Investment planning tips for 2010

 Keep the following investment planning tips in mind for 2010.

1. Get yourself a financial plan

As an individual it is very important to have a financial plan which will guide you with investments as per your goals and needs. It serves a very important purpose of bringing discipline to your investing habits.

An ideal plan gives you a complete picture of your current investments and liabilities, your net worth, cash flow, goals and a specific plan to achieve those goals. The goal can be buying a car, house, going for a vacation, children's education or building a retirement corpus. When you are young you tend to live for the moment and do things as they come but it's very important to secure your financial future. It does not have to be at the cost of a good lifestyle.

2. Start SIP (Systematic investment plan)

SIP is a proven instrument for long term investments for steady returns. Timing the market is rarely possible for anybody and you can end up spending a lot of your productive time and energy trying to do that. Even after doing that the chances of getting it right remains very low. Better alternative is to do SIP in some equity funds with a good track record of performance.

 Keep the following investment planning tips in mind for 2010.

1. Get yourself a financial plan

As an individual it is very important to have a financial plan which will guide you with investments as per your goals and needs. It serves a very important purpose of bringing discipline to your investing habits.

An ideal plan gives you a complete picture of your current investments and liabilities, your net worth, cash flow, goals and a specific plan to achieve those goals. The goal can be buying a car, house, going for a vacation, children's education or building a retirement corpus. When you are young you tend to live for the moment and do things as they come but it's very important to secure your financial future. It does not have to be at the cost of a good lifestyle.

2. Start SIP (Systematic investment plan)

SIP is a proven instrument for long term investments for steady returns. Timing the market is rarely possible for anybody and you can end up spending a lot of your productive time and energy trying to do that. Even after doing that the chances of getting it right remains very low. Better alternative is to do SIP in some equity funds with a good track record of performance.

3. Create a budget and track your expenses

A budget helps you break down your spending and compare on a month to month basis. Thus it helps you identify areas where expenditures can be cut and money diverted to meet your goals like buying a car or house. When you look at your budget and see anomalies, it becomes possible to take remedial action. Do not procrastinate on this

4. Make your PPF and other fixed income investments at the beginning of the financial year

If you invest in the latter half of the year, you miss out on a good amount of interest income. Investing early in the year will tie-up your money which will also help you control certain discretionary expenses.

5. Invest in insurance policies

You can get life cover, child education cover, health cover and save for retirement when you invest in the right insurance policies. Besides this, you get tax exemptions to reduce your current tax payout. This exercise should be done in the beginning of the financial year so that your tax planning can be taken care of. Remember that choosing the right insurance policy can be a tricky exercise and you might need to take assistance from a qualified financial planner.

6. Buy a house

• A house is one of the best investments you can make and it offers many advantages:
• You save on the rent
• Your interest payments are tax deductible
• It usually appreciates in value
• In times of need it serves as great collateral
• Peace of mind and many other intangible benefit

7. Determine your asset allocation and diversify

This involves matching your investment vehicles with your investment goals. Your investment choices should always be based on your age, portfolio, personal situation and level for risk tolerance. Diversification is the key to minimizing risk. You should not put all your eggs in one basket. Real diversification means spreading your money across multiple asset categories including stocks, bonds, real estate and commodities etc.

8. Rupee cost averaging

If you invest directly in stocks then rupee cost averaging is one technique you should look at adopting. It is similar to SIP for Mutual Funds. You fix certain amount of money for a stock and buy at regular intervals regardless of the price. In this way when the prices are low you get more units and vice versa. The key here is to select quality stock for the rupee cost averaging.

9. Don't be obsessed with tracking your portfolio

Stay invested for the long term and don't allow every downward market move to rattle you. It's far too easy to panic when you're watching daily, weekly or monthly results. Too many trading tips, recommendations etc only confuse you. Investment is like a test match and not a T20 match.

10. Don't wait. Start now!

One of the mistakes we do is waiting for the right time as well as a lump sum amount to start investing. Being slow and steady wins in this case. Start small but start now. All you need is self discipline to stay on course!

What is IIP? How it affects stocks?

Every month the stock markets wait with bated breath to hear the IIP numbers. These numbers decide the market movement. But what is IIP? What is its relationship to the stock markets? Let us understand more about IIP.

IIP, the key tracker of industrial production

IIP or the index of industrial production is the number denoting the condition of industrial production during a certain period. These figures are calculated in reference to the figures that existed in the past. Currently the base used for calculating IIP is 1993-1994.

Importance of IIP

As IIP shows the status of industrial activity, you can find out if the industrial activity has increased, decreased or remained same. Today it is important because with the news of recession hovering over the horizon, better IIP figures indicate increase in industrial production. It makes investors and stock markets become more optimistic.

Its relation with stock markets

The optimism amongst the stock markets and investors translates into the markets going up. This is because the markets expect the companies' performance to increase. This ultimately leads to the growth in the country's GDP. It implies improvement in country's economy, thus making it an attractive investment destination to foreign investors.

Computation of IIP

The first time IIP used the year 1937 as its reference point. It contained only 15 products. Since then, the criteria for the base year as well as the number of products have been revamped 7 times.

Currently, IIP uses 1993-94 as the reference year and includes items whose gross value of output is at least Rs 80 crores and Rs 20 crores at gross value added level. The products included are the ones used on consistent basis and can comprise of small scale sector as well as unorganized production sector.

They are segregated into 3 sections: manufacturing, mining and electricity. They are also classified on the basis of usage: capital goods, basic goods, non-basic goods, consumer durables and consumer non-durables.

The numbers for IIP are released within 6 weeks after the end of the month. This data is collated from 15 different agencies like Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organisation and Central Electricity Authority. But at times, the entire data may not be easily available.

Hence some estimates are done to generate provisional data, which is then used to calculate provisional index. Once the actual data is available, this index is updated subsequently.

Though IIP does indicate the condition of the country's economy, it should not be taken as the sole basis for investment. This is because some sectors may show higher performance as compared to others. This was evident in the recent past when realty sector showed higher performance, pharma sector lagged behind.

 So you need to check the reason behind the increase/decrease in IIP figures before investing.

Tax smart: How a will can save you a lot of tax

Where there is a will, there is tax saving. Many tax advantages are possible only through a will. For example, a separate income-tax file for a Hindu Undivided Family (HUF) can be established by transfer of property through a will.

Similarly, bequests can be made to minor children and minor grand children through a will in such a manner that there is no clubbing of income under the provision of Section 64(1).

Transfer of assets can be made by will to one's wife or one's daughter-in-law without any consideration, and without attracting the clubbing provisions of Section 64(1).

Where a person is interested in the creation of a charitable trust or the transfer of property after his demise for the benefit of the public for charitable purposes, this, too, can easily be done through the will. The different tax planning aspects through will are described below in some detail.

1. Tax saving by creating a Hindu undivided family (HuF) through a will

One of the important means of tax planning which can be adopted through a will is the creation of a Hindu Undivided Family. Under the provisions of Section 64(2) of the Income Tax Act, where a member of a Hindu family impresses his self-acquired property with the character of a joint family property, the income therefrom is to be clubbed with his other income.

This disadvantage can be overcome by transfer of property in favour of the coparcenary of a Hindu governed by the Mitakshara School of Hindu Law so that a separate Hindu Undivided Family comes into existence which is recognised as an independent and separate taxable entity under the income tax law.

For example, let us assume that you wish to transfer certain property to your son, his wife and his children. One can then make a will and transfer the property to the Hindu Undivided Family of one's son, stipulating in unequivocal terms that the property transferred would belong only to the son's Hindu Undivided Family, and not to individual family members.

The property would then get bequeathed to the Hindu Undivided Family which would be a separate tax entity. The newly-created HUF would be able to enjoy separate exemption limit applicable to an individual taxpayer under the Finance Act for the time being in force.

2. Tax planning for bequests to minor children or grand children through a will

Under the provisions of Section 64(1) if a person makes a gift to his minor children, minor grand children (paternal side) then the income accruing or arising to the minor children or minor grand children (other than disabled children) as the case may be, would be clubbed with the income of the donor.

This would not, however, be the case if one were to make a bequest to one's minor children or minor grand children through a will.

The reason is obvious. After the demise of the testator, the assets given to the minor child would result into separate funds of the minor child, income from which would not be clubbed once the minor attains majority.

It is possible to avoid clubbing of income of the minor by setting the funds to a trust for the minor based on the principles of a Supreme Court decision [C.I.T. vs. Mr Doshi, (1995) 211 AIR 1 (SC)]. Thus, a will can be adopted as a proper device for transfer of property by way of bequest through a will leading to a lot of tax saving.

3. Tax planning for transfer of funds to one's spouse through will

During a taxpayer's lifetime, any gifts made to one's spouse are liable to be included in the income of the donor under the provisions of Section 64(1). However, when bequests are made in favour of one's spouse through a will, obviously there is no question of clubbing of income.

This can result in a lot of tax saving. With the abolition of the estate duty this device, as well as other modes of transfer of property through wills can be very profitably adopted.

4. Tax planning for transfer to daughter-in-law by a will

Under the provisions of Sections 64(1)(vi) and (viii) of the Income Tax Act, it is provided that where a transfer of property is made in favour of the daughter-in-law either directly or for her benefit to the trustees of a trust, the income from the transferred assets would be clubbed with the income of the donor.

Hence, during one's lifetime, it is not possible to make gifts in favour of one's daughter-in-law even through the medium of a trust for the daughter-in-law. This handicap can, however, be overcome through the will.

Thus, a bequest can be made in favour of one's daughter-in-law, so as to confer on her an absolute title, and make her a taxable entity if she is not already one, after the testator's demise.

There would not be any clubbing of the income of the daughter-in-law with the income of the executor of the estate of the deceased person after the testator's death.

A discretionary trust can be created through a will which could be charged to tax at normal rates. It is provided in clause (ii) of the first proviso to Section 164(1) of the IT Act, that if there is only one trust declared by a will, then the income of the discretionary trusts would be chargeable to income tax as if it were the total income of an individual. Make sure only one discretionary trust is created through the will.

Conclusion

From the above description of the various aspects of Wills, it is clear that a considerable amount of tax saving is possible through proper drafting of wills. The proverb 'where there is a will, there is a way' can be altered to 'where there is a will, there is tax saving.'

Topsy-turvy markets: Do I invest or do I exit?

Markets dancing up and down: do I invest now or do I exit? This question is in the minds of almost all investors small or big; short-term or long-term. This is a problem because nowadays the markets are fluctuating so much that a 1 per cent to 2 per cent change per day has become quite common.

If one thought the market was weak two weeks ago and going down, this week the markets are looking up. So where does a salaried individual put his/her bet on? This article is to give some ideas particularly for the small investors.

Market fluctuations

The stock market fluctuates, that too when the overall economy is not that stable, it fluctuates a lot. This is true not only for India [ Images ] but across the world.

Again this is true not only in our times, but in all known history. To fluctuate is one of the basic characteristics of the stock market.

However, research -- or for that matter any five-year chart of the indices (Sensex or Nifty) -- shows that there is always a significant gain. The same is the case even for the 5 years ending December 2008, when the market has fell almost 50 per cent during the year.

What are the implications of fluctuation?

There are a number of negative aspects/scenarios to the short-term fluctuations.

1. Investments are still in negative even after the markets have gained.

If an investor had invested his/her funds at the peak of the market and stayed there, the funds would not have still recovered from the losses that they suffered in 2008. Will the investment ever recover? Should I exit, taking the loss?

2. The planned financial goal is here. But the market is still low.

The planned financial goal could have been the daughter's marriage, retirement, a housing down payment. But if one had the misfortune of a fall in the market happening right when the withdrawal was planned, it is definitely a long postponement of the plan (if possible) or financial trouble (if it could not be postponed). A requirement like a daughter's marriage cannot be postponed for want of money.

3. I have got a one-time lump sum of money.

A loving relative's gift or an unexpected bonus or an arrear due for 2 years may suddenly land in an investor's hands. One can be sure that the same will not happen often.  So when does one invest this money in the market?

A better perspective

A better perspective to investments in the stock market is that the loss or gain is only on paper till the shares are sold. So the investment that has a lower value today as in scenario 1 has not lost its true value, unless one sells it. All that it needs is time to give a better value.

This perspective however does not solve the problem, when an investment is time bound as in scenario 2 or 3.

The question is thus not whether there will be returns or not but how does one time the market to get better returns?

Timing the market: Is it possible?

Is this the solution? Again the answer is 'NO'. Because we could find the right time to invest in the market only retrospectively. No one could guess to what extent the market would react to certain economical news.

So too no one could guess accurately in advance at what level and when a market would turn down or up.

So timing the market is not really possible. However, any five years' graph will show a steady gain as discussed earlier. So can we use time in the market to our advantage?

Time in the Market –The Solution

 By increasing the time in the market by being invested for a longer period and by investing in a higher frequency, we can overcome the problems related to the fluctuations in the market.

This is definitely a solution that can be used to tackle the problems faced by the small investors.

By increasing the time in the market (investment period), fluctuations are over come. This requires planning earlier and investing at least for a period of five years.

Even the one time lump sum of money, can be invested over a period of, say, five months in smaller chunks. This will take care of the market ups and downs during the investment period.

Those who have invested for their retirement and their daughter's (or son's) marriage can practice the same but in reverse order. Rather than wait till the date of retirement for the withdrawal from the market, they could withdraw over a period of 6 months before the marriage.

This will not only help them in the run up to the event but also prevent losses from any sudden fall in the market.

Fluctuations are a basic nature of the stock market. An investor cannot wish it away. Nor should one avoid the stock market because of the fluctuations.

Timing the market for its ups and downs for making investments is not possible as accurate prediction is in the realm of speculation.

The better option is to stay in the market. This is done by increasing the time period of investment and by increasing the frequency of investment and withdrawal.

Home loan: Benefit from prepayment !!

What is prepayment? Why and when do people opt for it?

It's just what the name implies: prepaying all or part of the loan amount before it is actually due. However, it is more complicated that it sounds! First, you will have to check your retail loan documents to find out if prepayment is allowed and the percentage of outstanding loan amount that you will paying towards prepayment penalty charges, if any.

You might want to prepay your home loan for two simple reasons. First, you could save on the net interest payable as longer loan tenure would mean more interest. The second reason is you can own the asset earlier than planned.

You could decide to prepay your loan if you have the capacity to make larger payment or if you have had a promotion or received a bonus.

Why do banks charge penalty for prepayment?

Well, banks and lenders lend money in the form of loans only to make money out of service fees and interest. And this requires the loan to be open for a fairly longer duration to give profits. They cannot stop your legal right from making a prepayment. But at the same time prepayment would mean upsetting their profit calculations from interests.

Hence, the banks and lenders impose a prepayment penalty to compensate a portion of the lost profit. Usually, your loan agreement would have a clause defining your obligations and interest in case of prepayment in part or in full.

RBI's current stand on this penalty

Recently, the Reserve Bank of India (RBI) hinted at drafting a policy to restrict banks from imposing prepayment penalty of retail loans.

The proposed move follows many such complaints from loan borrowers paying EMIs based on the floating rate of interest. They feel that they are missing out on the benefits of periodical rate cuts in interest.

The anti-monopoly body Competition Commission of India (CCI) is dealing with complaints from loan borrowers against collecting prepayment penalties on home loans from major lenders in the country.

Prepayment penalties by different banks in India

Public sector banks charge 1 to 1.5 percent as prepayment penalty on the outstanding loan amount and in the case of private banks it is between 2 and 4 percent.

Name of the bank	Prepayment penalty (in %)
Axis Bank	No prepayment penalties
ICICI Bank [ Get Quote ]	No penalty on part-prepayment 2% on foreclosure (+ applicable service tax) This will be calculated on the outstanding loan amount and amounts prepaid in the last one year, if any.
LIC Housing Finance [ Get Quote ]	2% on the principal amount prepaid
HDFC [ Get Quote ]	0 to 2% on loans If a prepayment is made within 3 years of the first disbursement subject to terms and conditions, 2% on the prepayment amount if the amount being repaid is more than 25% of the opening balance.
SBI [ Get Quote ] Home loans	No prepayment penalty if the loan is prepaid from own savings/windfall gains for which documentary evidence is produced by the customer.

How prepayment can benefit you?

Perhaps, the biggest benefit of prepaying loans is saving on the net interest payable. Usually you could find out how much you save on the interest based on the amortization chart provided by your bank.

Moreover you could own the asset bought on loan earlier than planned. Some banks also allow for part-prepayments say every quarter. This could effectively bring down the principle amount and the outstanding loan amount and subsequently the net interest.

Here's an example.

Ramesh took a home loan of Rs 20 lakh for 20 years as loan tenure and at an interest rate of 12 percent. At the end of 20 years the net interest would be Rs. 32.85 lakh. Instead Ramesh decided to pay two additional EMIs every year, which would mean he could close the loan in 13 years time.

His bank loan agreement had mentioned that there would be no prepayment penalty unless he paid off more than 25 percent of the principal in a year. The table below shows two scenarios and how opting to pay extra EMIs in a year actually helped Ramesh save on interest.

Details	Scenario 1 – 12 EMIs/year	Scenario 2 – Two additional EMIs every year
Interest rate per year	12%	12%
Tenure of loan	20 years	Since two additional EMIs are paid every year the loan tenure is reduced to 13 years
Amount of loan taken	Rs 20 lakh	Rs 20 lakh
Net interest paid	Rs 32.85 lakh	Rs 19.58 lakh

Prepayment can be made in part or in full. If you have plans to make a full repayment read carefully on prepayment penalty charges on your loan agreement. Some banks might allow you to prepay up to a certain period without any prepayment penalty. So you can garner enough funds to foreclose before the expiry date.

If your loan agreement allows you to make part prepayment, then you could do so every quarter. This way you can save some money, reduce the principal and the outstanding loan amount and the net interest rate.

5 things to do to avoid the tax blues ... !!

It's a typical day in March when you see people running helter skelter to invest to save on taxes. And more often than not, they end up investing in products that are either not right for them or not worth investing at all.
You can, however, start saving on your personal income tax during the year, and make additional strategic moves as the year-end approaches. Here are some basic tips for saving on your taxes:

1. Invest and claim your deductions


Section 80C: There are various sections which offer you tax breaks, the most popular one being this one as you can claim up to Rs 1 lakh under this section and it offers you a wide variety of investment options. The options include Employee Provident Fund (EPF), Public Provident Fund (PPF) up to Rs 70,000 per annum, National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), unit linked insurance plans (ULIPs), school fees, and home loan principal repayment.
Section 80D: If you have taken a medical insurance plan for yourself, your spouse, dependant parents and dependant children, you can claim deduction up to Rs 15,000 (Rs 15,000 additionally for your parents' medical insurance is also available) under Section 80D for the premiums paid. The limit now has been enhanced to Rs 20,000 for senior citizens on the condition that the premium is paid via cheque.
Section 80DD: Expenses on the medical treatment of a dependent who is a person with a disability also qualifies for tax benefits under Section 80DD.
In this case, deductions up to Rs 50,000 can be claimed.
A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, certification by a medical authority is mandatory.

2. Interest component of your home loan

The interest component of your home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakh a year in case of self-occupied house.
One condition being that your house must have been financed by a housing loan taken after April 1, 1999.
It is also essential that the acquisition or the construction of the property is completed within three years from the end of the financial year in which the loan is taken.
The claim can be made even on loans taken for repair, renewal or reconstruction of an existing property.

3. Take a loss

If you've done well with your investments and are looking at significant short term capital gains, prior to year-end is the time to offset some of those short term gains by selling some of the losing investments.
If the stock is good, you could sell it on 31st March, say on March 31, 2010, and buy it back in the next financial year, say April 1, 2010; here of course there is the risk of price fluctuation.
Remember that you can carry forward short term losses from previous years' losses for the next 8 years.

4. Do some charitable donations

While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax.
You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act.
The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund. There is no restriction on the amount of charity.
However, donations must be made only to specified trusts and also only donations of up to 10 per cent of your total income qualify for such a deduction. Remember to get receipts.

5. Spreading your income

Normally, if you invest in your wife's or child's name, the income generated from such investments will be clubbed with your income and taxed accordingly. However, if you transfer money through a deed to a child who is over 18 years of age and invest in his name, then the income generated from such investment will not be clubbed with your income.
Instead, that will be clubbed with the income of your child/wife and taxed accordingly.
Cash gifts received from specified relatives are exempt from income tax and there is no upper limit.
Similarly, cash gifts of any amount and from anyone received during your child birth, marriage or any other specified event are totally tax-free. However, any cash received from a non-relative where the value is in excess of Rs 50,000 in a particular year will be considered as income in the hands of the recipient.
You should make sure that you have a record and valid receipts for all tax savings investments made in your name. You do not want to be running around at the last minute collecting all the documents required for tax filing.

Zero per cent schemes: How consumers get fooled

As a child when my first milk tooth fell, I was told to keep the tooth under my pillow at night. When I woke up the next morning, I was delighted to discover a one rupee coin instead of my tooth under the pillow. When I asked my parents about it, they told me that a tooth fairy had switched my tooth for a rupee coin during the night.

As a child the story had lots of appeal for me. Of course as I grew older I realised that there was no 'tooth fairy' and my parents placed that one rupee coin.

The stories surrounding zero per cent finance schemes are perhaps of the same genre. The old adage that 'there is no such thing as free lunch' aptly describes the zero-percent-interest schemes.

These schemes were widely popular till a few years back. RBI regulations advising banks to refrain from offering such schemes as well as the general withdrawal of major banks from consumer durables financing has meant that such schemes have not been in vogue for the last 2 to 3 years.

However there are several NBFCs (Non-banking financial companies) that continue to finance consumer durables purchase and also have zero per cent schemes. The main attraction of such schemes is that they influence you to purchase consumer goods that could be more expensive than your wallet size.

The lure of zero percent interest is an added attraction that makes you feel that 'YES' I am getting something free and thus I am able to buy a 'bigger and better' product. But that is just a smart way in which such schemes fool you. Here's how.

So how do these schemes work?

Unlike their names, most zero percent schemes have other costs in built. The biggest cost is that you forfeit the cash discount that you would have got otherwise from the retailer. Also you will be paying some processing/transaction fees and/or advance EMIs (equated monthly instalments).

So let us see how the costs stack up in a so called zero percent scheme.

Example: An LCD colour television costs Rs 48,000 and is available on zero percent EMI scheme for six months (thats is, there is a EMI of Rs 8,000 per month for six months). The consumer needs to pay a processing fee of Rs 1,000. If the customer had bought the same TV by making a full payment s/he could have availed of a cash discount of Rs 2,000 which s/he is not getting if s/he opts for the zero percent scheme.

So it works out like this:

Cost of television set: Rs 48,000

Amount paid/Cost incurred in advance:

Processing fees: Rs 1,000
Cash discount foregone: Rs 2,000
Total: Rs 3,000
Net finance received: Rs 45,000

Payment made by six instalments of Rs 8,000 each (aggregating in all to Rs 48,000 against finance received of Rs 45,000).

The effective interest cost works out to 23 per cent per annum.

Why consumers fall prey to zero per cent finance schemes

However the popularity of such schemes with consumers particularly in festive season cannot be denied. Market sources say that despite being costlier in some ways, consumers prefer to go for these staggered payment schemes and have been highly successful in pushing sales and expanding the market for the durables. This is primarily because of the fact that purchasing through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.

So are there any true zero per cent schemes? Yes there are.

Some of them are available on the much-maligned credit cards. The credit card that I have allows me to convert specific spends greater than Rs 5,000 into three-month EMIs without any cost or fees. This is the closest that hard-nosed bankers come to offering true zero per cent schemes. Some other major credit card issuing banks also have similar schemes.

All said and done, the best way to check if a zero per cent scheme is really worth it ask the following questions:

Any fees or charges?

If I pay full amount do I get a discount that I am not getting if I take the zero per cent scheme.

If answer to both the question is no then you have a true zero per cent scheme! So you can now zero in on your zero per cent schemes and spare yourself from being fooled.