SUKANYA SAMRIDDHI YOJNA

SUKANYA SAMRIDDHI YOJNA

Modi government has launched campaign ‘Beti Bachao Beti Padao’. Under this scheme the government has launched Sukanya Samriddhi Yojna Account. It is a small saving deposit scheme for the girl child to support her education and marriage. This account can be opened in the name of girl child from the time she is born till she becomes 10 year old. It can be opened in a post office or any public sector bank.

It can be opened with a minimum amount of Rs 1000 and maximum of Rs 1.5 lakh. The money can be deposited till 14 year from the date of account opening by parents or guardians. The interest rate will be decided by government every year. For FY 2014-15, the interest rate is 9.1% and it is compounded annually. The interest will be tax free. You can avail section 80C tax benefit, the amount deposit in this account till Rs 1.5 lakh in each financial year.

The account will mature after 21 years from the date of account opening. 50% fund can be withdrawn after the girl turns 18 year old. The premature closure of account is allowed in the case of death of girl child. If you do not deposit any amount in a whole year, a penalty of Rs 50 charged. One family can open only 2 accounts even if there are more than 2 girl child in family. Only 1 account per girl child is allowed. You cannot operate account online.

This scheme is better than post office schemes and fix deposit schemes or RD schemes. It will give the same tax benefit as PPF. It is good plan for your child because at least the government will try to meet the inflation rate at least. Interest rate will be announced every year. It is illiquid investment so invest in planned manner. Birth certificate of girl child, address proof and photo identity proof of girl child and parents/ guardian are required documents for opening the account.

It is less risky investment option and it will not give return like mutual funds or share market. As an asset allocation plan for debt investment, one can consider it. In my personal opinion, if you invest for 21 year then it is not much good option. A good mutual fund will give much better return if you compare between mutual fund and this scheme. I have still not opened this account for my daughter as I already invest in mutual fund.

If you have doubt about investment product and want more information regarding investment or you need investment services, feel free to ask us. We also conduct the seminar on investment and financial planning. If you are interested for conducting seminar in your city, just drop the mail.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

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

Debt Investment : Part 1

Debt Investment : Part 1

We have discussed about equity as asset class in details our previous blogs. Now we are moving towards debt investment. Debt means loan. It means borrower have obligation to return money with interest to lenders.

In debt market investor invest money as a loan with issuer at a predefined coupon rate. Issuer may be any institution, banks, government, public sector companies, private companies. Coupon rate is nothing but interest rate which issuer pays to the investors at predefined regular interval.

Advantage and disadvantage of debt investment:

• It is less volatile than equity market. Conservative investors invest in debt market for safety of principal amount. They feel more comfortable in debt compare with equity investment.

• In debt investment, investors get regular cash flow in the form of coupon which is predefined. Investors get coupon income at regular interval.

• It works on interest rate moment. The bond prices increase when interest rate goes down and investor can take advantage of capital appreciation.

• The return on debt investment is fixed. That is the reason investors feel more comfortable in this investment.

• However, it has less risk than equity but it gives low return and merely beat inflation. In majority of debt investment post tax return even not able to beat inflation.

• It is low risk and low return investment and retail investor cannot direct participate in the debt market. They participate in the debt market through bonds, debt mutual fund and PPF etc. Right price discovery is also problem in debt market.

• Debt investment has interest rate risk and credit risk also. We will discuss further about these risks in our further blogs.

We will discuss in our next blog about the various available debt avenues and its suitability to the investors. If you want more information regarding debt investment or you have any other query related investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Confused between interest rate and effective yield..?

Confused between interest rate and effective yield..?

We often see the advertisement in daily newspaper, magazine about the fix deposit offered by financial institution like bank, NBFC or corporate. They all offer the attractive return on fix deposit and often used a famous term “annualized effective yield”. There are difference between interest rate of fix deposit and annualized effective yield. The investors often don’t able to differentiate these two terms. Effective yield always look attractive than rate of interest on FD. We will understand it through an example.

Let us say, one financial institution offer an interest rate of 10% quarterly compounded for 1 to 10 year. So if one invest Rs 1,00,000 in this fix deposit for 4 year. In the first year at 10% quarterly compounded interest, he will get total interest Rs 10,381. After 4 year he will get total maturity amount of Rs 1,48,450. It means he has earned total interest Rs 48,450. To know the annualized effective yield we will divide it by no. of year deposit.

                 48450/4 = 12112.5

Annualized Effective Yield = (12112.5/100000)*100 = 12.11%

 Now you can easily understand the difference between these two types of rate. It means interest earned is same but companies can show it in different style. To attract the clients and to edge over the competitor, often some financial institution emphasis on a higher yield figure than normal rate.

So next time, when you go for fix deposit , please ask your representative for both rates and according to that comparision with other available fix deposits in the market.

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

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Government cuts tax on interest in government, corporate debt for foreigners

NEW DELHI: Government will cut the tax on interest payments to foreigners on government and corporate debt to 5 per cent from up to 20 per cent for a two-year period, in a bid to draw further inflows to bridge its current account deficit and polish its reformist credentials. 

The move meets a long-term demand of foreigners and makes debt more attractive. Many other Asian countries such as Singapore do not tax such interest income. 

Finance Minister P Chidambaram also clarified that a tax residency certificate issued by a foreign government would be an accepted proof of residency for tax purposes. 

The government, in its budget proposals, had created confusion with a proposal stating that a tax residency certificate "shall be necessary but not a sufficient condition" to take advantage of double taxation avoidance agreements. 

Chidambaram, moving amendments to his budget proposals on Tuesday, said that the February budget proposal to lower withholding tax on infrastructure bonds would now be extended to government debt and infrastructure bonds. 

The cut will be effective from June 1, 2013 to May 31, 2015, he said. 

The Finance Bill was passed by the lower house of the parliament amid an opposition boycott. 

The 10-year benchmark government bond yield fell as much as 4 basis points to 7.73 per cent while the Indian rupee breached 54 level to the dollar after the relaxation was announced. 

The cut in the withholding tax follows recent easing in rules for investment in government and corporate bonds. 

Chidambaram, who has been pushing reforms to draw inflows, recently met investors in roadshows in United States and Canada. 

"This development coupled with the recent simplification of foreign investment limits in debt and easing of know-your-customer norms shows that the regulators are gradually liberalising the debt markets," said Rohit Arora, emerging market rate strategist at Barclays Capital. 

"Our estimate of $6-8 billion capital inflow in government bonds in 2013/14 fiscal year is at a upside risk following these measures." 

Foreigners have invested over $11 billion in Indian equities and nearly $3 billion in debt so far in 2013. 

The latest measures by Chidambaram shows his attempt at pushing through executive reforms at a time when the opposition has stalled parliament over various charges against the government, including meddling in the affairs of the federal investigative body.

(The above news source from Firstpost news agency)

Understanding Bond – Part 3

In the part-2 we had learned the basic characteristics of bonds. Today we will understand about price fluctuation of bonds. Often we investor confuse about bond pricing. Bonds price fluctuate with prevailing market interest rate. For understand bond pricing, first we need to understand concept of yield.

Yield Concept:

Yield is a figure that shows the return you get on a bond. The formula of calculating simple yield is : yield = coupon amount/price. When we buy a bond at par or face value, yield is equal to the interest rate. When we purchase it below or more from face value then yield change accordingly our trade price.
For an example : If you buy a bond with a 10% coupon at its Rs 1,000 par value, the yield is 10% (100/1,000). But if the price goes down to Rs 800, then the yield goes up to 12.5% (100/800). This happens because you are getting the same guaranteed Rs100 on an asset that is worth Rs 800. Conversely, if the bond goes up in price to Rs1,200, the yield reduce to 8.33% (100/1,200).

Yield to Maturity (YTM):

In the above yield concept we have learnt calculation in very simple form. In real yield is calculated as YTM. YTM is a more advanced yield calculation that shows the total return you will receive if you hold the bond till maturity.

YTM consider all the interest payments (coupon payment) you will receive and assumes that you will reinvest these interest payments at the same rate as the current yield on the bond plus any gain or loss according to purchase rate. Calculation of YTM we learn in next part of this series. Now at this point we should understand that YTM is more accurate and enables us to compare bonds with different maturities and coupons.

Bond's price and its yield are inversely related. When price goes up, yield goes down and when price goes down the yield goes up.

As we have discussed the factors of face value, coupon, maturity, issuers and yield in past bond series. All of these characteristics of a bond play a role in its price. But there are one more important factor that influences a bond more and that is prevailing interest rates in the economy. When interest rates rise, the prices of bonds in the market fall, older bond’s yield increase and newer bonds being issued with higher coupons. When interest rates fall, the prices of bonds in the market rise, older bond’s yield decrease and newer bonds being issued with lower coupons.

I hope till now we have learnt about YTM concept in initial level. In next part we will discuss about different types of bonds.

Regards,

Arvind Trivedi

Certified Financial Planner