5 major changes in life insurance policies

5 major changes in life insurance policies from Jan 1, 2014 – How it affects you ?

Some major changes are going to happen in life insurance industry from Jan 1, 2014, especially in traditional policies like Endowment Plans, money-back plans and even ULIP’s. You will surely have a LIC policy or any other private sector traditional plans or might buy them in coming times. Here are 5 major changes which you should be aware about and they will come  into effect from Jan 1, 2014.

1. Service Tax introduced in LIC Policy Premium

Till now LIC was not charging the service tax of 3% from the customers and paying it to govt from the pool of money collected itself, but now the service tax will have to be charged separately from policy holders. Which means that if your LIC premium was Rs 50,000 per annum, now it will be 3.09% higher in first year, which is Rs 51,500  and after 1st year, it will be 1.545% as per moneylife article.

While customers see it as additional burden, note that its not the case exactly, Earlier – LIC was paying the service tax from the pool of money collected from investors only, which reduced the bonus amount given back to them. But now because it will not be taken out from the funds, that means the bonus declared each year will go up by that much margin and will come back to investors only. Note that Pvt companies were charging the service tax already, so nothing changes on their side. Only LIC was not charging it separately, which they will have to do from Jan 1, 2014 deadline.

2. Increase in Surrender Value

One of the major changes which has happened, is the change in surrender value for policy holders. The rules of surrender value depends on the premium paying term of the policy. If the premium paying term for policy is less than 10 yrs. Then the policy will acquire the surrender value after paying premium for 2 yrs (earliar it was 3 yrs), however if the premium paying tenure is more than 10 yrs , then the surrender value will be acquired only after paying 3 yrs premium.

In both the cases, the minimum surrender value would be 30% of the premiums paid without excluding the first year premium. Note that earlier, if you used to surrender after paying 3 premiums, you got 30% of premiums paid MINUS first year premium, but now as per new rules, the first year premium will not be deducted. Learn everything about LIC policies working before Oct 1

Another good change is that, from 4th-7th year, the minimum surrender value would be 50% of the premiums paid, and has to reach 90% of premiums paid in last 2 yrs of policy paying tenure.

3. Possible Decrease in Premium on LIC Policies

There is a great possibility that the premiums on LIC policies will come down by some margin, because the mortality rates will now be revised by LIC in calculating the premiums.

Mortality rates are the rates at which the insurance company deducts the fees for insuring you based on your age. LIC had been using old mortality rates till now, but now they will have to use new mortality rates . Just to give you an idea on reduction of premium, when I check the mortality rate for a 40 yrs old person in old table, its 0.001803 . But in new rates its 0.002053 . Which is approx 10% better. Lets not go into detailed calculation at the moment, but your risk premium part should go down by 10% (not the full premium, because only some part of whole premium in traditional policies are risk premium and rest is investment part) .

4. Higher Death Benefit

If the policy holder is above 45 yrs of age, then the Sum Assured has to be more than 10 times the annual premium, and for those who are less than 45 yrs old, it can be minimum 7 times the premiums. Note that for claiming the tax exemptions, your sum assured has to be 10 times the base yearly premium. So when you buy the policy in-case, you need to keep it in mind. BasuNivesh has done a great point by point notes on each aspect of regulation, in-case you want to go into details.

5. Agents’ incentives have now been linked to the premium paying term

Now agents commissions is linked to the premium paying tenure. Earlier a lot of agents used to sell the policies which had higher maturity tenure, but limited premium paying tenure (like 30 yrs policy with 10 yrs premium payment) . Here is the new commission structure taken from Moneylife article 

In case of regular premium insurance policies, a policy with a premium paying term (PPT) of five years will not pay more than 15% in the first year. Products with PPT of 12 years or more will have first year commissions up to 35% in case the company has completed 10 years of existence and 40% for the company in business for less than 10 years.

The funny aspect is that a lot of LIC agents tried to mislead many new investors by projecting date Jan 1, as the deadline when a lot of LIC products will stop giving good features using the official notification. LiveMint has even captured it in this image.

What should you do ?

The insurers have to refile all their products to IRDA and already lots of products have been approved and many are still waiting for approvals. So if you have a insurance policy, then you will get the communication from your insurer about any changes if any. Right now, for sure the traditional plans have got better, compared to their past avatars.

If you are adamant on buying endowment plan, better wait for some time and let things get more clear. Let me know about your thoughts on this change ?

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Transfer PPF account from Post Office to Bank

How do you transfer PPF account from Post Office to SBI Bank? This has been a big question mark for all the PPF account holders who opened their PPF account in Post Office and now want to transfer PPF account to SBI Bank or other banks so that they can take benefits of online money transfer to their PPF accounts. Also it becomes easy for them to do other kind of activities if PPF account is in some bank.

So, in this article we will see the steps required to transfer PPF account from Post office to any Bank. In this example we will use SBI as the example. But you can use the same procedure for any SBI Bank or its subsidiaries or even ICICI Bank which has recently started providing PPF accounts.

Steps required to Transfer PPF account from Post Office to SBI Bank

Step 1	First step is to make sure your PPF Passbook is updated with all the interest credited till date. You need to go to Post Office and get it updated.
Step 2	Fill up following documents PPF Transfer Form SB-10(b) . Download Form to transfer PPF Account here An application on plain paper requesting PPF Account transfer from Post Office to SBI Bank Incase you already have a SBI Account, then SBI passbook (Will fasten the process) PAN/Address Proof (Can be confirmed at Post Office)
Step 3	Submit the form to Post Office Head PostMaster, He will verify your signature with the records at Post Office and verification will be completed.
Step 4	The balance in your PPF account in Post Office will be taken out and your PPF account will be closed by Head Post Master and he will note the remark of Transfer of PPF Account to SBI Bank on all the relevant documents.
Step 5	The balance amount in your PPF account will then be remitted back to State Bank of India through Cheque or Demand Draft along with other relevant documents.
Step 6	Your PPF account will then be opened (transferred) at SBI Branch and you will be notified on this. It would be better to not wait for it and you yourself keep track of the progress.

Go to SBI bank after all these steps are done and collect your new PPF Passbook. Note that all the previous entries of your Interest payments etc will not be present in the new PPF Passbook. It will only have the new and current entries now. So in-case you needed the previous information for claiming tax deductions, better take the printout of the previous PPF Passbook and keep photocopies of all the documents you filled and submitted for PPF Account Transfer.

What about interest part when you Transfer PPF account from Post Office?

Do you know How PPF interest is calculated ? Its only monthly basis , but credited yearly. Now as per PPF Rules, the bank or the post office transferring the account will add interest up-to the preceding 31st March in the account before the it is transferred. The interest from 1st April onwards will be added by the transferee office after the close of the year. As per rule 8 of the scheme the interest in the account has to be added at the end of the year and not in the middle of the year in any case. So make sure to ask and confirm from Post Office Postmaster if he will do this step or not. And once the PPF Account is transferred, at the end of the year, make sure you get the total interest in your account. Just verify it at the end of the year.

What Problems you are can face while Transfer of PPF Account?

Problem 1 : The biggest problem you will face is the ignorance SBI & Post office employees have about this whole process. I think Post Office Employee has more information (and less ego) than SBI Employees. They might reject the whole idea and say “Its not possible to transfer”.

In that case, take the print out of Rule 153 of this document which is at Post Office website and clearly defines the rules to Transfer PPF Account from Post Office to SBI Bank. Another thing you can do is very humanly and in a soft voice, tell them you will file an RTI to know the process of PPF Transfer from Post Office to SBI Bank and would come back with that RTI query (Post Office and SBI comes under RTI incase you didn’t know). I am sure this will be enough to speed up the whole process.

Problem 2 : Another problem you may face is documentations, I am not very sure if PAN card/Address proof is required or not and what other documents, but in that case again take help of your Post Office Head Post Master, he will surely help you. If you are stuck at any points, use sentences like “I will file an RTI and … ” . That might help you.

 

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Public Provident Fund (India)

Have a PPF Account? Read This

Till date, the Public Provident Fund (PPF) scheme is the most popular investment in India. If you’re looking for an exemption on the money you invest, interest that is non-taxable and a maturity amount that is exempt from tax as well, this is the instrument for you.

So it’s no surprise that with these 3 very prominent benefits, almost every individual in the country has a PPF account and contributes to it religiously every year.

But do you really have total PPF knowledge? Are you aware of interest rate changes in the PPF over time? Do you know that this money can never be attached to any debt or liability i.e. it is yours forever? There are many ways in which you can derive the maximum benefit from your PPF account. Let’s see if you know everything you need to know about this incredible investment instrument.

Let’s get straight to the facts...

1. PPF stands for Public Provident Fund - a government backed, long term, retirement savings instrument.

With a 15 year lock in, this is the longest horizon for an investment that exists in India. If you are keen on a safe investment, a decent rate of return, tax benefits (deduction and tax free interest) and have a long term investment horizon, then the PPF is for you. It is a disciplined investment avenue as your money is blocked for 15 years. PPF also offers loan against the account which can help you during occasions like a wedding in the family, further studies of your children, etc.

2. The main features are:

1. the 15 year lock in,
2. the E-E-E status (tax exemption on investment, interest and maturity) under Section 80C,
3. the minimum investment of Rs. 500 p.a. and maximum of Rs. 1 lakh p.a. (w.e.f 01-Dec-2011)
4. and the interest rate which currently stands at 8.8% for this fiscal year. The interest rate will be announced annually, it is no longer fixed at 8% p.a.
   
   

In fact, the PPF interest rate has steadily dropped over the years, and can be expected to slowly fall as the years proceed. Here’s a look at what rates used to be in the hey-days of the PPF account:

Period	Interest Rate p.a.
01 April 1986 - 14 Jan 2000	12%
15 Jan 2000 - 28 Feb 2001	11%
01 March 2001 - 28 Feb 2002	9.50%
01 March 2002 - 28 Feb 2003	9.00%
01 March 2003 - 30 Nov 2011	8.00%
01 Dec 2011 - 31 March 2012	8.60%
01 April 2012 till date	8.80%

01.04.2014

Present

8.7%

3. An NRI can’t open a PPF account.

The rule of 25th July, 2003 states that ‘Non Resident Indians are not eligible to open an account under the PPF Scheme’. However ‘Provided that if a resident who subsequently becomes a Non Resident during the currency of the maturity period prescribed under the PPF scheme may continue to subscribe to the Fund till its maturity, on a Non Repatriation Basis.’

So if you open it as an RI, and during the 15 year tenure become an NRI, you can continue to invest, but on a non-repatriable basis.

4. You can make up to 12 investments in a year into your PPF account, in multiples of Rs. 5.

5. You can transfer your account from one ‘Account Office’ to another for example for convenience if you shift home.

6. The best time to invest is between the 1st and the 5th of any month, preferably April each year. Interest is calculated for the calendar month on the lowest balance at credit of your account, between the close of the 5th day and the end of the month, and is credited at the end of every year.

7. Regarding withdrawals from your PPF account, there are 3 things you need to know:

a) Any time after the expiry of the 5th year from the date that the initial subscription is made, you become eligible to withdraw an amount of not more than 50% of the previous year’s balance or of the 4th year immediately preceding the year of withdrawal, whichever is less. If you have taken any loan on your PPF, this also gets factored in and reduces your balance.

b) You cannot make more than a single withdrawal in the year. you need to apply with Form C for any withdrawals.

c) Our PPF Calculator helps you see exactly how much you can withdraw from your PPF account and also how much loan you are eligible to avail, and in which years.

8. You can close your account or continue your account without deposits after maturity...

Any time after your account matures i.e. after the 15 year tenure is over, you can withdraw the entire balance using Form C. Interest will continue to be paid on your account and you will receive the total amount including interest up to the last month preceding the month in which you apply for a withdrawal.

9. You can even continue your account with deposits after maturity...

Few people know this, but the PPF account is indefinitely extendable. It has a 15 year lock in, but then you can extend it for periods of 5 years at a time, indefinitely. Your account continues to operate normally i.e. you make deposits of up to Rs. 1 lakh, earn interest and renew after 5 years if you wish. Everything remains E-E-E. To extend by a block of 5 years, use Form H.

10. You can withdraw, even if you choose to extend...

If you choose to extend by subscribing for a 5 year block, you can make partial withdrawals (using Form C again) of up to 60% of the amount standing at your credit at the beginning of this 5 year block period.

11. At any point in your life, you are allowed to have only 1 PPF account in your name.

You can also have an account in the name of a minor child of whom you are the parent / guardian. However that will be the child’s account, you will simply be the guardian.

If at any time it is seen that you have more than 1 account in your own name, the second account will be deactivated, and only your principal will be returned to you.

12. If you choose to take a loan against your PPF account, you can repay it within 36 months from the 1st day of the month following the month in which the loan was sanctioned. So if your loan is sanctioned in June, 2012, the following month is July 2012, and you have until end July 2015 to repay your loan. The interest rate charged is 2% p.a. over the prevailing PPF interest rate.

Conclusion

There’s a lot to know that can help you make the most of your PPF account. And if past rate changes are anything to go by, you can expect 8.80% interest to not last forever. As it stands today, the PPF remains E-E-E, so make the most of it to add to your retirement corpus. Feel free to use the PPF Calculator.

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10 points you must know while investing in Mutual Funds

10 points you must know while investing in Mutual Funds

Today, with over 3,500 mutual schemes available in the market the task of picking the right mutual fund can be rather mind boggling. Moreover with a tendency amongst investors to fall for the "Rs 10" investment proposition - offered by New Fund Offerings (NFOs), the task of picking the right ones can be even more daunting. While many investors also do feel that 'any' mutual fund can help them achieve their desired goals, let us apprise you that each mutual fund scheme is unique and caters to a certain risk profile. Moreover, selecting winning mutual funds involves a rigorous process, where both quantitative and qualitative parameters are considered, as it is imperative to have consistent performers in your portfolio; those who can stand by you in sickness and health.

Thus while there are host of factors to be studied, while picking a good mutual fund (which may not be everyone’s cup of tea to evaluate), we recommend that one can broadly look at the following 10 points, which can enable in selecting the right one:

1. A fund sponsor with integrity
   
   Fund sponsor are individuals who think of starting a mutual fund house. They approach the capital market regulator - Securities and Exchange Board of India (SEBI), who then provide them approval to enter the mutual fund business (after having ascertained their credentials). After having given the approval by SEBI, the sponsors then establish a Trust under the Indian Trust Act, 1882, and the trustees of which appoint an Asset Management Company (AMC), who then manages investors’ money.
   
   It is vital for you investors to recognise this 3-tier structure of a mutual fund house, as the linkage of the same will help you understand who the promoters are, their record in the financial services domain and the experience which carry along with them. While SEBI would grant a permission to start a mutual fund only to a person of integrity, with significant experience in the financial sector and a certain minimum net worth; it imperative for you to be satisfied (by your own judgement) on these aspects. We believe these background checks are necessary be it sponsors from India or abroad.
   
   
2. Experience of the fund management team
   
   While the trustees assign the job of managing investors’ money to the Asset Management Company (AMC), a check over the experience of the fund management team may ensure that you give your hard earned money in competent and deserving hands.
   
   While many investors’ often get impressed seeing more number of schemes managed by the fund manager (of a respective fund houses); in our view this is rather worrisome since it reflects transcending pressure on the fund manager while managing investors’ hard earned money. It may so happen that he may simply replicate the portfolio, and in the bargain defeat the unique mandate of each scheme managed by him. In our view, ideally, a fund manager should not be managing more than 5 schemes; as such a "funds-to-fund manager ratio" can help in bringing in efficiency while managing your hard earned money.
   
   Also we think that one should not merely invest in a respective mutual fund scheme of a fund house, just because it is managed by a star fund manager. Many mutual fund distributors / agents / relationship managers may persuade you to invest in mutual fund scheme managed by a star fund manager; but then you need to ask relevant questions on track record of performance of all the mutual fund schemes managed by the star fund manager (which your mutual fund distributor / agent / relationship manager has high regards), where you need to check the following:
   
   
   • Returns of the respective mutual fund schemes
   • Risk investors are exposed to (as revealed by the Standard Deviation)
   • Risk- adjusted returns achieved by the fund (as revealed by the Sharpe Ratio)
   • Portfolio churning (as revealed by the Portfolio Turnover Ratio)
     
     
   Moreover, as a litmus test you also need to ascertain how the respective mutual fund schemes managed by the star fund manager has sailed during various market cycles (i.e. during bull and bear phases of the markets). Mind you, while your mutual fund distributor / agent / relationship manager may have everything to boast about the star fund manager during the bull phases, the true test of the fund manager (he's promoting) lies during the bear phase. This is because the respective mutual fund schemes managed by the star fund manager must display limited downside risk during the turbulence of the equity markets, thereby attempting to protect wealth erosion. And indeed if the fund manager has delivered a luring performance, then you got to ponder over the question of what should you do if the fund manager leaves the organisation (for better career prospects, or even when he retires). While this may sound a bit too much of long- term thinking, in our opinion it is imperative if the mutual fund house is not process and systems driven, whereby the fund manager has been given the leeway to manage a mutual fund scheme based on his individual fund management traits.
   
   
3. Investment philosophy, processes and systems followed at the fund house
   
   After having done an evaluation on the fund manager and his team’s experience, what is the broader investment philosophy at the fund house should be well recognised. Moreover, you also need to assess whether investment processes and systems have been well laid down by the respective mutual fund house. It is noteworthy that prudent investment processes and systems have a major impact of individual mutual fund schemes perform, and moreover tend to sail well during the turbulence of the equity markets and also when the fund manager quits or retires from his job. This is because everything is well-defined through an investment process and system (along with a mandate which a respective fund follows), and is not left to the fund manager’s whims and fancies. It is noteworthy that getting a fund house following strong investment processes and systems is the first, right and very important step in making a prudent investment decision in mutual fund investing. Hence it is important for you as investors to delve a little deeper in understanding all these aspects before entrusting your hard earned money to a respective fund house.
   
   
4. Investment objective
   
   Every mutual fund scheme, irrespective of the category - whether equity or debt has an investment objective. It is this investment objective which entails them to invest in various asset classes in defined proportions. As investors it is imperative to check the investment objective of the respective mutual fund scheme, and thereby see whether it suits your objective of investing as well. For example, if you have an objective of capital appreciation with a long-term investment horizon in mind and is willing to take high risk, then you should be looking at equity oriented mutual funds. Similarly if you are a risk averse investor, you should be looking at suitable debt mutual fund schemes (depending upon your investment time horizon).
   
   
5. Investment style
   
   Further depending upon your risk appetite, you can also structure your mutual fund portfolio as per market capitalisation bias (i.e. large cap, mid cap, small & micro-cap, mutli cap and flexi cap) and fund management style (i.e. opportunities style, value style, growth style and blend style). While one may argue over how the layman can judge which market cap bias and investment style the mutual fund scheme follows; we would like to apprise you that it’s all there in the mutual fund scheme’s offer document, which you ought to read well before parking your hard earned money.
   
   
6. Fund performance
   
   The past performance of a mutual fund scheme is important in analysing a mutual fund. But remember that, past performance is not everything, as it may or may not be sustained in future and therefore should not be used as the only parameter to select winning mutual funds. While during good times your mutual fund distributor in pomp, may exhibit you performance charts and tables, you also need to evaluate them in context to:
   
   
   • Risk they have exposed you to
   • Risk-adjusted returns clocked
   • Portfolio which they held (and its characteristics)
   • How often the fund has churned its portfolio
     
     
     
   Moreover, merely studying these numbers in isolation can do no good to you. On the contrary a comparative study on these, along with analysing performance across market cycles can help you in picking the good ones.
   
   While one may say why not invest in star rated funds if such vigorous process has to be followed, we would like to acquaint you that merely relying on star ratings (which are illustrated taking into account only quantitative parameters) may not enable you to have rock stars or winning mutual fund schemes in your portfolio. This is because when quantitative parameters (on which they are rated) undergo a change, mutual fund schemes would also play musical chairs. A fund which is "5 star" rated today, may become "3 star" in the ensuing year. The financial crisis of 2008 has shown that credit rating agencies were happy to sell their star system to those who offered them money. The saddest part is that, this completely misled the investors.
   
   Mind you, at PersonalFN we have never followed an "issuer pays" rating model. Our rankings are completely unbiased and independent, taking into account both quantitative as well as qualitative parameters. We never, put anything before the interest of our investors'. And that makes us unique.
   
   
7. Expense ratio
   
   Like any other organisation, a mutual fund house also incurs annual expenses (such as administrative costs, management fees, etc.) to run it business. Expense Ratio is the percentage of assets that go towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by investors in the form of an Expense Ratio. It is noteworthy that, higher churning not only leads to higher risk, but also higher cost to the investor for all the brokerage charges and taxes incurred on every trade. Costs are always there and are deducted immediately, but the returns and a higher NAV are a hope for all investors. Hence it is always recommend to select a mutual fund scheme, which has got a low expense ratio as compared to its peers.
   
   
8. Exit load
   
   Likewise, you should also be checking the exit load which a respective mutual fund scheme would charge. An exit load is levied when you sell your units of a mutual fund within a particular tenure; most funds charge if the units are sold within a year from date of purchase. As exit load is a fraction of the NAV, it eats into your investment value. Thus it is imperative that you invest in a fund with a low exit load, and more importantly stay invested for the long-term.
   
   
9. Investor service and transparency
   
   Services offered by mutual fund houses may vary across funds. Some fund houses are more investor friendly than others, and offer information at regular intervals. For instance, fact sheets of some mutual fund schemes are not disclosed in entirety, where the undisclosed portfolio holds a large composition, thus making one wonder in which securities is the money parked by the fund house.
   
   Thus while investing, it important to delve a little detail and assess whether the fund house and the respective mutual fund scheme adopts good disclosure norms, thus making you exude confidence in them and take a prudent investment decision.
   
   
10. The tax implications
    
    Many a times investors go by the word of their mutual fund distributor / agent / relationship manager and invest in mutual funds. While we aren’t debating about quality of the advice they provide (on a respective mutual fund scheme per se), we think that it is necessary for you to be aware of the tax implications of a respective mutual fund schemes.
    
    Apart from being aware of tax status for Equity Linked Savings Schemes (ELSS) - where you are entitled to a deduction under section 80C of the Income Tax Act, 1961 for the investment made upto a sum of Rs 1 lakh; through experience we can say that many investors aren’t aware of the other tax implications of investing in equity and debt mutual fund schemes.
    
    It is noteworthy that in equity mutual funds, if you have opted for the dividend option (for the reason that you want cash inflows to be managed through dividends), then the dividends which you received under the scheme is completely exempt from tax under section 10(35) of the Income Tax Act, 1961.
    
    If you are caught in the wrong habit of short-term (period of less than 12 months) trading, then you got to forgo your profits/capital gains, if any, in the form of Short Term Capital Gains (STCG) tax. STCG are subject to taxation @ 15% plus a 3% education cess. However, if you are the one who deploys money for the long-term (over a period of 12 months) and thus subscribe to a good habit of long-term investing, then there is no tax liability towards any Long Term Capital Gain (LTCG). Moreover, at the time of redeeming your units you will also have to bear a Securities Transaction Tax (STT) @ 0.25%.
    
    Similarly in debt mutual fund schemes too, if you have opted for the dividend option (to manage your cash inflows), then the dividend which the scheme declares will be subject to an additional tax on income distributed. Hence, in such a case you as an investor are actually paying the tax indirectly.
    
    Unlike equity funds, in debt funds, you are liable to pay a tax on their Long Term Capital Gains (LTCG) tax, which is 10% without the benefit of indexation and 20% with the benefit of indexation. However in case of Short Term Capital Gains (STCG), you will be taxed at the marginal rate of taxation i.e. to simply put, in accordance to your tax slab. As far as STT is concerned, debt mutual fund investors do not have any liability to defray the same.
    
    Thus you got to be aware of all these tax implications, which in turn would help you making a wise investment decision.
    
    

It always important to remember that investing is a serious business; and thus it is vital that you adopt enough prudence before you invest your hard earned money. Moreover, a disciplined approach to investing can help you to create wealth in the long run.

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Fixed Maturity Plans (FMPs)

What are FMPs?

FMPs are close-ended debt funds with a maturity period ranging from one month to five years. These plans are predominantly debt-oriented, while some may have a small equity component. The fundamental objective of FMPs is to provide steady returns over a fixed-maturity period, thus protecting investors from market fluctuations. 

 

What are the benefits of FMPs?

Capital Protection - FMPs provide less risk of capital loss as compared to equity funds due to their investment in debt and money market instruments.

Better Returns - FMPs offer better post-tax returns than FDs as well as liquid and ultra short-term debt funds.

Less Exposure to Interest Rate Risk - As the securities are held till maturity, FMPs are not affected by interest rate volatility.

Tax Benefit - FMPs score over fixed deposits because of their tax effectiveness both in the short-term and long-term.

Lower Cost - Since these instruments are held till maturity, there is a cost saving with respect to buying and selling of instruments.

Double Indexation Benefit - Indexation helps to lower capital gains and thus lower the tax. Double indexation allows an investor to take advantage of indexing his investment to inflation for 2 years while remaining invested for a period of slightly more than 1 year.

How do FMPs work?

A portfolio of FMPs consists of various fixed income instruments with matching maturities. On the basis of the tenure of the FMP, a fund manager invests in instruments in such a way, that all of them mature around the same time. During the tenure of the plan, all the units of the plan are held until they mature on a specified date. Thus, investors get an indicative rate of return of the plan. 

Who should invest in FMPs?

• Investors looking at stable returns over the medium-term
• Investors who are not pleased with returns from traditional fixed income avenues like Bank deposits, Bonds etc.
• Investors who want to invest money for a fixed tenure to meet certain financial goals in the  future
• Investors with a conservative and risk averse profile
• Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income

Where do FMPs invest?

FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), money market instruments, highly rated securities (like ‘AAA’ rated corporate bonds) over a defined investment tenure and sometimes even in bank fixed deposits.

What is the difference between FMPs and bank fixed deposits (FDs)?

Returns - FMPs are the equivalent of a fixed deposit (FD) in a bank. While, the maturity amount of a fixed deposit in a bank is guaranteed, the maturity amount of an FMP is not guaranteed.

Duration of Investment – FMPs invest as per the tenure of the Scheme i.e ranging from  1 month to 3 years. FDs on the other hand have an investment horizon of 15 days to 10 years.

Taxation - In FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab. If you invest in the growth option of an FMP for less than a year, the gains are added to the investor's income and taxed at the investor's slab rate. If you invest in the growth option of an FMP for over a year, you pay either 10% capital gains tax without indexation or 20% with indexation.

Example – The following comparative table shows the returns where an Individual investor has invested 10,000 in a Fixed Deposit and a Fixed Maturity Plan for six months in the dividend option.

Particulars	FMP	FD
Amount Invested	10,000	10,000
Rate of Return	10	10
Projected Maturity Value ()	10,493	10,493
Gross Dividend/Interest ()	493	493
Dividend Distribution Tax / Short term Capital Gains Tax Rate %	14.1625	33.99
Tax ()	61	168
Net Dividend / Interest ()	432	326
Post Tax Value ()	10,432	10,326
Post Tax Returns	8.76%	6.60%

Note:-

• The investor in this example falls in the highest tax bracket.
• The 10 % return used in the example for FMP is for illustrative purposes only and not assured and the actual returns may go up or down depending on the market conditions. The Fixed Deposit rate is also for illustrative purposes only.

In case of FMPs; all accretions are assumed paid on maturity.

 

 

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Investment Concepts - Power of Triggers

Investment Concepts - Power of Triggers

Trigger facility is an additional, optional feature provided in mutual fund schemes, which enables investors to book profit automatically at a pre-defined time or value. In another words, the fund declares a dividend, redeems and/or switches the units automatically on behalf of the investor on the date of the event.

Principal Mutual Fund has introduced the option of Triggers in its funds. You can specify a specific event, which may be related to time or value, in advance and when this event takes place the trigger is activated. Thus, this facility enables you to keep track of your investments without having to put in time and effort to track portfolio movements on a regular basis. It also helps you maintain a disciplined investment approach that ensures that you meet your investment goals. Triggers are of three types –time-based, value-based and event-based.

Time-based triggers

Time-based triggers are activated on a particular date that you have specified. For example, if you wish to gift some units to your mother on her birthday, a trigger can be set for that date.

Value based triggers

These triggers are based on the change in value of your investments. For example, you need 7.5 lakh for meeting the expenses of son's higher education after 5 years and you have invested 5 lakh in an equity scheme for this. If you set a trigger for change in investment value by at least 50%, the money is shifted to a low risk scheme as soon the value reaches that figure. In this way, the dream of your son's higher education will not go sour even if the market turns bearish.

Event-based triggers

You can also set triggers based on the occurrence of a particular external event that affects the value. For example, you want to set the Sensex value of 20,000 as a trigger. If the Sensex is less than 20,000 on the date of allotment, the trigger would be activated when the Sensex closes above 20,000. However, if the Sensex is more than 20,000 on the date of allotment, the trigger would be activated when the Sensex closes below 20,000.

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Systematic Withdrawal Plan (SWP)

An SWP allows an investor to withdraw a designated sum of money and units from the fund account at pre-defined regular intervals. It allows investors a certain level of independence from market instability and helps in avoiding market timing. The investor can reinvest the redeemed cash in another portfolio or use it as a source of regular income.

Advantages

Regular Income - SWP helps in creating a regular flow of money from investments on a periodic basis i.e. on a monthly or quarterly basis.

Tax Benefit - Instead of selling all the units at once, spanning the income across multiple intervals can lower the total tax. It is a tax efficient way of receiving regular income.

Avoid market fluctuations - It saves an investor from market fluctuations, as regular withdrawal averages out return value.

How does an SWP work?

An SWP allows you to withdraw a fixed sum of money every month or quarter depending on the option chosen and instructions given by you.

Let's say Ashish has 10,000 units in a mutual fund scheme on 1-Dec-11. He intends to withdraw 6,000 every month through SWP.

Date	Opening Balance (Units)	NAV	Units Redeemed	Closing Balance
1-Dec-11	10000	20	300 (6000/20)	9700
1-Jan-12	9700	18	333.33 (6000/18)	9366.67
1-Feb-12	9366.67	22	272.73 (6000/22)	9093.94

In this manner, units from mutual fund holdings will be redeemed in a systematic way to provide the investor with regular income.

Types of SWP

SWP is usually available in two options:

Fixed Withdrawal: In a fixed withdrawal option, the investor specifies the amount he wants to withdraw from his investment on a monthly/quarterly basis.

Appreciation Withdrawal: In an appreciation withdrawal option, the investor withdraws only the appreciated amount on a monthly/quarterly basis.

An SWP can help investors who require liquidity as it permits them to access their money precisely when they need it to meet their needs.

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Systematic Transfer Plan (STP)

An STP is a plan that allows investors to give consent to a mutual fund to periodically transfer a certain amount / switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house. Thus at regular intervals an amount/number of units you choose is transferred from one mutual fund scheme to another of your choice. This facility thus helps in deploying funds at regular intervals.

 

Advantages

Consistent Returns – Through STP, you can transfer your money to a target equity fund while you are invested in a debt or liquid fund. Therefore, you will get the returns of the equity fund you are transferring into and at the same time remain protected as a part of your investment remains in debt.

Averaging of Cost – Like SIP, in STP too, a fixed amount of money is  invested in the target fund at regular intervals. Since it is similar to SIP, STP assists in averaging out the cost of investors by purchasing more  units at a lower NAV and vice versa.

Rebalancing Portfolio – STP facilitates in rebalancing the portfolio by allotting investments from debt to equity or vice versa. If your investment in debt increases money can be reallocated to equity funds through an STP and if your investment in equity goes up money can be switched from an equity to a debt fund.  

How does a STP work?

The investor needs to select a fund from which the transfer should take place and a fund to which the transfer is taking place. Transfers can be made daily, weekly, monthly or quarterly depending upon the STP chosen and the options available with the AMC.

If an investor chooses to transfer from a liquid fund to an equity fund, the lump sum is invested in a liquid or a floating short-term plan and is transferred at regular intervals to a specified equity fund. For example, if one has 50,000 to invest in equities; he can put the entire amount in a liquid plan and go for a monthly SIP of 5,000 in an equity plan through an STP.

STPs can carry Exit Loads as per the respective schemes of the AMC.  

Types of STP 

A Systematic Transfer Plan is of three types; Fixed STP, Capital Appreciation STP and Flexi STP.

Fixed STP – In Fixed STP, the investor takes out a fixed sum of money from one investment to another.

Capital Appreciation STP – In Capital Appreciation STP, the investor takes the profit part out of one investment and invests in the other.

Flexi STP – In Flexi STP, the investor has a choice to transfer a variable amount. The fixed amount will be the minimum amount and the variable amount depends upon the volatility in the market.

Thus, STP is particularly suitable to investors who have lump sum money and wish to invest in equity funds but are wary of timing the market. They can then choose to park the lump sum money in a liquid or debt fund and use the STP option to systematically transfer a fixed amount of money at regular intervals into the target equity fund.

 

 

 

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Systematic Investment Plan (SIP)

Systematic Investment Plan

Systematic Investment Plan (SIP) is an option where you invest a fixed amount in a mutual fund scheme at regular intervals. For example, you can invest 1,000 in a mutual fund every month. It is a disciplined investment plan and helps reduce propensity to market fluctuations. It is a convenient tool that helps you preserve capital and also render significant wealth creation in the long-run.

SIP investments can help you reach your financial goals by taking advantage of rupee cost averaging, and growing your investments with compounded benefits. 

 

Advantages

SIP has several advantages over one-time investment. Some of the advantages are mentioned below:

• Disciplined approach to investments
• Flexibility to invest small amounts every month
• Benefit from the power of 2 powerful investment strategies
  • Rupee cost averaging – helps counter volatility
  • Power of compounding – small investments create a big kitty over time
• Convenient and hassle-free mode of investment
• No need to time the market 

Rupee Cost Averaging

Rupee Cost Averaging is an effective mechanism which helps in eliminating the need to time the market. Under this method, one need not be concerned about when and how much to invest. A fixed sum of money can be invested regularly and over time it averages out the costs. Say, you invest 1,000 a month, and, the price of the selected mutual fund scheme unit is 10 in the first month, you will get 100 units.

In the next month, if the unit price falls to 9, you are allotted 111 units. In the third month, if the price drops further to 8, it can get you 125 units. Thus, by investing 3,000 over three months, you will get 336 units.

On the other hand, had you invested the entire amount in the first month itself, you would have gained just 300 units. In case of SIPs, the average unit cost is about 8.9 as compared to 10 in case of lump sum investments. Thus, SIPs help lower the average unit cost and can buy you more units.  

 

 

Power of Compounding 

You can gain from compounding by reinvesting the money you earn from your investments to earn even more. The earlier you start, the longer your money has the opportunity to compound and enhance your corpus helping you achieve your financial goals.

Below is an example for a SIP of 1,000 invested per month @8% till the age of 60.

Starting Age	Total Amount Saved ()	Value at the Age of 60 ()
25	4,20,000	23,09,175
30	3,60,000	15,00,295
35	3,00,000	9,57,367
40	2,40,000	5,92,947

Thus, the power of compounding can have a considerable impact on your wealth accumulation, particularly if the investment is for a long period of time.

 

Convenience of Investment 

Register for SIP by signing up the required forms of periodic investments (monthly/quarterly) based on your suitability. Your account will be automatically debited on the requested date to purchase the units of the required fund.
SIP is a simple, convenient and affordable way to invest for your future. With as little as 1,000 every month, it’s an effective method to invest in the growth potential of Mutual Funds.

 

 

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