How are investors buying mutual funds - looking at the best performing ones?

The first thing to answer before you start investing is to know “WHY” you are investing in Mutual Funds.

  1. Debt Funds - To build a safety net, achieve short term goals and earn higher tax efficient returns compared to  fixed deposits.
  2. Equity Funds - To create long term wealth and achieve goals

 

Many Investors just look at the best performing funds. They would google - Top 5 funds for 2020 or Top 5 funds for 2021 and invest their money in the fund names that appear. So much so that most of the time they do not even remember the name of the fund. So many times, we have asked people - which fund have you invested in and I would get an answer saying - Umm HDFC bank? Kotak? Something DDFC…basically full confusion and no research.

 

Yes, when you don't know how to invest and you want to invest, choosing the best funds based on recent past performance seems the easiest choice to make. However, it would also turn out to be a bad choice. 

 

Studies have proven that selecting mutual funds based on high-performance track records is naïve. The Star rating of various mutual funds keeps changing, a fund that is top rated in this one year, is hardly the top-rated fund in the subsequent years. Tim Courtney, a chief Investment advisor of US-based Burns Advisory, did backtesting of past performance of the funds most highly rated, he found that they usually performed poorly after they have gotten 5 ratings. Hulbert financial digest, an investment newsletter, found that if investors continually adjusted their mutual funds' holdings to hold only the highest-rated funds, a total stock market index would have beaten them by 45.8 % in the past decade (he studied funds from 1994 to 2004 in the USA). In fact over the years, it has gotten even more difficult to beat the markets and get alpha on your investments.  - extracts from Millionaire extracts - How to build wealth living overseas by Andrew Hallam

 

Recently, even ET money conducted a similar study for the Indian Mutual Fund market and tracked the returns investors would make. As per the study, they tracked that if investors followed a buy and sell strategy with top rated mutual funds i.e. they bought the best fund and then sold them when their rankings fell, they would make a CAGR of 12.6% in the past 10 years (without accounting for the cost of investing, selling and taxation on the same). Now, instead of doing this, if the investor would have only invested in an index fund in the past 10 years (2010 to 2020), they would have made a return of 12.2%. 

 

The cost of transactions such as brokerage, exit load, STT and capital gains taxes (payable every time you book gains on mutual fund transactions) would further reduce your returns in case of a buy and sell strategy based on the top ranking fund. Also, it is not feasible to follow this approach once your portfolio grows too much.

 

Some learnings from the above 2 studies are as follows:

 

  1. Chasing past performance and looking out for best returns is a futile activity, it is not giving you better performances. It is only tiring you and keeping you away from focusing on important parameters.
  2. Invest as per your goals and risk profile, finalize the funds and stick to them. Rather than looking for quick gains, understanding wealth creation takes consistency and discipline is the way.
  3. If you want to learn on what parameters to check to select the right fund (please stop using the word best funds), check our blog  - Factors to check.
  4. If you really want to invest and make a financial plan - you can reach out to us by filling this google form or at iplan@wealthcafe.in We are SEBI registered investment advisors and can help you make sound investment decisions. You can read about our advisory services at ria.wealthcafe.in

 

Wealth Café Advice -  “Past performance is no guarantee of future results.” In search of looking for the best, you are missing on the right and the time a fund needs to create wealth and achieve your goals.

 

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

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.

Mutual Funds - 11/23/2021

How long should you stay invested in mutual funds?

The struggle to stay committed to investments is as real as it is to stay committed to a human. How long your relationship with your mutual funds is a function of your need for that investment and your risk profile. 

 

Based on tenure of your goals

 

Invest based on your goal tenure: Investing is very simple if we understand all the rules. Goal based investing is based on the tenure of your goals.

  • Short term goals are less than 3 years goals.
  • Long term goals are more than 3 years goals

 

Invest in mutual funds by first identifying for which goal you are investing, what is the tenure of that goal and then invest till that goal is accomplished. Now where you invest to achieve that goal is a function of your risk profile. (we have discussed that here)

  • Short term goals are less than 3 years goals. - Debt Mutual Funds (short term)
  • Long term goals are more than 3 years goals - Mix of debt & Equity (as per your risk profile)

 

Invest in Equity for long term for higher gains and managed risk

 

Invest in equity for the long term to reduce the risk of investing in equity. Compound and grow your wealth and eventually achieve your long term goals. Lets understand how your long term goals will be achieved by investing in Equity. 

 

For instance, in 2010, if Rakhi had a goal of financing her child’s education and back then she knew that 12 years later i.e. in 2023 for her child’s Graduation, she would need around 1 crore for the same she would invest in the below mentioned manner (based on our recommendations)

 

From our savings calculator, you would have known that you need to invest INR 42,000 each month for the next 10 years (based on the assumption that you have a growth profile and would earn 12.6% returns from the same).

 

Now based on our investment plan - she would put 70% in equity and balance 30% in debt. Hence, from INR 30,000 if she invested 21,000 in Nippon India Growth Fund ( a mid cap Mutual Fund) each month for the past 10 years and stayed with the fund through all ups and downs, she would have made 17.10% return. Do note that when you are investing for a long term goal it will eventually turn into a short term goal and in the last 2 or 3 years remaining for the goal, you must shift your investments to debt and discontinue investing in Equity.

 

Hence, in case of Rakhi, she would invest in Nippon India Growth Fund till 2021 and then discontinue the same. For 2021, 2022, and 2023, she would invest the entire 30,000 INR in debt.

 

As per the returns, in 2021, she would have an equity corpus of INR 98.31 lakhs and a debt corpus of INR 21 lakhs. A total of INR 1.19 crores was accumulated in 2021. Given the goal is 2 years away, we advise Rakhi to gradually move her Equity exposure to debt to avoid any last minute volatility. Where the goal's value would have changed and Rakhi decides to continue her 30,000 investments, she can invest the same in Debt. 

(image from value research)

 

Please note that the context of this article is that you must invest for the long term in Equity only where your goal is long term. Over the long term, the risk of equity also reduces as we can see in the case of Nippon India Growth Fund from the image above. Long term investing results in higher gains due to compounding. Still people do not make returns, because they cannot stay committed to their mutual funds.

 

Do people actually stay invested for long term

Nippon India Growth Fund, launched in October 1995 as a mid-cap scheme, completed 26 years in October 2021 delivering a compound annual growth rate (CAGR) of 22.91%. Since launch, the fund has grown 207 times over. In other words, ₹1 lakh invested in the fund at the start would now be worth ₹2.07 crore.

However, according to data released by the fund house, only 2,600 investors have stayed with the fund since inception and their average assets under management (AUM) is a mere ₹5 lakh. In other words, this cohort of patient investors would have invested just ₹2,415 on average at the time when this fund was launched. (source of this data is from mint - https://www.livemint.com/mutual-fund/mf-news/nippon-amc-sheds-light-on-missing-mf-millionaires-11634232789297.html)

The effect of your money staying invested for longer is far more than getting in at the right time. Not many investors had stayed put for more than 15 years. Unfortunately, people try to time the market. The fund had been managed by various fund managers over time, and has weathered numerous economic events, including the dot com bust, the 2008 crisis, 2013 taper tantrum and covid in 2020.

Wealth Café Advise:

As investors, learn to be more disciplined and focused on the long term and do not get carried away by market volatility.

According to the study conducted by Axis Mutual Fund, four behavioral traits affect investors’ returns:

  • They overreact to market sentiment.
  • They focus too much on short-term market or fund performance.
  • They don’t follow an asset allocation strategy.
  • And, finally, they tend to invest haphazardly, rather than systematically.

 

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

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.

Mutual Funds - 11/17/2021

Mutual Funds for a beginner - Your First Mutual Fund Investment?

Mutual Funds are one of the first investments that everyone wants to make. Reasons are very simple, it is super easy to invest in them and they are literally everywhere. Your uncle is recommending you the same, your friend has invested in it, even the influencers are talking about it. 

Many beginners get stuck with which mutual funds to invest in. There are over 2500 schemes across 44 AMC i.e. like there are over 4000 flavors available across 50 ice cream shops and one can only eat so much.

When it comes to ice cream, we all know that chocolate or candies are the standard safe bets that one can start with. Similarly in Mutual Funds, there are some categories which you can look at when you are a beginner. 

 

Before you start the process of Investing in Mutual Funds, check out the below 3 steps.

 

Step 1 - Understand what a Mutual Fund is - watch our YouTube video to know more about it.

Step 2 - Types of Mutual Funds and what do they mean - read our articles on this - Types of Mutual Fund

Step 3 - Know the basics of Investing your money that high risk = high returns and low risk = low returns. So when you are investing in Equity Mutual Funds, it sure does give you higher returns but has higher risks. On the other hand, when you invest in Debt Mutual Funds, it gives you lower returns but has lower risk. The only way to manage this high risk of equity to earn higher returns is to invest for a long  period of time (i.e. for more than 3 years) and stick to debt for short term investments. (Refer to the article to know how to invest your money based on your goals - Investment for children's higher education)

 

Mutual Funds to focus on as a beginner

 

Make your first investment in Debt Mutual Fund 

 

For the first time Mutual Fund investor, we would recommend going for a liquid mutual fund or an ultra short duration fund. These Mutual Funds basically invest in T-bills or short term debt investments with a maturity of not more than 90 days to 6 months. This ensures that there is liquidity and interest rate risk is minimized . Ensure that the underlying investment of the debt funds are all AAA rated to ensure your credit default risk is minimized. 

 

We recommend beginning with these funds as the risk is low and it will guide you to be more familiarized with the process of investing.

 

If you are skeptical of Equity, Invest in Hybrid Mutual Funds

 

Next investments you can try are Hybrid Mutual Funds such as Balanced Advantage Funds or Dynamic Asset Allocation Funds. These Mutual Funds primarily invest in a mix of debt and equity giving a balance of debt along with some growth exposure to equity. Do check the underlying portfolio mix of the Mutual Fund before you invest in them. For example, currently as of October 2021, ICICI prudential Balanced Advantage Fund has 60% in Equity and 40% in Debt. 

By Investing in a hybrid fund, you are not getting a 100% exposure to equity and it works good for you if you have never invested in equity and are skeptical to invest in it. By investing here, you will understand how volatile they can be and understand your risk tolerance better.

 

Going for Equity Mutual Funds as a beginner

 

Where you are comfortable with investing in Equity, you can try investing in either large cap mutual funds or index mutual funds. 

 

 Index fund is a mutual fund which invests in stocks which are a part of the indices that they track. The index can be the benchmark Nifty 50 index or it can be a small cap index or a sectoral Pharma Index.. There are index funds which track these indices and then change their allocation as per the changes in the index. Index Funds that track the Nifty 50 Index are a good starting point  as they give you exposure to the top 50 companies listed on the Indian Stock exchanges i.e. the large-cap companies. There is little to nil interference from the fund manager as they track the underlying index. Also, the expense ratio is lower compared to other actively managed funds. Hence, as a beginner a Nifty50 based index fund can be a good bet to begin with.

 

Large Cap Fund - These mutual funds select at least 80% stocks for investment from the largest 100 stocks listed in the Indian markets (highest market capitalization). These funds  may have higher expense ratios compared to Index funds as they are actively managed by the fund manager.  An actively managed fund attempts to beat the returns from an index fund by selecting stocks that the Manager expects will outperform. 

 

You can select between an active fund or a passive fund based on how you want your money to be managed.  

 

Useful, simple to understand and easy to execute. These should be the qualities of your first mutual fund. 

 

Wealth Café Advice:

Do not look at making quick returns by investing in mid or small cap mutual funds when you are a beginner. Start with large cap  mutual funds or hybrid mutual funds, understand them better, learn more about them and then allocate your money properly across other categories of Mutual Funds. You can start your investments in 2-3 Mutual Fund Schemes and build your portfolio over time. But be sure to keep a tab on the total numbers of Mutual Funds you own. Read our article - How many mutual funds to invest in to learn more about this.

 

To sum it up, your experience with your first fund will in many ways set the course for how you invest. This is why you do not want to overcomplicate the decision.

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

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.

Mutual Funds - 11/16/2021

EMERGENCY FUND

In the current situation, many people have experienced salary cuts or even job loss. During such trying times, an emergency fund can come handy and help you tide over such situations with relative ease. However, you don’t have to wait for an economic rebound to begin saving money. Even if you’re already facing income disruption or financial hardship, you can begin setting aside cash for the future.

Here is a quick guide  on  how to best make your emergency fund work for you.

Why have an emergency fund?

An emergency fund is like the fire extinguisher you keep at home. You hope you’ll never have to use it—but when there’s a need, you’re glad it’s there. 

While you can plan for some foreseeable expenses, an emergency fund can help you manage all unplanned expenses efficiently. The current pandemic is an example of one such unplanned expense. 

Here are a few cases in which you might dip into your emergency savings:

  • Job or income loss
  • Medical emergencies
  • Unexpected home repairs
  • Car maintenance
  • Family emergencies
  • Unanticipated travel (not your yearly leisurely travels)

So, how much emergency fund is needed?

Aim to have enough in a savings account to cover 6 months of expenses. 

Everyone’s situation is different, so you can adjust that number based on your circumstances. Before calculating the amount of the emergency fund you need, it is important to calculate the minimum amount you need to get through the unavoidable monthly expenses. 

This should include house rent, loan installments, utility bills, etc. Ensure that you don’t include avoidable expenses like movies, travel, etc. in this amount. 

However, it is most critical to know where to park your emergency fund as the amount invested should not go down either and must deliver excellent returns. So, you must design it specifically to meet your contingencies.

Where should you invest your emergency fund?

Some of the options available to you are:

  1. Fixed Deposit: It is highly liquid and if you decide to withdraw before maturity, you can have cash deposited to your saving account. Your FD should be linked to your net-banking.
  2. Liquid Mutual Funds - They are considered to be safer than other debt instruments. Many liquid funds allow redemption of up to INR 50,000 or 90% of the invested amount. You can redeem any time. However, you  need to remember that withdrawal may take 1-3 days for funds to be credited in your bank..
  3. Cash at Home - Cash can be your biggest protection against any emergency or any circumstances in which you cannot withdraw money from the bank. You should  have up to 1 month’s expenses as cash for super sudden need!

Considering the fact that each of these investment avenues behaves differently, it might be good to split up your emergency funds among them based on your comfort level. 

Where you should not park your emergency fund?

  1. Equity: Never park your emergency fund in equity as the market is volatile. It would be unfortunate to have to sell an investment at a loss to access your emergency fund.
  2. EPF/PPF/ELSS: The number one rule of your emergency fund cash is that it should be money you can easily access in a pinch. Anything that has a lock-in period does not qualify; money in your Public Provident Fund (PPF), Employee Provident Fund (EPF) or Equity Linked Saving Scheme (ELSS) cannot be part of your emergency fund.
  3. Real Estate: Even if you have crores of money in real estate it is impossible to generate emergency funds out of it due to illiquidity.

Therefore, the emergency fund is a personal insurance policy and not a wealth builder. The money must be easily accessible to you and your immediate family, or it may defeat the purpose if you are elsewhere or hospitalized and cannot access it. Safety and liquidity are the only two parameters that should be taken into account.

Wealth Cafe advice 

Emergency fund is like your parachute that saves you from a freefall in the event of a financial crisis. So, always give it the importance it deserves.

It would be useful to keep reviewing your emergency fund requirements at least once a year, as there may be changes in your life like starting out a business, taking a sabbatical from work, addition of a new family member or a change in your lifestyle.

Check out our course NM101: Maximise your savings - to learn how to manage your money and get started with savings.

You can also enroll to NM 102: Build a Safety Net - to learn more about emergency funds and insurances

Money tips - 11/11/2021

What is a recession? What causes recession?

Do you remember the financial crisis of 2007? It caused global economic chaos and an extended period of an economic slowdown. Well, that phase in the global economy was a phase of recession. So what is a recession and what causes it? Let us learn more about it.

 

Let us first understand, What is recession?

A recession is when the GDP growth rate of a country is negative for two consecutive quarters or more. It  is a significant economic downturn spread across the economy that lasts more than a few quarters.

Although an economy can show signs of weakening months before a recession begins, the process of determining whether a country is in a true recession (or not) often takes time. A recession is short, but its impact can be long-lasting. It is based on key economic indicators like manufacturing data, decline in incomes, employment levels etc.,

So during the period of recession, the economic performance of the entire country stagnates. Businesses across the country will suffer the effects of the recession. The government too will be helpless to an extent. Take for example the global recession of 2007-2008. It started due to the housing market fiasco in the USA, but the global economy suffered and its adverse effects were seen in India as well.

What causes a recession?

There are many theories as to what may cause an economy to go into an economic slowdown. Some factors have been identified that may cause an economic slowdown in a country that ultimately results in a recession. Let us take a look at some such factors.

Economic shocks. An unpredictable event that causes widespread economic disruption, such as a natural disaster or a terrorist attack. The latest example is the recent COVID-19 outbreak.

Loss of consumer confidence. When consumers worry about the state of the economy, they slow their spending and keep whatever money they can. Because close to 70% of GDP depends on consumer spending, the entire economy can drastically slow.

High interest rates. High interest rates makes it expensive for consumers to buy houses, cars and other large purchases. Companies reduce their spending and growth plans because the cost of financing is too high. The economy shrinks. We saw this in 1980 in the USA, when the rates were raised to battle stagflation. But instead, this resulted in a recession.

Deflation. The opposite of inflation, deflation means product and asset prices fall because of a large drop in demand. This encourages the consumer to wait until the prices to reduce further. This can cause a recession in the economy.

Housing Crisis: When the prices of houses fall the owners start losing equity. They can not pay their mortgages or take second mortgages on their homes. This may lead to foreclosure. This was the cause of the Great Recession of 2007.

Falling Wages: When the wages and salaries of workers do not increase with the same level as the inflation in the economy, the purchasing power of the public will reduce. He will not be able to afford the same goods and services that he used to. This can cause an economic slowdown.

Economic Scandals and Frauds: Sometimes banks, large corporations, and even government institutions employ questionable practices and illegal activities to boost profitability. When such schemes and scandals are exposed, the entire economy suffers. Take for example the current financial scandal of Sahara.

Stock Market: In a bear market, investors will pull money out of the stock market. This will drain capital out of the businesses and cause an economic slowdown. Crashes in the stock market are very harmful to the economy.

How Does a Recession Affect Me?

You may lose your job during a recession, as unemployment levels rise. Not only are you more likely to lose your current job, it becomes much harder to find a job replacement since more people are out of work. People who keep their jobs may see cuts to pay and benefits, and struggle to negotiate future pay raises.

Investments in stocks, bonds, real estate and other assets can lose money in a recession, reducing your savings and upsetting your plans for retirement. Even worse, if you can’t pay your bills due to job loss, you may face the prospect of losing your home and other property.

Business owners make fewer sales during a recession, and may even be forced into bankruptcy. The government tries to support businesses during these tough times, like with the PPP during the coronavirus crisis, but it’s hard to keep everyone afloat during a severe downturn.

With more people unable to pay their bills during a recession, lenders tighten standards for mortgages, car loans and other types of financing. You need a better credit score or a larger down payment to qualify for a loan that would be the case during more normal economic times.

Wealth Cafe advice:

Recessions are unavoidable and can be hard to predict. So even in times of healthy economic growth, it is good to be prepared for an economic downturn. Preparing for a rainy day now can save you trouble down the life.  Here are some ways you can prepare your finances for the possibility of a recession:

  1. Make sure you have an emergency fund of at least 6-7 months of your salary 
  2. Live within your means. Spending more than you make is never good.
  3. Limit your existing debt. You should not have an EMI of more than 30% of your income.
  4. Diversify your portfolio and plan an asset allocation based on your risk tolerance. You can use this risk calculator- https://financial.wealthcafe.in/risk-calculator/ 

 

Check out our course NM101: Maximise your savings - to learn how to manage your money and get started with savings.

 

Also, please note that we are not indicating or moving towards recession currently. There are many things that are happening around us and the world. We are opening back after COVID 19 lockdowns and there is a supply demand mismatch, but every industry and everyone is working towards making things better. Invest as per your allocation and goals and keep a tab of the overall macro market.

Money tips - 11/11/2021

Difference between NPS and EPF - which one should you opt for?

In Indian scenario, NPS (National Pension Scheme) and EPF (Employees Provident Fund) are two viable options for ensuring a financial cover in the absence of a regular income or as a corpus that can be used in times of need. 

However, not investing in the right instrument can mean you are losing out on the potential returns of your investment. For instance, while EPFO invests predominantly in debt instruments, investing in NPS promises higher returns over the long term.

Find out how they differ from one another:

Criteria National Pension Scheme Employee Provident Fund
A/C opening Mandatory only for government employees Mandatory for every establishment employing more than 20 or more employees
Eligibility Age: 18-65 (Indians + NRI) - can be opened by anyone Only for salaried Individuals
Investment It is a market-linked product. Its performance depends on the equity and debt market The Central Board fixes the interest rate for the year - government debt investment. 
Tax Benefit Tax deduction of INR 2 lakhs under section 80C and  CCD You can avail tax deduction of INR 1.5 lakhs under section 80C
Fund Manager Liberty of choosing your fund manager Do not have the liberty of choosing a fund manager. The funds are invested by EPFO
Min Investment 500/ year 12% of salary per month or 1800, which can be increased voluntarily. 
Max investment Unlimited Unlimited (however, taxability varies)
Return 8%-15% ( depending upon which funds you are investing your money in) 8.5% (Interest as on September 1, 2020)
Lock in period & Extension Age: 60

Extension: 70

 Age: 58

Extension: 60
Premature Withdrawal Partial withdrawals can be made up to 25% of the subscriber’s savings, but only after the 10th year of subscription. Partial withdrawal is allowed after 5 years of EPF when you fulfill certain conditions such as buying a new house, marriage, child education, sickness, death, etc. 
Withdrawal You will get 60% of the corpus and 40% will be invested in an annuity for a monthly pension.

Read here- to know more

 You will get the entire corpus after retirement.
Expense Ratio 0.01% (also varies - it is  not fixed) 0% (No expense ratio)
Risk Low risk (Market Dependent) No-Risk
Employer Contribution Can be done Employees along with the employers both contribute 12% of the employee’s basic wages towards EPS

Let’s assume, two friends Sanjay and Yogesh started saving for their retirement in 2021. Both of them are 23-years-old and want to retire at 60. Also, they plan to continue this investment until 2058, at the time of retirement. However, Sanjay has invested in NPS and Yogesh in PPF.

NPS vs PPF: Difference in the retirement corpus
Sanjay Yogesh
Investment Product picked NPS EPF
Average annual return 12.90% (Growth profile) 8.5%
Investment amount every month INR 10000 (10% of Basic salary & DA) INR 12,000 (12% of Basic salary & DA)
Investment time period 37 years 37 years
Investment in 37 years INR 44.4 lakhs INR 53.28 lakhs
Retirement corpus Lump-sum value: INR 7.33 crore

Annuity Value: INR 4.89 crore

 INR 1.44 crore

NPS is devised as a pension scheme. So, you get to withdraw 60 percent of your accumulated corpus at retirement without paying any taxes. The remaining 40 percent must be converted into an annuity instrument (from an insurance company) and get monthly payments.

The primary reason for the difference in their corpus is the power of compounding. Since the last few years, the interest rate for EPF has been decreasing. At the same time, there are chances that NPS can give you more returns in the future (where the equity markets perform well) w.r.t a higher risk of the equity exposure in NPS. So, while they reach their retirement age, there is a probability that this difference might increase further. 

Wealth Cafe Advice

Opting for EPF or NPS is a matter of choice based on specific needs and projected requirements. Both come with their set of merits and demerits. Subscribers at an early age or with risk-bearing capacity should subscribe to NPS and opt for equity allocation based on their risk profile to accumulate large corpuses targeted to fund retirement needs. Where you believe your risk-taking capacity is not very high and you will find it difficult to manage NPS post-retirement - EPF has always been a classic option for your investments. 

However, in both scenarios, investors should not touch their retirement corpus for other financial goals. You should always mark these investments only for retirement.

To know more about EPF and NPS you can read the following articles:

Uncategorized - 11/02/2021

Things to note about HRA and FAQ of HRA

Many times, people have to move to a different city in order to work. In such cases, they may end up paying rent for accommodation. Organizations often compensate employees for this expenditure by paying them a house rent allowance over and above their basic pay. This is usually a part of the salary structure. However, HRA is eligible for income tax exemption and can be a great way to reduce your taxable income.

Quest 1. What if I have a Home Loan as well? Can I claim a deduction on home loan interest?"

Ans. Yes. HRA has no bearing on your home loan interest deduction. Both can be claimed simultaneously. 

Read this article for more details- Can I claim Tax Benefit on both HRA & Home Loan?

Quest 2. “My employer doesn’t provide me with HRA? Am I losing out on saving tax?”

Ans. Not at all. If you are making payments towards rent for any furnished or unfurnished accommodation occupied by you for your residence, but do not receive HRA from your employer, you can claim a deduction under section 80GG.

However, certain conditions must be fulfilled to claim this deduction:

  • You are self-employed or salaried
  • You have not received HRA at any time during the year for which you are claiming 80GG
  • You or your spouse or your minor child or HUF of which you are a member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession.

In case you own any residential property at any place other than the place mentioned above, then you should not claim the benefit of that property as self-occupied. That other property would be deemed to be ‘let out to claim the deduction under section 80GG.

Quest 3. “So how do I claim the Section 80GG deduction?”

Ans. The least of the amounts below will be considered as the deduction under this section:

  • Rs 5,000 per month
  • 25% of Adjusted Total Income
  • Actual Rent less 10% of Adjusted Total Income

Adjusted Total Income means Total Income less long term capital gain and short term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U (except deduction under section 80GG).

Quest 4. “I am living with my parents. How do I claim the HRA deduction?”

Ans. Let’s understand this through a case: Ms. Sonam works at an MNC in Bangalore. Her company provides her with a house rent allowance. But she doesn’t live in rented accommodation; she lives with her parents instead. How can she make use of this allowance?

Sonam can pay rent to her parents and claim the allowance, provided they own the place they currently live in. All Sonam has to do is enter into a rental agreement with her parents and transfer money to them every month.

This way Sonam can make a nice gesture and give something back to her parents, and also save some tax.

Important: Sonam’s parents will have to show the rent she paid in their income tax returns. But as a family, they will save up. They can generate their Rent Receipts.

Ques 5. “I have forgotten to submit rent receipts to my employer. How can I claim the HRA tax benefit now?”

Ans. The good news is that HRA can be claimed directly on your income tax returns. . All you have to do is manually calculate the HRA tax exemption and then report this as an expense under Section 10(13A) in ITR1. You will also need to declare this in Form 16 - Part B. You will then be able to claim a refund of tax that has been deducted in excess.

Ques 6. Can the maintenance charges that I pay for my apartment be included for HRA tax exemption?

Ans. No. HRA deductions are allowed only for rent payment. Maintenance charges, electricity charges, utility payments, etc. are not included.

Ques 7. Can a self-employed taxpayer claim HRA?

Ans. No, a self-employed individual cannot claim HRA exemption under the Income Tax Act, 1961. A salaried individual having an HRA component in their salary structure can claim HRA exemption under Section 10 (13A) of the Income Tax Act.

Crackdown on tax evaders

Submitting fake rent receipts has been one of the most common ways for individuals to reduce their taxes, despite it being unethical. However, the new rules put in place by the Income Tax Appellate Tribunal (ITAT) are expected to change all this. Assessing officers can question individuals and ask them for additional documentation if they feel the rent receipts provided are not adequate proof. This is just one of several measures that the government has put in place to curb instances of tax evasion and black money.

Failing to comply with these rules and providing fake rent receipts is considered fraud, and could result in serious consequences.

 

So, ensure you are well versed with the tax filing process and that you have all the necessary documentation in place for filing returns. It will make the entire process smoother and quicker for you. 

Uncategorized - 10/29/2021

What is an allowance? What are the types of allowance?

Taxpayers are usually aware of deductions under Section 80C of the Income Tax Act or for which they are eligible. However, it is noticed that taxpayers are unaware of the taxability of allowances and the exemptions available under different sources of income.

If you think that your entire salary is liable to taxes, then that is not true. Your overall package, often known as CTC, comprises many allowances. 

While your basic salary is fully taxable, there are other benefits offered to the employees in the form of allowances and prerequisites. These allowances are offered to employees for the expenses they bear during work. There are three types of allowances:

  • Fully-taxable allowances

The fully taxable allowances are not exempted from Income Tax. You have to pay the full tax applicable to these allowances.

  • Potentially taxable allowances

The partially taxable allowances are exempted from the Income Tax to a limit.

  • Fully Exempt allowances

The non-taxable allowances are exempted from the Income Tax fully. But, these are usually offered to government employees.

Let’s see how these allowances can impact your take-home salary.

Fully-taxable allowances Potentially taxable allowances Fully Exempt allowances
Basic Salary House Rent Allowance Food Allowance
Dearness Allowance Leave Travel Allowance Children education allowance
Special Allowance Car Maintenance Allowance Conveyance Allowance
Overtime Allowance Daily Allowance
Bonus Academic and Research Allowance

 

Wealth cafe Advice

As soon a person joins an organization, s/he is provided with the breakup of the fixed salary and allowances. However, most of the time individuals are ignorant about taxation. But allowances can help employees save taxes provided they are placed in the salary intelligently.

Salary restructuring is not possible in every organization, but if possible, employees should try to include allowances that are non-taxable or are partially taxable in nature. This way they can reduce the tax liability to some extent.

Thus, one should take note that through intelligent planning one can use allowances to save taxes and reduce the tax outflow.

Uncategorized - 10/29/2021

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