To Commute Or Not To Commute Your pension?

To Commute Or Not To Commute Your pension?

Commuting part of the pension to get a lump sum can benefit a retired defence personnel in many ways, Here’s How

Though this note is specific for defence personnel's but it is applicable to all persons in government job.

After serving long years in the field, are you looking forward to retiring from the defense services and leading a comfortable retired life? While there are inflation linked pension plans that would replace your salary in your retirement years, there is one problem. You may need some lump sum money to complete your relocation or doing up your retirement home. Or, there could be some other needs, such as the need for some funds to bridge the shortfall for your chid’s marriage. You can solve the problem by commuting your pension, where you would have to forego some part of your future pension for next 15 years and get a lumpsum in return.

Thus for your immediate and near-term needs, you will be foregoing some of the income security of tomorrow. The question is should you make this choice?

Pension Commutation

After commutation, only the basic pension is reduced for retired defence personnel, while they get the dearness allowance benefits on the entire pension amount. After completing 15 years of commutation, the full pension is restored. The other added advantage of commutation is that while your pension would be taxable, the commuted lump sum amount is tax free. It is basically a trade off. If you commute, you obviously get a tax free and lump sum amount that you can use according to your needs and, at the same time your pension amount comes down.

While civilian government employees are allowed to commute a maximum of 40 percent of their pension, defence personnel are allowed to commute upto 50 percent of their pension. However it is mandatory for defense personnel to have at least 20 years of service to be eligible for full retirement benefits. Most personnel join the defense forces at an early age ie; between 18 and 23 years of age. The mandatory period of 20 years of service is completed by the time they turn 38 to 43 years, after which they can enjoy full benefits. Some of the personnel who retire from defense forces after completing this mandatory service period end up taking another government , public sector or even private sector job, adding to their taxable income. Even such people are entitled to pension commutation.

Best for Early Retirees

As the full pension is restored after 15 years of commutation, for personnel opting for early retirement at, say 45 years commutation helps since they get the advantage of full pension by the time they reach 60. As the pension is not tax free, you would have to pay higher taxes after 45 years if you have the higher pension amount. Commutation not only gives you tax free lump sum, but also reduces the taxable pension amount. By commuting you are getting a tax benefit, you have the option to utilize the lump sum and, at the same time, you could be generating a regular inflow, at a slightly better rate.

The most important aspect of pension which decides the lump sum amount is the commutation factor. At an early age the commutation factor is higher and it decreases with increasing age. For example if you commute Rs 10000 when you are 45, you would get a lumpsum of Rs 10.61 lakhs, however at the age of 60 years, you would get only Rs 9.94 lakhs, as early retirement gives you a higher lump sum for the same amount of commutated pension. Many people who retire early might not have completed their life goals, such as purchasing a home, or providing for their children’s education, among others. Here, they have the opportunity to get extra lump sum amount, apart from their other retirement benefits to take care of these goals.

On Regular Retirement

If you decide to retire at a later stage in your life, you may approach the commutation issue differently. Since this is the stage where most people prefer security and stability, commuting pension by taking lump sum and deploying it for generating better returns could be a slightly more risky preposition for them. Taking a call on commutation of pension should be based on the overall amount one receives as the lump sum from all retirement benefit sources and not just based on the commutation amount. However, even the personnel who retire at a later stage, have an edge over their civilian counterpart, as they have the back up of good health care through ECHS and access to subsidised items at military canteens. Apart that, dearness allowance is given to all government pensioners on the full pension amount which takes care of inflationary pressures over the long term. This raises their risk appetite to take the lump sum and deploy it in a manner which could give better future stability, reduce future cost or enhance future lifestyle.

If you want a lumpsum for which you either have some commitment to retire such as an outstanding home loan or you are going to generate higher returns by taking this lump sum and deploying it somewhere else, you should commute your pension. How you use the lump sum amount would depend on the long term objective, rather than splurging it, say on an exotic holiday.

AGE ON NEXT BIRTHDAY	45	50	55	60
BASIC MONTHLY PENSION Rs	20000	25000	30000	40000
PENSION TO BE COMMUTTED (OPTIONAL UPTO 50%)	50%	45%	40%	30%
COMMUTATION FACTOR (BASED ON AGE)	8.996	8.846	8.627	8.287
LUMPSUM AMOUNT Rs (COMMUTED PENSION)	10,79,520	11,94,210	12,42,288	11,93,328
DEARNESS RELIEF SAY IS 90%	90%	90%	90%	90%
MONTHLY PENSION INCLUDING DR AFTER COMMUTATION	28,000	36,250	45,000	64,000

 

Happy Investing

Source:Outlookmoney.com

Steer clear of these 7 misconceptions about MF SIP

Steer clear of these 7 misconceptions about MF SIP

MF SIP can build wealth for you in long term. However, one should overcome some of the myths surrounding MFSIP.

Systematic Investment Plan or Mutual Fund SIP is fast becoming a common term in the investment market. But a lot of people are still uncertain – some are cynical of the “new thing” in the market while most are just confused. With so many misconceptions on what Mutual Fund SIP is about, how and who can use it, it’s high time to clear out a few myths!

What is Mutual Fund SIP?

A Systematic Investment Plan (SIP) is not an investment; it is a method of investing in mutual funds. Mutual Fund SIP is not an investment scheme, just an investment strategy. Let us destroy a few myths surrounding Mutual Fund SIP that can hold us off from attaining financial freedom.

i: SIP stands for SMALL SYSTEMATIC Investors Plan

This is one of the biggest mistakes that people do when considering systematic investment plans. People think that Mutual Fund SIP is for investing small sum of money. Mutual Fund SIP can be done for investing Rs 1000 per month, Rs 1 lakh per month and even for Rs 1 crore per month.

Mutual Fund SIP is just a concept for a periodical, well-disciplined, long-term investment not limited to the amount of investment.

Irrespective of the amount invested, it is important to understand that the investment is into an underlying asset. And instead of timing the purchase, we are simply averaging the‘per unit cost’ of the investment. The rupee cost averaging works alike for all. Regular investment through ups and downs, whether it is a small or big amount, using Mutual Fund SIP, results in better long term returns.

ii: Penalty if I stop my Mutual Fund SIP in between…?

This is another prevalent myth about Mutal Fund SIP investment. Considering Mutual Fund SIPs in equity funds, if you have committed to an investment for a period of say 10 or 20 years, then you cannot change its tenure or the amount. And if you do, you will be penalized. This is not true.

You can continue, or stop, or adjourn the Mutual Fund SIP, as and when you wish to do so. This can be done by giving a written request duly signed, allowing about one month for the fund to adhere to this instruction. And, for changing the amount, all you need to do is stop the existing Mutual Fund SIP to start with a new one.

iii: Lumpsum or SIP?

There are two questions that need to be answered before we decide to make a choice between Lumpsum and SIP.

Can you be sure of your lumpsum investment today, to fetch guaranteed positive returns after 5 years?

By investing as a lumpsum, there is a possibility that, you may enter the market at a very wrong time. Wheras by investing in SIP, you are restricting yourself to enter everything at a wrong time. Mutual Fund SIP reduces the risk by diversifying our investments on different timelines.

Timing the market is very risky due to its volatility – you can never be sure what the state of the market will be after 5 years. But by investing the same amount in installments regularly over 5years, you can use the market volatility to your advantage. You would be participating not only in the upswings of the market but also restricting the losses in a falling market. So, the robust returns in case of Mutual Fund SIP, are received despite the fact that the investments would be subject to volatility at different levels.

The second question is whether everyone has large, lumpsum amounts to invest at one go? It is easier on your everyday budget to invest smaller amounts regularly.

iv: My returns are low – SIP isn’t working for me!

People tend to keep looking at their investments to see how much their returns are. If you invest in SIPs, looking at the absolute returns after short intervals is not going to make you feel good. SIPs are based on the Internal Rate of Return (IRR) of the investments.

Usually, in a short term SIP, the absolute returns seem lower than the IRR. This is because in an SIP,you invest at various points in time, not the whole of it at one go. Therefore, there is no one point-to-point annualized return. The returns will look good, if you consider the varying intervals of investment,after a long term.

v: Markets are high! SIP can wait

People ask – when should we start investing in SIP? The right answer is – Any time is a good time! If we could predict the markets, then the concept of SIP wouldn’t exist! It is not the time at which you invest that is important but the duration for which you invest regularly.

The volatility of the market is used to an advantage by investing in an SIP. The ups and downs of the market make sure that in the long term the price fluctuations don’t affect you because of the concept of averaging the cost of investment.

What you think NOW, as the market high will be a lowest point of investment, 5 YEARS LATER.

vi: Mutual Fund SIPs are ONLY for long term

Mutual fund SIPs need not be continued for long term. Even mutual fund SIPs can be enrolled for a minimum of 6 months. However, the investments made in that 6 months need to stay for long term.

In other words, the “investing” time of mutual fund SIP can be short term. The “holding” time of an investment done through mutual fund SIP should for long term.

vii: No for Mutual Fund SIP as I have a variable surplus every month

This is again a misconception. I have a variable suplus every month. So SIP is not suitable for me. Because SIP accepts only a fixed investment every month.

The point I would like to highlight is, you can commit a lower sip every month and add whenever you have surplus. For e.g. your surplus/savings varies every month from Rs 5000 to Rs.7000 to Rs.10000. In this case commit an SIP for Rs.5000 and make additional investment of Rs.2000 in the months you have surplus of Rs 7000. Similarly do an additioanl investment of Rs.5000 when you have a surplus o f Rs.10000.

You can make SIP and additional lumpsum investments under the same folio.

SIP: Smart Investment Plan

It is important to take well-informed decisions about your hard-earned money. Thus, it is necessary that we are free of any myths and misconceptions. Whether the amount is small or big, by investing the same regularly and giving it adequate time, you will reap the benefits of SIPs in the long term. Getting away with trivial myths, can also help us believe SIPs to be SMART investment plans!!! 

Happy Investing

Source:Moneycontrol.com

Best Investment Tip ... Start Young

Best Investment Tip ... Start Young


While you are partying in your 20's make sure you invest as well.

We are always told to save and invest but rarely told How to start. This is specially if you have just started working. Yet this is the right and best time to invest.

The first step of the long journey of investing is the willingness to save. But keep in mind that all those who save necessarily  do not reach financial freedom. It is those who invest and make their money work for them too, are one's who achieve financial freedom.

It's All in The Mind

Most people have the impression that finance is difficult and confusing, but it is not. So first you have to get rid of that mental block that you do not know how to invest and hence may lose money.This is not true. The basic rule in the investment world is "Buy low and Sell High". If you apply this basic rule to any asset class stocks, bonds, mutual fund, gold, real estate etc, you will turn out a winner.

There are also many products structured for those who do not want to put lot time, efforts and hard work. Mutual funds are best example. All you have to do is invest your amount in the scheme and the fund manager will take care of the rest and help you earn good returns on your investment.

But First Start Saving

Savings is the first step towards any investment. You have to set aside a portion of your income as savings. Otherwise you will not have any money left for investment. so take stock of your income and expenses and see if and how you can maximise your savings. Remember as you grow old you will have more responsibilities and expenditures. So make the best of your youth and save as much income as possible.

Better yet make a plan. It can be as simple as setting aside a fixed portion of your income say 30-50% as savings every month. Use the remaining for your monthly expenses, this will make you a more disciplined investor.

No Lumpsum Investment

If you have just started earning it is likely that your paycheck is not very large. Don't let it stop you though. Savings and investment monthly need not be very large amount. You can set aside as small an amount as Rs 500 or Rs 1000 per month. Invest this amount through SIP or Systematic Inestment Plan which lets you stagger your investments in monthly instalments.This will make life much easier for you and may turn out a better option in the long run.

Power of Compounding

And that is because of the concept of compounding, which lets you earn interest on past interest payments or profits.

Happy Investing

Fulfil Your Dreams by Smart Investing

Fulfil Your Dreams by Smart Investing

Did the price of a Hayabusa or Harley prevent you from even thinking about owning one?

Now, start planning your next trip to Goa on your very own superbike! All you need is disciplined investing in equity mutual fund SIPs to start creating wealth towards this goal.

Why we think this is possible?

Look at how Rs. 5000 invested in equity mutual fund SIPs has grown over the last 3 years:

Invested Amount per month (Rs.)	Assumed rate of return	Value after 3 years (Rs.)
5,000/-	10%	2,10,650
5,000/-	12%	2,17,538
5,000/-	15%	2,28,397
5,000/-	18%	2,39,926

And if you continue this SIP investment for 5 years, your invested corpus will grow compoundedly into a decent amount for you to be able to afford that Harley.

Happy Investing

Six home loan hiccups you must know about!

Six home loan hiccups you must know about!

Getting a home loan to fund property purchase appears to be an easy act. However, it requires some planning and perfect execution

An enthusiastic, 32 year old working professional walks into the bank. He is with a building brochure in tow. It says, ready for sale flats, all amenities at your disposal. The officer sanctions the home loan and seals the deal with a handshake in the first meeting itself. Kids are jumping with joy, wife is smiling happily and the proud owner is hosting the house warming party. The journey from getting a home loan to the possession of the dream house was a cake walk. Happens only in TV commercials though.

The scene in real life is a bit different. The home loan application, approval and sanction is a long process. At every stage there is a chance of getting rejected. Home loan rejections can be hard to handle. It’s like a direct blow to one’s dreams. A lot of effort, time and energy is at stake. Taking care of factors which are under our control can avoid the disappointing rejection situation. Here are six things you must be aware of while applying for that home loan.

#1 Check eligibility!

A number of factors determine the home loan amount you are eligible for. It includes your capacity to repay, the picture your CIBIL report paints and employment status. Finding out the eligibility criteria and the amounts beforehand will save on your effort and avoid disappointments. Either you can look out for properties which fall well within the eligibility amount, or steps can be taken to enhance your eligibility. It includes showing additional income, waiting to apply after that increment in salary or getting a co borrower to apply with you. It’s good to be cautious and aware while you still have time to fix it and move ahead.

#2 Choose one- fixed or floating?

Borrowers can choose between a fixed rate of interest or a floating rate of interest when it comes to home loans. Fixed rate of interest can help you to plan your finances better since the EMI amount will be known. And a floating rate of interest can turn out beneficial in the long run if the interest rates drop. Two things must be considered before making that decision. The first being, read the fine print carefully with reference to interest rates. If there is a change in the interest rate, after a certain period, which you are not aware of beforehand, then it is going to affect your financial planning directly. Secondly, discuss the historic trend of interest rates with the lender. Study the trends with the help of data, speak to experts if required. That will help you in making a wise decision.


#3 The money that you never saw again.

Home loan processing fees amount to 0.5% - 1% of the loan amount or a flat fee amount is charged, depending on the lender’s policies. But what we must bear in mind is that, this amount is generally not refundable. In case, the lender states otherwise, ensure the same is in writing as well. Processing fee works up to a substantial amount and letting it go when the deal doesn’t go through would not help the situation.

#4 It ended before it started.

Lenders usually have an initial screening process and conduct a series of investigations to determine if they want to continue with the applicant. This includes borrower profiling, age, income, employment details, verification of other such basic details, etc. To avoid a rejection at this level it is important to approach only those lender’s whose borrower eligibility policies match with your profile. Ensure you share correct information which can be easily verified by the lender. If this is taken care of, initial screening shouldn’t be a problem.

#5 A trunk full of cash!

Depending on the lender, a certain percentage of the total amount has to be paid by the borrower. This is called as the down payment. Down payment is a large slice of the pie. Arranging for this amount may need some time and prior preparation. Check on how much down payment needs to be done and plan accordingly. If that is not working out as per your budget, check with the lender for acceptable alternatives instead of cash. It’s good to know about the down payment amount beforehand so that you have time to make it work.

#6 Documents and all that jazz!

Lenders are very particular about property documents and other paper work. The details, formats, everything is checked thoroughly. Any discrepancies therein are not acceptable. This step is generally after you have sailed through most of the process. Things not moving ahead here on can be very upsetting. This can be easily avoided by checking with the lenders on their documentation requirements early during the home loan process. If something is not in order, you will have time to fix it. Also, sharing details with the lenders early, can give them an opportunity to recommend alternatives to you. Paperwork need not be painful. Preparation is the key.

And like always, knowledge is power. Find out what your lender is looking for, read about it and ask questions. Minor hiccups can be easily managed by being aware and prepared. Good luck for your dream home.

 Happy Investing

Source:Moneycontrol.com

When the Fed raises rates, here's what happens

When the Fed raises rates, here's what happens


For the economy specifically, history offers little guide about timing. A recession has come as quickly as 11 months after the first rate hike and as long as 86 months.

A rate hike will come and the bull market will stumble, bond yields will climb and the economy will slip into a recession.

This we know. 

What we don't know is how long all of that will take and how long it will last. For the economy specifically, history offers little guide about timing. 

A recession has come as quickly as 11 months after the first rate hike and as long as 86 months. The Federal Reserve's aggressiveness in raising rates is often, though not always, a determinant in how the economy and financial assets respond. 

That's why officials at the US central bank have stressed so vigorously that investors should not be focused on when it starts raising rates but rather the trajectory of how long it will take to normalize. 

There are, indeed, multiple variables at play. 

In the end, however, market participants may find that all the rate-hike fuss may have been overdone. 

"The first hike from the Fed since the global financial crisis will inevitably be interpreted by some as signaling the end of the era of 'cheap money,' " Julian Jessop, chief global economist at Capital Economics, said in a note to clients. "In contrast, we do not expect the gradual return of US interest rates to more normal but still low levels to be the seismic shock that many seem to fear." That's not to say there won't be effects, however. 

Here's a look at how some areas of the economy could react, based on historical trends: 

Stocks 

As the market has seen over the past month or so, anticipation of rate hikes can make things volatile for a while. Once the hike hits, though, the impact is not as dramatic. "

It does seem there is a trend for equity returns to stall 12-24 months after the first hike, which again perhaps reflects the lag in monetary policy," Deutsche Bank analysts said in a recent study of what happens after the Fed hikes. 

More specifically, the market over the past 35 years or so is most often up sharply—about 14 percent—heading into the rate hike, fairly flat in the 250 days after (average gain of 2.6 percent) then back to normal once 500 days have passed, with average return in the past six cycles of 14.4 percent, according to a recent analysis Bob Doll, chief equity strategist at Nuveen Asset Management, posted on Barron's. 

Deutsche said the impact on stocks tends to get more pronounced later in the rate-hiking cycle and returns begin to diminish. 

GDP 

Recessions are a fact of economic life, but rate hikes often help them along. In the current case, the Fed is facing some conditions that did not exist before and could hasten a recession. Most notably, gross domestic product will be near its lowest point ever for a Fed rate hike. 

 

According to Deutsche Bank, in the 118 rate hikes since 1950, only twice has nominal year over year GDP been below 4.5 percent. Even though the second quarter of 2015 was at 3.6 percent, few expect that to last, with the third quarter tracking at just 1.5 percent, according to the Atlanta Fed.

 Hiking rates into such a fragile economic backdrop could be risky and set up the question of "whether this time is different," Deutsche said. Market participants have been bracing for a Fed hike all year, with all eyes turned toward this week's Federal Open Market Committee meeting, which ends Thursday. 

While many strategists and economists believe the FOMC could approve a hike at this meeting, futures trading indicates just a 25 percent probability. "

In our study since 1950, all hiking cycles to date have been in a super cycle of increasing leverage with GDP eclipsing prerecession peaks very quickly post the recovery commencing," the report said. "By contrast this has been a uniquely slow recovery from what was the worst recession in the sample period." 

The current cycle is by far the longest the Fed has waited since the end of the last recession; the record had been 35 months, and this is 74 months and counting. 

US rate hikes and recessions 

Rate-hike cycle Duration (months) Next recession Time to next recession (months) 

12/1/1976-3/3/1980 39 Jan-80 37 

12/16/1986-9/4/1987 9 Jul-90 43 

2/4/1994-2/1/1995 12 Mar-01 85 

3/1/1972-5/1/1974 26 Nov-73 20 

3/29/1988-2/24/1989 11 Jul-90 28 

4/15/1955-8/23/1957 28 Aug-57 28 

5/2/1983-8/21/1984 15 Jul-90 86 

6/30-2004-6/29/2006 24 Dec-07 42 

6/30/1999-5/16/2000 11 Mar-01 21 

7/17/1963-4/4/1969 69 Dec-69 77 

8/7/1980-12/5/1980 4 Jul-81 11 

9/12/1958-9/11/1959 12 Apr-60 19 

Average 22 41 

Median 14 33 

Bonds 

Fixed income also has been volatile as the market anticipates a rate hike, and the pattern is somewhat similar to what equities experience. 

The principal difference is that the impact happens faster in bonds than stocks when the Fed changes course in policy. "For bonds, it does seem yields change direction immediately as the first hike/cut in the cycle arrives. At the end of the hiking cycle bond yields fall immediately," Deutsche said. 

Charles Schwab strategists believe the hike in rates will cause yields between longer- and shorter-dated bonds to move closer together, flattening the curve. 

High-yield bonds often perform better in such a climate, though "we are still cautious about stretching for yield," Kathy Jones, fixed income analyst at Schwab, said in an analysis. Interestingly, Jones thinks markets already have adapted to Fed policy expectations. "

In addition to the strength in the dollar and the drop in inflation expectations, there are several signs that the market has adjusted to the prospect of tighter monetary policy," she wrote. 

"Short-term interest rates are up, the yield curve is flatter, credit spreads have widened and volatility has increased—all characteristics of the market when the Fed tightens policy." 

Winners and losers Broadly speaking, companies that do the majority of their business in the US will win as interest rates rise and local products become more attractive. Multinationals with lots of debt will fare worse, as a rising dollar makes their products more expensive in the global market space and their debt more expensive the finance. 

"History shows that 'quality' stocks tend to outperform during the three months following an initial rate hike," Goldman Sachs analysts said in a report for clients. 

Firms with strong balance sheets outpaced weak balance sheet companies following each of the 1994, 1999, and 2004 rate hikes, by an average of 5 percentage points. Read More A $2 trillion bet against Fed raising rates this week "Companies with high returns on capital as well as low volatility stocks also outperformed their lower quality counterparts, by an average of 4 (percentage points) and 3 (percentage points), respectively." 

Debt will become a big issue. Companies with a high percentage of floating rate debt stand to lose the most, Goldman said. Outside pure stock plays, consumers stand to benefit as well through the rising dollar. Savers could see gains as well through higher yields at the, though experts differ on how quickly that will take hold.

Happy Investing

Source:Moneycontrol.com

6 Things to note while applying for house construction loan

6 Things to note while applying for house construction loan

House construction loan and home loan are different. The home construction loan’s rules before and after approval and the tax benefits are complicated and can throw up many surprises for the borrower.

Aman, a businessman who hated the high rise culture, preferred to construct a house in his home land. He had purchased a plot, and because of the rising real estate prices, had to stretch beyond his budget for it. With limited funds left, he was not in a position to start construction on the plot.

Aman applied for a home construction loan. He was under the impression that on sanctioning the loan and upon completion of all legal formalities, the bank would grant him money for starting construction work. But, Aman was surprised when the bank asked him to come back after completion of lintel level of the house.

Many people who apply for home construction loans are unaware of its complete terms. Here’s what you should know before approaching a bank for a home construction loan.

Loan disbursement in a construction loan happens in installments only.

If you are expecting that the bank would offer you a lump sum towards your home construction expenses, you may be in for a surprise. The loan disbursement in home construction loans happens only in installments.

The approved loan amount will be disbursed anywhere between 2-5 installments, depending on the progress of construction, loan size and loan to value ratio (LTV). So, borrowers will have to ensure that they have adequate funds to purchase raw materials and to start the construction work.

Disbursement is linked to construction progress

Banks have a pre-determined criterion for disbursing funds according to the progress of the construction activity. For example, if one takes up to 85% of the estimated construction cost as loan, the first disbursement will happen only after completion of foundation work, assuming that 15% of the estimate cost goes for it. The second disbursement will happen at lintel level, the third after completion of concrete works and the final when 90% of the construction activity gets over.

But if one takes only 50% of the estimated cost as loan, the first disbursement may come only after completion of lintel or when the concrete works gets over. Since the disbursal of this loan is linked to the construction activity, if the work gets suspended or delayed, further disbursements will not happen.

You will have to pay Pre-Emi until final disbursal

For a home construction loan, you will have to keep paying Pre-EMI monthly, until the final loan amount is disbursed. This means, you will need to pay interest for the amount getting disbursed under each installment and this amount will not go into repaying the principal loan amount. If you are suspending the construction activity for some time due to any reason, you will continue paying interest to the bank, which is not beneficial in any way.

Let us assume that you are opting for a home construction loan of Rs. 25 Lakh at 10.5% interest rate and the bank has disbursed only Rs 5 Lakh as per the construction status. You will need to pay Pre-EMI for the disbursed amount, which comes to around Rs.4375/- per month. So in a year, you will have to pay an interest of Rs.52,500, which does not go into repaying your loan outstanding.

Any variations from the approved plan are excluded

Before approving any construction loan, the bank seeks various documents including sales deed, approved plan, NOC from the municipal / corporation authorities etc. If you are making any changes from the approved plan like violating the boundaries, extension beyond approved area etc, the bank will not release its funds and holds the right to freeze your loan.

You will have to take additional approval for any deviations taking place from the approved plan or with the construction estimate submitted to the bank.

Limited tax benefits

Unlike regular home loans where you can avail tax benefits on both interest and principal amount, for a home construction loan you will get tax benefits only for the interest paid if the construction activity is not complete.

This means, if you are opting for Tranche EMI option, ie, the option for starting your EMI after the first installment, you will not get tax benefit for the principal portion paid against the loan, until the construction gets over and the bank certifies that they have disbursed the full loan amount.

Any interior works are excluded

Loan for home construction will be provided only for immovable works conducted for a house. This means interior works like painting, furniture, cupboards, kitchen cabinets, partition works, plumbing, lighting etc will not be funded.

Nowadays, the interior works of any small home cost a minimum of Rs 3-4 lakh, and can touch any level on the higher side according to your luxury preferences. So make sure you check with your bank about the exclusions in the loan.

Knowing all the terms of a home construction loan is crucial in avoiding last minute surprises and cash crunch, as home construction involves significant involvement
both physically and financially.

Happy Investing

Source:Moneycontrol.com

ELSS is not just a three year investment option

ELSS is not just a three year investment option

Tax-saving funds have three year lock in. However, you need not necessarily sell them after completion of three years.

Investors often think about equity linked savings schemes (ELSS), popularly known as tax saver mutual funds, as a three year investment but this might not be the right way to look at it. There are various conditions and points related to this instrument that needs some additional thought on the part of the investor and hence they must be careful in arriving at a hasty decision. ELSS funds are equity diversified funds that invest their money across different sectors that also have a tax element added to it. The tax benefit is in the form of a deduction as the ELSS is an eligible investment under Section 80C of the Income Tax Act. Here is a detailed look at the issue and how things can be considered.

Lock in

Since there is a tax benefit that is associated with the investment into an ELSS there are some other conditions that follow along with it. First one has to consider the fine print of the tax benefit under Section 80C. The amount that is invested into the fund during the financial year is available as a deduction from the taxable income of the individual. This means that the income on which tax has to be calculated will be reduced and a lower amount will be the figure on which it has to be paid. However along with this there is also a lock in that is present which is for a period of three years. This means that the investor cannot sell the investment for a period of three years from the date of investment but it does not say that once the lock in is over it has to be compulsorily sold. This is a big difference that has to be understood by the investor. Holding the investment for as long as required after the completion of the lock in is permissible so this can be made use of.

Long term investment

An equity investment is a long term investment which should stretch for 5 years or more and the ELSS is no exception to this. Investors who are looking to invest in the fund need to have framed a longer term outlook for their investment and hence they should be waiting for the time period to play out and the results become evident. It could be that in the three years that there was a lock in the market conditions were not very strong and this has led to a poor performance of the fund. The fund invests in equity and hence there will not be a linear performance witnessed in it but it can vary significantly and there could be a position wherein the entire returns are generated in a short period of time. The best way to tackle the whole situation is through a patient holding of the investment and hence the outlook for the investor should be for a period of more than three years which means that there is no need to sell immediately after the lock in period has been lifted.

Compounding

The investor in an ELSS can look for the benefit of compounding wherein the tax benefits can multiply and at the same time there is a build up of the capital in the fund. The dividends that are earned on the fund are tax free in nature and these if reinvested will count as an additional investment so ensuring that one has chosen the dividend reinvestment option will give tax benefits for years. At the same time the overall amount that is invested in the fund will be rising and this will give the investor the benefit of compounding which means earnings on a larger base. This will be the real manner in which an investor can get multiple benefits from their investment in an ELSS and is something that every investor should consider.

Happy Investing

Source:Moneycontrol.com

Six simple steps to get your money matters on track

Six simple steps to get your money matters on track

Here is a six steps guide to get your financial plan on track to achieve your financial goals.

Financial planning is a process of understanding your income and expenditures, and planning accordingly for your future – both short term and long term life goals.

Most often when you go shopping, you look at how much money you can spend and then accordingly prepare two lists. The first list includes stuff you NEED and MUST BUY. And the second list is all about the stuff you WANT to buy if you have ANY EXTRA CASH left.

Now, look back at the second list. You will notice that the little things here are the ones that are really going to make you happy from within. But most often, as expected, you just begin on the ‘Want’ list before you run out of cash.

Financial Planning will help you change this. It is all about looking at the larger picture.

It is important to set your goals on what you ‘need’ and what you ‘want’ and pay equal attention to both.

These 6 simple steps will help you get your financial plan on track:

1. Know your income –
Where is your money coming in from? Paycheck, investments, small business, etc. Try to add-on as much as possible – without killing yourself about it.

2. Understand your expenses –
Where does your money go? Food, bills, mortgages, shopping, recreational spends, medical emergencies, education, etc. – and try to save.

3. Estimate what will remain –
Try to do this regularly and start thinking about what you can do with the remaining funds. This will also help cheat yourself into saving more, by not spending. Invest, don’t spend.

4. Invest wisely–
Don’t let money lie in dud investments. There are numerous investment options in the market. Invest keeping in mind your short term and long term life goals, your budget and what you want out of your investments.

5. Pay-off mortgages –
Paying off your loans on property, credit cards, etc. as fast as possible, will give you peace of mind sooner and allow you to start saving sooner. Another little known fact about loans is that you will also save up money paid out as interest by shortening the term of your mortgage.

6. Improvise, if needed–
Things change. Over time, good stocks may turn bad. Inflation rates may get to your fixed investments. Modify plans if necessary. Break bonds and reinvest if needed. Look at the long term returns and take action – change course. Don’t panic every time though; play smart.

Following a plan does not mean you will get everything you want immediately. But having a realistic financial plan – and sticking to it – will ensure that you achieve most of your life goals.

Happy Investing
Source:Moneycontrol.com

Can’t gauge the volatile market? Take professional help

Can’t gauge the volatile market? Take professional help

A high rate of interest does not necessarily help in creating a decent corpus over the long term. This is mainly because of the implication of tax on the income earned and also the falling purchasing power of money due to inflation. From a gamut of instruments available, the choice inadvertently hinges on the aspects of safety, liquidity and the term. Whether the income generated is subject to tax or not is something least talked about. However, in order to create wealth in the long run, the post-tax real returns assume greater significance.

The IT Act does not treat all financial savings uniformly, and the taxability of contributions, accumulations and withdrawals differ from one instrument to another. Investments in a public provident fund (PPF) scheme, for instance, enjoy tax savings in the form of deductions, while the interest escapes the tax man's axe. The money you get on maturity is not taxable either. This method of taxation is referred to as the ‘exemptexempt- exempt' (EEE) method since all three stagesâ€"contribution, accumulation and withdrawalsâ€"are exempt of tax.

On the other hand, while contributions to, and accumulations in, certain insurance products such as pension plans are not taxable, the amounts received by way of lump sum withdrawal or periodical pensions are taxable in the year you receive it, i.e., pension plans are governed by the ‘exempt-exempt-tax' (EET) method of taxation. For example, for a bank fixed deposit that might give you a return of 8 per cent the effective post-tax return for someone paying 30.9 per cent tax would be a figure lower than inflation-a mere 5.5 per cent. Therefore, the question that comes to mind is: financial planning or tax planning? Should I be saving in banks or in share markets or in MFs? A proper financial planning exercise, making full use of the tax provisions, is what everyone wants.

Tax Benefits While Investing In Mutual Funds

Under Section 80 C of the IT Act 1961: If one invests in any of the specified instruments, his gross total income stands reduced by an equal amount, subject to a maximum of Rs. 1 lakh every year and tax is paid on the balance. For someone in the highest IT slab of 30.9 per cent, (including the education cess of 3 per cent which applies on tax plus surcharge) an investment of Rs. 1 lakh in one or a mix of Section 80C instruments reduces the individual's total taxable income by Rs. 30,900/-. For those with income above Rs. 1 crore, there is a surcharge of 10 per cent on tax payable in addition to education cess. Hence, for them the tax rate is 33.99 per cent. The list of specified instruments includes equity-linked savings scheme (ELSS), an equity-based MF scheme. As the name goes, ELSS is a savings scheme that is linked to equity. ELSS is a type of MF scheme that is formulated under ELSS guidelines and is similar to any diversified equity MF and routes investments into the equity market. However, it does come with some intrinsic features that differentiate it from other MFs. ELSS gives tax benefit on the amount invested and hence comes with a lock-in period of three years. One can invest up to Rs 1 lakh in a single or a combination of ELSSs.

There are two options to choose from in an ELSSâ€"dividend and growth. One can buy units under this scheme with a minimum amount investment of Rs. 500 and in multiples of Rs. 500 thereafter. Investments can either be in lump sums or through the systematic investment plan (SIP) route.

Investment in ELSS Scheme has a lock-in period of 3 years. Considering the volatility in the stock markets, it is better to invest through SIPs, save tax and create wealth over the long term. Typically, they are known as tax plans, and can be bought through intermediaries, such as banks, distribution houses, brokers and individual agents. One may also buy ELSS directly from fund houses or from the Websites of such fund houses. The entry load in ELSS, as in any other MF scheme, is nil. The entire investment participates in the stock market, and based on the scheme's net asset value (NAV), units get allotted. NAV is the applicable net value of each unit on any particular day.

Using ELSS to meet goals

Put to use the tax benefit of ELSS to your advantage. Spread your investments in 2-3 ELSS for the sake of diversification across market capitalization and fund managers. Consider the long-term performance as against its benchmark, volatility, small-, mid- and large-cap exposure before zeroing in on a particular scheme. The pedigree of the fund also plays an important role. Don't buy or invest in a fund simply because its NAV is lower than its competitors. Keep financial goals in mind. Every ELSS adopts different stock picking strategies. Some schemes maintain a large-cap focus and are suitable for investors who have a low risk profile. On the other hand, funds that have greater exposure to small- and mid-cap stocks fit the portfolio of an investor willing to take some risk. Ignoring this aspect would mean a mismatch between the fund and the investor's profile.

If your ELSS investment made in the past is about to mature in the next 3-6 months, you need to decide carefully. Once you complete three years in an ELSS, review your investment. After all, one of your objectives (the tax deduction) has been met. Tax laws don't allow a rollover for claiming the Section 80C benefitâ€"they insist on fresh investments. Hence, evaluate your “matured” ELSS investment as a normal equity investmentâ€"your decision to stay on or exit should be based on your perception of the market and the need for funds. You may reinvest proceeds in any other ELSS schemes. If there is a need for funds, you could liquidate some or all units. Remember, even partial units can be redeemed. However, if no such need exists, you may better postpone liquidation to few more months.

Conclusion
It is imperative to take advantage of equities to tackle inflation in the long run. An equity MF fits the bill as they come with a number of options to choose from. Volatility in the stock market will help generate wealth in the long run while tax benefit on returns can give your investment portfolio the much-needed edge. Therefore, take the MF route to meet your goals and say bye to tax worries!

Happy Investing

SECRETS OF WEALTH CREATION

SECRETS OF WEALTH CREATION

· Plan your SIP Investments. Frequent Intervals i.e. monthly, quarterly or semiannually increase chances of buying units when prices are low.

· Chart out a long-term investment plan. SIP works best for long-term investment periods and helps the long-term investor reap good returns over a period of time. Long-term investors tend to profit from the appreciation markets tend to show in the long-term.

· Diversify your investments. Since, Mutual Fund investments are diversified; it not only reduces risk but also helps in optimizing returns.


Dynamics of financial planning

Financial independence is now an integral part of our complex lives. Gone are the days when it meant having enough to tide over one's personal needs without really having to struggle. In current times, due to various reasons like a fast-paced life, job insecurities and high inflation rates (that erode the value of money), being financially competent in the present as well as the future should is of prime importance for every individual.

However, it is widely observed that most individual's spend their life in earning money and saving it but ignoring the third most important aspect, financial planning, i.e. managing money. The process of financial planning entails understanding an individual's present and future earnings ability, analysing future financial requirements (like buying a house) and developing a path to create wealth and reach those goals as per the individual's ability to tolerate investment-related risks. Further, financial plans must be dynamic to reflect the ongoing changing market environment and the changing needs of the individuals.

Why is financial planning important?
Financial planning is important for all individuals as it not only helps in meeting the present and future goals but also in dealing with unforeseen emergencies in life; in short, it provides the much needed financial security. Further, in a high inflation economy like India, rising prices erode the value of savings and financial planning can help in growing money at protecting a portfolio from such rampant erosions. Financial planning via diversification also helps to harness the power of compounding and reduce the uncertainties arising from a volatile market scenario.

While financial planning is important, it requires an understanding of various terms and processes - understanding the investment opportunities in the current financial system, creation of an optimum asset allocation / portfolio mix, tracking and reviewing the investments among others. Hence, we will try to simplify the financial planning process through a few steps (Chart 1):

Steps of Financial Planning

Define current financial state and financial goals

Individuals must clearly understand their current financial state which will give them an idea about their earnings and expenses. This analysis will reveal the annual cost of living and indicate the savings (income less expenses) or surplus money available for investment. After getting an idea about the current financial standing, investors must analyse the financial needs and goals which will help them to understand what they hope to attain. Commonly observed goals include buying a house, funding child's education, retirement planning, etc. The process doesn't end in just identifying the needs and goals but also find out the resources and the time frame required to fulfill them. Any financial need or goal would translate into determining the tenure of the investment i.e. short-term (< 1 year), medium-term (1 - 5 years) and long-term (> 5 years).

Analyse the risk profile

Analysing an individual's risk profile is an important component of financial planning as the asset allocation in a portfolio critically depends on this; remember each asset class carries different types of risks like market risk, credit risk, liquidity risk and interest rate risk. For any investment, a certain amount of risk cannot be ignored. But while investing in asset classes which offer higher returns, individuals must analyse their own risk taking (depends on the objective, time horizon, income level and age) and risk tolerance abilities (capacity to lose some or all of initial and subsequent investments in exchange of greater potential returns). E.g. an individual of over 40 years of age but with a stable long term income source can look at investing a relatively higher portion of the portfolio into risky assets such as equities unlike an individual unlike someone of the same age but with a not-so-stable long term income source.

Pick the right asset allocation mix

Traditionally, the three main asset classes are equities, fixed income (debt) and cash and equivalents. There are non-traditional asset classes such as real estate, gold, and commodities, to gain additional returns even though these assets carry additional risks compared to traditional assets. By allocating capital across several asset classes, the benefits of diversification can maximize gains and minimize the losses. After deciding upon different asset classes, individuals must develop an asset allocation plan which will determine the proportion of investments in each of the major asset classes. A right asset allocation plan means apportioning the investor's surplus across the various asset classes and their instruments based on the individuals' risk return profile. Mutual funds in India invest across most of the traditional as well as non-traditional investment classes and provide an ideal medium for investors, while also offering the benefit of professional management at low costs.

Conclusion
Given the ongoing market volatilities, it is important that individuals must have a disciplined approach to investments which can be acquired by following the above steps. Besides, individuals must keep in mind a simple modern day adage-Start Early, Invest Regularly and Be Updated-be it on their own or with help from a professional financial planner.

Happy Investing

How one should start ... Investing

How one should start ... Investing


Among the many mantras of investing, market timing is the most commonly used one, where investors look to invest, book profits and exit quite often. There are also diehard followers of the "invest and hold" strategy. At the same time there are people who believe that portfolio rebalancing across asset classes such as equity and debt is a must.

There are several theories of investing, retail investors are better off by simply investing consistently. As it is believed that since no one can time the markets consistently, there is no point in chasing this strategy. One should look for the cost averaging theory, popularly known as systematic investment plan (SIP).

Systematic Investment Plan (SIP) is a smart financial planning tool that helps you build wealth, step by step, over a period of time. You can start an SIP for Rs. 2500 per month and benefit from the power of compounding and rupee-cost averaging. This disciplined approach helps you to hedge the investment against inflation.

BENEFITS OF SIP

1. Disciplined Investing approach:Some of you may opt for stock options by timing the market to accrue wealth. However, timing the market calls for market knowledge, research, technical analysis and a lot of time from your end. Further it could also be risky. But through disciplined, regular investments you can stop worrying about when and how much to invest. In a way, it eliminates the need to actively tracking the market. And SIP helps you to achieve just that.

2. Takes advantage of Rupee Cost Averaging:Rupee Cost Averaging is an effective investment strategy that eliminates the need to time the market. All one has to do is to invest a fixed pre decided amount of money on a regular basis for a long period of time. Since the amount invested is constant one buys more units when the price is low and fewer units when the price is high which may man a lower average cost.

3. Simple, convenient and easy to monitor:You do not have to take time from your schedule to make your investments. With a completed application form, one can just submit post-dated cheques or avail the Magnum Easy Pay (auto debit) ** facility and relax. You can monitor your progress of investment through periodic statement of accounts.

4. Benefits of Compounding:The key to building wealth is to start investing early and to keep investing regularly. A small amount of money invested regularly can grow to a large sum. This helps in creating a substantial amount of wealth which includes your own contribution, plus returns compounded over the years. For example, the following graph demonstrates the effect of returns on monthly investments of `1000 per month for a period of 30 years.


5. Power of starting early:Helps create wealth: The earlier one starts regular savings, the easier it is for wealth creation. The graph below shows the impact of starting at various stages in life. `1000 was invested on a monthly basis till the retirement age of 60 years. The rate of return on investment was assumed at 10% p.a. It can be seen that even a five-year delay can make a significant reduction in overall creation of wealth.


Happy Investing

Investing .... Why start early

Investing .... Why start early

One of the most important things that you can do as an investor is to get an early start on investing. The old saying "the early bird gets the worm," certainly applies to investing in a big way. Investing is defined as making an investment in order to earn a profit, and earning that profit will be much easier to do if you get an early start. Investing at a young age isn't always easy, but the benefits are numerous and can't be overlooked.

Here is a look at five of the best benefits of investing at a young age:

1. Time is on your side - This is the straightest forward of all the benefits, but yet it may be the most important of them all. Quite frankly if you begin investing at a young age history tells us that you will end up with far more than those who invest later in life. Having time on your side means having a longer time period of being able to save money to invest and a longer time period of being able to find

investments that can increase in value quite nicely.

2. Compounding returns - are extremely powerful over the long run, and the earlier you get started the greater your chance is to take advantage of this. Put more simply this is the power of the time value of money. Regular investments in an investment portfolio or a retirement account has the potential to deliver huge compounding benefits.

3. Improves spending habits - This benefit is generally overlooked by many, but investing early on definitely helps develop positive spending habits. Those who invest early on are much less likely to have issues with overstepping their boundaries in spending over the long run. Investing teaches important lessons and the earlier you are able to learn those lessons the more you can benefit.

4. Ahead of the personal finances game - If you are a young investor you are putting yourself ahead in the world of personal finance as a whole. By growing your investments over time you will be able to afford things that others can't. Your personal finances are bound to get tight at times throughout your life,

and investing at a young age can help in those tight times.

5. Quality of life - The basic quality of life is a huge benefit of being an early investor. By investing early in things such as pension and retirement accounts you should be able to avoid having to make frantic moves near or during retirement. Quality of life during your retirement years will be much better because there will be less stresses and more of a nest egg to work with.

It is important to note that saving money to invest at a young age isn't easy, but you simply can't afford to wait to invest when it is convenient. Don't shy away from investing because you don't have enough, simply start with making small investments and give them time to mature. Investing while you are young is one of the best decisions one can ever make.

 Happy Investing