Case: Mr. Raghavan is nearing retirement and looking forward to the ways of regular income to ensure smooth funds after retirement. At present, he has Rs 4 lakh investible surplus through which he desires to earn the required returns. In addition to this, he is insured with a term-plan and has other investments, which would give him returns from time to time. Here, the main concern of Raghavan is liquidity and capital preservation; hence, he should not go for aggressive money-market schemes.

With conservative approach, he has two options to choose from:

• Investment in non-cumulative Fixed Deposits (FDs) and to withdraw monthly interest.
• Investment in other monthly income schemes to earn monthly returns.

Non-Cumulative FDs

In non-cumulative FDs, interest is paid on regular basis and investor gets a choice of frequency of payment – monthly, quarterly, semi-annual or annual basis. In non-cumulative FDs, the interest is credited directly to respective bank accounts via ECS. Interests are credited at the end of quarter of every financial year during FD tenure. In comparison to this, in cumulative fixed-deposits, interest is payable at the time of maturity along with the principal amount.

Investing in non-cumulative fixed deposits is suitable for people like Mr. Raghavan, who require periodic interest payments. This investment is most suited to conservative investors and investors with nil income, requiring capital protection at all costs. Similar is the case with Raghavan, where he cannot afford to take risks and let his investment go into riskier avenues.

Tax implication: If interest from such investment exceeds Rs 5,000 in a financial year, then TDS is applicable. However, investors can avoid TDS after retirement by filling form 15H, which states that the person does not have taxable income.

Other Monthly Income Schemes

On the other hand, Monthly Income Schemes (MIS) are market-linked avenues that invest your money in debt-related schemes.

There are various types of monthly income schemes depending upon the financial institutions they are attached with.

• POMIS: Post-office Monthly Income Scheme (POMIS) provides monthly income, currently 8 per cent, for a term of 6 years, which is not enough considering inflationary expectations. Apart from this, scheme also offers 5 per cent bonus at maturity. The scheme gives an option to exit after the completion of 12 months, with penalty. Minimum amount of Rs 1,500 and maximum of Rs 4,50,000 can be invested in POMIS.

Tax implication: Interest and bonus paid at maturity is taxable.

• Monthly Income Plans in Mutual Funds: Monthly Income Plans (MIPs) are either open-ended or closed-ended schemes with no assured returns. These schemes skew most of their investments towards debt for regular income, and prefer to keep a minimal amount invested in equities for achieving a desired amount of growth. The return in mutual funds depends on the distributable surplus of the scheme, where dividends can be skipped depending on the discretion of the fund house. Here, investors prefer investment decisions on the basis of MIPs’ dividend history because they feel that dividends declared reflect the fund’s performance.

Tax implication: Dividends on MIPs are majorly tax-free. However, 13.6 per cent of dividend distribution attracts tax, which includes surcharge and cess. An advantage here is that you don’t need to pay this tax as it is paid by mutual fund houses, and reflected in the NAV of fund.

• Life insurance Monthly Income Plans: These schemes include the benefits of guaranteed regular income for long-term along with the usual life insurance features and benefits, such as continued income, in case of death of the insured. They provide investors with potential upside, in form of bonuses.

Tax implication: As applicable to life insurance.

Among all the choices in option 2, Mr. Raghavan decides to pick regular income mutual funds because of the following reasons:

1. POMIS gives 8% returns on regular basis, which is not enough considering inflationary expectations.
2. Life insurance monthly income plans, on the other hand, would be a double blow for him since charges in life insurance are more as compared to mutual funds. Also, as he is fully covered under a term plan, it would not be advisable for him to go for another insurance product. This will only add to his costs and giving him marginal benefit.
3. Since he is already invested in plans that would give him income side by side, he surely has some margin and his risk taking ability rises. Therefore, picking up monthly income plans in mutual funds becomes a natural choice for him.
4. In addition to the above reasons, tax implication shows that investing in mutual funds would be most comfortable.

Analysis

Option 1: Investing in non-cumulative fixed deposits and withdrawing monthly interest.

Let the complete sum of Rs 4 lakh be invested in non-cumulative fixed deposits. The three-year returns data of fixed deposits of various banks is gathered. Mr. Raghavan wants a fixed deposit for more than 5 years for tax saving purposes. So, he looks for deposits whose tenure is more than 5 years.

 
Since Tamilnad Merchantile Bank gives highest interest rate, choosing the same is a natural choice for Raghavan.

Now interest applicable to him= Rs 4 lakh*10/100*1/12= Rs 3333, since non-cumulative fixed deposits calculate interest on simple interest basis.

Therefore, monthly income= Rs 3,333.

Tax applicable: Since the interest earned by fixed deposit done by Mr. Raghavan is more than Rs 5000 annually, he would have to pay tax according to the tax slab he belongs to. Let he belong to the 20% tax slab.

Now total income= Rs 3333*12= Rs 40000,

Therefore tax applicable= Rs 8,000

Therefore total income annually, after deducting tax= Rs 32,000

Option 2: Investing in monthly income schemes in mutual funds and earning monthly returns through them.

On further analysis Raghavan found out that dividend payout pattern of ICICI PRU MIP (G) is strong. Although the growth of ICICI PRU MIP(G) is reasonable and not very high as compared to its peers, but in Raghavan’s case, he is looking at high dividend payouts and not growth. So, ICICI PRU MIP (G) becomes a good option for him.

Source: Hdfcsec.com

 The dividend history shows regular dividend payout, it is a good choice for Raghavan.

To calculate the income which, Raghavan should expect on an average would be 0.068 per unit, i.e. the average of all historical dividends of past 5 months. Further to calculate units, which Mr. Raghavan could purchase, on the basis of average of historical NAVs beginning 01 Jan 2011. Since, the highest has been Rs 19.623 and the lowest has been Rs 17.713, the average NAV of both values is Rs 18.668.

Therefore, total units purchased by MR. Raghavan= Rs 400000/18.668 = 21,427 units.

Now, for 21427 units, average monthly income of Raghavan= Rs 1457

Tax implication: MIPs are tax free. Therefore, after tax income = 1457*12= Rs. 17,484

Final Conclusion

The investment in fixed deposits earns Raghavan an annual, after tax, income of Rs.  32000 and in MIP his return equals Rs 17,484. Therefore investing in fixed deposits would be comparatively more beneficial.

Arun bought a Super Saver Endowment Plan from Bajaj Allianz in 2008 with the sum assured (life cover) of Rs 3.5 lakh and annual premium of Rs 26,305. Baffled with low returns amidst present day’s high inflation scenario, he is contemplating to surrender his endowment policy and invest into diversified mutual funds. Should he surrender the policy now? If not, at what point will it be prudent for him to surrender the same.

According to general perception, Arun has a valid point. Endowment plans, generally, invest in approved debt and/ or low-yielding government securities. As the result, Arun’s premiums would fetch him an earned a meager 5-6% or 7%, at best, after 20 years, which is a barely sufficient cover for inflation.  

In other words, even if, the actual returns on endowment plans cross 7%, one would never know it. This is because under endowment plans, insurers are not obliged to disclose the proportion of funds chosen for investment. In addition, the charges deducted from premiums are also not mentioned. In fact, you may be surprised to know that charges in endowment policies are generally higher than that of ULIPs.

Coming back to Arun’s case, where on one hand, his endowment policy is not giving him sufficient returns; on the other hand, surrendering the existing policy would leave Arun without any life coverage, which is not advisable. Here, it would be advisable for him to take a term insurance plan, let’s say Kotak Term Insurance Plan, when he surrenders his endowment policy. The reason behind choosing a term plan is that as Arun is already mulling investment in mutual funds, there is no point of including investment perspective in his next insurance policy. Let’s assume that Arun chooses a maximum life cover of Rs 24.9 lakh under the plan (much more than the life cover in Arun’s endowment policy), its annual premium will come at around Rs 4,221 for 20-year policy.          

Now, covering him for life, Arun’s decision to surrender the existing policy would depend on the following factors:

• How old is his existing policy? That is, how many premiums are yet to be paid? The older the policy, the higher will be the loss.
• What is the present surrender value? More will be the surrender value of the policy, less beneficial it will to move out of it as you will end up losing that much amount.
• Expected rate of return on the alternate investment option?

As the mandatory three-year lock-in period in Arun’s policy is over, he has an option of moving out right away. Under this plan, the guaranteed surrender value is limited to 30 per cent of total premiums paid till date minus premium paid in the first year and any extra premiums. As per standard benefit illustration given by Bajaj Allianz, the total amount that Arun is entitled to receive on maturity is Rs 9,43,543, which includes guaranteed benefits and vested bonus.  

If Arun surrenders the policy, according to our assumption, he would invest the remaining money (surrender value of the policy + premium of next year, which he has saved by surrendering the policy) into mutual funds for remaining years. For instance, if he surrenders his policy in 5^th policy year, he will be left with Rs 53,650 [Rs 31,566 (surrender value after 5 years) + Rs 22,084 (premium of 6^th year)] investment surplus to invest in mutual fund.

Here, let’s assume that he choose diversified equity mutual growth funds to invest in. On the basis of the past 5 years performance of top-performing mutual funds, HDFC Top-200 & IDFC Premier Equity with 17.5 per cent and 20.6 cent growth respectively, and being little conservative, while we have taken only 12 per cent.  

Average Annualized Returns of Mutual Funds

Calculations To Show When To Move Out Of Endowment Policy

*Annual Premium

The calculations show that up to end of 6^th year, wherein Arun will receive Rs 39,458 as the surrender value, it is advantageous to break the policy and invest the money in mutual funds for the remaining period of time.

Beyond 6^th year, it’s not profitable for Arun to surrender the policy. Consider the 12^th year, for example, if he surrenders the policy, he will receive a surrender value of Rs 86,807, which is invested along with Rs 22,084 into mutual funds for 8 year (reminder of 20 year period). This will fetch him Rs 3,82,366, which is far less than what his endowment policy would have fetched, i.e., Rs 9,43,543.

Returns Projection Of Popular Equity Mutual Funds

Source: Money control

With this, you should clearly know that exactly when to decide whether you would like to keep the policy or not. As said earlier and comes out with our analysis, it depend upon on how long you have had it, what the policy’s present surrender value and rate of return you would get on your alternate investment. Else, you can always bank upon your financial planner.

Case: Nikhil is recently blessed with a son. He wants to start investing as early as possible, so that he can save well for his son’s higher education.

As the result, he decides to contact an investment agent to decide strategy on the he should adopt. His investment agent pushes few child plans towards him. While deciding, he remembers that his friend once mentioned that a combination of an adequate term plan and mutual fund is a good option to save money. Nikhil sits down to analyze features of term plans & mutual funds and compare them with those pushed by agent.

Understanding requirements

Nikhil wants to save for his son’s higher education. Here, the investment horizon being 15 years. We assume the current cost of higher education at Rs 5 lakh with 6% inflation assumed. With this, Nikhil will be requiring Rs 12 lakh rounded off after 15 years.

Options available:

Option 1: Investing in child ULIP, for protection of the family as well as earning returns for his child’s education, in case of his death.

Option 2: Investing in a term plan for protection, in case of his death, and mutual funds for earning the required returns.

Finding out best products

Option 1

Nikhil wants to find out the types of child plans available in market and wants to find out most suited option. The universe of child plans can be divided into three categories:

Out of these three investment options, ULIPS are the only ones, which would give highest returns although not guaranteed. Within ULIPS, if Nikhil invests in equity funds, it would be most suited to his goals, since he has long-term investment horizon. In-long term, equity gives about 16-18 per cent returns on annual basis.

Apart from returns, money back would not be suitable for him since he does not need funds for any of his interim needs. His final goal is set, for which, he needs funds only at specified milestone years. If we look at traditional plans, they will skew the portfolio towards debt instruments, as required by the regulator, which would be unable to match equity returns of ULIPS.

Within ULIPS, Nikhil decided to pick one policy of each AEGON Religare, Birla Sunlife, Aviva and ICICI Prudential, based on the products pushed by agent.

Feature Comparison of child plans

Now, let us compare the yields of these policies by keeping in mind the returns of Rs 12 lakh. He has generated this data through EBI calculators provided on the respective websites.

Yield Comparison of child plans (Rs 12 lakh returns)

He decides to pick ICICI Smart Kid Premier, according to features and yield.

Option 2

Nikhil wants to find out the costs and benefits attached to the second option, i.e., term plan along with mutual fund. He now looks at different term plans available in the market.

He looks at different term plans available in the market and reaches on the conclusion that plans from AEGON Religare, ICICI Prudential and Kotak Life Insurance are most cost-effective. Hence, he decides to compare their yields. Here, we take the cover of Rs 50 lakh by keeping in mind the needs of entire family, in case of death.

Term plans’ comparison (Cover of Rs 50 lakh)

Among these, Aegon Religare Term Plan is most cost effective, with the premium of Rs 4412.

Choosing Mutual Funds

Nikhil finds out information on newspapers and internet to find best mutual funds. Since he has no good knowledge of the market, he does not want to invest in sectoral funds. With a long-term horizon, he wants to maximize his returns, so he would not go in for debt or balanced funds. The best suited option for him is to invest in diversified equity funds.

Comparison of returns on various mutual funds

On basis of stability in returns, Nikhil shortlists four funds for himself – HDFC Equity Fund, ICICI Pru Focused Bluechip Equity, Tata Dividend Yield Fund and UTI Master Value Fund.

Out of these, Tata Dividend Yield Fund is a dividend payout fund as per what companies declare. This fund does not reinvest in the fund to buy additional funds. Hence, it would not be beneficial to Nikhil since it is not aligned to Nikhil’s final goal as he does not need interim funds through this investment but need a large corpus.

Further, looking at asset size and large investment in HDFC Equity Fund, Nikhil decides to invest in this fund due to stable returns. . Also this find is the oldest on the block. Here, the average returns of all three years needs to be considered as the market has been choppy, hence, only averaged out returns can help understand the right aspect.

Cost-benefit comparison of Options 1 & Option 2

If Nikhil decides to invest in option 1, his annual premium comes to Rs 60,000, where he gets coverage of a maximum of Rs 30 lakh and the yield equals 8.43%.

As compared to this, if he decides to go in for option 2, he has to pay Rs 4,412 as premium to AEGON Religare for coverage of Rs 50 lakh. In addition to this, for making Rs 12 lakh after 15 years, he has to invest Rs 9,558 every year in HDFC Equity Fund (calculated through annuity).

Result: Option 2 will save him Rs 60,000-Rs 13,970= Rs 46,030 annually and gives him added protection of Rs. 46 lacs.

What is the budget impact on housing loans?

The Union Budget 2011-12 has taken cognizance of the growth potential in the residential sector especially in the priority sector and has announced a laudable interest subvention.  The budget has redefined the priority housing sector to include property up to Rs 25 lakhs, from Rs 20 Lakh earlier, on account of rising real estate prices. Beside the budget has increased the 1% interest subsidy on housing loans of up to Rs 15 lakh, where the cost of house does not exceed Rs. 25 lakhs. The existing interest subsidy is on loans of Rs10 lakh where the cost of house is Rs20 lakh.

Both incentives will result in more access to loan funds (Hike in upper limits) with more affordability (Reduced EMIs with lower interests) for house aspirants in lower income groups, likely to result in higher demand for home loans at individual levels. Also, the priority sector incentive will reduce the cost of the funds for developers, a definite plus for development momentum especially in smaller townsIt may possibly prompt some of the larger developers to enter smaller geographies. The Budget has also indicated an investment linked deduction to businesses which develop affordable housing under a notified scheme.

2. What does the fine print mean for housing finance companies?

Easy access of loan funds to end-users will spurt up the demand for home loans. This will help the housing finance companies in maintaining the traction in the mortgage loan market, resulting in healthy competition amongst players. This could reflect in more benefits being offered to home buyers.

3. Can you explain the benefits with a numerical example comparing the earlier year?

CASE:Mr X, a State government employee with an income of Rs.20,000 a month has enough savings for down payment. He intends to take a housing loan for 20 years. Let’s assume he takes Rs 10 Lakh loan as per last year’s limit from HDFC Ltd at its current Retail Prime Lending Rate of 15.5% (applicable from March, 01). His pre & post subsidy EMI comes to around Rs 13,539 and Rs 12,800 respectively (Using HDFC Calculator), with the net saving being Rs 739 per month and Rs 8,868 for the first 12 months.

Benefit from 1% Subsidy on Housing Loans Scheme:

And as shown with the calculations, with the proposed housing loan limit hiked to Rs 15 Lakhs Mr X can save additional Rs 370 per month for the first 12 EMIs. So Beside increase in affordability, the proposed step would mean a higher save on interest subsidy. Further, to make use of the maximum subsidy, it is wise to opt for longer repayment tenure, up to 20 years, under which EMIs will be smaller and you have the option of making part prepayments (normally banks and finance companies will not charge any penalty) later on. In the above example, if Mr X takes loan for 10 years his gross savings are reduced to Rs 11,016. However, one should be cautious while selecting tenure. The subsidy benefit exists for only first 12 EMIs and longer tenure selected (say 20 years) would have high component of interest. So while you benefit during the first year, you might end up paying more interest over 20 years, especially in rising interest rate scenario like we are witnessing at present.

For priority sector lending, RBI allows banks to determine their interest rates for loans higher than Rs 2 lakh. Most banks allow incentives worth up to 1% reduction in interest rates for priority sector advances. E.g. Karur Vysya Bank was offering priority loans to housing sector at 11.5%, compared to 12.5% for home loans more than Rs 20 Lakh (Say Rs 25 Lakh).

Benefit from Proposed Priority Sector Lending Limit

Now, post budget that loan worth Rs 25 Lakh would attract priority lending status and hence benefit of reduced interest rates. Continuing our last example, Mr X would have to shell out an EMI of Rs 28,404 for an Rs 25 Lakh loan from Karur Vysya Bank pre budget, which goes down to Rs 26,661 post budget as his loan now would fall within priority lending.

4. Anything else on the topic of housing loans and budget 2011

Beside the aforesaid provisions, The Union Budget 2011-12 has proposed the following in connection with housing loan market:

• The corpus of Rural Housing Fund (RHF), a scheme set up by the National Housing Bank (NHB) has been enhanced to Rs 30bn from Rs 20bn earlier. This is aimed at increasing the coverage of housing finance to targeted groups in rural areas at competitive rates.
• The budget has proposed to create a Mortgage Risk Guarantee Fund under Rajiv Avas Yojna to enhance the credit worthiness of EWS and LIG households. This far reaching policy shall encourage housing finance institutions for lending to these sections and will cover the risk element of a possible default in loan repayment.
• Setting up of Central Electronic Registry to prevent frauds in loan cases involving multiple lending on the same immovable property

Sumit, 27 is software professional working in a reputed IT firm earning Rs 40,000 (In hand) a month. He has been working for past 5 years and the following is its current financial position:

• ·He has no substantial savings.
• ·He bought a car worth two years back
• ·Outstanding balance of his credit card: Rs 45000
• ·He took a ICICI Prudential Life Time Gold in January 2008 with annual premium Rs 40,000 &premium paying term left is 3years
• ·In May 2008 he invested 30,000 & 20,000 in equity Mutual Funds (Lump Sum)& Stocks respectively. He sold his shares in hurry

InFebruary 2009 amidst market loss for Rs 8,000

• ·He lives in Gurgaon, and pays rent worth Rs 6,000 per month on a sharing basis.

Mr. Sumit is about to get married in a year time. His would be wife, Radha, 26, working in a govt. school as a teacher and earns Rs 20,000.He intended to take a personal loan for his marriage, which got rejected because of his poor financial history. After his marriage he also bought a ULIP with sum assured

Problems don’t come in installments. Just when Sumit, 27, a software professional having 5 years of experience behind him, would have dreaming of his married life in about years’ time, learnt the hard realty when bank rejected his personal loan application on grounds of poor financial history. Obviously dejected about what went wrong and puzzled somewhat thinking how he is to arrange Rs 3.5 Lakhs he plans to spend on his marriage. He wants to resurrect things now, which includes arranging funds for his marriage as well as having a sound financial plan for their married life.

What Went Wrong?

• Directionless spending on consumption
• Selling shares in a hurry
• ULIP for short duration
• No Emergency Fund Created

What he did right?

• Choosing cost effective ULIP
• Holding on to MFs investments

Prima facie,Sumit had fallen prey to a common malady amongst young passouts. He would spend mainly on eating out,lifestyle items and enjoying life in general with little savings or investments, that too in a random and directionless manner i.e. Sumit was yet to set any goal oriented investments like buying a house property or retirement planning. Instead, he is able to accumulate an outstanding credit card balance of Rs 45,000 with no substantial savings as yet. However, buying car could have not been termed luxury spending as it would have enabled him commute, though he could have waited 1-2 years longer for that.

Buying a ULIP for a short term such as 5 years was a bad decision and seemed to be inspired by tax savings. Also he might well have lured in to well-rehearsed sales pitch of “ULIP being three in one product offering insurance, equity exposure and are a tax-saving option”used by the insurance agent. This is because ULIPs are very expensive for short duration. Through Sumit chose one of cost effective policy at that time in ICICI Prudential LifeTime Gold,with 80-90% (compared to 40-60% in worst case) of the premium was actually invested in the past 3 years. The return could have been more in well-diversified mutual fund such as DSP BlackRock Top 100 Equity Fund, which has delivered a decent 10.7%, return though recession. Also, asset management fee of 2.25% for the policy was amongst the highest prevailing in 2008. The same policy for 10 or more years would have given a healthy return, enabling him build corpus for the future. Also, cost-wise investment in Ulip is cheaper option than a mutual fund over a 10-year horizon as policy charges are distributed over a longer run.Typically, it can be proved that ULIPs recover their entire initial charges in the 7th or 8th year and thereafter begin to have a much lower expense structure than mutual funds

Apparently, Sumit wasn’t a financial market savvy, so investing directly in stocks wasn’t such as prudent idea. The best possible way to get astock market exposure for guys like Sumit is equity mutual funds. He could have easily clubbed his Rs 20,000 investment with his Rs 30,000 invested mutual funds but through an SIP route, not the lump sum way Sumit went. The SIP route would have ensured no risk of market timing as it proved critical in Sumit’s case that put money in May, 2008 when Sensex was trading at ~ 16,600, only to eventually falls to ~8,500 levels in January’2009. Beside he made a bigger slip-up by panicking like many other at that time and selling off the stocks at poultry Rs 8,000. Also had Sumit kept that investment intact like he did with mutual funds, it would have fetch him ~Rs 68,000, considering 10.7% CAGR returns by DSP BlackRock Top 100 Equity Fund.

Needs a Goal oriented saving plan:

Not the best of starts, but not the end of the road either. Sumit now need a goal oriented saving plan to generate the requisite funds worth Rs 3 Lakh for his marriage. Leaving out February in which he is getting married, he has 10 months at his disposal starting April.

To start, Sumit has Rs 20,000 worth of monthly expenses in Rent (Rs 5,000) for shared apartment and overall monthly expenses worth Rs 15,000. We suggest Sumit should take a hard cut on his monthly outgo to the extent of Rs 12,000 till his major debt (Credit Card) is not paid off and simultaneously accommodate a steady saving for his eventual goal.In-fact he can also leave his savings flexible for the time being.

The reason why servicing his bet must be the top priority as it’s the most expensive form of debt. At typical rate of interest ranging 3.25-3.5% per month (39-42% per annum) for credit cards is way above the personal loans at 18%.It is advisable for Sumit to systematically plan his card payment as any lump sum payment toward re-payment may hurt his savings plans. For this, he can approach his bank to convert his outstanding in EMIs, just like a personal loan. Banks usually offer this service on new purchases but are open to covert the whole amount too as long as they see a better chance of recovering their dues.Banks charge low interest rates on these EMIs compared to the roll-over interest on credit cards. For instance, the rate of interest charged by Axis Bank is 1.5%, per month, and that by ICICI Bank is 1.49-1.99%, per month, compared to 3.25-3.5% charged on credit cards. Considering 1.5% interest per months for 6 months tenure, he would settle his credit card due, paying off a total of Rs 47,679. This will also help Sumit improve his credit history for future loans he might be applying.

Monthly Fund Distribution Table for Sumit:                                      (Monthly Salary; Rs 40,000)

After the debt repayment, Sumit must focus on building surplus for his marriage. As his goal is less than a year away, part of his salary can be put in short term recurring deposit (RD) scheme for 9 months tenure. The step makes sense as most Banks are offering higher rates than ever before due to tight RBI policies. Taking ICICI Bank’s Interest rate of 7.5% for recurring deposit of less than year, Sumit can accumulate Rs 49,586 by January’12 end earning Rs 4,586 as interest. Moreover, the proceed is tax free as interest earned up to Rs 10,000 is exempt for a particular financial year. He can even try short term govt. bonds, treasury bills etc.

The table above shows how Sumit can maintain his saving level at ~Rs 10,000 per month, while disposing off his credit card debt by curtailing his monthly outgo. Note that while EMIs are being accounted for, his savings are fluctuating and once debt is paid his expenses are back to normal Rs 15,000. Combined sum that Sumit has accounted for by now is Rs 1,74,907 (Regular Savings till January +Recurring Deposits).

But the amount is still way of the mark. To fulfill the remaining sum of ~Rs 1,25,000  he has the option of breaking his ULIP policy as its lock-in period of 3 years (Purchase = Jan 2008) would have expired on 31^st January. The policy if surrendered would fetch Sumit Rs 1,46,493 (after surrender charges of 2.25%). Besides, proceed from ULIP will be tax-free in hands of Sumit. However, the benefit is set to vanish once the Direct Tax Code (DTC) comes into effect from April 1, 2012. This leaves Sumit within Rs 29,000 short of his target that can be fulfilled selling off him mutual fund investments. For that he can wait till December to see were the market is headed. The current value of its investments is ~ Rs 38,869 (on the basis of 7^th March NAV).

Thus, with proper financial planning, Sumit will be able to build Rs 3.5 Lakh for his marriage. A very good thing for Sumit is that he has mutual funds investment still intact.

Happy Married Life to newlywed couple. However, the job is not even half done. As many a pessimist would have you believe, marriage is a zero sum game. You gain some, you lose some. Income can be doubled so can the debts; affordability to buy assets may increase, but so will the insurance liability. In short, a person’s entire asset allocation might need to be rejigged. Also, financial goals take shapes, both short & long term. For instance, a vacation abroad or buying a buying a new house for would fall under short term goals whereas long term goals may include decisions regarding children education/marriage and retirement benefits. Let’s see how Sumit and Radha should manage their financials:

Post marriage, another Rs 20,000 will be added to Rs 40,000 Sumit earns. Currently, Sumit pegs his expenses at about Rs 15,000 a month. After marriage, his expenses are expected to increase by another Rs 10,000, provided he moves to a new & rented house post marriage. This means the couple will have a monthly investible surplus of about Rs 35,000.

Contingency Fund:Future is uncertain, so a contingency fund is the need of the hour for Sumit & Radha especially when Sumit has only just managed to cross the line with marriage finance. Both should also be prepared for a temporary loss of employment. In such situations, one should set aside funds that are adequate to meet at least 6 months of a family's monthly expenditure. However, as both are working, financial planners say that the contingency fund could be even 3-4 months of family expenditure. In our case, Sumit & Radha should built an emergency corpus of at least Rs 75,000-1, 00,000

Insurance:As both are earning, there is no immediate need for an insurance policy, but considering life insurance plans are best buy at young age, the couple can opt for a term policy of at least Rs 60-70 lakh cover for at least 25 years. One can look at LIC’s Amulya Jeewan, Kotak Preferred Term Plan, Life Shield Plus, ING Term Life, Tata AIG Raksha etc. The annual premium outgo for this will be about Rs 18,000-20,000.Buying a fresh plan at an older age (say, in your 50s) will you Sumit a bomb. Another important cover to consider is health and disability insurance. Chances are Sumit might be insured by his employer, but it's advisable to buy a separate policy. On an average, a combined cover of 5 lakh for a couple is considered adequate.

Once the couple is adequately insured, they must start investing for the future. As mentioned earlier, they have a monthly saving surplus of Rs 35,000 which can be invested. Both Sumit and Radha are relatively young and have the potential to build a lot of wealth though the magic of compounding. So Sumit must allocate as much as possible to investments without compromising on his lifestyle.

The couple should look to own a house first, as the couple is paying a hefty rent of Rs 12,000 for an apartment in Gurgaon. But they have hardly any funds to do so in the near future (2-3 years) due to tight liquidity as lacks the money. We suggest he should go for an affordable house in Gurgaon, available at competitive rates ranging Rs 20-30 Lakh.

Considering the property prices in Gurgaon anRs 25 lakh apartment will be worth about Rs 33lakh in 5years (at 6% inflation). To arrange for the down payment, the couple must invest Rs 12,000 per monthin Assured Return, Diversified Debt Funds, High Yield Debt Funds, Balanced Funds etc., for 5 years assuming the typical 13% returns. The proceed worth Rs 10.1 Lakh is slightly more than what’s required but is advisable for couple to accommodate the EMI burden at later stages. The EMIfor the leftover Rs 22.9 Lakhs comes to be Rs 21,327. This should be affordable given the couple should achieve a reasonable 5% salary increment every year.

Young age allows them to park large chunk of total savings in aggressive instruments such as well diversified mutual funds though SIP route. Suppose the couple invests Rs 10,000 per month in a separate SIP and fund earns them annualised returns of 15%, the value of his SIP would be Rs 1.1 Crore when he retires at 60. That is the magic of compounding and both couple must make the best use of it.As pointed out earlier, Sumit is not financial savvy, direct equity exposure is not desirable for him.

Child education for couple should not be a problem initially as Radha is a govt. school teacher and her child would be entitled to free education in the school up to secondary level. For expenses such as higher education and marriage, the couple can invest through a mix of equity & debt products such as ULIP, gold ETFs, sectoral mutual funds, FD/bond ladder, infrastructure bonds etc. This is because goal is such that couple cannot risk their premium but at the same time intends to take advantage of slightly longer time horizon.

But Sumit should not forget to open a PPF account to build tax free corpus for retirement. It is termed as the best instrument for long term retirement planning because it gives you tax free proceed on maturity of 16 years. In Sumit’s case PPF can play even bigger role as years left for retirement would more than doubled (33 Years). Sumit should build on that great advantage of time in hand to build a ladder, e.g. after 16 years he can open a fresh PPF account utilizing partial proceed an initial sum. We suggest Sumit invest a smaller fund to build first ladder as it earns smaller interest (8%) and Sumit could benefit more investing in equity based instruments.  For example, if Sumit opens a PPF account today with monthly contribution of Rs 5,000 every month he can build a tax free corpus of Rs 18, 85, 243. Of this Rs 70,000 could be invested in a fresh PPF. The balance could be invested in a mix of debt & equity products such as Infrastructure bonds NSE, pension plans, mutual funds, UILIPs etc.

Mr. Praveen, 25 works in a reputed MNC and has just received Rs 1,00,000 performance bonus. Praveen wants to invest the same in profitable avenues but is confused about eventual financial goals. Suggesting him a suitable financial strategy.
At the very outset, Mr Praveen needs to define its goals clearly. Goals have to be realistic and must be clearly aligned with the time frame in which goals are to be attained. This is imperative because if Mr Praveen doesn’t, then he may not only digress from the right path of planning but also end up depleting your hard earned money. For example, Say MR Praveen plans to buy a car but is not sure about the timing. He allocate the sum in PPF, NSC, Infrastructure bonds and similar safe instruments, After say 3 years a new car is introduced in the market which suits your requirements, but can’t buy it as all of invested products have a lock-in period.
Similarly, Say his wedding is just a year away, which he plans to finance through the funds. Carried away with the stock market boom he takes direct equity market exposure. Just a month before the event, the stock market crashes and your capital is reduced to half.
So let’s suggest Mr Praveen diverse investment avenues amidst various time frames he can consider:
Goals which are 1 Year away: As a rule of thumb,if goals are very short-term – a conservative approach is best suited, more so in today’s rising interest rate scenario. He can go for Short Term Deposits, treasury bills, government bonds etc., which if anything today are fetching 9-10%. Lakshmi Vilas Bank and Karnataka Bank offer 10.10% and 9.75%, respectively, to FD depositors for one year. Interest rates are expected to remain in higher zone as inflation which stands at 8.5%, still out of comfort zone of 5-6%. Post office time deposit, Sweep in deposits etc. is another option available to Mr Praveen.
Alternately, MR Praveen could build a ‘ladder’ of short-term bonds for three, six or 12 months (bond laddering is a strategy for managing FI investments where the investor builds a ladder by dividing his or her investment evenly among bonds that mature at regular intervals). That way, if the rates rise, he would be able to capture higher yields when he rolls over the instruments that mature.In 2011, corporate bonds are expected to yield 9% at least.

Investment Avenues for Immediate Goals: less than 1 year away

A better option exist in short term floating rate mutual funds, wherein he can put rising interest rate to better use, compared to FDs wherein returns are fixed. However, he should choose it carefully, as there’s hardly anything special that a floating rate fund offers. Ultra short-term and short-term funds are alternatives that offer better clarity in terms of their investment objectives.For example, A Rs 1,00,000 investmentsin SBI’s one year deposit would have fetched 7.75% in December, 2010, floating rate funds would have invested in higher yielding debt instruments post December.
If Mr Praveen is prepared for high risks, he can also exploit global macroeconomic environments in short-run. He can invest in emerging economies through global mutual funds given cheap valuations but strong fundamental. China, for example, is a favorite destination. Its equity market has tanked 12% since Jan 2010 and is trading at 16x, much lower than India’s Sensex at 19.8x (As on 23rd Feb), making it undervalued. Similar is the case with Vietnam, Thailand, South Africa, Russia etc.
An investor can expose himself to Currency/commodities futuresif he has some clear view on the economy or forecasting ability and is confident about a predictable trend in the exchange rate.In 2011, there is a real danger of the Eurozone &US printing more currency to ride the downturn, which will effectively result in loss of value for dollar & euro and benefiting Indian Rupee. Similarly, political unrest in Egypt, Libya&continued supply pressures makes Energies/Metals futures attractive. As we speak, Oil Prices are hovering around $100 per barrel and is sighting $120-130 within 3-4 months. Similarly Gold prices are expected to touch Rs 25,000 in the near term.
Goals which are 2-3 Years away: For financial goals that are 2-3 years away, Mr. Praveen can continue benefiting from investing in Bonds, FDs, debt instruments earning higher interest rates.Suppose he has a non-retirement goal, such as buying a mid-size car or a house, for which you need a lump sum in 2-3 years. In such cases, you can’t afford to risk the principal of your investment. He can build a ladder of short term bonds maturity around 2-3 years which can serve down-payment of Mr Praveen car or house.

Suppose Mr Praveen invests Rs 33,000 each in one-year, two-year and three-year bonds with coupons of 6, 6.25 and 6.50%, respectively. After the first year, he invests the proceeds of the 6% bond in a 6.5% bond with a maturity of 2 year. After the second year, let’s assume he invest the proceeds from the 6.25% bond in a 6.5% bond, with the maturity of one year. As you are able to reinvest your returns each year, he is able to take interest rate advantage. Also his average return also goes up every year.

With slightly more risk, Mr Praveen has a better option in fixed maturity plans (FMP) as these are more tax-efficient as compared to FDs, especially investing in plans giving double indexation benefits and higher returns. For FMPs with over one year (long-term capital gains) the tax liability is computed using two methods i.e. with indexation (charged at 20% plus surcharge and cess) and without indexation (charged at 10% plus surcharge and cess); the tax liability will be the lower of the two.

FMP Vs Fixed Deposits: Compared

Cost Inflation Index: 632 (for Previous Year) & 711 (for Current Year)

The above table depicts that if you fall in the highest tax bracket (33.9% for FD); the post-tax returns you enjoy in a FMP (tenure over one year) are far superior from that of a FD (tenure over one year). After claiming the indexation benefit as you have long term capital loss, the post-tax return enjoyed by you in a FMP is entire 8.25% p.a. whereas a similar tenure FD generates just 5.45% p.a.

In Mutual Funds, Mr Praveen can consider a monthly income plan (MIPs). It typically invests up to 85% in debt and has an equity exposure of 15%. The result is stable growth which outperforms the returns from debt funds but carries far lower risk than an equity fund. These funds carries moderate risk as equity component ensure returns are ahead of inflation. In Commensuration, Reliance MIP (G) fund, and HDFC MIP have given 13.4% and 10.9% returns over the past 3 years (Source: Money control)
Amongst the riskier options, Mr Praveen can choose Equity-linked saving schemes (ELSS) which apart from generating good returns, they also give you tax benefits under Section 80C and come with only a 3 -year lock-in. However, if the proposed Direct Taxes Code is accepted in its current format, the tax advantage will disappear post 2012. The top 5 ELSS funds have given returns from 22% to 26% compounded annually over the past 5 years, compared to 19% returns generated by Nifty.
Also, he can put money in corporate FDs, unsecured debts instruments, but comes with high returns ranging 10-15%, as compared with 8.5% for 3 year FD with Allahabad Bank. However, Mr Praveen should give due consideration to company’s rating, management track record, fund use etc. before investing. Companies including HDFC, DHFL, Exim Bank, ICICI Home Finance, LIC Housing Finance etc. are few renowned firms have returned decent money.
Goals which are 5 Years away: Here primary motive for Mr Praveen could be to realize funds for a particular event e.g. Home buying. Generally, a mix of debt and equity products is advisable as you don’t want to loose on your investments, but at the same time intends to take advantage of slightly longer time horizon.

On a conservative side of things, Mr Praveen can invest in avenues like Infrastructure Bonds, FDs, Gold ETFs, Post office Time Deposits and Assured Return/Diversified Debt Funds, High Yield Debt Funds.Most Infrastructure bonds have tenure ranging 10-15 years, but offers buyback options after 5-7 years, while the coupon rate for the 10& 15 -year bond is ranging 8.15-8.3%, comparable to 8.25%, what a 5 year FD with SBI will earn you at present. Also, only few handful firms are allowed to issue such bonds and hence tend to be reliable. He can take call bonds to redeem them (typically after 5 years) with put options to invest in bonds with higher returns.

Assured return Mutual funds are also a good bet as it assures a specific return to the unit holders irrespective of performance of the scheme. However, a scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC.

Alternately, Praveen can invest in more promising commodity, Gold though ETFs. Gold prices are expected to rise in future as global liquidity is improving, which would support gold investments. As per the World Gold Council, the total assets under management of all listed gold ETFs in India have grown to about 15 tonne, from just 8-9 tonne in November 2010. Analysts are predicting gold prices to shoot up to $1500-2000 per 10 grams over the 3-4 years.

However, investing in aforesaid instruments, Mr Praveen may be under utilizing its money’s earning potential. Risking a bit more, he can opt for sectoral mutual funds. Sectoral funds are usually cyclical in nature and their performances are affected by different macro-economic parameters and greater risk. However, certain sectors, such as banking, have the potential to outperform the overall Sensex. For example, BSE Bankex, which gave a return of 28.4% in 2010. Also category average during 2006-2010 has been 24.9% outperforming Nifty or Sensex

Rs 1,00,000 could also be used to initiate SIP investments in small tranches that will help Mr Praveen build corpus for the future, given he continues to invests once these one lakh expires. It could be an important tool. (Example of compounding is given in next category)
Goals which are more than 10 Years away: Long term goals are generally includes child marriage, education and retirement planning.For this, Mr Praveen can consider traditional avenues like PPF, NSE, pension plans etc., which would help build future corpus but with low returns. NSE comes with 6 year maturity period, so he can either a ladder or invests in some other post office savings schemes. PPF would yield him tax free amount after 15 years and termed best for long term investments. All mentioned plans earn around 8% per annum.
However, in the long run, 8% return might not be sufficient to leave you desired corpus, given long term inflation of ~6-7%. Therefore, to mentioned goals, equity is an optimal asset class. Mr Praveen can invest in equity, either directly on the stock exchange or through an aggressive equity-oriented mutual fund. If Praveen has both the skill and time to invest in stock market directly, Equity investing are risky but they also have the potential to give high returns. In the long term, equities tend to outperform all other asset classes. In the 10 years between 1999 and 2009, the Sensex gave returns of 17.15% compared with the 12.96% given by gold and 8.3% by government bonds. Alternately, investment can be made in fundamentally strong sectoral funds, e.g. Infrastructure, Power etc.
Alternatively, SIP in an index fund to build future corpus through compounding. The fact that Mr Praveen is still 25 has time in his favor. SIP will utilize this to great effect though compounding of money.
For example, today, Mr Praveen makes an investment of Rs 5,000 per month in SIPs given he continues to invest once these one lakh expires. Assuming a 15% return per annum over 10 years, this investment could grow to as much as Rs 13.93 lakh, something that could come handy in making an upfront payment for specific purposes such as Child Education.

Best ways to buy a new Rs.25000, Rs.50000, Rs. 1Lakh, 2Lakh, 5Lakh consumer goods (or any consumable) – break FDs, get EMIs, get company advance, pay on your credit card, get a personal loan, – evaluate each option and rates.

In our life tenure, sometime we come across a situation where we are in urgent need of some money but don’t have the resources for that kind of amount at that time. What should we do then? In current situation where there is a lot of competition among various lending institutes, the customers are spoilt for choices. But, as a borrower you should be careful to choose an option which costs you the least.

1.     Rs.25000 – 50000 Requirement (Refrigerator, Air Conditioner, Washing machine, mobiles, laptops etc.)

Often we have a requirement for some urgent cash of around 25k to 50k for buying consumer goods like Refrigerator, Air Conditioner, Washing machine etc and cannot come up with the amount needed with the resources they have. In that case we have other options.

If your expense is small enough (e.g. 25K-50K) and you believe that you will be able to pay it off quickly, a credit card offering a low interest on purchases is obviously better than a personal loan, as you will pay little or no interest. You will have to pay no interest in case you pay pack the amount before the credit card’s free interest days which is normally around 50-55 days.

The next option that you can try is to take a loan against your FD, in case you have one. This is better choice than a personal loan because the rate of interest on a loan against FD is quite lower than that of a personal loan. The rate of interest is 1% more than your FD rate and you can get up to 90% of the FD amount.

But in case you think that you will not be able to pay back the amount in free interest days of your credit card and you also don’t have a FD to take a loan against it, then you can go for a personal loan. Getting a loan today has become very easy, what with the stiff competition prevalent among different banks. The easiest to get among the plethora of loans available are personal loans.

Personal loans are easy to get and has its pros and cons:

Pros

• No collateral – Unlike other types of loans, you don’t need to produce any collateral, or security, to avail of a personal loan
• Can be taken for any reason – Normally a personal loan is just that – for personal use. Once you satisfy the loan eligibility, the banks give you the loan irrespective of how you put the money to use
• Minimal paperwork – banks normally do not ask you for more than a few critical documents for approving a loan

Cons

• Strict qualifying criteria – because of minimal paperwork and no security, qualifying for a personal loan is a strict affair
• High interest rates – the interest rates for personal loans are very high and second only to the extremely high interest rates charged by credit card companies for credit card cash advances
• Lots of fine print – the loan agreement has a lot of clauses in fine print, which one needs to understand thoroughly before opting for a loan

An urgent requirement for cash – because of minimal paperwork, getting a personal loan is a fast process. So if you are really in a tight spot and need some urgent cash to bail you out, personal loans make sense.

It is important to understand that personal loans are a good option only if the amount you require is not very big (as in this case) and your monthly budget can easily fit in the added EMI expense. Exercise the option of taking a personal loan, only because you have no other option and it is possible to pay it off in as less a time frame as possible to help you save on the interest cost.

2.     Rs.50000 – 1 Lakh (House refurnishing, bikes, High end TV)

In case you are in urgent need of Rs. 1 Lakh for house refurnishing, buying a bike or high end TV, a credit card may not suffice as the credit limit of normal credit cards is around Rs. 50,000 only. So the next better option in case you have Bank FDs, is to pledge them and take loan from same Bank. The rate of Interest is 1% more than your FD rate and you can get up to 90% of the FD Amount as loan. It is better to negotiate otherwise banks give up to 80% of the FD amount as loan and charge 2% more than FD rate. So effectively if FD rate is say 8% you earn Rs 80 on Rs 1000 and pay 9% on Rs 900 or Rs 81.00. Effectively you pay just Re1/- and get liquidity of Rs 900.

The other option is the personal loan as discussed in earlier section. As stated earlier, it is important to understand that personal loans are a good option only if the amount you require is not very big and the added monthly EMI does not bother you much. Exercise the option of taking a personal loan, only because you have no other option and try  to pay it off in as less a time frame as possible so that you save on the interest cost.

3.     2 Lakhs (Painting of house, Minor Surgery, Down payment for a small car, Education fees)

Sometimes you need around Rs. 2 Lakh for a minor surgery of your loved one or for down payment of a small car or for education fees of your children. You might need the money for surgery if the patient is not insured. It might be difficult for you to arrange for such an amount in short duration. The options available to you as before are loan against FD and personal loan. Apart from it, as this is a big amount you can go for breaking your FD too.

Breaking a fixed deposit means withdrawing the money before the maturity expires. You will have to pay a cost; for instance you may receive an interest rate 1 per cent lower than the stated interest rate on the FD. For example if you invested in a 3 year FD with 9 per cent and you break it after two years you may receive only 8 per cent interest for those two year instead of 9 per cent. Before taking a decision, you must do an analysis whether it is good for you to take a loan against a FD or break the FD. Taking a loan against FD will lead to interest payment whereas breaking your FD will receive less rate of interest.

The last option which you have is personal loans. As mentioned earlier, personal loans are a good option only if the amount you require is not very big and the added monthly EMI does not bother you much. Exercise the option of taking a personal loan, only because you have no other option and try  to pay it off in as less a time frame as possible so that you save on the interest cost.

4.     5 Lakhs (House renovation, Buying a car, home loan down payment, Major surgery, buying equipments, marriage purposes)

You should avoid taking personal loan in the situations where you need such huge amounts as the interest rates of personal loan are too high and the EMI of such a loan may become unbearable to you. Normally, we require such a huge amount for financing home improvement, buying a car etc.

• Financing the home improvement – in case if you are looking for doing some repairs to your house, opting for a personal loan is not necessary. You can do these repairs with a home improvement loan
• Buying a car – if you are buying car, a car loan would take care of your needs. You do not need to take a personal loan for that.

For other purposes if you need such a huge amount, it is better to use your current resources i.e. if you have a FD then you can go for breaking that FD. You should try to obtain as much as possible from other sources before taking up a personal loan so that the amount which you take as personal loan can be minimized.

There is some good news for all of us. Most world economies are on the path of recovery and the dreary recession is behind us.

Though recession threatened our job, our lifestyle and our existence at one point in time, it nonetheless taught us some basic, yet important, money management lessons. We learnt to stretch our money and survive against all odds. And, now we can continue the process of getting more out of our money with just a little planning.

Here, we will discuss some strategies that will help salaried people maximise their income post tax, with the help of their salary.

Getting more out of your salary

In a salary slip, the total pay is categorised under various heads – base salary (Basic + Dearness Allowance) and allowances like HRA, LTA, Medical, Transport, Telephone and Leave Travel Allowance.

The tax is computed on your total amount or gross pay, after taking into account any investments that you have made under Section 80C of the Income Tax Act. The total limit allowed under this section is up to Rs 1,00,000.

If your tax is more than Rs 30,000, then you have to use the entire limit of Rs 1,00,000. You can effectively condense your tax liability by investing in tax-saving instruments like:

• Employee Provident Fund (PF)
• Public Provident Fund (PPF)
• Life Insurance Premium
• National Savings Certificates (NSC)
• Post Office Time Deposit
• School and College Fees paid for children's education
• Stamp Duty and Registration Charges for your home
• NABARD rural bonds

But your aim is not just to save money, so you will not rush in and invest the Rs 1,00,000 straight off. Now that you know the law, you will use it effectively to save some money. Let us see how:

1. Tax breaks on allowances: First, meet up with your tax consultant at work and find out your taxable and non-taxable salary. Figure out how you can structure your salary to maximise tax breaks. There are specific heads or allowances – like medical, telephone, transport and meal expenses and leave travel allowance – which qualifies for tax breaks.
2. Reimbursements: Many organisations give allowances as reimbursements against bills. The items listed below are efficient means of claiming tax benefits and increasing your income:
   • Food coupons like Sodexo and Ticket Restaurant – they are exempt from tax up to Rs 60,000 per year.
   • Medical expenses which are reimbursed by the employer are exempt up to Rs 15,000 per year.
   • Individuals living in a rented accommodation should have House Rent Allowance (HRA) as part of their salary.
   • Transport allowance is exempt up to Rs 800 per month.
   • Leave Travel Allowance (LTA) can be claimed twice in a block of four years for domestic travel.
3. PF contribution: Find out your PF contribution at your workplace. Since this amount is exempt from tax, subtract it from the maximum limit of Rs 1,00,000. Now, invest the balance amount in any of the tax-saving instruments (this saves you from over-investing).
4. LIC premium: If you are investing in a life insurance policy, give a thought to the cycle of your premium. Pay annual premium as most policies offer a rebate on it. For more saving, you can keep your premium amount in a recurring deposit maturing just before the premium due date. The premium will be distributed over twelve months. This will help you save money on the premium and earn interest on the deposit. Remember, you also get a grace period to pay the premium. Use it to the full benefit by investing the maturity amount of your recurring deposit for a short-term fixed deposit of 15-20 days and earn more interest.
5. PPF investment: Investments in PPF earn you a tax-free return. PPF accounts have a 15-year lock-in period, but on completion of five years you can withdraw 50 per cent of your balance from the account. You can then re-deposit this money and avail tax benefits. This way you will get dual benefits: you will get tax benefits and you can keep your money free for other investments yielding higher returns.

Tips to save more tax

• Buy medical insurance and claim tax rebate under Section 80D up to Rs. 15,000. If you pay the premium for your senior citizen parents, you can claim additional tax exemption for Rs 20,000 under the same section.
• Contribute to a charitable organisation and get exemption under Section 80G.
• Claim up to a maximum of Rs 1,50,000 from your taxable income if you pay interest on a housing loan for a self-occupied home, under Section 24.
• If you have taken an education loan for your spouse or child, you can claim rebate under Section 80E on the interest paid for the loan for the current financial year. All you need is a certificate from the bank stating the amount of interest paid on the loan.

To ease the burden of saving tax, do your tax planning at the beginning of the year. You will not feel the pinch if you apportion a part of your earnings every month. After all, this planning will ensure you get to take home much more.

In today's troubled economic scenario, we prefer the kind of investments that will protect our wealth rather than create wealth for us. Gold is one such investment. It is a bedrock of investments that can weather any storm. Gold as an asset has long-term intrinsic value, which helps shield our investment from inflation, currency debasement and equity market declines. At the same time, it saves the country's purchasing power from nosediving. In fact, it offers the best protection against volatile markets. The reason: gold prices are maintained or increased irrespective of the country's economy moves in an upward or a downward direction. From the last 20-30 years, gold prices have been on a steady and continuous rise. The precious metal has given returns of around 9.45 per cent as the prices went up from Rs 1,000 per 10 gram in 1979 to its present value of Rs 15,000 per 10 gram.

Why should we invest in gold?

Gold is a proven way to preserve wealth, especially when the local currency is losing value. It is also valuable for things beyond investments as demonstrated by its ever-increasing demand. The demand for the yellow metal is so high that its current consumption has exceeded its production. The production of gold is controlled by a few companies; whenever the prices of gold fall below its production costs, these companies stop their operations. This mechanism creates a stable floor price for gold. Thus when market plunges, like stock prices gold prices do not get affected, and cushion our investment portfolio against downturns.

Ways to invest in gold

We Indians have been the largest buyers of natural gold, but it's not long ago that we recognised its value as an asset and start adding it to our investment portfolio. Investments in gold are made through gold coins, gold jewellery, gold bullion (biscuits or bars trading through demat account), gold futures, gold ETFs and the recently-acknowledged gold mining companies. Gold jewellery, no doubt, carries high emotions and intrinsic value in real sense, however it is not the smartest way to invest in gold, mainly on account of the uncertainty of quality of gold used and high additional making costs. In terms of return too, you find variations in the forms of gold investment. You can make 100 per cent in gold stocks, 50 per cent in gold coins or bars, or even 500 per cent in gold futures. Table 1 briefly describes the different aspects of gold investment while Table 2 delves into the tax structure of the different forms of gold investment. Let us understand both in detail:

Gold jewellery

We all love the yellow metal, don't we? Be it in whatever form, jewellery or others. Nothing can match the emotions that are attached to the buying of gold jewellery. In India, we buy gold jewellery either out of desire (to wear gold ornaments) or needs (mandatory purchase in marriages and other functions). This is an expensive way of buying the precious metal since a buyer has to pay for the craftsmanship associated with the making of jewellery, which increases the total cost. Moreover, selling of the jewellery may not fetch the same price in case the current market price does not exceed the buying price.

Gold coins

It is one of the purest forms of gold. All the commercial banks and financial distributors are authorised to sell gold coins of 24 karat (the purest), with a certification from an independent agency. The prices of gold coins depend on the daily market rates of gold. But banks don't buy the coins back, so our only option to get our money back in this case will be by selling the coins to jewellers at the prevailing market price.

Gold mining companies

It is not a direct investment in gold but in the stocks or shares of a gold mining and exploration company. It brings additional rewards as well as its share of risks. The price of these stocks moves with the price of the gold and also depends on the company's future outlook. In India, there are not many gold mining companies but on the international front one will find companies such as Newcrest Mining, Barrick Gold, Impala, Gold Corp, Lihir Gold, etc. However, we can invest in world (gold) mining stocks through mutual funds such as DSL BlackRock (DSPBR World Gold Fund) and AIG India MF (AIG World Gold).

Gold futures

Gold futures are a sophisticated tool to invest in gold markets. But be cautious: Risks attached to gold futures are of the highest level. One can make 500 per cent in a single day by trading in gold futures or even lose all the money put up. However, gold futures are not about minuses only. Its plus point is it eliminates the hassle and costs of settlement and storage. Investors need much less money (margin money) to participate in quite large scale. Even traders can short sell as the market is deep and liquid. But these options are not recommended for retail investors.

Gold ETFs

It is a very recent development that the market regulator SEBI allowed gold Exchange Traded Funds (ETFs) in India. Gold ETFs enable investors to purchase and sell shares of a mutual fund whose primary asset is gold. These funds are listed on the stock exchanges, i.e., can be bought or sold like other stocks or shares. But one needs to have a demat account and a share trading account to invest in gold ETFs. The unit size in a gold ETF is as small as one gram of gold equivalents. Investments in gold ETFs are eligible for tax treatments similar to that in a debt mutual fund and subject to long-term capital gains after one year against three years for physical gold. The cost involved is also less and investors do not face the risk involved in holding gold like theft. Some of the gold ETFs are UTI Gold ETF, Gold BeES, Kotak Gold ETF and Reliance Gold ETF.

Gold bullion

This investment avenue is open for investors with a higher investment corpus or greater risk profile. Gold bullion or bars can be bought or sold with the help of brokerage firms or gold dealers. It is traded on commodity exchanges, i.e., MCX and NCDEX, at an amount above the market price of gold. Investors can keep the bars in their custody or leave them with the broking firm. Though the brokerage charged in this case is very low compared to market price, its overall cost is more as it also involves storage and assay (analyse gold to determine its composition) costs.

Historical returns of different gold investment options

Let us analyse the performance of different gold products as on July 31, 2009 with the help of Table 3. The data has been obtained from www.mcxindia.com and www.mutualfundsindia.com, an online arm of Financial Technologies and ICRA Online Ltd, respectively. The table shows that all investments with gold as an asset have given comparable returns of around 16 per cent while the return of gold mining dedicated mutual fund (AIG World Gold) is stipulated to a paltry 3.48 per cent. The fall in return in the mutual fund can be attributed to underperformance of gold mining stocks due to a slump in gold demand. But in case of gold ornaments and gold coins, the return would be comparatively less than gold bullion and gold ETFs as they also involve making costs and storage costs.

Gold in portfolio

Since gold has emerged as an asset class, fund managers are advising investors to allocate at least 10-20 per cent of their investment portfolio towards gold, irrespective of their risk appetite. It has seen that trading in Gold ETFs is the best way to invest in gold given its low cost of buying, high liquidity, low risk associated with it, etc. Moreover, whatever be the economic scenario, gold will always remain the best hedge against inflation and also help in achieving our long-term goals.

It is said that the parents are the first teacher of the child. You have to run behind your little son or daughter to get them to sit still and learn as they desist from learning things! But along with teaching your child daily etiquette, educational subjects and other things, you need to teach him/her the importance of money and saving.

They say – money doesn't grow on trees. But if it did the only way to see it bear fruit would be by letting it grow and not pulling it off the trees and spending it unwisely! This is a basic concept which we as adults understand and we should try explaining to our kids, so they understand the value of money. In this article, we give you reasons why inculcating the value of money and the importance of saving and investing to your kids, in a simple and fun way, is essential for them!

Set aside time

Every week, set aside some time to spend with your child wherein you can start explaining the concept of money. Spend this time wisely, by being interactive and getting your child to ask questions about money. The more fun you make it for your children, the keener they are to learn and retain these teachings! You can get them to make their own money by using paper and paints, which they can use to buy things in the kitchen like an extra cookie after dinner. If they are of a slightly older age ask them to do some simple household chores, then show them how by doing simple things like making beds they can earn some play money just as you earn money!

Saving before spending

Once your child is clear on the concept of money, you should introduce him or her to savings. The best way to do this is by giving them a piggy bank! Show them how they should store all the money they receive into this little magic box which when full and opened gives them far greater amounts. If your child is slightly older, you can even set a date to go open a savings bank account with him/her and explain how it works, and show him/her that all the money he/she saves every month in the piggy banks, will go into the bigger bank which will get added together every month. After all, a bank is like a bigger piggy bank, isn't it? Once your child has seen how the quantity of money increases by saving, he/she would rarely be enticed into spending it elsewhere!

Going for goals

You might think your child is too young to start setting goals, but think again! The financial goals you set for your child are different from what they as children desire for themselves. Children can only think of toy planes, remote-controlled racing cars and kitchen sets or expensive dolls, whilst you as the parent think of their college education, marriage, etc. Yet just because their goals are different does not mean we should neglect them. On the contrary, it is best if we ask our children to identify what they want and get them to plan to buy it. This method reinforces the concept of savings and also strengthens the child's inherent independence. And how do we achieve this? You can make this a fun activity by getting them to draw out what they want for this year (short-term goal) and something they would want within 5 years (long-term goal), and using some basic math help them understand the price and how much they would need to save each month to achieve these targets of expenditure. This would boost their confidence in themselves, as they would feel capable and responsible for their savings as well as the end target they want.

Urge to splurge

All humans have an urge to splurge. For women it is known as retail therapy! However, you must practise restraint and show your child that money when saved and not spent is money accrued through means of investing. It is ok to buy the occasional toy, but not spend money every week buying more toys. The best way a child learns is by watching and observing the parent. Whatever the parent does, the child follows the same. So go ahead and save, save, save…because your child will learn to do the same too!

Basics of investing

You may be aware of the basic tenets of investing, but how would you explain it to the children? Complicated terminology will surely go over them, so it's best once they have opened a bank account to start them off on maybe a fixed deposit, or even a mutual fund. However, there is a simpler way. You could inculcate the habit of saving and investing in your child by encouraging him/her to 'invest' with you. Here you act as the bank/fund by keeping your child's money and returning an increased amount within a stipulated time period. This game would help children understand the benefit of investments and get them started on the right path towards investing for themselves. Teaching children to invest would prove beneficial as it will instil in them the habit of investing, and as the term duration grows they will see how the returns on their investments grow, and this will attract them towards savings and investments as opposed to spending.

Stay focused

Now that you have explained not only the value of money, but also the concepts of savings and investing to your children, you should remain dedicated and focused to the cause, as children tend to lose interest fast. Maybe you can set aside time once a week, where your child and you can collate the money saved, see how much you've spent, outline how much closer is your child towards achieving that cycle he/she is saving to buy, and once you've started him/her off on a fund you can track the growth together. Introduce a new way of spending quality time with your child, by teaching him/her the value of money, and showing how it grows when saved and invested wisely!