Smart Options

BE SMART IN ACQUIRING DEBT PRODUCTS

Perhaps, we would have to wait for a lifetime to buy a car and a dream house and abstain from shopping binges if there were no debt products and we could not avail loans. Loans and credit cards are an integral part of our life now. While the uglier side of debt is rather well-documented, you may not get affected by it if you know how to use it. Here are some smart strategies to help make loans work smarter.

• Opt for lifetime free, zero surcharge credit cards. This will take care of two major recurring annual costs. Even as you opt for such a card, don’t forget the old rules of not revolving credit, since interest rates are a huge, typically 2.95 % per month charged on daily basis or 41.74 per cent per annum.
• Use overdraft facility instead of credit card cash. You should also avoid withdrawing cash using credit cards since you have to pay a processing fee, an interest of 2.95 per cent per month charged on daily basis and service taxes. Instead, opt for a bank savings account with an overdraft facility that will allow you to access funds at a much lower 21-22 per cent per annum.
• Take loans against assets. For short-term cash requirements, opt for loans against assets instead of costly personal loans (interest rates 18-20 per cent). The best bets are loans against fixed deposits (FD) where you can get around 80% of the FD amount at an interest rate 1-2% above the FD rate. This way you can lock in funds for a longer duration and use the over-draft facility to meet short-term liquidity needs. Next, come shares and mutual fund units of income schemes. You can get around 60% of their value as loan at rates of 12-14%.

If you have been a good borrower in the past, you can use your record as a bargaining chip for lower interest rates

• Time your car loan application. When availing loans from private institutions, submit your loan applications towards the month-end so that executives sweeten the deal with freebies or discounts so as to meet their month-end targets. Go during lean periods like “Shradh” (a 15-day period in September, considered inauspicious for purchases). You can also take advantages of schemes during September-end, when dealers provide promotional schemes to spur purchases by the self-employed and institutions to claim deprecation for vehicles during the same financial year. The same is true during December-end and March-end, when dealers try to clear their inventories of stocks, albeit for two different reasons.
• Leverage your credit history. If you have been a good borrower in the past, you can use your credit record to bargain for lower rates. “An applicant with impeccable credit history can claim for lower interest rate and waiver of processing charges,” says S. Santhanakrishnan, Chairman, Credit Information Bureau (India). Many banks have already introduced products that reward good credit history with loans at lower rates, waiver of processing charges and increased loan eligibility.
• Apply for loans in groups to get discounts. While seeking loans, it pays to apply in groups. “If a group of friends purchase flats in the same property, they can successfully negotiate for discounts,” says Harsh Roongta, CEO, Apnaloan.com. The same is true if you take a loan along with your office colleagues. “The lender offer lower rates as it benefits from getting bulk business with its transaction, origination and servicing costs per loan coming down,” says Harsh.
• Part-prepay home loans and get Section 80C deduction. You can claim Section 80C benefits up to Rs 1 lakh per annum from a variety of sources, such as investments in Public Provident Fund (PPF), National Savings Certificate (NSC), premium of life insurance policies, investments in equity linked savings schemes (ELSS) and pension plans of mutual funds, and principal repayment of home loans, among others. Experts suggest that a key objective for anyone buying a financed home has to be of complete home ownership at the earliest possible time without compromising other goals such as retirement. So, it makes sense, especially during periods when interest rates are on a high, to increase the principal repayment through part prepayment of the loan (assuming that the loan has no or very little prepayment penalty) and claim the entire Section 80C deduction from this.

AVOID TAX LEGALLY

Deduction on jointly-taken home loans is available individually to both the spouses

Personal direct income tax rates have come down from the dizzy heights of 97.75 per cent in the 1970s to 30 per cent at present. The decrease in tax rates have also been accompanied by elimination of many routes for tax planning, most notably tax rebates such as those under Section 88 and Section 80L. However, there still exist some provisions in the Income Tax Act, 1961 (Act) that contain some possibilities of reducing the personal tax burden.

Apply jointly with your spouse for a home loan to claim larger tax deductions. Section 24(b) grants deduction for interest up to Rs 1.5 lakh per year on a loan for acquiring a residential house for self-occupation. This deduction is available individually to both the spouses. To be eligible for the deduction, the home loan needs to be taken in joint names, property be owned and financed jointly in equal shares, with both spouses being joint owners. Needless to say, a joint loan application will also help a couple avail of a larger loan.

Get tax deduction for home loan interest repayments. Self-occupied residential properties can avail of another tax concession under Section 23(2) that provides that the notional income for the purpose of income tax for such properties will be deemed nil and yet the deduction for interest up to Rs 1.50 lakh will be available. In other words, there will be negative income (loss) from such property that will be available for set off against the tax payer’s any other income, including salary income. To put it differently, interest on borrowed money becomes tax deductible. If husband and wife both were to have their own salaries, they could claim an annual tax deduction of Rs 3 lakh (Rs 1.5 lakh for each) and save aggregate tax of Rs 1,01,970 (33.99 per cent of Rs 1.5 lakh multiplied by 2) between them. In case of rented out property, this deduction is without any limit but the rent received gets added to your income.

Claim tax deduction for principal repayment for home loan. Repayment of the principal amount of a housing loan is one of the tax concessions a taxpayer can enjoy under Section 80C. But unlike Section 24, this deduction is available only for repayment of the loan from an approved source like banks, HDFC, HUDCO or the employer’s company, which includes AGIF. The repayment of principal part of the loan qualifies for a deduction under Section 80C up to a maximum of Rs 1 lakh per year. In case of joint home loan application, this results in joint tax saving of Rs 67,980 (Rs 33,990 multiplied by two). But the biggest advantage in availing Section 80C deduction for repayment of housing loan is immunity from any adverse tax consequences of the proposed EET (Exempt, Exempt and Tax) system—where investments will get taxed on maturity, redemption, or sale. The simple reason for this is that by the very nature of the transaction (repayment of a loan), there is no question of “withdrawal’ of funds to attract tax, unlike in the case of National Savings Certificate (NSC), Public Provident Fund (PPF) or life insurance policies with cash values.

While investing for kids, opt for growth option in mutual funds (MFs). The growth option in MFs is a great tax-efficient option for individuals trying to create wealth for their kids. With the clubbing up provisions of Section 64 in the Act, by which all incomes of minor children (under the age of 18 years) are to be added to the income of that parent (father or mother) whosever’s income is higher, the scope of tax planning here is very limited. The growth option comes in handy in such cases. Here’s how. The father could subscribe to a MF scheme and opt for growth option till the minor child attains majority. Under this option, the scheme does not declare any income distribution but merely accumulates it. Because the scheme does not declare any income, it does not pay income distribution tax (or dividend distribution tax) of 12.5 per cent, imposed by Section 115-R. The accumulated income of the scheme has the effect of enhancing from year to year the net asset value (NAV) of units held by the parents for the benefit of their minor children. When the child attains majority, the parents may transfer the units to the child and allow it to grow or encash the units to fund future requirements such as higher education and marriage. This can be done without paying any gift tax (abolished from 1 October 1998) or any wealth tax (since units are exempt from wealth tax) or any income tax (since there is no income declaration).

Stocks: Buy cum-bonus, sell ex-bonus. Equity shares of listed companies that announce bonus shares present excellent opportunity to book short-term capital loss without effectively losing any money. Such loss is available for set off against any other capital gain, including long-term capital gain. The modus operandi goes like this. Let’s assume that a company’s shares are quoting at Rs 2,000 per share on 20 June. On 22 June, the company announces one bonus share for every one share held and declares 10 July as the record date for allotting bonus shares. A taxpayer buys 100 shares (cum bonus) on 25 June at Rs 200 per share and pays Rs 20,000 for the same. On 11 July, the price of the company’s share drops to Rs 100 per share (ex-bonus) and hence the taxpayer will sell 100 shares for Rs 100 per share and get Rs 10,000 as sale proceeds. Since he was holding 100 shares on the record date (10 July), the company will allot him 100 bonus shares. He bought 100 shares at Rs 200 per share cum-bonus and sold 100 shares at Rs 100 per share ex-bonus booking a short- term capital loss and yet in effect retaining his original holding of 100 shares. The loss, as indicated earlier, can be used for setting off against any other capital gain and cannot be contested by authorities since there is no legal bar on it.

GET THE VERY BEST OUT OF NON-LIFE INSURANCES

One adverse event or a health aliment can sap your financial strength, and the premiums you pay during your lifetime are small even if the event doesn’t take place. Even as a majority of we urban Indians get more and more aware about risks we face and realise the need for covering themselves, the following six tips would help us get more bang for buck.

Use deductibles in auto policy to reduce premium. Deductibles are amounts which, in case of a mishap, will not be covered. A deductible of Rs 5,000 means that you will foot expenses till Rs 5,000 of damages. As you raise your deductible, your premium goes down. But remember, when your damage is above the deductible, you only get the difference between the deductible and the actual cost.

Enhance third-party property damage cover in auto policy. In the third-party cover, you get covered for Rs 6,000 of damages to a third-party’s property. Enhance this cover to Rs 7.5 lakh by paying an extra premium of just Rs 50.

Leverage your no-claim record for a new car to pay lower premium. When you sell your old car and buy a new one, you can carry forward the no-claims bonus to the cover for the new car. This way, you pay a lower premium. You can avail this bonus even if the old car is sold to a family member, including your spouse.

Insure your liability under Workman’s Compensation Act, 1923 towards servants and maids working in your house. The cover is available as part of the householder’s policy. The policy takes care of liability arising out of any injury or mishap while the servants are on duty.

Insure home contents at current replacement value. While going for home insurance, insure home contents at the price it will take to replace them at the current replacement cost. This helps you when there is partial damage to items like gadgets. You will then be able to get the claim for a value not accounting for the depreciation of the item. For fully damaged items, insurance claim will factor in depreciation.

Get discounts of 15-20 per cent on the premium by buying cover under four to six sections of the home insurance policy and above 20 per cent for coverage in more than six sections.

Opt for a standalone personal accident policy instead of an accident rider in a life cover. If you are seeking an accident cover that will give a payout to your dependents in the event of your death in an accident, it is better to go for a standalone accident policy rather than an accident rider with a life cover since it works out cheaper. While an accident rider with death benefit comes at a premium of Rs 80-110 per Rs 1 lakh of sum assured, the same benefit from a standalone policy comes at Rs 45 per Rs 1 lakh of sum insured.

An accident rider with a life cover will cost Rs 80-110 per Rs One lakh. An accident cover will cost Rs 45 per Rs One lakh.

GET THE BEST OUT OF MUTUAL FUNDS

You have probably gone by the book in making your investments and are happy with the result. But have you really done everything to get the best out of your investments? If you want the most from your funds, follow these eight smart moves.

• Choose old over new. Market movements are uncertain, so look at funds that have had the opportunity to prove their mettle in both rising as well as falling markets. This gives you a better idea of the fund’s ability to navigate all market situations. Schemes such as HDFC Top 200 and DSP BR Top 100 Equity Fund have been around to experience the downturn in the markets post the Internet bust in 2000, the recession of 2008 and part-2009 and the bull run of 2003-07 and later half of 2009. The five-year rolling returns for the last seven years show that good equity-oriented mutual funds have given yearly cumulative returns at least four times as much as the Sensex. These funds have also showed the strength to weather lean periods. Between March 2000 and April 2003, when the markets fell by more than 60 per cent, some funds actually gained around 10 per cent during this period.
• Go the SIP and STP way. The more effective way to invest in volatile markets is to do systematic investing. This method has stood most people in good stead. The SIP advantage is that you get more units at lower net asset values (NAV) when markets are down and this averages out your cost. If you have a lumpsum to invest, park the funds in a money market (liquid) fund, use the systematic transfer plan (STP) and periodically transfer funds to the schemes of your choice.
• Choose flexibility. Markets never favour one segment, industry or theme continuously. Therefore, it helps if your fund is not constrained by a narrow portfolio mandate and is able to exploit opportunities across industries and segments. Funds like HDFC Equity and Franklin Prima Plus have been flexible with their portfolio allocations to take advantage of market preferences while keeping the underlying strategy and focus intact. In varying degrees, they increased their mid-cap allocations during 2004-2006, and reallocated to large-caps after the May 2006 crash. Look for funds that have displayed the ability to spot trends and use them, and check if the fund manager has the mandate to re-allocate resources.
• Be wary of costs. Good funds charge expenses between 1.88 and 1.96 per cent—much lower than the limits allowed. This goes to prove that it is not essential to incur high expenses to generate returns. On the other hand, some funds have charged the investors the maximum permissible expenses, but languished when it came to performance. The other hidden cost that you need to check is the transaction costs of the fund. These costs, such as brokerage and Securities Transaction Tax (STT), are incurred every time the fund buys or sells securities. Look closely at a high portfolio turnover ratio. If it is because of inflow of funds or redemptions, then it is warranted. Else it may mean active trading by the fund which increases costs as well as risk as the fund manager tries to exploit short-term market movements.
• Don’t overcrowd. An efficient portfolio is one that is dictated by your financial planning needs and is easy to monitor. It is important to diversify across fund manager styles but not to the extent that you end up holding similar portfolios under various schemes. It is essential to monitor the fund performance and rebalance when required. Prune your portfolio to 8-10 schemes that meet your requirements.
• Consider bond funds. For a category of funds which at one time gave annual returns as high as 25 per cent, bond funds have been facing tough times in the last four years. However, now that interest rates are expected to have reached close to the peak and inflation figures have lowered, investing in bond funds may be a smart move. If you are willing to live with a small degree of uncertainty, then this is the right time to look for well-managed bond funds. Check the portfolio quality and look for funds whose portfolios have higher average maturities and modified duration. These portfolios will stand to benefit more from a rise in bond prices when interest rates fall.
• Be careful with new products. It is essential that new offerings be evaluated carefully. Identify where these funds fit into your overall portfolio. For instance, a young investor may not necessarily need capital protection funds. Similarly, gold ETFs can form a small part of your allocation purely for hedging benefits. International funds lend geographical diversification to your portfolio. Find out where these funds plan to invest and what benefits it will lend to your portfolio. Don’t forget to keep in mind the tax implications. Systematic investing is the right prescription for successful mutual fund investing. Any one or a combination of strategies listed above may suit your investment purpose and style. So adopt the ones that suit you best and see your investments go from strength to strength.

HARNESS THE BEST SHINE OF GOLD

Despite rising gold prices, it is important to note that a lot of gold bought in India is in the form of jewellery. Considering gold jewellery as investment is not prudent since its sale always involves loss on account of labour charges, not to mention losses that might occur if the purity of gold is less than desired. Indians have a long way to go before they become better investors in gold. The following investment strategies will add lustre to your gold investments.

• Invest in gold ETFs and Mutual Funds. Gold exchange traded funds (ETFs) and Mutual Funds, currently offered by many companies like Benchmark Mutual Fund, UTI, Reliance, Kotak etc, are the best way to invest in gold. They invest up to 90 per cent of their assets in gold and the remaining in money market mutual funds. These funds, launched from 2007 onwards, give the benefits of buying and selling gold while sparing you worries over issues such as the purity of gold and finding a secure place for storing it.
• Invest in gold coins and bars. If you want to physically own gold, buy it from a reputed jeweller who will give you a certificate of purity and not charge a premium for that. Moreover, you can sell the gold or recast it into jewellery at the same establishment at the prevailing gold prices. You also need to check whether the jeweller has a buyback policy. If he has, find out the rate at which he buys back. Banks and non-banking finance companies (NBFC) also sell gold now. Most of them charge a premium for the certificate of purity and only a few of them would buy it back from you. So, be careful before you put your money across the counter. The Reserve Bank of India has recently allowed banks and NBFCs to buy back gold from their customers. If they do, you will be able to sell it back to them anywhere in the country, an advantage which buying from a jeweller does not provide.
• Invest regularly and on special days, avoid peak season. Ideally, you should invest in gold periodically and also on occasions such as birthdays of family members, especially your children, and on wedding anniversaries. Gold retailers brand certain festivals and run good deals on days such as Akshaya Trithiya and Karva Chauth. Avoid buying gold from September to February, unless there are special deals. Demand peaks during this period due to Dussehra, Diwali and the wedding season and prices are likely to be high. Clearly, it is not enough to buy gold. The what, how and when of gold investing is crucial to notch up smart returns.

BUY A SMART CAR SMARTLY

Car sickness is the feeling you get when the monthly car payment is due. Most of you would agree? And why not, there is good reason for it, as unlike your home loan payments, the equated monthly instalments (EMIs) towards your car go for a fast depreciating asset. However, some smart moves can help you get a better deal on your car loan and soften your monthly EMIs, besides giving you what you actually want.

• Keep your priorities clear. Decide what car you want to buy, do not leave it to the salesman. First, shop for the car and then, for the finance. Identify your requirements, your budget and whether you really need features like a four-wheel drive or a huge boot (or even a sedan). Otherwise, you might end up buying a car that does not have the features you need, or shelling out extra money for no real purpose.
• Spend time shopping around to bag the best deal. Ask yourself an essential question: Have you spent adequate time researching the new car you are going to buy? Answer that in the affirmative and then spend an equal amount of time shopping for the finance. Take your time, months if need be, and be an aggressive and price-oriented buyer. In most of the cases, you will find that our own AGIF gives the best deal. Do not stretch your budget—even a few hundred rupees extra EMI every month can pinch over the years. Avoid dealer’s finance. It may be hassle free and offer huge discounts, but the fact is that interest rates charged by them are almost invariably higher. Pay as much of the price as down-payment as possible. Remember, a car is a depreciating asset and will give you no returns. So, the less you pay as interest, the better off you are. Check out the rates of direct selling agents of banks, or even banks themselves. Only when you have shopped around considerably, can you zero down on the best deal. Also, focus on the total price interest repayment amount than just on the interest rate. Be clear about the other charges—nameplate, registration and insurance.
• Buy good cars, not hot cars. “You aren’t what you drive” goes a chapter heading of The Millionaire Next Door by Thomas J. Stanley and William D. Danko. The book reveals that a majority of the millionaires surveyed do not drive the current-model-year automobile. There’s your cue: to get low rates of interest and bigger discounts, consider not going for the model with a waitlist, but a car that has been in the market for some time. When a new model comes in, there is a huge demand for it and dealers are eager to sell off older models. It is easy to find out which car is moving slow. It might not be the car of your dreams, or fetch you the highest resale value, but will be a good car to own nonetheless. When you have zeroed down on a car, shoot for the slowest selling variant. Most of the time a particular variant, which is usually the top-end one, is not the fastest moving. So the dealer will be eager to push it and you can negotiate more and get a better bargain. You can get a lot of additional stuff at a price a bit higher than a lower variant.
• Look at net acquisition cost. While trading off your old car for a new one, if you try to get a good bargain for your old car, the dealer will normally tend to jack up the price of the new car. If you want a big discount on the new car, he will push down the price of your trade-in. Either way, he will try to keep his margin fat. Your aim should be to slim it down and, thereby, reduce your net cost of acquisition. So, you should look for the highest price for the old car and the lowest price for the new one. If your new car dealer is not giving you the best price, sell somewhere else. Some minor repairs and a thorough cleaning might cost you a little bit of money, but will help you get a much better price for your old car.
• Skip the freebies. Shoot for cash. If your dealer tries to lure you with free goodies—stereo, floor mats, or seat covers—do not go for it. They will, more often than not, be of questionable quality. When the dealer puts a price on them to show you what a good bargain you are getting, tell him to give you a cash discount of the same amount so that your loan burden comes down.

Keep these smart moves in mind so that when you drive out of the showroom, you are a happy man behind the wheels who is not likely to experience ‘car sickness’ in the years to come.