Family finances: Simple goals, disciplined investing to ease journey
A cursory look at the Godboles' portfolio is unlikely to enthuse any financial planner. A dismal net worth of Rs 84,000, a moderate income, poor investments, and no life or health insurance.
The obvious lack of financial planning for this couple in their early 30s would be alarming if it weren't for two facts. One, the Godboles have a realistic set of goals, which is aligned to their financial reality. These include buying a car, funding their daughter's education and marriage and planning for their retirement.
Two, they don't need to save for a house even though they don't own one yet because they are expecting to inherit ancestral property. "Hence, my real estate requirements will be taken care of. I would like to focus on building a future for my daughter," says 32-year-old Amar. The Godboles can do this, along with achieving their other goals, if they set about implementing the plan laid out by Shiv Kukreja of Ojas Capital.
Amar lives with his wife Swapnaja, also 32, and 10-month-old daughter, Swara, at Lonavala, Mumbai. Amar, who is employed in the hospitality sector, takes home a monthly salary of Rs 36,000, while Swapnaja is a homemaker.
Though their asset allocation pie chart looks good, the portfolio is worth only Rs 84,000, of which 34.5% is invested in equity, while debt investments comprise nearly 48%. The cash component seems very high as a percentage (18%), but the actual figure is just Rs 15,000. The cash outflow includes Rs 12,000 on household expenses and Rs 1,000 as house rent. This leaves the couple with a surplus of Rs 23,000, which needs to be invested to achieve the goals. However, before they do so, the family must insure itself adequately.
While the couple has shown willingness to enter the markets by investing in equity, the duo has been caught completely off guard on the insurance front. So, to begin with, they must buy adequate insurance and set up a contingency fund.
Currently, Amar does not have any life cover, which is a bad financial move since the Godboles do not have substantial assets to fall back on in case of an eventuality and Amar is the only earning member. So, Kukreja suggests Amar purchase a term plan of Rs 75 lakh for himself immediately, and this will cost him Rs 840 every month.
Even on the health insurance front, the Godboles have not done too well. Hence, Amar must buy a family floater plan worth Rs 4 lakh, which will cost him Rs 688 a month.
As for the contingency fund, which should be equivalent to three months' expenses, the Godboles need to have a corpus of nearly Rs 45,000.
Currently, they have Rs 15,000 in their bank account, which can be kept aside for emergencies. However, this amount will have to be enhanced by saving the surplus for the next month and a half.
This will help them build the required corpus. Once this is done, the Godboles can proceed towards planning for their other goals. To begin with, the family wants to buy a car worth Rs 4 lakh after six months.
To arrange for the down payment of Rs 1 lakh, the couple can allocate the equity worth Rs 29,000 towards this goal. To build the balance corpus, they will have to start investing a surplus of Rs 21,000 for four months in an ultra short-term debt fund.
This will help them amass Rs 1.13 lakh in the required time.
They can then take a loan of about Rs 3 lakh for five years, which will result in an EMI of Rs 6,463 per month. The Godboles can now plan for the longterm goals, of which they first want to build a corpus of Rs 91 lakh in 19 years for Swara's education.
For this, they can start investing Rs 13,000 every month in equity mutual funds, starting September this year.
Assuming a growth rate of 12% every year, the investment is likely to grow to Rs 72 lakh in 16 years, after which it must be invested in a fixed deposit or short-term debt fund to shield it from volatility.
This investment is likely to grow to Rs 91 lakh, assuming a growth rate of 9% every year. To meet their daughter's marriage expenses, the Godboles will need to build a corpus of Rs 30 lakh. As this goal is 25 years away, they need to start an SIP of just Rs 1,900 in equity mutual funds. Assuming a growth rate of 12% every year, the investment is likely to grow to Rs 24 lakh in 22 years. Thereafter, the Godboles will have to reinvest the corpus in a fixed deposit or debt mutual fund, and it will grow to Rs 30 lakh, assuming a growth rate of 9% annually.
Finally, the Godboles need to plan for their retirement, for which they will need a corpus of Rs 3 crore after 31 years. Since this goal is not a priority, the Godboles can start investing for it after five years. They will have to start a monthly SIP of Rs 26,500 in equity mutual funds, which will grow to Rs 2.5 crore in 26 years. This corpus should then be reinvested in a fixed deposit for three years, which will grow to Rs 3.3 crore, the amount needed for retirement.
Financial plan by Shiv Kukreja, Founder & Managing Partner, Ojas Capital
From working people to senior citizens, there are a host of tax saving schemes that one can opt for. Shalini saksena gives you a lowdown on some ways to help you pay lesser tax by saving more
The 2013 Budget is out and it has brought good news, especially for those whose total taxable income is up to Rs 2.20 lakh per annum. In such a scenario, one doesn’t have to pay any tax on the income. If the total income is up to Rs 5 lakh, one can claim a rebate of Rs 2,000 or actual tax payable, whichever is lower. For example: If the total tax payable in the next financial year is Rs 15,000, then you can claim a rebate of Rs 2,000 and pay just Rs 13,000.
To some, this rebate looks like a no-gainer. “After all, what will one do with a meagre Rs 150 per month rebate? But, if one sees the larger picture (from the Government perspective) if there are a million people with an income of Rs 5 lakh, the spending in the market increases by approximately Rs 200 crore,” Mumbai-based finance expert and CEO of apnapaisa.com Harshvardhan Roongta says.
There are a few tax tips that must be kept in mind. If one is a salaried individual, he should ensure that his salary is structured in a manner that can help keep the tax liability at the minimum. But to do so, one will have to ensure that the conveyance allowance is part of the gross salary, that medical bills are reimbursed up to at least Rs 15,000 a year. If one is living in a rented house, one can claim HRA under Section 10 (13A) for rent paid.
Income Tax lawyers suggest that you should not forget to claim the deduction of Rs 1 lakh under section 80C of the Income Tax Act, 1961. For this, you can invest up to Rs 1 lakh in the public provident fund (PPF). Senior citizens (60 or above) can invest in the Senior Citizen Saving Scheme, National Savings Certificates and specified five-year bank fixed deposits and Equity Linked Savings Schemes (ELSS). Similarly, one can claim deduction for payment of life insurance premiums and repayment of home loan principal.
One can also claim deduction under Section 80D for medical insurance premium for self, spouse, dependent children and parents. The maximum deduction allowed under this category is Rs 15,000 for self, spouse and dependent children. For parents, the deduction is an additional Rs 15,000. If the parents are senior citizens, the deduction is Rs 20,000.
One must claim deduction for interest paid on home loan of up to Rs 1.50 lakh a year. This is available under Section 24B of the Income Tax Act. Then there is a deduction of up to 10 per cent of the gross total income for donations to any charitable and religious trust. The amount of deduction could either be 50 per cent or 100 per cent of the total amount donated, depending on the tax concession provided by the relevant tax authorities. This benefit is available under Section 80G.
Besides this, there are some lesser known tax savings. Not many know that investment in equity-oriented funds and equity shares of listed companies are exempt from long-term capital gains tax if the investment is held for more than 36 days from the date of purchase.
In case of debt funds, opt for the growth option if your investment horizon is more than a year. One can claim the benefit of indexation. However, the same is not available for interest income from fixed deposits and other similar fixed income securities.
While most people would know that long-term capital gains arising from the sale of a house property are exempt from tax if another house property is purchased either a year before or within two years from the date of sale or a new property is constructed within three years of sale. What they would probably not know is that if someone doesn’t want to reinvest in another house property, he can invest the amount of capital gains into capital gains tax savings bond issue by the National Highways Authority of India (NHAI) and the Rural Electrification Corporation (REC).
In case of open offers by listed companies, when such an offer is accepted by a shareholder wherein he transfers the shares to the company, it is treated as an off-market transaction which is not subject to Securities Transaction Tax (STT). The shareholder will be eligible for indexation benefit and will have to pay a tax equal to 10 per cent of capital gains (without indexation) or 20 per cent (with indexation) whichever is lower. This comes with a warning — do not tender the open offer in off-market trade if the open offer price and stock market quoted price is nearly the same.
But what about investment options in view of the present Budget? “Investments don’t really depend on changes that may happen like the Budget. Since investments are long-term plans, they are independent of such changes. The only difference comes a minor bumps or a smoother ride. The fact that 90 per cent of the returns are dependent on asset allocation what matters is where the money has been invested and how much,” Ronngta tells you.
He is also quick to point that investment options should be goal-oriented. For the investor, what should matter is how he will reach that end. External factors don’t really affect the portfolio. But this doesn’t mean that one should just invest and forget about it.
“Reviewing the portfolio is important. How one does that needs due consideration as well. Overkill is bad and so is no revision. Once in six months is a must,” Roongta says, adding that first-timers who want to invest should not try unique investment options.
“The best option for such people is to go for tried and tested investment options. Since they are new to the whole investment scene they should stick to well-known options that are available in the market,” Roongta states.
Have new investment options been announced? “The only new option is inflation-indexed bonds. But till the time the structure of these bonds is announced, it is not possible to express any views about it. However, it is a welcome move to introduce these bonds as such an investment would be quite helpful for the investors to protect themselves against high inflation,” Shiv Kukreja, CFP, founder and managing partner of Ojas Capital, tells you.
This year’s Budget was disappointing for investors and taxpayers. “Except a couple of tweaks there is nothing new in the budget which a large number of investors would be able to use to cut their tax burden or increase their investment returns. Increase in the Dividend Distribution Tax from 12.5 per cent to 25 per cent for all debt schemes of mutual funds is also a dampener from the investors’ point of view. It would be advisable if the investors move their money from dividend option to growth option of their debt fund investments,” Kukreja says.
Despite the fact that the criterion of Rs 10 lakh gross taxable income has been increased to Rs 12 lakh in RGESS and the exemption will be available for three consecutive years, the scheme is a little complicated.
“It will be better if the investors take advantage of the tax exemption under 80CCG and invest in RGESS eligible mutual fund schemes in order to make it less complicated for them,” Kukreja concludes.
Budget 2013 has modified the Rajiv Gandhi Savings Scheme as follows:
RGESS is available under section 80CCG of the Income Tax Act
Earlier the RGESS provided that first time equity investor who is a resident Indian with gross total income up to Rs 10 lakh can claim a deduction of 50 per cent of the amount invested in listed equity shares enlisted under this scheme. Maximum deduction available is Rs 25,000. Further this deduction was available only for one year
The Budget has now provided that first time investors in the equity market, with total income up to Rs 12 lakh can invest in the RGESS. Also, the deduction will now be available for three consecutive assessment years
One may invest in specified stocks and equity oriented mutual funds under this scheme. But, being a first time investor, it is recommended that one takes the mutual fund route as the portfolio is managed by a professional fund manager
The Budget has introduced new section 80EE under which first time home buyers taking a home loan of up to Rs 25 lakh can claim a deduction of up to Rs 1 lakh for interest paid during the financial year. If the interest amount is less than Rs 1 lakh in the FY 2013-14, the balance can be claimed in the FY2014-15. However, the following conditions have to be fulfilled by the assessee:
Loan should be sanctioned between April 1, 2013 to March 31, 2014
Value of property should not be more than Rs 40 lakh
Tax payer should not own any house on the date of loan sanction
Ghidiyals must approach their targets one at a time & invest in a disciplined manner
Praful Ghidiyal is a rare combination of youthful zeal and prudence. The 24-year-old Mumbai-based manager has started early with his financial planning, maintains a high rate of savings despite a low income, is enthusiastic about equity investment, has clarity about his goals, and has approached an adviser at the right juncture.
"My investments may not be perfect and goals not very realistic, but I am willing to sacrifice the non-priority goals if I can achieve the big ones," says Praful. These include saving for his sister's wedding, brother's education, his own wedding, buying a house, travelling and retirement. While the goals may seem daunting, the good news is that he will not have to compromise on most of these after a portfolio rejig.
Praful lives with his parents, Vijay (48) and Sarojini (42), two siblings, Pradeep (17) and Mamta (21), in their own house in Mumbai. Employed as a sales development manager with an insurance company, Praful takes home a salary of Rs 17,000. His parents earn Rs 7,000 and Rs 3,000, respectively, while his sister, who works with a travel agency, earns Rs 6,000 a month. They also get Rs 800 as rent from a room they own in Mumbai.
After accounting for household and other expenses and investments, they are left with a monthly surplus of Rs 12,280. Unlike most people who shy away from equity and prefer debt instruments, Praful has nearly 32% in equity, while debt is close to nil. On the other hand, real estate occupies 66%, while gold and cash constitute the remaining 1%.
To begin with, Praful must maintain an emergency fund and have adequate insurance to deal with the unexpected. Currently, he has three insurance plans, apart from a personal accident cover of Rs 10 lakh and a term plan of Rs 50 lakh.
Both his father and sister also have personal accident covers of Rs 10 lakh each. Shiv Kukreja of Ojas Capital is of the opinion that Praful and his family are adequately insured and do not require additional cover.
However, Praful will have to surrender the ICICI Prudential Smart Kid, ICICI Prudential Life Link Super and ICICI Prudential Pension Super, which will generate a combined corpus of Rs 1.25 lakh. This will save him Rs 2,100 per month as premium, which can be used to finance the additional expenditure on health insurance.
The Ghidiyals have a family floater plan worth Rs 3 lakh. Kukreja feels that they should buy additional insurance of Rs 5 lakh, which will cost him about Rs 1,700 every month.
As for the emergency corpus, Praful can bank on his annual bonus of about Rs 1 lakh. He can invest a part of this bonus to build the contingency fund of Rs 70,000, which will suffice for three months' expenses.
Now, Praful can plan for his other goals. Since the family's resources are limited, he will have to adopt a step-up approach, wherein he invests only for the top priority goals now and takes up the others after his income rises. His immediate need is amassing Rs 5.6 lakh in two years for his sister's marriage, for which he will have to invest Rs 12,000 in debt instruments, such as a recurring deposit or debt mutual funds. This amount should rise with an increase in income.
Assuming an annual growth rate of 9%, the investment is expected to generate Rs 4.5 lakh. In addition, the Rs 1.25 lakh that Praful will receive on surrendering the traditional plans should be invested in a fixed deposit and added to the wedding corpus.
Next, Praful wants to save Rs 2.6 lakh for his brother's education. Planning for this goal will start only after he has built a corpus for his sister's marriage. By this time, his salary and that of his parents would have risen, so they can invest Rs 17,500 either in an RD or a short-term debt fund. This will generate about Rs 2.3 lakh, and if he has surplus from his yearly bonus, he can use it to fill the gap.
Praful also wants to buy a house worth Rs 25 lakh in three years and save Rs 5 lakh for the down payment. For this, he can allocate his current SIPs of Rs 4,700 in equity mutual funds. This will generate Rs 2 lakh, while Praful can sell off their room in Mumbai to meet the shortfall of Rs 3 lakh.
Praful also needs to amass Rs 8 lakh for his own wedding in five years. For this, he can use his current balance in equity funds worth Rs 1.2 lakh and invest the yearly bonus in debt funds. Since the bonus may fluctuate, the final corpus could be affected, but Praful does not mind compromising on this goal.
Among his less important goals is a vacation for his parents after 13 years, for which he needs Rs 2 lakh. For this, he can start a monthly SIP of Rs 1,500 in an equity mutual fund after four years.
After six years, the investment will generate Rs 1.5 lakh. In the last three years, this money should be invested in debt. It is expected that by this time, his brother will also start earning and his income will help them reach this goal as well as share the EMI burden, which is expected to be around Rs 20,000-23,000.
Finally, Praful needs to build a retirement corpus of Rs 4 crore in 35 years. His EPF will contribute Rs 25 lakh on maturity. For the rest, he should start a monthly SIP of Rs 25,000 in equity mutual funds after nine years. After 23 years, this will grow to Rs 3.6 crore. In the last two years, he should invest this in an FD, which will grow to Rs 4.27 crore.
(Financial plan by - Shiv Kukreja, CFP, Founder & Managing Partner, Ojas Capital)
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The one big day of the year, which almost all of the taxpayers and investors await, is today. It is the Budget Day. Though I would call the announcements to be of a very low significance, this year’s budget has something in it for the fixed income investors. Here is what the budget has in it for us.
Inflation-indexed bonds - This is what the finance minister P Chidambaram quoted in his budget speech - “In consultation with RBI, I propose to introduce instruments that will protect savings from inflation especially the savings of the poor and middle classes, these could be inflation-indexed bonds or inflation-indexed national security certificates”. To make investors move their household savings from gold or gold-linked instruments and to safeguard them against high inflation, the finance minister plans to introduce inflation-indexed bonds.
As the name suggests, interest rates on these bonds will be linked to the inflation figures and will be set periodically, say quarterly, half-yearly or yearly. Further details about these instruments will be announced in due course.
Tax-Free Bonds - The finance minister expects the institutions, which are allowed to issue tax-free bonds like REC, PFC, IRFC, IIFCL, HUDCO, NHAI etc., to collectively raise Rs. 25,000 crore in the current fiscal year. To feed the hunger of the infrastructure sector in the coming year as well, the government has decided to allow these institutions to issue tax-free bonds to the tune of Rs. 50,000 crore. The government has not announced the names of institutions allowed to issue tax-free bonds in the next financial year.
DDT on Debt Mutual Funds - The finance minister has also increased the rate of dividend distribution tax (DDT) levied on debt mutual funds from 12.5% to 25%. DDT @ 25% till now is applicable only to the money-market mutual funds, but now it will be applicable to all of the debt-oriented schemes managed by the mutual fund houses in India. This change will become effective from June 1, 2013. So, the existing investors in the dividend option can opt to switch to the growth option to avoid such a high DDT.
The budget has its ups and downs for the fixed income investors. While the introduction of inflation-indexed bonds and the continuation of tax-free bonds are some of the positive moves, the increase in DDT levied on the debt mutual fund schemes is something which will not go well with the investors. Let us hope the features of these inflation-indexed bonds and tax-free bonds are structured to be investor-friendly in the coming financial year.
Indian Railway Finance Corporation Limited (IRFC) will be the next company to launch its tax-free bonds this financial year from January 21st. The company plans to raise Rs. 1,000 crores from this issue with an option to retain oversubscription up to Rs. 8,886.40 crores.
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This will be the second such issue by IRFC as the company issued tax-free bonds last year also. The issue will close on January 29th, coincidently on the same day on which the RBI is scheduled to announce its monetary policy.
Investors who want to invest in these tax-free bonds for their higher effective yields, I think this is the last such opportunity this financial year. I am saying this because IRFC was among those few companies which filed their final prospectus in December when the yield on the 10-year government securities was higher at around 8.15-8.20%. It has fallen by 35-40 basis points (or 0.35-0.40%) since then.
As the interest rates offered by these companies are linked to the benchmark government securities, the upcoming tax-free bond issues are going to offer lower rate of interest and hence, will be very unattractive.
As most of these tax-free bonds are quite similar in their regular features, here are some of the unique features of this issue:
Interest Rate: IRFC is offering 7.84% per annum for its 15-year option and 7.68% per annum for the 10-year option to the retail investors investing up to Rs. 10 lakhs. Again, the additional incentive of 0.50% will be payable to the original allottees only who invest in these bonds during this offer period. In case these bonds are sold or transferred by the original allottees, except in case of transfer of bonds to legal heir in the event of death of the original allottee, the coupon rates will be revised downwards to the base coupon rates.
As with all of these issues, the interest rate for the other categories of investors, like QIBs, corporates and HNIs, will be 0.50% lower than the above rates offered to the retail investors. For 15 years, it will be 7.34% per annum and for 10 years, it will be 7.18% per annum.
NRI Investment: Like HUDCO tax-free bonds, NRIs can also invest in this issue, but only non-US based NRIs. They can apply for these bonds both on repatriation basis as well as non-repatriation basis. Eligible NRIs can use their NRE/NRO/FCNR/NRNR/NRSR account to invest in this issue but will be required to get a bank certificate made to confirm that the money has been used out of an NRE/NRO/FCNR/NRNR/NRSR account. If the NRI is a Person of Indian Origin (PIO), then it is mandatory to attach the copy of the PIO card.
Other Terms of the Issue
The issue is secured in nature and has been rated ‘AAA’ by CRISIL, ICRA and CARE. The bonds will get listed within 12 working days post closure of the issue on both the national exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Like its first issue last year, IRFC has fixed October 15th as the interest payment date for this issue as well. The investors have the option to apply for these bonds either in the demat form or physical form and thus, demat account is not mandatory to apply for these bonds.
40% of the issue is reserved for the retail investors, another 20% of the issue is reserved for the high net worth individuals (HNIs) i.e. for the individual investors investing above Rs. 10 lakhs. 20% of the issue is reserved for the institutional investors and the remaining 20% is for the corporate investors.
The minimum amount of application is Rs 5,000 with face value of Rs 1,000 per bond. The allotment will be made on first-come-first-serve basis.
Indian Railway Finance Corporation Limited (IRFC) is a wholly-owned public sector undertaking (PSU) and works as a financial arm of Indian Railways. It is also registered with the RBI as Infrastructure Finance Company-NBFC (IFC-NBFC). IRFC has strong asset quality zero gross and net non-performing assets (NPAs) as on March 31, 2012.
The proceeds raised from the issue will be utilised by the company towards financing the acquisition of rolling stock that will be leased to the Ministry of Railways and for funding other projects approved by the Ministry of Railways.
As mentioned above, interest rates have fallen by around 0.35-0.40% in the last few days and going by this trend, the upcoming issues of tax-free bonds will offer lower rate of interest. As much anticipated, if the RBI decides to cut interest rate this time on January 29th, the bond yields should fall more from these levels.
So, it is highly recommended now for the investors in the higher tax brackets to use this opportunity to invest their money either in the ongoing HUDCO tax-free bonds which offer the highest interest rates or in this issue which is rated higher at ‘AAA’.