Tax Planning: Debt Product in Section 80C

Tax Planning: Debt Product in Section 80C

We have witnessed a sharp market rally in last couple of months due to stable and much awaited leadership. The next big event is union budget which is coming next month July. There may be some changes regarding tax exemption in this coming budget. Let us discuss about the currently fixed income instrument available option under section 80C. However I always recommend ELSS scheme is good option available under section 80C if you have risk appetite for equity market and have a long term vision. Today we are going to discuss only about fixed income instrument.

Under section 80C, there are many options available like PPF, EPF, NSC, Post Office Time Deposit and 5 year tax saving bank FD. Before choose any option you should also understand liquidity and tax treatment of particular option which you are going to choose along with return.

Employee Provident Fund (EPF):

In this option employer deduct every month 12 % of your basic salary and deposit the deducted amount in your provident fund account. At present it gives return of 8.5%, the rate of interest rate announce every year by the government of India. The maturity amount and accrued interest during the entire investment term is tax free.

Public Provident Fund (PPF):

 In this option you can contribute any amount but your tax exempt limit is Rs 1 Lakh including all investment option under section 80C. The lock in period is 15 year and maturity amount is tax free. At present it offer 8.7% return. The rate of interest is announced every year by the government of India. The maturity amount and earned interest during the investment period both are tax free.

National Saving Certificate (NSC):

 It comes with 5 year and 10 year fix term. The 5 year NSC offers 8.5% and the 10 year NSC offer 8.8% fix return. The return of NSC is taxable. Every year earned interest is taxable and maturity is also taxable. If accrued interest during the investment time is not declared every year in IT return then the accrued interest amount for all years is taxable at the time of maturity according to your income tax slab.

Post Office 5 year Time Deposit:

 It offers 8.4% return and lock in period is 5 year. The accrued interest during the tenure and maturity both is taxable as per your tax slab. However, tax not deducted at source. You should specify it your IT return.

Tax Saving 5 year Bank FD:

 It is bank fixed deposit with lock in period 5 year. The banks offer the return between 8.5% to 9% range. The bank deducts the tax every year from your earned accrued interest. So the accrued interest and maturity is taxable.

After reading about above mentioned fixed income instruments, you can easily find out that except EPF and PPF all instruments are taxable. So before investment in the above mentioned instruments calculate your real rate of return after paying the tax. It is very clear that none of the above mentioned instrument beat the inflation.

If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Debt Fund : Interest rate movement impact

Debt Mutual Fund: Interest rate effect

In India, the reach and awareness of mutual fund is still very low. People do not understand the difference between equity and debt asset class. Investors often consider all type of mutual fund in the same way. Today we will discuss about the impact of interest rate movement on debt mutual fund.

In debt mutual fund, we can divide it into three broad categories liquid fund, FMP and Income fund. Liquid fund has very low volatility and government bonds are very high volatile product in short term. On the basis of historical data of interest rate movement and debt fund return we have arrived on some facts.

Whenever the expectation of interest rate is going towards up then investor should be defensive and should consider liquid fund or FMP fund. The difference between liquid and FMP funds is nothing but the time period. Liquid fund is suitable for short term investment like 1 or 2 months. FMP is for the fixed lock in period investment and do not get affected from interest rate movement at the time of maturity. The only risk in the FMP is opportunity loss if any arises during the investment period.

During the falling interest rate scenario, long term bond investors get benefit. In longer maturity bond portfolio, one term called modified duration play vital role for return generation. For example, two long term duration funds have modified durations 4 year and 7 year. If interest rate moves down 1% then 4 year’s modified duration fund would generate 4% additional return whereas 7 year’s modified duration fund generate 7% additional return. But unfortunately if interest rate goes up 1% then these funds generates negative return according to the modified duration. Exposure in long term bond fund should be taken according to the risk appetite of investors.

If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

How to Choose Best Health Insurance?

Do you have Proper Health Insurance?

Health insurance is the vital part of every individual financial plan. We also call it mediclaim policy also. In India, it comes under general insurance category. In our country the penetration and awareness of health insurance is still very poor. In metro and big cities now people are considering it. In my personal opinion, it should be compulsory for every individual as without good health all wealth have no mean.

Why it is so important?

Healthcare costs are increasing day by day in our country. The annual growth rate of increasing cost is around 15% to 20% YoY. Any emergency hospitalization due to any illness or accident makes a big hole in your pocket. I feel very surprise when people say purchasing health insurance is wasting your money as there is no return if you do not get hospitalized. Health insurance is a protection tool, it is not for investment. It should be your first priority that protect your family and yourself with proper amount of mediclaim policy.

How to choose good health insurance?

Choosing good and proper health insurance is not easy task for everyone. If you do not have enough time and resources, contact any IRDA certified and skilled health insurance planner. There are more than 25 general insurance companies exist in our countries so it becomes very difficult to choose the best one. For health insurance buyer premium would be the first criteria to judge the policy. But your focus should not be only on premium amount there is another important factor you must judge that is claim settlement ratio. You should check the claims settlement ratio of particular insurance company. There is no mean of cheap premium if company do not settle the claim in proper time. If settlement happens after a long waiting period that is also the concern.

Health insurance companies publish this data quarterly or annual basis. IRDA does not report the claims settlement ratio in its annual report whereas in case of life insurance IRDA publish the same. Choosing a health insurance is vital for your financial plan and choose it very carefully. Only cheap premium should not be parameter for purchasing the health insurance. You should consider the other important factor like settlement time taken by the company, settlement ratio etc. After all it is for you and your family’s wellness.

If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

How to choose best investment?

Some lesson from Charlie Munger

In the investment world, if you want to learn fundamental of investment you cannot ignore Warren Buffett and Charlie Munger. Almost all fund manager and banker across the globe learn the investment principal from both investment icons. Buffett admits in his one letter that before 50 year, Charlie had given him one advice that it is far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.

Munger has given a lot of stress on the multiple mental models. In this model there are need to understand the various dynamics surrounding an investments both in its internal and external environment. One doesn't need to be an academic to tap these different models, including the modern Darwinian synthesis model from biology or cognitive misjudgment models from psychology. Indeed, Munger himself acknowledges that his understanding of these models is entirely self-taught.

According to Munger that any ordinary investor should follow preparation, patience, discipline, and objectivity. When practiced correctly, these attributes should result in buying great businesses at good prices and keeping one's portfolio turnover low. Munger considers every aspect of a business when considering a candidate for investment, evaluating management's character and capital allocation decision-making. He also analyzes a business' competitive advantages, mindful that few businesses endure for multiple generations. Thus, understanding a business' sustainable competitive advantages is critical. Munger pays close attention to the company's operating and regulatory environment, the impact on it from changes in technology, hidden exposures, and the current and future impacts of stock options, pension plans, and retiree medical benefits.

Munger holds the view that he should stick to his knitting when evaluating investment candidates. "Yes" candidates are easy-to-understand businesses with distinct and sustainable competitive advantages with a dominant franchise. He immediately dismisses other possibilities, especially in health care and technology, into what he calls the "too tough to understand" pile. Some of the core investment principles that Munger has espoused can be found in the excellent 2005 book Poor Charlie's Almanack, a collection of Munger's best talks, quotations, and thoughts.

If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in