Life insurance in India made its debut well over 100 years ago.
In our country, which is one of the most populated in the world, the prominence of insurance is not as widely understood, as it ought to be. What follows is an attempt to acquaint readers with some of the concepts of life insurance, with special reference to LIC.
It should, however, be clearly understood that the following content is by no means an exhaustive description of the terms and conditions of an LIC policy or its benefits or privileges.
For more details, please contact our branch or divisional office. Any LIC Agent will be glad to help you choose the life insurance plan to meet your needs and render policy servicing.
Insurance Vs. Other Savings
Contract Of Insurance:
A contract of insurance is a contract of utmost good faith technically known as uberrima fides. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance.
At the time of taking a policy, policyholder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void.
Protection:
Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.
Aid To Thrift:
Life insurance encourages 'thrift'. It allows long-term savings since payments can be made effortlessly because of the 'easy installment' facility built into the scheme. (Premium payment for insurance is monthly, quarterly, half yearly or yearly).
For example: The Salary Saving Scheme popularly known as SSS, provides a convenient method of paying premium each month by deduction from one's salary.
In this case the employer directly pays the deducted premium to LIC. The Salary Saving Scheme is ideal for any institution or establishment subject to specified terms and conditions.
Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.
Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force.
Assessees can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.
Money When You Need It:
A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time.
Children's education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies.
Alternatively, policy money can be made available at the time of one's retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).
Find tips and resources that help you save your hard-earned money. Lots of financial schemes to provide you with guaranteed returns. Visit Insurance, PPF, NSC, PostalSaving, Tax, Credit Card, Salary, NRI, Tax Saving account in Pune Post Office
Showing posts with label Investment. Show all posts
Showing posts with label Investment. Show all posts
January 21, 2010
KNOW YOUR LIFE INSURANCE
Life insurance in India made its debut well over 100 years ago.
In our country, which is one of the most populated in the world, the prominence of insurance is not as widely understood, as it ought to be. What follows is an attempt to acquaint readers with some of the concepts of life insurance, with special reference to LIC.
It should, however, be clearly understood that the following content is by no means an exhaustive description of the terms and conditions of an LIC policy or its benefits or privileges.
For more details, please contact our branch or divisional office. Any LIC Agent will be glad to help you choose the life insurance plan to meet your needs and render policy servicing.
Insurance Vs. Other Savings
Contract Of Insurance:
A contract of insurance is a contract of utmost good faith technically known as uberrima fides. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance.
At the time of taking a policy, policyholder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void.
Protection:
Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.
Aid To Thrift:
Life insurance encourages 'thrift'. It allows long-term savings since payments can be made effortlessly because of the 'easy installment' facility built into the scheme. (Premium payment for insurance is monthly, quarterly, half yearly or yearly).
For example: The Salary Saving Scheme popularly known as SSS, provides a convenient method of paying premium each month by deduction from one's salary.
In this case the employer directly pays the deducted premium to LIC. The Salary Saving Scheme is ideal for any institution or establishment subject to specified terms and conditions.
Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.
Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force.
Assessees can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.
Money When You Need It:
A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time.
Children's education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies.
Alternatively, policy money can be made available at the time of one's retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).
October 25, 2009
January 24, 2008
Basics of Mutual Fund
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal
A mutual fund is a professionally-managed form of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income.
The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.
You could make money from a mutual fund in three ways:
1) Income is earned from dividends declared by mutual fund schemes from time to time.
2) If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's unit price increases. You can then sell your mutual fund units for a profit. This is tantamount to a valuation gain.
What are the different types of Mutual Funds?
Mutual fund schemes may be classified on the basis of their structure and their investment objective
A. By Structure
1. Open-ended Funds
An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices.
2. Close-ended Funds
A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the Stock Exchanges.
B. By Investment Objective
1. Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time.
2. Income Funds
The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.
Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund.
3. Balanced Funds
The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents.
This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market.
Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.
4. Money Market Funds
The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market.
These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.
C. Other Equity Related Schemes
1. Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws. (ELSS) and Pension Schemes
2. Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.
3. Sectoral Schemes
Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry higher risk and restricted to specific sector.
What are the benefits of investing in a mutual fund?
The benefits of investing in mutual funds are as follows -
1. Access to professional money managers - Experienced fund managers using advanced quantitative and mathematical techniques manage your money.
2. Diversification - Mutual funds aim to reduce the volatility of returns through diversification by investing in a number of companies across a broad section of industries and sectors. It prevents an investor from putting "all eggs in one basket". This inherently minimizes risk
3. Liquidity - Open-ended mutual funds are priced daily and are always willing to buy back units from investors. This mean that investors can sell their holdings in mutual fund investments anytime without worrying about finding a buyer at the right price.
4. Tax Efficiency - Mutual fund offers a variety of tax benefits. Please visit the tax corner section or consult your tax advisor for details.
5. Low transaction costs - Since mutual funds are a pool of money of many investors, the amount of investment made in securities is large. This therefore results in paying lower brokerage due to economies of scale.
6. Transparency - Prices of open ended mutual funds are declared daily. Regular updates on the value of your investment are available. The portfolio is also disclosed regularly with the fund manager's investment strategy and outlook.
7. Well-regulated industry - All the mutual funds are registered with SEBI and they function under strict regulations designed to protect the interests of investors.
8. Convenience of small investments - A mutual fund on the other hand allows even individual investors to hold a diversified array of securities due to the fact that it invests in a portfolio of stocks. A mutual fund therefore permits risk diversification without an investor having to invest large amounts of money.
What are the different plans that mutual funds offer?
Mutual Funds offer various investment options. Some of the important investment options include:
1. Systematic Investment Plan (SIP)
The investor is given the option of preparing a pre-determined number of post-dated cheques in favor of the fund. The investor is allotted units on a predetermined date specified in the offer document at the applicable NAV.
2. Systematic Encashment Plan (SEP)
As opposed to the Systematic Investment Plan, the Systematic Encashment Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.
3. Growth Option
Dividend is not paid-out under a Growth Option and the investor realizes only the capital appreciation on the investment (by an increase in NAV).
4. Dividend Payout Option
Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.
What are the types of risks?
For mutual fund investments, risks would include variability, or period-by-period fluctuations in total return. The value of the scheme's investments may be affected by factors affecting capital markets such as price and volume volatility in the stock markets, interest rates, currency exchange rates, foreign investment, changes in government policy, political, economic or other developments.
1. Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".
2. Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you'll actually be able to buy less, not more.
3. Credit Risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?
4. Interest Rate Risk: Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in the interest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interest rates drop, the prices increase
5. Investment Risks: In the sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.
6. Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near their real values. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market.
7. Changes in the Government Policy: Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund.
A mutual fund is a professionally-managed form of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income.
The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.
You could make money from a mutual fund in three ways:
1) Income is earned from dividends declared by mutual fund schemes from time to time.
2) If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's unit price increases. You can then sell your mutual fund units for a profit. This is tantamount to a valuation gain.
What are the different types of Mutual Funds?
Mutual fund schemes may be classified on the basis of their structure and their investment objective
A. By Structure
1. Open-ended Funds
An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices.
2. Close-ended Funds
A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the Stock Exchanges.
B. By Investment Objective
1. Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time.
2. Income Funds
The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.
Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund.
3. Balanced Funds
The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents.
This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market.
Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.
4. Money Market Funds
The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market.
These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.
C. Other Equity Related Schemes
1. Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws. (ELSS) and Pension Schemes
2. Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.
3. Sectoral Schemes
Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry higher risk and restricted to specific sector.
What are the benefits of investing in a mutual fund?
The benefits of investing in mutual funds are as follows -
1. Access to professional money managers - Experienced fund managers using advanced quantitative and mathematical techniques manage your money.
2. Diversification - Mutual funds aim to reduce the volatility of returns through diversification by investing in a number of companies across a broad section of industries and sectors. It prevents an investor from putting "all eggs in one basket". This inherently minimizes risk
3. Liquidity - Open-ended mutual funds are priced daily and are always willing to buy back units from investors. This mean that investors can sell their holdings in mutual fund investments anytime without worrying about finding a buyer at the right price.
4. Tax Efficiency - Mutual fund offers a variety of tax benefits. Please visit the tax corner section or consult your tax advisor for details.
5. Low transaction costs - Since mutual funds are a pool of money of many investors, the amount of investment made in securities is large. This therefore results in paying lower brokerage due to economies of scale.
6. Transparency - Prices of open ended mutual funds are declared daily. Regular updates on the value of your investment are available. The portfolio is also disclosed regularly with the fund manager's investment strategy and outlook.
7. Well-regulated industry - All the mutual funds are registered with SEBI and they function under strict regulations designed to protect the interests of investors.
8. Convenience of small investments - A mutual fund on the other hand allows even individual investors to hold a diversified array of securities due to the fact that it invests in a portfolio of stocks. A mutual fund therefore permits risk diversification without an investor having to invest large amounts of money.
What are the different plans that mutual funds offer?
Mutual Funds offer various investment options. Some of the important investment options include:
1. Systematic Investment Plan (SIP)
The investor is given the option of preparing a pre-determined number of post-dated cheques in favor of the fund. The investor is allotted units on a predetermined date specified in the offer document at the applicable NAV.
2. Systematic Encashment Plan (SEP)
As opposed to the Systematic Investment Plan, the Systematic Encashment Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.
3. Growth Option
Dividend is not paid-out under a Growth Option and the investor realizes only the capital appreciation on the investment (by an increase in NAV).
4. Dividend Payout Option
Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.
What are the types of risks?
For mutual fund investments, risks would include variability, or period-by-period fluctuations in total return. The value of the scheme's investments may be affected by factors affecting capital markets such as price and volume volatility in the stock markets, interest rates, currency exchange rates, foreign investment, changes in government policy, political, economic or other developments.
1. Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".
2. Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you'll actually be able to buy less, not more.
3. Credit Risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?
4. Interest Rate Risk: Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in the interest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interest rates drop, the prices increase
5. Investment Risks: In the sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.
6. Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near their real values. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market.
7. Changes in the Government Policy: Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund.
ULIPS are a long term Investment
I have recently come across agents selling ULIP's as three year plans. You might hear them ask you to invest for just three years and then reap the benefits.
All this in my opinion is miselling. Investing in ULIP's work only if your investment horizon is more than 10 years.
Below is an illustration of returns from HDFC Unit Linked Endowment Plus based on term of the plan.
These illustrations are for a 34 year male. Assuming returns of 10% per annum the following is what the figures look like.
Term : 3 years
Premium : Rs.25,000 per annum
Sum assured : Rs.1,25,000
Total premium paid : Rs.75,000
Fund balance at the end of 3 years : Rs.68,976
Net return on investments : Loss of Rs.6,024 on principal
Term : 10 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 1,25,000
Total premium paid : Rs.2,50,000
Fund balance at the end of 10 years : Rs.3,17,657
Net return on investments : 7.17%
Term : 15 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 1,87,500
Total premium paid : Rs.3,75,000
Fund balance at the end of 15 years : Rs.7,37,790
Net return on investments : 8.07%
Term : 20 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 2,50,000
Total premium paid : Rs.5,00,000
Fund balance at the end of 20 years : Rs.13,01,447
Net return on investments : 8.43%
Term : 25 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 3,12,500
Total premium paid : Rs.6,25,000
Fund balance at the end of 25 years : Rs.13,01,447
Net return on investments : 8.62%
Clearly, if you look at the net returns, investment in ULIPs only work if you plan to stay invested for long term. If someone is selling you a ULIP for a time frame of 3 to 5 years, it will not work. All he is doing is mis-selling
Investment returns for government issued bonds is also around 8%. After investing for 20-25 years we get around 8.5% interest rate.
Tips
All this in my opinion is miselling. Investing in ULIP's work only if your investment horizon is more than 10 years.
Below is an illustration of returns from HDFC Unit Linked Endowment Plus based on term of the plan.
These illustrations are for a 34 year male. Assuming returns of 10% per annum the following is what the figures look like.
Term : 3 years
Premium : Rs.25,000 per annum
Sum assured : Rs.1,25,000
Total premium paid : Rs.75,000
Fund balance at the end of 3 years : Rs.68,976
Net return on investments : Loss of Rs.6,024 on principal
Term : 10 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 1,25,000
Total premium paid : Rs.2,50,000
Fund balance at the end of 10 years : Rs.3,17,657
Net return on investments : 7.17%
Term : 15 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 1,87,500
Total premium paid : Rs.3,75,000
Fund balance at the end of 15 years : Rs.7,37,790
Net return on investments : 8.07%
Term : 20 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 2,50,000
Total premium paid : Rs.5,00,000
Fund balance at the end of 20 years : Rs.13,01,447
Net return on investments : 8.43%
Term : 25 years
Premium : Rs.25,000 per annum
Sum assured : Rs. 3,12,500
Total premium paid : Rs.6,25,000
Fund balance at the end of 25 years : Rs.13,01,447
Net return on investments : 8.62%
Clearly, if you look at the net returns, investment in ULIPs only work if you plan to stay invested for long term. If someone is selling you a ULIP for a time frame of 3 to 5 years, it will not work. All he is doing is mis-selling
Investment returns for government issued bonds is also around 8%. After investing for 20-25 years we get around 8.5% interest rate.
Tips
- Do not exit before the Ulip matures.
- If you need to withdraw, do it partially, and only if there's an emergency.
- Take 100 per cent equity exposure when the maturity is over five years away.
- Review you life cover needs and increase the cover, if required.
- Use top-up facility to deploy surplus funds.
January 23, 2008
Post Office Savings Schemes
This section of InvestInn offers information about various savings and investments plans available to residents of India via. Indian Post offices. These schemes are popular among each and every section of society as they offers higher returns without any risk loss. i.e. Guaranteed returns.Current Small Savings Schemes With Main Features
- Post Office Time Deposits
- Post Office Recurring Deposits
- Post Office Monthly Income Scheme [Post Office MIS]
- National Savings Certificates [NSC]
- Kisan Vikas Patra - [KVP]
- Public Provident Funds [PPF]
- Deposit Scheme for Retiring Government Employees.
- Deposit Scheme for Retiring Employees of Public Sector Companies.
- Postal Life Insurance
1. Post Office Time Deposits
Post office Time deposit scheme is a type of fixed deposit account offered by Department of post, Government of India at all post office. This saving plan is best for those investors who want to deposit a lump sum for a fixed period. Investor gets a lump sum (principal + interest) at the maturity of the deposit, where rate of interest on investment depend on the term of deposit.
Who can open
- A single adult or two adults jointly,
- A pensioner to receive/credit his monthly pension,
- Group Accounts by Provident Fund,
- Superannuation Fund or Gratuity Fund, Authority controlling funds of the Sanchayika. Public Account by a local authority/body,
- Institutional Accounts by the Treasurer of Charitable Endowments for India, Trust Regimental Fund & Welfare Fund,
- A cooperative society / cooperative bank or scheduled bank on behalf of its members, clients or employees
- Gazetted Officer in his official capacity.
[ Non Resident Indian / HUF can not open the account. ]
Nomination facility
Nomination facility is available under Post office Time Deposit scheme.
Amount Required
Minimum amount required: Rs.200/-. Maximum Amount : No Limit
Time / term of investment
Time Deposits can be made for the periods of 1 year, 2 years, 3 years and 5 years.
Interest Rates
Period of deposit--- Rate of Interest per cent/ per annum
1 YEAR ----------------6.25
2 YEARS ---------------6.50
3 YEARS ---------------7.25
5 YEARS ---------------7.50
2. Post Office Recurring Deposit Accounts
Who can open :
- A single adult or two adults jointly,
- A guardian on behalf of a minor or a person of unsound mind; or
- A minor who has attained the age of ten year, in his own name.
Where can be opened :
At any post office.
Maturity
Period of maturity of an account is five years.
Period of maturity of an account is five years.
Deposits
Sixty equal monthly deposits shall be made in an account in multiples of Rs. five subject to a minimum of ten rupees.
Defaults in deposits
- Accounts with not more than four defaults in deposits can be regularized within a period of two months on payment of a default fee.
- Account becomes discontinued after more than four defaults.
Interest & Repayment on maturity
- On maturity of the accounts opened on or after 1st March, 2003, an amount (inclusive of interest) of Rs. 728.90 is payable to a subscriber of Rupees: Ten denomination account.
- Amount repayable, inclusive of interest, on an account of any other denomination shall be proportionate to the amount specified above.
Pass Book
Depositor is provided with a pass book with entries of the deposited amount and other particulars duly stamped by the post Office.
Depositor is provided with a pass book with entries of the deposited amount and other particulars duly stamped by the post Office.
Premature closure
Premature closure of accounts is permissible after expiry of three years provided that interest at the rate applicable to post office savings account shall be payable on such premature closure of account.
Premature closure of accounts is permissible after expiry of three years provided that interest at the rate applicable to post office savings account shall be payable on such premature closure of account.
Continuation after maturity
Permissible for a maximum period of five years.
3. Monthly Income Scheme [Post Office MIS]
Who can open
A single adult or 2-3 adults jointly.
More than one account can be opened subject to maximum deposit limits.
A single adult or 2-3 adults jointly.
More than one account can be opened subject to maximum deposit limits.
Where can be opened
At any post office.
At any post office.
Maturity
Period of maturity of an account is six years.
Deposits
Only one deposit shall be made in an account.
Only one deposit shall be made in an account.
Deposit limits
Minimum: rupees one thousand.
Maximum: rupees three lakhs in case of single and rupees six lakhs in case of joint account. Deposits in all accounts taken together shall not exceed Rs. three lakhs in single account and Rs. six lakhs in joint account. The depositor’s shares in the balances of joint accounts shall be taken as one half or one third of such balance according as the account is held by 2 or 3 adults.
Interest
- Interest @ 8 per cent/ per annum, payable monthly in respect of the accounts opened on or after the 1st March, 2003.
- In addition, bonus equal to ten per cent of the deposited amount is payable at the time of repayment on maturity.
Pass Book
Depositor is provided with a pass book with entries of the deposited amount and other particulars duly stamped by the post Office.
Depositor is provided with a pass book with entries of the deposited amount and other particulars duly stamped by the post Office.
Premature cloasure
Premature closure facility is available after one year subject to condition.
Premature closure facility is available after one year subject to condition.
Closure of account
Account shall be closed after expiry of 6 years, bonus equal to ten per cent of deposits shall be paid alongwith principle amount.
Income Tax relief
Income tax relief is available on the interest earned as per limits fixed vide section 80L of Income Tax, as amended from time to time.
Income tax relief is available on the interest earned as per limits fixed vide section 80L of Income Tax, as amended from time to time.
4. National Savings Certificates [NSC]
Who can purchase
- An adult in his own name or on behalf of a minor,
- A minor,
- A trust,
- Two adults jointly,
- Hindu Undivided Family.
Where available
Available for purchase/issue at Post Offices.
Maturity
Period of maturity of a certificate is six Years.
Available for purchase/issue at Post Offices.
Maturity
Period of maturity of a certificate is six Years.
Nomination / Transferability
- Nomination facility is available.
- Certificates can be transferred from one post office to any other post office.
- Transfer from one person to another person permissible in certain conditions.
Denomination / Deposit limits
- Certificates are available in denominations (face value) of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000 & Rs. 10,000.
- There is no maximum limit for purchase of the certificates.
Interest/maturity value
- With effect from 1st March, 2003, Maturity value a certificate of Rs. 100 denomination is Rs. 160.10.
- Maturity value of a certificate of any other denomination shall be at proportionate rate.
- Interest accrued on the certificates every year is liable to income tax but deemed to have been reinvested.
Premature encashment
Premature encashment of the certificate is not permissible except at a discount in the case of death of the holder(s), forfeiture by a pledgee and when ordered by a court of law.
Place of Encashment/discharge on maturity
Can be encashed/discharged at the post office where it is registered or any other post office.
Income Tax relief
- Income Tax rebate is available on the amount invested and interest accruing every year under Section 88 of Income tax Act, as amended from time to time.
- Income tax relief is also available on the interest earned as per limits fixed vide section 80L of Income Tax, as amended from time to time.
5. Kisan Vikas Patra [KVP]
Kisan Vikas Patras (KVPs) are available at all Head Post Offices and authorized post offices throughout India. The KVPs are measured as the most safe investment tool, as it has the backing of the Government of India. The principal is assured (guaranteed) and it is deemed to be a safe avenue for investing your money. KVP is suitable for an increase in investment as it accumulates money at a fixed rate, and money doubles at the end of the specified period. It is for those looking for guaranteed returns.
Who can purchase
- An adult in his own name or on behalf of a minor,
- A minor,
- A Trust,
- Two adults jointly.
Where available
Available for purchase/issue at Post Offices.
Available for purchase/issue at Post Offices.
Maturity amount / period
With effect from 1st March, 2003, invested amount doubles on maturity after Eight Years and Seven months.
With effect from 1st March, 2003, invested amount doubles on maturity after Eight Years and Seven months.
Nomination
Nomination facility is available.
Nomination facility is available.
Denomination / Deposit limits
- Certificates are available in denominations (face value) of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000, Rs. 10,000 & Rs. 50,000.
- There is no maximum limit for purchase of the certificates.
Tax Benefits
No income tax benefit is available under the scheme. However the deposits are exempt from Tax Deduction at Source (TDS) at the time of withdrawal.
No income tax benefit is available under the scheme. However the deposits are exempt from Tax Deduction at Source (TDS) at the time of withdrawal.
Premature encashment
Premature encashment of the certificate is not permissible except at a discount in the case of death of the holder(s), forfeiture by a pledgee and when ordered by a court of law.
Premature encashment of the certificate is not permissible except at a discount in the case of death of the holder(s), forfeiture by a pledgee and when ordered by a court of law.
Place of Encashment/discharge on maturity
Can be encashed/discharged at the post office where it is registered or any other post office.
6. Public Provident Funds [PPF]
Who can open account under the scheme
An individual :
- in his own name,
- on behalf of a minor of whom he is a guardian,
- a Hindu Undivided Family.
Where to open an account
- at designated post offices throughout the country and
- at designated branches of Public Sector Banks throughout the country.
Maturity period
- The account matures for closure after 15 years.
- Account can be continued with or without subscriptions after maturity for block periods of five years.
Nomination
Nomination facility is available.
Nomination facility is available.
Deposit limits
- Minimum deposit required is Rs. 500 in a financial year.
- Maximum deposit limit is Rs. 70,000 in a financial year.
- Maximum number of deposits is twelve in a financial year.
Loans
Loans from the amount at credit in PPF account can be taken after completion of one year from the end of the financial year of opening of the account and before completion of the 5th year. The amount of withdrawal cannot exceed 40% of the amount that stood to credit at the end of fourth year preceding the year of withdrawal or at the end of preceding year whichever is lower.
Loans from the amount at credit in PPF account can be taken after completion of one year from the end of the financial year of opening of the account and before completion of the 5th year. The amount of withdrawal cannot exceed 40% of the amount that stood to credit at the end of fourth year preceding the year of withdrawal or at the end of preceding year whichever is lower.
Withdrawal
Premature withdrawal is permissible every year after completion of 5 years from the end of the year of opening the account.
Premature withdrawal is permissible every year after completion of 5 years from the end of the year of opening the account.
Transferability
- Account can be transferred from one post office to another post office,
from a bank to another bank; and - from a bank to post office and vice-versa.
Depositor is provided with a pass book with entries of the deposited amounts, interest credited every year and other particulars duly stamped by the post Office.
Interest
· Interest at the rate, notified by the Central Government from time to time, is calculated and credited to the accounts at the end of each financial year. · Present rate of interest is eight per cent / per year since: 1st March, 2003.
Income Tax relief
- Income Tax rebate is available ‘on the deposits made’, under Section 88 of Income tax Act, as amended from time to time.
- Interest credited every year is tax-free.
Everything you wanted to know about PPF
The Public Provident Fund (PPF) is one of the most popular investment options. Here are some frequently asked questions on this subject
What is the actual yield on the 11 per cent annually compounded return?
If you are in the 34.5% bracket, the tax equivalent yield amounts to 16.79 per cent. It amounts to 14.10 per cent and 12.22 per cent, if you are in the 22 per cent or 10 per cent tax brackets. This means that if you want a similar return, you will have to scout for an investment that offers you these returns putting the risk factor at the forefront.
What is the investment leeway offered?
You can invest anywhere from Rs 100 to Rs 60,000 in a year. This can be put in one lumpsum or a maximum of 12 monthly installments, but it should be in multiples of Rs 5. In fact, you can use the PPF account as a recurring deposit by making it a point to put aside a fixed amount from your income every month. Unlike a bank recurring deposit, you don't need to put the same amount every month.
Since the amount invested will vary month-to-month and year-to-year, how is it computed?
The rate of interest will be calculated on the lowest balance in the account between the close of the fifth day and the end of the month and will be credited to your account at the end of the year. So, to get the maximum out of your investment, deposit the amount in the first few days of the month.
What if I am desperately in need of funds?
Then you can opt either for a partial withdrawal (only one a year) or take a loan on your PPF account. A second loan can be taken only after the first is totally repaid.
Can I do both simultaneously?
No. You can take a loan only after two years from the end of year in which the initial subscription was made. A partial withdrawal is permissible only from the fifth year from the end of the year in which the initial subscription was made. For all practical purposes, it means from the seventh year onwards.
How expensive is the loan?
Very cheap. If you manage to repay the principal within 36 months, you are subject to just 1 per cent per annum as the rate of interest. In case you fail to repay it by then, it goes up to 6 per cent per annum. But this rate of interest is payable out of your non-taxable income.
Up to what limit is the loan sanctioned?
Up to 25 per cent of the balance to your credit at the end of the second year immediately preceding the year in which the loan is applied for.
Up to what limit is partial withdrawal permissible?
An amount not exceeding 50 per cent of the amount that stands to your credit at the end of the fourth year, immediately preceding the year of withdrawal, or at the end of the preceding year -- whichever is lower -- less the amount of loan, if any, which still has to be repaid.
For how long can I maintain my PPF account?
Though it says 15 years, it actually works out to be a 16-year period since an individual is allowed to make his last contribution in the 16th financial year. Even if the contribution is made on the last day, the tax rebate still holds though no interest on the amount will be earned.
What about continuing with my account after this period?
Sure, but at a block of five years. And, you can continue extending this in five-year blocks till it touches 30 years.
Do these extensions require me to continually invest?
No. If you merely retain your balance, it will earn the 11 per cent as interest until withdrawal.
What if I want a withdrawal during the extension period?
If you are just retaining the balance in your account, you can withdraw the entire sum in one or more installments at the commencement of each extended period. However, not more than once a year. If you have been continuing with fresh subscriptions, then you can withdraw up to 60 per cent of your balance at the commencement of each extended period in one or more installments, but not more than once a year.
Do I have to notify the bank about my PPF account being extended?
Yes. The Central Board of Direct taxes has stipulated that after 15 years, the tax benefits under Section 88 will not accrue unless the option for continuance is exercised.
Where can I open up my PPF account?
At head post offices, selection grade sub-post offices, State Bank of India and its subsidiary banks, and selected branches of nationalised banks.
or You can contact us at:
Invest-Inn
What is the actual yield on the 11 per cent annually compounded return?
If you are in the 34.5% bracket, the tax equivalent yield amounts to 16.79 per cent. It amounts to 14.10 per cent and 12.22 per cent, if you are in the 22 per cent or 10 per cent tax brackets. This means that if you want a similar return, you will have to scout for an investment that offers you these returns putting the risk factor at the forefront.
What is the investment leeway offered?
You can invest anywhere from Rs 100 to Rs 60,000 in a year. This can be put in one lumpsum or a maximum of 12 monthly installments, but it should be in multiples of Rs 5. In fact, you can use the PPF account as a recurring deposit by making it a point to put aside a fixed amount from your income every month. Unlike a bank recurring deposit, you don't need to put the same amount every month.
Since the amount invested will vary month-to-month and year-to-year, how is it computed?
The rate of interest will be calculated on the lowest balance in the account between the close of the fifth day and the end of the month and will be credited to your account at the end of the year. So, to get the maximum out of your investment, deposit the amount in the first few days of the month.
What if I am desperately in need of funds?
Then you can opt either for a partial withdrawal (only one a year) or take a loan on your PPF account. A second loan can be taken only after the first is totally repaid.
Can I do both simultaneously?
No. You can take a loan only after two years from the end of year in which the initial subscription was made. A partial withdrawal is permissible only from the fifth year from the end of the year in which the initial subscription was made. For all practical purposes, it means from the seventh year onwards.
How expensive is the loan?
Very cheap. If you manage to repay the principal within 36 months, you are subject to just 1 per cent per annum as the rate of interest. In case you fail to repay it by then, it goes up to 6 per cent per annum. But this rate of interest is payable out of your non-taxable income.
Up to what limit is the loan sanctioned?
Up to 25 per cent of the balance to your credit at the end of the second year immediately preceding the year in which the loan is applied for.
Up to what limit is partial withdrawal permissible?
An amount not exceeding 50 per cent of the amount that stands to your credit at the end of the fourth year, immediately preceding the year of withdrawal, or at the end of the preceding year -- whichever is lower -- less the amount of loan, if any, which still has to be repaid.
For how long can I maintain my PPF account?
Though it says 15 years, it actually works out to be a 16-year period since an individual is allowed to make his last contribution in the 16th financial year. Even if the contribution is made on the last day, the tax rebate still holds though no interest on the amount will be earned.
What about continuing with my account after this period?
Sure, but at a block of five years. And, you can continue extending this in five-year blocks till it touches 30 years.
Do these extensions require me to continually invest?
No. If you merely retain your balance, it will earn the 11 per cent as interest until withdrawal.
What if I want a withdrawal during the extension period?
If you are just retaining the balance in your account, you can withdraw the entire sum in one or more installments at the commencement of each extended period. However, not more than once a year. If you have been continuing with fresh subscriptions, then you can withdraw up to 60 per cent of your balance at the commencement of each extended period in one or more installments, but not more than once a year.
Do I have to notify the bank about my PPF account being extended?
Yes. The Central Board of Direct taxes has stipulated that after 15 years, the tax benefits under Section 88 will not accrue unless the option for continuance is exercised.
Where can I open up my PPF account?
At head post offices, selection grade sub-post offices, State Bank of India and its subsidiary banks, and selected branches of nationalised banks.
or You can contact us at:
Invest-Inn
January 22, 2008
Fixed Income: Playing safe!
Over the last few years, an overbearing concern for investors in the fixed income (and small savings) segment was rationalisation of interest rates. Attractive returns offered by small savings schemes (like National Savings Certificate - NSC and Public Provident Fund - PPF) coupled with tax sops, in the midst of a soft interest regime, was a dichotomous situation. The general consensus was that interest rates on the small savings schemes would be trimmed down and brought in line with prevalent market rates. However, the authorities chose to leave the rates unchanged. Instead a rather novel approach to rationalisation was adopted.
For example, some schemes (like Deposit Scheme for Retired Government Employees) were discontinued; similarly, small savings schemes were put outside the investment purview of entities like trusts and Hindu Undivided Family (HUF). In other cases the benefits were trimmed, for example the 10% maturity bonus on Post Office Monthly Income Scheme (POMIS) was scrapped. Interestingly, most of these changes were implemented outside of the Union Budget.
At present, we are faced with a situation wherein the interest rate cycle has turned around and interest rates are moving northwards. The Reserve Bank of India's recent move to hike the Cash Reserve Ratio (CRR) bears testimony to the same. Clearly, any reduction in interest rates on small savings schemes seems unlikely at this stage.
From an investor's perspective, the portfolio of fixed income instruments that offer tax sops (under Section 80C) is a comprehensive one. NSC and tax-saving bank fixed deposits can find place in the investor's portfolio who wishes to invest for relatively shorter time frames. Conversely, those planning to provide for long-term needs like retirement and child's education can employ PPF. Similarly, other schemes (sans tax benefits) which provide for specific needs like providing regular income i.e. POMIS and Senior Citizens Savings Scheme are also in existence.
For example, some schemes (like Deposit Scheme for Retired Government Employees) were discontinued; similarly, small savings schemes were put outside the investment purview of entities like trusts and Hindu Undivided Family (HUF). In other cases the benefits were trimmed, for example the 10% maturity bonus on Post Office Monthly Income Scheme (POMIS) was scrapped. Interestingly, most of these changes were implemented outside of the Union Budget.
At present, we are faced with a situation wherein the interest rate cycle has turned around and interest rates are moving northwards. The Reserve Bank of India's recent move to hike the Cash Reserve Ratio (CRR) bears testimony to the same. Clearly, any reduction in interest rates on small savings schemes seems unlikely at this stage.
From an investor's perspective, the portfolio of fixed income instruments that offer tax sops (under Section 80C) is a comprehensive one. NSC and tax-saving bank fixed deposits can find place in the investor's portfolio who wishes to invest for relatively shorter time frames. Conversely, those planning to provide for long-term needs like retirement and child's education can employ PPF. Similarly, other schemes (sans tax benefits) which provide for specific needs like providing regular income i.e. POMIS and Senior Citizens Savings Scheme are also in existence.
Pension Plans: Planning for old age
A lot of investors take pains to plan for their short-medium term needs like buying a car or providing for children's education. While this is a good thing, they must also show the same enthusiasm while planning for long-term needs, in particular retirement planning.
An inevitable outcome of the brisk pace at which our economy is growing is a decline in the purchasing power of currency i.e. inflation. Put simply, a product that costs Rs 100 at present, would cost Rs 105 a year from today, assuming that prices rise at 5%. This is the impact of rising prices over just 1-Yr, over a 30-Yr period, assuming that inflation continues to rise at 5%, the same Rs 100 product will be available at Rs 432.
It is apparent that if investors are not prepared to counter the looming prospect of rising prices, retirement (when income ceases, but expenses continue) can be a challenging phase. Another factor that needs to be considered is changing lifestyles.
Keeping this in mind, investors must plan for retirement in a manner so as to ensure that their finances are sound enough to provide for their expenses and to help them in maintaining their desired lifestyles. This is where pension plans can play a vital role.
What are pension plans?
When an individual opts for a pension plan, he has to pay a fixed amount, known as the premium, to the insurance company, over a pre-determined period of time, known as the term of the policy. The premium (net of expenses) will be invested by the insurance company in various instruments to earn returns and build a corpus over the term of the policy. The amount paid as premium is eligible for deduction under Section 80C of the Income Tax Act, upto an upper limit of Rs 100,000.
How pension plans work
At the time of opting for the pension plan, the policy holder defines his retirement age (known as vesting age in industry parlance); at this age, typically, he will be provided with one-third of the accumulated corpus as a lump sum payment. This lump sum payment (subject to a maximum of one-third of the corpus) is tax-free in the hands of the policy holder. The balance amount (accumulated corpus less lump sum payment) is converted into a monthly income, also known as annuity. In other words, the policy holder can choose to invest the balance sum with any life insurer to obtain a monthly income for the rest of his life. The period over which he will receive the monthly income is known as the annuity period; the monthly income is taxable as per the policy holder's tax slab.
In a plan, wherein there is a lag between the policy holder making the lump sum payment to the insurance company, and he receiving annuities, is known as a deferred annuity plan.
Another form of annuity is the immediate annuity wherein the policy holder pays a lump sum amount upfront and the insurance company begins paying the annuity immediately. In India most insurers offer deferred annuities, with only the Life Insurance Corporation of India (LIC) providing immediate annuities.
Like any other investment, if the pension plan is taken earlier on, the returns can be that much higher, as the benefits of compounding set in. Also, most insurers offer the option of increasing the premium over the policy term, which can be availed of by the policy holder as his income rises.
While LIC offers good traditional pension plans, most of the private insurance companies, offer ULIP (unit linked insurance plan) based pension plans, thus offering a wider choice to investors.
An important feature of most pension plans available in the Indian market is the absence of an insurance benefit. For instance, Bajaj Allianz UnitGain Easy Pension Plus does not offer any life insurance cover. On the other hand, ICICI Prudential LifeTime Super Pension offers the policy holder the option to opt for a life insurance cover. But it must be understood that the policy holder will have to bear the cost of insurance. The charges (i.e. premium for life cover) would be deducted from the pension plan premium paid by the individual and the same would impact his returns
An inevitable outcome of the brisk pace at which our economy is growing is a decline in the purchasing power of currency i.e. inflation. Put simply, a product that costs Rs 100 at present, would cost Rs 105 a year from today, assuming that prices rise at 5%. This is the impact of rising prices over just 1-Yr, over a 30-Yr period, assuming that inflation continues to rise at 5%, the same Rs 100 product will be available at Rs 432.
It is apparent that if investors are not prepared to counter the looming prospect of rising prices, retirement (when income ceases, but expenses continue) can be a challenging phase. Another factor that needs to be considered is changing lifestyles.
Keeping this in mind, investors must plan for retirement in a manner so as to ensure that their finances are sound enough to provide for their expenses and to help them in maintaining their desired lifestyles. This is where pension plans can play a vital role.
What are pension plans?
When an individual opts for a pension plan, he has to pay a fixed amount, known as the premium, to the insurance company, over a pre-determined period of time, known as the term of the policy. The premium (net of expenses) will be invested by the insurance company in various instruments to earn returns and build a corpus over the term of the policy. The amount paid as premium is eligible for deduction under Section 80C of the Income Tax Act, upto an upper limit of Rs 100,000.
How pension plans work
At the time of opting for the pension plan, the policy holder defines his retirement age (known as vesting age in industry parlance); at this age, typically, he will be provided with one-third of the accumulated corpus as a lump sum payment. This lump sum payment (subject to a maximum of one-third of the corpus) is tax-free in the hands of the policy holder. The balance amount (accumulated corpus less lump sum payment) is converted into a monthly income, also known as annuity. In other words, the policy holder can choose to invest the balance sum with any life insurer to obtain a monthly income for the rest of his life. The period over which he will receive the monthly income is known as the annuity period; the monthly income is taxable as per the policy holder's tax slab.
In a plan, wherein there is a lag between the policy holder making the lump sum payment to the insurance company, and he receiving annuities, is known as a deferred annuity plan.
Another form of annuity is the immediate annuity wherein the policy holder pays a lump sum amount upfront and the insurance company begins paying the annuity immediately. In India most insurers offer deferred annuities, with only the Life Insurance Corporation of India (LIC) providing immediate annuities.
Like any other investment, if the pension plan is taken earlier on, the returns can be that much higher, as the benefits of compounding set in. Also, most insurers offer the option of increasing the premium over the policy term, which can be availed of by the policy holder as his income rises.
While LIC offers good traditional pension plans, most of the private insurance companies, offer ULIP (unit linked insurance plan) based pension plans, thus offering a wider choice to investors.
An important feature of most pension plans available in the Indian market is the absence of an insurance benefit. For instance, Bajaj Allianz UnitGain Easy Pension Plus does not offer any life insurance cover. On the other hand, ICICI Prudential LifeTime Super Pension offers the policy holder the option to opt for a life insurance cover. But it must be understood that the policy holder will have to bear the cost of insurance. The charges (i.e. premium for life cover) would be deducted from the pension plan premium paid by the individual and the same would impact his returns
SIP: All you need to know
Regular visitors and clients of Personalfn appreciate the importance of the systematic investment plan (SIP) route of investing in mutual funds. However it is surprising to note that it takes difficult times (read volatile markets) for the investing community at large, to appreciate the importance of such a handy facility.
Simply put, investing via an SIP entails making regular investments (generally) in smaller denominations as opposed to making an one-time lump sum investment. The intention is to capitalise on the volatility in equity markets by lowering the average purchase cost. While few would dispute the utility that an SIP can offer, there is a flipside to the same as well. In this article, we discuss the pros and cons of SIP investing.
How an SIP helps...
1. Lowers the average purchase cost
Perhaps the single most important advantage offered by an SIP is the opportunity to lower the average purchase cost. This is achieved in periods when equity markets experience a turbulent patch. Since the investment amount for each installment is fixed, the investor gains by receiving a higher number of units. An example will clarify this better. Suppose the monthly investment installment is Rs 1,000 and the fund's net asset value (NAV) is Rs 50; this will lead to 20 units of the fund being credited to the investor. However, in the next month on account of the volatile markets, the fund's NAV falls to Rs 40. This will lead to a lowering in the average purchase cost; as a result, the investor will have 25 units credited to his account. In other words, an SIP can help investors benefit from volatility in equity markets.
2. Induces disciplined investing
Lack of disciplined investing is one of the major reasons for investors not achieving their financial goals. For example, often monies that are kept aside for investment purpose end up getting used for extraneous purposes. As a result, the investor is even further divorced from his goals. An SIP ensures that the investor continues to be invested in a disciplined manner and thereby stays on course to achieve his financial goals.
3. Lighter on the wallet
An often heard excuse for not investing is lack of monies. SIP takes care of this problem by lowering the minimum investment amount. For example, while the minimum investment amount for a lump sum investment in a diversified equity fund could typically be Rs 5,000, for an SIP it can be as low as Rs 500. As a result, investing via the SIP route becomes lighter on the wallet.
4. Makes market timing irrelevant
Alongwith cricket and movies, timing the market ranks as a popular pastime. Investors have an inexplicable urge for timing markets and trying to get invested when markets have bottomed out. It's a different matter that timing markets to perfection and doing so consistently is beyond most investors. An investment via the SIP route makes market timing irrelevant. On account of the on-going investments, investors can afford to bid adieu to one of their favourite pastimes and concentrate on more pressing matters.
When an SIP won't deliver...
1. In rising marketsAn SIP could fail to deliver on its proposition of lowering the average purchase cost, if equity markets rise in a secular manner. Such a scenario is fairly possible over shorter time periods. As a result, investing via an SIP could prove to be more expensive vis-a-vis a lump sum investment. Hence, the solution lies in opting for an SIP that runs over an appropriate time frame, say at least 12-24 months.
2. A directionless SIPBy a directionless SIP, we are referring to an SIP that is not a part of an investment plan or an aimless SIP. It should be understood that an SIP is not an 'end'; instead, it is the 'means' to achieve an end. Hence starting an SIP in isolation is unlikely to be of too much help. Instead, the SIP should form part of an investment plan aimed at achieving a predetermined objective.
3. An SIP in the wrong fundInvesting via the SIP mode doesn't improve the prospects of a wrong fund. A poorly managed fund stays that irrespective of the investment mode. Its shortcomings will not be eliminated by an SIP. Hence the key lies in first selecting a well-managed fund that is right for the investor and then investing in it via an SIP.
As can be seen, the SIP mode of investing has a fair number of advantages to offer; conversely, there can be instances when it may not deliver as expected. Investors on their part should make well-informed investment decisions after acquainting themselves of both the pros and cons.
Simply put, investing via an SIP entails making regular investments (generally) in smaller denominations as opposed to making an one-time lump sum investment. The intention is to capitalise on the volatility in equity markets by lowering the average purchase cost. While few would dispute the utility that an SIP can offer, there is a flipside to the same as well. In this article, we discuss the pros and cons of SIP investing.
How an SIP helps...
1. Lowers the average purchase cost
Perhaps the single most important advantage offered by an SIP is the opportunity to lower the average purchase cost. This is achieved in periods when equity markets experience a turbulent patch. Since the investment amount for each installment is fixed, the investor gains by receiving a higher number of units. An example will clarify this better. Suppose the monthly investment installment is Rs 1,000 and the fund's net asset value (NAV) is Rs 50; this will lead to 20 units of the fund being credited to the investor. However, in the next month on account of the volatile markets, the fund's NAV falls to Rs 40. This will lead to a lowering in the average purchase cost; as a result, the investor will have 25 units credited to his account. In other words, an SIP can help investors benefit from volatility in equity markets.
2. Induces disciplined investing
Lack of disciplined investing is one of the major reasons for investors not achieving their financial goals. For example, often monies that are kept aside for investment purpose end up getting used for extraneous purposes. As a result, the investor is even further divorced from his goals. An SIP ensures that the investor continues to be invested in a disciplined manner and thereby stays on course to achieve his financial goals.
3. Lighter on the wallet
An often heard excuse for not investing is lack of monies. SIP takes care of this problem by lowering the minimum investment amount. For example, while the minimum investment amount for a lump sum investment in a diversified equity fund could typically be Rs 5,000, for an SIP it can be as low as Rs 500. As a result, investing via the SIP route becomes lighter on the wallet.
4. Makes market timing irrelevant
Alongwith cricket and movies, timing the market ranks as a popular pastime. Investors have an inexplicable urge for timing markets and trying to get invested when markets have bottomed out. It's a different matter that timing markets to perfection and doing so consistently is beyond most investors. An investment via the SIP route makes market timing irrelevant. On account of the on-going investments, investors can afford to bid adieu to one of their favourite pastimes and concentrate on more pressing matters.
When an SIP won't deliver...
1. In rising marketsAn SIP could fail to deliver on its proposition of lowering the average purchase cost, if equity markets rise in a secular manner. Such a scenario is fairly possible over shorter time periods. As a result, investing via an SIP could prove to be more expensive vis-a-vis a lump sum investment. Hence, the solution lies in opting for an SIP that runs over an appropriate time frame, say at least 12-24 months.
2. A directionless SIPBy a directionless SIP, we are referring to an SIP that is not a part of an investment plan or an aimless SIP. It should be understood that an SIP is not an 'end'; instead, it is the 'means' to achieve an end. Hence starting an SIP in isolation is unlikely to be of too much help. Instead, the SIP should form part of an investment plan aimed at achieving a predetermined objective.
3. An SIP in the wrong fundInvesting via the SIP mode doesn't improve the prospects of a wrong fund. A poorly managed fund stays that irrespective of the investment mode. Its shortcomings will not be eliminated by an SIP. Hence the key lies in first selecting a well-managed fund that is right for the investor and then investing in it via an SIP.
As can be seen, the SIP mode of investing has a fair number of advantages to offer; conversely, there can be instances when it may not deliver as expected. Investors on their part should make well-informed investment decisions after acquainting themselves of both the pros and cons.
5 things to look at in an FD
A fixed deposit (FD) probably ranks as the most conventional investment avenue for domestic investors. More importantly, given its offering, it makes an apt choice for risk-averse investors. In this article, we present 5 things investors must look at in an FD.
1. Credit profile
The FD's credit profile is an indicator of the degree of risk associated with it in terms of timely repayment of the principal and interest payment. For example, an 'AAA/FAAA' rating is indicative of the highest level of safety. Typically, an FD with a higher rating would offer lower returns vis-a-vis an FD with a lower rating. The additional return in a lower rated FD is in effect a compensation for the higher risk borne. Investors would do well to decide on the quantum of risk they are willing to bear and then select an FD.
2. Rate of return
Rate of return or interest rate indicates the return that the FD investor will clock. At any point in time, it is not uncommon to find various entities like banks, small savings schemes and corporates offering differential returns on similar rated FDs. Investors on their part would do well to scout various options and select the FD that offers them the best return at a rating that suits them.
3. Interest payout options
Investors can generally choose between various interest payout options like monthly, quarterly, annually or on maturity. Ideally, the investor's need for liquidity should be used to determine which interest payout option is chosen. Selecting the interest payout 'on maturity' option can help investors benefit from the compounding effect and clock a higher return.
4. Tenure
The FD's tenure is the period over which the investor stays invested. By and large, a longer tenure translates into a higher rate of return. Investors must match their investment tenure with their needs/objectives. For example, if the investor has an expense to meet 3 years hence, he can invest an appropriate amount in a 3-Yr FD to ensure that the maturity proceeds match his future obligation. On the same lines, if there is a 5-Yr investment tenure, then investments can be considered in tax-saving FDs; this will help the investor simultaneously benefit from tax sops under Section 80C.
5. Premature withdrawal
An often-ignored aspect of FD investing is the premature withdrawal clause. Investors opting for a premature withdrawal can be penalised by either being given a lower rate of return or zero interest depending on the terms and conditions of the FD. Investors would do well to acquaint themselves with the implications of a premature withdrawal before making an investment
1. Credit profile
The FD's credit profile is an indicator of the degree of risk associated with it in terms of timely repayment of the principal and interest payment. For example, an 'AAA/FAAA' rating is indicative of the highest level of safety. Typically, an FD with a higher rating would offer lower returns vis-a-vis an FD with a lower rating. The additional return in a lower rated FD is in effect a compensation for the higher risk borne. Investors would do well to decide on the quantum of risk they are willing to bear and then select an FD.
2. Rate of return
Rate of return or interest rate indicates the return that the FD investor will clock. At any point in time, it is not uncommon to find various entities like banks, small savings schemes and corporates offering differential returns on similar rated FDs. Investors on their part would do well to scout various options and select the FD that offers them the best return at a rating that suits them.
3. Interest payout options
Investors can generally choose between various interest payout options like monthly, quarterly, annually or on maturity. Ideally, the investor's need for liquidity should be used to determine which interest payout option is chosen. Selecting the interest payout 'on maturity' option can help investors benefit from the compounding effect and clock a higher return.
4. Tenure
The FD's tenure is the period over which the investor stays invested. By and large, a longer tenure translates into a higher rate of return. Investors must match their investment tenure with their needs/objectives. For example, if the investor has an expense to meet 3 years hence, he can invest an appropriate amount in a 3-Yr FD to ensure that the maturity proceeds match his future obligation. On the same lines, if there is a 5-Yr investment tenure, then investments can be considered in tax-saving FDs; this will help the investor simultaneously benefit from tax sops under Section 80C.
5. Premature withdrawal
An often-ignored aspect of FD investing is the premature withdrawal clause. Investors opting for a premature withdrawal can be penalised by either being given a lower rate of return or zero interest depending on the terms and conditions of the FD. Investors would do well to acquaint themselves with the implications of a premature withdrawal before making an investment
January 19, 2008
PPF vs NSC: What's the difference?
This is what we attempt to do here. Explain the difference between the Public Provident Fund and the National Savings Certificate.
The NSC is a post-office savings scheme while the PPF was established by the central government in 1968. But both are very safe since they are backed by the government.
How much goes in?
The minimum amount you have to put into your PPF account in a year is Rs 500. The maximum you can put is Rs 70,000 per year.
With NSC, the minimum amount is Rs 100. Here, is no upper limit on investment.
However, NSC is sold in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. So, if you want to invest Rs 30,000, you will have to buy three certificates of Rs 10,000 each.
What do I get?
On the face of it, both give an identical rate of interest: 8% per annum. Or so it seems.
The only difference is in the way it is computed. PPF is compounded annually. NSC is compounded half-yearly (twice a year).
Let's say on April 1, 2006, you invested Rs 30,000 in PPF and the same amount in NSC.
On April 1, 2007, your PPF account will have Rs 32,400 while your NSC will have Rs 32,448.
What's the tax impact?
The most important issue!
Both these investments fall under Section 80C. That means the investments made under this section are eligible for an income deduction upto a maximum Rs 1,00,000.
This is as far as your principal investment goes.
Let's look at the interest earned.
With PPF, you pay no tax on the interest you earn.
What about NSC?Till FY 2004-'05, an individual could avail of a deduction under Section 80L of the Income Tax Act. This limit was Rs 12,000 of interest income received during the financial year. This deduction has been done away with from FY 2005-'06. Now, all interest income is taxable at the respective slab rate of the individual.
The interest accrued on NSC is taxable. But, it is also eligible for a deduction under Section 80C.
Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such a case, it does not amount to a huge sum.
If you do not declare the interest on accrual basis, then the entire interest earned (difference between the amount deposited and the maturity value) would accumulate in the year of maturity. You could then claim it under Section 80C but it would be a huge amount and would be taxable at the current applicable tax rate.
How long do I hold it?
PPF is for 15 years, but you can extend it for a block of five years. Let's say you open a PPF account when you are 21 years old. It matures when you are in your late 30s, when you may be earning well and may not need the money. In that case, you can continue with the account.
Of course, you do have the option of withdrawing the entire balance on maturity, that is, after 15 years of the close of the financial year in which you opened the account.
So, if you opened it in FY 2006-07 (this financial year), you will be able to withdraw it 15 years later, starting March 31, 2007 (end of this financial year). That is April 1, 2022.
If you extend it for five years after that, you continue to earn the rate of interest and can also make fresh deposits and get the tax benefit.
NSC is for a much shorter duration -- just six years from the date of investment.
How many can I have?
Once you open an NSC, you can't keep adding to it. You will have to buy another. Let's say you buy a NSC of Rs 30,000. In a year's time, you want to add another Rs 30,000. You cannot add it to this amount. You will have to buy another NSC.
With PPF, you can have just one account. But this does not matter because you have to make annual additions. Every year, you keep adding to it.
However, if you like the safety of the investment and a guaranteed return of 8% per annum, you can open one in your child's name. So you can have one account for yourself and one for your child. But this does not mean the tax benefit is doubled. The limit is the same -- Rs 70,000, irrespective if it all goes in your account or in your account and your child's.
Let's say you open an account for your minor child. You can deposit Rs 70,000 in your account and Rs 70,000 in your child's account. But you will only get the tax benefit on Rs 70,000.
How is it held?
The PPF account cannot be held jointly. You can nominate someone but it cannot be jointly held with someone else. With NSC, you can hold it jointly or you can hold it singly and nominate someone.
Where can I open it?
To open a PPF account, you can drop by a State Bank of India branch. No, you do not have to have an account with them.
You can also ask your nationalised bank where you have an account if they are authorised to open PPF accounts. You can also approach the head post office in your area. If that is inconvenient, ask your local post office (selection grade sub post offices are allowed to do so).
To buy an NSC, just approach our office.
The NSC is a post-office savings scheme while the PPF was established by the central government in 1968. But both are very safe since they are backed by the government.
How much goes in?
The minimum amount you have to put into your PPF account in a year is Rs 500. The maximum you can put is Rs 70,000 per year.
With NSC, the minimum amount is Rs 100. Here, is no upper limit on investment.
However, NSC is sold in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. So, if you want to invest Rs 30,000, you will have to buy three certificates of Rs 10,000 each.
What do I get?
On the face of it, both give an identical rate of interest: 8% per annum. Or so it seems.
The only difference is in the way it is computed. PPF is compounded annually. NSC is compounded half-yearly (twice a year).
Let's say on April 1, 2006, you invested Rs 30,000 in PPF and the same amount in NSC.
On April 1, 2007, your PPF account will have Rs 32,400 while your NSC will have Rs 32,448.
What's the tax impact?
The most important issue!
Both these investments fall under Section 80C. That means the investments made under this section are eligible for an income deduction upto a maximum Rs 1,00,000.
This is as far as your principal investment goes.
Let's look at the interest earned.
With PPF, you pay no tax on the interest you earn.
What about NSC?Till FY 2004-'05, an individual could avail of a deduction under Section 80L of the Income Tax Act. This limit was Rs 12,000 of interest income received during the financial year. This deduction has been done away with from FY 2005-'06. Now, all interest income is taxable at the respective slab rate of the individual.
The interest accrued on NSC is taxable. But, it is also eligible for a deduction under Section 80C.
Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such a case, it does not amount to a huge sum.
If you do not declare the interest on accrual basis, then the entire interest earned (difference between the amount deposited and the maturity value) would accumulate in the year of maturity. You could then claim it under Section 80C but it would be a huge amount and would be taxable at the current applicable tax rate.
How long do I hold it?
PPF is for 15 years, but you can extend it for a block of five years. Let's say you open a PPF account when you are 21 years old. It matures when you are in your late 30s, when you may be earning well and may not need the money. In that case, you can continue with the account.
Of course, you do have the option of withdrawing the entire balance on maturity, that is, after 15 years of the close of the financial year in which you opened the account.
So, if you opened it in FY 2006-07 (this financial year), you will be able to withdraw it 15 years later, starting March 31, 2007 (end of this financial year). That is April 1, 2022.
If you extend it for five years after that, you continue to earn the rate of interest and can also make fresh deposits and get the tax benefit.
NSC is for a much shorter duration -- just six years from the date of investment.
How many can I have?
Once you open an NSC, you can't keep adding to it. You will have to buy another. Let's say you buy a NSC of Rs 30,000. In a year's time, you want to add another Rs 30,000. You cannot add it to this amount. You will have to buy another NSC.
With PPF, you can have just one account. But this does not matter because you have to make annual additions. Every year, you keep adding to it.
However, if you like the safety of the investment and a guaranteed return of 8% per annum, you can open one in your child's name. So you can have one account for yourself and one for your child. But this does not mean the tax benefit is doubled. The limit is the same -- Rs 70,000, irrespective if it all goes in your account or in your account and your child's.
Let's say you open an account for your minor child. You can deposit Rs 70,000 in your account and Rs 70,000 in your child's account. But you will only get the tax benefit on Rs 70,000.
How is it held?
The PPF account cannot be held jointly. You can nominate someone but it cannot be jointly held with someone else. With NSC, you can hold it jointly or you can hold it singly and nominate someone.
Where can I open it?
To open a PPF account, you can drop by a State Bank of India branch. No, you do not have to have an account with them.
You can also ask your nationalised bank where you have an account if they are authorised to open PPF accounts. You can also approach the head post office in your area. If that is inconvenient, ask your local post office (selection grade sub post offices are allowed to do so).
To buy an NSC, just approach our office.
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