Dutt's Money Eearning & Investment Solutions

Tuesday, November 21, 2006

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.

What you MUST know about HRA

What you MUST know about HRA

House Rent Allowance is an allowance given by an employer to an employee. The sole purpose of this is to meet the cost of renting a home.

Here, we hope to clear the doubts you may have about HRA.

Do note, when we refer to salary in this article, it encompasses basic component and the dearness allowance.

1. You can claim HRA if you fulfill these three conditions:

~ You have an HRA allowance as part of your salary package.
~ You are staying in a rented accommodation and paying rent for it.
~ The rent exceeds 10% of your salary.

2. You can claim rent given to your parents. Let's say you live with parents and pay them rent. This makes your parents the landlords. One of them will have to declare it in his/ her personal income tax return to prevent litigation in the future.

3. You cannot claim rent paid to spouse. The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together. So payment of rent to a spouse will not be accepted by the income tax authorities.

4. You will need to keep all your rent receipts since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement. However, if the HRA is upto Rs 3,000 per month, then receipts/ agreement is not mandatory. It is only when your HRA exceeds this amount that you will have to keep the receipts.

But it is wise to still keep them because, at the time of assessment, the Income Tax Officer may demand the receipts/ agreement.

5. The actual HRA you will be entitled to will be the least of the following.

~ The actual amount of HRA received.
~ 40% of salary. This increases to 50% if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.
~ Rent paid minus 10% of salary (basic component + dearness allowance)

6. The HRA that does not get exempted is taxed. Let's see how it works with an example.

Assumptions

HRA per month = Rs 15,000
Basic monthly salary = Rs 30,000
Dearness Allowance = Nil
Monthly rent = Rs 12,000
Rental accommodation is in Mumbai.

Exemption

Actual amount of HRA = Rs 15,000

50% of salary = 50% x (30,000 + 0) = Rs 15,000

Actual rent paid - 10% of salary = Rs 12,000 - [10% of (30,000 + 0)] = 12,000 - 3,000 = Rs 9,000

Rs 9,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 6,000 (15,000-Rs 9,000) is taxable.

7. If you took a home loan for a home in one city but reside in another, you will be entitled to:

~ Tax benefit on principal repayment under Section 80C
~ Tax benefit on interest payment under Section 24
~ HRA benefit

Or, even if the home is in the same city but is not ready forcing you to rent a place, you will still be entitled to all the above benefits.

Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops.

If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above.

However, in this case, the rent you receive would be considered as your taxable income.

8. Let's say you took a home loan and have bought a home but are not residing in it for genuine reasons.

It could be that the home is at a considerable distance from your work place. Or, it could be that the home is rather small and your parents are living in it so you have to stay elsewhere.

Though your rental accommodation and home are in the same city, you can still get all the benefits.

~ Tax benefit on principal repayment under Section 80C
~ Tax benefit on interest payment under Section 24
~ HRA benefit

However, it is necessary you have some of your belongings at your home (the one you own) and you stay there on and off on during weekends and holidays.

Despite this, if your employer does not agree and denies your tax benefits, you will have to claim it at the time of filing your tax returns.

10 MUST knows about LTA

10 MUST knows about LTA

Leave Travel Allowance affects every salaried employee. Here we give you a quick low-down on what to expect.

1. You can get LTA only if you have applied for leave from your company and have actually travelled. However, international travel is not valid. You must have travelled within the country.

2. The entire cost of the holiday is not covered. Only the travel costs are covered. So, whether you fly, hop on to a train or take public transport, you will have to show the ticket to claim your LTA. This means you will need to keep your air, rail or public transport ticket.

3. If you travel by car and it is owned by a central government organisation like ITDC, the state government or the local body, then LTA is permitted.

If you could not get public transport and resorted to private transport like renting a car, get a bill issued by the rental company. If the bill is not accepted by your employer, you can always file an income tax return, claim an exemption and get a refund.

4. LTA covers travel for yourself and your family. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if your spouse is working) and children.

For children born after October 1, 1998, the exemption is restricted to only two surviving children (unless, of course, one birth has resulted in multiple children like twins and triplets).

If your family travels without you, no LTA can be claimed. You have to make the trip, either by yourself or, if claiming for your family, you should travel with them.

5. LTA is not related to when you started your employment. The government fixes blocks of years. These blocks are not financial years (April 1 to March 31); they are calendar years (January 1 to December 31).

The current block is 2006-09 -- January 2006 to December 2009. The earlier one was from 2002-05 -- January 2002 to December 2005.

During this time period, a person is entitled to two LTA claims.

6. Though you can claim two journeys in a block of four years, you can claim the LTA benefit just once in a year. You cannot claim both the journeys in one year.

So, while a person can get an income tax exemption for two journeys in a block of four calendar years, he can make a trip only once a year.

If you make two trips in a year, you lose one. One way out is to claim one and make your spouse claim the other.

7. You can carry forward your LTA. One LTA can be brought forward and claimed in the first year of the next block.

Let's say you do not take your LTA in 2002-05. Or that you use only one LTA. Don't worry, you will be able to take the pending LTA in 2006. This means that, in the 2006-09 block, you will be totally entitled to the three journeys.

8. If you switch jobs, you can get the LTA not only from your present organisation but also from your former employer, if the concession is lying unutilised.

Let's say that, in the 2002-05 block, you claimed LTA in 2003. In 2004, you switched jobs. You can still claim your second journey with your new employer. Of course, your new employer will ask to look at your earlier tax returns to see whether it has been claimed or not.

9. You must take the shortest route to your destination to be eligible for LTA.

Let's say you are going from Delhi to Mumbai on a holiday. So the cost of your travel from Delhi to Mumbai and Mumbai to Delhi will be eligible for LTA.

If you decide to go to Mumbai via Agra, Jhansi and Itarsi, your LTA from Delhi to Agra will be covered. But Agra to Mumbai will not be covered.

Let's take another scenario. You traveled from Mumbai -- Kerala -- Delhi -- Mumbai.

If you take a direct connection, you will be eligible for LTA. Mumbai -- Kerala -- Delhi -- Mumbai: LTA covered

But if you throw in Hyderabad, then it goes out of gear.

Mumbai -- Thiruvananthapuram: LTA covered
Thiruvananthapuram -- Hyderabad -- Delhi: LTA not covered
Delhi -- Mumbai: LTA covered

10. If your LTA is not utilised, it gets added to your salary and you will be taxed on it.

Let's say you and your spouse are both employed and both have LTA as part of the salary package. Your LTA is Rs 20,000 and hers is Rs 20,000 too.

Both of you and your child go for a holiday. The tickets for the three of you amount to Rs 15,000. You supply the tickets to your office and this amount will be eligible for a tax deduction; the balance Rs 5,000 will be taxed. You can claim exemption only to the tune of your expenditure.

If you claim this, your spouse will not be able to claim this same holiday from her employer. His/ Her Rs 20,000 will be taxed. Unless, of course, you go for another holiday and he/ she claims it.

Or, let's say, you spend Rs 30,000 on tickets but your LTA is just Rs 20,000. You can claim up to Rs 20,000 and tell your spouse to claim his/ her ticket from his/ her employer.

4 Rules To Start Saving

4 Rules to start saving

Can never bring yourself to save? Here we try to help you get out of that rut. Read these four rules to get you started.

1. View expenses in percentage terms

Just because your buddy or colleague spends Rs 5,000 a month on entertainment, it does not mean this is the right amount for you as well.

Your friend may be earning Rs 20,000 a month. In that case, it would amount to 25% of his salary.

But, if you earn Rs 12,000 a month and spend the same amount, it would amount to a phenomenal 41% of your salary.

Look at all your expenses with reference to the amount you are earning.

2. View expenses from an annual viewpoint

Also, take an annual viewpoint.

Let's say you live in a metro and spend up to Rs 5,000 a month on wining and dining (especially if you have expensive tastes). But, if you look at it on an annual basis, it would amount to Rs Rs 60,000 per annum. Even if you spend just Rs 3,000 a month, it will amount to Rs 36,000 per annum.

Looking at it from an annual perspective does throw a different light on the issue.

3. View expenses as a flexible solution

Take a quick look at all your expenses. Some will be fixed (rent, monthly contribution to home, loan payments), others will vary but will be essentials (paying electricity bill, travel, cell phone bill).

You cannot cut down on the first category, so try the second.

Cell phone bill too high? Stop forwarding messages and cut down on pointless SMSes.

If you find your travel bills mounting, try compromising. On and off, deliberately bypass the taxi or autorickshaw and hop onto a bus or a train.

Try and take lifts from your family or a neighbour (even if it means reaching early) or maybe a colleague.

Form a travel group or maybe a car pool with your co-workers.

Spending too much on branded attire? Shop at sales or frequent factory outlets. Ensure you have one branded piece of clothing; the rest can be cheaper options to go with it. For instance, a pair of branded jeans will go well with a cheaper shirt or kurta.

Find yourself eating out often? If you can't cut down the number of times, ensure you don't order dessert and cut down on alcohol. This will benefit your health and wallet.

Or, convince your friends to have more pot-lucks (where you get together at home and everyone contributes one dish).

When you go for a movie, avoid snacking inside the theatre (everything is exorbitantly priced).

Don't be rigid, get flexible and innovative.

4. View savings as a spending category

Saving as spending? Quite an oxymoron isn't it?

Just as you have various categories of spending (rent, cell phone bill, eating out), add one more -- saving.

Go for an investment like a Systematic Investment Plan of a mutual fund. This will require you to put in fixed amounts every single month into a fund of your choice. This amount will be directly debited from your bank account.

Or, opt for a recurring deposit where a fixed amount gets deposited every month.

On the other hand, maybe, you could do both.

This way, some amount of money is automatically saved every month.

People normally associate saving with miserly behavior. It's not. It's just about hitting the right balance and making saving a habit.

How to pick a good mutual fund

We always advise our readers never to go by tips but to do their own analysis. Here, we tell you what to keep in mind in order to pick a good mutual fund.

The way to do it is by comparing it rightly with other benchmarks and parameters.

Absolute returns

Absolute returns measure how much a fund has gained over a certain period. So, you look at the Net Asset Value on one day and look at it, say, six months or one year or two years later. The percentage difference will tell you the return over this time frame.

Compare the returns of various funds. But, when using this parameter to compare one fund with another, make sure that you compare the right fund. To use the age-old analogy, don't compare apples with oranges.

So if you are looking at the returns of a diversified equity fund, compare it with other diversified equity funds. Don't compare it with a sector fund.

Don't even compare it with a balanced fund (one that invests in equity and debt).

For instance, compare HDFC Equity with Franklin India Prima. Both are diversified equity funds. Similarly, compare UTI Auto with J M Auto, both being auto sector funds. Or Birla Midcap with Magnum Midcap, both being funds that invest in mid-cap companies.

Don't compare the performance of Alliance Equity with UTI Auto or even Alliance Equity with Birla Midcap.

Benchmark returns

This will give you a standard by which to make the comparison. It basically indicates what the fund has earned as against what it should have earned.

A fund's benchmark is an index that is chosen by a fund company to serve as a standard for its returns. The market watchdog, the Securities and Exchange Board of India, has made it mandatory for funds to declare a benchmark index.

In effect, the fund is saying that the benchmark's returns are its target and a fund should be deemed to have done well if it manages to beat the benchmark.

Let's say the fund is a diversified equity fund that has benchmarked itself against the Sensex.

So the returns of this fund will be compared vis-a-viz the Sensex.

Now, if the markets are doing fabulously well and the Sensex keeps climbing upwards steadily, then anything less than fabulous returns from the fund would actually be a disappointment.

If the Sensex rises by 10% over two months and the fund's NAV rises by 12%, it is said to have outperformed its benchmark. If the NAV rose by just 8%, it is said to have underperformed the benchmark.

But if the Sensex drops by 10% over a period of two months and during that time, the fund's NAV drops by only 6%, then the fund is said to have outperformed the benchmark. This is because it dropped less than the benchmark.

A fund's returns compared to its benchmark are called its benchmark returns.

Compare a fund with its own stated benchmark, and not another one. For instance, Fidelity Equity and BoB Growth are both diversified equity funds with different benchmarks.

Fidelity Equity is benchmarked against BSE 200 while BoB Growth is benchmarked against the Sensex.

Time period

The most important thing while measuring or comparing returns is to choose an appropriate time period.

The time period over which returns should be compared and evaluated has to be the same as the one that fund type is meant to be invested in.

If you are comparing equity funds then you must use three to five year returns. But this is not the case of every other fund.

For instance, cash funds are known as ultra short-term debt funds or liquid funds that invest in money market instruments. These are fixed return instruments of very short maturities. Their main aim is to preserve the principal and earn a modest return. The money you invest will eventually be returned to you with a little something added.

Investors invest in these funds for a very short time frame of around a few months. It is alright to compare these funds on the basis of their six month returns.

When returns are compared between funds, make sure the time period is identical. Else, you may be looking at the one-year returns for one fund and the three-year returns for another.

For instance, let's assume you are told the return of Fund A was 60% and that of Fund B was 70%. But, if Fund A's return is a one-year return while Fund B's return is a three-year return, the answer you would get would be very misleading.

While there are other factors that have to be considered when investing in a mutual fund, returns is the most important. So make sure you do your homework right on this count.

How to save for your goals

How to save for your goals

Wealth creation is never easy. It is like sowing seeds, watering them regularly and nurturing them until they grow into fine trees. It will take years before the tree of wealth grows tall.

Currently, Neha is only setting aside Rs 500 in mutual fund and Rs 1,667 towards insurance premium. Her investments add up to Rs 2167 per month. This works out to about 15% of the take home pay being invested.

Unfortunately, a major portion of this goes towards paying her insurance premium. Insurance is never a good investment instrument, as a large portion from the premium is deducted towards expenses and brokerage.

Usually, it is recommended to save a minimum of 10% of one's take-home income. However, in Neha's case, since she is single does not have any family responsibilities as yet, she should try and reach a figure of 25%.

This will be difficult but not impossible.

She will have to deal with dilemma of savings and splurging. Splurging will give immediate gratification and anxiety later, as to whether she has saved enough to ensure her financial security. On the other hand, savings will give some anxiety now -- for example, worries like if I concentrate on saving, when will I enjoy life -- but will give gratification later when financial security is achieved.

Where Neha is today

Emergency fund: She has absolutely no emergency fund. In case of adversity, she will have to leave Delhi and return to her family.

Health insurance: Her employer is covering her to the extent of Rs 3 lakhs

Life insurance: She has life insurance to the extent of Rs 1 lakh. At the moment, since she has no financial dependents, she does not really need life insurance.

Savings & investment: She has invested Rs 5,000 in SBI Magnum Tax Gain's fund. She also has an SIP in Fidelity's equity based fund.

Net worth: She has total invested assets of about Rs 8,000 in equity based mutual funds. There are absolutely no liabilities.

The way ahead

Emergency fund: First, she should set aside funds equivalent to about three months of expenses as her contingency reserve (for emergencies).

Funds equivalent to about one month's reserve should be kept in form of cash at home and rest should be kept in savings bank linked to fixed deposit.

Ensure there is ATM access to funds.

Savings and investment: Neha should continue her SIP of Rs 500 in an equity-based fund. She should, ideally, increase this amount to Rs 1,500. This investment should be for her long-term goal of financial security.

Over and above this, set aside additional Rs 2,000 in a debt-based mutual fund for the next 18 months. Funds so collected should be utilised to purchase a laptop computer costing around Rs 40,000

6 common investment mistakes

6 common investment mistakes

In the heady days of bull runs, we tend to make far more investment mistakes than in normal times. Sure, most of us make money when the market is going up. But, when the bull run ends, we all have stocks and funds we wished we had never bought.

It is an established piece of investing wisdom that, to make money over the long-term, all you have to do is make sure you don't lose it.

Or, to put it in a different way, you don't so much have to do the right thing as you have to simply avoid doing the wrong ones. This may sound simple. But, if you look at reality, it turns out that avoiding mistakes are just as hard, if not more, than doing the right things.

Here are some common investing mistakes.

1. Having a piece-meal approach

The biggest and foremost roadblock to building a successful portfolio is the failure on an investor's part to look at investing in a holistic way.

Investments are not pursued with proper planning and a goal in mind. Instead, a sales pitch from a broker, a mutual fund agent or an insurance agent guides our investment decisions. And, yes, the year-end frantic tax planning too.

Do not judge the investment-worthiness of an avenue right at the moment of making the investment. Then, you will look at current market conditions only. For instance, when the stock market is rising, you will not look at investing in National Savings Certificate. But, the moment the market crashes, you will run to it. Or, just before March 31, you may end up buying an insurance policy you don't really need.

Your investment decisions should not be a collection of random individual investments.

2. Making the wrong choices

Here, we refer to the problem of being invested in wrong companies or mutual funds of the right type. So, it may be right for you to invest in diversified equity funds but you may have selected the wrong funds. Or, investing in stocks in the pharma sector may be a good idea, but you may have zeroed in on the wrong companies.

Investors have a tendency to get carried away with the current hot performers and tips from everyone. Always look at long-term performance where funds are concerned, and future growth prospects where a stock is concerned.

3. Going for too many or too few

This is a common problem with portfolios; specially in the case of mutual funds.

Many of us keep on adding investments in the name of diversification. Fund investors normally think they are getting the units cheap if they buy them at Rs 10 each, so they invest in virtually every new fund that comes into the market.

Having a huge portfolio ensures nothing except complexity. Diversify sensibly and objectively.

While most investors have the problem of plenty, some are guilty of too much concentration. Letting just a few stocks or a fund managers determine your financial fortunes might not be an ideal situation to be in.

Ideally, a portfolio should have at least five to eight stocks from at least three distinct sectors. Fund portfolios should not have less than four funds, preferably by different fund managers.

4. Chasing returns

The anxiety of missing out on the opportunity of becoming rich overnight in a bull run often induces even the disciplined investors to stray. There are times when greed takes over the long term view of investments and you may start investing in funds and stocks that have no right to be in your portfolio.

So a portfolio that was well on track to achieving your goals taking into account the risk you can take is now suddenly derailed.

5. Getting out of focus

Sometimes you may feel you are doing a job investing and being focused, but that may not be the case if you take a good look at your portfolio.

You may have invested in a few mid-cap stocks but, if you look at your mutual funds, you may find that a number of your funds are heavily invested in mid-caps. Or you may have invested in mid-cap funds.

Ditto with certain sectors. You may have bought a lot of stocks in the infotech sector and your mutual fund too may be heavily invested in tech stocks. That means your overall portfolio is skewed towards infotech.

Finally, when approaching your goal, it is safe to shift from equities to fixed return investments. Let's say you began saving for a home and gave yourself a five year deadline. If you are getting substantial returns on your shares after three years, you can sell them and put the money in a two-year deposit. If you wait to sell the shares when you near your five-year deadline, and the market is down, you will be in a soup.

6. Ignoring tax

When selling funds or stocks, tax considerations are the last thing on an investor's mind. But, you could save a lot by merely delaying your decision to sell by a month or two.

If you sell your shares or diversified equity funds after a year of buying, you pay no tax. So don't be too hasty to sell soon after buying just because of a small profit.

Or, if you want to invest in a diversified equity fund, you could look at an Equity Linked Savings Scheme. This is a diversified equity fund that offers a tax benefit under Section 80C. Other diversified equity funds do not offer this benefit.

So, here you are. If you find yourself committing any of these mistakes, step back and rectify them. If not, that's fine. But do keep them in mind to ensure you do not commit them in the future.

How to spend your bonus

How to spend your bonus

A friend of mine would often comment on how she would wait for a bonus or windfall to 'live it up.'

When I asked her what stops her now, her response was, "I prefer blowing up money that is not regularly earned."

I am still not sure what she meant, but I think it is obvious that -- depending on where it comes from -- she segregates money in her mind.

Just because you get it unexpectedly or without working for it, don't undervalue or undermine your money's worth. Money is money.

It could be an inheritance, a gift from a rich relative, a bonus you were not expecting, a great return from some shares or mutual fund investment or maybe a tax refund. It could even be a lottery or a winning in a television game/ reality show.

Whatever be the source of the profit or windfall, do not gamble it all away or splurge. Here are some ways on managing an unexpected windfall smartly.

Don't take a risk with all of it

A friend of mind once made Rs 1,50,000 as profit from selling shares. This was during the peak of the current bull run. He wanted to live dangerously and reinvest the entire amount. His mentality -- it was easy money so why not play around with it.

Maybe you can settle your debt

An unexpected windfall is a great way to clear your loans. This will give you peace of mind and help you save on interest in the long run.

The first type of loans you should look at clearing are those with the highest interest rate and no tax benefit, especially if you are servicing a personal loan or credit card debt. These loans are the most expensive and the rates of interest are in the 18% to 30% per annum category.

Look for expenses that have been put on hold

Don't blow it all up. Have you been genuinely saving for something?

Draw a balance between your needs and wants.

Are you saving for a particular goal like an upcoming wedding? Or are you saving for the down payment of a home? Channelise this money towards that end. These are needs that will put pressure on you later.

Steps to buy insurance...

One of the major myths I deal with in the business of financial planning is that insurance is often misconstrued as an investment product.

The insurance industry is ever ready to oblige with fancy illustrations and creative selling techniques to add to this myth.

Were you aware that 65% to 80% of insurance policies are sold in the months of February and March? Whatever the exact figure is, the reason is not hard to find. People need to do their last-minute tax planning and opt for an insurance policy to take care of it.

Insurance companies, too, go berserk at this time with their advertisements, promotions and contests.

So, you have an essentially potent combination of a buyer wanting to save tax and running out of time and an insurance agent eager to meet his targets.

Do you need insurance? You don't need insurance if you are sufficiently wealthy. Let me explain.

I have a client whose net worth is around Rs 20 crore (Rs 200 million). He was sold an insurance policy by his friend and has been paying a premium of Rs 15 lakh (Rs 1.5 million) every year for a cover of Rs 60 lakh (Rs 6 million).

Don't fall for the sales spiel
I recently got a call from a private insurer. They wanted to sell my father, aged 65, a Unit Linked Insurance Plan. This is an insurance policy that also offers an investment like a mutual fund where you buy units.
Be objective
Insure yourself based on the needs of your family. Do not view your premium as an expense.
When you buy auto insurance, you do not do so with the assumption that, if no damage is caused to your car, you will get some money back. The same applies to life insurance.
Always question your agent
A 57-year-old acquaintance was sold a policy on the pretext that he needed to pay the premium for only three years; after that, he could cancel the policy.
When I looked at the policy, the premium paying term was for 12 years. He could cancel it after three but would lose a lot.

Want to save tax and get fixed returns?

With the stock market touching an all-time high, investors are looking at fixed return alternatives.

Read on to understand fixed return investments that also give a tax benefit.

Five year bank deposits

Five year bank deposits are the latest addition to Section 80C. For those of you who prefer depositing money in the local bank, this one is a real boon. Do remember, however, that any deposit with a tenure of less than five years will not be valid for the tax benefit.

What banks generally do is open a current account with that overdraft amount. You will have to pay interest only on the amount that you utilise.

As of now, you can expect around 8 per cent interest on a five year fixed deposit. Senior citizens will get 0.5 or 1 per cent more.

So, while this option scores high on convenience and safety, the hitch is that the interest earned on bank deposits is taxed.

Public Provident Fund This one has been the darling of the tax-saving instruments for decades. And not without reason. With an interest rate of 12 per cent, those who invested in it in the past would have reaped great returns. It dropped to 11 per cent, then 9.5 per cent and is now 8 per cent per annum.

National Savings Certificate On the face of it, this one is identical to PPF, but with a lower tenure. While NSC offers the same interest rate of 8 per cent per annum, it is computed on a half-yearly basis, while PPF is calculated on an annual basis. On this point, NSC scores.

Employee Provident Fund The EPF is a retirement benefit scheme available to salaried employees. Under this scheme, a stipulated amount decided by the government (currently 12 per cent) is deducted from the employee's salary and contributed towards the fund. The employer makes an equal contribution.

Infrastructure bonds At one time, it was mandatory to invest in them. And financial institutions like ICICI and IDBI garnered phenomenal amounts of money due to this stipulation. Now that the investor has the flexibility to bypass this investment, this is exactly what is being done. The financial institutions, too, have not been coming out with issues. more

Want to save tax?

In the first part of this article, we explained the various options available if you want to save tax and yet earn a fixed return on your investment.

The question we answer now is how much of your tax-saving investment must be allocated to fixed return and how much to Equity Linked Savings Schemes (ELSS). These are mutual funds that invest in the stock market and give you a tax benefit under Section 80C. With a lock-in period of just three years (which means you cannot withdraw this money for three years), they make for a great investment.

Let say it is your first job and you want to invest for the long term. Since you have age and time on your side, the best investment would be ELSS. Of course, it is advisable to also have a fixed income instrument in your portfolio. If you are a salaried employee, your PF would give you that option. If no provident fund is available, then do opt for PPF.

If you have already invested in mutual funds or in the stock market and have no fixed-return investment, then bypass ELSS as a tax-saving option. But, if you have only fixed return investments, then you should allocate most of your tax saving to ELSS.

Once you decide how much to allocate to fixed return instruments, the next step would be deciding which fixed return investment to opt for.

PPF vs NSC

A debate always rages about the benefits of choosing Public Provident Fund and National Savings Certificate as investment options. Both are safe and backed by the government. Moreover, both give a return of 8 per cent per annum.

Over here, the time frame will be the main consideration. NSC is only a six-year investment as against 15 years for PPF. So if you need the money much sooner, then NSC scores. However, if you are looking at a long-term investment that you can stash away for retirement, then PPF is the best. If you invest Rs 70,000 every year in PPF for 15 years, you will end up with more than Rs 22 lakh.

Or, if you have surplus funds inspite of having touched the Rs 70,000 limit of PPF and want a fixed-return investment, then NSC would be the next logical choice.

If you are looking at the shortest tenure, then you also have infrastructure bonds (three years onwards) and bank deposits (five years onwards) to choose from. The interest rate from these investments should hover around 8 per cent, the same as NSC. Want to save tax?

Child Money Investment Policies

The best gift a parent can give his/her child is the gift of literacy! In this article, however, I am going to talk about something that is not taught in most schools across the world -- financial literacy.

Let me begin with an example. We stay in Mumbai. The other day, I asked my daughter Reet where she wanted to go. "Shopping" she said. "Crossword," she added. On further questioning, I realised she wanted to go shopping at Infinity Mall in suburban Mumbai and then go to Crossword to read books.

Later, I realised why she had responded in this manner -- the mall, after all, was where we went most often. I talked to several other parents and they said the same thing -- the mall was where they headed for with their families on most weekends. Ask yourself where you spend most of your time with your kids and I bet you will see where I am coming from.

We are living in a period of unprecedented economic prosperity where many of us are becoming more and more prosperous. This prosperity also brings with it a tendency to spend and make financial decisions that may not be in one's best interests.

Financial literacy means understanding:

~ Income, expenses and savings
~ Budgeting
~ Assets -- real and financial -- and liabilities
~ Insurance and its purpose
~ Investments and how to make money work for you
~ Taxation
~ Risk management, asset protection
~ How to handle situations such as disability, divorce, starting a business, inheritance
~ Wills, trusts, intergenerational wealth transfer Child Money Investment Policies

How to make money in shares!

veryone wants a piece of the stock market. And why not?

But do you know how shares reward an investor?

If you are a shareholder, there are two ways you can benefit from the profits of a company: capital appreciation or dividend. Read on to understand how shares reward you.

Dividends, dividends!

Usually, a company distributes part of the profit it earns as dividend.

Say a company earned a profit of Rs 1 crore (Rs 10 million) in 2004-05.

It keeps half that amount within the company. This is used for a variety of purposes -- buying more machinery, land or raw materials, building a new factory or setting up a new office. It could even be used to repay loans.

The other half is to be distributed as dividend.

Assume the company has 10,000 shares. This would mean half the profit -- ie Rs 50 lakh (Rs 5 million) -- would be divided by 10,000 shares.

So each share would earn Rs 500. The dividend would then be Rs 500 per share.

If you own 100 shares of the company, you get a cheque of Rs 50,000 (100 shares x Rs 500) from the company. more