Financial Advisor

Monday, February 24, 2014

Beware of your bank representative

Beware of your bank representatives..!!!

It is seen, we Indian have very much trust with our banks. Fixed deposit in bank gives us peace of mind and a sense of greater safety. We give much importance to safety of our capital than real return. As we enter in bank branch, we totally surrender ourselves to the bank representative. A bank representative with skilled communication push to the other financial products like insurance, ULIP, endowment, money back policy and many more other products for complete their monthly target.

I tell you here, a true event which happened today inside the bank branch which is very famous brand in banking industry. Although it is very common in our country but I still want to share it with you. I was in Axis Bank branch in the morning to make a demand draft. I have submitted the request for the same and waiting for collecting my DD. The process to make DD takes 10 - 15 minutes usually. A 25-26 year approximate age girl in the banking counter was explaining a fix deposit plan to a client. She was promising 24% fix return from a mutual fund scheme if he deposit money for 3 years and repeated it thrice with very confidant and smiling face. The surprising thing was that customer had got convinced from that girl who was representing the bank for invest in that scheme within 30 seconds. I was shocked that the customer had not asked any question about the risk associated with that scheme. When customer asked about the tax benefit in that scheme, she had smiled with moving her head and said “No, Mutual Funds me koi tax benefit nahi milta hai” (There are no tax benefit in mutual fund at all).

I was very shocked and surprised for that the witty communication by that bank representative. It was a clear example of mis-selling by that bank employee. In realty, a bank customer was cheated by that bank employee. A thousands and millions bank customer was cheated by such representatives of the banks. I am not against any bank or and bank representative but yea I am against their faulty communication with the bank customer. Anyway, I am giving you below some points which every investor should always keep in mind when they make an investment decision.

In mutual fund, there is no assured and fixed return. The return is totally depends on many factors like market movement, interest rate, inflation rate GDP growth and many more.

The promise of 24% is unrealistic return in such current economic condition when govt bond offer around 8%. I am not saying it is impossible but you cannot commit it to anyone.

There are tax benefit exist in mutual funds scheme which I have written in my past articles. When you promise such a high return, you should also talk about risk associated with such schemes whether mutual fund or any other asset class.

As an investor, it is also your responsibility before making any investment decision understand the risk and return properly.

Do not believe on any agents, bank representative do your own research from many other sources. The agents are not your friends. They also have some sales target. So next time, beware from such agents and representatives.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Saturday, February 22, 2014

Is Insurance plan is the best for tax saving and investment ..?

Insurance Policy is the best tax saving or investment option…?

In these days, we are discussing more about tax saving as the financial year 2013-14 approaching towards end. The whole insurance agents are doing hard work to push their life insurance products and want to increase their income on the expense of investor’s premium.

I agree that the life insurance is the vital part of any financial planning for face any unwanted events in the life. There are many pure or term insurance plans available in the market which need very less premium compare with other famous insurance plan. The investor also purchase these costly policies in the hurry on the name of tax saving and investment. The two type of policies are very famous among the investors and agents. One is endowment plan and other is money back plan. We will analyze here these type of plans today.

Endowment Plan: It is life insurance plan which deduct one part of the premium which you pay for insurance cover and the other part invest in different available financial products according to the particular policy plan. Investor get the amount at the time of maturity and pay the premium either till maturity or according to the mentioned year on policy.

Money Back Plan: This plan is very popular among the investors. In this plan, policy holders get some part of money like 20% to 25% of the sum assured as survival benefit in regular interval. This regular interval varies according to the plan 3 year, 5 year etc. The premium of these plans high compare with endowment plan. Except receiving money in regular interval all other features same as endowment plan.

Let us take one example for better understanding. A 30 year old person decide for insurance plan, risk cover 20 year and sum assured 10 lakh. The approximate premium for endowment plan would be Rs 48,000 and on the approximate maturity amount would be 19 lakh. The premium for money back plan would be approximate Rs 64,000 and he will receive Rs 2 lakh in every 5 years. The maturity value would be approximate Rs 12.3 lakh. Investor feel very happy when would receive amount 2 lakh in every year but ignore the high premium.

For above mentioned example, the term insurance premium would be approx Rs 3000 annual which is much lower compare with other plan’s premium.

If we calculate the internal rate of return of the above mentioned plan, the return of endowment plan would be 6% and 5 % for money back plan. You can easily understand the difference now. Would you still like to go with such types of plans which provide you with 5% - 6% during 20 year investment? In fact the return do not beat to inflation even which is at present in 8% to 9% range. We are not showing entire calculation here due to space and it would be too lengthy for 20 year calculation. If you want to see the entire calculation we can provide you.

Many people consider LIC product due to safety. If safety is your most priority there is one product which is more safer called PPF which also give return 8-9% and lock in period 15 years. It also qualify for tax saving under section 80C as equal insurance premium. For insurance cover you can consider term insurance plan which have more cheaper premium.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Wednesday, February 19, 2014

National Pension Scheme

National Pension Scheme

In earlier days, only government employees were eligible for life time pension after retirement. After demise of employee, the pension continues to his/her spouse and dependent children. With the passing of time, due to the increasing no. of retired Govt. employee the liability of the government has increased tremendously. It has felt across the world. Increase in life expectancy age and better medical facility the expected increased liability, defined pension proved like a ticking time bomb for Indian government.

The defined benefit pension means guaranteed pension or the pre decided pension benefits or fix benefits. After the report of three different studies, the defined contribution pension system has been replaced. On the basis of these studies, the NPS (New Pension Schemes) was made mandatory for central govt employees except the Armed forces with effect from 1st January, 2004.

In our country, only 12% the working population covered under pension schemes. To cover the large no. of population for pension benefit, NPS has opened for all Indian citizen between age of 18 and 60 with effect from 1st May 2009. The name has been changed from New Pension Scheme to National Pension Scheme.

The main features and architecture of NPS:

PFRDA (Pension Fund Regulatory and Development Authority) issues the investment guidelines for investment and manage the fund. It is regulatory authority for NPS.

NPS has a two tier structure. Tier-1 account does not allow premature withdrawal and it is mandatory for all Govt. employees joining after 1st Jan, 2004. Tier-2 account is withdrawable account. Individual can make withdrawal prior retirement without telling any reason. To open Tier-2 account, Tier-1 account is mandatory. The monthly contribution would be 10% of the salary and DA to be paid by the employee.

The minimum amount per contribution Rs 500 per month and one should invest at least once in a year. The minimum annual contribution is Rs 6000 in each subscriber account.

If unable to deposit minimum annual contribution, a penalty of Rs 100 would be levied and account would be dormant. A dormant account would be closed when the account value falls. For re-active the account, subscriber have to pay minimum annual contribution amount and penalty.

The normal exit option is available at or after the age of 60. At the time of exit, the individual would be required at least 40% corpus to purchase annuity. If any individual decide to exit prior age 60, then 80% corpus mandatory to purchase annuity. In case of subscriber’s death, the whole 100% available amount will be given to nominee.

NPS scheme has lowest cast model in the world. The fund management charge is 0.0009% of the total AUM managed. The fund managed by 8 different fund houses with the help of professional fund managers. LIC , SBI and UTI manage the government employees and other subscriber’s funds. HDFC, ICICI, Kotak Mahindra, Reliance and DSP BlackRock fund houses manage only non-govt subscriber’s funds. NPS allows to subscribers to switch from one fund house to another fund house.

NPS offers two broad approach to invest. First is Active choice and the other is Auto choice. In Active choice, the subscriber will decide the asset classes for investment. In Auto choice, the funds will be invested according to life cycles of subscriber. Asset allocation would be change based on age of subscriber automatically in this option.

These are the main features which we have discussed. The article has been a bit lengthy. For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Monday, February 17, 2014

Is only tax saving important enough?

Is only tax saving important enough?

Jan to march, in this quarter people rush for tax saving. Some people wait till last week of the march and make a investment decision in hurry. Often they stuck with those investments which they don’t need and return also come very poor. In today’s article we will discuss about some points which are also important when you make investment decision for tax saving.

· Before go to nearest bank, investment advisor or your CA do your proper homework.

· Avoid to rush for save tax. Make your tax planning well before the end of financial year. It will prevent you make wrong decision in hurry.

· Do not purchase a small new insurance or ULIP policy every year. Keep in mind your section 80(C) limit. You can save only upto Rs lakh including all your investment and expenses under this section .

· If you are salaried, calculate your PF and PPF contribution, HRA if applicable. Your principal repayment on home loan and tution fee for children also come under section 80(C).

· Today’s many government backed companies bonds like IIFCL (Indian Infrastructure Finance Company), IREDA (Indian Renewable Energy Development Agency) and many more in the market. It is good for long term investment and safety points but it is not as good if you need liquidity in short to near term.

· The return of these bonds are tax free but the investment in these bonds are taxable. These bonds are not under section 80(C).

· Tax planning mutual funds (ELSS) have the shortest lock-in period of 3 years and PPF (Public Provident Fund) have longest lock-in period of 5 years.

· If your investment horizon more than 5-7 years then the most suitable option is ELSS for tax saving.

At last the more important thing please do not ignore return and liquidity need in rush to save tax.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Sunday, February 16, 2014

Are your investment agent cheating you?

Yesterday, I was my in area’s neighbor shop for my hair cut. He had narrated one incident with happened with his relative who is not educated and never went school. His relative’s main profession is agriculture. One agent had come to him before 5 year’s back and promised him 2 times return whatever amount he deposit. He had trusted him and deposited Rs 45,000 with the hope that after 5 year he would get Rs 90,000. After completing 5 years when he had contacted his agent, the agent was not available. After contacting to the concern office when he had knew the value of his investment. It was shocking experience for him. Can you guess the value of his Rs 45,000 invested after 5 years? The value was only Rs 17000 !!! only. Such huge wealth destruction he had never imagined. His agent has cheated him by making false promise and hot informed about the investment product.

Till now many of you may guessed, yes it was ULIP product. A product designed by mixing insurance and investment called ULIP.

I am sure that you also here such type of cheating incidents regarding investments. I always write in my blog and during the meeting with investors that never mix your investment with insurance need in one product. Avoid such products.

I think insurance product sold by more in emotional sense and less in real need sense. The agent finish conversation in very hurry and their large focus on sign the document quick. They only tell you what you want to hear like “promise” and “guarantee” type words. They often do not talk about product in detail never tell you about the risk of that financial product. My friends keep in one thing in your mind that there is not a single financial investment product designed in the world without risk. Every investment product comes with a type of risk. Now the question how to avoid yourself being mis-sold. I suggest you some point here.

· Do read carefully before sign any form or documents.
· Understand about the product which offered by your agent.
· Contact the company’s call centre and cross check your agent.
· Never give and bank cheque or sign the form in first meeting.
· Collect all detail about agent like his office address, contact, employee ID, job tenure, some little background about him and cross check by calling his office
· Use internet to know more about the offered product
· Focus on real return after cut taxes and expenses.

There are many more points worth discuss which we will discuss again sometime.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Saturday, February 15, 2014

Are you paying 30% tax on Bank FD…?

I have seen since my childhood that majority of us feel very comfortable invest in bank fixed deposit. Either you educated or illiterate most of us assume that bank FD is safest and the best instrument for investment. If you are in 20% or 30% tax bracket, you have to pay tax according to your tax slab on your earned interest income from FD. There are many fixed maturity plans (FMPs) available which are safe compare with equity market investment and you can also save a huge amount of tax or many times pay nil tax. When you invest in debt funds and hold it more than one year you have two choices to pay the long term capital gain. Either pay flat 0% on capital gain or pay 20% using indexation method. Let us take a simple example for better understanding.

Bank FD investment:

Mr A has deposited Rs 1 lakh in bank FD for one year and earn interest Rs 9,000 at the rate of 9%. If Mr A is in 30% tax slab then the tax liability is Rs 2700. In means after post tax his real gain only Rs 6300. In reality, Mr A has earned after paying tax only 6.3% on his bank FD investment which even does not cover inflation also.

FMP investment:

Mr B has invested Rs 1 lakh in 365 days FMP in Feb 204. After one year Mr B would earn around 9.5%. It means Mr B would earn Rs 9,500 after one year on his Rs 1 lakh investment. Now Mr B has two options to pay the tax, either pay flat 10% on capital gain or use indexation tax benefit method and pay 20% on gain.

If calculate according to flat 10% method Mr B would pay Rs 950 tax. Before calculate tax according to indexation tax benefit, first understand about it.

What is Indexation Tax Benefit Method ?

The government of India announces a number called the cost inflation index (CII) every year. It represents the inflation movement of our country. We adjust our investment value according to this CII index. The CII for the year 2013-14 is 939 and expected CII index for 2014-5 would be 1,005 if assuming inflation 7%. The formula of obtaining the inflation adjusted value is as given below:

Inflation adjusted value = Invested Amount X (CII at the time of sale/ CII at the time of purchase)

Inflation adjusted investment value = 1,00,000 X (1,005/939) = 1,07,028

Net capital gain : 1,09,500 - 1,07,028 = 2,472

Tax Payable: 2,472 X 20% = 495

So Mr B have two choices either he can pay Rs 950 according to flat tax calculation method or pay Rs 495 according to inflation indexation method. Obviously Mr B would like to pay tax Rs 495. So the real gain after tax would be1,09,005 (1,09,500 – 495).

If Mr B uses Indexation tax method then after post tax return would be 9.05% whereas in the case of bank FD Mr A’s after tax return would be 6.3%.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Thursday, February 13, 2014

What is ELSS...?

What is ELSS ?

ELSS stands for Equity Linked Saving Schemes. It is very good option for tax saving and better return. It has better potential returns and comes with 3 year lock-in period which is lower than other available tax saving instrument under section 80(C).

ELSS schemes are mutual funds which are professionally managed and invest major part of corpus in equity which have potential to beat inflation.

In India, equity market has been negative to range bound for more than 5 years. It make sense to invest in ELSS due to the expected positive development in domestic market within next couple of years.

Like other mutual funds it also comes with two options growth and dividend. You can choose any one of these. Growth plans gives you a chance for compounded growth with capital appreciation and you can get it only minimum 3 year lock-in period. Dividend plan provides some income in your hand during the lock-in period which is tax free in investor’s hands.

After 3 year lock-in period investor can reinvest again in ELSS schemes and claim again section 80(C) benefit. By this method you can less the burden on your pocket for tax saving.

Apart from ELSS many other sections and investment instruments available which we will discuss later.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

Wednesday, February 12, 2014

Banks Role in Insurance Distribution Business

Banks role in Insurance Distribution Business

As the financial year 2013-14 is approaching towards its end. People are rushing for tax saving investment options and for tax saving insurance product is very popular among the investors. However, in my personal opinion it becomes very toxic product if you mix your insurance need and investment. Insurance mainly sell by individual agents, brokers, direct selling and banks.

Banks are the main contributor in the sells figures of private insurance companies products. In India, people have immense faith on banks. They still prefer bank FD even the net inflation adjusted post tax return is very poor. Due to this blind faith on banks, common investors become a victim of mis-selling of these products. I met a lot of cases almost in every investor meet of mis-selling by the banks. The complaints of mis-selling by banks are increasing. Due to this mis-selling complaints, bank regulator RBI has proposed the new guidelines for selling of insurance products. The main RBI proposal as given below:

· A bank’s NPA should be less than 3%
· It should have made profits for last 3 consecutive years
· A bank’s net worth should be at least Rs 500 crore

The government is also planning to mandate multi insurance companies sales for bank. At present banks are selling only one company’s products. The insurance regulator IRDA has also capped a bank’s sale of joint venture partner’s products at 25% of the overall.

In fact the aim of insurance sales by bank is to increase the reach among the maximum people as banks have wider branch network across the country. The above mentioned proposal by RBI, IRDA and govt are not fully implement. We hope that after implementing these guidelines mis-selling would be stop to some extent. However, insurer would not allow implement these guidelines in very smooth manner.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

Tuesday, February 4, 2014

Cost of delay investment decision

Cost of delay investment

Have you think ever what cost you pay for your delay decision for investment? I know many youngsters and people between 25 to 30 age group who has just star the job but clueless for the investment. They are too confused where they should invest. The worst fact majority of them are not serious for investment. They find it boring when you discuss with them about saving and investment.

They often ignore the most powerful concept the time-value of money about wealth building. In my opinion, everyone needs to understand this powerful concept. The famous physics scientist Albert Einstein had admitted that the most powerful force in the universe is power of compounding interest. According to this concept that even a small amount and insignificant amount of the money actually grow to an amount if left it to be invested for a long period.

My friends, believe me you pay a huge cost for delay decision for investment. Let me take an example for better understanding.

Example of delay investment decision:

Mr A is planning to accumulate wealth for retirement. His retirement age is 60 and currently he is 30 year old. He has decided to invest some money on monthly basis in an equity mutual fund till his retirement and expect return 15%.

If he start invest at present Rs 5,000 every month and invest till his retirement he will accumulate huge corpus of 2.82 crore approx.

If he delays the decision of investment 10 year means he start investing at age of 40 year and even if he invest Rs 10,000 every month till retirement. The accumulated corpus would be 1.33 crore approx at the time of retirement.

And now the worst case if he start invest at the age of 50 means he delays the investment decision 20 year and invest every month Rs 30,000 till his retirement but accumulate only just Rs 79 lakh approx.

You can easily see in above example that even if you increase your investment amount but if you delay in investment, you pay huge price for delay or in other words you will accumulate less amount even after investment of large amount.

For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner