Bond-Risks associated with it.

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BasuNivesh now available in it’s own domain from 22nd June 2012.

Want to start this post with one happy note. Financial Planning Standards Board India (FPSB India) which is a lone board to  certify  Financial Planners in India, accepted my experience credentials which is mandatory after clearing my exams and  education, permitted me to use the certification mark as CERTIFIED FINANCIAL PLANNERCM  or  with my name. So, now I am Certified Financial Planner!!!!

It is common perception to judge Bond as safe investment like Bank Fixed Deposits in terms of returns and risk. But their are so many risks associated with it. Hence I thought to share those with you all. First I will make you familiar with Bonds and it’s terminologies.

Bonds in simple language is, loan you are giving to the government or to company which in return will give you specified Coupon amount (return on your investment). Coupon is either on specific intervals or you can get it on maturity. Bonds which not pay any coupons during it’s tenure is usually  called Zero Coupon Bond. You will get the discounted rate to Face Value (Maturity Value) while purchasing for Zero Coupon Bonds. Difference between Issue Price (Purchasing Price) and Face Value is your return.

Now I will show you the risks associated with it.

1) Interest Rate Risk- When interest rate falls, Bonds Prices rises, conversely, when interest rate increase, Bond Prices decrease. Longer the maturity period of Bond higher the interest rate risk. So, wise thing now as RBI is steadily decreasing Interest Rate means start to invest in Bonds.

2) Reinvestment Risk-When the trend is declining interest rate then investor has no choice but to invest in prevailing interest rate which may cause him receiving less return for his future goals.

3) Inflation Risk-Higher Inflation means higher Interest Rates. Higher Interest Rates means lower Bond Price. Hence Bond prices are also associated with Inflation risk.

4) Call Risk-Some companies have attached “Call Option” with bonds. Which means, after certain period they may call back bonds by paying you the returns. Hence when interest rate in market down compare to what you are getting in Bonds then their is certainty that the issuing company may exercise this option. By this you may loose good return at that time.

5) Liquidity Risk-When investor intends to sell bonds in secondary market, he may not get the buyers. This is specifically with low rated bonds.

6) Default Risk-The issuing company may default you in paying coupon amount or maturity amount due to it’s financial crunch. Hence choose the Bond which have good rating.

These are the few risks which you need to look for before investing in Bonds. So, choose the Bonds which have good rating by rating agencies and this is the best time to purchase as everyone is predicting interest rate decline in future. Hope these points made you clear about the risks associated with Bond.

NSC-Accrued Interest taxation and way to reduce it.

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BasuNivesh now available in it’s own domain from 22nd June 2012.

Today I will show you how you can reduce your tax liability on Interest you earned by investing in NSC. Many investors may not know how to do it. As you all know, interest you receive on your investment in NSC is taxable when it matures. It is taxable income under the head of “Income from Other Sources”. But their is a way to reduce a bit by following your accrued  interest on yearly base. Before discuss further, we will glance at the features of NSC.

Tenure-5 Yrs and 10 Yrs

Min Amount-Rs.100

Interest rate-8.4% for 5 yrs deposit and 8.7% for 10 yrs deposit (Compounding Half Yly)

Tax Benefit-Avail upto Rs.1,00,000 by investing in NSC under Sec 80C of Income Tax.

Maturity Taxation-Interest is taxable under the head of “Income from Other Source”

Suppose you invested Rs.100 in 5 Yrs maturity NSC then you will get the tax exemption under Sec 80C when you invest. Hence after 5 year you earn Rs.50.89, which is taxable income under the head of “Income from Other Source”. But how to reduce tax liability on interest you earned? First you need to show each year’s accrued interest as income under the head of “Income from Other Source”. Afterwards for the same amount of interest you can avail deduction under Sec 80C as re-invested in NSC. But you can avail this facility till 4th year for 5 Yr Maturity NSC. I will show in below table how you can avail in below tableyou below, how much you can claim as re-investment for each year.

So, till the 4th year interest you can claim as re-investment and avail deduction. Suppose you didnt claimed yearly interest then the maturity accrued interest of 5th year will be calculated as Income from Other Source and it can be taxed as per your tax slabs. Hence it is better to claim on yearly base till 4th year to avail the exemption benefit (About NSC Tenure-10Yr, when I contacted local Post Office, even they dont have clarity about that.  Hence I avoided to mention about 10 Yr NSC). Hope this posting may benefit a lot of people. Happy Saving!!!

Inflation-What it mean to our investments?

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BasuNivesh now available in it’s own domain from 22nd June 2012.

You may have heard a lot about inflation these days by media and Economists. Especially when RBI hikes Repo and Reverse Repo rates. But today we will look into it in terms your investments. How it will affect your investments and how we can beat it to survive and achieve our financial goals.

Inflation in simple term “chasing by lot to purchase few available goods”. Suppose you have 10 vacant sites available in your area and when no one ready to purchase or only few people available then automatically the price of those sites decrease due to less demand. But in a reverse case, if lot of people flocked to buy those 10 sites then price of those sites will rise automatically. This is called inflation.

You may noticed it’s affect in your daily life by just thinking about the daily utensils price when we were kid and to today’s price. Even our parents or grandparents used to tell how cheap were utensils those days compare to today’s.  But what about their earning those days? They were earning few thousands and to maintain the same lifestyle.

Now about your investments. You always need to consider inflation when you are planning for your financial goals. The reason is, suppose your household expenses in today’s term is around Rs.25,000 then the same value after 25 yrs will be Rs.1,07,296 (Inflation considered is 6%). Surprised right? It is reality which even we can compare with the past. Example- if our parents used to spend Rs.6,000 25 yrs back then today’s same value is Rs.25,000. So what they used to tell is right that with mere Rs.6,000 they used to maintain household expenses comfortably.

Now,  suppose you are planning for your retirement. Your current age is 30 yrs, you are planning to retire at the age of 60 yrs and your life expectancy is around 75 yrs. Then to survive till your life expectancy how much corpus you need? We will do that with below data

1) Inflation-6%

2) Pre Retirement investment returns-15%

3) Post Retirement investment returns-8%

4) Current Household Exp-Rs.25,000 PM

So, the amount required at 60 yrs of your age will be around Rs.2,25,56,062 (Aprox 2.25 Cr)!!! Surprised right? We never thought our target as 2.25 Cr for just one goal of our life when we are investing today.

Usually what we will consider when investing is today’s cost but not future cost. Hence in above example to achieve your retirement target at 60 yrs should be Rs.2.25 Cr not mere 50 lakhs or 1 Cr (Which is huge in today’s term).

One more mistake what often we used to do is, the way we will look into the returns which our investment is generating. For example if your fixed deposit is fetching you around 9.25% of returns. Then is it exact 9.25 % return of less? It is less when we adjust this with inflation. So, it is 9.25% (Return on investments)-6% (Inflation Rate)=3.25%. Return adjusted to inflation is called as Real Return. Hence you need to think all your investments in terms of Real Return. The simple formula to calculate it is {[(1+r)/(1-i)]-1}*100 where r=return on your investments and i=inflation rate.

So decide while investing for your financial goals and the instruments where you are investing. I hope that this simple article is given you the clarity about inflation and how it will affect our goals. Happy Saving!!!!

How much Life Insurance you need?

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BasuNivesh now available in it’s own domain from 22nd June 2012.

Have you ever calculated how much Life Insurance you need? In my experience not many.  Even though you currently have Life Insurance of XYZ company, but you never calculated is it enough or not? It is common practice in India to approach Insurance Agent without validating his qualification and authenticity. Which makes him to force on you his selected product and he may never calculate your “Human Life Value”. He may mix up your Insurance need with your investments need and will show you some illustrations which may be rosy in today’s term but what about future? Basic thing you must understand is, never mix your Insurance with Investment. But how to calculate Human Life Value? Will show with simple illustration.

Human Life Value in simple term you can define as “your future obligations towards your dependent which you need to make it to current value” for example Mr.X’s age is 30 yrs and his wife Mrs.X’s is 25 yrs and her life expectancy is around 70 years. I will try to illustrate with simple 3 common expenses of his life span.

1) Mr.X’s Household expenses in today’s term-25,000 PM (Excluding Mr.X’s personal expenses and his Tax Liability)

2)  Mr.X have Home Loan of about Rs.50,00,000 (Current Value)

3) Both have a child whose age is around 5 yrs and they need around Rs.15,00,000 in current terms for their child’s future education and marriage expenses

Then in above case we need to calculate each value in today’s term till the life expectancy of Mrs.X’s life span (It is assumed that Mrs.X is financially dependent on Mr.X for her whole life).

Then the above mentioned 3 expenses should be calculated to find Human Life Value as below.

1) They need around Rs.91,00,000 aprox to sustain household expenses till Mrs.X’s life span considering inflation as 6% and return on investment around 8%. Means, with that Rs.91,00,000 she can lead her life till 70 yrs of her age with expenses being Rs.25,000 PM which is going to increase 6% (Inflation) for each year . She needs to invest Rs.91,00,000 where  she will generate around 8%

2) Home Loan need to be pay by the insurance amount in the event of his untimely death. Hence we need to consider that value to in calculating his human life value.

3)  Child’s expenses too take in today’s value. Hence we need to consider that too for considering Human Life Value

In all, after adding above three values his requirement of cash in the event of his untimely death towards his family is around Rs.1,56,00,000. Hence he need around Rs.156,00,000 Insurance Cover for his Life. Which again need to be increased in line with Inflation on yearly basis or atleast either for after each 3 or 5 yrs.

Now deciding factor is, which Plan will cover this much Life Risk for you. Endowment Plans (You need to pay high premium to cover this much Life Risk with return being low), ULIPs (Expensive in terms of cost and Premium also high) and Term Plans (Pure Life Risk Cover Plans which are nowadays available in very compitative  price).

Decide and cover your life risk which is precious when you think about your dependents. Hope now you understood the value of “Insurance” and “Human Life Value”

Gold-Ways of Investments


BasuNivesh now available in it’s own domain from 22nd June 2012.

I want to start this post with one good news. Within one month of start of this blog, total visitors count crossed over 500. Thanks for all who visited this blog.

Today I will share my knowledge about ways of investing in gold.

1) Physical Form: This is the one of the oldest and favorite format of investment method in India. But when you purchase gold in physical format it includes making charges and wastage. Main disadvantage is pricing which vary from shop to shop. Hence you will not get the standard price which is on spot market. Quality of the gold is also not sure. Biggest disadvantage is safe keeping of physical gold. So, it is inconvenient to buy, sell and safe keeping. Also, if you are investing aiming at your child’s marriage and the gold ornament which you purchased today may be old fashion at your child’s marriage. Again at that time you need to alter your existing gold, which will cost you more in the form of making charges and wastage. It may also  cost you wealth tax if your total wealth crosses 30 lakh. Hence for investment purpose this is not the best way.

2) In the form of Bars and coins through Banks: This also have same features as that of physical form of purchasing with additional disadvantage being resale may not be possible. Hence even though you may get purity assurance, this format of investment still have few disadvantages.

3) Gold ETFs: Your investment will be in Dematerialized format. Hence safe keeping of your gold will not arise in this case. Purity issue will not exist here as you keep in e format. Reselling is not the issue, easily you can liquidate in secondary market. Convenience of buying, selling and storage is very high. Pricing is linked to International Gold Price. Hence currency risk is more. You need to pay some annual reccuring expenses like storage, Insurance and AMC Expenses. Physical delivery of Gold only from Bombay. So, if you want to take physical delivery then it may be time consuming. It is a recommended way of investment except disadvantage being currency risk, annual expenses and physical delivery inconvenience. Tax Advantage is, it is treated like any other financial product. Hence Long Term Taxation will apply after one year.

4) Gold Mutual Funds: These are actually Funds Of Funds. Usually AMCs will invest into their own Gold ETF products. Hence in term of cost these are costlier compare to Gold ETF. But the few advantages are-no requirement of Dmat Account, even small amount like 500 can also be possible for investment.

5) E-Gold: This is emrging and favorable way of investment. Price is linked to Indian Gold Prices. So currency risk is nil. In terms of cost this is cheapest of all forms of investment. No reccuring expenses like Gold ETFs.  Physical delivery is convenient as presently around 15 delivery centers available. E-Gold is considered as physical asset. Hence for taxation purpose Long Term Capital Gain will arise only when you hold this format of investment for more than 3 yrs. But this is advisable to invest in E-Gold as in terms of buying, selling, security, pricing and purity are highly convenient compare to other forms of investment.

So, now decide which is best way to invest in Gold to diversify your investment Portfolio. Happy saving!!!!

Tax Saving-What mistakes often we do?

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BasuNivesh now available in it’s own domain from 22nd June 2012.

As this is peak time for all salaried class to look for Tax Saving Instruments, I thought to share how you can avoid doing the same mistakes again and again.

1) Insurance (Life and Health)- When I ask few salaried people about how they are planning about their tax saving then the first answer they say with big smile is, they have enough Insurance Payment to save tax under 80C (remember not enough cover). They share with proud that currently they purchased insurance plan either from friends or relatives who are agent of some particular company. Neither you nor your agent worked out how much Insurance cover you required or your “Human Life Value” and what is the future value of the returns you are going to get when your invested Policy matures. You may say with proud that you have cover of around Rs.10,00,000 for that you are paying around Rs.75,000 (aprox) then what will be the Rs.20,00,000 (Aprox Maturity Proceeds) value after 15 yr of 20 yrs of your policy maturity? It may be your 4-5 yrs yearly household expenses. Then what is use of purchasing such a plan which will not make you to sustain and not fulfill your financial goal?

Hence before purchasing Life Insurance always work out how much Life cover you need and what is the maturity value, not in today’s term but in future term. Also, is the maturity amount matches your any financial goal or not.

Health Insurance is usually taken care by Employer, but only few people know how much cover they have and who are all covered in that Insurance. In some cases people try to purchase through employer to seek cover for their spouse or parents (if are not covered by employer health insurance). But in this case also, employer chooses the company not the employee. Employer will deduct from salary for this and employees get relieved.

Have you ever thought which company the employer selected for covering your spouse or parents(who are not covered by employer), how the plan features are and is any other company providing better plan with competitive price in market? To my knowledge answer is always no no no.

Hence, please try to get knowledge about the health insurance provided by employer like how much SA covered, who are all covered, what are the plan features. If you are taking new insurance to cover non covered member of your family member then plan offered by your employer is good and competitive in price or not. Else purchase it in market by doing good homework.

2) Mutual Funds: It is always trend to invest lump sum by year end in Equity Linked Saving Scheme of mutual fund to save tax. But it is risky to enter equity market with lump sum investments and waiting for good returns after 3 years. Hence start in the beginning of financial year through SIP route which will reduce your risk of loss. Here again few people invest but never think is it worth to invest in equity mutual funds and wait for positive returns after 3 years. Also this invested money will be aiming any of the financial goals or not? In my view, if you have requirement of invested money at 3 years or within that period then never invest in Equity related market. You need to give sufficient time to grow it like 4,5yrs or more than that.

3) PPF-This is the good product for longer tenure and must be goal specific of maturity amount. But it is the product just to diversify your investments. Hence never invest all your money into PPF. Invest within 5th of each month instead of investing at year end. If you invest at year end then you will not get interest on the money invested for that year. But if you invest monthly then each month’s contribution will accumulate some interest.

4) NSCs and Fixed Deposits-Again these are low yielding products. Hence always keep in mind that how these are going to help you in diversifying your investments and how the maturity amounts can be utilized to achieve your financial goals.

5) Housing Loan-You take housing loan and take tax exemptions but you need to cover your life for the equal amount of Loan you have taken. Suppose something happens to you then your dependents may not be in a financial crunch to repay the loan. Hence suppose if you have taken housing loan of around Rs.50,00,000 then you have to take Life Cover of Rs.50,00,000 which covers till the last EMI ends. Nowadays bank started to offer this type of cover while giving loans. The best feature of this is, your Life Cover will also reduce yearly with the decreasing of Loan Amount you owe.

6) Infrastructure Bonds-This is the new avenue of investments started few years back. It is nice to invest in these Bonds if your overall investments under sections 80C, 80CCC and 80CCD is exhausted means including all three sections 1,00,000 permissible limit. You can claim deduction under Section 80CCF if you invested in Infrastructure Bonds. But remember that Bonds are not always risk free investments they tend to fluctuate with interest rate of market.

These are the few basic mistakes I noticed what people tend to make in a year end hurry to save tax. Hence plan your Tax Saving Options in such a way that it has to achieve both tax saving and your financial goals. If your only aim is to save tax then you will end up in a situation where you will not get cash flow for your desired goals.

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