Income tax Feature Image

Income-tax relief for home buyers

Hello fellow investors
 

As a part of various relief measures taken by the Government in response to the economic slowdown post-COVID-19, the Finance Minister (FM) has announced a very attractive income tax relief for home buyers (new residential properties of value up to Rs 2 crore). Here is what you need to know.  

Income Tax relief for home buyers
 

In case the declared purchase consideration of the land/building is less than the stamp value (circle rate) by up to 20%, there will be no additional tax outgo for both the seller and the purchaser for the period 12th November 2020 to 30th June 2021. Earlier, the acceptable difference was 5% which was to be enhanced to 10% with effect from 01 st April 2021.

This move will also help developers in selling off their unsold inventory at up to 20% below the circle rate and the buyers in getting cheaper homes without any additional tax burden on either party. Let’s look at the relevant provisions of the Income Tax Act to understand the applicable tax relief.

Section 43CA of the Income-tax Act – for the seller

This section provided for deeming of the stamp duty value (circle rate) as sale consideration for the transfer of real estate inventory in the case the circle rate exceeded the declared consideration. The circle rate is the minimum rate per unit area fixed by the state governments for the sale of land or property and is
aimed at reducing stamp duty evasion by declaring lower sale values in the sale-purchase deeds.

Thus, even if the real estate was sold at a price below the circle rate, the circle rate was considered as the sale value for calculation of business profits of the seller. For example, if a house is sold by a developer for Rs 80 lakh but its value as per the circle rate is Rs 96 lakh, the developer is supposed to take Rs 96 lakh as the sale value for
calculating his profit.

Through Finance Act 2018, a difference of 5% between the two rates was declared to be acceptable. This was increased to 10% through Finance Act 2020. Now, the FM has raised this acceptable difference to 20%. Thus, in the above case, the difference is exactly 20% as seen below and the developer can consider Rs 80 lakh for calculating his profits from the sale. 

Section 56(2)(x) of the Income-tax Act for the buyer

This section is applicable to the buyer and provides for stamp duty value to be deemed as purchase consideration even if the purchase was made at a lower price. As per the above example, the buyer is deemed to have received Rs 16 lakh (the difference between the stamp value and the sale consideration) and was supposed to declare this amount as ‘Income from other sources’ and pay tax on the same. Now, he will not have to pay any tax if the difference is up to 20% as is the case in the above example.

In summary, this announcement by the FM comes as a major relief to real estate developers who were struggling to offload their inventory due to lower demand in the market. The benefit is applicable, however, only for the primary sale of residential properties and not for commercial and secondary sales.

Know your Mutual Funds (2)

List of banks for your PPF investments

What is PPF?

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

Why open a PPF account?

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

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

Eligibility Criteria

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

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

Interest in a PPF Account

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

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

How to Open a PPF Account

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

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

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

Tax Benefits

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

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

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

List of Banks Offering PPF Accounts

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

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

 

17

Harsh Mehta – 1992 Scam – Our Learnings

Hello fellow investors

Ishq hai, toh Risk hai!! Today, I am going to talk about the most acclaimed show of the Indian network currently - Harshad Mehta - 1992 Scam. Don't worry I am not going to give any spoilers. Through this article, it is my attempt to share the learnings about investing that we all can take home and apply.

Harshad Mehta, a name which is could be new to many young investors but is the reason why my father moved to Bombay and took up finance as his profession. He was the living God for many young investors back in 1992 and he also helped many people make money in the market. However, when the basis of his work and reality came to light, he also became the reason for many people losing their entire life savings. 

 


Let's check out the learnings you budding investors can take from the show:

  1. The 3 main fundamentals of investing in the stock market are 1. Have common sense 2. Do research on the fundamentals of the company 3. Do not underestimate how behavior and investors' confidence changes the tides of the market.
  2. The entire show in fact focuses on the fact that the blinding trust of people in Harshad made them buy stocks of companies he was buying even where some of the companies had no business or value. Never just invest in tips + articles - Do your own research, it is your money. 
  3. Fear of missing out (FOMO) can lead to higher losses if not managed properly. You need to be able to control your emotions. Buying when the market is going up in the fear of missing out could make you lose more money. Buy when the price is right, not because everyone else is buying.
  4. When you invest on the basis of a tip from anyone you are gambling in the market, playing your chances not really investing any money on fundamentals.
  5. No one is the god of the market, the market waits and listens to nobody, there are many players and forces that make the market move, and having a proper process which guides you when to enter and when to leave will help you manage your risk of investing. One such process is asset allocation. We have written many articles to explain how this process helps you overcome your fear and FOMO and invest as per your risk-taking capacity.
  6. Equity Investing is RISKY and has always been but over time, various financial institutions and SEBI has better control to protect the interest of investors, having said that there have been many crashes after 1992 which are beyond our control (including the one in March 2020). One thing to remember as an investor is a market high in 1992 was 4000 and 2020 was 40,000. After every crash, the market does bounce back, all you have to do is give it time. Hence, the key to success in Equity Investing has always been Long term !!
  7. There will always be another market crash around us waiting to happen, we can never time that or control. As investors what you and I can control is our learnings, investing basis true fundamentals, and building a balanced portfolio that is designed based on goals and asset allocation, phir Harshad Aaye ya corona, Hume Nahi koi Rona Dhona.

This was a small email with some very detailed take-aways. Do enjoy the show, there are so many things to learn from it and I could not feel more proud to be a part of the time and space where Indian television is making shows which highlight the importance of financial literacy. The main learning from the entire show is that we must know how to manage our money, we must be financially aware so that no one can take any undue advantage of us and our money.

On this note of learning and becoming more aware, I want to inform you that we are coming out soon with our new course on money management - Namaste Money only for you - newbie investors. This will be a detailed online course where we will teach you everything from debt and equity to mutual funds to asset allocation. All our days and nights are going into finalizing the content of this course and opening it for registration. You can read all about 1this course here. Don't forget to give us your feedback.

 

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



5

Things To Do After You Buy A Health Insurance

Hi there Usually, we have health insurance and discuss how to get health insurance. In this article, we discuss things to do after you buy a health insurance plan. 1.  Understand claim procedures In the case of emergency hospitalization and in the case of planned hospitalization find out the documents and steps necessary to intimate the insurer. Copy this information from the insurer or TPA’s website onto a word processor, print it, and keep it along with the policy document and policy ID card. 2. Recognise that ‘cashless’ is not a right! Health insurance comes with a right to claim reimbursement. However, cashless claims are more of a privilege than a right. It is quite possible that the insurer may either deny cashless or allow it partially and ask the insured to claim the rest of the expenses via reimbursement after the hospitalization is complete. 3. Prepare for the next premium Even if you choose not to increase the cover each year, do not assume the premium will be the same next year. The premium could increase due to other reasons – age of individuals, the risk profile of the entire group covered by the group, underwriting test, and perhaps medical checkups too. Start an online recurring deposit that matures 6-8 weeks before the premium is due.  If you are comfortable, you can choose to put money aside in a liquid fund for your insurances. 4. Understand the implications of sub-limits There is nothing wrong with buying a policy with room-rent sub-limits. The only precaution is to ensure that the room-rent is always lower than that allowed by the sub-limit. This is because every kind of hospital fee (medicines, doctor fees, etc.) is linked to the room rent. So if you choose a room rent higher than that allowed by your policy, you will only be reimbursed (or paid via cashless) a portion of the hospital bill. 5. Recognize the impact of non-medical expenses Hospitalization is not only about paying hospitalization fees! There is a huge list of non-medical expenses that any patient could incur. There are some administrative expenses, household expenses (while you are hospitalized), support staff expenses, and some expenses which get rejected in your insurance. Even if you believe that your health insurance cover is sufficient, these expenses have to be paid. This is where your emergency fund will come in handy. So ensure that you have one in place. 6. Health Cover for family members If you are the earning member it is very crucial to have your own insurance but it is equally important to have health insurance for your family members, as any medical emergency for them would result in a financial setback for you and the entire family. If the budget is a constraint you can consider taking up a family floater plan - watch our youtube video on this.  https://www.youtube.com/watch?v=F0JNvA5a_eQ&ab_channel=WealthCafeFinancial  Health Insurance could be considered as one of the trickiest insurances to buy as the health issues are very different for each person and then each insurance company has varied insurance needs. As a practice, do understand the various clauses of your insurance and have an emergency fund in place to be stressfree of any unforeseen health issues. 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.



4

‘Investing’ in Real Estate?

Hello fellow investors!

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

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


1. Real Estate will skew your Asset Allocation

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

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


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

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

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


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

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

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


4. TAX cost, buying another property.

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


5. Difficult to sell emotionally

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


6. Risk of renting out

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

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

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

Happy Investing!

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



6

Mistakes Investors Make That You Should Avoid

Hello fellow investors!

This Thursday, we are sharing a few mistakes that a beginner does when he/she starts investing and it is important that you understand them and act on it accordingly.


1. Not investing

The first and the biggest mistake investors and savers make is not doing it.
Don’t wait for that raise, inheritance, or lottery win. Start today, right now, with whatever you can.

Consider this: If you can save just 100 INR a day every day for 20 years, and earn 12 percent on it, you’ll end up with INR  30,48,395. That’s enough to change your life and the lives of those you love. So let's just start with keeping INR 100 aside.



2. Investing before doing your homework

When it comes to investing in risk assets like stocks, one mistake I’ve made is going on “gut instinct” and 20 minutes of Internet research.

When dealing with investments that can go south, don’t invest without a clue. If you’re thinking about stocks, there’s plenty of online research and information available free, not to mention TV shows and library books.



3. Being impatient


In a post called The 10 Commandments of Wealth and Happiness, the author, Stacy Johnson, offers this advice: Live like you’re going to die tomorrow, but invest like you’re going to live forever.

Stare at a newly planted tree for 24 hours and you’ll be convinced it’s not growing. Fixate on your investments the same way, and you could miss out on a game-changer.

As discussed above, your 100 INR daily grows into 30 lakhs over 20 years, you gotta be consistent and patient.



4. Not diversifying

There are two types of risk in stocks. The first is called market risk: If the entire market tanks, your stocks probably will as well. The other is called company risk: the risk a specific company will do poorly.

It’s hard to eliminate market risk, but you can reduce company risk by investing in lots of companies.

Can’t afford to own a meaningful number of companies? That’s what mutual funds are for. A mutual fund allows you to own a slice of dozens – even hundreds – of companies with an investment of as little as INR 500.



5. Taking too much risk

Everybody wants to double their money overnight. But if you’re always swinging for the fence, you’re going to strike out often.

Some investments are little more than gambling. Investments like options and commodities, for example, promise huge rewards, but the risk is also huge. Don't forget high risk = high returns.



6. Not taking enough risk

On the other side of the same coin, some investors stand like a deer in the headlights, unwilling to take even a measured amount of risk.

Instead, they keep their savings only in fixed deposits and bank, earning less than 6% (which is only reducing) and comforting themselves with Mark Twain’s expression: “I’m more concerned with the return of my money than the return on my money.”

Insured savings will ensure you never lose anything. But they’ll also ensure the purchasing power of your savings won’t keep pace with inflation. In other words, you’ll become poorer over time.



7. Paying too much attention

There is such a thing as information overload. Between the Internet, newspapers, magazines, and cable TV, it’s easy to get more than your fill of conflicting information.

Step back, look at the big picture, find a few financial journalists or others you trust, then tune out the rest.



8. Following the herd

One of the world’s wealthiest men, Warren Buffet, said, “Be fearful when others are greedy; be greedy when others are fearful.”

If you’re convinced the economy is going to zero, buy guns and canned goods. But if you can reasonably expect a recovery someday, invest – even if that day is a long way away, and even if it’s possible things could get worse before they get better.

We have seen the recovery that has happened from the below of March 23, 2020, of the stock market to current where we are almost back to what we were at the beginning of 2020.



9. Holding on when you should be letting go


Equity is best played as a long game. You should hold on long enough to see it through, but not knowing when to get out could cost you big.

Don’t obsess over your investments, but don’t ignore them either.



10. Being overconfident

The economy runs in cycles of boom and bust – when times are good, people often confuse luck with skill.

This is what happened during the housing bubble and the dot.com stock bubble and the past 4 months (March 2020 to July 2020). Being in the right place at the right time isn’t the same as being smart.



11. Failing to adjust

How you invest should change as your life changes. When you’re young, it makes sense to invest aggressively, because you have time to recoup from mistakes.

As you approach retirement age, you should reduce your risk.



12. Not seeking qualified help

While investing isn’t rocket science, if you don’t have the time or temperament, consider getting help.
The wrong help?
A commissioned salesperson more interested in their financial success than yours.
The right help?
A fee-based planner with the right blend of education, knowledge, credentials, and experience - you can contact us at ria.wealthcafe.in

Happy Investing!

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



11

Health Insurance: Single Plan or a Family Floater Plan?

Hello fellow investors

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

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


How much Insurance should you have?

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

 


What is an Individual Health Insurance policy?

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

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


What is a family floater plan?

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

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

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

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

Case 1 - A couple



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


Case 2 - Parents with 2 children


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


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

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

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

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

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



Top-Up Plan

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

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


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

What should you do?

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

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

Hope this helps you understand your insurance needs better.

Happy Investing!


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



10

Ways to Invest in Gold

Hello fellow investors,

We Indians love our gold.

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

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

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

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


Physical Gold

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

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

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

 

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

 

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

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

 

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

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


Paper Gold or Gold Securities

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

 

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

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

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

 

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

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

 

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

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

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

 

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

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

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

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

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

Happy Investing!



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



9

Should You Prepay Your Loans?

Hello fellow investors

 

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

The answer to this question depends upon 2 things:

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

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

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


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

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

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


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

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

 

Check I

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

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

Let us understand this with numbers:

 

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


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

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

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

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

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


Check III 

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

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

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

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


See you next Thursday!

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



8

Should you spend or invest your bonus?

Hi fellow investors

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

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


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



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



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

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

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


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



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

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

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

See you next Thursday!

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





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