Among Fixed Income Investments, Invest in a judicious mix ... · Among Fixed Income Investments,...
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I am 29 years old. I have to invest for the marriage and education of my daughter (5 years old). How much should I invest since my budget is Rs 10 lakh for marriage and Rs 15 lakh for education? Will the maturity amount be taxable? Will there be any charge on maturity amount? Are SIPs tax free? Some people say that as per one’s age, in- vestments should be di- vided into equity and debt (100 – your age). Should I follow the same? Harish Pal, via email Nirav Panchmatia replies: You will need money for your daughter’s higher education when she is about 18 years old and for her marriage when she is about 24 years, with the current cost for her education and marriage at Ts 10 lakh and Rs 15 lakh respectively. Accordingly, at 7% annual rate of inflation, the future cost comes to Rs 24.10 lakh for higher education and Rs 54.25 lakh for her marriage, respectively. Accordingly each month you have to invest about Rs 5,750 for your daughter’s education and Rs 5,150 for her marriage. Alternatively, today you can make a one time investment of Rs 4.65 lakh and Rs 4.90 lakh, respectively, to achieve the two financial goals for your dughter. Thus either with a Rs 10,900 monthly SIP or with a one time investment of Rs 9.55 lakh, your goals could be achieved. Here we have also assumed a 13.50% per annum compounding rate of return for your investments. For this our advice is you invest in diversified equity mutual fund schemes. This is because the traditional mode of investments like bank FDs or PPF can not compound your wealth at this rate. TAXATION ETC.: Equity mutual funds enjoy a tax arbitrage. That is after one year from the date of investment, your capital gains are entirely tax- free, irrespective of your returns and whether you have invested one time via lumpsum mode or every month via the systematic investment plan (SIP) route. As per current laws, your maturity amount will neither be taxable nor will you have to pay any other charge on maturity. HOW TO INVEST: Thumb rules are meant for beginners. What percentage of your investment goes into equity funds should be a function of your risk taking capacity, investment horizon, current investments and your financial goals. If you are investing for your child’s education and marriage, with these goals more than a decade later, and since all your investments would predominantly be via the SIP mode, you can invest entirely in diversified equity mutual funds as of now. A few years later, based on the prevailing circumstances your asset allocation can be shifted more towards debt mutaul funds and/or traditional avenues. CAVEAT: Invest in a carefully created portfolio of diversified equity funds (5-7 schemes at best) chosen with professional help and with a medium to long term horizon. It pays to pay for professional advice and it may cost dearly if one ventures out on his own. Nirav Panchmatia is founder & CEO, AUM Financial Advisors Partha Sinha | TNN I n the last one year, ex- cept for a select few sec- toral funds and small cap funds, not many of the equity funds have given great returns. On the other hand, debt funds have done relatively well in terms of returns. So far in the new year too, the stock market has been ex- tremely volatile, pushing in- vestors to look for safer havens. In this context, debt funds are looking safer bets for those investors who do not have the appetite for higher level of volatility. Investors who look for a reg- ular income stream, also look at fixed income products like debt funds, bank fixed deposits and post office monthly in- come schemes. “Among the fixed income products, debt funds score over others because of chances of higher return, has nearly similar level of risks and liquidity,” said Jignesh V Shah, president, South Gu- jarat IFA Association. Ac- cording to Shah, people look- ing for regular income could opt for a systematic with- drawal plan (SWP) in debt funds, which, if done judi- ciously could also save on taxes. Shah explained how it works. For example a person invests Rs 1 lakh in a debt plan from which he/she wants a regular stream of income. The person invests at Rs 10 NAV, so he gets 20,000 units of the scheme. Now this person wants Rs 2,000 every quarter. So at the end of the first quarter since in- vesting, say the NAV of the fund goes up to Rs 10.05. At this NAV, if the per- son withdraws 199 units, he/she will get nearly Rs 2,000. Now if this is done every quar- ter, the person can get a regu- lar income. Now if the person invests Rs 1 lakh and goes for a simi- lar SWP three years after in- vesting, the burden of paying tax on the gains that had ac- crued to him/her will be min- imal. This is because the per- son will enjoy the benefits of long term capital gains and will have to pay a tax of just 10% if he/she doesn’t want to avail of indexation, Shah said. In case the person wants to take benefit of indexation, then he/she will pay 20% tax after indexation benefits are availed of. Shah also suggested two specific types of debt funds for fixed income investors, but warned that these schemes carry slightly high- er amount of risks. These are duration funds and cred- it opportunities funds. Duration funds are those in which the fund managers take a call on the rate of in- terest in the market, and hence yield on bonds in his portfo- lio, and try to maximum re- turn. Since the yield on a bond is inversely proportional to the price, the fund manager takes a call on yield and tries to maximise returns. On the other hand, in cred- it opportunities fund, the fund manager would look for com- panies in which there is a chance for a credit rating up- grade, which will lead higher price of bonds issued by that company and hence to a fall in yield for the same bond. If the fund manager can buy such bonds cheap and sell af- ter credit rating goes up, he/she can give higher re- turns to investors in the fund. “Investors who want to in- vest in duration and credit op- portunities funds should look at the experience and expert- ise of the fund management team and also their process- es,” Shah said. “IFAs can play a very important role in fund selection for investors,” he said. INVESTOR QUERY OF LATE WE RECEIVED QUERIES FROM SOME READERS ABOUT RAJIV GANDHI EQUITY SAVINGS SCHEME (RGESS), ITS WORKINGS, TAX IMPLICATIONS ETC. HERE ARE SOME BASICS ABOUT RGESS: STRUCTURE : There are mutual fund schemes that adhere to RGESS rules notified by the government. These funds invest in only those stocks which are notified under RGESS. RGESS FOR TAX BENEFITS: RGESS provides tax benefits to investors who are investing the equity market for the first time. These benefits accrue under Section 80CCG of the Income Tax Act. This is in addition to Section 80C of the Income tax act. INVESTOR PROFILE: Tax deductions are available to only those new retail investors whose gross total income for the financial year in which the investment is made is less than or equal to Rs 12 lakh. HOW MUCH IS TAX DEDUCTIBLE: New retail investors can invest up to Rs 50,000 in a financial year and under Section 80CCG of the Income Tax Act, 50% of that is tax deductible. This benefit is in addition to the tax benefits available under Section 80C of the Income Tax Act. LOCK-IN: There is a three-year lock-in for RGESS investors. However, after the first year the investor is allowed to shift his/her RGESS investments among other investments which are also RGESS approved. WHO CAN INVEST UNDER RGESS: A new retail investor can invest in RGESS. Such an investor is defined as any Indian resident individual who does not have a demat account, one with a demat account but has not transacted in equity or derivatives segment, or one who has a demat account as a joint holder. Since its launch three years ago, the response to RGESS has been muted. Lately there have been news reports that the government is contemplat- ing to bring in some changes which will make it attractive to get more investors into the equity market. Why the troubles in the Chinese market matter for India? Swatantra Kumar answers: In the last few months, weakness in the Chinese economy and a sliding stock market there have been affecting the global markets, including India. This is because China is the second largest economy in the world and also was the growth engine of the world for about two decades. A slowdown in China means that would naturally have its impact around the globe. A slowing China means less demand for mineral ores like Iron, copper, bauxite, zinc etc. Since some of the Indian companies export mineral ores to China, declining demand is hurting their business. Also due to the low demand for Chinese goods in the international market, the prices of goods produced in that country is also coming down. Once these goods are entering India, local producers of those goods are also being hurt since they are being forced to lower the prices of their products. This is one of the several ways how a slowing China is hurting India. Among Fixed Income Investments, Debt Mutual Funds Score High Duration funds, credit opportunities funds carry slightly higher risks but can give superior returns How indexation works Indexation is a process by which the government compensates investors in debt, gold, real estate etc so that the investor does not have to incur any loss in real terms. Due to inflation, the market price of an asset may not reflect the real value of the asset. So if the government taxes an investor going by the market price, that may turn out to be a disincentive to invest. Hence government allows inflation-adjusted selling price to determine the capital gain for incidence of taxation on the seller. CASE STUDY Invest in a judicious mix of good equity schemes PAL’S FINANCIAL GOALS FOR DAUGHTER Twenty years in this business convinces me that any normal person using the customary three per- cent of the brain can pick stocks just as well, if not better, than the average Wall Street expert Peter Lynch, celebrated fund manager GURU SPEAK NEXT EDITION In our January 26 edition of Swatantra we will deal with the basics of SIP and how investors can use SIPs in various types of funds to meet their financial goals. Goal Approximate Age: Time Estimated Monthly One time amount Current/ left to Future Investment Investment needed on Goal achieve Amount (Rs) today (Rs) today (Rs) (Years) Goal (Rs) (years) Higher Education 10 lakh 5/18 13 24.1 lakh 5,750 4.65 lakh Marriage 15 lakh 5/24 19 54.25 lakh 5,150 4.90 lakh Total 25 lakh - - 78.35 lakh 10,900 9.55 lakh Investors who want to invest in duration and credit opportunities funds should look at the experience and expertise of the fund management team and also their processes,” Jignesh V Shah ILLUSTRATION: SACHIN VARADKAR ● So the person’s capital gain will be Rs 10 lakh – Rs 8.76 lakh = Rs 1.24 lakh ● His/her tax will be calculated on Rs 1.24 lakh. In the absence of indexation the tax would be calculated on Rs 5 lakh, that is on (Rs 10 lakh – Rs 5 lakh). ● Debt mutual funds enjoy benefits of indexation when held for more than three years. ● Capital gain = (Selling price at market value – Inflation-adjusted purchase price) ● Inflation-adjusted purchase price = Original purchase price * (Consumer inflation index for the year of sale/Consumer inflation for the year of purchase) ● Suppose an investor had bought a house for Rs 5 lakh in 2000 and sold it for Rs 10 lakh in 2010. ● Government data shows in 2000, CPI was 406 and in 2010 it was 711. ● So the person’s indexed purchase price will be about Rs 8.76 lakh. DEMYSTIFIER THE TIMES OF INDIA, MUMBAI TUESDAY, JANUARY 12, 2016 15
Transcript of Among Fixed Income Investments, Invest in a judicious mix ... · Among Fixed Income Investments,...
I am 29 years old. I haveto invest for the marriageand education of mydaughter (5 years old).How much should I investsince my budget is Rs 10lakh for marriage and Rs15 lakh for education?Will the maturity amountbe taxable? Will there beany charge on maturityamount? Are SIPs taxfree? Some people saythat as per one’s age, in-vestments should be di-vided into equity and debt(100 – your age). Should Ifollow the same?
Harish Pal, via email
Nirav Panchmatia replies:You will need money for yourdaughter’s higher educationwhen she is about 18 yearsold and for her marriagewhen she is about 24 years,with the current cost for her
education and marriage atTs 10 lakh and Rs 15 lakhrespectively.
Accordingly, at 7% annualrate of inflation, the futurecost comes to Rs 24.10 lakhfor higher education and Rs54.25 lakh for her marriage,respectively.
Accordingly each monthyou have to invest about Rs5,750 for your daughter’s
education and Rs 5,150 forher marriage. Alternatively,today you can make a onetime investment of Rs 4.65lakh and Rs 4.90 lakh,respectively, to achieve thetwo financial goals for yourdughter. Thus either with aRs 10,900 monthly SIP or witha one time investment of Rs9.55 lakh, your goals could beachieved. Here we have alsoassumed a 13.50% per annumcompounding rate of returnfor your investments. For thisour advice is you invest indiversified equity mutualfund schemes. This is becausethe traditional mode ofinvestments like bank FDs orPPF can not compound yourwealth at this rate.
TAXATION ETC.: Equity mutualfunds enjoy a tax arbitrage.That is after one year fromthe date of investment, yourcapital gains are entirely tax-free, irrespective of yourreturns and whether youhave invested one time vialumpsum mode or everymonth via the systematicinvestment plan (SIP) route.As per current laws, your
maturity amount willneither be taxable nor willyou have to pay any othercharge on maturity.
HOW TO INVEST: Thumb rulesare meant for beginners.What percentage of yourinvestment goes into equityfunds should be a function ofyour risk taking capacity,investment horizon, currentinvestments and yourfinancial goals. If you areinvesting for your child’seducation and marriage,with these goals more than adecade later, and since allyour investments wouldpredominantly be via the SIPmode, you can invest entirelyin diversified equity mutualfunds as of now. A few yearslater, based on the prevailingcircumstances your assetallocation can be shiftedmore towards debt mutaulfunds and/or traditionalavenues.
CAVEAT: Invest in a carefully
created portfolio ofdiversified equity funds (5-7schemes at best) chosen withprofessional help and with amedium to long termhorizon. It pays to pay forprofessional advice and itmay cost dearly if oneventures out on his own.
Nirav Panchmatia isfounder & CEO, AUM
Financial Advisors
Partha Sinha | TNN
In the last one year, ex-cept for a select few sec-toral funds and smallcap funds, not manyof the equity funds
have given great returns.On the other hand, debtfunds have done relativelywell in terms of returns. Sofar in the new year too, thestock market has been ex-tremely volatile, pushing in-vestors to look for saferhavens. In this context, debtfunds are looking safer betsfor those investors who do nothave the appetite for higherlevel of volatility.
Investors who look for a reg-ular income stream, also lookat fixed income products likedebt funds, bank fixed depositsand post office monthly in-come schemes. “Amongthe fixed incomeproducts, debtfunds score overothers because of
chances of higher return, hasnearly similar level of risksand liquidity,” said Jignesh VShah, president, South Gu-jarat IFA Association. Ac-cording to Shah, people look-ing for regular income couldopt for a systematic with-drawal plan (SWP) in debtfunds, which, if done judi-ciously could also save on
taxes. Shah explained how it
works. For example aperson invests Rs 1 lakh
in a debt plan fromwhich he/she wantsa regular stream ofincome. The personinvests at Rs 10 NAV,so he gets 20,000units of the scheme.Now this personwants Rs 2,000every quarter. So atthe end of the firstquarter since in-vesting, say the NAV
of the fundgoes upto Rs
10.05. At this NAV, if the per-son withdraws 199 units,he/she will get nearly Rs 2,000.Now if this is done every quar-ter, the person can get a regu-lar income.
Now if the person investsRs 1 lakh and goes for a simi-lar SWP three years after in-vesting, the burden of paying
tax on the gains that had ac-crued to him/her will be min-imal. This is because the per-son will enjoy the benefits oflong term capital gains andwill have to pay a tax of just10% if he/she doesn’t want toavail of indexation, Shah said.In case the person wants totake benefit of indexation,then he/she will pay 20% taxafter indexation benefits areavailed of.
Shah also suggested twospecific types of debt funds
for fixed income investors,but warned that theseschemes carry slightly high-er amount of risks. Theseare duration funds and cred-it opportunities funds.
Duration funds are thosein which the fund managerstake a call on the rate of in-terest in the market, and henceyield on bonds in his portfo-lio, and try to maximum re-turn. Since the yield on a bond
is inversely proportional tothe price, the fund managertakes a call on yield and triesto maximise returns.
On the other hand, in cred-it opportunities fund, the fundmanager would look for com-panies in which there is achance for a credit rating up-grade, which will lead higher
price of bonds issued by thatcompany and hence to a fallin yield for the same bond. Ifthe fund manager can buysuch bonds cheap and sell af-ter credit rating goes up,he/she can give higher re-turns to investors in the fund.
“Investors who want to in-vest in duration and credit op-portunities funds should lookat the experience and expert-ise of the fund managementteam and also their process-es,” Shah said. “IFAs can playa very important role in fundselection for investors,” hesaid.
INVESTOR QUERYOF LATE WE RECEIVED QUERIESFROM SOME READERS ABOUTRAJIV GANDHI EQUITY SAVINGS SCHEME (RGESS), ITS WORKINGS,TAX IMPLICATIONS ETC. HERE ARESOME BASICS ABOUT RGESS:
STRUCTURE:There are mutual fund schemesthat adhere to RGESS rules notifiedby the government. These fundsinvest in only those stocks whichare notified under RGESS.
RGESS FOR TAX BENEFITS:RGESS provides tax benefits toinvestors who are investing theequity market for the first time.These benefits accrue underSection 80CCG of the Income TaxAct. This is in addition to Section80C of the Income tax act.
INVESTOR PROFILE:Tax deductions are available to onlythose new retail investors whosegross total income for the financialyear in which the investment ismade is less than or equal to Rs 12lakh.
HOW MUCH IS TAX DEDUCTIBLE:New retail investors can invest upto Rs 50,000 in a financial year andunder Section 80CCG of the IncomeTax Act, 50% of that is taxdeductible. This benefit is inaddition to the tax benefitsavailable under Section 80C of theIncome Tax Act.
LOCK-IN:There is a three-year lock-in forRGESS investors. However, after thefirst year the investor is allowed toshift his/her RGESS investmentsamong other investments which arealso RGESS approved.
WHO CAN INVEST UNDER RGESS:A new retail investor can invest inRGESS. Such an investor is definedas any Indian resident individualwho does not have a demataccount, one with a demat accountbut has not transacted in equity orderivatives segment, or one whohas a demat account as a jointholder.
Since its launch three years ago, theresponse to RGESS has been muted.Lately there have been news reportsthat the government is contemplat-ing to bring in some changes whichwill make it attractive to get moreinvestors into the equity market.
Why the troubles in the Chinese market matter for India?
Swatantra Kumar answers: In the last few months, weakness in the Chineseeconomy and a sliding stock market there have been affecting the globalmarkets, including India. This is because China is the second largest economy inthe world and also was the growth engine of the world for about two decades. Aslowdown in China means that would naturally have itsimpact around the globe. A slowing China means lessdemand for mineral ores like Iron, copper, bauxite,zinc etc. Since some of the Indian companiesexport mineral ores to China, declining demand ishurting their business. Also due to the low demand forChinese goods in the international market, the prices ofgoods produced in that country is alsocoming down. Once thesegoods are entering India, localproducers of those goods arealso being hurt since they arebeing forced to lower the pricesof their products. This is one ofthe several ways how a slowingChina is hurting India.
Among Fixed Income Investments,Debt Mutual Funds Score High
Duration funds, credit opportunities funds carry slightly higher risks but can give superior returns
How indexation worksIndexation is a process by which the government compensatesinvestors in debt, gold, real estate etc so that the investor does nothave to incur any loss in real terms. Due to inflation, the marketprice of an asset may not reflect the real value of the asset. So ifthe government taxes an investor going by the market price, thatmay turn out to be a disincentive to invest. Hence governmentallows inflation-adjusted selling price to determine the capital gainfor incidence of taxation on the seller.
CASE STUDY
Invest in a judicious mixof good equity schemes
PAL’S FINANCIAL GOALS FOR DAUGHTER
Twenty years in this businessconvinces me that any normal
person using the customary three per-cent of the brain can pick stocks just aswell, if not better, than the average WallStreet expert
Peter Lynch, celebrated fund manager
GURU SPEAK
NEXT EDITIONIn our January 26 edition ofSwatantra we will deal withthe basics of SIP and howinvestors can use SIPs invarious types of funds tomeet their financial goals.
Goal Approximate Age: Time Estimated Monthly One time amount Current/ left to Future Investment Investmentneeded on Goal achieve Amount (Rs) today (Rs)today (Rs) (Years) Goal (Rs)
(years)Higher Education 10 lakh 5/18 13 24.1 lakh 5,750 4.65 lakhMarriage 15 lakh 5/24 19 54.25 lakh 5,150 4.90 lakh Total 25 lakh - - 78.35 lakh 10,900 9.55 lakh
Investorswho want to
invest in durationand credit opportunities fundsshould look at theexperience and expertise of thefund managementteam and also theirprocesses,”
Jignesh V Shah
ILLU
ST
RA
TIO
N:
SA
CH
IN V
AR
AD
KA
R
● So the person’s capitalgain will be Rs 10 lakh –
Rs 8.76 lakh = Rs 1.24 lakh
● His/her tax will be calculated onRs 1.24 lakh. In the absence of indexationthe tax would be calculated on Rs 5 lakh,
that is on (Rs 10 lakh – Rs 5 lakh).
● Debt mutual funds enjoy benefits ofindexation when held for more than three years.
● Capital gain = (Selling price at marketvalue – Inflation-adjusted purchase price)
● Inflation-adjusted purchase price = Original purchase price * (Consumer inflation index for the year ofsale/Consumer inflation for the year of purchase)
● Suppose an investor had bought a house for Rs 5 lakh in 2000 and sold it for Rs 10 lakh in 2010.
● Government data shows in 2000, CPI was 406 and in 2010 it was 711.
● So the person’s indexed purchase price will be about Rs 8.76 lakh.
DEMYSTIFIER
THE TIMES OF INDIA, MUMBAI TUESDAY, JANUARY 12, 2016 15
