Set off of LTCL from Shares against LTCG of Debt Funds

Six Tata Steel preference shares (FV Rs 100 each x 6 = Rs 600) were converted into one equity shares on 01 Sep 2009 by Tata Steel @ Rs. 417.10 (Equity Share closing price on 01 Sep 2009). Earlier the preference shares were alloted on 22 Jan 2008. Thus there is long term capital loss of Rs. Rs 600 - 417.10 = 182.90. Since this was done off market, no STT was paid.

Is it right to consider this loss for offsetting against LT gain from Debt Mutual Funds ( where no STT was paid)?

- Vinayak Bapat

Dear Vinayak, As per the given info, you can set off your LTCL from conversion of Pref. shares against LTCG from Debt fund.

Thanks

Ashal

Should I redeem my MFs before DTC

Sir,
In DTC,LTCG is likely to be taxable,may be @5% or 10%.I have investments in funds like R.Growth,H Top200,D Top100etc for last, say about five years.Should I redeem & then reinvest to avoid tax.Should I switch from R.Growth to RSF Equity?Kindly reply in detail.Thanks,urs sincerely

Lcbansal

Dear Dr. Lal, First of all. Plz. note these are mere proposals not the act as of now for DTC. The final picture may be different from what we are seeing today.

Regarding your query for redemption - Sample this -

Say you have total basic investment of 5L Rs. as on date where the with profit value is say 8L Rs. It means 3L Rs. is your profit. Now if you redeem these 8L Rs. in full & reinvest the same in same funds. your holding period 'll be counted from the reinvestment date. So in case in future, just after implementation of DTC, you require money due to any reason, the gains if any 'll be STCG & these STCG 'll be taxable at your marginal slab rate. Now If we consider that you are going to hold these units for a long term & 'll redeem after 4-5 more years in DTC, the LTCG 'll be discounted based upon your holding period. In the example given in the new proposals, it seems, higher the holding period, higher 'll be the discount for calculation of LTCG. 

Now interestingly If you don't take any action, the holding period is already eligible for LTCG & as the period is already more than 5Y (by the time, DTC is implemented), the resultant Tax liability 'll be very low. As now after 8-10 years (5Y current holding + 3-5 year more in DTC), your total holding period 'll invite a high %age discount & thus lower tax outgo.

One more Question I want to ask - Due to these DTC proposals, 'll you stop investing from now onwards? In any case, the future is EET. 

Your query is similar to public behavior - Fill the fuel tank of vehicle just b4 the hike in fuel prices. "ll this tank fill last for life long? NO. In any case we 'll continue to use now so called high priced fuel. Same is here in your query.

Plz. don't worry for now & future. Keep Investing. Yes redemption due to under performance should always be done.

Bye Bye & happy investing.

Thanks

Ashal

Reliance Infrastructure Fund (D)

Hi
i have invested in Reliance infra fund (D) now my 1 yr locking going to over... but return is not good....

plz guide me shall i continue to hold or do STP

if i do STP then give me better fund name of Reliance grp for STP...

i have invested 5K in reliace infra fund....

Thanks

Cshah

Dear Cshah, In the light of under-performance of Rel. Infra fund, my choice 'll be to switch your money to Rel. RSF Eq. in Growth Option.

Thanks

Ashal

Investing for Daughter's marriage

I' m long term invester through mf via sip n top up time to time when market got corrected 5-6 pc from high i have --rel growth rel.regular saving hdfc top 200 Hdfc prudance birla front n mid cap mainly n one sectorial fund rel banking i m 50 years old n have invested in mf since 2004-5 till i have invested 14L n have handsome gain today i need my money after 4 -5 years for my daughter's marriage at present i have very little responsibility n can invest 30k every month more. pl check my portfolio n advise me--when we start withdrawl , can invest more 1-2 years 30-40k every mone in the above mf or any other pl advise my son got job in this years n start to invest in mf for next20-25 years n start with very small amount --rs 3000pm pl dvise mf for him

thanks

Ramesh Sahu

Dear Ramesh, To create a corpus specially for your D'ter's marriage, here is my take.

First calculate what 'll be your expenses, if marriage is 2day in 2010? Say the figure comes out around 10L Rs. Now calculate down the line after 5 years, what 'll be the expenses due to impact of inflation say @ 7% rate. For example the figure comes out around 15L Rs. so that's your cut off point for exclusive corpus with a exclusive goal.

The moment, your current fund value reaches that cut off point, redeem at least 50% of your holdings & invest the same in debt funds. I.e. out of your 15L fund value redeem at least 7-8L Rs. & invest the same in debt funds. On the other hand, keep on investing your fresh SIPs in the funds chosen by you.

When the goal is just one year away, redeem sufficient amount from the funds to create the final corpus with out any problem & invest the same in debt fund.

Regarding your choice of funds, I w'd like to replace Birla Midcap with Quantun LTEF.

For your son, you may ask him to invest 1K Rs. each in following funds thru SIPs

HDFC Top 100
DSP Eq.
Quantum LTEF

Thanks

Ashal
 

How to buy a house

Please suggest me how to buy a house within next 2 years about 35 -40 lakhs cost. How much do I have to invest monthly and which modalities? I am a 35 year old lady and earn about 1 lakh/month, no dependents, have LIC and mediclaim.

Thanks

Maitricee

Dear maitricee, If you can save 50K Rs. per month from now onwards for next 2 years, the basic principal amount with you 'll be 24m*50k = 12L Rs. With the addition of some return on your investment, you may expect your corpus value around 14L Rs. 

For a house costing 40L Rs. balance 26L Rs. can be availed from a bank home loan.

You should invest in the following fund - Birla MIP II Savings 5 Plan to save for your target amount.

Thanks

Ashal

Need Insurance Help

Last year i purchased three LIC policies, LIC Endowment policy, Jeewan Surabhi & LIC money back policy. I paid a premium of around 50000 & they gave me a cover of 14 lakh. It was also told to me that these policies will give me a return of 8%, but now a few of the experts suggested that these policies will just give a return of 4 to 5 %. What should i do. Shall i continue with these policies as they diversify my portfolio, or shall i allow these policies & amount ot lapse& i should start investing in ELSS? All the policies that i have took are for 25 & 30 years. I have sufficient term insurance. Kindly guide me in deciding my tax planning for this yearso that i dont repeat the mistake that i have done.

Regards 

Nagendra Singh Dhani

Dear Nagendra, from your query, it seems you were mis-sold for the policies, you are referring to. In my view, Stop paying more prem. in these policies.

Uou may divert the prem. amount to a better managed pure Debt fund or a low. Eq. exposure MIP fund like Birla MIP II savings 5 fund. The reason lies in your query that you were using these policies for diversification of your portfolio into debt class.

As you already have sufficient term cover, no need to purchase more term cover.

Thanks

Ashal

Accumulating gold for Daughter's marriage

I am 32 years old and I have a daughter of 5 years.I plan to accumulate gold for her when she grows to 25.I used to by 10 gram gold and keep it in a locker from last 2 years , but thats of not much use and a bit risky.I have heard there are some MF schemes which has one unit as one gram of gold and the unit value varies as price of gold in market changes.

Please advise me some best fund where I can invest and my money is not in risk.

Regards
Sanjay

Dear Sanjay, For your specific need of accumulating Gold for your Daughter's marriage, I 'll like you to invest in Gold ETF. First open a demat acct. & once your demat acct. is open, you may purchase at least 1 UNIT of Benchmark Gold ETF every month. This way you 'll be able to accumulate 12 unit of the fund over a year. 

Plz. understand 1 UNIT of this fund represents 1 gm. physical Gold of 99.995% purity (24 Carat in normal parlance).

From the current age of 5Y of your D'ter, you 'll be able to accumulate a total of around 240-250 gms of gold over next 20Y.

Thanks

Ashal

Mutual Fund Portfolio readjustment

I am 45 years old and I have purchased mutual funds as advised by friends without proper guidance of professionals with lack of knowledge. so please do needful assistance for proper portifolio.My risk tolerance is moderate

SIP Investments:

Sundaram Capex oppourtunities fund Rs.500/-
Reliance Growth fund Rs.500/-
Reliance diversified power sector Rs.500/-
HDFC Top 200 Rs.500/- and HDFC equity fund Rs.500/-
IDFC premier equity fund Rs.2,000/-
DSP BR Top 100 equity fund Rs.1,000/-
DSP Equity fund Rs.1,000/-
SBI Contra fund Rs.500/-

Single investments are :

1. TI Growth fund
2. TI equity income fund
3. FI Tax saver (lock on period completed)
4. TI Short term income fund
5. FI Blue chipfund
6. BSL Mid cap fund
7. BSL Dynamic bond fund
8. Tata P/E ratio fund
9. Reliance RSF balanced fund
10.DSP BR Balanced fund
11.IDFC Imperial fund
12.SBI Comma fund
13.BSL Dividend yield
14.HDFC prudence

thanking you sir,


Anant

Dear Anant, as ur risk tolerance is moderate, my choice for u 'll be like this -

Sundaram Capex opp. fund Rs.500/- STOP
Reliance Growth fund Rs.500/- OK
Reliance diversified power sector Rs.500/- Stop
HDFC Top 200 Rs.500/- and HDFC equity fund Rs.500/- OK
IDFC premier equity fund Rs.2,000/- OK
DSP BR Top 100 equity fund Rs.1,000/- OK
DSP Equity fund Rs.1,000/- OK
SBI Contra fund Rs.500/- STOP


1. TI Growth fund - OK
2. TI equity income fund - Switch to TI Growth
3. FI Tax saver (lock on period completed) - Switch to TI GRowth
4. TI Short term income fund - SWitch to TI Growth
5. FI Blue chipfund - Switch to TI Growth
6. BSL Mid cap fund - Switch to IDFC Prem. Eq.
7. BSL Dynamic bond fund - OK
8. Tata P/E ratio fund - Switch to DSP Eq.
9. Reliance RSF balanced fund - Switch to HDFC prudence
10.DSP BR Balanced fund - OK
11.IDFC Imperial fund - Switch to HDFC Top 200
12.SBI Comma fund - Switch to DSP Eq.
13.BSL Dividend yield - OK
14.HDFC prudence - OK

Thanks

Ashal

My recent posts on Outlook Money Facebook boards

Dear Friends, here r some of my recent posts on OLM FB Board.

http://www.facebook.com/group.php?gid=107180401906&v=app_2373072738

Thanks

Ashal

Financial Plan for a real life

Dear Sk, as I promised ur Financial plan is ready & given below.

Mr. X (SK), an Ex Indian Navy man, is currently working as an Electrical Engineer in a pvt. Shipping co. belongs to a small city in South India. Family consists of his wife Mrs. Y, & a Daughter Baby Z. On his request, a detailed analysis of his present financial condition was done. The result of analysis & corrective action recommended are given below.

The Present Condition:-

At present, Kumars are residing in a rented accommodation & they have planned to live there for at least next 7-8 years till their dream of constructing their own home is over. At present their investments in Debt (PF, PPF, FDs etc) & in Investment oriented Life Ins. Policies represents a major chunk of their investments. On assets sides there are two Residential plots out of which one ‘ll be used to construct house. To make future calculations, Income of only Mr. SK has been considered.

The inflation rate has been taken as 7%, Increase in living standard as 2% every year & Income rise is taken as 10% per annum. Life expectancy of both (Mr. & Mrs. SK) has been taken 85 years.

What are they saving for:-

At present Kumars are saving for following goals in chronological order.

1. A house current construction cost 35L Rs. as early as in 2017.
2. Financial provisioning for education, career & marriage expenses of Z
3. New Vehicle in 2018 for current cost 6L Rs.
4. Retirement after above goals r over & sufficient provisioning is there to live a comfortable retirement life.
5. Apart from above goals, a one time dream vacation of current cost 2L Rs. possibly in 2011.

The Cash Flow :-

The current monthly income is 113000 Rs. (it includes Salary + Pension + Interest).

Out of which no mandatory deductions are there.

So the Net monthly take home income (NMI) is 113000 Rs.

The living expenses are appx. 21.5% of NMI. A very good sign & indicates that almost 78-80% of ur NMI u r saving.

Currently No Loan is there hence EMI value is zero.

Ins. Prem. (Gen. + Life) is about 30.9% of NMI.

MF SIPs/RDs mly investments are around 22% of NMI

Net Monthly Cash Surplus is appx. 25.6% of NMI, A very healthy sign.

Current Assets & Investments:- Current assets includes gold valued 5.25L Rs. in the form of jewelry of Mrs. SK, Bank/Co. FDs 8.9L Rs., NSC 10K & RD 11K form the Debt part of the portfolio. Direct Eq. (Shares) are around 20K Rs. & Eq. MF 3.5L Rs. which together form the Eq. part of portfolio. Apart from this there is Insurance fund value of appx. 23.5L Rs. out of which 20.5L Rs. in Eq. linked ULIPs & 3L Rs. in debt based traditional plan. So adding the Ins. Fund value in other investments, the changed Assets & Investments situation is like this –

Plz. Note in the above calculation, for real estate, only the investment oriented 1800 Sq. feet plot value has been considered as u r going to use the bigger plot (6400 Sq. Ft.) for self consumption & it 'll remain that way. .

Combined current valuation of all assets & investments is appx. 46.5L Rs.

Protection:- Currently Mr. SK is covered for 72L Rs. Out of which 16L cover is from Aviva life long, which is to be dropped finally. So the net cover as on date ‘ll be around 56L Rs. Neither Medical ins. nor accidental insurance for self or family is there.

Liabilities:- No loan is running so loan related liabilities r nil as of now. Future financial liabilities in the form of children’s Edu., Career & marriage Exp. are there. Mr. SK intends to construct a house of valuation 40L, in future from his own money (as per his own estimate in 2017).

Path to be taken:-

Here is the future journey path of their financial nirvana.

First of all please keep amount equal to 3 months’ expenses (Living, Ins. Prem., MF SIPs) appx. 80000*3 = 240000 in your bank account for immediate liquidity in case of emergency. Try to put this amount in ur saving bank account where u have SWEEPING FD facility. Apart from it keep another 3 months’ expenses amount in Liquid plus funds for emergency.

1. Protection:- On detailed checking of lifestyle, future goals & future loan liabilities, the current Lifecover (all thru investment oriented policies) is not a good thing & the same is falling short of actual need. First of all I'm discussing for current policies.

Bajaj Unit Gain – Although policy is in wife's name but u r paying the prem. Action taken by u already as advised in mail.

Aviva Life Long – surrender this policy

HDFC traditional Endowment plan – Surrender this plan as the current surrender value is just around ur break even point

Birla Children plan – Opt for prem. Holiday. After surrendering all these policies. Ur new Sum assured from all these plans 'll be like this 40L from HDFC Y'star Ulip & 6.44L from Birla children Plan. Total around 46L.

Future requirement of Life insurance is as below.

1. In case of Home Loan, take a term Plan equal to loan amount in future as & when u r constructing the house thru home loan. The details on home loan r discussed in the Home topic.

2. Use HDFC Young Star ULIP's Sum assured for expenses of child Education & career. So keep on paying prem. Year after year with out fail.

3. Total 40L Term Plan for marriage expenses of Z. 25L term cover for age 57, to be taken from IPru Pure Protect Elite. 15L term cover from Aviva – Life Shield Plus for age 52.

4. To cover living expenses of ur family adequately in ur absence, Take 50L term cover for age 60 from Aegon Religare's I-Term. & another 50L Term cover from Kotak Preferred Term Plan. Take these plans immediately.

Please note, While selecting Term plans, importance is given to have the cheapest term cover or next to cheapest cover & over all to have a mix of covers from different Ins. Cos. You may discuss (if u feel that the idea is not at all comfortable with u) in detail.

Purchase a Family Floater mediclaim policy for ur family's medical expenses of at least 5L cover. The prem. paid by you for this policy is eligible for Tax benefit under section 80-D for max. limit of 15000 Rs.

As & when u purchase ur house, Insure it with a House Holder (HH) policy from IFFCO Tokio General Insurance Co. with detailed covers of building for earth quake, lightening, floods & terrorists activities for current market valuation of ur property, fixtures & furniture, electrical equipments & appliances for theft & break down, Jewelry for upto 50K in house against theft & loss in traveling. With this HH policy, plz. take accidental insurance of 10L for urself & 5L for ur wife. While Taking this policy, try to take 7-8 sections to get maximum discount on prem. Plz. take this policy for an year only & renew the same for market value of ur property year after year. Plz. keep the purchase documents of ur jewelry, electrical & other equipments safely as these ‘ll be required at the time of claim if it happens. Apart from 50K valuation, keep remaining jewelry in bank lockers.

I’m advising for specific cover of 50K for jewelry as beyond this amount the Ins. Co. ‘ll ask u to provide purchase & valuation details of the jewelry, which ‘ll be quite problematic to u, as I think a major part of this is received as marriage gift by Mrs. Karthika.

2 Home:- As of now u are planning to purchase another plot as an investment, Plz. Don't do that. The reason is ur current financial condition as well as future liabilities r not allowing u to do it. Also ur family is still living in a rented accommodation. So ur first priority should be to construct a house on ur plot. There is more logic in doing so immediately, say after 2-3 years from now onwards, something happens to u, & ur family is still living in rented house, then how ‘ll they live like that continuously in ur absence & how ‘ll ur wife, construct the house?

For construction of house, start the work immediately. Use 5-6L Rs. From ur Fds for ur own contribution & for balance amount go for a home loan of 24-25L Rs. Based on ur income level, any bank 'll finance u easily. My preference 'll be SBI & within SBI the specific product 'll be Max Gain home loan. For details on SBI Max. Gain home loan, u may discuss in detail after going thru the plan. Go for a 20Y loan term as of now. The appx. EMI 'll be around 21K Rs. As of now which is very much within the limit of ur mly cash surplus amount.

Don’t forget to insure ur house property at the time of completion of construction for its fair market value & renew the same every year.

P. S. As u r liquidating a part of ur FDs for construction of ur house, ur Interest income ‘ll come down & so do ur total mly income (Salary + Pension + Interest ). The reduction ‘ll depend upon how much money u r pulling out from ur FDs. & also what Interest rate FDs u r redeeming.

3 Child:- From ur own reply, u r planning to save 5L Rs. in today’s value for career related expenses of Z. So the obvious thing is u r planning to shoulder the responsibility of normal education of Z from ur own pocket. Keeping in view the spiraling cost of education, ur future expenses on this ‘ll increase in a big way. So I’m calculating that a education funding corpus is created which ‘ll cover all these education related expenses.

Back of the envelope calculation shows that a one time investment of around 24L Rs. growing @ 15% growth rate can easily cover education expenses from nursery class to professional education. The calculation also indicates that the current HDFC Y’star ULIP of 2L yly prem. can sufficiently do all this thing. So u need not to worry for education & career related expenses of Z.

For Z's marriage & as a back up for edu. & Career expenses of Z in case there is a short fall from HDFC Y'g Star ULIP. Start investing 10K Rs. monthly in Eq. MFs & balanced funds. Increase this amount by 2000 Rs. Every year. U 'll wonder from where this amount 'll arrive, My dear friend, the prem. Saved from surrendered policies is the answer. The saved prem. Amount is almost 2.5L Rs. Yly. So after investing 1.2L Rs. yly for Z’s marriage & Education back up, u r still left with 1.3L Rs. spare cash yly.

Keeping in view the current gold holding u have, no separate provisioning is advised to accumulate gold for Z’s marriage. I’m open for discussion on this if u want to.

4 Vehicle:- Invest 11K Rs. (from remaining Prem. saved amount) Mly in MFs, primarily in balanced funds to save for ur dream vehicle. @ a conservative growth rate of 12%, within next 4 years i.e. around 2014, u ‘ll have enough cash in ur pocket to purchase ur dream vehicle with ur own money.

5 Retirement:- For post retirement life, life expectancy is assumed up to age 85 both U & Mrs. Y. Inflation rate of 7% is taken as basis for calculating post retirement life expenses. An increase in ur life style @ 2% per annum is also considered from current level for calculation of retirement corpus.

Ur current mly expenses are around 25000 Rs. out of which 4K Rs. is the house rent, which ‘ll not be there as & when ur own house is completed. So the net living expenses r around 21000 Rs. only. After retirement, there ‘ll be reduction of appx. 35% in this figure so ur post retirement life, mly exp. ‘ll be around 13650 Rs. in current value.

The Corpus required for your retirement is appx. 3.9Crore Rs. Out of which your current investments in Fds (less withdraw for House construction), Policy surrender amount & current Shares & Mfs investments (total 12L) as well as the 1800 Sq. Ft. plot (current valuation taken as 5L Rs.) are considered as starting capital. The growth rate for these 17L Rs. from now onwards is taken @ 8.5%.

The monthly amount to be invested for creating retirement funds is 1.55L Rs. Mly if u opt to retire @ age 50 @ 15% growth rate for this new investment from now onwards year after year.

That’s the reason enough to show u that u can’t think of retiring @ age 50.

The monthly investment requirement for retirement funds is 25K Rs. Mly if u opt to retire @ age 60 @ 15% growth rate for this new investment from now onwards year after year. U r already investing almost the same amount in MFs/RDs as of now. So the question remains only to go for the correct choice of MFs.

Till your age 50 the major portion of retirement funds ‘ll be in Pure Eq. MFs. From then onwards divert ur fresh investments in balanced funds & also bring down your pure Eq. holdings to 40% till u reach age 55 in favor of balanced funds. At the time of retirement have a mix of Pure Eq. MFs, Balanced, MIPs, Fixed Income instruments. No morecomment as of now for exact % of individual instrument at the time of retirement.

5 Vacation:- As of now plz. Skip ur vacation plan for at least the construction of ur house is over within next 18-24 months. We ‘ll revisit in between to provide funding within ur overall cash flow to go for a vacation.

Note:-

List of MFs‘ll be provided after getting your review on above financial plan.

All the above analysis, planning & advises there on, are based on ur current salary structure.

Please feel free to ask whatever doubts, questions you have.

I wish for best of your future life. Happy Investing.

Please take good care of yourself & your family.

Thanks

Ashal Jauhari.

UTI Wealth Builder Fund Series II

Q. Dear Ashal,
This fund`s theme seems to be good. Is it worth investing? I am asking, since I have invested in Gold funds (I was going to quit these ones and start investment in Gold ETF). But now i want to know, what will be good.

regards,
MIK

Ans. Dear MIK, this UTI fund is in a class of it`s own. Having at least or more than 65% Eq. exposure (this is to gain from the Taxation window for Eq. MFs) & mandated to not more than 35% in gold ETFs or money market instruments, it`s very hard to compare this fund with any other fund.

The fund is relatively new (just completed it`s 1st year of operation in Nov. 2009). From it`s launch in Nov. 2008, till March 2009 the Eq. as well as Gold market, both were dull. From march 2009 onwards, both these asset class r firing all guns blazing. This may create a misleading picture due to super duper performance.

In future how it`s Eq. component 'll perform is yet to be tested. having only 35% Gold ETF exposure may not give enough diversification for a person who wants to invest a part of his portfolio in gold ETFs. Yes to have a Gold exposure as per ur requirement u w`d have to stop in some of ur other plain Eq. funds to keep the Eq. & Gold ratio in ur portfolio at ur desired level.

Sample this what i mean.

I assume Gold price 17K per 10 gm.

In normal if u want to invest for 1 gm. of gold in ur portfolio ur inv. amount `ll be 1700 Rs.
In case of this UTI Wealth Builder Fund II, to have the same 1 gm. Gold u w`d have to invest around 5K Rs. - 1700 Rs. for 1 gm of Gold & remaining 3300 Rs. for 65% eq. exposure. As u rinvesting additional 3300 Rs. in Eq. thru this fund, u w`d have to stop some of ur other funds. To maintain the over all balance of Eq. & Gold.

In general, people may invest from diversification point of view to have exposure in 2 asset class under a single investment.

Thanks

Ashal...

Investing are ' YOU ' in Control

An Investing Illusion

By Dhirendra Kumar | Jul 20, 2009

A few days ago, I read an interesting article by an American security expert named Bruce Schneier. He is a cryptographer and computer security specialist who has evolved into a thinker and writer about all kinds of risks and security. I find it very interesting that some of his ideas about risk and human reactions to it have great relevance to investing. A couple of years ago, I wrote about how people tend to overrate the risks they face from rare but dramatic events and underestimate those from mundane everyday risks.

Schneier talks about a 'Control Bias' where we tend to underestimate risks in situations where we are in control, and overestimate risks in situations when we are not in control. The most common example is the fear of flying vs the perception of risk while driving. There's clear evidence that flying in a commercial airliner is by far the safest mode of transport that there is. In contrast, Indian roads are quite unsafe. Yet, many sensible people have a deep fear of flying but are quite unconcerned about driving.

Worse, people take slippages in risk levels on the road unthinkingly. They chat on their phones while driving (it's not unusual to see two-wheeler riders type SMS messages while driving); they drive after having had a couple of drinks; they drive when they know their brakes or tyres are not good; they overtake while turning and so on. Yet, they are scared of flying. All these could be examples of ‘Control Bias’.

When we are doing something ourselves, we have an illusion of control. We underestimate risk because we are in possession of all the facts and we feel that we can control the situation when in reality we can't. When flying, we really don’t know what’s happening so we do not have the illusion of control.

I find that this false impression of control is exactly what make people underestimate risk while investing. It is a fact that most people don’t know enough to be dabbling in stocks. Yet they do so because they have a large amount of information which makes them believe that they know enough to be in control of the situation. Someone sells investors a story about why a stock will do well and the story appears to have enough information to give an adequate illusion of control.

This is also the reason why many genuinely knowledgeable investors advise even newbies against investing in mutual funds (MFs). These people have enough information of stocks but feel inadequately informed about what is going on if their money is in a MF. The fund investment manager is like pilot and you don’t know what he’s doing.

Unfortunately, investing also has its equivalent of driving drunk or without good brakes and tyres. Almost no individual stock investor follows any systematic risk-control on their portfolio. They don’t diversify properly. They allow their portfolio to have odd concentrations in one or two stocks or sectors and they don’t track exactly what is happening with the stocks they have already bought. The fact that they are doing things themselves gives them the illusion that they know what’s happening and if the situation gets tricky they’ll manage to get out of it.

NEW PENSION SYSTEM - NPS

Dear friends, a lot of u were demanding details on the NPS, so for  benefit of all of you. Here i'm giving some details of this.

WHO CAN INVEST?
Scheme is open to all Indian citizens aged between 18 years and 55 years.

WHERE TO INVEST??
You can invest from any of the 285 Point of Service across India, run by 22 Point of Presence Providers(POP) including SBI, its 7 Associate Banks, ICICI Bank, LIC, Reliance Capital, etc. Once registered, the Central Recordkeeping Agency (CRA) will give you a Permanent Retirement Account Number (PRAN) along with Telephone and Internet Passwords.

HOW DOES THE NPS WORK??
Just like a Depository maintains Demat Accounts, likewise your Records are maintained by the Depositories.
Six Different Pension Fund Managers would invest the Amount Invested by the Commonn People into Different Asset Classes classifed as
Equity (E)
Government Securities (G)
Debt Instruments (C)

The Six Fund Managers are
ICICI Prudential pension Management\
IDFC Pension Fund Management
Kotak Mahindra Pension Fund
Reliance Capital Pension Fund,
SBI Pension Fund
UTI Retirement solutions

Depending on the efficiency of the Fund Manager, these Contributions would Grow and accumulate over the years.
You do need to mention the Fund Manager of your Choice, without this, your Application is liable to be rejected.
The Default Investment is called the Auto Choice Lifestyle Fund.
For a investor below 35 years of age, 50% of investment amount will go into E(Equity), one-fifth into asset class G(Govt Securities), and the rest into asset class C(Debt Instruments). From the age of 36, the default proportion going to equities decrease annually and investment percentage in government securities will increase such that by the age of 60, these investments will gradually be adjusted so that only 10% remains in equities, another 10% in corporate bonds and 80% in government bonds.

MINIMUM CONTRIBUTION :
Minimum Contribution per annum is 6000 and you can contribute even as low as 500, at least 4 times a year. You can invest through Cash, Cheque or DD at the POP.
There is no upper ceiling for your annual contribution but Tax Benefits is capped at 1 lakh under Sec80C. The Investor HAS to invest at least once every quarter. In case of default, you will have to pay Rs.100per annum and also need to pay the required minimum amount to reactivate your Account.
Also during this period of your non-payment, your Corpus will keep getting reduced because the NPS will keep charging its Expenses against your Units. The Account will be closed as and when the Value of your Account falls to Zero.


WHERE IS MY MONEY INVESTED???
You have got the Right to decide where your money is invested. Please note, that you cannot invest more than 50% in Equity and Fund Managers cannot in invidual stocks but only in Index Funds.



RETURNS :
On Completion of 60 years, the investor`s accumulated amount gets transformed into a lumpsum towards buying Annuity for a steady stream of payments for the rest of the Investor`s life. The Insurance Companies, who come into the picture now, with their expertise will compute as to how long the investor could survive and offer flexible investment and payment options on annuities.
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies.
A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.

LAST YEAR THE NPS GAVE A RETURN OF 14.82% WHILE HANDLING THE CORPUS OF CIVIL SERVICE PENSIONS.


TAX ANGLE :
At present, the NPS is to be Taxed at the time of Withdrawal. The Pension Fund Regulator has taken up the issue with the Finance Ministry to address the anamoly and the decision is expected within next year or so.


NEGATIVES :
1) Though the Fund Management is ridiculously low at a miniscule 0.0009% per annum, the Cost of Opening an Account(Rs.50), Annual Maintenance Charge(Rs.350) and a Per Transaction Charge of Rs.10 actually makes the NPS COSTLIER than a Regular Mutual Fund with a 500 monthly sip. The cost works out to around Rs.350 as fixed cost on every Rs.2000 he contributes. Unless the Govt steps in to correct this, NPS would be a failure with the small savers.
2) No Tax Concession on Withdrawals.
3) No premature Withdrawals allowed expect for Critical Illness, building/buying a house; Even at sixty, you can only withdraw as cash 60 per cent of the corpus, the rest must be used to buy an annuity.
4) You need to compulsorily buy Immediate Annuity with 80% of the Money accumulated, if you want to Withdraw before you are 60.

POSITIVES :
1) The Investor has the option of shifting from One fund Manager to another by instructing his POP to do so. This facility is available between May 1 and May 15 every year.

2) Even relocating to another city will not affect your investment as the PRAN remains the same.
3) The Monthly/Quarterly Contribution towards the NPS will be partly routed towards Equity which will automatically ensure Rupee cost Averaging and ensure High Returns and thus ensure 'higher than inflation' returns.
4) Investment upto Rs.1 lakh is Tax Deductible under Sec80c.
5) For Investors with slightly larger amounts and investing 4 times a year, the charges are attractively low. The NPS wins hands down on this matter.

CONCLUSION :
This is the Best thing to have happened to the Indian Investors who have not had much of a choice regarding Pension earlier. The benefits of Compounded Returns that the NPS offers will be immense. If the NPS is promoted in the right way, it will be no less than a Revolution.
The Tax on Withdrawal, for me, is a blunder and will be rectified by the Govt sooner rather than later.
The Interim Withdrawal too may be allowed in future, which will make this product that much more attractive.
The best option as of now i think is to remain invested in max. Eq. for person below age 50 & above that should go for the LifeCycle Fund.
The Low Charges and Automatic Rupee Cost Averaging makes NPS a Better Option than the Pension Plans offered by Insurance Companies.

But still some loose ends are there so as of now enter in NPS with minimum annual commitement of 6K Rs. & wait for the dust to settle & the clarity on taxation matters & then bump up ur investment in NPS.

Thanks

Ashal

Tax calculation for STCG on STP from Liquid fund to Equity fund

Q. - Dear Friend,

i have been reading ur post quite long time. please advise on this.

I would like to know the Tax treatment on STP transaction. My transaction are ::

Invested Rs. 49,999 in DSPBR MoneyManager fund on 10th of Dec 2008. Registered STP in DSPBR top 100 equity fund.

started STP from 7th of Jan 2009 for Rs. 4000 every month. so till date total 4 instalments totalin 16000 has been transfered to top 100 equity fund. i understand tax treatment for equity fund. but not for liquid fund. The profit i made each month is

7th jan = Rs. 43
7th Feb = Rs. 57
7th Mar = Rs. 60
7th April = Rs. 65

I would like to know the tax treatment on liquid fund. if there is any tax how it will be taxed(like i need to add in my salary income or some % i have to pay).

If i dont show these incomes to IT Department(i think very few Retail investor use to show these incomes) what will happen.

Waiting for ur reply.

Thanks
Amit

Dear amit, ur STP transactions from Liquid fund to Eq. fund r ok.

The tax treatment is as below.

For Transactions b4 31st of march 2009, the same `ll be treated at STCG & `ll be added to ur income from all other sources & `ll be taxed as per ur tax slab rate in the prev. FU i.e. 2008-2009.

So for total STCG = 43+57+60 = 160 Rs.

As per ur Tax slab the Tax `ll be =

@ 10.3% slab = 17Rs.
@ 20.6% slab = 33 Rs.
@ 30.9% slab = 50 Rs.
@ 33.99% slab = 56 Rs.

Ur April onwards STP `ll be taxable in the same manner for ur income in the current FY i.e 2009-2010.

I hope the message is clear to u now.

thanks

Ashal...

DEBT funds or DIversified funds for Retirement

Question - 

Hi,
If we see returns of Diversified equity funds for last three years mostly are in red and few are sitting on marginal gains whereas debt funds have given return of 40% over 3 years. Looking at scenario, if i want to invet for my retirement(for 20 Years from now) what is your openinon where should i invest. If you say to invet in Equity MF how should i select for 20 years? If you say Debt funds what are good options available?

Rohit

Answer - Dear rohit, When u r talking for ur retirement, u should n`t compare the past 3 years` returns for ur future 20 years.

Just for ur info, Eq. is the only asset class which `ll provide inflation adjusted best returns over such long 20 years.

Now look at the following No.

On 31st of march 1989 (i.e. 20 years back) the SENSEX level was 713.60 & on 31st March 2009 the sensex level was 9708.50.

The above Nos. tell the CAGR of Sensex for past 20 years = 13.94% or almost 14%. Even if u adjust 7% inflation rate for all these 20 years, still u r getting 7% positive return over the inflation.

In my view u should invest in 3 large cap funds thru SIP. Check the performance of ur funds once in a year. If the performance is in line with over all market performance it`s ok to continue ur SIP, if the performance lags continuously for 3-4 quarters, switch ur SIP to a better performing fund. After 14-15 years, Stop fresh SIP in large cap funds. Divert SIP amount to balanced funds & gradually shift ur money from Eq. funds to Debt funds when ur retirement is closer to u. 

After 20 years, when u r retired, u should n`t have more than 15-20% money in Eq. funds.

Thanks

Ashal ...

14.16% or 33.99%? Which Tax Rate is higher?

Strange isn’t it! With out doubt majority of U ‘ll declare 14.16% as lower Tax than 33.99%. Some of u may be thinking what I’m talking about? My dear friends my question is quite interesting & a valid one. Let me clear u what I’m asking?

All of us already aware that Div. Distribution Tax on Debt based MFs is 14.16% where as STCG Tax on debt funds for a person in the highest Tax slab is 33.99%. Now think again on my question & answer.

Now read below to find the truth –

I assume there r 2 investors Mr. Sharma & Mr. Kapoor. Both r in the highest Tax slab of 33.99%. Now both have a surplus saving of 10L Rs. Which both want to invest in secure debt funds. There is a debt fund available for investment @ NAV of 10 Rs. for both Growth as well as Div. payout option. Mr. Sharma opts to invest in Div. payout option. While Mr. Kapoor has some other plans & invest in Growth option. From 10L Rs. each has been allotted 1L Units. On 364th day, the NAV of the fund for both option is 12 Rs.

Div. pay out option – The fund announces a div. pay out of 10% per Unit i.e. 1 Rs. per unit.
A. Div. Amount = 1*No. of Units = 1*100000 = 100000 Rs.
B. Total amount withdrawn from fund including Div. Distribution Tax = 100000/0.8584 = 116496 Rs.
C. Hence DDT = B-A = 16496
D. Per Unit of fund, the impact of Div. = 116496/100000 = 1.165 Rs.
E. Post Div. NAV of fund = 12-1.165 = 10.835 Rs.
F. Value of investment after Div. distribution = E* 100000 = 1083500

Growth Option – In parallel to Div. amount of 1L Rs., Mr. Kapoor decides to book STCG. Here is his calculation

A. No. of UNITs redeemed for STCG = 8833.8
B. Redeemed amount = Per Unit NAV*A = 12*8833.8 = 106005.6
C. Per UNIT STCG = 12-10 = 2 Rs.
D. Tax on C @ 33.99% = 0.6798 Rs.
E. Total STCG Tax = A*D = 6005.6
F. Redeemed amount net of STCG Tax = B-E = 100000 (Equal to Div. Received under Div. pay out option)
G. Total No. of Units remain = 100000 – A = 91166.2
H. Value of investment post STCG = G*NAV of UNIT = 1093994.4

Now all of us can look, DDT (@ 14.16% ) is higher than STCG Tax (@ 33.99%) due to which the value of investment is higher for Mr. KAPOOR.
So it’s now for all of U guys to decide what to do in case of investment in Debt funds.
The above calculation once again proves that don’t look at the nos. for what they appear at first glance, just dig deep & u ‘ll see another truth.

Thanks

Ashal

Charges in ULIPs & Mutual Funds

My insurance agent told me that There are many internal charges in MF which are charged by MF companies but these charges are not visible to Normal investor.

He suggested : In case of ULIP, there are 2 things :

- charges are completely transparent then MFs
- And in long Term (10-15 yrs), ULIPs are cheaper than MFs in terms of charges.

Please suggest and draw some clear picture about charges.

-vivek

Dear vivek, there is totally opposite picture what ur Insurance agent had advised u. Let me explain.
In case of MFs there r only 3 types of charges applicable -
1. Entry Load - It can be avoided if u invest directly to ur MF bypassing ur MF agent.
2. Exit Load - It can also be avoided by remaining invested for certain time period in that particular plan.
3. Fund Management Charge - It`s charged as a %age of total assets under the plan. Normally it varies from 0.25% to 2.5% depending upon type of funds (Debt to Eq.) as well as expertise of fund co. for a same set of MF plans, lower FMC Plan is always advisable for investment.

In case of ULIP following 4 types of charges r applicable.
1. Prem. allocation Charge - It may vary from as low as 1% to as high as 65-70% of ur first year prem. & reduced year after year or may remain same at a constant level say 4% or 5%.
2. Mortality Charges = It`s the basic cost of insurance & again it varies among Ins. cos.
3. Policy admin charges - Some ULIPs charge as low as 20 Rs. per month where as some charge as high as 200-300 Rs. per month. Again not constant among Ins. cos.
4. Fund Management charges - From 0.5% to 2.5% depending upon the type of Fund (debt to Equity).

From the above list u can judge urself that in case of MFs there is only 1 charge FMC, which u `ll have to pay but in case of ULIPs there r several charges & no common benchmark is there to see the impact of these charges. I do hope the message is clear to u.

Thanks

Ashal...

To Gift or To Loan

Q. A & B are Brothers married and staying in joint family.Each of them are separately assessed for Income tax. B sales shares worth 1 cr paying STT which he had baught before more than 3 years. B invests this amount equally in 4 names i.e A Plus A`s wife, B & B`s Wife 25 Lakhs each in Mutual Funds.Can you please advise the tax Implecation and also we should make a Gift Deed for this or show as a loan to others.Please advise in detail.



Best Regards.



Answer :- Dear friend, From ur query, it seems u had directly invested the amount of 25L for each person as mentioned by U, from ur own bank account. This `ll be treated as cash gift.If u had first invested all the 75L Rs. (for other 3 members), under ur name & later gifted the alloted units to ur family members, then it w`d be a gift in kind.

U`ll ask, what`s the difference in this?

In case of gift - For ur Brother A & his wife, the income from such MF investments, `ll be taxable in their own hands, but in ur wife`s case, if the income from these MFs is taxable (if the gains r STCG from Eq. MFs or the MFs r debt oriented), it `ll be clubbed with ur income under the clubbing provisions of Section 64. For ur own 25L Rs. the income generated by MFs `ll be taxable in ur hands if it is taxable at all.In case u want to show the 25L rs. to all other 3 persons as loan, in this case, the interest received (if any) from these 3 `ll be taxable in ur hands & the income from these MFs `ll be taxable in the hands of the respective owners. In this case, even ur wife`s investment `ll be taxable in her hands & clubbing provisions of section 64, `ll not be applicable as it was not a cash gift. Instead it was a loan & u r paying Tax on ut interest income.

I hope the above info is useful for u. Plz. feel free to ask, if u need more help.

Thanks

Liquid Funds

Please pardon my ignorance, but I have a very basic question regarding "Liquid" funds.
I am planning to park my lumpsum money in liquid funds and initiate STP to diversified equity funds of the same fund house.
This was actually discussed in this messageboard about one month back. My question is: do I need to park my money in only those funds which have the word "Liquid" in the name? I know this sounds silly, but just wanted to confirm if the term "Liquid" (when used in a fund name) has some special meaning? e.g. consider the following 2 options where I want to STP to Birla Sunlife Frontline Equity.

1. Birla SL Dynamic Bond -RP (G) - STP to - Frontline Equity
2. Birla SL Liquid Plus - RP (G) - STP to - Frontline Equity

Now, the first option seems to be a better option to me as it has given 11% return in last 1 year. So can I go ahead with this?
Or do I have to choose the 2nd option only because the name suggests it's a "Liquid" fund?

FYI, exit loads are as below:
Birla SL Dynamic Bond (0.20% if the investment is redeemed within 30 days months from the date of allotment.)
Birla SL Liquid Plus (0.25% for redemption /switch out of units within 1 month from the date of allotment)

Again, that means I cannot start STP from Birla SL Liquid Plus before 1 month, correct me if I am wrong.

Dear, Plz. note -

Birla Dynamic bond fund is a bond fund, that's why its performance in terms of returns is better than liq. + fund. As it is a bond fund, exit load is there.
Birla SL Liq. + fund don't have any exit load. I personally check from birla web site for the same. In fact no liq. + fund has exit load.

If u opt Dynamic bond fund for higher returns, even in this case Exit load don't seems much as u 'll transfer 1K per week only. So u 'll pay exit load for 4 weeks only. So for a weekly STP of 1K, ur total exit load for 4K Rs. 'll be 8 Rs. (0.2% of redeemed amount) only.

One plain advise, to avoid entry load on Target Eq. fund (Birla Frontline in this case), invest under direct mode only.

Regarding the use of word, liquid + , is not at all necessary, some AMCs use other words like Cash plus, Cash management, Money Plus etc. Please check the individual schemes' details that it fits in the Liq. + category or not.

thanks
Ashal ...

Lump Sum Investment during Retirement

My uncle is around 65 yrs. Recently he has got a lump sum of Rs.2 lacs as arrears. Please suggest whether investing in land/FD/MF would be better.

If anyone would suggest a good financial planner it would be of great help.

Dear, As his age is already 65 or may be 65 in current FY. The zero Tax limit for him 'll be 2.25L Rs. Although not much data regarding his current income & investments is available, still for his age investment in Land is strict no-no.

Invest in bank FDs & MFs as per his liquidity requirement. Even under MFs, invest in FMPs, Bond funds & MIPs. Avoid Eq. funds for his age.

Thanks

Ashal