Month: January 2019

MONEY TALKS

Money Talks- Part 7- Mutual Funds

preetymundhra

In this post I will cover the Mutual funds (MF) :

–          What they are?

–          Broad Types.

–          How we can do it ?

Mutual Fund combines the features of shares ( stock/ equity instruments) and debt instruments (debentures/Bonds/Any other fixed income investments).  So it gives the option to us to invest in a combination of equity and debt instruments with proportion of each varying under different funds.

You would come across multiple funds. Below would help understand broad differences-

–          Equity Funds where majority of funds say more than 60% would be invested in shares and balance in debt instruments. Equity fund can further be divided into Large Cap, Mid Cap, Small Cap and Multi cap funds. Market capitalization (Cap) is value of shares of the company listed on stock exchange.

–          Debt Funds where almost entire funds would be invested in debt instruments & balance in cash/ liquid instruments.

–          Balanced Funds which invest in almost equal proportion in debt and equity.

–          Liquid Funds which invest in short term instruments like commercial paper etc.

You further get the below options while choosing the first three categories:

–          Dividend Option

–          Growth Option

The first one pays dividend when declared , while the second one reinvests that. Considering there is no payout of dividend in second one, the overall returns would be higher than the fund with dividend option.

The other common term you come across is SIP ( Systematic Investment Plan). So you can either make a lumpsum payment to invest in a MF or save yourself of the hassle of investing every month and register SIP which will help you put the amount every month on specified date and fund. Minimum period is 6 months for which you need to continue  SIP.

Now how to do it?

You can go directly to any mutual fund website and register there where you will need provide your basic KYC details.

Your KYC should have been verified which you can do directly from either MF website or from one of the CRA agencies – NSDL/CDSL. CAMs also provide CRA services.

Once your KYC details are verified, some MF’s ask to upload a scanned copy of cheque. After having registered you are ready to invest in the funds offered by that fund house.

Some banks also provide the facility to invest in MF account from your net banking portal itself like HDFC bank. It enables ease to invest in any MF of any MF house from a single place. There is however a variation in the returns ( which may or may not be significant of around 0.5%) when you invest directly or through an intermediary like a bank.

So get started with your SIP in case you haven’t.

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MONEY TALKS

Money Talks- Part 6- EPF and PPF

preetymundhra

Provident Fund is another common investment option but used interchangeably for EPF and PPF.  Both are similar in few aspects but not same.

  • EPF stands for employee provident fund and is applicable for salaried individuals.
  • PPF stand for Public Provident fund which anyone can put investment into.

Both are long term investment options and offer less liquidity.

  • Returns on both of them are announced yearly/ quarterly by Government bodies.
  • Return you will receive in investment is not known in advance as it keeps on changing Quarterly/ yearly and the maturity of this instrument extends for longer period. However in the past 5-6 years the returns have ranged around 8% plus/minus 1%.
  • Both give you the benefit of Sec-80 C deduction on the amount invested and the return is also exempt provided you are holding it for min 5 years in case of EPF. PPF partial withdrawals are permitted post 7th year .

Snapshot of both these instruments is as  below:

  EPF PPF
Who Salaried Anyone
Frequency Monthly deduction from salary Min once in a year.
Tenor Retirement. It can be withdrawn in case of unemployed. 15 years.
Withdrawal Permitted for specified usage Permitted from 7th financial year.
Max withdrawal Upto 90% Upto 50%
Taxation of returns If withdrawn before 5 years taxable If withdrawn before 15 years taxable.

 

Government is considering increasing giving the option of increasing equity contribution for EPF on which more clarity should come post March-19.

MONEY TALKS

Money Talks- Part 5

preetymundhra

So after having understood the need of investment, post tax return and risk return taking ability during different life stages, lets now understand different investment options.

Let’s start with fixed return investments ie Fixed Deposit (FDR) and Recurring deposit (RD).

  • Both offer fixed Rate of interest (ROI). So one knows well in advance what is the amount which would be realized at the end of tenor/ maturity.
  • Both are taxable. So take into consideration the post tax returns. Banks deduct TDS amount post a threshold amount in case of FDR’s.
  • Both can be done for short as well as long duration and withdrawal can be made before expiry also subject to lower ROI/Penal and excluding tax saving FDR’s. Tax saving FDR are for 5 year period and amount invested for the same is eligible for Sec 80 C deduction. Interest received on same is taxable.
  • If certainty of amount is of essence these are the best options.

For those who are new to RD, FDR is one time deposit and RD is regular which generally ranges from 6 months onwards.

FDR can be done for a few days also. However if you are breaking the FDR there is penalty and / or lower ROI payable.  ROI of the applicable tenor when you are withdrawing the amount prematurely is paid and/or penalty generally is 0.5% to 1% of applicable ROI.

So if the surplus is for very short duration say upto 30 days then you need to look at saving interest which currently is around 3.5% (4% for if amount maintained is > Rs. 50 lacs) for most banks and interest on FDR for that period.  Note that Saving account interest upto Rs. 10000 is tax exempt.