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/



3

How Many Mutual Funds Should You Have? (Part 1)

This week I am back with some discussion around Mutual Funds. In one of my workshops, during our mutual fund's discussion, I had this one trainee ask me - So what's your number?

I stared at her for a while not knowing what I am supposed to answer to that. Well, she rephrased her question, 'What is the number of mutual funds you are invested in?'  I said, '6 Mutual Funds'.She had the bewildered look on her face wondering how I had so fewer funds. I decided to show her my portfolio.


How many mutual funds schemes should you own? 

Owning around 5-7 mutual fund schemes across various categories is enough. These many mutual fund schemes will help you diversify, do your asset allocation, and also map these investments to your goals. You can invest your savings in the mutual fund schemes as per the below categories:

  1. Large Cap Mutual Fund (Equity)
  2. Large & Mid-Cap Mutual Fund (Equity) (your ELSS tax saving schemes are generally a Large & Mid Cap Mutual Fund)
  3. Mid Cap Mutual Fund (Equity)
  4. Small-Cap Mutual Fund (Equity)
  5. Thematic Mutual Fund (where you understand specific sectors and have a higher risk-taking appetite)  
  6. Short Term Debt Mutual Fund (For your short term goals)
  7. Long Term Debt Mutual Fund (For your long term goals)

In addition to the above, I have one Liquid Mutual Fund where I park my Emergency Funds. You can park your Emergency Fund in a Bank Fixed Deposit as an alternative.


Why only 5-7 Mutual Funds?

When you invest in Mutual Funds, you already diversify your risk across the stocks of the companies a particular mutual fund has invested in. Hence, with a large-cap mutual fund, your risk is diversified across more than 70 stocks that particular large-cap mutual fund has invested in. Investing in three different large-cap funds is not going to reduce your risk further, it will only make your investment portfolio messy.

'Mutual funds investing is to diversify your risk and not to di"worsify" the same'.

Further, reducing the number of schemes to a minimum of 5 also reduces the cost of managing the same and the time that goes in keeping a track of it and analyzing it regularly.


What do I do when I have more savings to Invest?

Increase your investment in the existing mutual fund's schemes you own. 
Investing in a new scheme every time you have extra savings will just lead you to own 15-20 mutual funds schemes with no plan in sight. Hence, it is important to do your due diligence and identify the mutual funds you want to invest in and stick to them. 

Yes, you must review your schemes regularly to see how are they performing in various market cycles but know that all schemes will not give you the best results always. There are some time periods where mid-cap and small-cap schemes will do better, other times when large-cap schemes will outperform and sometimes your debt investments will be the best performer for the year. Hence, it is important to be diversified across categories.


'Every time I check for the best mutual fund scheme and invest in the ones that are on the top' 

Studies have proven that selecting mutual funds based on high-performance track records is naive. The Star rating of various mutual fund 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

Hence, just investing in top-rated schemes is not going to give you the desired returns but only make your portfolio messy and not even get you the best returns.

Wealth cafe Takeaway - While you are investing in 5-7 different schemes across the options stated above, ensure that you invest across various AMCs as well. This will ensure that you are diversifying your risk and your entire money is not with only one AMC.

We shall follow up this article with a part 2 on how to downsize your portfolio.

Until then, keep reading, if you find this helpful, do share it with your friends.

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.



2

One size does not fit all!

Hi fellow investors,


Ever walked into the ladies' shoe section of the mall during the sale season?

They have long tables filled with all kinds of shoes and each table has the shoe size written on it. I happened to have very petite feet (a size 36) and I look forward to the sale season to upgrade my shoe collection. And during the sale, I go to the mall oozing with enthusiasm to pick up some great heels at flat 50% off, fight off scores of other women and claw my way to the front of the table only to find ugly black chappals in my size!

However, at the end of the store, there is a table filled with some amazing shoes and without the commotion around it, but they are SIZE 41 - 42. Ugh! I hate having small feet during the sale season. All the best brands have their best discounts on shoes in the 40-42 size range. They even have color options! They have so many great options that I am even tempted to try them on just to see what they'd look like. But I do NOT buy these shoes because they are NOT my SIZE. They may be the BEST shoes out there but I DO NOT BUY it. Why would anyone spend money on shoes that would ever fit them, right?

So, in spite of knowing not to buy shoes that do not fit them, why do people invest without knowing what is the right fit for them?

Everyone is always searching for:
'The best Mutual Funds to Invest in?' 
'Tell me where can I get the maximum return possible'
'How much returns will I make through this investment'

The best returns are in the shoe of size 42 but clearly, they do not fit me and will only be a waste of money and similarly, so will your investments if they are bought considering only the 'best returns' as criteria.

You need to invest your money in the investments which are 'RIGHT' for you as per your risk profile. The investments which fit perfectly well in the asset allocation determined by your risk profile just as my feet size determine the final shoe design I pick.

What is this Risk Profile?

The risk profile is your risk-taking capacity and how much risk you can take so that you can peacefully sleep at night. It is based on your ability to take a risk and your willingness to take the risk. Where the ability is more a function of your age, your money, and your goals, willingness is completely behavioral and is determined by your life experiences and education.

Before you start your investments, it is very important that you take a risk profile test (we have attached an indicative risk profile for your reference) and know what is the RIGHT Debt-Equity mix for you.

High Risk = High Returns
Low Risk = Low Returns

Where you make the investment decision based on the risk you are taking, you will eventually be able to achieve your goals with peace of mind and not worrying about the volatility in the markets.
Shouldn't that be the whole point of investing in the first place?

Hence, don't just run behind the highest returns, they might not be the right fit for you. Instead, understand what you want to achieve by investing, plan accordingly, and then invest.

Disclaimer -  These 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.  



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Questions Related to Income Tax

GENERAL FAQs

  1. How will I get my excess paid tax refunded back?

Once you file an income tax return, the excess fund will be transferred to your bank account or by cheque once the refund gets processed.

 

  1. Is it possible to communicate with CPC in paper form?

No, no paper communication is allowed with CPC.

 

  1. What is the toll-free CPC help line number?

It is 1800-425-2229.

 

  1. What to do when an assessee is not able to call on toll-free number from abroad?

In that case, you can use the chargeable number 080-22546500 to contact IT department.

 

  1. What is the email id to contact CPC?

There is no Email ID provided from CPC to contact them. The only way is through the toll-free and chargeable contact number.

 

  1. What are the working hours of CPC?

It is 8.00 am to 8.00 pm from Monday to Friday, excluding all the national holidays.

 

  1. How to claim a refund for TDS deducted due to late PAN submission?

Your employer can file the “Correction Statement” and provide your PAN information. In this case, you have to file IT return even if your income is below the tax slabs.

 

  1. Do I have to file Original return once again, if the Original e-return declared to be invalid due to non-receipt of ITR-V?

If the ITR-V has not been received by the CPC and you have the 120 day period remains, then you will have to sign a new ITR-V form and send it to CPC within the time frame. But if the time frame has expired, then you have to file a revised return which will be ultimately treated as original return.

  1. What is the password to open ITR-V

The password to open ITR-V is the combination of your PAN number and your DOB. It should be last 5 digits of your PAN number and ddmmyyyy of the DOB.

 

  1. Can more than one ITR-V be sent in one envelope?

Yes, more than one form can be sent together in one envelope but one needs to take care that the barcode does not get folded.

  1. Can I send the ITR-V to CPC by Registered Post?

No, ITR-V can be sent only via ordinary post or speed post.

 

  1. I am not receiving any communication from ITD CPC regarding receipt of ITR-V, Intimation u/s 143(1) or other communications. What should I do?

All the CPC communications are done by email and mobile number and that is why you must check this information first. Go to the E-filing website and access the user account and review the details. For help, contact your tax practitioner.

 

  1. How many times can I file the revised return?

You can do it multiple times till the expiry of one year time limit.

 

  1. How can a taxpayer find his Assessing Officer (AO) Code?

Go to www.allindiaitr.com and log into your account. Under the account tab, click on “services” menu and under that click on “Know Your Jurisdiction” tab.

FAQs ON BANK DETAILS

  1. What is IFSC Code and where to find it?

It is called as Indian Financial System Code, which contains 11 alpha numeric characters which is a must required thing for electronic transfers. This code can be found in the cheque leaf or from the passbook or you can get it by contacting the bank.

 

  1. What is MICR code and where to find it?

Magnetic Ink Character Recognition is required for cheque processing technology and can be found in the bank account cheque book.

 

  1. What is a bank branch code?

It is a unique code for a bank branch which helps in recognizing it.

 

  1. What is ECS?

It is an electronic fund transfer mode that can be used for paying interest, dividends, pension and to pay bills for electricity, telephone or water.

FAQs ON CONTACT DETAILS

  1. Is it mandatory to enter email id and if so, then Which email ID should I provide?

Yes, it is mandatory to provide email ID while filing e-return through online system. You must enter your personal email ID.

 

  1. Should I provide my permanent address or current address?

You can provide either of them, whichever is best available to communicate.

 

  1. Which documents will serve as proof of ‘identity’ for individuals and HUFs?
  • The following documents are needed:
  • Matriculation certificate
  • School leaving certificate
  • Educational degree certificate from a recognized institution
  • Depository account
  • Bank account
  • Credit card
  • Water bill receipt
  • Ration card
  • Property tax assessment order
  • Passport
  • Voter identity card
  • Driving license
  • Certificate of identity signed by an MP or an MLA or a municipal councillor or a Gazetted officer

FAQs ON RESIDENTIAL STATUS

  1. What will serve as the proof of ‘address’ for individuals and HUFs?

All of the below mentioned documents can be used as address proof:

  • Electricity bill
  • Telephone bill
  • Depository account
  • Credit card
  • Bank account
  • Ration card
  • Employer certificate
  • Passport
  • Voter identity card
  • Property tax assessment order
  • Driving license
  • Rent receipt
  • Certificate of address signed by an MP / MLA / Municipal councilor / Gazetted officer.

 

  1. Does taxability change as per residential status?

Yes, it does depends on the residential status of the taxpayer.

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How to Save Long Term Capital Gains Tax from Property?

The long-term capital gains from property can be huge especially if the asset was held for really long term. These gains are taxed at 20% + cess (effectively 20.8% from FY 2018-19) which can cause a major dent in the amount received on sale. So if we have an option to save, we must save on this tax. The post below gives details of the 3 sections concerned with the Saving of Long Term Capital Gains Tax from Property.

As capital gains taxation is concerned property can be two types:

  1. Residential(house, apartment used for residential purpose)
  2. All others(this includes land, commercial buildings etc)

There are 3 sections using which tax payers can use to save tax on their long-term capital gains. We discuss these one by one:

  1. Section 54(buy residential property on sale of residential property)
  2. Section 54EC(buy specified bonds on sale of any property – land/building/residential/commercial)
  3. Section 54F(buy residential property on sale of any property – land/building/residential/commercial)

We discuss each section in detail:

Section 54 (buy residential property on sale of residential property)

Section 54 is applicable in case of long-term capital gains arising out of sale of any residential property. The exemption is up to following:

  1. Purchase of another residential property(including under construction property) 1 year before the sale of 2 years after the sale and/or
  2. Construction of residential property within 3 yearsof sale
  3. From FY 2019-20 a person can nowbuy two houses on sale of 1 house if the capital gains are less than Rs 2 crore. This benefit can be availed only once in lifetime. [proposed in Budget 2019]

The new property purchased or constructed should not be sold with-in 3 years of purchase/construction. In case the sale happens within 3 years, the purchase price of the property would exclude the capital gains exemption that was claimed.

There is NO limit to the amount of capital gains that can be exempted u/s 54. If the long-term capital gains are less than or equal to the new house purchased/constructed, the entire gains would be tax exempted. In case the capital gains are more, the difference of capital gains and cost of new house would be taxed.

The NEW House should be on the same name as on the previous property which was sold.

Even if the builder fails to hand-over the under construction property with-in 3 years, the exemption still holds.

Relevant Points:

The section 54 tax exemption is available only if the amount is invested in only one residential property in India [Budget 2014]

Under section 54, the tax payers are given 2 years to purchase the house or 3 years to construct it, however the long-term capital gains arising out of sale is taxable in the financial year the transaction happened. Both the above provisions are not consistent to each other. To avoid this, the tax payer has to deposit all their unutilized long-term capital gains in “Capital Gains Account Scheme” of banks before the due date of filing returns (in most cases before July 31). The income tax return forms ask for details of the capital gains account, which should be filled in correctly. Also, the amount which has already been utilized for purchase/construction would be exempted from capital gains.

In case the amount deposited in capital gains account has not been utilized (partially or fully) within 3 years, it would be considered capital gains of the year in which the 3 years would be completed from the date of sale.

Section 54EC (buy specified bonds on sale of any property)

You can save long term capital gains on assets if you invest the gains in specified long term capital gains bond within 6 months of sale of asset. As of today, NHAI (National Highway Authority of India), REC (Rural Electrification Corporation) and PFC (Power Finance Corporation) issue capital gains bond and have annual interest rate of 5.25%. The interest earned is taxed as per the income tax slab. Also, the bonds have tenure of 3 years which would increase to 5 years from FY 2018-19 (as changed in Budget 2018). Until this year these bonds were available for long term capital gains from any asset but from FY 2018-19 the capital gains resulting from sale of property (land/building/residential/commercial) can only be invested.

 

Section 54F (buy residential property on sale of any property)

Any long-term capital gains arising due to sale of any asset can be made exempt by:

  1. Purchase of another residential property(including under construction property) 1 year before the sale of 2 years after the sale and/or
  2. Construction of residential property within 3 yearsof sale

In case entire amount is not invested in new purchase, the exemption would be proportionate.

Amount Exempt = Capital Gains X [Amount Invested / Net Sale Consideration]

The NEW House should be on the same name as on the previous property which was sold.

Even if the builder fails to hand-over the under construction property with-in 3 years, the exemption still holds.

There are certain limitations:

  • The tax payer should not have more than 1 residential house as on the date of sell of the asset.
  • The tax payer purchases any residential house other than the new house within 1 year of sale.
  • The tax payer constructs any residential house other than the new house within 3 years of sale.
  • Budget 2014 also made it compulsory that the new house should be located in India. Also, the capital gains account scheme can be used by the tax payer if required.
  • The proceeds should not be invested in a commercial property or in another vacant plot.

Some of you may be confused between Section 54F and 54. Below is a comparison to make things more clear:

Section 54F Vs 54:

Section 54Section 54F
When Applicable?buy residential property on sale of residential propertybuy residential property on sale of any property
Full Exemption?To claim full exemption all Capital Gains must be invested in new houseTo claim full exemption entire sale receipt must be invested in new house
Any LimitNo such conditionsShould not own more than one residential house at the time of sale of the original asset

We have explained all 3 sections – Section 54, Section 54EC and Section 54F which can be used to save long term capital gains tax on property. 

 

 

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Can I claim Tax Benefit on both HRA & Home Loan?

Can I claim Tax Benefit for both HRA & Home Loan? – A question which is often asked by many tax payers. This is mainly because many employers do not allow both tax benefits together in certain situations. Unfortunately this is NOT the right thing to do.

 

Both HRA and Home Loan Interest tax sections are unrelated. You claim tax benefit on HRA (House Rent Allowance) under section 10(13A) while the tax benefit on payment of interest on home loan comes under section 24(b). However there can be issues if both the sections are used together with the intent of tax evasion.

 

We can have four situations for people claiming HRA & Home Loan tax benefit.

  1. Rented house in place of employment and own house in different city
  2. Own flat in city of employment and stay on rented house in same city
  3. Own flat in city of employment and stay with parents/siblings in the same city and pay them rent
  4. Rented house in different city and own house at place of employment

 

  1. Rented house in place of employment and own house in different city

This is a very easy situation to handle. You can easily claim tax benefit on both and NO employer has issue with this arrangement.

  1. Own flat in city of employment and stay on rented house in same city

This is tricky situation. The first logical question which comes to mind is why would any person owning house in the same city stay on rent? Most employers have issue with this arrangement and may not give tax benefit on both HRA & Home Loan.

 

But legally you can claim tax benefit on both if you can give a valid reason for this arrangement. The reasons can be its more convenient to stay. For e.g. your flat is on the outskirts with almost negligible public transport, you might not want to live there and rather stay close to your place of employment. The other reason could be the owned house is smaller for the size of family.There are misconceptions that there should be minimum distance between two houses. All this is myth! All you need a genuine reason to stay on rent.

 

Also if you move to your new owned house in the middle of financial year, its a genuine thing to do and you can claim HRA for the period you stayed on rent and house loan benefit for the entire year. In case your employer is not ready to give tax benefit on both – you can claim HRA tax benefit from employer and claim tax benefit on Home Loan while filing your Income Tax return. 

The other question is should the owned house be assumed to have notional rent? The answer is No. If you receive actual rent then show, only then you need to pay tax on that.

3. Own flat in city of employment and stay with parents/siblings in the same city and pay them rent

The situation is similar as discussed above with the difference being your landlord or landlady is your close relative like parents/siblings. Any such rental transaction is full with suspicion and so you should be very careful if you use this for tax saving. You must do the following:

  1. Actually pay the rent through Cheque/ECS etc. and receiver should give rent receipt for the same.
  2. The landlord/lady should show this rent as “income from house property” and pay taxes on the same.

There have been cases where rent paid to close relatives have been denied tax benefit by income tax department as there was NO evidence of actual transaction. So stay careful.

4. Rented house in different city and own house at place of employment

There may be case where you have rented a place where your spouse/parents stay (in a different city) while you own a house at the city of your employment and stay there. In this case you cannot claim HRA tax benefit as HRA is paid for staying on rent for purpose of employment. However you can easily claim home loan tax benefit.

1

Why do people ‘NOT’ consider financial education ‘ Important’?

Hi fellow investors!

A very dear friend visited me for lunch recently, and we had a nice afternoon chat. It was such a relief to see a new face to talk to and eat with. He also happens to be the Marketing Executive for another education company and we got talking about Wealth Cafe and why we conduct money workshops and teach financial education.

The most important discussion we had was around 'WHY' so many people don't consider financial education or money as a priority, and my usual long phone conversations with Harsh Vardhan Dawar (Founder & Director of Wealth Cafe) also majorly revolve around the 'WHY' and 'HOW' of Financial education, I thought it would be interesting to share the same with you this week.

Why it is important yet difficult to study about managing your OWN Money & Investments?

 


1. Money takes time to grow!


It does and we have always said it. When you buy chocolate, you get to enjoy it within 10 seconds of you purchasing it, whereas when you invest, you may finally enjoy its fruits only after years. Your Fixed Deposit of 10,000 becomes 10,600 after 1 year. 365 days. 8,760 hours. It takes time and it requires the investor to wait for it to grow. 

Remember - Don't wait to Invest, Invest, and Wait.


2. Not a part of our dinner table discussions or school gang chats


Do you talk to your family about where you should invest your money or have your parents discussed it with you over dinner? If you have, then it's amazing, but most families don't have this discussion. Also, when we're hanging out with our friends we almost never talk about investments, savings, or goals (we may have mentioned the economy and stock market but not concrete discussions on how you can plan your finance). 

#letschangethedialogue. 


3.  Money matters 


For most of us, money is important until we have enough to buy and do what we want to do at the moment or maybe in the near future. Many of us are at a phase where we want to earn more and work (job/freelance) for it is the only option. Money matters a lot but only to the extent where it adds comfort to our present life. 

We generally don't tend to ponder over questions like 'Will I have enough when I retire?' or 'Can I quit my job to start something of my own?'


4. Money is boring


Well, I have to face this, I love reading and talking about money and investments, but for a person without a financial background, it may not be as exciting. Not many people are pumped about getting up from their beds and reading about the nuances of Mutual funds or FDs. It is akin to researching the bacteria that caused you the toothache.

But if you love yourself, you go to be on top of your health and wealth. Either learn about it or have an expert take care of it for you.


5. Not a priority


While my friend and I were having this long discussion, I asked him if he had ever taken the effort to educate himself about money matters, and surprisingly, his answer was no!  He said that there was never enough time for him to sort his finances or read up about it. Work always kept him busy and Alas! this is the most important reason.

If any of these reasons are blocking you or holding you back, let's work on it together. 

When you work hard your entire life to make money, you can work a little to make your money work hard for you. It's all about prioritizing.

 

The important subject of Money Management is not taught at any level of school or college in India which is why the financial literacy of India is at a meager 2%. Without proper knowledge about financial products, one cannot make the right decision with respect to investments. At Wealth Café, we are working on doing that, our everyday effort is to make finance simple for you :).

Here's wishing that you also start taking that small effort to make your own money a priority for you.

Where you think any of your friend or family could benefit from this, please do share via email or Facebook :)

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.  



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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.

 

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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.

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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’.

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