I am 35 years old and earn Rs 35,000 a month. I need Rs 40 lakhs in ten years. How much should I invest in a mutual fund through SIPs to achieve this target?
- Vikas Kumar Gupta
If your mutual fund investments grow at an annualise 12 per cent; you will need to invest Rs 17,220 every month to achieve your target. However, if the portfolio earns an annualised 15 per cent, you need to invest Rs 14,360 every month. You can achieve this by investing in a portfolio of large-cap funds such as DSPBR Top 100 Equity or Franklin India Bluechip along with large- and mid-cap funds such as HDFC Top 200 or Fidelity India Growth fund. Make sure you invest regularly and track the performance of these funds and their progress towards your goal of accumulating Rs 40 lakh in ten years.
(Source:www.valueresearchonline.com)
Mutual Fund News update from Nishit Doshi (9824021680) a leading MF Advisor based in Ahmedabad. Gujarat.
Thursday, June 16, 2011
Save Tax and Create Wealth
Making investments that enables one to save on income tax is one of the commonest and yet one of the least well-planned investments. Most of us are happy that the tax-saving investment we make has saved tax. Whether it suitable as an investment or not is generally not thought about.
Why does this happen? The basic reason is that there is a confusion of goals between saving tax and making investments. The typical investor makes this decision either in late March under the duress of having the deadline slip by. At the end of the day, we may make sub-optimal investment decisions and even if we realise it, we console ourselves by saying that that at least we got tax benefits.
This duality of concerns—tax as well as investments—prevents clear-headed thinking about just exactly what one is getting out of an investment. However, these investments should also be treated as actual investments. The investment part—the returns we get should be considered as important as the tax we save.
For example, if you otherwise do not need to invest in a traditional fixed return avenue, but would rather invest in equity, then you can do so in your tax-saving investments as well.
In fact, going in for traditional tax-saving instruments like PPF, fixed-return deposits carry the disadvantage of long lock-in periods ranging from five to fifteen years.
By contrast, Equity Linked Saving Schemes(ELSS) can offer all the wealth building opportunities of equity funds, coupled with the same tax-saving, with a lock-in period of just three years. Birla Sun Life Mutual Fund offers investment solutions that help you grow your wealth with equity while savings taxes, all with a shorter lock in than traditional tax-savers.
Key benefits of saving tax by investing in an ELSS scheme by a mutual fund
Save tax upto Rs. 33,900 on investment of upto Rs. 1 lakh per year.
Traditional tax savers offer fixed returns, ELSS offer the opportunity to
realise potentially higher returns through investments in equity.
ELSS offer a much lower lock-in period of just three years compared to
other tax saving avenues.
Opportunity to earn dividends
The Financial Solution (Save Tax and Create Wealth) stated above is ONLY for highlighting the many advantages perceived from investments in Mutual Funds but does not in any manner, indicate or imply, either the quality of any particular Scheme or guarantee any specific performance/returns.
(Source:www.valueresearchonline.com)
Why does this happen? The basic reason is that there is a confusion of goals between saving tax and making investments. The typical investor makes this decision either in late March under the duress of having the deadline slip by. At the end of the day, we may make sub-optimal investment decisions and even if we realise it, we console ourselves by saying that that at least we got tax benefits.
This duality of concerns—tax as well as investments—prevents clear-headed thinking about just exactly what one is getting out of an investment. However, these investments should also be treated as actual investments. The investment part—the returns we get should be considered as important as the tax we save.
For example, if you otherwise do not need to invest in a traditional fixed return avenue, but would rather invest in equity, then you can do so in your tax-saving investments as well.
In fact, going in for traditional tax-saving instruments like PPF, fixed-return deposits carry the disadvantage of long lock-in periods ranging from five to fifteen years.
By contrast, Equity Linked Saving Schemes(ELSS) can offer all the wealth building opportunities of equity funds, coupled with the same tax-saving, with a lock-in period of just three years. Birla Sun Life Mutual Fund offers investment solutions that help you grow your wealth with equity while savings taxes, all with a shorter lock in than traditional tax-savers.
Key benefits of saving tax by investing in an ELSS scheme by a mutual fund
Save tax upto Rs. 33,900 on investment of upto Rs. 1 lakh per year.
Traditional tax savers offer fixed returns, ELSS offer the opportunity to
realise potentially higher returns through investments in equity.
ELSS offer a much lower lock-in period of just three years compared to
other tax saving avenues.
Opportunity to earn dividends
The Financial Solution (Save Tax and Create Wealth) stated above is ONLY for highlighting the many advantages perceived from investments in Mutual Funds but does not in any manner, indicate or imply, either the quality of any particular Scheme or guarantee any specific performance/returns.
(Source:www.valueresearchonline.com)
Securing The Future
I am 34 and am investing for the past six months for my year and half old daughter’s future education expenses and marriage. I am investing Rs 4,000 in ICICI Prudential Discovery, IDFC Premier Equity and Reliance Regular Savings Equity. I am left with Rs 2,000 more to invest; please suggest funds to invest in? Also, I have not taken any insurance plan for my daughter and wife; could you please suggest any insurance plans for both of them?
- K Shankar
You have investments in good funds that have a proven track record and performance history. Collectively these form an aggressive portfolio of funds, and you should consider investing the additional Rs 2,000 that you have in a large-cap fund such as DSPBR Top 100 Equity or Franklin India Bluechip to balance the existing funds that you have to have a diversified portfolio to achieve your long-term investment goal of saving for your daughter’s education and marriage. As both the goals are a long way to go; you should invest regularly and track the performance of your funds through this period to evaluate its progress and make any changes to the funds you hold if needed.
As for life insurance for your wife and daughter; you don’t need to cover for your daughter, you should make sure that between you and your wife you are adequately insured so that your daughter’ future needs are taken care of if something happens to you. You should also make sure to take cover for any liabilities that you may have such as a home loan. As for your wife; if she is working, you should consider insurance that that is 8-10 times her annual income to start with. But, insurance should be taken only to cover for risks and not as investments.
(Source:www.valueresearchonline.com)
- K Shankar
You have investments in good funds that have a proven track record and performance history. Collectively these form an aggressive portfolio of funds, and you should consider investing the additional Rs 2,000 that you have in a large-cap fund such as DSPBR Top 100 Equity or Franklin India Bluechip to balance the existing funds that you have to have a diversified portfolio to achieve your long-term investment goal of saving for your daughter’s education and marriage. As both the goals are a long way to go; you should invest regularly and track the performance of your funds through this period to evaluate its progress and make any changes to the funds you hold if needed.
As for life insurance for your wife and daughter; you don’t need to cover for your daughter, you should make sure that between you and your wife you are adequately insured so that your daughter’ future needs are taken care of if something happens to you. You should also make sure to take cover for any liabilities that you may have such as a home loan. As for your wife; if she is working, you should consider insurance that that is 8-10 times her annual income to start with. But, insurance should be taken only to cover for risks and not as investments.
(Source:www.valueresearchonline.com)
Infrastructure Disappoints
I have a SIP investment in ICICI Prudential Infrastructure Fund. Of late its performance has been dismal. Should I continue with this fund or it's advisable to discontinue, as the entire Infra pack is not performing poorly?
- Narasimha G Prasad
ICICI Prudential Infrastructure Fund invests in companies belonging to infrastructure development category. A thematic fund, it is a risky investment compared to the broad diversified equity fund category. A three-star fund, the returns are not as expected, but it is a belief in such themes that finds investors flocking to them. We can empathize with your situation, but the way out is for you to exit this fund if you no more believe in it. You would be better of cutting your losses now and investing in a consistently better performing fund.
(Source:www.valueresearchonline.com)
- Narasimha G Prasad
ICICI Prudential Infrastructure Fund invests in companies belonging to infrastructure development category. A thematic fund, it is a risky investment compared to the broad diversified equity fund category. A three-star fund, the returns are not as expected, but it is a belief in such themes that finds investors flocking to them. We can empathize with your situation, but the way out is for you to exit this fund if you no more believe in it. You would be better of cutting your losses now and investing in a consistently better performing fund.
(Source:www.valueresearchonline.com)
Exit Strategy
At Value Research, we receive a large number of queries from investors asking for advice on their portfolios. On the insurance side, one of the most common problems we encounter is the existence of Ulips and traditional products (endowment and moneyback plans) that are meant to serve as two-in-one, investment-cum-insurance products. We, on the other hand, firmly believe that investors should keep insurance and investment apart, and that their interests would be best served through a combination of term plan and mutual funds.
Why go for term plan-MF combo
The term plan-mutual funds combination is financially the most efficient. Ulips levy a number of other charges besides the fund management charge (that a mutual fund also charges) and mortality charge (that a term plan charges). They levy a premium allocation charge (PAC), an administrative charge, and so on. The cost structure of Ulips is also complicated. For the lay buyer it can be hard to know what the charges are and what their implications on his final returns will be, especially at the time of purchase. (Later, of course, he will get statements from time to time, but by then it will be too late). Therefore, in the first place, the mutual fund-term plan combination scores by having a lower and more transparent cost structure.
Another problem with Ulips is that an insurance company offers only a limited number of fund options. If the funds offered by the insurance company underperform, the investor does not have the option to exit his current fund and invest in a high-return fund from another company (until the lock-in period is over). On the other hand, if he invests in mutual funds, he can easily exit his current underperforming fund (most mutual funds do not have an exit load after one year), and choose from any one of the hundreds of funds available in the market.
Traditional products such as endowment plans and moneyback plans too have drawbacks. The biggest is that they offer simple interest, whereas if you invest in a mutual fund or even in a PPF, your investments grow through compounding. As we well know, the effect of compounding is powerful, especially over the long term. The second disadvantage of traditional products is that they have a high allocation to debt products. This, too, affects their returns: over the long term, as we know, returns from equities trounce those from debt.
Another disadvantage of insurance-cum-investment products belonging to insurance companies is that despite paying a hefty sum of money as premium, the family could still be under-insured. Since term plans are inexpensive, one can buy adequate amount of cover through them.
What should you do
Exit and bear the losses upfront: If a person has invested in a Ulip or in traditional products, and especially if he has paid the premium only for two or three years, the ideal solution would be for him to exit these policies right away. In the older Ulips, there was a lock-in period of three years, which has now been extended to five in the new Ulips. If an investor exits from an old Ulip after paying two premiums, he will lose out on his premiums completely. If he exits an old Ulip after three years, all he is likely to get is the third-year premium; the myriad charges in Ulips would eat up the rest. According to Pune-based financial planner Veer Sardesai, “Over a 20-25 year span the investor is likely to be better off exiting these policies, even if it means entirely forfeiting his premium, and going with the term plan-mutual funds combination.” However, only investors who are financially savvy would perhaps agree to pursue this course of action.
Stay put: At the other end of the spectrum, you would have investors who are not at all financially savvy. They would have little knowledge of term plans (because agents do not push them) and mutual funds (especially in smaller towns, there tends to be greater awareness about insurance products than about mutual funds). Such investors would be wary of these options.
These investors would prefer being in a Ulip rather than in a term plan-mutual fund combination because a Ulip, being a product from an insurance company, would offer them a greater sense of security (especially if it is from the public-sector behemoth). Such investors could stay put in the Ulip. Even if the Ulip is not a financially-efficient product, it would still benefit these investors by offering them equity exposure, which would boost their returns over the long term.
The middle path: Next, you have investors who are financially savvy and who understand the logic behind promptly exiting a Ulip or a traditional product. Despite this, they might shy away from the option of writing off their premiums in the Ulip entirely. Very often the premiums they have paid are as high as Rs1 lakh or more per year, so bearing the loss upfront becomes difficult.
For such investors, Sardesai suggests the middle path of making the policy “paid up”. Enquire from the insurance company the minimum period for which premiums must be paid. Pay till then and then stop. Thereafter, the policy will continue to exist. The insurance company will deduct its annual charges from the corpus that has accumulated within the policy and keep it alive. The paid-up policy would offer a lower sum assured, but the investor would at least be saved from throwing good money after bad. The advantage of this course of action is that the investor feels he has not lost his money entirely, though if one were to do the mathematical calculations, the first rather than this third option would be optimal.
As you can see, once you have entered these high-cost insurance-cum-investment policies, there can be no painless exit. Taking your losses upfront, especially if you have not been in these policies for long, would be the best course of action if you are keen to get your financial portfolio back on track.
(Source:www.valueresearchonline.com)
Why go for term plan-MF combo
The term plan-mutual funds combination is financially the most efficient. Ulips levy a number of other charges besides the fund management charge (that a mutual fund also charges) and mortality charge (that a term plan charges). They levy a premium allocation charge (PAC), an administrative charge, and so on. The cost structure of Ulips is also complicated. For the lay buyer it can be hard to know what the charges are and what their implications on his final returns will be, especially at the time of purchase. (Later, of course, he will get statements from time to time, but by then it will be too late). Therefore, in the first place, the mutual fund-term plan combination scores by having a lower and more transparent cost structure.
Another problem with Ulips is that an insurance company offers only a limited number of fund options. If the funds offered by the insurance company underperform, the investor does not have the option to exit his current fund and invest in a high-return fund from another company (until the lock-in period is over). On the other hand, if he invests in mutual funds, he can easily exit his current underperforming fund (most mutual funds do not have an exit load after one year), and choose from any one of the hundreds of funds available in the market.
Traditional products such as endowment plans and moneyback plans too have drawbacks. The biggest is that they offer simple interest, whereas if you invest in a mutual fund or even in a PPF, your investments grow through compounding. As we well know, the effect of compounding is powerful, especially over the long term. The second disadvantage of traditional products is that they have a high allocation to debt products. This, too, affects their returns: over the long term, as we know, returns from equities trounce those from debt.
Another disadvantage of insurance-cum-investment products belonging to insurance companies is that despite paying a hefty sum of money as premium, the family could still be under-insured. Since term plans are inexpensive, one can buy adequate amount of cover through them.
What should you do
Exit and bear the losses upfront: If a person has invested in a Ulip or in traditional products, and especially if he has paid the premium only for two or three years, the ideal solution would be for him to exit these policies right away. In the older Ulips, there was a lock-in period of three years, which has now been extended to five in the new Ulips. If an investor exits from an old Ulip after paying two premiums, he will lose out on his premiums completely. If he exits an old Ulip after three years, all he is likely to get is the third-year premium; the myriad charges in Ulips would eat up the rest. According to Pune-based financial planner Veer Sardesai, “Over a 20-25 year span the investor is likely to be better off exiting these policies, even if it means entirely forfeiting his premium, and going with the term plan-mutual funds combination.” However, only investors who are financially savvy would perhaps agree to pursue this course of action.
Stay put: At the other end of the spectrum, you would have investors who are not at all financially savvy. They would have little knowledge of term plans (because agents do not push them) and mutual funds (especially in smaller towns, there tends to be greater awareness about insurance products than about mutual funds). Such investors would be wary of these options.
These investors would prefer being in a Ulip rather than in a term plan-mutual fund combination because a Ulip, being a product from an insurance company, would offer them a greater sense of security (especially if it is from the public-sector behemoth). Such investors could stay put in the Ulip. Even if the Ulip is not a financially-efficient product, it would still benefit these investors by offering them equity exposure, which would boost their returns over the long term.
The middle path: Next, you have investors who are financially savvy and who understand the logic behind promptly exiting a Ulip or a traditional product. Despite this, they might shy away from the option of writing off their premiums in the Ulip entirely. Very often the premiums they have paid are as high as Rs1 lakh or more per year, so bearing the loss upfront becomes difficult.
For such investors, Sardesai suggests the middle path of making the policy “paid up”. Enquire from the insurance company the minimum period for which premiums must be paid. Pay till then and then stop. Thereafter, the policy will continue to exist. The insurance company will deduct its annual charges from the corpus that has accumulated within the policy and keep it alive. The paid-up policy would offer a lower sum assured, but the investor would at least be saved from throwing good money after bad. The advantage of this course of action is that the investor feels he has not lost his money entirely, though if one were to do the mathematical calculations, the first rather than this third option would be optimal.
As you can see, once you have entered these high-cost insurance-cum-investment policies, there can be no painless exit. Taking your losses upfront, especially if you have not been in these policies for long, would be the best course of action if you are keen to get your financial portfolio back on track.
(Source:www.valueresearchonline.com)
Understanding Tax Planning Funds
I am confused with my investments in HDFC Top 200 and HDFC Taxsaver; which one of them will provide tax exemption? I have investments in ICICI Prudential Dynamic and DSPBR Equity, someone told me I won’t get any tax exemptions in my investment in these funds. Can you please tell me all the differences between normal mutual funds and tax saver funds?
- Rajeev Jagasia
Tax planning funds, better known as ELSS (Equity Linked Savings Scheme) is a type of mutual fund which is qualified for tax exemption under Section 80C. These are equity funds with a three-year lock-in wherein the investments qualify for tax rebates and the redemption after the lock-in is tax free. HDFC Taxsaver is a tax planning fund and hence, your friend is right in pointing out that your investments in it qualify for tax deductions and redemptions are tax free at the end of the lock-in.
You will not get any tax exemptions on your investments in HDFC Top 200, DSPBR Equity and ICICI Prudential Dynamic. However, if you have opted for the dividend option in these two funds and receive dividends; it will be tax free. Likewise if your holdings in these funds are more than a year, you won’t pay any long-term capital gains. However, if the holding period is less than a year, short term capital gains will kick-in at 15 per cent.
(Source:www.valueresearchonline.com)
- Rajeev Jagasia
Tax planning funds, better known as ELSS (Equity Linked Savings Scheme) is a type of mutual fund which is qualified for tax exemption under Section 80C. These are equity funds with a three-year lock-in wherein the investments qualify for tax rebates and the redemption after the lock-in is tax free. HDFC Taxsaver is a tax planning fund and hence, your friend is right in pointing out that your investments in it qualify for tax deductions and redemptions are tax free at the end of the lock-in.
You will not get any tax exemptions on your investments in HDFC Top 200, DSPBR Equity and ICICI Prudential Dynamic. However, if you have opted for the dividend option in these two funds and receive dividends; it will be tax free. Likewise if your holdings in these funds are more than a year, you won’t pay any long-term capital gains. However, if the holding period is less than a year, short term capital gains will kick-in at 15 per cent.
(Source:www.valueresearchonline.com)
Consistently Underperforming
I have been investing through SIPs in Magnum Taxgain for a period of 3 years and off late the performance has not been comparable with other tax saving funds such as HDFC or Sundaram. Should I continue this SIP or switch to another fund?
- Abbas Ali
The performance of this tax planning fund has been going down compared to some of the other funds in this category. If your three-year lock-in is over, you can consider exiting this fund. If your investments in this fund were to gain from tax savings, you can consider investing in Fidelity Tax Advantage or Canara Robeco Equity Tax Saver, which are the best performing funds in this category.
(Source: www.valueresearchonline.com)
- Abbas Ali
The performance of this tax planning fund has been going down compared to some of the other funds in this category. If your three-year lock-in is over, you can consider exiting this fund. If your investments in this fund were to gain from tax savings, you can consider investing in Fidelity Tax Advantage or Canara Robeco Equity Tax Saver, which are the best performing funds in this category.
(Source: www.valueresearchonline.com)
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