Senior Citizens Savings Scheme By Deepesh Raghaw

During our entire work life, we get used to getting salary cheques at the end of the month and using the funds to meet our expenses. Once we retire, the game stops. There are no salary cheques at the end of every month. Though the salary has stopped, the expenses haven’t. And it is not easy to change or shun money or expense management skills that have been developed over a long period of 35-40 years. So, you need regular income to replace your salary even after retirement.

Therefore, before retirement, you work hard to build a retirement corpus that can be used to generate regular income once you retire. Well, you have built a good retirement corpus. But, how do you use the corpus to generate regular income? The first product that comes to mind is a pension plan or an annuity product.

Under a pension plan/annuity product, you pay a lumpsum amount to an insurance company. The insurance company, in turn, provides you regular income for life (or a fixed period as per product terms). There are many variants of annuity products available. You can choose one that suits your requirements. However, annuity products have their own set of problems. For instance, the annuity rates are quite low (6%-7% p.a.). At 7%, to get annual income of Rs 2 lacs per annum for life, you will have to purchase annuity plan for Rs 28.5 lacs. Do we have other products around which can provide better returns?

In one of earlier posts, we showed you how to use PPF as a pension tool. PPF provides better returns than an annuity product. Returns are tax-free (pension income is taxable). The limitation is that there is just one withdrawal allowed per year. Additionally, such flexibility to use it as a pension tool is possible only after initial maturity of 15 years. What if you do not have a PPF account or you opened your PPF account only five years back? In this post, we will review Senior Citizens Savings Scheme (SCSS), a savings product which has been designed specifically for senior citizens. We will discuss the eligibility criteria, maturity, deposit limits, interest rates and tax treatment. We will also discuss how SCSS account fares against other income products available in the market.

Senior Citizens Savings Scheme (SCSS)

Eligibility

Only an individual aged 60 or more can open this account. There is relaxation in age limit to 55 for those retiring on superannuation or opting for voluntary retirement subject to certain conditions. Retired defence personnel (excluding civilian defence employees) can subscribe to the scheme irrespective of the age limit.

Non-resident Indians (NRIs) and Hindu Undivided Families (HUF) are not eligible to open SCSS accounts. If a depositor becomes an NRI after opening an account, he/she may continue to hold the account till its maturity.

Where to open?

You can open this account in any post office, public sector banks and select private sector banks.

Maturity

Maturity period is 5 years. The account can be extended for further three years (only once) at the end of 5 years. In case of extension, the investor can close the account any time after one year without any penalty. This facility of extension is not available to NRIs.

Interest Rate

Interest is paid out quarterly on 1st working day of April, July, October and January. The interest rate is not fixed and is notified by Ministry of Finance every year. For FY2015-2016, applicable interest rate is 9.3% p.a.  Since the interest is paid out quarterly, there will be no compounding on interest.

Please note that the rate of interest on an investment/deposit remains unchanged for the entire duration of the investment till maturity. For instance, if you deposit Rs 2 lacs in SCSS and the prevailing interest rate is 9.3% p.a., you will earn 9.3% p.a. for the duration of such investment. Even if the government changes the interest rate offered on such scheme in the future, you will earn 9.3% during the entire term. 

Deposit Limit

There can be only one deposit in the account. You cannot make multiple deposits in the same account. Any number of accounts can be opened but the total balance in all the accounts cannot exceed Rs 15 lacs.

 An individual may open the account in individual capacity or jointly with the spouse. In case of a joint account, the age of the first applicant is considered for eligibility. There is no restriction on the age of second applicant. The entire amount is attributed to the first holder.

 If you want to contribute maximum amount to the Senior Citizens Savings Scheme, you can do either of the following:

1. You and your spouse can open individual accounts with Rs 15 lacs in each of the accounts
2. You can open two joint accounts. You can be the first holder in one account while your spouse can be the first holder in the other account. Deposit Rs 15 lacs in each of the accounts

This way, you can deposit/invest Rs 30 lacs in the SCSS for the family.

Tax Treatment

Investment under the scheme qualifies for tax deduction under Section 80C.

Interest earned is taxable.

There is tax deduction at source (TDS) if the interest earned for the financial year is more than Rs 10,000.  Rate of TDS is 10% (20% in case PAN has not been provided)

 If no TDS has been deducted, it does not mean you do not have any liability. You need to include the entire interest income in your income tax return and pay income tax, if required. Additionally, even if TDS has been deducted, you may still have to pay additional tax if you fall in the higher tax bracket.

For instance, if you earn interest of Rs 20,000, TDS of Rs 2,000 will be deducted. However, if you fall in 30% bracket, your tax liability will be Rs 6,000. You need to pay the remaining Rs 4,000 while filing your income tax return.

Submission of Form 15G/Form 15H

To avoid tax deduction at source (TDS), you can furnish Form 15G/15H with the post office/bank. Form 15G can be submitted by depositors below 60 years of age and Form 15H by depositors above 60 years.

You can file Form 15G if your estimated income tax for the financial year is Nil and your total interest income is less than minimum tax exemption limit (Rs 2.5 lacs). Please note both the conditions have to be satisfied.

There is relaxation of second condition in case of filing Form 15H. You can file for Form 15H if your estimated income tax for the financial year is Nil. So, if you are above 60, you can furnish Form 15H if your total taxable income is less than Rs 3 lacs (Rs 5 lacs for people above 80).

You are advised to check eligibility for submission of Form 15G/Form 15H before submitting Form 15G/15H to the post office/bank. A false or wrong declaration may attract penalty or imprisonment under Section 277 of the Income Tax Act. Read more about Form 15G/15H in this Business Standard article.

How to maximise tax benefits?

Since you get the benefits under 80C of Income Tax Act for investing in SCSS, you can stagger your investments in SCSS to get the maximum income tax benefit. For example, if you want to invest Rs 7.5 lacs in SCSS, you can invest Rs 1.5 lacs every year for five years to get the maximum tax benefit.

Please note this is a generic suggestion to maximize benefits under Section 80C. You must consider additional information, including but not limited to your taxable income, other committed 80C investments etc. You can also seek services of a tax consultant or a financial planner to help you plan your taxes better.

Premature Withdrawal/Closure

Premature withdrawal/exit/closure from the scheme is allowed after 1 year with penalty of 1.5% of the deposit amount. After 2 years, the penalty amount goes down to 1% of the deposit amount. Partial withdrawal is not allowed i.e. you cannot withdraw part deposit amount from the account. The account has to be closed completely if you want to access your principal amount.

 Please note that in case of premature closure of the SCSS account, tax benefits claimed under Section 80C will be reversed. Therefore, in case of closure before 5 years, the deposit amount, along with accrued interest, shall be added to the income of the depositor in the income of depositor and taxed accordingly.

Operation of account in contravention of SCSS Rules

If found that the account has been opened in contravention of the SCSS account rules (e.g. investment more than Rs 15 lacs across accounts), the account shall be closed immediately. The deposit in the account shall be refunded to the depositor after deducting any interest already paid.

Let’s compare SCSS with other regular income products available in the markets.

Senior Citizens Savings Scheme vs. Pension plans

Prevailing annuity rates are around 6-7%. Hence, in comparison, SCSS offers a much higher interest. Income from both pension plans and SCSS is taxable. Given that the tax treatment is same, SCSS offers much higher income as compared to any annuity/pension plan. The only limitation is the maximum investment limit of Rs 15 lacs. Therefore, the maximum income from SCSS can be Rs 1.39 lacs (at 9.3% per annum). You can double the amount if your spouse opens SCSS account and deposits the maximum amount. You need to see if this amount is going to be enough.

Additionally, by purchasing a pension plan, you lock in interest rate for the entire tenor of the pension plan (may be your entire life). However, under SCSS, you can lock in the interest rate for only 5 years (8 years if you opt for extension).

Senior Citizens Savings Scheme vs. Bank Fixed Deposits

Every bank offers special rates to senior citizens. For any tenor, senior citizens are offered 0.25% to 0.5% more. SBI FD (for 5 years) offers 8.0% to senior citizens currently. You can opt for monthly or quarterly payout in a fixed deposit. SCSS offers only quarterly payout. Though interest rates for bank FDs keep changing, these are likely to be lower than SCSS interest rate. Additionally, not all bank FDs will give you benefit under Section 80C. However, there is a maximum investment limit in SCSS.

Senior Citizens Savings Scheme vs. Public Provident Fund (PPF)

These are not exactly comparable. PPF is primarily a wealth accumulation tool. SCSS, on the other hand, is an income generation instrument. We did discuss a way to use PPF as a pension instrument in one of our earlier posts. But, you can do that only after initial maturity of 15 years. Additionally, only one withdrawal is permitted every year. So, that requires a lot of planning. With SCSS, you can simply go to a bank/post office, open an account and start getting regular income.

PPF currently offers 8.7% p.a. while SCSS offers 9.3% p.a. PPF interest rate changes every year. Interest rate for SCSS is notified every year. However, your investment earns the same interest rate (as at the time of deposit) for the entire duration of the deposit. PPF interest income and withdrawals are tax free while SCSS interest is taxable. So, if you have planned well and have a sizeable corpus in your PPF, PPF will give better results than SCSS ( for those whose taxable income is more than tax exemption limit).

PersonalFinancePlan Take

Senior Citizens Saving Scheme (SCSS) is a good product for senior citizens. It offers high interest rates and gets them tax deduction under Section 80C. You can stagger your investment across different years to get maximum benefit under Section 80C. Those who seek regular income from their investments can opt for this scheme. It is not suitable for those looking for growth as there is no element of compounding (Interest is paid out quarterly).

We have compared SCSS with other products which can be used to generate regular income in retirement. There is no clear cut best product. Choice will depend on an individual’s requirements and financial situation. SCSS offers better interest rates than all the products discussed. However, you can only deposit a maximum of Rs 15 lacs in SCSS account (Rs 30 lacs if your spouse also contributes maximum amount). This limits the regular income from SCSS deposits. Hence, you may have to use other income products, along with SCSS, to generate regular income you need during retirement.

We have put emphasis on regular income products after retirement. However, with the increase in life-expectancy, over reliance on income products may cause problems. Your income from these products will stay constant while your expenses will increase with inflation. You need a good mix of income and growth assets (that give benefit of compounding such as mutual funds, stocks, real estate etc) in your retirement portfolio. Growth assets will help you counter inflation. Exact allocation between your income and growth assets will depend on your financial risk profile. You may seek services of fee-only financial planner or a SEBI registered investment adviser to advise you in this matter.

Image Credit: TaxCredits[dot]net. Original image and information about usage rights can be downloaded from Flickr

Deepesh is a registered Investment Adviser and Founder, PersonalFinancePlan.in.

Source : http://www.personalfinanceplan.in

Read More

12 Personal Finance tips for young professionals By Deepesh Raghaw

Most people don’t start saving from the day they start earning. Even for those who save, money lies idle in savings account. It is only 3-5 years into professional lives that we get serious about investing. In one of our previous posts, we had discussed financial planning tips for the new financial year. These ideas would have been better appreciated by our readers who have been working for a few years. In this post, we will discuss a few personal finance tips / ideas that everyone starting his/her professional life should be aware of. These are not out of the box ideas but it is better to have these ideas at the back of your mind when you get initial salary credits in your bank account.

Making good financial decisions and avoiding bad ones are equally important. For example, you might pick up two very good stocks but a bad stock pick will wipe off the profits of the two good stocks. Additionally, financial products may require long term commitment on the part of the investor. For instance, a life insurance products (especially those which provide investment benefits too) typically require the investor to pay premium for 10-15 years. So, if you purchase a product that does not fit your financial needs, you will regret it for many years. Even surrender of such products may involve high penal charges.

Here are a few personal finance tips that young professionals would well to be aware of:

1. Start investing early and appreciate the power of compounding: Rs 10,000 invested per month in a mutual fund can compound to Rs 23 lacs in 10 years and Rs 50 lacs in 15 years (assumed rate of return 12% p.a.). So, you can see difference if you are late by 5 years. Similarly, a rate of return of 10% will yield only Rs 20.5 lacs in 10 years and Rs 41.5 lacs in 15 years. You can see the difference if we let your money compound at a lower rate.
2. Save/invest first and spend later: Most of us do it the other way round. Even the legendary Warren Buffet subscribes to this philosophy. Of all things required to become the great investor that he is, this one is probably the easiest.
3. Never underestimate the power of inflation: If you are 30 and your monthly expenses are Rs 20,000 per month, at an inflation rate of 7% p.a., you would require Rs 1.52 lacs per month by the time you retire. Specific inflation (medical services, education etc) can be far higher than general inflation.
4. Do not borrow unnecessarily: Borrow only to create an asset (home loan), for education or if it is unavoidable. Taking a car loan when you are expecting a baby or to take care of an ailing relative makes sense. However, taking a personal loan for vacation abroad makes little sense.
5. Purchase adequate life and health insurance: Life is fickle. You need to guard against exigencies. You must ensure that your family needs are taken care of even when you are no longer around. Don’t get fixated with random round number (say Rs 50 lacs or Rs 1 crore). Assess your life insurance requirements properly. Purchase health insurance to avoid any hit to your savings in case of medical emergency. Wealth preservation is as important as wealth accumulation
6. Don’t mix insurance and investment. Don’t invest merely to save tax: I have been guilty of this crime too. Everyone who does not finance education background is susceptible to making this mistake. A lot of us invest in high cost and complex insurance products towards the end of the financial year in the rush to save on taxes. When the sales person (agent/financial intermediary) talks on dual benefit of insurance and investment, the picture looks very rosy. When the same sales person happens to be a family friend or relative, there is an obligation angle too. To add to it, we simply cannot say “No” for the fear of looking bad. However, you finally sit down to assess your purchase a few years later, you realize neither are you adequately insured nor are the returns any good. I made this mistake. You don’t have to repeat it. Purchase a pure term insurance plan and invest the remaining money in good mutual funds.
7. Money for short term goals in debt, money for long term goals in equity: Don’t complicate your investment unnecessarily. Never park those funds in equity funds that you might need in the next 2-3 years. Similarly, for long term goals such as retirement, have an equity heavy portfolio. You can also invest in PPF/EPF for long term savings but allocate a greater portion to equities. A home to live in is not a bad investment either.
8. Keep an emergency fund: Do keep 3-6 months of your expenses in a savings account, fixed deposit or a liquid fund. This avoids eating into your savings in case of loss of employment or any emergency.
9. Diversify your investments: Don’t put your eggs in one basket. You must get your asset allocation right. It is not wise to have all your assets in equities even if you are very young.
10. Stick to investment discipline. Slow and steady wins the race. You will be fortunate if one of your stock holdings doubles in a month once or twice in your lifetime. Still a number of people I talk to want to hear about the next buzzing stock. Mutual funds are too conservative for them. You can be rest assured average investors like you and I will be far better off investing in mutual funds through Systematic Investment plans (SIPs).
11. Do not act on stock tips: This is a sure shot recipe for disaster. You will be better off going to a casino and gamble your money away.
12. Do not trust any financial intermediaries blindly. Do your homework: You will taken for a ride if you do not conduct due diligence. I am not raising question marks over intermediaries’ integrity. They have targets and every sales person (and not just financial intermediaries) goes slow on unfavourable features of the product to increase chances of a purchase. No matter what they say, it is your job to understand the product features well before you make the purchase.

 PersonalFinancePlan Take

This is not a comprehensive list of personal finance tips. However, you will do much better keeping these things in mind while you are making a financial decision. It will do your long term financial health a lot of good. However, don’t make every decision in your life a financial decision. Money is not an end into itself. It is merely a means to an end. Don’t overdo the investment part. Enjoy your life.

Deepesh is fee-only financial planner and Founder, PersonalFinancePlan.in

Image Credit: Jeremy Jenum. Original image and information about usage rights can be downloaded fromFlickr.com

Source : http://www.personalfinanceplan.in

Please visit Independence Day

Read More

Choose the best Children’s Insurance Plan by Manish Misra

Your children are your pride and joy and you would like them to have the best that money can buy. As discussed in our earlier article, with a sound financial plan, you can make sure that materializing of your child’s dreams is not hindered for want of funds. Children’s insurance policies and products are designed with this specific aim in mind.

What are Children’s Insurance Plans?

These plans set out to secure you financially against the back drop of constraints such as inflation and the rising cost of education. They help you to fund various aspirations like an overseas education, extra curricular activities, sports training, supplementary vocational education, marriage celebrations, etc. by providing a lump sum amount at a specified future date.

An additional feature offered by children’s plans is that they continue to offer financial protection even in the event of the loss of the premium paying parent. This ensures that the amount envisaged is actually delivered even in the event of unforeseen eventualities.

In a nutshell these plans offer financial security to children in the form of savings combined with life insurance by paying at regular intervals so that the money is made available to your child at pre-determined stages.

Benefits of Children’s Insurance Plans :

• Children’s insurance plans enable the parents to save money for child’s future without any disturbance to the family budget. This is because the premiums can be chosen to suit the parent’s convenience.
• There are a number of options and customized products to choose from for the child’s future.
• Reversionary bonuses are usually declared by the insurance company annually and once declared are guaranteed.
• Tax benefits under Section 80C are applicable on the premium paid.
• Certain plan options also allow the plan to continue after demise of insured parent and the insurance company continues paying the premium.

Types of Children’s Insurance Plans

There are two broad category of Children’s Insurance Plans available today. They are :

1. Traditional Children’s Plans

Insurance companies offer policies such as children’s money back or endowment, which give a defined payout at a defined period.

Besides, if something unfortunate happens to you as a parent, not only does the child still get the sum assured on maturity, but the interim premiums are also waived off.

However, the return from such policies is relatively quite low, barely covering the inflation.
2. Unit Linked Children’s Plans

These Children’s insurance plan are very similar to any ULIP plan the only difference is that the beneficiary in such plans is the child. Not to mention, these plans come with a charges similar to any ULIP. Make sure you know about all the charges applicable before you buy these plans.

How to choose a Children’s Insurance Policy?

Premium

Most insurance companies offer children plans with various features at various prices. Most of these plans have riders like waiver of premium and accidental death benefit rider inbuilt in them and in cases of others you have to buy them.

But, there’s no free lunch. You have to pay for these riders.

When considering which one to buy, you should add the cost of the riders with the basic premium for the policy. Then you compare it to the premium of the policy where the riders are in-built; and then make your final decision.

Riders

Most child plans available in the market have many of the riders in-built. In others you have to buy them at an extra cost. In case of child insurance the riders are the most important parts of a policy as it will take care of the child and your child education and his/her career doesn’t have to suffer due to anything unfortunate happening to you.

• Comprehensive Health Benefit Rider Sum Assured
• Waiver of all the future premiums
• Income Benefit Rider
• Accidental Death Benefit Rider

Comparing Traditional Children’s Plans

Compare children’s insurance plans offered by all life insurance companies to help you decide the plan which suits you the best.

1. LIC – Jeevan Kishore

• Death benefit: Before commencement of risk: Premiums paid excluding the premiums for the premium Waiver Benefit. After commencement of risk: Sum Assured + vested bonuses upon the death of the life assured.  
• Maturity benefit: Sum assured plus accrued bonus plus final additions  
• Comment: Can be bought by any parent for their child less than 12 years for their bright future

2. ICICI Pru – Smart Kid Plan – Option 1

• Death benefit: Sum assured is paid and all future premiums are waived
• Maturity benefit: 30 per cent of sum assured plus Guaranteed addition plus Vested Bonus
• Comment: Guaranteed 3.5% of SA compounded annually for first 7 years of the policy.

3. SBI Life – Scholar II

• Death benefit: Sum assured plus all vested bonus is paid and all future premiums are waived
• Maturity benefit: 25 % of Sum Assured plus Vested Bonus
• Comment: Attractive rebate on premiums for Female lives and High Sum Assured

4. Tata Life – Assure Career Builder

• Death benefit: Payout as per maturity
• Maturity benefit: 40% of sum assured plus vested bonus
• Comment: Guaranteed addition of 10% of Sum Assured in case of more than 10 policy years

5. Bajaj Life – ChildGain 21

• Death benefit: 1) Below 7 years – Premiums paid will be refund without interest, 2) Above 7 and below 18 years – Sum assured with accrued bonuses 3) Above 18 years – Outstanding payouts paid as lumpsum.
• Maturity benefit: 35 per cent of sum assured
• Comment: In case of death or accident of insured during policy term, 1% of SA maximum to Rs. 10,000 paid per month till end of term of policy

6. Reliance Life – Child Plan

• Death benefit: Sum assured is paid and all future premiums are waived
• Maturity benefit: 25 per cent of sum assured plus accrued bonus
• Comment: Attractive rebate on premiums for High Sum Assured

7. Max New York – Children Endowment to 24 (Single)

• Death benefit: Refund of Premiums plus Interests plus Accrue bonus (if any)
• Maturity benefit: Sum Assured plus accrued bonuses
• Comment: Gives your child a lumpsum amount at age of 18 to support his higher education/ marriage

8. ING Life – Creating Life Child Protection Plan

• Death benefit: Sum Assured and vested bonuses.
• Maturity benefit: Sum Assured plus accrued bonuses
• Comment: Gives your child a lumpsum at maturity to support his higher education/marriage

9. Shriram Life – Vivah

• Death benefit: Sum Assured and vested bonuses
• Maturity benefit: Sum Assured plus accrued bonuses
• Comment: In case of death or accident of insured during policy term, 1% of SA paid per month till end of term of policy

Comparing few Unit Linked Children’s Plans

Unit linked Children’s Insurance plan comes with various charges applicable to any ULIP. Before you decide to buy one for securing the future of your child, make sure you understand these charges and get a clear picture of how much it will cost you on your chosen plan. Here is a list of charges applicable on Unit linked Children’s Insurance plans:

• Premium allocation charge
• Fund management charge
• Surrender charges
• Mortality charges
• Fund switching charges

There are some other charges too, such as:

• Partial withdrawal charges
• Policy administration charges
• Revival charges
• Miscellaneous charges

Conclusion

All parents dream that their child gets the best possible childhood and a safe and secure future. Yet sometimes due to sheer negligence or laziness, parents are unable to offer their children a well laid out financial platform to pursue career ambitions. Plan ahead and secure your child’s future through Children’s Insurance Plan today!

Source : http://www.personalmoney.in

Read More

How to build your Retirement Portfolio by Manish Misra

Each type of investment has distinct advantages and disadvantages, and because each tends to behave differently in different types of economic mood swings.  Your retirement portfolio should be broadly diversified and well balanced to last for your and your dependant’s life time. Your may have various financial assets viz. shares, debentures, gold, bonds, life insurance, annuities, mutual funds, fixed deposit, company deposits, PPF, monthly income schemes, national savings certificates, etc in your portfolio. In addition to this it may also contain tangible assets that can take the form of gold, silver jewellery, precious stones like diamonds, real estate, painting, carvings etc. and other collectibles. You may also have some insurance to cover risk.

But, how can you be sure that your portfolio has all the components adequate enough to cover all your retirement needs? Let’s review various factors that you should consider while building your Retirement Portfolio.

Your Attitude Towards Risk

Firstly, understanding your attitude towards investment risk is very important. Normally we come across two types of investors :

1. Risk takers: They are willing to take high risk to get high return on their investments. They have high-risk tolerance. Their portfolios consist of equities, growth schemes of mutual funds, unit linked plans, variable annuities, real estate and long term deposits. The proportion of risky assets in the portfolio is higher as compared to safe assets.

2. Risk averse: Generally, a large number of people are risk averse. They want to optimize the rate of return on their portfolio with minimum risk. They invest in diversified assets to minimize the risk of their portfolio. Their portfolio of assets varies from low return- low risk fixed deposits to high risk-high return shares. But a smaller proportion is devoted to equities and growth schemes of mutual funds and a large proportion is devoted to low and medium risk assets. Their investments include short-term deposits, fixed/variable annuities, government bonds, mutual fund units or monthly income scheme.

Both these investment strategies are good, however you need strike the right balance depending on your age, your investment time horizon and your current financial situation. Remember, the primary objective of retirement planning is to generate regular income after retirement.

Let us assume that the person gets a regular income of a fixed amount. This amount may be sufficient to start with. But inflation can result in increased financial needs over a period of time and the regular fixed income may become insufficient to meet the needs after a period of time. Hence, your portfolio should beat the inflation so as to generate a comfortable stream of income throughout your life. This is only possible, if you take balanced approach and review and adjust your portfolio frequently.

How to determine the right portfolio mix?

You can follow a general rule of thumb (i.e. 100 minus your Age) to determine the allocation to risky assets in your financial portfolio. So, when the retirement is long way off, it is desirable to take greater risk to accumulate wealth but as a person reaches the retirement date he/she should change his attitude towards risk and adopt a more risk-averse investment strategy.

Rule of Thumb : Determine your portfolio mix
Your Age	Fixed Rate Investments	Market Linked Investments
20-30	20-30%	70-80%
30-40	30-40%	60-70%
40-50	40-50%	50-60%
50-60	50-60%	40-50%
60-70	60-70%	30-40%
70+	80+%	Less than 20%

For example, when you are in your 20’s you can have upto 80% of your investments in Equities, Equity Mutual Funds or Unit Linked investments and 20% in Fixed Deposits, Bonds, NSC, etc. As you grow older allocation to fixed rate investments avenues needs to go up and market linked investments should be reduced gradually.

Failure to reduce the market linked investments as you grow older can cause severe consequences. Imagine, what will be the return on your portfolio if the share market collapses? When such a situation arises, the portfolio return reduces to zero or may even some times become negative i.e. principal loss, and then you will have to wait till the markets rises again. If the situation does not turn around in a short period, it will be very difficult for you to maintain your standard of living post retirement. Never ignore your risk tolerance.

While it is important to take greater risk early in the accumulation phase, bring down the risk exposure as you approach closer to your retirement to preserve and nurture accumulated wealth.

Liquidity of your Retirement Portfolio

After risk and return, portfolio liquidity is the important factor, which you should think of while planning for post retirement. Liquidity refers to the ability to buy or sell an asset without inordinately influencing the price at which the transaction is consummated.

Often, to preserve tangible assets such as, gold, silver jewellery, precious stones like diamonds, real estate, painting, carvings etc. maintenance cost by way of insurance and storage would need to be incurred. During the post retirement period, if this maintenance cost is draining your retirement income, you might have to liquidate them and convert them into income producing assets. Assets like real estate, other than self-occupied house may be systematically liquidated over a short period of time to make the investments liquid. Alternatively, you may consider renting out such real estate to cover maintenance costs and generate some additional income stream.

Reviewing your Life Insurance

No matter how much you have saved or invested over the years, sudden eventualities, such as death or critical illness, always tend to affect your family financially apart from the huge emotional loss. Though one of the main objectives of taking insurance is to provide financial cushion to your family for times when you are not around, but it’s not the only objective. Insurance covers the risk of a person dying too soon or live too long. Insurance helps you to build a corpus for yourself; provides you with comfortable retired life and even takes care of your lengthy medical bills.

Even after you retire, you may need your life insurance for many reasons. One important reason is to make sure your spouse will have enough income, if you pass away first. Some pensions pay reduced amounts or even nothing at all, to surviving spouses. Life insurance can provide the funds to help offset that possible loss of income.

You need to review your insurance cover regularly and take additional cover to safeguard your family. When you retire, even though your original purpose for acquiring life insurance may have changed, as your children have grown up and your home mortgage is paid, you may still have a need for life insurance. Do not drop your life insurance without first consulting with a financial planner or insurance expert. Once you lose your insurance, it may be difficult or even impossible to get insured again.

Medical Emergency Cover

With age come health problems. With health problems, come medical expenditure which may make a huge dent in your income post retirement. Failure here could lead you to liquidate your assets in order to meet such expenses, which may adversely impact your retirement plan.

Your portfolio should contain health insurance i.e. Mediclaim, Personal Accident Insurance, Hospitalisation policy, Critical illness policy, etc so as to reduce the lump sum expenditure in the event of any medical emergency post retirement. It is worthwhile to take these medical cover as soon as possible as they tend to get costlier with your age.

It is true that medical insurance provides compensation for the medical expenses incurred, but there are several limitations. Depending only on medical insurance may not be enough to take care of all medical expenses. Therefore, individuals must aim at building a separate medical corpus to supplement the medical insurance and cater toemergency requirement post retirement.

Conclusion

Ultimately, the best asset allocation for your retirement portfolio will depend on your own circumstances and tolerance for risk. Knowing your retirement needs and planning for it while you still earning can take away lots of unpleasant surprises when you retire. With some care and discipline you can build a retirement portfolio suitable for a comfortable and peaceful retirement.

Source : http://www.personalmoney.in

Read More

Get safe with 8 per-cent Savings Bonds by Shweta Misra

The Government of India 8 per cent Savings Bonds, 2003 (taxable) scheme is another instrument suitable for investors seeking returns that are fixed and assured. GOI Savings Bonds may not be terrific investment option if you are looking for capital appreciation or a substantial margin over inflation.

An 8 per cent return offers neither. Further, investments in RBI’s 8% Savings Bonds do not qualify for Income Tax Deductions and interest earned is fully taxable. But there is no better deal when it comes to safety. No need to fret over credit ratings.

If you are a retiree and wish to invest for more regular income after investing in Senior Citizen Savings Scheme and Post Office Monthly Income Scheme combination, you may opt for half-yearly option of RBI 8% Savings Bond scheme with no upper investment limit.

Who can invest in 8% Savings Bonds (Taxable), 2003?

1. An individual;
   1. Who is not a Non-resident Indian
   2. In his or her individual capacity or
   3. On joint basis, or
   4. Anyone or survivor basis, or
   5. On behalf of a minor as father/mother/legal guardian.
2. A Hindu Undivided Family
3. An Institution
   1. ‘Charitable Insititution’ under section 25 of the Indian Companies Act 1956.
   2. Institution obtained Certificate Of Registration as charitable institution .
   3. Any Institution which obtained certificate from Income Tax Authority
      U/S 80G of Income Tax Act ,1961.
4. “UNIVERSITY” established or incorporated by Central, State or Provincial Act, U/S 3 of University Grants Commission Act, 1956 (3 of 1956) .

Mode of Holding for 8% Savings Bonds (Taxable)

Bonds are issued in the form of Bond Ledger Account in denominations of Rs. 1000/- These bonds are not transferable. A nomination facility is available..

Liquidity of 8% Savings Bonds (Taxable)

These bonds can not be traded in secondary market. The good thing is that investors can get a loan against these bonds, from select banks.

Salient Features of 8% Savings Bonds (Taxable)

• Minimum Contribution : Rs.1,000 (Investment in multiples of 1000); no maximum limit on investment
• Maturity Period : The tenure of the bond is 6 years from the date of issue. No interest would accrue after the maturity of the bond.
• Options Available : 1) Half Yearly Interest Payable, 2) Cumulative
• Rate of Interest : Bonds will bear interest @ 8.00% p.a. and are payable half-yearly. The interest payment dates are February 1 and August 1 for non-cumulative investments. For investors who have chosen the cumulative option, the value of the investments at the end of 6 years would be Rs. 1601/- (being Principal and Interest) for every Rs. 1000/- invested. Interest on the Bonds is taxable under Income Tax Act 1961.
• Compounding Frequency : Half Yearly Compounding for Cumulative
• Premature Withdrawal : Not allowed
• Nomination Facility : Nomination facility is available for Individual investment for sole holder or surviving holder basis. This facility is not be available for joint holdings and minor investment.
• Tax Exemptions : No income tax exemption available, however, the bonds will be exempt from Wealth-Tax under the Wealth-Tax Act, 1957.
• Tax on Interest : Fully Taxable

Source : http://www.personalmoney.in

Read More

April 1st, All fools day or Smart investor day? by Manish Misra

April 1st marks the beginning of the new financial year. The ‘infamous’ day is also the one when we ought to set clear financial plans  for the next one year. We can, of course, choose to celebrate April 1 as “All Fools Day” if we continue to commit the same mistakes that we did in previous years. Instead, we should convert it to a “Smart Investor’s Day” by learning from our financial mistakes. Given below are my confessions as well as resolutions for the new financial year as a retail investor.

Set your objective and stick to it

We often invest in multiple asset categories to create our investment portfolio. Our obsession to generate good returns from our portfolio cloud our investment objectives. Portfolio performance is more complicated than simply looking at “how much I started with and what do I have now.” We should put portfolio performance in a context relative to our investment goals, risk tolerance, and the investment climate for the assets invested. We should also note that past performance does not necessarily indicate future results. In chasing returns, I somewhere lost track of my investment objectives.

Resolution 1 : Understanding why I am investing is the first step in structuring my portfolio. I should develop a clear understanding of my specific needs and goals.

Head over Heart

It is said man is governed more by the heart than his mind. I too have been attached to specific companies and continued owning these scrips without regards to their fundamentals. I even went to the extent of topping up when they declined in order to reduce my average holding cost, whilst ignoring their fair value.

Emotions are hard to ignore. I am not immune to that. But following my emotions did cost me dearly last year.

Resolution 2 : Eliminate emotions from my investment decisions. I will not follow the herd and keep focus on the fair value of my stocks and will accumulate only if their fundamentals are intact.

Investment strategy and risk tolerance

Understanding risk is an integral factor in your investment strategy. The max-loss rule of risk tolerance states that you should be prepared to accept a loss equaling half of your equity allocation.

The euphoric rise of Indian stock markets during the secular bull run from 2003 to 2008, had made my portfolio extremely aggressive. The fact that I participated in this bull run mid-way forced my subconscious to allocate more to equity. My greed had taken over my analytical assessment of risk tolerance.

Come 2009, and all theoretical rules were shattered. The market tumbled more than 60% from their peak making a huge dent in my (notional) profit and turned it into (notional) losses. If you can’t bear to lose 45% of your money, investing 90% of your portfolio in equities is beyond your risk tolerance.

Resolution 3 : I will never take exposure that is more than what I can endure as per max-loss rule. I will be honest while assessing my Risk Tolerance.

Don’t put all your eggs in one basket

When stock prices fell last year, for example, gold prices rose to a new all time high. Often when stock prices fall, bond and debt market deliver better performance because investors move their money into what is considered a less risky investment. So a portfolio that included stocks, bonds, and gold would perform differently than the one that included only stocks, only bonds, or only gold. I thought my portfolio was diversified with exposure to some large-cap and mid-cap equities as well as mix of equity diversified Mutual Fund schemes. But, at the end of the day, it was still equity-heavy. With markets collapsing all over the world, my holdings also lost money.

Resolution 4 : I will follow two steps to diversification. First, to spread my money among different asset categories such as equities, mutual funds, fixed interest bonds, gold, etc. Second, to further allocate those funds within each category to minimize risk of over-exposure to a single type of asset category.

Protect the interest of your loved ones

While investing, we asses our investment objectives, risk tolerance and investment climate. We often tend to ignore the risk associated with our health and life. Adequate insurance cover to safeguard yours and your family’s interest is needed against financial uncertainties that may result due to an unfortunate demise or illness. It is an integral part of your financial planning process that lets you protect yourself against everyday risks to your health, home and financial situation.

Resolution 5 : Unlike popular belief, insurance is not an investment, but a risk cover. I will reassess my insurance cover every year.

Conclusion

We all fall prey to one or more such traps while investing our hard earned money. For a good investor it always pays to follow a rational and well thought out long-term investment strategy, leaving out all of the “get rich quick” schemes that are so readily available in the marketplace.

My return on investment was the learning’s that I got from my mistakes.

Source : http://www.personalmoney.in

Read More