Category: Blog

06 Feb 2014
Involving your better half in the financial planning- humfauji initiative

Involving your better half in the financial planning.

When Wing Commander AK Singh (name changed), a serving Air Force officer, approached us for preparing his financial plan, it was clear to us that his expectations of sending two children to an expensive boarding school in the next three years while still in the process of acquiring a flat for his family, two office spaces for investment, paying for eight insurance policies with yearly premium of Rs 2.22 Lakhs and still planning to take VRS four years later, all from his Govt salary earnings, were not realistic. Fortunately, his wife was associated with the financial planning process right from the beginning and was instrumental in moderating the expectations. She had her reservations about many of the goals they were pursuing but was keen herself too about the boarding school for children.

Their financials did not support their requirements. Their household expenses were high, there was large outgo into insurance products not suitable for them, monthly savings were almost entirely into fixed income products which were not tax and inflation beating, and net monthly cashflow was negative. However, since both of them were deeply committed to getting an implementable roadmap made for their lifetime, it was much easier for us to tone down their expectations, get them to offload unsuitable products they had subscribed to, and rework correct priorities for their financial goals. In fact, making their financial plan was much easier for us than for many other families with better financials due to the active involvement of both the husband and the wife in the process.

It is a common experience of all the Financial Planners that the first data inputs for preparing a financial plan for a family come almost entirely from the husband. Somehow, it is taken for granted that the wife should not involve herself in financial matters in a family. However, after we insist in involving the wife too, the results almost always are pleasantly surprising. Inputs like household expenses, listing out of the goals and their inter-se priorities, timeframes of financial goals, etc are more realistic. Many lofty goals listed earlier may go out of the window and new practical ones edge in.

Generally speaking, wives can provide many inputs that the husband would miss out on or just gloss over. While men are better at costing and long-term visualising, women know the preferences and requirements of children, and the family as a whole, much better. Thus, the two combined can vastly improve the financial plan inputs and planning process. Another advantage is that when both the partners become stake-holders in the plan, its execution and longevity is almost assured. Conversely, a financial plan made in isolation may face resistance from the spouse and have limited chances of success. When the plan is a team effort, both would ensure that there is healthy spending, savings goals are adhered to, financial products are jointly analysed before being subscribed to and uncalled for diversions are minimised. In fact, if the grown up children are also involved in such financial planning, they make the goal-achievement task of their parents much easier, apart from learning valuable financial lessons for their lifetime. There is another angle to it too. If unfortunately something happens to one of the spouse, the surviving members of the family would try and stick to the plan as far as possible not only because they are aware of its nitty-gritty and logic, but also due to emotional reasons. Thus the adage, that team effort is always better than a lone effort, holds true in financial planning in a family too very well.

 

Col (Retd) Sanjeev Govila, CFPCM,

CEO, Hum Fauji Initiatives

Visit our Blog, https://humfauji.in/blog or facebook page http://www.facebook.com/HumFaujiInitiatives or follow us on Twitter  https://twitter.com/#!/humfauji  to get latest insight on matters financial.

 

02 Feb 2014
What returns to expect from Debt Mutual Funds-humfauji.in

What returns to expect from Debt Mutual Funds

Last of our knowledge series on Debt Mutual Funds below gives out what can you expect from Debt MFs. As you will see, compared to other fixed income products like bank FDs, Post Office schemes, Senior Citizen Savings Scheme etc, Debt MFs are poised to give better returns, are much more tax-efficient, and have much better liquidity and flexibility. Thus, they can be your flagship product for the part of the portfolio where you are looking for safe and tax-efficient wealth creation.

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What kind of returns do Debt Funds offer?

Debt funds offer two kinds of income:

  1. Dividends &
  2. Capital gains

Dividends: Debt funds receive interest on the debt securities invested by the fund. This interest can be distributed to the investors of the debt fund as dividends. Dividend distribution is however subject to availability of distributable surplus and approval from the Trustees of the Mutual Fund.

Capital gains: As stated earlier, debt fund managers trade in debt securities in the debt segment in order to earn profits. This gain or loss is typically reflected in the NAV movement of the debt scheme which would include the accrued interest on the securities too. For instance, let’s say an investor invests in a debt scheme at an NAV of say, Rs 12; when he wants to redeem, if the NAV is say, Rs 13.5, he would earn a capital gain of Rs 1.5 per unit (Rs 13.5 minus Rs 12).

What about tax? Do I need to pay tax on my debt mutual funds?

Tax on dividend income:

Dividend income that you receive from your debt fund is tax-free in your hands. However, the mutual fund has to pay tax (called Dividend Distribution Tax) at the rate of 28.325% for individuals before distributing dividend. In other words, you get dividend after payment of this tax.

Tax on capital gains:

Tax on capital gains in case of debt funds depends on how long you stay invested in the fund for. If you stay invested for less than a year, the capital gain gets added to your other income and is taxed according to rate applicable to your total income. For instance, if you are in the tax bracket of 20% and you earn a capital gain of Rs 5,000 on redemption of your debt scheme, you will pay tax of Rs 1,000 (20% of Rs 5,000).

If you stay invested for more than a year, the capital gains that you earn from your debt funds are taxed at a lower rate of 10% without indexation or 20% with indexation (the government publishes a cost inflation index table each year for this purpose), whichever is lower. Indexation helps you increase the cost of your investment to account for inflation. So for example, if you have invested in a debt scheme at Rs 10 and redeemed after a year at Rs 20, you either pay 10% tax on Rs 10 (Rs 20 minus Rs 10) or 20% tax on Rs 9.2 (Rs 20 minus Rs 10.8 – assuming inflation @8%). You pay tax on the lower of the two, that is, 10% of Rs 10, which is Re 1 or 20% of Rs 9.2, which is Rs1.84. So you pay Re 1 per unit as tax.

My bank deposits offer me the ‘cumulative’ facility where my interest is reinvested and given to me along with my deposit amount when the deposit matures. Do mutual funds offer something similar?

Mutual funds offer three ways of receiving income:

Dividend payout: Here, you instruct the mutual fund to pay you the dividends when they are declared. In other words, the dividend amount is credited to your bank account.

Dividend reinvestment: Here, you instruct the mutual fund to reinvest the dividend due to you back into the scheme. In this case, the reinvestment into the scheme is done at the NAV at the time of the dividend declaration.

Growth: Here, you instruct the mutual fund not to give you the dividend; instead, the dividend is retained within the scheme and the NAV of the scheme accordingly rises. Hence, instead of dividend, you get capital appreciation. This option is similar to the ‘cumulative’ option offered in bank deposits

Col (retd) Sanjeev Govila

CEO, Hum Fauji Initiatives

Visit our Blog, https://humfauji.in/blog or facebook page http://www.facebook.com/HumFaujiInitiatives or follow us on Twitter  https://twitter.com/#!/humfauji  to get latest insight on matters financial

02 Feb 2014
Types of Debt Mutual Funds-humfauji.in

Types of Debt Mutual Funds

Continuing with our information regarding Debt Mutual Funds, in this edition, we give out the various types of debt funds and how are they suitable for you.

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So, which mutual fund schemes invest in debt? Well, the following schemes are pure debt schemes (that is, they invest only in debt securities):-

Money Market Funds: These funds invest in very short term debt securities and are suitable for parking your money which you have kept aside for your emergency needs.

Flexible Income Funds: Also known as floating rate funds, these invest in debt securities that do not have a fixed coupon rate (that is, interest rate payable on the face value of the security). The rate varies periodically with the movement of a specified benchmark interest rate. If you prefer lesser interest rate risk and are satisfied with the current interest rates prevailing in the market, these funds are suitable for you.

Income Funds: These funds invest in a wide variety of debt securities like bonds, debentures, etc. issued by government, public sector and private companies. They are more diversified and tend to invest in various debt securities depending on the prevailing market conditions. If you plan to stay invested for a longer period (say, more than 3 years), these funds are suitable for you.

Gilt Funds: These funds invest in government securities such as treasury bills, government bonds, etc. If you prefer not to take any credit risk, these funds are suitable for you.

Bond Funds: These funds invest only in fixed income securities. There are many types of bond funds depending on the duration of the debt securities, the credit quality and interest rate. You may pick one to suit your need.

Liquid Funds: These funds invest in debt securities with duration of up to 90 days. These are suitable for very short term investments of a few days or weeks. Instead of keeping your money in your savings account, you can invest in these funds.

Short term Debt Funds: These funds invest in bonds with relatively shorter duration (the duration of debt securities invested by these funds is longer than those invested by liquid funds and money market funds, but shorter than that of income funds). If you plan to stay invested for a few months, these funds are suitable for you.

Fixed Maturity Plans (FMPs): These close-ended funds invest in debt securities with a fixed duration. The duration of the debt securities invested is in line with the duration of the fund. For instance, if the FMP is for 1 year, it can invest in debt securities of one-year duration.

Dynamic Bond Funds: These funds judge the expected change in interest rates and accordingly invest in debt securities. For instance, if they expect interest rates to fall, they invest in debt securities of longer investment duration, and vice versa. If you do not want to predict interest rate movements, this fund is suitable for you.

The following schemes are debt oriented hybrid schemes (that is, they invest a major part of their funds in debt):

Multiple Yield Funds: These funds are debt funds but with a dash of equities, typically in the range of 10 to 30%. These are for you if you are a conservative investor preferring returns along with potential capital appreciation.

Capital Protection Oriented Funds: These funds are basically debt funds with a small amount invested in equity. The portfolio structure of such schemes is that the capital amount is oriented towards protection of capital. The equity investment portion aims to provide capital appreciation. If you don’t like taking risks, this fund is suitable for you.

Monthly Income Plans: These funds invest about 75 to 95 percent in debt securities and the balance in equity. Though they attempt to offer regular income, there is no guarantee of any monthly income. If you prefer a combination of regular income and growth, these funds are suitable for you.

(Source: ICICI Prudential write-up on www.myuniverse.co.in)

 

Col (retd) Sanjeev Govila

CEO, Hum Fauji Initiatives

Visit our Blog, https://humfauji.in/blog or facebook page http://www.facebook.com/HumFaujiInitiatives or follow us on Twitter  https://twitter.com/#!/humfauji  to get latest insight on matters financial

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