Monday, October 8, 2012

BEST TAX SAVINGS OPTION "ELSS"


There are so many tax saving investment options; how Mutual fund ELSS Schemesstand out from all other options?
A Mutual Fund ELSS is similar to diversified equity funds. That means the fund manager can invest in shares of various companies across various industries. The difference is ELSS has got the added tax benefit, something a diversified equity fund does not offer.
ELSS is part of the Section 80C instruments which are cumulatively eligible for a deduction from income up to Rs.1 Lakh. This gives the tax payers benefits from 10 per cent to 30 per cent (excluding the educational cess) based on their current tax slab.
The other tax saving investments like NSC, PPF will give only 8% return p.a whereas the Mutual Fund ELSS has got the potential to deliver more than 12% return p.a. Also the lock-in period in Mutual Fund ELSS is 3 years and with NSC it is 6 yrs lock-in and with PPF it is 15 years. Among the various tax saving investment option, Mutual fund ELSS has got the least lock-in period.
Ulips are also one of the tax saving investment options. But now everyone has realized that Ulips has got heavy front loaded charges. Moreover smart investors want to separate their insurance from their investments. They no longer see insurance as an investment; they see insurance as a protection plan. So the smart investors go only for pure term insuranceand reject ulips.
This is how Mutual Fund ELSS stands out of the crowd.
Before deciding to go for Mutual fund ELSS, here are some points to ponder over. First check your overall portfolio. Does it need more equity exposure? If yes then you can go for ELSS; if no then you can go for PPF or NSC.
Second thing is to keep in mind, the equity investments are for long term, say 5 years or more. Though the lock-in period in ELSS is 3 years it is better to invest with a time horizon of 5 yrs or more.
Also investors need to keep in mind, SIP is the best form of investing in mutual funds and ELSS is not an exception. So doing an SIP in ELSS is a good strategy to be followed.
The poor performing ELSS has given around 10% annualized return in the last 5 years whereas the best performing ELSS has delivered around 25% annualized return in the last 5 years. So investors need to be careful in choosing the right ELSS scheme. Past performance, risk adjusted return, consistency are a few parameters to be evaluated in selecting a best performing ELSS scheme. Investors also can approach financial advisors for selecting the right scheme.
There are two groups of ELSS investors. Majority of investors belong to the first group. They will wake up late to these tax saving investments. For salaried individuals, it is typical that they will be informed by their accounts department somewhere around end of January to provide proof of tax saving investment immediately or else extra tax will be deducted from their February salary. At the neck of the moment, the choice ends up being guided by convenience alone. They tend to think about tax first and investments later. As long as something saves tax, its real benefits and features as an investment are paid less attention to. That means the investments will be chosen more for convenience than for suitability.
There is another group of investors. Though this group is a very small group, it is a very smart group. They will not rush for tax saving scheme at the last minute. They will plan in advance. That means they will have more time to choose the right product. They will save tax as well as choose a good investment option. They will also check whether this particular tax saving scheme will suit their overall portfolio or not; will this tax saving investment is going to fit into their comprehensive financial plan. That means they will consciously choose an investment which saves tax as well as helps them in achieving their financial goals like children’s higher education, buying a house, retirement plans.
So…now just check up which group you are in.
The above matter views of Mr. Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in

3 Simple ways to become RICHER in 365 Days



You have got complete 365 days. Why don’t you chalk out a plan to become richer by next year? The good thing is you don't have to employ some highly esoteric investment strategies or complex algorithms to become richer in a year's time. Some simple reorganisation in your personal finance management could make you richer. Almost always, the simplest are the most profound.

1) Make a Financial Plan: 

This is the first and foremost important step to become financially successful. It is not your income, but your wealth that counts. People with high income like Michel Jackson died with a lot of debts. So a careful personal finance management is more important than how much you earn. To have an effective personal finance management system in place for you, you need to have a personalized well written financial plan.
What are the things you want to save and invest for? It may be for buying a home, buying a car, children’s higher education, retirement planning. Decide how many years from now you need to achieve each and every goal. Because you need to take into consideration the inflation for all those years and also you need to choose investment options based on the timeframe for investments.
You need to create your own list of financial goals. If you don’t know where you are going, you may end up somewhere you don’t want to be. To end up where you want to be, you’ll need a roadmap, a financial plan.
So create a financial plan for you and your family on this. There is a lot of help available for you online to create a financial plan in various websites with financial calculators. But if you want to create a more workable financial plan, you may seek assistance from professional financial planners.

2) Pay off all high interest debts: 

You need to create a plan to come out your high interest debts like personal loan, credit card outstanding, car loan and the like. Credit cards can make it seem easy to buy expensive things when you don’t have enough cash. But it is not free money. To come out of debt, you need to have specific strategies that can work in your own situation. There are 11 ways to get out of debt and stay out of debt. You can choose one or a few ways from this to become debt free.
If you are not giving enough attention to your debt, then it can sink your financial ship. So take some time on this to list down all your borrowings and make out a plan to come out.

3) Start Saving and Investing: 

As soon as you have paid off all your high interest debts, you need to start saving and investing for your financial goals. To save more either you need to spend less or you need to earn more. So you check up what are all the ways and means available for you to spend less and earn more.
If you are spending more than your income or all your income and you don’t have any money left to save or invest, you need to look for ways to cut back on your expenses. When you check where you are spending your money, you will be surprised to know how everyday petty expenses that you can do without add up over a year. You need to understand what makes us spend more and strategies to have self control with money to spend smart and save more.
When you started saving money, you need to convert your savings into investments. When you are choosing your investment option you need to take into account, the timeframe for investments, risk you can afford to take, inflation and your financial goals. Also you need to be careful in avoiding the biggest investment mistake. That is to choose a scheme in sync with basic investment principle. Make sure that you are not violating any investment principle. Don’t fall for speculative gains, ponzi schemes and get rich quick schemes.
Mutual fund investment by means of SIP ( Systematic Investment Plan ) is best saving option
If you follow these simple but authentic steps, by next year you will be richer than what you are in this year. Celebrate this year with much more confidence and peace of mind by following these simple steps for financial success.
The above matter views of Mr. Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached atramalingam@holisticinvestment.in

Monday, August 27, 2012

Financial Planning


What is Financial Planning?
Financial planning is the process of establishing personal and financial goals and creating a way to reach them by beating Inflation (Purchasing power eater). The financial goals can include buying a house, saving for your child’s education / marriage or planning for your retirement or simply creating a wealth in future.   
 
Benefits of Financial Planning
  1. Knowing & understanding your financial needs / goals
2    Achieving your goals with optimum use of resources
3    Understanding impact of investment choices
4    Adapting to changes in personal & financial situations

5    Peace of mind – ensuring that your goals are not compromised

 

Effect of inflation (Prices of commodities)

 

Items

1957

1982

Present

 

2025

A Kg of Rice

0.30 paisa

Rs 4

Rs 30

 

Average 7% to 8% Inflation

82

A Kg of Tur Dal

0.50 paisa

Rs 8

Rs 70

190

A liter of Milk

0.50 paisa

Rs 2

Rs 30

82

A Liter of Petrol

0.25 paisa

Rs 3

Rs 75

204

A Kg of Sugar

0.15 paisa

Rs 3

Rs 35

95

What are available investment option

 

Opportunities

Indicative Returns

Indicative Risk

Indicative holding period

Fixed income

Bank FD / RD, Postal RD / MIS, PPF, Debt Mutual fund

 

8% to9% ( Pre tax)

No

Ad per Desired holding period

 ( 1to 3 years)

Equity ( Stocks /MF/ PE )

 12% to 20%

High

Easy liquidity ( 5+ years)

Metals ( GOLD ETF / MF)

 10% to 15 %

Moderate

Easy liquidity  ( 3 to 5 years)

Real Estate

15% to 18%

Moderate

Not liquid  (5 + years )

 

Performance of various Assets since 2000 to 2010 If Rs 100000 invested in Jan 2000 

Assets

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Average

Maturity value

Equity

-20.60

-17.87

3.52

72.89

13.08

42.33

46.70

47.15

-52.45

75.5

16.7

20.63%

Rs 787061

Gold

0.10

0.33

14.00

4.50

14.00

2.60

3.30

15.5

20.00

23.00

23.80

13.71%

Rs 410946

Debt

10.8

22.46

15.68

9.95

-3.15

3.47

0.76

5.29

20.78

-5.5

8.4

8.09%

Rs 235310

Equity is more volatile than others & also gives more returns than other assets over longer period investment.

So considering INFLATION, 

  Fixed income option – This can only preserves the investment value.

  Equity (MF) & Gold can create wealth.

 


Goals

Investment period

Suggested Asset class

Rate of returns

Emergency Funds

No lock in OR

Up to 1 year

Bank SB a/c

MF Liquid schemes

 4%

7 to 9%

Child Education    OR

Child Marriage

1 TO 3 Years

3 to 5 years

5 years & above

Bank FD / MF Debt schemes

MF Hybrid / Gold schemes

MF Equity / Gold schemes

7 to 9 %     / 7 to 12%

9 to 15%

12 to 18%

Retirement

5 years & above

MF Equity / Gold schemes

12 to 18%

We have use these assets based on our goals and investment period

 Others goals ( Dream House, Four Wheeler, Foreign tour etc)  can be set as per available investment period.

 

15 YEAR SIP RETURNS FOR SIP OF Rs 10000 PER MONTH

115 DIVERSIFIED EQUITY SCHEME CONSIDARED

 



   YEAR STARTED

2009

2007

2005

2002

2000

1997

Invested Amount

360000

600000

840000

1200000

1440000

1800000

YEARS

3

5

7

10

12

15

MAX RETURNS %

15.76

18.21

15.41

24.01

27.28

26.79

MAX RETURNS Rs

454746

944927

1454739

4276954

8580924

17450539

Average Returns %

1.73

7.73

8.64

17.84

19.94

20.29

Average Returns Rs

369687

729187

1142390

3064256

5228736

9802547



                      Data source    NJ SIP WATCH   August 2012