4

‘Investing’ in Real Estate?

Hello fellow investors!

Roti - Kapda - Makaan has been the three needs of us Indians and we strive to make that makaan a reality. Once the makaan works as a shelter it becomes our personal asset. When you go for the second or the third property for investment reasons then you should consider the following points before proceeding.

Yes, the returns are good in real estate. We have always stated that investments are not all about returns, it is about building your portfolio to become financially free. So instead of just comparing past returns of both asset classes and claiming equity is better than real estate or vice versa, we would like to consider other important aspects.


1. Real Estate will skew your Asset Allocation

Investing is all about the right asset allocation. Investing a major portion of your investments in real-estate could skew your allocation in that direction for a very long time.

Once the Real estate is added to your investments, your allocation is considered with 4 assets, Real Estate, Gold, Equity & Debt. Once you choose to buy real estate, it may take a few years for other asset classes to occupy a significant portion of your portfolio. Hence, you should check and consider the reasons for investing in Real-estate.

2. It is hard to assign “present value” and calculate ‘growth’

Most people talk about how much their property is worth without actually speaking to potential buyers. It is only when you do so, you realize what is the real selling price of it. People would rather wait and enjoy lower returns than sell their properties at a price lower than what they want/wish to receive.

There is no designated market price. He who haggles the best wins here. Because of the lack of such a standard price, it makes real estate risky as most times people are stuck with a price they have in their mind without actually checking it for real.

3. It is not liquid enough that you can sell whenever you want.

I am sure you have heard of this, you cannot sell a bathroom to meet a financial emergency unlike Equity, mutual funds, and some debt options which can typically be traded in small amounts and on any business day.

You need to have other liquid assets (i.e. have a balance allocation) to take care of your financial needs.

4. TAX cost, buying another property.

The tax on capital gains from real estate in a way encourages you to go ahead to buy another property. As per the law, if you want to avoid capital gains tax on real estate you should necessarily reinvest the same in another property or in section 54EC bonds (with low returns) for 3 years to ensure the capital gains are tax-free.

5. Difficult to sell emotionally

Many people post-retirement do not have enough fixed income and other liquid investments to manage their every day cashflows. They are still not able to liquidate their properties for cash and use it for a more relaxed late age. They have an emotional attachment towards it and then it gets rationally difficult to decide to sell.

6. Risk of renting out

No guarantee of regular income. One may need to constantly look for tenants. Issues with paying property and water tax, and the legal hassles associated with tenants not moving out!

We do not intend to discourage you from purchasing houses for the purpose of investments but it is about becoming aware of what are the issues you can face when you do so. Before taking the decisions about investing in real estate, do calculate your returns, the money you would make from the investments in real - estate, and know your numbers. A close analysis for real-estate purchases should be done in a similar way as you would do for any other asset.

Analyze your risk-taking capacity and your goals before you make the final decision.

Happy Investing!

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



11

Health Insurance: Single Plan or a Family Floater Plan?

Hello fellow investors

With COVID-19, the one thing that everyone has realized is Health insurance is a must! We all need adequate Health Insurance cover and at a good price. Because whether to have Health Insurance or not is no longer a point of discussion. In fact, now we want to ensure that everyone in the family also has Health Insurance.

We have been asked many questions about whether you should opt for a stand-alone health plan or a family health plan; and whether to opt for a top-up plan afterwards. We are going to break down these concepts for you.


How much Insurance should you have?

Before getting into the discussion of what type of plan, it is important that you know how much insurance is enough for you. Ideally, if you live in a tier 2/3 city you must have a cover of at least 5 lakhs and if you are in a metro/tier 1 city you must have a cover of at least 10 lakhs. These are indicative numbers based on the cost of health incurred in different places and you can always take a higher cover.

 


What is an Individual Health Insurance policy?

In the case of individual cover, the policy provides specific health cover for each member covered in the policy. You can decide to have a higher cover for the working member and a smaller cover for the children. Each family member will have a dedicated sum assured under the policy.

For example, you can buy an Individual Health policy that gives a cover of INR 10 lakhs each to yourself and your spouse and INR 6 lakh for your elder kid aged 15 and INR 3 lakhs for your younger kid aged 10. The cover amount is specific to each person and not shared among the different members.


What is a family floater plan?

In the case of a family floater policy, all family members are covered in a single policy. Unlike individual policies where there is a dedicated sum assured, here there is a single “floater” sum assured which is shared between all members of the family. 

For example, if the family in the above example takes a family floater policy with a sum assured of INR 10 lakhs, all the four members of the family share the INR 10 lakhs sum assured. That means the insurer’s maximum liability towards the entire family for a particular year (irrespective of which individual gets hospitalized) stands at INR 10  lakhs.

Under the family floater policy, medical reimbursements can be availed by any or all of the members subject to the total sum Insured.

Let us compare the prices of family floater and individual policies to understand better:

Case 1 - A couple



Family floater plan premiums are determined based on the age of the older person. Given that this is a relatively younger couple, their premiums are not very different.


Case 2 - Parents with 2 children


In case 2, for older parents, there is a significantly higher premium being paid for a family floater plan. In case there is a predetermined illness that would further push the premium for the entire family. However, the 20 lakhs cover under the floater plan would be available to each family member thus increasing the cover amount at a higher premium.


However, where you have a cash crunch, you can go for a floater plan of 5 lakhs wherein the cover of 5 lakhs is available for all members with a reset clause for a cheaper price. You save around 10 K per annum in the premium costs where you go for a floater plan of 5 lakhs for the family. 

The reset clause: Family floater plans come with a reset clause that allows for a 100% reset of the sum insured once in a policy year. This option automatically comes into operation when the sum insured (including the accrued additional sum insured, if any) is already used by one insured person and hence is insufficient for the other. The reset of the policy happens only for an unrelated illness.

For example: In the case above if the husband is sick for malaria and makes a claim of 3 lakhs in a year and later wife gets admitted for a different health issue like blood pressure and has a hospital bill of 4 lakhs. The floater plan will cover it as it would have reset the sum assured. But if the wife is admitted for malaria itself and the bill is of 4 lakhs, only 2 lakhs (to the tune of the original sum assured of 5 lakhs less 3 lakhs claimed by husband) will be payable by the insurance company.

A Family floater policy is value for money and comes a bit cheaper compared to individual policies and that’s a plus especially for young families who are tight on budget for their insurance spending. 
 

No claim bonus: If you do not make any claims under the policy any year, a percentage of your sum insured, say 10%, is added each year to your sum assured. So if in 2019, I do not make any claims under my policy which has a sum assured of INR 5 lakhs, in 2020 when I renew it, my sum assured is increased to INR 5.5 lakhs without any increase in my premium amount. The negative of family floater plan that is that in case of a claim by even one member under a family floater, the entire No Claim Bonus (NCB) is nullified for the year under the policy whereas the same is not true for individual policies.



Top-Up Plan

A top-up plan is a regular health insurance policy that covers hospitalization costs but only after a threshold limit, known as a deductible, is crossed. A deductible is that portion of the claim amount that is not covered by the insurer and has to be paid by the policyholder before the benefits of the top-up policy can kick in.

A top-up plan, therefore, is a cost-effective way to increase your health insurance. You can take a base policy and a top-up over above that policy. This way you can use your base health insurance policy to make a claim up till the deductible amount and use your top-up plan for any payments over that.


Where you want to increase the sum assured of your policy, you can do that only when the policy is due. Top up gives you the option to increase the sum assured at a minimal cost during the year. Hence, Top-up helps you to increase the base sum assured amount for your insurance needs.

What should you do?

The health insurance that you would take would depend upon the age of the oldest member in your family, the number of members, and the premium you are comfortable paying for the same. It would be interesting to check various options and choose which one best suits your needs and pockets.

It is advisable to have separate health insurance for older people or those who are susceptible to illness/hospitalization. By doing that, you are protecting the no-claim bonus clause of the policy and also not paying a higher premium for other insurance.

Hope this helps you understand your insurance needs better.

Happy Investing!


Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



10

Ways to Invest in Gold

Hello fellow investors,

We Indians love our gold.

And it also works as a good financial backing. In fact, it is the fallback asset in India to tide over financial emergencies. In the calendar year 2020, gold has given an exceptional return of over 41%, the highest returns generated in the last decade. While that is attractive, gold has given an average return of 9% per annum for the last 30 years. 

Gold is on everyone's mind so we thought let us highlight the ways in which you can invest in gold. Though in no way are we recommending you go and buy it without checking if it fits in your portfolio. 

Gold can be owned as physical gold and as paper gold.

You can buy it physically in the form of jewelry, coins, and gold bars. Gold can be owned digitally through Gold ETF, Gold Mutual Funds, Sovereign Gold Bonds (SGBs), and as Digital Gold through wallets. We have discussed each of them in detail here.

Physical Gold

1. Buying Jewelry: For buying jewelry you reach out to your neighborhood jeweler or your family jeweler uncle or can buy it online today. Such jewelry generally forms a part of your personal assets against your investment assets.

As an investment, there are some concerns with gold jewelry like safety, purity, and its high cost (such as making charges). Jewelry making charges range from 6% to 10% of the cost of the gold and are a cost for you the day you purchase jewelry and hence not a preferred mode of investment.

To ensure its authenticity, you must check The Bureau of Indian Standards (BIS) hallmark, the Jewelers' identification mark, and the purity of gold stamp on the jewelry that you are buying to ensure its authenticity.

2. Gold Savings Scheme - Given the high prices of gold, (₹ 55,000  per 10 grams for 24kt purity gold as of 5 August 2020), many jewelers run gold savings schemes to make it easy for buyers to buy gold by paying in installments. 

A typical gold scheme allows you to deposit a fixed amount every month for the chosen tenure. When the term ends, you can buy gold (from the same jeweler) at a value that is equivalent to the total money deposited, including a bonus amount added by the jeweler to incentivize the depositor.  In most cases, the jeweler adds a month's installment for every 11 installments deposited or may offer a gift item.

Please note that this scheme is useful only when you want to buy gold jewelry from the jeweler (say Tanishq or Kalya Jewelers or your local jeweler) whom you are depositing the installment each month. Don't forget that jewelry making charges would still be payable by you when you buy the jewelry.

3. Gold Coins: If still want to own physical gold and do not want to lose out on the making charges, then Gold Coins is a good option. You can buy them from jewelers, banks, non-banking finance companies, and even some e-commerce websites.

The government has launched ingeniously minted coins that will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other. The coins are available in denominations of 5 and 10 grams while the bars are for 20 grams. 

Paper Gold or Gold Securities

Physical gold has its advantages and most of us own gold like that. However, PAPER GOLD is the new seamless way of investing in gold. It is effortless to buy and does not carry the security risk and purity risk of physical gold. Let's look at options to invest in Paper Gold. 

1. Gold Exchange Traded Fund (ETF) - Gold ETF is the most cost-effective way of owning gold. The Gold ETF can be purchased via the stock exchange (NSE or BSE) which has gold as the underlying asset. Transparency in pricing is another advantage.

To Invest in ETFs you need to have a Trading and a Demat account which is the same one used for owning stocks.

 When choosing an ETF, compare the Fund Management charges and the Tracking Error of the ETF with other ETFs and choose the one with the lowest Fund Management charges (expenses for managing the ETF for you) and lowest Tracking error (deviation from gold prices). This ensures you get the return on your gold investment with the least deviation from the actual gold prices.

2. Gold Mutual Funds: If you don't have a Trading and Demat account, you can invest in Gold Mutual Funds which in turn invest the Gold ETFs discussed above. Just like Gold ETFs, choose the Gold Mutual Fund with the lowest Fund Management Expenses and Tracking Error.

While Gold Mutual Funds allow you to own gold without having a trading and demat account, you land up paying Fund Management charges twice, to the Mutual Fund as well as to the Gold ETF.

3. Digital Gold: You can buy gold online via mobile wallets such as Paytm, PhonePe, Google Pay and under the Gold Rush Plan of Stock Holding Corporation of India. All these gold buying options are offered either in association with MMTC-PAMP or SafeGold or both. 

This is a good option to invest in gold in smaller quantities of as little as INR 1 grams of gold. However, you can keep the gold with them for 5 years, after that you must either sell the gold or convert it into gold coins. To know more about digital gold, read here.

Be sure you understand the charges associated with liquidating the amount you accumulate when investing in gold via this option.

3. Sovereign Gold Bond -  If you don't mind a lock-in of 8 years for your investment, the best way to invest in gold is via the Sovereign Gold Bonds (SGBs) issued by the Government of India.  

The returns on gold via this mode are tax-free investments as no tax is levied on capital gains on the maturity of these Bonds. Further, you also earn a simple interest of 2.5% per annum on the gold bonds in addition to the increase in gold prices. If you are looking to invest your money in Gold for value appreciation and bringing a balance to your portfolio then SGB's are a good investment option. You can read more about it here.

SGBs are not available 'on-tap basis'. Instead, the government intermittently opens a window for the fresh sale of SGBs to investors. This could typically happen every 2-3 months and the window remains open for about a week. If you are looking to purchase SGBs anytime in between, you can buy them from the secondary market as the SGBs are listed on the Stock Exchange.   

You have quite a few options to buy Gold. Now, which option should you opt for would depend upon the need of buying gold? If you want to buy gold to wear as a jewelry or gift for wedding functions then physical gold is the way to go for. However, if you are looking to invest in Gold then depending on the time period you have in hand - for short term needs (like 3 - 4 years), you can invest in Gold ETFs or Gold Mutual Funds, for long term needs (of 5 to 8 years), you can opt for SGBs.

Avoid going overboard with gold investments given the good returns of the recent past and stick to your Asset allocation.

Happy Investing!

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



9

Should You Prepay Your Loans?

Hello fellow investors

 

Every person who takes a loan faces the question of whether they should prepay the loan or invest the surplus.
You take a loan at an EMI you can afford. Eventually, your income increases and you find that can pay back more of the loan than you had originally planned. So what should you do? Prepay your loan or invest the surplus?

The answer to this question depends upon 2 things:

A. How much interest are you paying on your outstanding loan? 

B. How many returns would you earn by investing that money?

If the trade-off is positive enough then you continue with your loan and invest and if not – you prepay your loan. Pretty simple right? I shall break this up for you based on the type of loan you have and what kind of investments you are comfortable to make.


Credit Cards & Personal Loans: 
These are the most expensive loans ever! In fact, the cost of borrowing i.e. the interest you pay on your credit card varies from 2% - 4% per month i.e. 24% to 48% per annum. The interest on your personal loans is also usually 14% - 18% which is also pretty high.

The only way you can earn a return higher than these loans is by taking an extreme risk with your investments which include the risk of losing your capital. It makes no financial sense in not paying your card bills and using that money to make investment gains. 

Given choice, prepay your credit card and personal loans with your extra savings.


Education Loans and Home Loans: 
Education loans are attractive for their tax deductions. Home loans are the cheapest and the longest loan that you will ever own and hence, there is always a question of whether to prepay your home loan or not.  

To help you decide, you should do the below three checks.

 

Check I

One way to check this is how comfortable you are with your home loan. If the home loan EMI is at 50% of your take-home income – you should consider pre-paying your Home loan and reducing the EMI to at least 20%-30% of your take-home income. If it is already a 20%-30% of your home loan EMI, you can consider continuing with the home loan.

Next, you need to consider the returns of your current investment opportunities i.e. what is the after-tax return of available investments opportunities versus the interest burden on your home loan. 

Let us understand this with numbers:

 

Cost of home loan: Home loans EMI are at an interest cost of about 8.00% per annum. If you fall under the 20% tax bracket, the home loan cost is reduced to 6.40% after assuming you are able to claim the entire interest as a deduction in your Income Tax Return. If you come under the 30% tax bracket, the cost of your loan falls to 5.60% because of the tax-saving you get.


Check II 
Return on Investments: It will make sense not to prepay the loan if the returns you will earn from investing today are higher than your cost of 6.40% or 5.60%, 

How much you earn from your investments would depend upon in which asset class, you invest your savings:

1) Fixed deposits – The interest rate on Fixed Deposits today range from 5.00% to 6.00%. Some of the Corporate deposits are yielding returns in the range of 7%. The post-tax returns will be lower by 20%/30% depending on your tax bracket. 

If you are risk-averse and generally park your money in fixed deposits and other safe and low-return instruments, then you are certainly better off using your surplus earnings to reduce the home loan.

2) Equities - The returns on equity investment average about 12-15% over 10-15 years. So investing your surplus into Equities is numerically more beneficial than prepaying the loan.


Check III 

But before you make the decision to invest the surplus in Equity Mutual Funds/Equity Stocks, you must check if you have the risk tolerance for dealing with the ups and downs of the equity market. You should choose to if you are planning to stay invested for 7-10 years because equity investments give better risk-adjusted returns over the long term only. 

Also, by investing the surplus into Equities, your target Debt Equity ratio determined by your Asset Allocation should not get skewed towards Equities.

In conclusion, the decision to prepay the loan or not depends on your existing financial situation, the extra earnings from investments, and your risk-taking capacity as an individual.

Do ensure that you have your emergency fund in place and some investments at your disposal before you go ahead and prepay the loan with all the money at hand.  


See you next Thursday!

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



8

Should you spend or invest your bonus?

Hi fellow investors

The bonus season is here! 
Given that we cannot use our bonuses immediately to travel anywhere as such, it is a good time to put our thoughts to what we can do with our bonuses.

Generally, what you do with your bonus is a very personal choice on how you want to use your lump sum money and make the most of it. I have made the following suggestions to help you make an informed decision.


1. Reward yourself
Bonus is the money that you get for doing exceptional hard work in the year that has passed by and it is only fair to use a part of it to reward yourself. You can use it to buy yourself that fancy gadget that you always wanted, go on that vacation, put it aside for your dream car, etc.



2. Create your emergency fund 
Using your bonus amount to create your emergency fund of 4-6 times of your monthly expenses if you already don't have one. Given, the uncertainty of COVID 19 has not yet found a resort/calm it is best to have an emergency fund in place.



3. Pay your outstanding debt
Many people use their bonuses to prepay their loans and reduce the burden of a heavy loan. While how much loan you are comfortable with is a very personal choice, you can consider these 2 parameters to check if you should prepay or not. 

  • If your loan EMI is 50% or more of your take-home income, you should use your bonus amount to prepay and reduce the same to a comfortable 30% - 40% of your take-home income.
  • If your loan EMI is 20% - 30% of your take-home income, you can continue the same and pay it from your monthly income and enjoy tax benefits. You can avoid using your bonus to prepay your loan.

Basically, if you are having sleepless nights because of outstanding loan amounts, then use the bonus to prepay and have a good night's sleep.


4. Cover up your tax-saving investments
My first advice is always to invest regularly even for tax deductions to avoid any last-minute cash crunch in February and March. However, if you have not done the same, then use your bonus to do so and plan your investments to claim the tax deductions.



5. Keep it aside for your dream goals
Take that photography/culinary course, put it aside for your trip to Norway, buy that bike, save up for your business idea you have - keep this money aside for any goal of yours that is important to you and can be used for your own dreams. Use the bonus money for something that would add value and make you happy.

Bonus is a good lump sum payment and it is good to use it for something that will have a lasting impact on you.

Have fun splurging and investing (at least some of it).

See you next Thursday!

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



Know your Mutual Funds (2)

List of banks for your PPF investments

What is PPF?

Public provident fund is a popular investment scheme among investors courtesy of its multiple investor-friendly features and associated benefits. It is a long-term investment scheme popular among individuals who want to earn high but stable returns. Proper safekeeping of the principal amount is the prime target of individuals opening a PPF account.

Why open a PPF account?

public provident fund scheme is ideal for individuals with a low-risk appetite and is okay to invest their money in the long term. Since this plan is mandated by the government, it is backed up with guaranteed returns to protect the financial needs of the masses in India.

You can read more about PPF and things to note in PPF in our article.

Eligibility Criteria

Indian citizens residing in the country are eligible to open a PPF account in his/her name. Minors are also allowed to have a Public provident fund account in their name, provided it is operated by their parent.

Non-residential Indians are not permitted to open a new PPF account. However, any existing account in their name remains active till the completion of tenure. These accounts cannot be extended for 5 years – a benefit available to Indian residents.

Interest in a PPF Account

The interest payable on the public provident fund scheme is determined by the Central Government of India. It aims to provide higher interest than regular accounts maintained by various commercial banks in the country.

Interest rates currently payable on such accounts stand at 7.9% and are subject to quarterly updates at the discretion of the government.

How to Open a PPF Account

Both offline and online procedures are available for an individual provided he/she meets the requisite parameters mentioned in the eligibility criteria. Activating PPF online can be done by visiting the portal of a chosen bank or post office.

The following documents have to be produced at the time of activation of a public provident fund account –

  1. KYC documents verifying the identity of an individual, such as Aadhaar, Voter ID, Driver’s License, etc.
  2. PAN card.
  • Residential address proof.
  1. Form for nominee declaration.
  2. Passport-sized photograph.

Tax Benefits

Income tax exemptions are applicable on the principal amount invested in a PPF as an account. The entire value of an investment can be claimed for tax waiver under section 80C of the Income Tax Act of 1961. However, it should be kept in mind that the total principal that can be invested in one financial year cannot exceed Rs. 1.5 Lakh.

The total interest accrued on PPF investment is also exempt from any tax calculations.

Therefore, the entire amount redeemed from a PPF account upon completion of maturity is not subject to taxation. This policy makes the public provident fund scheme attractive to many investors in India.

List of Banks Offering PPF Accounts

  • Allahabad Bank
  • Corporation Bank
  • Bank of Baroda
  • HDFC Bank
  • ICICI Bank
  • Axis Bank
  • Kotak Mahindra Bank
  • State Bank of India and its subsidiaries which include the following –
    • State Bank of Travancore
    • State Bank of Bikaner and Jaipur
    • State Bank of Hyderabad
    • State Bank of Patiala
    • State Bank of Mysore
  • Canara Bank
  • Bank of India
  • Union Bank of India
  • Oriental Bank of Commerce
  • Central Bank of India
  • Bank of Maharashtra
  • Dena Bank
  • Syndicate Bank
  • United Bank of India
  • Indian Overseas Bank
  • Vijaya Bank
  • IDBI Bank
  • Andhra Bank
  • Punjab National Bank
  • UCO Bank
  • Punjab and Sind Bank

These are some of the common PPF Account opening banks. There are other banks too and if you hold a savings account with another bank that is not on the list, you can find out whether the bank is a PPF Account opening bank or not.

 



7

A Fixed Interest Of 8.5% With Low Interest- Invest Now?

Hi fellow investors

Have you recently checked returns of debt investment options like Fixed deposits/Liquid Funds? I am sure you would have been very disappointed by the return numbers there.  The approx interest from some of the popular debt investments today are::

1. Overnight/Liquid Debt Funds (Up to 90 days): 3.5% - 4.0%
2. Short term Debt Funds (1-3 yrs): 5.5% - 6.5% 
3. Fixed Deposits (1-5 years): 5.5% - 6.5%
4. Bharat Bond ETF (5-year bond) - 5.46%
5. Public Provident Fund (PPF) (15 years) - 7.1%

Clearly, the returns have reduced by 3%-5% across different debts in the past few months and debt as an investment category doesn't look very attractive. With the latest inflation number hovering at 6%, our money invested in the above debt options barely covers the impact of inflation on our expenses.

What if I told you that there was an option to earn 8.5% per annum?

For salaried fellow investors, it is something you deal with every payslip; Employee Provident Fund (EPF), giving an interest rate of 8.5% (for FY 2020-21) which is not only risk free, but also tax free. 

How can you make the most of it? 

If you are a salaried individual and your company has a provident fund and you have not opted for EPF,  you could opt for it as in the current market scenario no other debt investment is giving returns as high as 8.5% p.a.


1. Maximize your EPF Limit 

 If you are just contributing only INR 1,800 (the minimum required under EPF rules) towards your EPF account, you could consider increasing it making it to 12% of your basic salary. That way you can make the full use of the EPF limit available to you.


2. Invest as VPF (Voluntary Provident Fund) 

Where you are already investing 12% of your Basic Salary towards EPF and want to invest more to earn 8.5% you have an option to increase your contribution in EPF by opting for VPF (Voluntary Provident Fund). You can invest an amount up to your entire 'Basic' salary with the EPFO and earn the same interest rate of 8.5%. Please note your employer is not obliged to match this higher contribution and hence, it is called a 'voluntary' provident fund.

Features of VPF that you must know of 

  • It will earn you the same interest as your EPF i.e. 8.5% per annum (currently)
  • It will have a lock-in period of 5 to 10 years but you can withdraw for some specific reasons. Check out when can you withdraw from your EPF here.
  • Your employer will not match the contribution of your VPF unlike EPF
  • our contribution to VPF is eligible for tax deduction under section 80C.
  • The interest earned from VPF would also be tax-free (provided it is not withdrawn within the first 5 years).

So, if you have funds that you want to invest in risk-free investments and can park it for a while, (EPF + VPF) is a good debt investment option and can be mapped to your retirement goal. 

How much should you invest in VPF?

We are not advising you to invest your entire salary as VPF and have no money to pay your bills or cover your short term goals. We also don't want you to miss out on your equity investments that result in wealth creation over the long run. You can compute how much to invest as your VPF as under:

For example, if your in-hand salary is INR 1,50,000 per month (A basic component of INR 50,000):  

  • 12% of your basic salary i.e. INR 6,000 would be invested as your EPF.
  • A matching amount of INR 6,000 will be contributed by your Employer.
  • If your monthly expenses are INR 100,000, you have a monthly savings of INR 62,000 (INR 50,000 + INR 12,000).

Now if you are looking to invest in VPF, the lower of the 2 parameters will help you compute the same.

Limit I: 
Not more than 40% of your total portfolio holding should be in illiquid investments (Know about the step-by-step process to withdraw your EPF). You can ensure this by not contributing more than 40% of your monthly savings towards Illiquid investments.
Accordingly, 40% of your savings (INR 62,000) will be INR 24,800 out of which INR 12,000 is already invested as EPF. So the balance you could additionally invest is INR 12,800 as per this.

Limit II: 
It should be considered as a part of the contribution you make towards your retirement goal. Now if your retirement goal requires you to invest 18,000 per month for the next 25 years to achieve your corpus to retire peacefully (based on Wealth Cafe Investing tool) and you are already investing INR 12,000 from the EPF, then only the balance of INR 6,000 should be invested towards VPF.

Limit III:
You are already investing INR 12,000 towards EPF. A maximum of another INR 38,000 can be invested by you in VPF.

Based on the above limits, INR 12,800 or INR 6,000 or INR 38,000 whichever is lower can be additionally invested in your VPF.

For simplicity sake, the above computation assumes that you are not investing your money in any other illiquid investments and are not saving for your retirement in any fund apart from EPF and VPF. If you are doing so, the amount invested in that could be reduced from the amount arrived at in Limit I & II above.

Another advantage of using the VPF route is that it is invested directly from your salary and then the balance salary comes to you, ensuring the consistency of your investments. 

Do review your numbers and you will have to contact your HR/accounts team to start contributing to VPF. Let us know if you have any questions about this in the comments section of our blog.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



6

Be the champion of your Investments – A Liverpool Fan’s Analogy

Hi fellow investor,
 
Date night discussions with my husband does belong to our goals or my travel plans but the evenings he gets a chance to contribute to our conversations (which is not rare), it is a detailed discussion on how sports can help you build character, release stress, and become a better strategist. For me, sports was always Cricket and Sachin (why not!); but this weekend I was celebrating the championship win of Liverpool Football Club (they won the domestic league after 3 decades) with my husband.
 
I am not a football expert; but yes, in the past one year, I have heard enough stories and 'force watched' some late-night matches with my husband to understand what this win means to him and in general to everyone who is a football fan. So along with one such discussion, we have together compiled this financial learning from the win of Liverpool and we hope that you will enjoy this too.
 
Learnings from the Liverpool championship after 30 years:

Planning & Strategy Is Most Crucial For Your Win

The player cannot just kick a football anywhere he wants - similarly you just can't get up and start investing your money anywhere you want. There are defined goals and strategies to put your money (like the ball) in the right asset classes. As they say - A goal without a plan is just a wish.

The way the Liverpool team transformed itself from very ordinary gameplay to a very possession and pressing-oriented gameplay with a purpose behind every move, and every player in the team has a specific role to play, similarly there is a definite role to be played by every asset in your portfolio and you should invest by maintaining your asset allocation and goals.




Some Championships Take Time
 Don't jump ship after every loss - Liverpool, historically one of the largest and most successful clubs in the football world had to wait for 30 years to win a domestic league cup. They won the champions league last year making it 6 Champions League titles (a record number of Champions League by an English club). But they were just a point shy of a Domestic League last year which cost them the title (but that did not make me stop supporting the club). Finally, they made it happen this year!! So yes, at the face of it one may say 30 years too long but it is important to know what has happened right and wrong in these years.

Similarly, when you are investing, some of your best investments may give you unexpected loss in some years and you may tend to dump them. If you start selling with every sight of loss, your investments will not have enough time to compound and grow. Every decision to invest, stay, and sell must be made based on an appropriate analysis of the variations in the returns and your goals.




Focus On The Management Style
 

A new manager who took charge almost 5 years ago, brought about some gradual changes to the club for good, resulting in all the success the Club garnered in these 5 years. 

Similarly, when you are investing in Stocks or Mutual Funds, a change in management (style of investing) can move your investments either towards good or bad. Hence, it's important to know about your managers, their style of investing, and whether that matches your expectations from the investment or not. It is not only numbers that show you performance but also non-financial things like the attitude and strategy of the management. 




A Good Strategy May Take Time To Show Results

Give time to your fund managers/advisors - Jurgen Klopp took over Liverpool FC almost 5 years ago (in October 2015) and the first 3 years were only spent in organizing/ streamlining the team, picking up the right player to include in the squad and prepping them. There was not much belief then as compared to now. In the past year, Liverpool FC has won 4 major honors in football that made them the world Champions in 2020. But when someone with new strategies comes in we need to be patient about the kind of results they can show.

The same applies to our investments and advisors. No one holds a magic wand and it takes time to show results; in the right hands, there is a possibility of the results compounding over time and give the investors exponential returns. Don't go asking - 'Kitna returns milega?' as your first question to your advisors. 
"Sometimes it is not about money, but rather the process of managing the money" - Anonymous
 
To sum up, have a plan for your investments and see them work towards that plan instead of letting time and circumstances let your goals fade away. Discuss the plan with your partners and family just like you discuss sports and movies. In the last year I learnt a lot about about football and Liverpool over the dinner table. But we never forget to sit and discuss our investments each month and review our statements because remember - You will never walk alone



Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.



5

How can I downsize my portfolio? – Part 2

Hi fellow Investors,

As discussed 2 weeks back (in our article - How many Mutual Funds should you have, an investor should not have more than 5-6 Mutual Funds in his/her portfolio. These should be restricted to 1 Mutual Fund scheme to invest in each Mutual Fund category based on your risk profile, goals, and other requirements. As a follow up to this, we told you that we shall tell you how to downsize/limit your portfolio to 5-6 Mutual Fund schemes.

The simplest way to do this is to first identify which Mutual Fund categories you need to invest in (based on your risk and goals) and identify the right schemes in each category (it is advisable to invest in schemes that are right for you and not look for the best schemes). This will give you your desired holding of Mutual Fund Schemes.

Once you have done that, it is important to take stock of mutual funds that you already have.

Make a list of all your investments in Mutual Funds. To do this, you can download your Consolidated Account Statement from CAMS Online. It will give you transaction wise details of all your mutual fund transactions provided you have used your existing email ID when doing the transactions. Otherwise, if you have an agent or use a platform for investing in mutual funds - you can ask them as well for a holding report.

Compare the existing holding of schemes with the list of desired holding schemes determined above.

SELL unwanted schemes

The way to downsize is to redeem the extra/unwanted schemes and invest the proceeds from the redemption into the desired mutual fund schemes. You can exit from some scheme and buy another scheme in the same category (hence, setting off your loss or gain). You will have to trim your portfolio to reduce it to 5-6 mutual fund schemes.

 

How should you decide what to sell?


Maintain your Asset Allocation

We always tell you to do this and this time around as well, it's the same solution.  Your investments in various asset classes should be made to achieve the right allocation. Even with Mutual Funds, your split between Debt & Equity should be based on your asset allocation. You can read more on this here - https://financial.wealthcafe.in/how-should-you-invest-right-now/


% of your portfolio - Small value funds
 

 You can choose to sell the schemes where the invested amount is low and they are only increasing the number of schemes you hold.


Underperforming funds
 
Analyze the performance of your invested funds and understand which are the funds you should have in your portfolio. Exit from risky funds and poor performing funds. This can be understood by checking the returns of your scheme with the underlying benchmark returns.   
Currently, almost all your investments pre-march would be performing poorly, hence it is important for you to check funds past consistent performance and not just last 2 months' results. 

Minimalism is the key to a cleaner and better portfolio as the reduced number of funds makes it easier for you to analyze your invested funds regularly and also, take a more informed decision with respect to your investments. Also, the cost of managing these funds is reduced.

Where you have just started investing, keep in mind that every time you want to invest more money, you need not invest that in a new mutual fund scheme. You can instead increase your SIP amounts in your existing schemes.


Consult an Advisor
 
Where you already have 15 - 20 Mutual Funds and are finding it difficult to select which ones to keep and which ones to let go, it is advisable to get the assistance of a financial advisor who will go through your risk profile and advise you exactly which mutual funds to hold and for how long. Where you need an advisor/financial planner for your specific financial needs, you can reach out to us at  https://ria.wealthcafe.in/



4

What To Do When You Lose a Part of Your Income

Hi there

Times are difficult, as the economy is getting back on its feet and everything is slowly opening up again. Payments have been delayed/cut and jobs have been lost amongst the various uncertainties that plague our everyday. Amidst this, it is very important to keep our heads straight and use this time and your money effectively. 

Here are a few things that you can do right now to make the most of your money in case you have had a pay cut/job loss recently:

1) Keep a track of all your spendings


It is extremely important to prioritize your expenses and use whatever money you have effectively. Make a list of all your expenses - divide them into essential and non-essential expenses (and avoid this completely for a while). This way, you can reduce expenses which are not important at the moment.

We know shopping is relaxing and helps you feel good but do not use 'delivery start ho gaya' as an excuse to go overboard with online shopping. If you don't need something in the next few months as you are still working from home,- DO NOT SHOP! SAVE that amount instead! Use this time to evaluate all your unnecessary spendings and list them down and control it. 


2) Use your Emergency Fund


This is what your Emergency Fund was built for. If you have been following us, you must be having at least  3 months' worth of your expenses on hand. DO use it to cover your essentials like groceries and rent. DO NOT use it to splurge on that big sale. Make sure you are spending your Emergency Fund sensibly. Cutting back on spending will help you stretch your savings for longer.

If you can take support from your parents/spouse/family - there is no harm in asking them for help. These are tough times and asking for help is not a bad thing. 


3) Hide your Credit Cards


Hide this card, give it to your mother if you must, to keep it away; but do not use it. Credit cards may look very lucrative right now and even make you buy some things which you 'feel' like buying. Stay away from them. It will be a financial disaster, given the uncertainty around your future income and the interest rates that get charged on deferred credit card payments. Completely avoid using them.


4) Stop/Pause your Investments


If there is a reduction in income/ or no income now - it is advisable to stop/pause your SIPs until you have a regular flow of income to match up to them. If you have a credit card payment pending, use your savings to pay that off. But remember, the idea, for now, is to free up your cash flows, instead of spending or investing it away. 

Also, evaluate your investments to check what you can do if things get worse (its good to be hopeful but better to be planned) and know all the avenues you can revert to if things go bad.

Ensure you have your health insurance & life insurance in place. If a health emergency strikes now, it can really eat into your savings, so it is better to be prepared.

As a last resort - if you have been contributing to EPF (Employee provident fund), you have the option of taking money out from the same, worth 3 months of your contribution to EPF. Do remember it will take some time to get this money credited to your account and we would recommend not touching it unless it is extremely important.

5) Start preparing for what is next right away
  • Update your skill sets, read about things that can help you become better in your field, and also garner more attention.
  • Update your social media and use it as a tool to interact and network with new people.
  • Take up freelancing work, many organizations are looking to hire part-time/freelancers for case-specific work - a good time to learn about that.
  •  The idea is to reach out as much as possible, towards people and opportunities that may help you come out of this crisis sooner. 

Clear communication and a positive planned approach will help you sail through this. Look at hidden opportunities in this to develop those skill sets, writing your weekly blogs (like this one :P) or catch up on your reading. 
 
Whenever you feel like you're stuck in a difficult situation, it is advisable to seek the services of a good, honest financial advisor. You can always reach out to us for any financial problems that you may have. We are here to listen and help you out.


Until then keep reading, learning, and growing. This too shall pass.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.





Wealth Cafe Financial Services Pvt Ltd is a AMFI registered ARN holder with ARN -78274.

Wealth Cafe Financial Services Pvt Ltd is a SEBI registered Authorised Person (sub broker) of Motilal Oswal Financial Services Ltd with NSE Regn AP0297087003 and BSE Regn AP0104460164562.

 

Copyright 2010-20 Wealth Café ©  All Rights Reserved