Do you want to be wealthy?

Do you want to be wealthy?

Got a question about your money? What you should or should not do with it? Our expert Devang Shah has the answers.

• Got a question? Please write to us.

I have a monthly take-home of about Rs 19,000 and I've been working for about 10 months now. What are my options to start saving money for the future? I don't have any expenses as such -- I am still supported by my parents except for my own personal expenses -- so I would like to make a head start.

Congratulations, Leena.

Few people understand that the inclination to become financially well off is the single most important ingredient to becoming wealthy.

You have many, many options in which you can save and invest money. None of these options are bad or good in themselves. But your choice will certainly have implications on where you are today and where you want to be eventually, financially.

I will quote Lewis Carroll in Alice in Wonderland. When Alice follows the rabbit and falls in the hole, she is lost because the rabbit dissappears. Then a cat appears...

'Cheshire Puss,' she (Alice) began... 'Would you tell me, which way I ought to go from here?'

' That depends a good deal on where you want to get to', said the cat.

' I don't much care where...' said Alice.

'Then it doesn't matter which way you go,' said the cat.

When it comes to becoming wealthy, the power of dreaming is underestimated. In fact, it is often berated. But I will encourage you to dream how you want your future to be and what that would mean in financial terms. In technical terms, it is said 'laying down your financial goals.'

The next step is to lay down financial objectives. In simple words, you must put a time frame to your goals and also put an amount to that goal.

For example, you might be dreaming of nice racer bicycle (now you know what I dream of!) that costs, say, Rs 1 lakh today. Your financial objective, in this case, will be a bicycle at the end of one year for Rs.1.06 lakhs.

I have assumed the bicycle will get a little more expensive along with the general inflation. But this may not always be the case.

Take education for instance. Let's say you dream of doing a post graduation overseas. If you are considering doing this in a state university in the US, the present cost may be around Rs 15 lakhs for the first year. If I was planning something like this for myself, I would plan on the basis that I am going to work in the second year; as a result, I really am planning on spending for the first year only. I don't want to borrow. So my dream (read financial goal) translates into something like an MBA in UT Austin after six years at a cost of Rs 27 lakhs. The assumption here is about 10% inflation + currency devaluation.

This is only the beginning. But, remember, a job well begun is half done. A professional advisor (I always recommend consulting an advisor who charges you a fee) can take you through the rest of the steps.

The last step is selecting the investments.

Your options to invest, which is your main question, must be evaluated from the perspective of how well that option helps you accomplish your financial objective. Here is a list of some options you can consider:

Property
~ Low risk
~ Medium return expectation
~ Low liquidity
~ High transaction cost
~ Amount required for investment large
~ Seven to eight years time horizon

Mutual funds
These typically are fairly marketable(liquid in lay man's terms) and need small amounts to begin with. Here are some of the different kinds of mutual funds you can consider.

Equity Mutual Funds -- Sector Funds
~ Very high risk
~ Among the highest return expectations
~ Eight to 10 years time horizon

Equity Mutual Funds -- Diversified Funds
~ High risk
~ High return expectation (inflation + 6 - 8%)
~ Seven to 10 year time horizon

Government Securities Mutual Funds
~ Medium risk
~ Medium return expectation (inflation + 3 - 4%)
~ Three to five year time horizon

Corporate Bond Mutual Funds
~ Medium risk
~ Medium return expectation (inflation + 2 � 3%)

Floating rate funds and Liquid funds
~ Low risk
~ Low return expectation (inflation + 0.5-1%)
~ Any time horizon

NSS, RBI bonds, NSC
Small savings such as NSS, RBI bonds and NSC typically offer around 8% taxable interest for six years. Some of them offer tax benefits. They also have limits on who can invest and how much can be invested.

PPF
The Public Provident Fund presently offers 8% tax free interest. However, your investment needs to be made for a period of 15 years. There are tax benefits attached and limits on who can invest and how much can be invested. Your employer may also offer EPF.

Insurance (investment) products
These products typically have high expense ratios and, because they are bundled, lay people find it difficult to evaluate them. I would say tread cautiously here.

Gold
~ Low risk
~ Low returns (inflation)
~ Good hedge
~ Offers currency diversification in some way

You also have avenues for alternative investments such as art, collectibles and investing overseas. You could consider these at a stage when you are already comfortable with the basic alternatives.

Good luck!

 

 

Got a question for Devang Shah? Please write to us.

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, rediff.com or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Do you need a critical illness cover?

Do you need a critical illness cover?

Almost everyone takes a Mediclaim. If they don't, it's because their office covers them. But where critical illness is concerned, there is a lot of ambiguity.

Here we clarify your doubts.  

How it differs from Mediclaim

Critical illness is a benefit plan, not a reimbursement plan.

If you have medical insurance, whatever you spend -- within the limit of the cover -- will be reimbursed. As a result, all your expenses will be cleared.

Under a critical illness cover, you will not be reimbursed; you will be given the entire amount for which you are covered. Let's say you get a heart attack. If you have a critical illness cover of Rs 1,00,000, then this amount will be given to you because you got a heart attack. How much money you spend on your treatment is irrelevant.

If you have Mediclaim, however, whatever you spend on hopitalisation will be reimbursed. So, if your insurance is for Rs 1,00,000 but your expenses, Rs 75,000, then you will get just Rs 75,000.

With critical illness cover, you get the benefit of the entire cover; with Mediclaim just the reimbursement within the cover limit.

What's covered?

This one is self-explanatory -- only critical illnesses are covered. You will, however, have to check and see what illnesses the insurance company calls critical.

Cancer, stroke, coronary artery surgery, renal failure (failure of both kidneys), multiple sclerosis, major organ transplants like kidney, lung, pancreas or bone marrow, paralysis, arota graft surgery and primary pulmonary arterial hypertension are the common ones.

However, if you die within 30 days of the illness being diagnosed, you will not get the cover. You will also not get the cover if the illness is diagnosed within 90 days of taking the policy.

What's more, you have to be careful to see if you will get compensated.

Let's say you suffer from heart failure or angina. Heart failure occurs when the heart cannot pump blood fast enough to meet the needs of the body. Angina is pain or discomfort due to lack of oxygen to the heart muscle.

Technically, neither of these are heart attacks so you will not get the critical illness cover.

If you do suffer a minor heart attack that is not termed as critical, you will not get cover.

Or, if you have a cancer growth that has been operated and taken out and the cancer has not spread, it might be excluded since the insurance company will no longer view it as critical.

Once your illness is diagnosed by a registered medical practitioner and supported by ample evidence (X-rays, laboratory tests and reports), the insurance company will get it reconfirmed by a registered medical practitioner on their board. If they decide it is critical, payment will be made.

Why would you take critical illness when you have Mediclaim?

A number of reasons actually.

Most importantly, Mediclaim only covers your expenses when you are hospitalised. It also covers pre-medical expenses -- for 30 days prior to hospitalisation -- and post medical expenses -- 60 days after being discharged.

But, in the case of critical illness cover, you are given the benefit whether or not you are hospitalised.

For instance, you may be diagnosed with cancer but not hospitalised. Nevertheless, you are paid your cover.

Your Mediclaim comes into effect only when you are hospitalised.

Secondly, it is only recommended to people who have a history of certain illnesses in their family; critical illness cover will only include certain illness.

Moreover, it provides a welcome financial boost at a time of emotional stress and financial hardship.

Let's say you have a critical cover for Rs 1,00,000. You are also covered by Mediclaim for the same amount.

If your bills amount to Rs 75,000, you will get Mediclaim as well as the critical Illness cover (Rs 1,00,000).

The critical illness cover is not a substitute for medical insurance cover; it complements Mediclaim.

For instance, if you had a kidney failure and needed a kidney transplant, a Mediclaim policy may not cover donor expenses. So the money you get from a critical illness cover will take care of it.

The age factor

Mediclaim is normally from five years of age upto 75 or 80 years. For a child less than this age, a policy can be taken out only if a parent also is insured.

Where critical illness is concerned, the insurance companies have different criteria.

Some start from the age of six while others only from 20 years onwards. Some provide it only till 59 or 60, while others go up to 65 years.

Made a claim?

There are a list of illnesses that will qualify for the critical illness cover. Once you get paid for any of them, the entire cover expires. So if you have a critical illness cover of Rs 1,00,000 and get a heart attack, the entire payment is made and the policy terminates.

If you want a fresh policy, you can apply for one. The only caveat: heart related illnesses will no longer be covered. Remember, even the insurers want to lower their risk.

Are fixed deposits tax free?

Are fixed deposits tax free?

You have a question about recurring deposits, housing loans, travel allowances or even a general tax query.

Here's where we step in with our experts, Relax With Tax.

• Got a question for Relax With Tax? Please write to us! 

I have the following doubts regarding tax. 

1. If I open a new post office recurring deposit for 5 or 10 years, can I show it  as a tax saving scheme?

2. If I buy a house in my home town for my mother who is dependent on me, can I claim the EMI as a savings for tax?

Money deposited as a term deposit for a period of five years or more is eligible for deduction under section 80C; this is in accordance with a scheme framed by the central government on April 1, 2006.

As for your second question, deduction in terms of principal and interest will be available to you for the house property at your home town.

But, if you currently own a house, then a deemed rental value would be included as income. However, the relevant deductions, including interest, is available on the amount.

I relocated to Bangalore recently on change of job and received a relocation allowance.

Can I claim tax exemption on relocation allowance? If so provide the details

I have bills  of certain expenses incurred for the purpose of  relocation e.g. real estate broker's bill, school admission amount, local transportation & rearrangement.

Yes. Any allowance granted to meet the cost of travel on transfer -- including any sum paid in connection with transfer, packing and transportation of personal effects related to such a transfer -- is exempt from tax to the extent the allowance is utilised under section 10(14).

Got a question for Relax With Tax? Please write to us!

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, rediff.com or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Why you must look at balanced funds

Why you must look at balanced funds

Balanced funds attempt to provide investors with the best of both worlds. They aim for growth (through a high equity allocation) and stability (through the debt allocation) of the investment.

Despite this, they have failed to appeal to many. That was the past. Now, this has changed. In May, when the stock market began to decline, the debt component made all the difference.

Over the last three months (data as on August 4, 2006), the diversified equity category lost over 19% on an average. The corresponding figure for balanced funds was 12.7%.

Alternately, we can also look at the returns from January 1, 2006, till August 4, 2006. The average balanced fund delivered a return of 7.4% while the average diversified equity fund delivered a return of 5.4%.

Why balanced funds are good

Balanced funds invest in equity and debt. Hence, you get growth coupled with a cushion should the market plunge. This makes them an excellent option for investors who are planning a foray into stocks but are also wary of volatility.

Since it is wise for every investor to put part of his money in equity and debt, investing in such a fund makes sure you do this automatically. If an investor has to personally plan his investments in equity and debt, it can be very time consuming. 

When the stock market shoots up, investors tend to put more money in shares. Investing in a balanced fund ensures that a fixed proportion stays in equity and debt.

What you have to be wary of

A pure equity fund has the advantage of long-term capital gains. If you sell the units after a year of buying, you pay no tax on the profit. This is not true of a debt fund.

Before Budget 2006, a balanced fund that had more than 50% of its total investments in equity was considered an equity fund. So, investors got this tax benefit.

After the Budget, this ratio has been hiked to 65%. To pass on this tax benefit, fund managers will have to put at least 65% in equity.

So, if you are wary of that much investment in equity, pick up a fund that invests less than 65% of its portfolio in stocks.

Here are some funds that have increased their equity allocation after the Budget.

	Previous (%)	Revised (%)
Pru ICICI Balanced	51 � 60	65 � 80
Pru ICICI Chidl Care-Gift Plan	51 � 60	65 � 80
LICMF Balanced	Up to 60	65 � 80
LICMF ULIS	Up to 60	65 � 80
HDFC Prudence	40 � 60	40 � 75
HDFC Children's Gift-Inv Plan	40 � 60	40 � 75
ING Vysya Balanced	55 - 80	65 - 80

Picking the right fund

Depending on the risk and performance, we give funds a star rating -- five stars being the best and one star, the worst.

The five-star funds are Magnum Balanced and HDFC Prudence. The four-star ones are Canbalance II, DSPML Balanced, FT Balanced, Kotak Balance and Sundaram BNP Paribas Balanced.

Tomorrow, we shall look at the some funds and tell you which ones make for a good investment.

Part II: The best balanced funds  

6 best balanced funds

6 best balanced funds

In Why you must look at balanced funds, we spoke of balanced funds. Here we list out the best picks.

All returns and data are as of July 31, 2006
All returns are in percentage
All returns are benchmarked against the Crisil Balanced Fund Index.

DSPML Balanced

With a large-cap dominated portfolio, the fund has delivered good returns over the years. Its five-year annualised return of over 28% is proof of that. Because of the large-cap stocks in its portfolio, it has lost less than other balanced funds during the recent collapse. 

Even when the fund manager increased allocation to large-cap and mid-cap stocks, he made sure he did not go overboard. This has resulted in a large-cap dominated, diversified equity portfolio with good debt holdings.

Returns

Crisil		Fund
22.67	1-year	28.85
23.40	2-year	31.91
24.39	3-year	34.70
-	5-year	28.67

FT India Balanced

Invest in this fund if you prefer stability over flashy returns. The fund stuck to its large-cap orientation but also invested in mid-cap stocks. This fund has not been an exceptional performer as other funds with mid-cap stocks raced ahead. But, its five-year annualised returns of almost 29% make it a very compelling option for any balanced fund investor. 

This fund is not conservative; equity often comprises of more than 65% of total investments. However, the stocks are mainly large-caps and the investments are well spread out across 35 to 40 stocks.

Returns 

Crisil		Fund
22.67	1-year	25.37
23.40	2-year	29.06
24.39	3-year	33.33
-	5-year	28.56

HDFC Prudence

Every investor desires a fund that can deliver excellent returns year after year, as well as protect their money during tough times. That's a tough task, but this fund has lived up to it well.

In the last 10 calendar years, the fund has outperformed the Sensex every year, an achievement no other equity fund can claim. When the stock market fell in the past three months, other balanced funds lost over 13% on an average; this fund just lost 6.24%.

The fund manager has spotted the right opportunities at the right time. For instance, in 2003, the fund moved from a traditional large-cap portfolio to a mid- and small-cap one. In 2002, when energy stocks were shooting up, the fund manager increased exposure to this sector from 4.3% in January to 16.7% by March.

Currently, the fund has 75% of its investments in equity, so expect it to be volatile for a while.

Returns

Crisil		Fund
22.67	1-year	28.33
23.40	2-year	41.20
24.39	3-year	40.01
-	5-year	39.14

Kotak Balance

Kotak Balance's aggression proves rewarding but it can also test your nerves in turbulent times. Its performance in the last two calendar years speaks much about its ability to generate returns. But the ride can be bumpy.

The fund will appeal to aggressive investors but may not be right for conservative investors as it is a volatile fund. But it compensates for the higher volatility with good returns. It is an agile fund and moves quickly between sectors and stocks. Its stock investments are spread over 20 to 30 stocks.

Returns 

Crisil		Fund
22.67	1-year	30.20
23.40	2-year	43.10
24.39	3-year	40.22
-	5-year	30.30

Pru ICICI Balanced

This fund is a stable and consistent performer. Launched in October 1999 during the peak of the tech boom, it delivered 68% in five months but delivered a loss of 45% by the end of 2000 when the tech boom ended. Things changed for the better from then on.

Right now, large-cap stocks constitute almost 70% of its total equity allocation. Given the prevailing uncertainty and volatility in the stock market, this looks like a wise move.

Do not expect any miracles from this fund. Go for it if you want stability and consistency.

Returns

Crisil		Fund
22.67	1-year	27.98
23.40	2-year	35.56
24.39	3-year	35.53
-	5-year	27.67

UTI Balanced

Being very conservative, this fund has been a laggard in recent times. Even with the stock market boom in the recent years, this fund rarely put more than 61% of total investments in equity. In the recent months, it has turned even more conservative by reducing equity exposure to 55%.

Within this allocation, the fund invests in mid- and small-cap stocks. Yet, its performance has not been impressive.

However, the fund scores low on volatility.

The fund has found the going tough in the last few years. Investors will have to keep a close watch and gauge how the new manager takes things forward.

Returns 

Crisil		Fund
22.67	1-year	20.98
23.40	2-year	26.97
24.39	3-year	28.25
-	5-year	23.44

6 things you must know about PPF

6 things you must know about PPF

The Public Provident Fund is the darling of all tax saving investments.

Little wonder! You invest in it and you get a deduction on your income. Besides, the interest you earn on it is tax-free. Since it is a scheme run by the Government of India, it is also totally safe. You can be sure no one is going to run away with your money.

Here, we summarise the scheme, tell you how to open a PPF account and what to expect.

1. To open a PPF account, drop  by a State Bank of India branch. SBI's subsidiary banks can also open accounts. A list of these subsidiary banks is available on the bank's Web site.

You can even visit the nationalised bank in your neighbourhood. Selected branches of nationalised banks can also open accounts.

The head post office or selection grade sub-post offices also open PPF accounts.

2. You will have to fill up a form. You can take a look or download the form from SBI's web site.

Along with the form, attach a photograph and submit your Permanent Account Number. If you do not have a PAN, then furnish an attested copy of either your ration card, voter's identity card or passport.

When you open an account, you will be given a passbook (just like a bank pass book) in which all subscriptions, interest accrued, withdrawals and loans are recorded.

3. You can have only one PPF account in your name. If, at any point, it is detected that you have two accounts, the second account you have opened will be closed, and you will be refunded only the principal amount, not the interest.

4. You cannot open a joint account with another individual. The account can only be opened in one person's name.

You are free to nominate one or more individuals. On the death of the account holder, nominees cannot keep the account going by making contributions. If there are no nominees, the legal heirs get the money.

You can open one account for yourself and others for your child/ children. But, on your death, your children cannot make any additional contributions.

5. The minimum amount to be deposited in this account is Rs 500 per year. The maximum amount you can deposit every year is Rs 70,000. The interest you will earn is 8% per annum.

Let's say you open an account for your minor child. You can deposit Rs 70,000 in your account and Rs 70,000 in your child's account. But you will only get the tax benefit on Rs 70,000.

Just because you have one account for yourself and one for your child, it does not mean the tax benefit is doubled. The limit is the same -- Rs 70,000 -- irrespective if it all goes in your account or is divided betweeb your account and your child's account.

You can make up to 12 deposits in one year. You don't have to put in this money at one go.

6. The PPF account is valid for 15 years.

The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account.

So, if you opened it in FY 2006-07 (this financial year), you will be able to withdraw it 15 years later, starting March 31, 2007 (end of this financial year). That means your PPF matures on April 1, 2022.

It can be extended for a period of five years after that. During these five years, you earn the rate of interest and can also make fresh deposits. Once your account expires, you can open a new one.

The only limitation is that you cannot withdraw it until seven years are completed, after which 50% of your deposits can be withdrawn, if needed. 

Do consider opening a PPF account if you do not have one. You can put in as little as Rs 500 a year to keep it going.

How to get financially organised

How to get financially organised

When I was asked to do this piece, I could not help but smile. I am passionate about organising things. No kidding! I cannot bear to see anything in my house in a mess.

Sure, I have learnt to tolerate other people's messiness and even ignore it. But when it comes to myself, I cut no slack.

Here are some tips to help you get organised with your financial paperwork.

Now, I understand that being financially organised may mean different things to different people. So, I will just show you how I put my stuff in order.

To being with, I have four huge files: Tax, Banking, Investments, Other documents.

Tax

As the name indicates, all the papers I have to hand over the income tax department find their way here.

All the pending and past stuff is clubbed together in this file. All my photocopied documents of previous years' filed returns will be here. Returns of 2003-'04 will be in one big envelope, returns of 2004-'05 will be in another big envelope. Every year's returns is put in one big envelope and filed here.

If I have claimed a refund, the correspondence will be kept here.

My salary statements too are kept here.  

Banking

Since I deal with two banks, I have a file for each. I keep both files in this one. If you find this too much of a bother, just dump it all together.

Over here, I have all the details related to my savings account, internet banking and phone banking. My cheque books are kept here.

My monthly statements are kept here. However, I submit them every year for filing my returns. Once I do that, they go into one of the above envelopes.

All my correspondence with the banks too are kept here.

I also keep my credit card related information here. In a separate folder, you guessed right. But this is not much since I do not revolve on my card and pay all my bills on time.

Investment

This is by far my largest file. Over here, I have all the details regarding my online trading account.

It has all the details relating to my demat account and regular statements on the balance in my demat account.

The paperwork of all the bonds and company fixed deposits that I have invested in, my life insurance policy papers, my medical insurance papers, my Public Provident Fund passbook and my National Savings Certificate. 

Other documents

This is where I keep my marriage certificate, my birth certificate, school leaving certificate, and all other such related documents.

I also keep photocopies of my PAN card and passport here.

I do not have any loans, else I might have had a loan file. But my husband is servicing a home loan so he does keep such a file. This includes all the correspondence with the home loan company and a photocopy of all the documents lying with them.

And, yes, I have a file which has marked across it in huge letters 'TO DO'. Over here I keep all my current bills (newspaper, cell phone, society maintenance, electricity) that have to be paid. Or any urgent matter that has to be looked into.

Quick tips

• Keep photocopies of very important documents
• My PAN card, ration card, passport, election card, driver's license and other membership cards are all place in one box and kept in the cupboard. When my credit cards or debit cards are not in my wallet or bag, I keep them here.
• Always keep passport-sized photographs ready. You never know when you might need them.
• I go through my files only once in six months to pull out stuff I no longer need -- like old correspondence, etc. 
• I mark the subject on the files so I can locate them easily

Alright, I may sound really fastidious. But the truth is, being organised ensures I never lose anything. And if I really need it in a hurry, I get it easily.

Even if all the above was too much, maybe you can start with at least one file.

Go on, sooner or later you will have to.

Can ex-employers hold back PF?

Can ex-employers hold back PF?

You have a question about shares, PF or even a general tax query.

Here's where we step in with our experts, Relax With Tax.

• Got a question for Relax With Tax? Please write to us!  

If I recieve shares as a gift from my father, will the short term capital gains tax be applicable if I sell them before one year?

In determining whether a gift received is short or long term, one would need to ascertain the holding period of the original holder (donor).

In the case of shares, if the combined holding period between the donor and the donee is more than 12 months, then such shares would be treated as a long term asset.

Accordingly, in your case, if the combined holding period between you and your father does not exceed 12 months, then any gains arising from the sale would be covered under short term capital gains.

I am working in India. I resigned from a company with notice period. I also applied for PF withdrawal.

Now, they are asking for 2 months notice period amount and then only they will process my PF.

Is it legal to withheld PF if notice period pay is not given?

Employment conditions and PF regulations are distinct and cannot be merged to suit an employer's requirements. Though the employer can effectively delay the completion of the PF settlement process, they cannot stop it.

Got a question for Relax With Tax? Please write to us!

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, rediff.com or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Taking a loan? 6 questions you must ask

Taking a loan? 6 questions you must ask

Taking a loan? There is more to it than just the interest rate. Here, we tell you what to look if you are going for a loan.

1. How much are you expected to pay upfront?

In virtually all cases, you are not given the loan for the entire amount; you're given just a part of it.

So, you may get a loan for around 80% to 90% of the cost of the home, vehicle or consumer durable you are buying. Even for education loans, you will have to put in a small amount of the total fees.

The amount you put in is referred to as the margin amount. The amount the financier gives is the principal.

In addition to this, you will also have to pay administration or processing fees. Check if this is a fixed amount or a percentage of the loan.

2. How much EMI you can afford?

The Equated Monthly Installment is the amount of money you will have to pay every month towards repaying your loan.

It is a combination of interest rate payment and principal repayment. Read Understanding EMI to understand how the EMI is computed.

Your income and repayment tenure will determine the EMI. You should go for an EMI that you can comfortably repay. Read Are you comfortable with your EMI? to help decide how to arrive at it.

3. What are the tax benefits?

It's nice to know that you get a tax break on some loans. But only two loans offer the tax benefit.

Education loans have a tax benefit. Read Tax benefits on education loans.

The most well known tax benefits are the ones on home loans. Repaying a home loan? will tell you the tax benefits on principal repayment of your home loan while Paying interest on home loan? will tell you the tax benefits on interest payment.

But, if you take a consumer durable loan, a car loan, or a credit card loan, you get no tax benefits.

4. Is there any prepayment penalty?

Always check this out if you have an intention of repaying your loan before the tenure ends. Sometimes, you are not charged anything. Sometimes, you are charged only if you repay the entire balance principal, not if you repay a part of it.

Consider the future. Are you expecting a windfall from the sale or an asset (shares or property) or a bonus or a substantial raise. Even if you don't have any money now, you may think of using this to repay your loan sometime later. 

So check this aspect out.

5. When is the EMI date?

Once you fix your EMI date, the financiers don't change it. Think carefully before you set it.

Don't put it towards the end of the month when you bank balance gets depleted. Don't put it on the first of the month because, sometimes, salary payments may get delayed by a day or two.

It will be safe to put it in the first week of the month.

If you are also servicing another loan too, make sure you have sufficient funds during that time of the month to make both payments.

6. How is the rate of interest calculated?

Don't just ask what the interest is but check to see how it is computed.

Let's say you are taking a loan of Rs 1,00,000 at 8% per annum for one year. You go to three players and they all say that they will give it to you at 8% per annum.

Yet, if you compare their EMIs, it may be Rs 9,000, Rs 8,699 and Rs 8,553.

That is because of the way it is computed. The more frequently computed, the better the deal you get. In the above example, it is calculated on an annual reducing basis (Rs 9,000), monthly reducing basis (Rs 8,699) and daily reducing basis (Rs 8,553).

This means that, when you make your payment, the next EMI takes into account the principal amount repaid. If it is daily computing, it is taken into account the very next day. For monthly reducing, the next month, and the next year for annual reducing basis.

So always compare the EMI of various financiers with a similar amount and tenure.

4 things you should not do to your money

4 things you should not do to your money

We all know what to do with our money. Whether we do it or is a separate issue. Here, we tell you how to make sure you are not messing up when it comes to financial decisions. Read on to find out what you should not be doing with your money.

Give the government more than necessary

A friend of mine was recently cribbing about how much of tax he pays. When I asked him what he was doing to save on taxes, he said nothing. It was his first job and he was totally unaware of any tax breaks.

When the government gives you a chance to save on taxes, please use it.

Take medical insurance. You get a tax benefit on the premium that you pay.

Look at the investments that fall under Section 80C of the Income Tax Act. If you invest in them, you get a deduction of up to Rs 1,00,000 on your income.

The safe, fixed return instruments that fall under it are Public Provident Fund and National Savings Certificate. Read PPF vs NSC.

If you want to add some zing to your investments, try Equity Linked Saving Schemes. These are diversified equity mutual funds that have a tax benefit under Section 80C. 

Do you have any dependents? Take a life insurance policy. The premium you pay here is eligible for a deduction under Section 80C.

Are you looking at buying a home? You get a tax benefit on the home loan. Read Repaying home loan? Must knows and Paying interest on home loan?

Spend it all

Our financial advisors often get flooded with queries from our young readers trying to manage their debt. Nearly all of them would have incurred the debt because of their lifestyle.

While all of us love to spend, there should be a limit on how much you spend. If you find you are saving nothing, it is worth it taking a good look at where your money is going.

A friend of mine told me that she would drop in at Barista (coffee shop) at least thrice a week and blow up around Rs 75 on each visit. It did not seem a huge amount. But when she added it up, it was Rs 900 a month. When she took into account the fact that she also eats out on weekends, she decided to save by just cutting down her trips to Barista.

Is your weakness hopping into cabs all the time? Or shopping? Or smoking? Or eating out a lot?

If you find yourself revolving on your credit, make an effort to find out where and why you are flashing your card so often and stop using it till you clear your dues.

Leave it all in the bank

A lot of readers write in and tell us they have huge amounts in their savings accounts because they don't know where to invest it.

You need to list down all your investment options.

You have the very safe ones which are backed by the government like RBI bonds (bonds by the Reserve Bank of India), NSC (National Savings Certificate is offered by post offices) and Public Provident Fund (offered by State Bank of India and other nationalised banks).

You can also consider bank fixed deposits and fixed deposits by other companies.

Read Want a fixed return investment? to understand the various options.

Then, you have diversified equity mutual funds. You can also invest directly invest in shares.

If you will need the money in the short term, you can try short-term bank deposits or even liquid funds. But there is no need to leave huge amounts in your bank account. Read The safest mutual funds to understand liquid funds.

Put it all into one investment

Distribute your money evenly. Let's say you take home Rs 10,000 a month and manage to save just Rs 3,000. That is Rs 36,000 a year. Don't put all this amount in one investment.

Distribute this Rs 3,000 amongst at least two investments. Let's say you pick up a very safe investment like the NSC. This is backed by the Government of India and available at post offices. The rate of interest you will get is 8% per annum and the lock-in is six years.

Maybe you can open a NSC account for Rs 30,000 if you want most of your money safe. The balance Rs 6,000 you can invest in a diversified equity mutual fund or maybe buy some shares.

But don't put all your savings in the NSC or all of it in shares.

List down all the investments and then decide how long you want to block your money and how much of a risk you are willing to take. Then decide where to invest.