.

2. In case of insolvency the money in the fund will not be attached to the assets. So only this investment is truly ours, come what may. (Except for education in a philosophical sense). This feature can be very useful particularly for business people in high risk industries / businesses. The fund cannot help anyone if there is tax evasion though. 

9. How does it score on convenience?

The fund scores high on convenience. As a savings tool, it is incomparable in terms of the flexibility of payment and quantum. You can make up to 12 contributions per year. Each contribution can be as low as Rs.100/- subject to a minimum of only Rs.500 per year.
There has to be at least one contribution per year. In case no payment is done for a whole year, there is a charge of Rs.50/- when the next investment is made. The objective is to make savings as comfortable and convenient for the minimum possible investment.
A minor disadvantage is that the fund is yet to go online. So we have to carry our passbook and also face a queue to make the payment every time.

To sum up

PPF is a typical savings tool but one has to invest for the long term. This means that there is an asset class mismatch. But on the convenience side, the fund scores pretty high for the flexibility that it offers.
There are additional unique advantages in the form of wealth tax and insolvency benefits from the Public Provident Fund. On the flip side, the long term (minimum 15 years) of the plan is a limitation.

Note: This article first appeared in Money Control

Choosing the right tax-saving product!

The tax season is just round the corner! And there are too many tax saving options available broadly categorized under two heads: one equity and two debt products! There is your financial consultant but more often than not he might suggest only those products that will get him the highest commission! Obviously you are confused! How about analyzing the right tax saving product for you? Want to know how?

To begin with ask yourself these two questions: your risk tolerance level and what stage in life you are in. But why should you do it in the first place?

Importance of finding your risk profile

Finding answer to this question can lead you to the right tax saving plan! Analyzing your risk tolerance level will help you shape up your investment portfolio and get the best out of it. Now what is risk tolerance? Your investments are prone to both positive and negative changes. In the risk of negative changes the big thing is to find out how much you can afford to lose on your investment. This is your risk tolerance level.

How to find your risk tolerance level?

There are two sides to it: one is financial and the other is emotional. The financial risk tolerance level is self explanatory. That is the amount of money you can afford to lose. If you can afford to lose more money then you have a high risk tolerance level and if you cannot afford to lose huge money your financial risk tolerance is moderate and if you do not want to take risk at all your financial risk tolerance is called low.

Emotional risk tolerance is all about the stress level that you are put into when you lose money on your investment. The more your stress is, the lesser is your risk tolerance.

Investors fall into three categories based on their risk profile: conservative, balanced and aggressive

 

As the name implies conservative investors are averse to taking risk. Typically they have a low risk tolerance and prefer investing in safe havens like Public Provident Fund (PPF), National Savings Certificate (NSC), and Employees Provident Fund (EPF), Endowment plans when it comes to life insurance and on tax-saving bank fixed deposits.

The balanced investors are those who wouldn’t mind taking some amount of risk but still would park their investments in low-risk products like balanced unit linked insurance plan or ULIPs. In other words, their risk tolerance is moderate.

Those investors with the highest risk tolerance levels belong to the aggressive investors category. They have an appetite for taking risk. If you belong to this category you could invest in tax saving products like the equity linked savings scheme or ELSS.

Let us see the pros and cons of each of the tax saving products in all three categories of investors.

Products for conservative investors

With low or almost nil risk tolerance level the conservative investors usually go for fixed income products that would secure their investment.

Product	Returns (%)	Pros	Cons
PPF	8% annual tax free return	Min amount: Rs. 500Max amount Rs. 70,000/year for 15 years till it matures. Loan facility available. Enjoys ‘EEE’ status that is ‘exempt-exempt-exempt’ from tax. Your contribution, accumulation and withdrawal are exempt from tax.	Long lock in period. You cannot withdraw until the beginning of the sixth year. The loan amount is limited to a maximum of 25 percent of the balance at the end of the first year.
NSC	8 percent annual pre-tax return	Min amount: Rs 500 per year. No maximum limit.Enjoys ‘exempt-exempt-tax’ (EET) that is no tax on contribution but the interest is taxable on an accrual basis that is on each-year basis.	Maturity period: 6 years. No premature encashment option. Interest income is taxable.The effective post-tax return for the highest tax bracket is only 5.53% every year.
Employees Provident Fund	8.5 percent tax-free returns every year.	PF withdrawal is not taxable if contributions for over five years.’EEE’ status that is the contribution, accumulation and withdrawal is ‘exempt-exempt-exempt’ from tax.	PF withdrawal before five years is taxable. Premature encashment is available but only with conditions.
Endowment plan	Lower returns compared to products like the PPF.	Life coverage and returns.	High premiums. Compared to the premiums that are paid in the first few years the surrender value might be lower.
Tax saving fixed deposit	6 to 8 % returns every year.	Min amount: Rs. 100 but varies with banks.Lock in period: 5 years, comparatively lesser than investing in products like PPF.	TDS is applicable for interest income of more than Rs. 10, 000 in a year. No premature withdrawal.

Products for the balanced investors

The risk tolerance level of these investors is moderate and they invest in low-risk products as the conservative investors and also in unit linked insurance plan or ULIPs.

Product	Pros	Cons
ULIP	Provides both insurance and investment.Long term saving products hence absorbs market volatility. Investing in debt funds is also available. Tax free returns.	Subject to market risk as a percentage is invested in stock markets.For better returns premiums for the entire duration should be paid.

Products for the aggressive investors

These investors with high risk appetite can invest in tax saving products as the conservative and the balanced investors do. Apart from this they can also invest in equity-linked products, which generally do better than the conservative products but returns may vary with funds.

Product	Pros	Cons
Equity-Linked Savings Scheme (ELSS) Invest in Shares	Minimum amount is Rs 500. Lock-in period: Three years. Dividend and returns at maturity are tax-free. No lock in period, less charges etc.	ELSS invests in stock market and hence is prone to market risks. Wrong selection of stocks leads to capital erosion

 

Importance of having goals

Your stage in life will also have a say in deciding your investment portfolio composition. If you are someone young then you could consider investing in equity like ELSS, ULIP or take a home loan or educational loan to save tax. Once you grow older you can slowly get out of these avenues and invest in fixed income tax saving products like the PPF, FDs etc.

How to use risk profile + goals to choose the right option?

Returns on your investment are important but this alone should not be the driving factor in deciding your investment choice. There is no investment per se that can save you tax and simultaneously secure your investment and give highest return. Your final choice of tax saving investment should be guided by both your risk profile and your goals in life which again depends on the stage of life you are in. Remember, the goal is to have an investment portfolio that can give you decent returns and the risk tolerance level you can handle.

Note: This article first appeared in Money control