As per the prevailing tax laws in India, one can save tax on the investments in noted mutual funds, insurance, ULIPs upto Rs. 1 Lakh.
We can compare ULIPs as equal to the mutual funds in their operation except the extra feature the ULIPs provide, the insurance cover. However linking the insurance with the investment is debatable. Everyone's life should be covered by certain amount of Insurance, except their family can financially sustainable in absense of the family head. But at the same time Insurance should not combined with investment. Investments are something different from the insurance.
Another point to be noted here is all the ULIPs charge 20% to 80% of the capital in the initial stages of investment as administration and other charges . So we cannot expect the high returns until and unless we continue investing for longer term. For instance the ULIP companies charges 20% for the first year, around 12% in the next year, 4% afterward (Applicable for some schemes only, may vary for each scheme).
Coming to the mutual funds, the total charges must not cross 6% of the capital as per the prevailing rules . Generally, money invested with Tax Saver mutual funds and ULIP schemes will have the lock in period of 3 years during which your money cannot be taken back. Since the maintenence charges involved in the mutual funds are very less compared to ULIP schemes, they may give more returns.
Since both Tax Saver mutual funds as well as ULIP schemes invest in Stock Markets, the risk will be higher compare to the other savings schemes like Bank Deposites, PPF etc.
Monday, August 10, 2009
Site Restoration fund
Conditiond :- The assessee must satisfy the following conditions
1. The taxpayer is engaged in the business of the prospecting for or extraction or production of petroleum or natural gas or both in India .
2. The central government has entered in to an agreement with the taxpayer for such business.
3. It must-
a Deposit with SBI any amount in an account (here in after referred to as special account) maintained by the assessee with that bank in accordance with and for the purpose specified in a scheme approved by the Government of indiain the Minisry of petroleum and naturak gas
b Deposit any amount in an account (herein after referred to as site restoration account) opened by the assessee in accordance with and for the purpose specified in a scheme framed by the ministry of petroleum and natural gas (herein after referred to deposit scheme).
4. The aforesaid amount shall be deposited before the end of the previous year.
5. The aforesaid amount shall be audited by a charactered accountant and the report of the auditor is filed along with the return of the relevant assessment year . In cases where the accoubts of the taxpayer are required to be audited under that law and the audit report as per that law is furnished with the return along with a further report in the form prescribed for the purpose of this provision .
1. The taxpayer is engaged in the business of the prospecting for or extraction or production of petroleum or natural gas or both in India .
2. The central government has entered in to an agreement with the taxpayer for such business.
3. It must-
a Deposit with SBI any amount in an account (here in after referred to as special account) maintained by the assessee with that bank in accordance with and for the purpose specified in a scheme approved by the Government of indiain the Minisry of petroleum and naturak gas
b Deposit any amount in an account (herein after referred to as site restoration account) opened by the assessee in accordance with and for the purpose specified in a scheme framed by the ministry of petroleum and natural gas (herein after referred to deposit scheme).
4. The aforesaid amount shall be deposited before the end of the previous year.
5. The aforesaid amount shall be audited by a charactered accountant and the report of the auditor is filed along with the return of the relevant assessment year . In cases where the accoubts of the taxpayer are required to be audited under that law and the audit report as per that law is furnished with the return along with a further report in the form prescribed for the purpose of this provision .
Systematic Investment Planning (SIP)
The two methods of investing in mutual funds are invest once and the second one is SIP, an acronym for Systematic Investment Plan.
Most of the people who invest in mutual funds don't know the actual benefits of the Systematic Investment Planning and are tend to invest the available money at one go. However, Instead of investing at a time, if we will invest the same amount in a Systematic way we will have the following benefits.
It is proven that in most of the cases, your money will grow more in SIP method than in investing at one time.
Also, the risk of investing in the stock markets reduced by using this method.
How investing in SIP method will affect the growth of the investment? Answer is simple. We will invest when the market is in down trend so that we will get more number of units at lower NAVs and we also invest in the up trend where we may get the low number of units. It is expected that the markets in a country like India, where the GDP is over 8%, can give the average returns of 15%-20% over the time.
Now how you will override the risk of investing in equities? Again simple. The profits from investment made at lower prices will balance the losses incur from the investment made at higher prices. Take for example of current market environment where the world markets are in recession. Most of the stocks, the small and mid caps or even large caps, have lost their stock prices ranging from 50% to 95%. If you are not lucky enough and invested in a stock which lost 95%, you would have left with 5% of your investment. But if you followed the SIP method and invest, you may not lost more than 40%-50%. This is true not only with the stocks but also with the mutual funds. After all, mutual funds invest in stocks only, though the percentage of the total amount varies between stock to stock.
However, if you are lucky enough and invested in a stock which is strong enough to sustain such a recession environment, you would have beaten the SIP method. But how much confidently you can say that whatever the stock you choose will be one of such stock?
Investing in SIP method doesn't mean that you have to invest only in mutual funds. You can follow SIP method even with the stocks as well, however you have to take care of choosing the stocks and placing the orders on time regularly. Some of the brokers like Sharekhan are providing the SIP for stocks. All you have to select the stock which you want to invest, the amount and date of placing the order. And you have to keep required amount in your account on the date of placing the order.
The last but not the least, the exit point which we chose to stop investment is critical in SIP. If you start investing in SIP when the market is at peak and stopped when it is at rock bottom, you will have to wait for many years to recover your capital. Where as if you continue investing, you can recover your capital in very few days/years.
At the exit point if the markets are doing excellent and the fund is at its peaks then our investment returns are more otherwise we may get moderate profits or may be small amounts of losses also possible, but they are having minimal chance.At the same time, we can minimize the effect of volatility of the equity market using SIP. Since we invest in ups as well as downs the profits and losses are balanced and we can have the chance of getting good returns. This method is more preferable for all those who wanted the good returns and at the same time low risk.
Most of the people who invest in mutual funds don't know the actual benefits of the Systematic Investment Planning and are tend to invest the available money at one go. However, Instead of investing at a time, if we will invest the same amount in a Systematic way we will have the following benefits.
It is proven that in most of the cases, your money will grow more in SIP method than in investing at one time.
Also, the risk of investing in the stock markets reduced by using this method.
How investing in SIP method will affect the growth of the investment? Answer is simple. We will invest when the market is in down trend so that we will get more number of units at lower NAVs and we also invest in the up trend where we may get the low number of units. It is expected that the markets in a country like India, where the GDP is over 8%, can give the average returns of 15%-20% over the time.
Now how you will override the risk of investing in equities? Again simple. The profits from investment made at lower prices will balance the losses incur from the investment made at higher prices. Take for example of current market environment where the world markets are in recession. Most of the stocks, the small and mid caps or even large caps, have lost their stock prices ranging from 50% to 95%. If you are not lucky enough and invested in a stock which lost 95%, you would have left with 5% of your investment. But if you followed the SIP method and invest, you may not lost more than 40%-50%. This is true not only with the stocks but also with the mutual funds. After all, mutual funds invest in stocks only, though the percentage of the total amount varies between stock to stock.
However, if you are lucky enough and invested in a stock which is strong enough to sustain such a recession environment, you would have beaten the SIP method. But how much confidently you can say that whatever the stock you choose will be one of such stock?
Investing in SIP method doesn't mean that you have to invest only in mutual funds. You can follow SIP method even with the stocks as well, however you have to take care of choosing the stocks and placing the orders on time regularly. Some of the brokers like Sharekhan are providing the SIP for stocks. All you have to select the stock which you want to invest, the amount and date of placing the order. And you have to keep required amount in your account on the date of placing the order.
The last but not the least, the exit point which we chose to stop investment is critical in SIP. If you start investing in SIP when the market is at peak and stopped when it is at rock bottom, you will have to wait for many years to recover your capital. Where as if you continue investing, you can recover your capital in very few days/years.
At the exit point if the markets are doing excellent and the fund is at its peaks then our investment returns are more otherwise we may get moderate profits or may be small amounts of losses also possible, but they are having minimal chance.At the same time, we can minimize the effect of volatility of the equity market using SIP. Since we invest in ups as well as downs the profits and losses are balanced and we can have the chance of getting good returns. This method is more preferable for all those who wanted the good returns and at the same time low risk.
Net Asset Value (NAV)
NAV is one of the key term in the mutual funds terminology. Most people confuse it with the share price, but there is lot of difference in the share price and the net asset value. Net asset value is nothing but the value of each unit of a particular mutual fund.
When a mutual fund starts all the investment put in by the investors will be divided into number of units with the initial price say Rs 10. i.e if the total invested money in an NFO is Rs 10 crore, then one crore units of Rs 10 each will be allocated to the investors, if the fund doesn't charge any entry load. Few funds are not charging any entry load for the investment greater than 5 crore and some of the funds are not charging entry load for any amount of investment in NFO.
When the fund manager starts investing the money in the equity, debt or money market, then the value of the total assets will be increased whenever the profit realizes and decreases if loss occurs. This is the reason why the price of each unit is called as Net Asset Value which is representing the value of the assets for that fund. Other than this there is no specific significance for NAV. We cannot judge the future performance with the NAV.
Some people believe that, though the NAV of a mutual fund is not have that much preference, a fund with small NAV performs better than their counterparts. Example, the DSP Merrill Lynch (Now it is DSP Black Rock) mutual fund has started World Gold Fund when the markets are in bull run. It has reached rs 13 which is 30% gain in less than a month. Of course the fund manager is the main entity in generating the best returns, we should also see the NAV to be less than certain range. And obviously it depends on the markets whether the fund gives profits or losses.
When a mutual fund starts all the investment put in by the investors will be divided into number of units with the initial price say Rs 10. i.e if the total invested money in an NFO is Rs 10 crore, then one crore units of Rs 10 each will be allocated to the investors, if the fund doesn't charge any entry load. Few funds are not charging any entry load for the investment greater than 5 crore and some of the funds are not charging entry load for any amount of investment in NFO.
When the fund manager starts investing the money in the equity, debt or money market, then the value of the total assets will be increased whenever the profit realizes and decreases if loss occurs. This is the reason why the price of each unit is called as Net Asset Value which is representing the value of the assets for that fund. Other than this there is no specific significance for NAV. We cannot judge the future performance with the NAV.
Some people believe that, though the NAV of a mutual fund is not have that much preference, a fund with small NAV performs better than their counterparts. Example, the DSP Merrill Lynch (Now it is DSP Black Rock) mutual fund has started World Gold Fund when the markets are in bull run. It has reached rs 13 which is 30% gain in less than a month. Of course the fund manager is the main entity in generating the best returns, we should also see the NAV to be less than certain range. And obviously it depends on the markets whether the fund gives profits or losses.
Know When Do You Have To Sell Your Mutual Funds
Most people loose the earnings by selling their hard earned investment without any reason or taking wrong advises. The best time to sell your fund depends on many parameters.
The performance of the fund comes down: This is the typical case where everyone tempts to sell their investment. But how do you decide that your fund is under-performing?
When you compare the performance of the fund with the past performance, if it is not doing well over the continuous time, it is basically the fund is not performing. But if you compare the fund with any other fund you should see whether you are comparing with the similar type of fund like sector, type etc.
Changing of Fund Manager: Most people doesn't care about the fund manager and his qualifications. But he is the one who manages your investments. A worthy fund manager will be an asset for you in the form of your investment in his fund.
When the fund manager changes, the investment style will obviously changes and it would definitely have impact on your returns. If you feel the fund manager is not capable and you have enough reasons to say that, switch to new fund.
Fund Expenses: According to the SEBI rules, the maximum expenses of the fund should not cross 6%. But it is also a big overhead for the fund. If your fund seems to charging more expense charges than it had before and they are not controlling, time comes to switch.
Fund Style: The fund style has the major impact on the returns of the fund. For example, a fund whose portfolio is formed with diversified style, and gaining good returns suddenly concentrates on some sector which you think that it will not perform in the future then you should shift to another fund.
The performance of the fund comes down: This is the typical case where everyone tempts to sell their investment. But how do you decide that your fund is under-performing?
When you compare the performance of the fund with the past performance, if it is not doing well over the continuous time, it is basically the fund is not performing. But if you compare the fund with any other fund you should see whether you are comparing with the similar type of fund like sector, type etc.
Changing of Fund Manager: Most people doesn't care about the fund manager and his qualifications. But he is the one who manages your investments. A worthy fund manager will be an asset for you in the form of your investment in his fund.
When the fund manager changes, the investment style will obviously changes and it would definitely have impact on your returns. If you feel the fund manager is not capable and you have enough reasons to say that, switch to new fund.
Fund Expenses: According to the SEBI rules, the maximum expenses of the fund should not cross 6%. But it is also a big overhead for the fund. If your fund seems to charging more expense charges than it had before and they are not controlling, time comes to switch.
Fund Style: The fund style has the major impact on the returns of the fund. For example, a fund whose portfolio is formed with diversified style, and gaining good returns suddenly concentrates on some sector which you think that it will not perform in the future then you should shift to another fund.
Growth vs Dividend vs Dividend Reinvestment Option
Many investors has the common confusion in selecting the growth/dividend/dividend reinvest option. Here is short summary of them.
Dividend Option: Dividend offered by the Mutual Funds is similar to the the dividends given in stocks. The funds will give the dividend when the fund manager thinks that there is enough excess funds available for the dividend, like in stocks. The dividend we got can be invested in any where. Only remaining funds after giving the dividend are invested in the stocks.
Growth Option: In this the fund will not offer any dividend, rather the fund will invest all available funds effectively in the companies so that they can produce high returns in the equity market. Yes there is a scope of loss also. But who will give 30-40% returns for your investment? Bank deposits, gold? None.
Dividend Reinvestment Option: This is somewhat tricky. In this method the fund company will reinvest the dividend offered in the same fund rather than giving it to the customer. This will some times gives better results than the growth option though it looks similar to it.
Investors who wants good returns in a long term view can go for growth or dividend option of their choice. However the investors who wants to be on safer side can go for dividend option as it will give at least some returns if the fund may give losses during tough times. Since nobody can guess the future of Capital markets, we cannot rely on this method at all times.
In dividend reinvestment option the dividend declared will be immediately invested in the same fund instead of giving it to the customer. Where as in dividend option the dividend is directly given to the customer. So the extra money invested in dividend reinvestment option will yield some more units. So the number of units allocated will be more in case of dividend reinvestment option at the time of dividend declaration, but the NAV will remain same as with the Dividend option.
Some times Dividend option is useful in some cases for example, the fund is performing extremely well and share the dividends and after some time it incurs losses. In this case we would avoid the losses on the dividends shared and also we got some of our money in the form of our dividends. However, we cannot say that this would become true at all times.
As such there is no thumb rule to decide which one is better- Dividend or Growth. It's a personal preference. These options do have some pros and cons. Best strategy is one has to divide the MF investment portfolio in to weighted average basis. Make sure you have some percentage allocated to growth options and some percentage allocated to dividend options. Dividend options are always easy to track as we can be expecting dividend at regular intervals. Growth options give better results but waiting time is longer and are more prone to the market volatility. Dividend Reinvestment obviously a better option but you need to be choosy about picking up the right fund.
Dividend Option: Dividend offered by the Mutual Funds is similar to the the dividends given in stocks. The funds will give the dividend when the fund manager thinks that there is enough excess funds available for the dividend, like in stocks. The dividend we got can be invested in any where. Only remaining funds after giving the dividend are invested in the stocks.
Growth Option: In this the fund will not offer any dividend, rather the fund will invest all available funds effectively in the companies so that they can produce high returns in the equity market. Yes there is a scope of loss also. But who will give 30-40% returns for your investment? Bank deposits, gold? None.
Dividend Reinvestment Option: This is somewhat tricky. In this method the fund company will reinvest the dividend offered in the same fund rather than giving it to the customer. This will some times gives better results than the growth option though it looks similar to it.
Investors who wants good returns in a long term view can go for growth or dividend option of their choice. However the investors who wants to be on safer side can go for dividend option as it will give at least some returns if the fund may give losses during tough times. Since nobody can guess the future of Capital markets, we cannot rely on this method at all times.
In dividend reinvestment option the dividend declared will be immediately invested in the same fund instead of giving it to the customer. Where as in dividend option the dividend is directly given to the customer. So the extra money invested in dividend reinvestment option will yield some more units. So the number of units allocated will be more in case of dividend reinvestment option at the time of dividend declaration, but the NAV will remain same as with the Dividend option.
Some times Dividend option is useful in some cases for example, the fund is performing extremely well and share the dividends and after some time it incurs losses. In this case we would avoid the losses on the dividends shared and also we got some of our money in the form of our dividends. However, we cannot say that this would become true at all times.
As such there is no thumb rule to decide which one is better- Dividend or Growth. It's a personal preference. These options do have some pros and cons. Best strategy is one has to divide the MF investment portfolio in to weighted average basis. Make sure you have some percentage allocated to growth options and some percentage allocated to dividend options. Dividend options are always easy to track as we can be expecting dividend at regular intervals. Growth options give better results but waiting time is longer and are more prone to the market volatility. Dividend Reinvestment obviously a better option but you need to be choosy about picking up the right fund.
Mutual Funds vs ULIP
ULIP - Unit Linked Insurance Plans:
High Loads (Ranging from 4% to 60%, ULIP companies will charge you around 20%-60%, depending on the company, in the first year and less in the subsequent years).
We can claim tax reduction on the amount invested subject to the laws (currently upto 1 Lakh under 80C).
Capital is protected as it is the insurance policy.
Risk is medium as the amount invested is safe, we may get the additional return based on the performance of the fund.
Amount is locked for atleast 3 years to 5 years and we will be charged upto 100% of the amount if we exit.
Flexibility in changing the funds, balanced, debt etc (they allow you to change the amount between funds upto some number of times) .
Mutual Funds:
Low entry loads of 1% to 2.25% and/or the low fund maintenance costs of no more than 6% (according to the SEBI rules).
High risk in the equity oriented funds and at the same time high returns are possible depending on the market conditions.
Amount is locked for 3 years.
We cannot move our money to other funds even with the same AMC as the amount is locked .
We can check the portfolio of the funds regularly and keep updated with the growth of the fund.
We can save tax with some tax saver funds but the returns are not as high as the other mutual funds.
High Loads (Ranging from 4% to 60%, ULIP companies will charge you around 20%-60%, depending on the company, in the first year and less in the subsequent years).
We can claim tax reduction on the amount invested subject to the laws (currently upto 1 Lakh under 80C).
Capital is protected as it is the insurance policy.
Risk is medium as the amount invested is safe, we may get the additional return based on the performance of the fund.
Amount is locked for atleast 3 years to 5 years and we will be charged upto 100% of the amount if we exit.
Flexibility in changing the funds, balanced, debt etc (they allow you to change the amount between funds upto some number of times) .
Mutual Funds:
Low entry loads of 1% to 2.25% and/or the low fund maintenance costs of no more than 6% (according to the SEBI rules).
High risk in the equity oriented funds and at the same time high returns are possible depending on the market conditions.
Amount is locked for 3 years.
We cannot move our money to other funds even with the same AMC as the amount is locked .
We can check the portfolio of the funds regularly and keep updated with the growth of the fund.
We can save tax with some tax saver funds but the returns are not as high as the other mutual funds.
Subscribe to:
Posts (Atom)