Categories: Financial Cocktail Samosas
Key financial things to do earliest now
As the new financial year 2023-24 approaches, you may have already started planning your investments to achieve your financial goals. But before we dive into the new financial year, it is necessary to complete certain tasks at the earliest now, maybe before 31st March 2023, to ensure maximum savings and a good start to the new fiscal year. Taking care of these important things will enable you to save on taxes and prevent yourself from paying certain penalties.
So, let’s take a look at the top Four things you need to do earliest now:-
- Advance Tax Payment: The last date to pay the final installment of advance tax payment for the financial year 2022-2023 was March 15, 2023. However, you can still pay it, as any tax paid before 31st March is also considered to be advance tax. After 31st March 2023, a 1% penalty per month will be charged on the tax amount due till the day you pay your taxes. So, make sure you clear all your dues of advance tax payments before 31st March 2023.
- Tax-saving Investments: Check out on your tax-saving investments such as PPF, ELSS, Life Insurance Policies, etc. In case you’ve missed your tax-saving investments and have yet to utilize the 1.5 Lakhs deduction available u/s 80C, you still have a couple of days left to make these investments.
- Linking PAN with Aadhaar: The government had made it mandatory to link PAN with Aadhaar by 31st March 2023 (extended to June 30, 2023, now). In case the deadline is missed, you will not be able to use your PAN for any financial transactions. The linking of Aadhaar and PAN can be done online through the Income Tax Department’s website: https://eportal.incometax.gov.in/iec/foservices/#/pre-login/bl-link-aadhaarYou can also check it here on the mentioned link if your Aadhaar has been linked to your PAN https://eportal.incometax.gov.in/iec/foservices/#/pre-login/link-aadhaar-status
- Mutual Fund Nominee Update: If you have invested in mutual funds, it is mandatory to link your PAN with your Aadhaar by 31st March 2023 (extended to September 30, 2023 now). Failure to do this linking can result in disruptions in the transactions. It can be done online through the following websites.
CAMS – https://www.camsonline.com/Investors/Service-requests/Nomination/Nomination-Opt-in_&_Opt-out
Karvy – https://mfs.kfintech.com/investor/general/NCTNomineeUpdation#
In case of any queries or problems, please contact your financial planner at Hum Fauji Initiatives.
(Contributed by Yogesh Gola, Financial Planner, Team Vikrant, Hum Fauji Initiatives)
Master the art of debt-free living
When you google the term ‘become debt free’, the search result will also display a query: “Is it good to be debt free”!!
There is a lot of generic financial advice available for getting out of debt: gain more wealth, take your credit cards apart, eat out less, etc. This straightforward advice is ultimate of little practical use.
So, try out some ideas which can actually change your life in a positive manner and get you out of your debt:-
- The One-Week Rule – There is a straightforward strategy you can employ if, like a lot of consumer debt, your debt is a result of impulsive spending: WAIT! Try putting this one-week rule into practice – waiting a week before making any unnecessary purchases – and see what happens! Because it enables you to establish new spending patterns, this is especially helpful as you work toward paying off debt. In addition, the one-week rule is similar to a budget in that it allows you to spend however you want, but with intentions.
- Snowball: A Strategy with Sense – Make use of the debt snowball strategy to tackle your debt incrementally. Start with the debt with the lowest balance while paying your other debts in full as usual. After you have paid off your lowest-balance debt, move on to the next lowest debt. Accumulate the amount saved from the first debt’s monthly outgo to pay off the next-smallest debt. Soon you will start seeing the result of how it will improve your debt scenario.
- Dedicate unexpected windfalls to your debt – When you get unexpected money, it’s easy to think of fun ways to spend it: Go on a vacation or buy that brand-new smartphone you’ve been eyeing. However, if you have a lot of debt, it might be better to use the cash to pay it off than to get into a new one or indulge in fantasies. Try not to consider a financial bonus as ‘additional cash’ that you can use for optional purposes.
Please remember that it is always better to look at debt from a ‘screen of affordability’ – what you can afford to buy?
(Contributed by Gautam Arora, Associate Financial Planner, Team Sukhoi, Hum Fauji Initiatives)
What’s better – Traditional Insurance Policies or a Combination of Pure Term Plans and Mutual Funds
Experienced financial planners will always tell you to avoid most of the traditional insurance cum-investment policies and go in for a combination of a Pure Term Insurance Plan and good Mutual Funds to get the best of both worlds – good life insurance cover and good investments.
Let’s check this advice given by the financial advisors through a real-life example using the popular LIC policies:-
An annual premium of Rs 5.7 lakhs must be paid if a 30-year-old purchases the well-known ‘LIC New Jeevan Anand plan’ with a 20-year term for Rs. 1 crore insurance cover. This policy is the typical combination of Insurance-cum-Investment plan.
After 20 years, and assuming the tax-free status of the policy continues, this plan will mature with a return of around 5% and a maturity corpus of Rs 1.98 crore.
Now let us see if this person had gone in for the Term Insurance and Mutual Fund combination instead of this Insurance-cum-Investment policy.
Again taking a policy from LIC stable only the ‘LIC New Tech Term plan’ which is a term insurance policy with no investment component. The premium is approximately Rs 11,000 for a cover of Rs 1 crore for a 30-year-old with a 20-year term.
So instead of paying Rs 5.7 lakhs as the premium, we are only paying a premium of Rs 11,000 for the insurance part.
If the balance of Rs 5.59 lakh (Rs. 5.70 lakh – Rs. 11,000) per year is invested in long-term predominantly-equity mutual funds and assuming a lowly 10 percent average annualized returns over 20 years, you will get – hold your breath – approx Rs. 3.52 Crore. In fact, we would expect it to be much more than this amount.
That is why it makes sense to go for a combination of a term insurance plan and equity funds rather than traditional term insurance plans.
Our CEO has also articulated the same views in this article by Economic Times recently:- https://m-economictimes-com.cdn.ampproject.org/c/s/m.economictimes.com/wealth/insure/life-insurance/why-mutual-funds-plus-term-insurance-can-be-better-than-traditional-life-insurance-investment/amp_articleshow/98651000.cms
(Contributed by Ujjwal Dubey, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)
Bought the Wrong Insurance? Correct It Now
Life insurance helps secure the livelihood of one’s near and dear ones in the case of one’s untimely demise. This aspect also makes it an emotional product and investors frequently end up buying the wrong type of life insurance.
Broadly, life insurance is of 3 types:
- Endowment / Money Back.
- Unit Linked.
- Term Plan.
Among the above three, only term plan is the one advisable as it helps you get a large cover for a small premium. The other two are insurance-cum-investment products which neither provide you an adequate cover nor are good investments and are in fact, worst of both the worlds. They usually come with high charges and lack of transparency.
A pure term plan doesn’t provide you any money back, like your car, health or house insurance does not if nothing goes wrong. In other terms, the entire premium goes towards providing only life insurance which actually is the reason you take a life insurance.
If a term plan promises a part or entire capital back, beware!! It’s not a pure term plan and be avoided. For investments, you should consider specialized/pure investment products only like mutual funds, FDs, govt investment avenues etc.
If you already have endowment or unit linked insurance plans (ULIPs) and want to exit them, here’s how you can do so:
Surrendering the ULIPs: ULIPs comes with a mandatory lock-in period of 5 years. It doesn’t means you must continue paying the premium for the entire 5 year period. In fact, it can be stopped anytime. Once you stop paying the premiums, the life cover is terminated and the market value of the premium paid minus discontinuance charges is credited to your bank account when the lock-in period gets over.
Getting out of Endowment/Money Back plans: This is slightly complicated. Typically, most insurance companies have a toxic policy and will pay nothing if surrender is within 3 years of starting the policy. Even otherwise, first year’s premium will always lapse. For other premiums, every insurance company has a formula to calculate amount to be paid back, which is not investor friendly anyway. But you have another way out called ‘Paid-up Policy’.
A paid-up policy is what you have when you stop paying premiums but continue to get insurance coverage. However, the benefits reduce accordingly and the Bonuses/additional benefits are not paid.
So, Paid up vs Surrender, which one to choose?There is no one-size-fits-all answer to this question. It could differ even for two individuals having the same insurance policy. Various variables like policy tenure, premiums paid etc need to be analyzed. Generally, if the maturity period is a long way off, say 5-7 years or more, it could be worthwhile to surrender/get your money back and utilize it wisely subsequently.
(Contributed by Jatin Uppal, Deputy Manager, Financial Planning, Hum Fauji Initiatives)
The Dark Side of Fintech Borrowing
What is Fintech Lending? These are web- and app-based services which rely on technology and digital solutions to facilitate the process of seeking out, applying for and repaying loans. Fintech lending has become an increasingly popular option recently for individuals seeking quick access to credit. The positive part is that they help students, homeowners, businesses and underserved communities access financing options quickly and efficiently.
Fintech lending may seem like a quick fix and quick access to loans without the need for lengthy paperwork or physical visits to banks for your financial needs. However, there is a dark side to fintech and as your trusted financial advisor, it is important for us to ensure that you are aware of all sides of this industry before making any decisions.
One of the main concerns about fintech lending is that it can be significantly more expensive than traditional lending. The interest rates in them are usually higher, and there may be additional fees/charges, obvious or veiled, that can increase the overall cost of borrowing. This can lead to financial strain if the borrower faces any adversity or temporary hitch in paying back the loan on time.
Another important factor is that Fintech loans often have short repayment periods, which can put pressure on borrowers to repay quickly. The borrower may then take out another loan to repay the first loan and thus may start the vicious cycle of debt that can be difficult to break.
The lack of regulation in the fintech lending industry is also a concern. Without proper oversight, borrowers can be vulnerable to unscrupulous lenders who may take advantage of their financial situation. It is important to thoroughly research any fintech lender before signing up for a loan to ensure that they are reputable and trustworthy.
In conclusion, while fintech lending may offer convenience and accessibility, it is important to consider all factors before making any decisions. High-interest rates, short repayment periods, and lack of regulation can all contribute to the dark side of fintech borrowing.
(Contributed by Manish Kumar, Relationship Manager, Team Vikrant 2, Hum Fauji Initiatives)
Decoding the New Tax Regime…Should you go for it?
The Union Budget 2023-24 has made the new tax regime the default option for every taxpayer from next financial year onwards. The slabs and tax rates as per the new regime have also been suitably tweaked to lessen the overall tax burden as also making the Rs 50,000 standard deduction available.
What’s new in the New Regime (Sec 115BAC)?
- The number of tax slabs has expanded under the new system with considerably reduced tax rates.
- Most of the exemptions and deductions that taxpayers used in the old regime will be unavailable. The positive side of this is that the life becomes simpler!
- It allows taxpayers to invest their money without any preconceived limitation. There are no mandatory rules and regulations governing your investment pattern under the new program.
- An individual can switch between the new tax regime and the old tax regime in every financial year. However, the facility of this switch is available only for those individuals having salaried income and no business income.
Both the regimes have their benefits and drawbacks, and which one is good for you would get known only after a bit of calculations.
The new tax regime is very well tailored for new investors and individuals who have only recently begun their careers.
(Contributed by Kritika Saini, Assistant Manager, Team Sukhoi, Hum Fauji Initiatives)
Key Things to Know About Loans Against Mutual Funds
In case of any financial emergencies, you look out for existing savings or liquidate your investments even at the loss to meet the requirements. If it is still not enough, you also look for a loan. However, taking on an avoidable debt may not be the best thing to do.
You would have come across loans against land, gold or home. But, do you know that you can take a loan against your mutual funds? You heard it right, instead of selling them in case of any financial emergency, you can have a loan by pledging your mutual funds.
Here are the key things that you should know about –
- Existing mutual funds investment remains unaffected – While your MFs may go on a lien till the loan is on, they will keep growing with the markets and earning interest, as the case be while remaining in your name – just that you cannot sell the MFs which are under lien till the loan is paid back. Also, loans against MFs have interest rates much lower than personal loans or credit cards. When the loan is fully repaid, the lien is removed.
- Loan up to a certain limit – The amount you can borrow will depend on the type of mutual funds you hold. Typically loaning agencies will offer loans up to half of the Net Asset Value (NAV) for equity mutual funds, and higher amounts for debt funds.
- Many agencies including banks provide such loans – Banks are major agencies giving such loans. Apart from this, there are many other agencies which give loans much more quickly, generally within a day and fully online though at higher interest rates. Many banks lend money only against a selected set of mutual fund schemes. For instance, SBI provides loan only against SBI Mutual Funds holdings, and banks such as HDFC and ICICI are also very selective about the schemes against which they lend money. When the market is in a slump, taking loan against MFs rather than selling them can be a smart move. By avoiding selling your investments, you can ride out the storm. When the market bounces back, so will the value of your mutual funds.
Should Variety Be the Spice of Life in Mutual Funds too?
‘I want to invest some more money but don’t give me the same mutual funds that I already have!
No, I don’t accept this – will you invest all my money in just Five funds?’
Above are the typical responses of some of the investors in the tone of ‘Yeh Dil Maange More’ while investing!Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time. However, over-defensive investors often go to the other extreme while trying to weave a safety net around their investments. They allocate their investments in far too many products, something that risks the growth potential of their entire investment portfolio.
Over-diversification can impact expected investment returns: When someone invests in too many products, the degree of this risk-correcting marginal loss on expected returns increases – to an extent that it starts eating into the marginal benefit of risk-reduction. As such, over-diversification can turn out to be a self-defeating exercise by impacting your expected returns. The overall counter-risk benefit can be too feeble and negligible to help meet your financial goals in time.
Over-diversification can become unmanageable: It can get unmanageable to keep track of, and evaluate the performances of, too many investments because several active investment tools (like stocks, commodities, and even certain mutual funds) may require constant monitoring and re-calibration.
How to secure optimal diversification of investments: The good old notion that ‘quality is better than quantity’ holds even when it comes to diversification of investments. Optimal diversification of investment can be secured if the portfolio is distributed only amongst meaningful instruments according to the investor’s financial goals, risk profile and monitoring capability.
SAFE Investment Strategy to Navigate 2023
As an investor, we often find ourselves caught between the desire for high returns and the need safety. It is a constant dilemma, but one that can be resolved by sticking to the fundamentals of investing and seeking out safe opportunities.
In 2022, equity markets globally underwent a sharp correction, leaving investors on the lookout for a safe strategy to navigate 2023. The SAFE strategy offers a framework that investors can use to ensure they remain successful in the face of market upheavals. And here, SAFE stands for:-
S: Secure your yield: Not all asset classes perform over the same time horizon. Equity performs during an economic expansion, while debt and gold perform during market fear and recession. Last year, central banks have rapidly raised the interest rates in the economy to control inflation and other macroeconomic issues. The impact of that on the debt market has been a sharp rise in bond yields, making them very attractive for long-term safe investment for investors at this point. That is the reason we launched DOP (Debt Opportunity Portfolio) recently which will only be open till this opportunity exists and is meant to take advantage of this opportunity which has opened up after many years.
A: Allocate for the long term: Rome was not built in a day – this famous idiom we have heard a lot of times. The same idiom applies in investing; when we invest in equity for the long term, we enjoy the benefit of compounding, and when we invest in debt funds for the long term, we enjoy the indexation benefits which beats all other safe products. In 2023, we believe that tactical income opportunities from exposure to debt funds and some long-term equity portion will help the investors to create wealth.
F: Fortify against further surprises: While attractive bond yields offer optimism to investors in 2023, we believe investors should be ready for surprises in their portfolios on the equity side. Maybe, a balanced and defensive portfolio with a mix of cash, gold, bonds, and equities would be a prudent approach to ride out any market uncertainties.
E: Expand beyond the traditional: Investors with lesser risk appetite usually choose traditional investment options like gold, FDs, real estate etc, but these assets have somewhere lost their charms amongst new investors. Their substitutes have become more attractive like REITs instead of Real estate, Bonds, debentures and debt mutual funds instead of bank FDs and sovereign gold bonds, gold funds and gold ETFs instead of physical gold along with exposure in pure equity or equity mutual funds. In fact, that may be a more prudent investment strategy for 2023 as we go forward.
(Contributed By Ujjwal Dubey, Associate Financial Planner, Team Prithvi, Hum Fauji Initiatives)