Tips to grow your money the safe way

Plain-vanilla fixed income assets can pump up the savings of not only the retired, but also those of young professionals.

You won’t catch them dead near the stock market. They are very happy putting away their hard-earned savings in fixed deposits, public provident funds, company deposits and so on. And not all of them are retired individuals who do not want the uncertainty of stocks ruining the fun of their sunset years.

There are many young executives, who don’t want to take the extra risk of investing in stocks. While a retired individual wants a monthly income to meet his day-to-day expenses, the working individual looks at building a fixed-income corpus to save for a rainy day or emergencies which may come his way. According to an India Wealth Report 2010 by Karvy Private Wealth, as much as 66% of Indian wealth, which is around Rs 48 lakh crore, is in fixed income assets.

Compared to this, global investors invested only 58% of their individual wealth in debt instruments during the same period.

Fixed income investors are generally risk-averse, want safety of principal and do not believe in churning their portfolios too much. They also want their investments to be as simple as possible.

There was a time when fixed-income investors earned as high as 12% by investing in bonds of reputed companies such as Tata Capital and Shriram Transport Finance or fixed deposits (FDs) of companies like Telco (now Tata Motors) and Mahindra Finance. However, that was during the global financial crisis in 2008-2009. With the crisis receding, earning double-digit interest on FDs is no longer possible.

No wonder, 2010 has been a tough year so far for fixed income investors. Inflation has sky-rocketed and remained in double digits for a major part of the year. The Reserve Bank of India raised rates five times during the year, in a bid to rein in rising inflation. However, banks were flush with liquidity and did not raise interest rates.

So, while inflation was close to 10%, interest rates were in the range of 6-7% per annum. As a result, investors got negative real returns from their fixed income investments. Simply put, when an investor gets 7% from his FD while the inflation rate is 10%, he actually earns negative returns.

Typically, fixed income investors have choices such as FDs (bank and company FDs), debt mutual funds (liquid funds, income funds, gilt funds, fixed maturity plans) and post office investments like National Savings Certificates and 8% Government of India (GoI) bonds. Fixed deposits account for 30% of the overall individual wealth in India, while small savings constitute around 7% of the estimated wealth in India. Here, we take a look at some solutions for retired and working individuals:

Retired Individuals: Typically, an individual, who has worked during his active years, receives a lump sum on his retirement. Safety of capital is of prime importance to him. His objective is to generate a monthly income out of this corpus to sustain his lifestyle, some lump sum money for his children’s wedding or education and some surplus money to take care of medical emergencies or to go for a dream vacation as the case may be.

Safety is one of the biggest priorities for retired individuals. The Senior Citizens Savings Scheme, which gives 9% per annum payable quarterly, meets this important need. Individuals, aged 60 and above, and retiring employees, aged 55 and above, can invest in the scheme. The scheme has a five-year tenure and can be extended further for a period of three years.

“This is the highest return that a retired individual can get with the highest degree of safety from the central government,” says Uttam Agarwal, executive vice-president, Bajaj Capital , who advises retired individuals to invest in this scheme. However, one must note that premature closure is possible only after one year, with a nominal penalty.

If individuals want a monthly income, they can opt for a post office monthly income scheme (MIS), which gives a return of 8% per annum. Here, the maximum limit is Rs 4.50 lakh in a single account and Rs 9 lakh in a joint account. Here, too, premature closure after one year attracts a penalty of 2% while closure after three years attracts a penalty of 1%.

Investors can also look at company FDs, where in some cases the returns can be as high as 9.5-11%, though they do carry a higher risk compared to government schemes. “We advise senior citizens to invest in companies with AA or AAA rating and spread their investments across a number of companies,” says Anup Bhaiya, managing director, Money Honey Financial Services.

Remember, don’t go by returns alone while zeroing on company FDs, as many retired people often fall victim to bogus companies offering high interest rates. However, when it comes to getting the capital back, they realise that the company has folded up.

When it comes to mutual funds for retired investors, fixed maturity plans (FMPs) and short-term income funds are considered the best bet.

“FMPs give you the benefit of indexation and returns could be in the range of 8-8.5% for a 1-3 year tenure,” says Ramanathan K, chief investment officer, ING Mutual Fund.

Working Individuals: We are assuming that you are averse to taking risks and, hence, do not want to invest any money in equity. Also, you may have some loans, like home and car loans, to repay. So, liquidity will be of prime importance to you, as the accumulated surplus money can be used in times of emergencies or fulfil short-term goals like a vacation. 

So, what kind of strategy should such young risk-averse people adopt in a rising-interest rate scenario? “He could invest some amount in a post-office MIP, and if he does not want the monthly income, he could further invest it in a post-office time deposit,” says Anup Bhaiya. In addition to this, he recommends company fixed deposits, as they give a slightly higher return than other products.

“He can invest in short-term income funds, as they offer ample liquidity, are tax-efficient and could give returns of around 7-7.5%,” adds Ramanathan K. “Such investors should invest in a combination of FMPs (fixed maturity plans) and short-term income funds. The duration risk in short-term income funds is low as they have a maturity of 1-2 years,” adds Pankaj Jain, fund manager, Taurus Mutual Fund .

However, experts believe that younger people should invest at least a small portion of their corpus in equities, as they can add sheen to their wealth. 

Short ‘N’ Sweet

Here are some ways to grow your money without investing in equities

If you have an investment horizon of 6-12 months, then you should opt for short-term income funds that give 6-7% returns

Go for fixed maturity plans (FMPs) of 370 days and reap the benefit of indexation for up to 8%

Invest a part of your money in company deposits for three years and earn returns as high as 10%. However, don’t get swayed by the promise of returns alone. Always stick to a company with an AAA or AA rating

You can switch from short-term income funds or liquid-plus funds to income or gilt funds, depending on the prevailing interest rates

Senior citizens can invest up to Rs 15 lakh in 9% Government Savings Scheme. They can also go for post office monthly income plans that give 8% returns per annum

Do not make the mistake of keeping too much cash in your savings account as that will earn the lowest interest. 

For greater liquidity, you could invest in Equities. (Share/ Funds)

Curtesy: ET

Note: To invest in Shares you need DMAT and Trading account.

 

How much tax do infra bonds really save?

The IDFC Infrastructure Bonds issue joins five other issues this financial year. A similar issue by Rural Electrification Corporation is already open. By investing in these products, taxpayers can claim a deduction of up to Rs 20,000 under Section 80CCF. This is above the Rs 1 lakh invested under Section 80C. While you save tax, your real returns may not be as high or precise as those being projected by some brokers. So before you rush to invest in the issue, here are a few points to ponder.

Good for saving tax:

IDFC bonds have a tenure of ten years and offer 8% interest on both the annual payout and cumulative options. The effective rate of return rises if you account for tax savings. The higher the tax bracket, the more the tax-saving potential. That means taxpayers in the 30% tax bracket will earn marginally higher returns than those falling in the 10% tax bracket.

If the company buys back the bonds after the lock-in of five years, the effective return would be 12.1%. This is higher than what most fixed income instruments will offer.

Don't believe in projections:

Your broker might try to lure you with calculations that show spectacular returns of up to 17-18% in case of a buyback of the bonds by the company after five years. Such a high rate looks probable only because there is a flaw in the assumptions. But the real rate of return is revealed when you crunch the numbers. First, to project high returns, it is taken for granted that the investor falls in the top tax bracket.

Now, considering tax savings of Rs 6,180 (30.9% of Rs 20,000), the actual investment drops to Rs 13,820 (Rs 20,000–Rs 6,180). The rate of return on this (using the concept of internal rate of return), considering the 8% earned every year for 5 years and the buyback at Rs 20,000, works out to about 18%. The problem with this figure, however, is that it assumes that the interest earned is tax-free, which is not the case. It also assumes that the interest earned every year is reinvested at 18% for the remaining tenure.

Also, the interest further earned on the reinvested amount is assumed to be tax-free, which again is incorrect. When accounted for all this, the effective return declines to about 12% —assuming that the interest is reinvested at 8% and the interest earned on the reinvested amount is taxed at 30.9%.

Remember buyback dates:

Both issues offer a buyback option to investors after the five-year lock in. It is best to exit at the first opportunity and reinvest the proceeds in other, more lucrative options. If you miss the window that opens for a specified period, the company may not buy your bonds. However, you can still sell them.

The bonds will be listed on major exchanges and you can sell them like any other security in the secondary debt market. Keep in mind that it is not easy for retail investors to find buyers in the secondary bond market.

The average transaction size is in crores of rupees. Imagine how much interest your Rs 20,000 bonds will earn. Add to that issues about capital gains that will crop up if you sell in the secondary market.

What is required:

A self-attested copy of the PAN card has to be enclosed with the application form. A demat account is not necessary because these bonds are in physical form as well. Of course, if you own a demat account, it is better to apply in the demat form. 

Curtesy: ET

Note: we provide DMAT and Trading account.

Holding mutual funds in a demat account

Investors can now hold their mutual fund units in dematerialised form. Investor who own a demat account can use it to hold mutual fund units. It is however not mandatory to convert units into demat form. Investors can also use the electronic platforms of stock exchanges to transact in their mutual fund units through the brokers of the stock exchange.

For this, investors have to use a standard form specified by the depository (CDSL or NSDL) called the conversion request form ( CRF )) or destatementisation request form (DRF). This form is available with the depository participant (DP). The completed form, along with the statement of account (SoA) which shows the unit holdings of the investor, has to be submitted to the DP. The DP will verify and forward it to the registrar and transfer agent, who in turn will confirm the details of units held in the SoA. Units will be credited to the demat account after this confirmation.

1. ISIN: Each mutual fund is assigned an ISIN ( International Security Identification Number )). It can be obtained from NSDL or CSDL and has to be included in the CRF/DRF.

2. Details: The details of each scheme with respect to scheme name, ISIN and number of units held should be correctly mentioned in the CRF/DRF and should tally with the SoA being attached.

3. Holding Pattern
The holding pattern of the mutual fund folios and that of the demat account should be the same, and in the same order.

4. Free & Lock-in Units
Mutual fund units such as those of tax-saving schemes may be subject to lock-in. Different forms have to be used for free and locked-in units of the same scheme even if held under the same folio.

Points to note
Signatures: The CRF/DRF has to be signed by all the unit holders of the folio, irrespective of the mode of operation of the folio.

Transacting with the mutual fund: Once units are dematerialised, investors cannot transact in them directly with the mutual fund or investor service centres. Transactions are routed through the stock exchange platform or through the DP.

Re-materialsation of units: Investors can also make an application for re-materialisation of the dematerialised units and only then transact with the mutual fund. 

Note: We provide DMAT and Trading account .

courtesy: ET

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Why endowment plans are almost always a bad buy

Ulips, which were hailed by insurance agents and companies as magic wands capable of giving you the triple benefits of insurance, investment and tax-saving, are suddenly being branded unappealing, as they are market-linked and thus, volatile.

“The value of your investments in Ulips can yo-yo, so it is better to invest in endowment plans,” goes the new sales pitch. Insurance agents promise potential customers that endowment plans offer stable returns in the form of bonuses declared by an insurance company every year in addition to providing a life cover.

“Recently, I came across a case where an agent convinced a couple to liquidate their investment in a Ulip and switch to an endowment plan instead,” says financial writer Uday Kulkarni. The bait was, of course, the assured returns these plans offer.

“While people often talk about the high-commission structure of Ulips, there is little focus on endowment plans where the charges are simply not revealed. If the commissions are in the range of 8-10% in the case of Ulips, in endowment plans it could be as high as 30-40% in the first year,” he adds.

So now you know where the newfound love of agents for endowment plans comes from. What’s more, with the insurance regulator categorically ruling out measures to cap charges on traditional policies, it seems that the new form of mis-selling is here to stay. On your part, you can stonewall this old-wine-in-a-new-bottle strategy, by asking the right questions and taking a decision on what suits your needs the best on the basis of your knowledge.

Here is the truth about endowment plans.

Behind the opaque veil

By design, endowment policies are debt-heavy—that is, they invest only in approved debt or government securities, and not equities. Consequently, they cannot generate returns comparable to Ulips with an equity component.

“Most endowment policies yield returns of around 5% per annum, which, at best, could up to 6% in some cases, particularly LIC policies,” says certified financial planner (CFP) Pankaj Mathpal.

Or let’s put it this way. Even if the actual returns earned were to cross these figures, you will never know. Why, you may ask.

The answer to that question is that under endowment plans, an insurance company is under no obligation to reveal where your money is being invested or what portion of your money is being invested. In other words, the brochures of these plans do not specify the charges that will be deducted from the premium paid before investing the balance.

Of course, agents are putting this lack of transparency to good use by telling prospective customers that unlike
Ulips these plans have no charges and all their money gets invested. This is not correct. Endowment plans have higher charges than Ulips. It’s just that the insurance company is not obliged to give an exact breakdown as is the case with Ulips.

The products, therefore, lack transparency offered by Ulips, which, despite their much-maligned status, at least gave a clear indication of how your money was being used.

 

High charges, low returns

In an endowment policy, a policyholder is insured for a certain amount. This amount is referred to as cover (or sum assured). Over and above this, an insurance company announces a bonus, which is a certain percentage of the cover, from time to time. When the policy matures the accumulated bonus as well as the cover is paid out.

Before Ulips became popular, agents used the entire concept of a bonus to mis-sell endowment plans. So if you had taken a 25-year policy with a cover of Rs 10 lakh, and paid a premium of Rs 38,000-40,000.

On this, if a company paid a bonus of 5%, or Rs 50,000 (5% of Rs 10 lakh), the agents would go to town telling people that the bonus of Rs 50,000 is more than the premium of Rs 40,000.

Of course, what they did not tell is that this bonus is not payable immediately and also will not compound. Put another way, what this means is that if an insurance company declares a bonus of 5% for the first year of the policy, a bonus of Rs 50,000 would accumulate.

And this Rs 50,000 would stay at Rs 50,000 till the 25th year when the policy matures. This explains the low returns that should be expected from investing in endowment plans.

Ignoring the principle of compounding is primarily why at maturity, the returns are unable to break the 5-6% barrier. This is inadequate if you have a long-term horizon in mind. Remember that there are better (read more remunerative and liquid) investment avenues at your disposal.

“When someone is looking to invest for a long period of time, debt instruments (where endowment policies invest) are not the ideal vehicles. In that context, I would say endowment plans are not advisable,” feels Suresh Sadagopan, principal financial planner, Ladder 7 Financial Services.

Instead, you could look at investing the money in a diversified equity fund for the long term. Also those who are not comfortable with equity can try a combination of investing in a public provident fund and getting a term plan. As can be seen from the table on the left, that is indeed a better bet.

So, the next time your agent tries to entice you to buy an endowment policy by dangling the carrot of yearly bonus that exceeds the annual premium, remember that at the end of day, it is the accumulated corpus that matters. A simple term plan along with a large-cap equity mutual fund can do better than a complex endowment product. 

Courtesy: ET

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Mobile Number Portability: Frequently Asked Questions

The long-awaited mobile number portability finally became reality on Wednesday, empowering consumers to change providers conveniently.

What is mobile number portability?

Allows subscriber to opt for service provider of his choice but retain his mobile number. The number gets ported to the new provider.

Mobile Number Portability: Does it allow a technology switch?

Subscriber can stay with same technology, GSM/CDMA. Also change to CDMA or vice versa. Both post-paid & prepaid subscribers can use it.

How long will it take to port a number?

Seven working days. Fifteen days in J&K , North-east

How expensive?

Will cost Rs 19, to be collected by new service provider.

Can you retain your number in another city?

No. You can’t change circles.

How frequently can you switch service providers?

A subscriber must be with a provider for at least three months.

The process- Step 1

To switch, send the following text PORT mobile number to 1900.

You’ll get an eight-digit alphanumeric code and expiry date for it. This is the unique porting code.

 The process-Step 2

Approach service provider you have opted for with unique code. Carry address & ID proof/ photograph/ application form with unique code & mobile number. Complete this process within the expiry date that came with unique code

Operator will take request to mobile portability clearing house. Clearing house will get your number deactivated from existing provider and activate new one.

The process- Step 3

You’ll then get text from new provider mentioning date & time when phone will go through a no-service period.

This is when switching of service providers will happen. Phone will be out of use for couple of hours — between 12 pm and 5 am.

Courtesy: ET