pexels-photo-921783

Five mistakes you must avoid while investing to save income tax

In Indian taxation system, income tax is one of the main types of direct taxes levied by the government. It is the tax that is levied under the regulatory guidelines of CBDT (Central Board of Direct Taxes), and is imposed by the government on income generated by businesses and individuals (including HUFs or Hindu Undivided Families) within their jurisdiction. An income tax is therefore the tax that is levied on the earnest monthly salary and it varies from one taxable slab to another. Section 80C of the Income Tax Act, 1961 allows exemptions for various investments which people undertake for saving on taxes. However, while planning to invest in order to save payable income tax, there are certain common mistakes, which must be avoided. Following is a list of these mistakes that you must avoid while investing to save income tax:

  1. Ignoring your specific needs and requirements: This is one of the most common mistakes that many people make. Before making any investment decision, you must make a list of your specific needs and requirements so that the right kind of matched decisions can be taken. Therefore, it is important to not follow what the others are doing but to take care of your own financial aspirations.
  2. Not choosing the right amount of investment: Underinvestment and overinvestment are both factors that you must avoid. The amount that you to choose to invest obviously depends on the earnest monthly income. Therefore, if you choose to invest in a particular instrument, you must do so after taking due care of meeting your needs and that of your loved ones. After doing that, the surplus amount must then be invested. However, investing the surplus completely must be avoided because you have to contribute towards the basic savings corpus as well as keep emergency funds available.
  3. Not exploring all options: Sections 80C, 80G, 80D and 80CCD are various sections that offer exemptions on options that range from investments in health insurance to contributions towards certain charitable or other institutions. Therefore, you must have a clear understanding of the legal Sections under which exemptions are being offered so that you can have a better grasp of the available options.
  4. Lop-sided investment portfolio: The ideal investment portfolio must consist of both the debt and equity instruments and even hybrid instruments. This ensures stable benefits over a period of time and ensures that all your funds are not tied up in a single investment option.
  5. Not taking due care of present commitments: This means that if you have invested more than the surplus, then the present day commitments or immediate financial goals may not be duly met. Therefore, it is important that you take due care of present commitments while planning your long term investments.

 

Income Tax / Money tips - 06/01/2020
pexels-photo-1246954

How to manage my irregular/business income?

This lockdown seems to be going on forever with no respite in sight and we just have to find a way around it. We are all trying our best to make the most of this time, use this time to read more, catch up on movies, and learn a new skill. Some of us have started new side ventures and blogs.

As a part of this process, many of you have asked us how you should manage your irregular income as a freelancer/entrepreneur. Many business owners feel they do not have good control over their cash flow and it is difficult to plan for their own finances. This email is to help you understand how to manage your cash flows as a business owner.


1) CREATE AN EMERGENCY FUND

This will always be important and becomes critical as a business owner. You must project your expenses and cash requirements for 6 months and have that much funds kept aside in liquid investments like Fixed Deposits or Liquid Mutual Funds.

As your income is erratic but your expenses are regular, the Emergency Fund comes as a great support and you can dig into it to pay your bills in those months where the income has been a bit slow. Always, ensure to refill your Emergency Fund to back to its original value during time or surplus cash.

2) YOU SHOULD HAVE 3 BANK ACCOUNTS

Having separate accounts for your various needs will ensure a smooth flow of cash and you will know where exactly your money is going.

Bank account 1 - Business Account
Bank account 2 - Personal Account
Bank Account 3 - Investments Account

Bank Account 1 - All your business income and expenses must be taken care of from this bank account. This will also help you to file your financial statements and know the exact numbers for your business.

Bank Account 2- You must transfer an amount for your personal basic living expenses to your bank account 2. This is the account from where you will spend on your food, home rent, everyday conveyance, etc.

There are months when you do not have enough from your business to take care of your personal expenses and in such times your rainy-day friend - emergency fund comes to your rescue. Please note that the emergency fund is to be used for basic spends not for parties and shopping!!

Bank Account 3 - This is the bank account from where you will INVEST. The months in which you make great revenues, you must transfer an amount from your Business Account to Personal Account to Investment Account and Invest that money for your future goals. These goals can be either personal or business.

Having a separate account from where you invest helps you to keep your money in an organized manner (all the extra funds will always be invested) and at the time of redemption, all the redeemed money will flow back to your Investment account. This will help you have control over your investments as well.Today when you have just started to invest, this all may seem like a lot of work, but you must understand that after a few years when you have made investments and business has grown, it will be very difficult to backtrack and put things in place and hence, the same should be done today!!

Use this time to understand how your money is flowing and put a process in place for it. We shall see you soon with more articles on the same.

Money tips / Uncategorized - 05/17/2020
7

Importance of Travel Insurance post COVID

Not many people realize this but travel-related insurance is easily one of the most ignored aspects of international travel and with the entire COVID-19 scenario running roughshod on international travel, it will become all the more important. This kind of insurance has always been essential to cover travel-related risks like missed connecting flights, lost baggage, injury or illness abroad, loss of travel documents, loss or damages caused by weather-related problems, etc. With the evolving Corona Virus situation, however, things will continue to remain exceptionally unpredictable for the foreseeable future, leading to any factors which will lead to increased need and importance of insurance for travel purposes.

 

Factor 1: The lingering risk of Corona Virus infection:

There will be a few long months, maybe more than a year, before you can expect an effective vaccine for coronavirus infection. News shows that while some medicines have shown promising preliminary results in the treatment of Covid-19, a vaccine is always the best choice because it is a preventive measure and as the old adage goes, prevention is always better than a cure. International travel takes place in planes which are enclosed environments and people are too close for comfort in the planes. Did you know that even if you fly business class, you are still not far enough from other people in a plane for sensible social distancing to be possible? Imagine flying a coach in such a scenario! This means that ​travel ​insurance​ is going to be extremely necessary for everyone.

 

Factor 2: Airlines services will continue to be shaky

Airlines are trying very hard across the globe to keep their systems operational but the situation was so bad that they were not even able to find enough parking spaces for all the grounded planes. The fact of the matter is that airlines always run at paper-thin margins because of the highly competitive industry and extremely volatile cost structure. Once they are going to get things in the air once more, there will be a lot of turbulence. Many systems were working by duct tape and hammer blows and getting back these systems to operational level in an understaffed and risk-bearing situation will mean many people will miss connections, luggage will get lost many times and all such risks will be very high, creating a strong need for everyone to buy travel insurance online before they fly to anywhere out of the country.

 

Factor 3: You might get stuck out of India during lock-down

Let there be an assumption that you were able to travel to any country out of India and you landed there all safe and sound, but just before you were supposed to travel back, your host area encountered a sudden rise in infections, making it necessary for the government of that area to suspend all travel activities in and out. In such a situation, you will be stuck in your host country until the government of India can arrange for your return. Travel insurance will be your only help in such a case. It will cover all the extra expenses which you will have to bear during the lockdown.

 

All things said and done, in the coming few months, international travel will change like never before.

Alternative Assets / Insurance / Making Money / Money tips - 03/21/2020
8

What is travel insurance ?

With the increase in travel, one of the important things that travellers need to know about is Travel Insurance. This form of insurance helps cover a whole range of uncertainties and scenarios that can drain out a traveller’s finances. Most countries require mandatory Travel Insurance while applying for a visa. But choosing the right Travel Insurance which covers all the risks of travel is important.

 

What does Travel Insurance mean?

Travel Insurance is a type of insurance that covers different risks while travelling. It covers medical expenses, lost luggage, flight cancellations, and other losses that a traveller can incur while travelling.

Travel Insurance is usually taken from the day of travel till the time the traveller reaches back to India. Taking Travel Insurance ensures comprehensive coverage in case of any emergency in another country. Travel Insurance is also available for trips taken in the home country of the traveller like Bharat Bhraman & E-Travel, but it is a more popular option for travel abroad.

Some of the risks covered under Travel Insurance are:

  • Personal Accident Cover, which covers:
    • Insured’s Death
    • Permanent Total Disability
  • Accident & sickness medical expense reimbursement
  • Dental treatment relief
  • Emergency evacuation
  • Repatriation of remains in case of death
  • Baggage delay
  • Loss of checked baggage
  • Loss of passport
  • Flight delay
  • Hijack
  • Home burglary
  • Trip curtailment
  • Trip cancellation
  • Missed connection/missed departure
  • Bounced hotel/airline booking.

There may be more risks covered under individual policies depending on the requirements of the traveller. The amounts to which these risks are covered depends on the policy & plan that the traveller opts for. Travel Insurance also covers additional risks at an additional premium. Some of these risks are specific to the traveller or the place the person is travelling to.

 

Types of Travel Insurance:

There are single trip Travel Insurance policies meant for one journey. But for frequent travellers who travel abroad for business purposes, there is an option to buy a multi-trip Travel Insurance policy. Some policies last for an entire year and cover multiple trips to a particular destination. Opting for such policies is much more cost-effective for businessmen and frequent travellers to a particular destination. We also have student policies which are specially designed for students going abroad for studies at an affordable premium. The maximum trip length can last from 30, 45 and 60 days.

Another type of travel policy is a Group Travel Insurance policy. A group policy covers 7 or more travellers. These policies are cost-effective and offer similar benefits as single trip Travel Insurance policies. Group Travel Insurance policies are based on the age of the travellers which means it works out more cost-effective per traveller. Most travel companies opt for group Travel Insurance policies when they take groups across different countries on tours.

It is easy to pick out a policy once you know the Travel Insurance definition. While planning your trip abroad, pick out a Travel Insurance policy that provides exhaustive coverage with high coverage. It is possible to check the cost of Travel Insurance on insurance aggregators and pick out the best policy. HDFC Bank offers a variety of Travel Insurance policies through the bank’s website like Student Travel Insurance, Domestic, Senior Citizens, Family and even Individual Travel Insurance. You can easily pick out a policy that suits your need and provides the best value for money.

 

Income Tax / Insurance / Investments / Making Money / Money tips - 03/20/2020
david-paschke-72432-unsplash

Why do Women need Financial Education and Money Management Skills?

Apart from the fact that everyone (men and women alike) should be aware of how to manage their money appropriately. The socio-economic situation around us increases the need to know how to grow one’s wealth for women.

1. The cost of being a woman - Spendthrift nature

Women have always been considered as spenders. The temptation to shop and hoard things is perceived as a common womanly trait. Moreover, it is considered okay for women to do the same. Statistically, women are the best buyers - so things are marketed towards women including the men's products. Discounts, offers and sale days such as Women’s Wednesday Bazaar are specifically women-oriented because we make the most of such days.

Due to this innate spendthrift nature, even the banks have introduced special ‘Woman’ bank accounts with special ‘Debit/Credit card’ which allows them additional points for shopping. Women are encouraged to let their purse loose at every other step.

2. The cost of being a Woman - More expensive things

A study from New York – has shown that woman pays thousands of dollars (equivalent to lakhs of INR) over their lives to purchase similar products as men. Women’s products cost 7 percent more on average than similar products for men across toys, clothing, accessories, personal care, home, and health. The report also pointed out that although gendered products often differ in branding, construction, and ingredients, shoppers do not have control over those factors and must purchase what is available at a higher cost. Women have no choice but to buy expensive products.

Apart from this price differential treatment, there are certain expenses that we have to incur such as sanitation, hygiene, skin care because of our body, biology, and gender.  These are certain basic expenses which cannot be avoided.  So, how do we continue to afford everything? We cannot stop using the basic things which have become a part of our life just because it's more expensive as compared to men. Should we just start buying men’s products which are similar to ours?

3. The disparity in the pay scale

According to The Global Wage Report 2016-17 published by the International Labour Organization, the gender pay gap in India amounts to 30%. To put in simple terms, men get paid 30% more just for being born as men.

Apart from getting paid less, the number of paid working days are lesser than men, women tend to take more leaves over their working career as compared to their men. They do so during their pregnancy, marriage, taking care of their children and elderly in the house resulting in lost income and depleted savings.

4. Longer life expectancy

Women live longer than men by an average of 5 years. So, we need more money for our retirement and insurance for a longer duration than men. Further, a woman has a 50per cent chance that at some point in her life, she will need long-term care - meaning a period of at least 90 days when she requires assistance with activities like dressing, eating, and bathing.

5. No support to fall back on

Most of us are used to being dependent on our families or partners for financial support. We have always had someone to fall back on in case of a financial emergency. 

Women who are suddenly single, like divorcees and widows, obviously are at an immediate disadvantage. They do not have that financial backing. 8 out of 10 women are responsible for taking care of their finances at some point in life.

6. Ability to take decisions

Researchers have proven that women have the ability to make smart decisions under pressure and are not carried away by market trends and investment biases. Women's behavior with respect to handling money is very stable. This is also the reason why women asset managers for mutual funds are very sought out for.

Wealth Cafe :

Women have limited income and a list of unavoidable expenses.

The only way to deal with this is to grow your wealth by yourself. Learn about the farfetched world of finance.

Our workshops are designed to you (women) acquire the skills of financial planning and money management. Rather than leaving the money matters to the other members of the family, money education will make you more independent and empowered to make smart money decisions confidently. 

Don't just be a feminist, be a 'fe-money-ist'.

Alternative Assets / Money tips - 03/05/2019
pexels-photo-668353

Annualised Return and CAGR

Annualized return and CAGR are not technically the same thing. They refer to the returns on various investment options computed on per annum basis. All long term investments multiply by your wealth by compounding.

Where investment has grown at different rates over a few years, CAGR is the formula used to define the number at which the investment has grown year on year.

Compounded Annual Growth Rate (CAGR) shows how much a person’s investment grew in one year. In other words, it is the average returns an investor earns on his investments after one year. The bank or the financial institution calculates this rate in terms of annual percentage.

How to calculate CAGR?

To calculate CAGR, you must know the following:

  1. The investment made in the initial year (the year of investment)
  2. Amount invested in the current year and
  3. Tenure of investments

CAGR = [(End value/beginning value)^(1/year)] – 1

Example:

For example, you bought a stock for ₹100 in 2015. It appreciated by 25% to ₹125 in the year 2016 and further appreciated to ₹150 in the year 2017. Therefore, the appreciation in the rate from 2015 to 2017 was 20%.

If you want to know the growth rate of your investments for the complete period of time, use CAGR. If we put the above values in the formula, Compound Annual Growth Rate for your investment between 2015 and 2017 will be 14.47%.

Mutual Funds/Equity and CAGR

Return on any investment is discussed in terms of CAGR. Especially, in case of equity and mutual fund investments. When you invest in mutual funds, the return that is shown in CAS statements and your Dmat statements are in CAGR.

This is because the actual return % on mutual funds is dependent on the movement in the stock market which keeps changing. It never grows or falls at a fixed rate.

Hence, it could be possible that an investment in mutual fund grew at the rate of 20% in year 1, 30% in year 2, 10% in year 3. In such a case, it becomes very difficult to discuss the actual gains. This is when and why CAGR is used in market-related variable returns investments.

In our Article, how to set goals, we have discussed the expected returns on various asset classes, we are always talking about CAGR.

Wealth Cafe Note:

  1. CAGR is an average rate. Hence, if a CAGR is of 15% of an investment made for 4 years. It could be possible that the first 3 years have 30% gains and the next 2 years lower gains.
  2. The gains are not distributed evenly over the period of investments. One must stay invested for the right time based on the asset class to benefit the most.
  3. CAGR is different from absolute returns and year-on-year gains.
  4. There is a chance that two investments may reflect the same CAGR, with one being more lucrative than the other. This could be because the growth was faster in the initial year for one, while the growth happened in the last year for the other.
Investments / Money tips - 03/01/2019
salary 1

What is Absolute Returns ?

If you are making direct investments in various mutual funds or making the same through any portal/website. You could see in the mutual fund statements that a column states absolute return and a % is mentioned next to it.http://www.wealthcafe.in/understanding-a-mutual-fund/

Absolute return is the simplest return metric that is used to quantify how much gain or loss you have made from an investment. It simply tells you how much money you have made or lost as a percentage of the money you invested over a given period of time.

For example – you invested Rs. 100 in 2010 and it became 130 in 2012, your absolute return is 30% for 2 years. It is not a per annum return.

Absolute return is the actual return that you receive for the specific period i.e. from the start to the end.

If you invested INR 10,000 in October 2018 and currently, in Feb 2019, its value is 10,600. The absolute return is 6% on this investment.

Absolute Return = Current Saleable Value - Purchase Value / Purchase Value * 100

Absolute Returns are not used for mutual fund calculations until the investment period is less than one year. The returns can be very misleading. It is mostly used for real estate investments. You must have heard people say that they bought a house in 2000 for 30 lakhs and today in 2019 the value of that house is 1 crore. This is absolute returns of 235%

Why Absolute Returns are not favorable?

It is hard to compare 2 different investments return where the time periods vary: The scope of using absolute return metric to evaluate performance is limited as it does not take into account the time period of investment and its compounding effect. For example, if Fund A gave you 25% return over 2 years and Fund B gave you 25% returns over 1 year, both of them would rank the same if you take the absolute return metric when clearly, one fund has taken longer to deliver the same returns.

It does not allow comparison against various asset classes: Different asset classes returns are generally referred to differently. Real Estate and gold are generally discussed in absolute terms whereas fixed deposits and mutual funds are discussed in annualized returns.

Absolute Return gives a false impression of high worth: Further, because absolute figures are usually high, it gives a false impression of the worth of that investment compared to others. Take the real estate example. The investment in Bombay house which fetched a gain of Rs.70 lakhs does sound grand, and an absolute return of 235% sounds even better. But when we look at the same gains in CAGR terms, it works out to be a modest 6.54%.

Tip – Absolute returns are feel-good returns but they do not give the real gain scenario. In our view, you should always compute the annualized return or CAGR. Refer our Article on the same.

Investments / Money tips - 02/14/2019
What-is-XIRR-in-Mutual-Funds

What is XIRR in Mutual Funds and How to compute the same?

What is XIRR? How to compute the same?

Cash inflows and outflows may not always be evenly matched and instead, these could be at irregular intervals.

Specially, in a mutual fund SIP. In the case of SIP, there are investments made at regular intervals, some withdrawals, then investments and so on. There is no fixed pattern of such investments and it makes calculating the exact return on these investments a bit difficult.

XIRR or extended rate of return is a measure of return when multiple investments at different points of time are made in a financial instrument.

SIP Investments Method

In a SIP, you keep investing regularly over a long period and get back the maturity amount upon exit. SIP investments happen on a pre-decided date and even the amount is fixed and depending on the NAV of the scheme on that day, you get a certain number of units. You can read more about SIP in our Article http://www.wealthcafe.in/why-should-you-do-a-sip/

Hence, you keep accumulating units from the day your SIP starts. On the day you exit the scheme, i.e., redeem your total units, you get the maturity amount, which is NAV (of redemption day) multiplied by total units (on redemption day). You may also choose to redeem a part of your investments as and when you need them.

XIRR is used to calculate the return in the case above where various investments are made on different dates and the simple return formula is not applicable.

XIRR can be computed using an excel as excel has an inbuilt XIRR formula. To compute XIRR, we do not need the NAV amount or number of units.

The details required :

  1. SIP Amount
  2. SIP dates
  3. Any lumpsum Investments
  4. Date of such investments
  5. Redemption Amounts
  6. Date of Redemptions

Steps to Compute XIRR. (The steps are explained with reference to the image below)

Step 1 – Enter all the transactions in column B

Step 2 – In the next column (Column C), enter all the amounts of SIP and the lump sum investments. All the investments amount should be in negative. Also, any lump sum amount should be added to this column and the same should also be in negative.

Step 3 – In the case of redemption, add that amount in Column C in positive.

Step 4- In the next box, enter the XIRR formula which is = XIRR (select all dates, select all values)*100. This shall give you the XIRR amount.

You can see the extract of the excel in the photo below.

 

Investments / Money tips - 02/08/2019
pexels-photo-1289902

Should you switch from the traditional endowment plan to a mutual fund?

In spite of being a financial planner and helping people invest and understand investments, it took me a long time to convince my husband to stop paying his endowment plan and invest the equal amount in the term-insurance and good equity oriented mutual fund.

It is just not him, 9 out of 10 people own an endowment insurance plan rather than a term insurance plan. The only reason for the same is to get their invested money in return.

Further, even after knowing that the endowment plan is not a wise investment choice, they are not convinced to surrender the insurance policy because they do not want to bear the loss on surrender.

We have tried to make your decision of switching much easier by calculating the actual loss that you might incur on surrendering the insurance policy versus the benefit of investing the premium amounts in the mutual funds.

To make it easier for you, I have tabulated below the gains that one would receive in both the scenarios to help you take a smart decision.

Scenario 1 – You continue to invest in the endowment plans such as Jeevan Labh or Jeevan Anand from LIC. (this is purely for an example purpose)

Total Premium over 35                            8,40,700
Maturity value after 35 years                         12,20,000
Total Gains from Insurance                            3,79,300
CAGR 1.1%

Scenario 2 – You withdraw the insurance premium amount and invest the same into mutual funds. You would also incur an additional cost of buying a term Insurance which would give you a cover of 1 Crore for INR 1200 per month.

Total Investments      8,13,551
Value at the end of the term   41,06,447
Total Gains from Mutual Funds    32,92,896
CAGR 5.5%

For detailed working of the above 2 tables and how we arrived at those numbers, refer to surrender of an endowment plan vs investing in mutual funds (working).

We have attached the excel sheet here for your own calculation. Just change the numbers in the boxes highlighted in pink, the sheet would compute the gains value and CAGR in each scenario. The same shall help you take a decision of whether you should stay invested in an endowment plan or move out your money and invest in an equity mutual fund.

These decisions are very case specific and factors such as risk-taking ability play a huge rule in deciding the movement. Never forget the following base rules before making the switch:

  • Understand your risk taking capacity.
  • An equity mutual fund is very volatile in short-term, investments in them are made from a long-term goal of 10+ years for the best results.
  • Where you cannot bear the risk, it is best to consult your financial advisor, who shall guide you in the same.

This transition is easier and profitable in the first few years of insurance premium has been paid. If you plan to move after 10-12 years of paying insurance premium it will generally not be profitable. The premium amount lost on surrendering the policy would be higher as compared to what you can receive in the balance tenure in mutual fund investments.

Please note the assumptions and explanations provided in the excel sheet for the computation of gain numbers and do your analysis accordingly.

Insurance / Money tips - 12/07/2018

GET STARTED

Attend a Workshop

Quick Financial Review

Schedule a workshop at your office

FOLLOW US

ABOUT US

About Us

Contact Us

Join Us

[mc4wp_form id="2150"]

WCafe Financial Services Pvt Ltd (formerly known as Wealth Cafe Financial Services Pvt Ltd) is a AMFI registered ARN holder with ARN-78274.

WCafe Financial Services Pvt Ltd (formerly known as Wealth Cafe Financial Services Pvt Ltd) is a SEBI registered Authorised Person (sub broker) of Sharekhan Limited with NSE Regn AP2069583763 and BSE Regn AP01074801170742.

Copyright 2010-20 Wealth Café ©  All Rights Reserved

Terms & Conditions   |   Privacy Policy