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.'