SIP RETURNS BASED ON PERIOD AND RETURNS

TARGET/GROWTH Possibility of SIP at various rate of returns
Investment Amount IF EXPECTED RETURNS IS
9% 12% 15%
Time frame(yrs) 10YR 15 20 10 15 20 10 15 20
5000 955430 1846405 3217281 1120179 2379657 4599287 1315091 3081828 6635367
10000 1910860 3692810 6434561 2240359 4759314 9198574 2630182 6163656 13270734
20000 3821720 7385620 12869122 4480718 9518628 18397147 5260364 12327312 26541469
50000 9554300 18464050 32172805 11201795 23796570 45992867.5 13150910 30818280 66353672.5
100000 19108600 36928100 64345610 22403590 47593140 91985735 26301820 61636560 132707345
200000 38217200 73856200 128691220 44807180 95186280 183971470 52603640 123273120 265414690

How debt funds score over fixed deposits

February 4, 2013 1 comment

ILLUSTRATION:
Suppose Mr. A. invests 10,00,000rs. in fixed deposits for 10 years renewing every 3-5 years
averaging 9% returns before tax. At end of 10 years because of paying tax every year in the 30%
tax slab the returns that Mr. A gets is 1888000rs. only i.e. a return of 6.56% after tax.
Suppose Mr. A invests the same amount in debt funds for 10 years and averages 8.5% returns
then his return is 22,60,000rs. before paying tax. The maximum tax he will pay if we do not
consider indexation benefit is 1,26,000rs. whereby his net returns is 21,34,000rs. and per annum
gains of 7.87% per annum after tax. In this case we are not considering indexation. In case we
consider indexation benefit the tax will be much less and net returns much higher.
All in all Mr. A, after tax has added 2134000-1888000 = 2,46,000rs. which is 24% of his original
investment by just changing his way of investing in fixed income securities using the beautiful
taxation laws given to us by the Income Tax Act.
In the same example:
If returns generated are 8.5% but taxation is calculated with indexation(approx 5%)
His tax will be 63000rs. AND after tax returns will be 21,97,000 which is 8.18% after tax.
If returns generated are 9% and tax is calculated with indexation(approx 5%)
His accumulated amount will be 2367363rs. his tax on the same will be 68368 and after tax returns will
be 2298995rs. which comes to post tax 8.68% per annum.
WHICH IS 2298995‐1888000 = Rs. 4,10,000 extra.
EFFECTIVELY JUST BY USING TAX EFFICIENT METHOD OF INVESTING ONE CAN GAIN 24 TO41% over
one’s investment in just 10 years without taking any undue risk.
THE BEST PART IS THAT THIS IS JUST ANOTHER WAY OF INVESTING IN FIXED DEPOSITS USING THE
TAXATION STRUCTURE TO OUR ADVANTAGE. THERE IS NO EQUITY INVOLVED IN 100% DEBT FUNDS.

Categories: Save Tax

RAJIV GANDHI EQUITY SAVING SCHEME – FAQ detailed

Categories: Save Tax

KEEPING CASH AND WATCHING IT GROW OUTSIDE SAVINGS ACCOUNT – AN UPDATE

 

  1. ARE YOU KEEPING TOO MUCH IDLE CASH IN YOUR SAVINGS ACCOUNTS?
  2. DO YOU WANT TO KNOW OF A WAY IN WHICH YOUR IDLE CASH CAN GENERATE ADDITIONAL INTEREST MORE THAN WHAT YOUR SAVINGS ACCOUNT GIVES WITHOUT ANY PRINCIPAL RISK?
  3. DO YOU ALSO WANT EMERGENCY ACCESS TO THE ABOVE FUND THROUGH ATM CARD WHICH CAN BE USED IN HDFC BANK ATM’S?
  4. DO YOU ALSO WANT A FACILITY IN WHICH YOU CAN TRANSFER FUNDS TO AND FROM THE FUND ONLINE THROUGH YOUR BANK ACCOUNT?

For knowing how all the above is possible please read on?

FOLLOWING UP ON ARTICLE POSTED ON 7TH OCTOBER 2011 whose link is (https://aryaadvisoryservices.wordpress.com/2011/10/07/flag-this-message-keeping-cash-and-watching-it-grow-outside-savings-account/)

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.
Secondly liquid funds do not have entry or exit loads so its as good as savings account.  Liquid funds give more returns than savings account normally as per the scenario of interest rates in the market.  For e.g. last one year returns of liquid funds is around 8.5%.  Whereas last 2 years per annum return is around 6.5%.
Can be easily liquidated and dividend re-investment/payout option saves tax to a person in the highest tax bracket.

Coming back to point 2 above instead of keeping lakhs of rupees in banks at a meagre rate of 4% per annum, keep them in liquid funds and let it generate returns above your savings interest rate.  Keep some amount for emergency only in your savings account and transfer other to liquid funds.

As in point 4 you can also have online facility so that after creating folio through us we will help you get the online access so that through selected banks you can transfer money online. i.e. additional purchase or even redemption you will be able to do online yourself without worrying about the time taken for redemption/purchase.

Also now Reliance has launched an ATM card for selected liquid schemes, whereby you can withdraw upto 50% of your funds in a single day (max. limit as per ATM limit per day) from any  ATM so in case of small emergencies you can withdraw from your liquid fund in any ATM.

Loss to you in the last 2 years by keeping 2,00,000rs. idle in savings account on an average is atleast 6000rs. just because you did not open  a liquid fund.  Why crib for small change when you are not interested in keeping your money wisely?  Think.

Retirement Planning Article – Part 2.

Retirement Planning article – part 1

HOW to LOSE your first CRORE RS. by NOT DOING ANYTHING

Q:  How are we unique as Indians?

A:  As Indians we dig deep into what we understand.   We cut a hard bargain for mobiles, cars and other consumption items including food items wherever we can bargain.   In case of consumption we try to decrease our expenses but do we do the opposite i.e. try to increase our savings.  At the end of the day Income – Expense = Savings or Income – Savings = Expense.  Definition is in our hands.

Q: What is the major problem in decision making in the new generation?

A: Procrastination is a complex psychological behavior that affects everyone to some degree or another.

Some of the reasons for procrastination would be that the task would seem difficult or time-consuming or the fear of what happens afterwards.  What we forget is that INFLATION never procrastinates.  It is continuously decreasing the value of your money.   Here I will show you an example of 2 people Peter and Paul who started working at age 25.  Peter believed in the mall culture so he used up all his hard earned money.  He started saving 10,000rs. per month from age 33 for his corpus to be used for retirement planning after age 45.  Paul started saving 10,000rs. monthly from age 25 itself till age 45.  Both got an annual return of 15% in equity funds.  The corpus of Peter at age 45 was 37 lakhs. Whereas Paul had accumulated 132 lakhs.

Just delaying 8 years to start a nominal investment of 10,000rs. per month,  cost a crore to Peter.

Q: We hear this term “herd mentality” repeatedly? Can you elaborate how humans behave as a herd?

A: There are typically two things which guide us to this herd mentality.  One is that we do not want to miss out on something that our peer group has and another is that in case we fail, we don’t want to be the only failures.

Q: Any instances of herd mentality which you would like to share with us?

A: Sure.  In 2007 everybody was running after everything equity, thereafter gold, then again silver and now real estate.  People want to invest in the asset which has already risen just because it is currently rising instead of doing proper asset allocation.  I have observed that out of 100 people who have good savings rate only 30 people would have made good per annum gains in their savings.  Its just because of the salary hikes and increase in business income that a major people have good amount of cash with them, not because of their investment habits.

Q: Any tips for investors?

A: Yes.  Don’t run after your investments.  Do a proper asset allocation depending on your age, risk taking ability, liquidity requirements, goals and time horizon.  Review only once a quarter.  Not every single day.  If you have spare time take up a good hobby or develop your skills which would help you in your job or business.  Chill out.  Too much stress does not do any good to your finances or your health.

Conversations with a MF non-believer

November 2, 2011 4 comments

‘MFs are for the rich’
‘No, they for the dumb’
‘And they hardly give any decent returns’
‘Infact I can make more money from investing directly in stocks’

Presumptions about MFs always seem to outnumber the facts.   It took a 13-hour train ride to finally let go of my distrust of MF investing and emerge a believer.

There is a warm smell of chhole bathura as the young lady seated next to me meticulously opens the plastic wrapped boxes for her children. The old woman on berth 48 looks on indulgently while I’m trying hard to control my hunger pangs. We are on the 1019 UP Konark Express to Bhubaneshwar and I know I will have to deal with more delectable smelling food, restless children and an unending stream of chaiwallahs over the next 13 hours.

To take my mind off the food, I decide to start a conversation with a bright looking young man seated across me. He’s reading the Economic Times’ stock pages; Perfect. Just the kind of person I can share notes with on the recent market upswing.

Me: So you invest in stocks, eh? It definitely is a good time for people like you and me, what with the stock market on a roll.

BrightLad (BL): I don’t invest in stocks, Sir. I have all my savings in mutual funds with a good mix across equity, debt and liquid funds. I was just going through some of the NAVs

Me: Mutual funds? That’s surprising. You are a smart young man. Why would you invest in insipid mutual funds when there are much better returns to be made by investing directly in stocks? I’ve never known a man to make the kind of money in MFs that one can make in stocks directly.

BL: (laughing) Or lose that kind of money either… Investing in stocks is far riskier, Sir. It entails a lot of research, constant monitoring and most times a lot of money too in order to ensure that I have enough diversity in my investment portfolio. There is just too much risk investing the little surplus I have each month in 1-2 stocks. If they do badly, my savings are at stake.

Me: But the returns are so much more. I invested 40,000 in Vien Systems and now it’s worth Rs 1.1 lakh in just 6 months. You would never be able to make that kind of money in a MF.

BL: Maybe. But the risk attached with it is also far higher than that of a MF. When I say risk, I mean that these smaller company stocks which rise that fast can also fall as rapidly and then you might get far less returns or even have your capital wiped out.  People only talk about the money they make in stocks but not the money they lose. For every stock that gives you 300% returns, you would have 3 others in your portfolio which might be losing money.

With a mutual fund, you know that your funds are being managed by fund managers who are trained and whose job is to research companies and track markets on a full–time basis. It’s almost impossible for a lay person with a day job to replicate that kind of thoroughness or information about companies, industries or markets. Which basically means that the decision we common people on the street make about shares will be less informed than them and hence higher risk.  And if you would still prefer to invest in small cap stocks, MFs offer a  variety of schemes which invest largely in these stocks so that you can derive the benefit of value-investing.

Me: Ok so forget Vien. Even if I invest in a blue-chip stock I think I’ll make more money than say a MF which invests in blue chip companies; the reason being that MFs charge annual expense fees for the funds they manage.

BL: But you pay brokerage on your stock market transactions too, each time you buy and sell shares.  Moreover that brokerage is paid merely for executing the transaction whereas annual expense fees charged by MFs include the research that goes into picking stocks, managing the scheme’s risk-return across market conditions and executing all transactions required to maintain the portfolio in line with the scheme’s investment objectives. And to make sure that MFs do not charge any random fee, SEBI has prescribed stringent limits for MFs.

Our conversation is now drawing interested glances from a middle-aged man on the side berth and the old woman. Finally the man cannot resist:

Middle Aged man (MAM): Ok, so a mutual fund gives me the benefit of a well-diversified portfolio and hence better returns for the level of risk taken. It also allows me to achieve market related returns for small sums of money, since MFs accept investments as low as Rs 1,000 and still give you the benefit of investing in the stock markets.

Old Woman (OW): All that’s fine, but I’d rather invest my money in bonds than MFs. At my age, there is no place for any risk element in my investments.

BL: I agree. You would probably be better served by debt or liquid funds, since they give you the double benefit of investing in fixed income instruments as well as the flexibility of withdrawing your funds whenever you need it.

OW: But I thought  MFs invested only in stocks.

BL: That is a common misconception. There are several MF schemes which invest essentially in bonds, debentures and fixed deposits of banks and corporates. These are called debt  or income funds and are tailored to people who prefer low risk investments. The advantage an individual investor like you and me have here is that we are not tied down by a bond’s maturity period and can withdraw our money whenever we have the need for it. So we get the benefits of a steady income instrument without losing out on the ability to take our money when we need it.

Me: So basically what you’re telling us is people can choose lower-risk schemes like income funds or higher risk equity schemes depending on one’s risk appetite and return aspiration. And that since people have different needs at various points in their lives, MFs have devised schemes which suit those specific investment requirements.

MAM: (laughing) Probably also explains why there seem to be hundreds of schemes all over the place. People’s needs are not going to reduce any time soon, so MFs will continue to launch schemes I guess.

BL: Yes, but SEBI has also realised that this plethora of schemes can get confusing for the ordinary man and hence has issued strict instructions that MFs cant launch new funds unless they are fundamentally different from their existing schemes.The train rolls into Bhusaval and I take the opportunity to step out and buy myself some chai at the station. A while later, the whistle sounds. I run alongside the train a bit before jumping on. As I amble into my compartment, I see a new face in our midst. There’s an old man trying hard to squeeze his bag alongside all ours.

As the train gains momentum, I see the old gentleman pull out his mobile phone  and tell the person at the other end, most likely his son or daughter,  that he’s boarded the train and will call them once he reaches Bhubaneshwar. I’m trying hard not to eavesdrop but like the rest of us, the old man believes that long-distance conversations have to be conducted loudly. Suddenly he starts talking about SWP s and how he’s forgotten to deposit the cheques he’s received. The bright young lad looks at me and smiles; Another mutual fund investor, his face seems to be saying. I roll my eyes heavenwards and smile back.

The old man finishes his conversation and apologises for being loud. The bright lad smiles warmly at him: ‘You seem to have chosen your compartment well, Sir.  We have been having this interesting conversation on mutual funds and investing over the past few hours. I’m happy to see that we have another seasoned investor onboard now.’

OG: You embarrass me young man. I can hardly be called seasoned. I started investing after much prodding from my daughter. Initially I would berate her often when I had problems with either the process of investing or when the fund didn’t do as well as I expected it to. But now after nearly 2 years I’m glad I took her advice.

Me: But isn’t investing in MFs all too complicated? I mean everywhere I look I can see MF ads but none of them tell me what I really need to know. Where do I start from?

OG: (Smiling) You sound just like I did two years earlier, when investing in MFs was an alien concept for me. I had no clue either. I saw all these long articles about the virtues of MFs but absolutely nothing on the basics needed to get me started; Till a friend of mine guided me to his advisor. And that’s what I would recommend to you too.

Categories: Mutual Fund Articles

GOLD ACCUMULATION PLAN

GOLD ACCUMULATION PLAN
Easy guide to plan accumulation in Gold
Case I – Accumulation plan on Gold units (tola) desired over given period.
SIP amt. per month required for desired accumulation
25 tola 50 tola 75 tola 100 tola
5 years 14182 28365 42547 56730
10 years 8821 17642 26463 35284
15 years 7173 14346 21519 28692
20 years 6442 12883 19325 25766
Case II – Accumulation plan depending on SIP amount over given period
Gold(tola) accumulated with given SIP amt per month
2000rs. 5000rs. 10000rs. 25000rs.
5 years 5.8 14.5 29 72.51
10 years 15.34 38.36 76.72 191.8
15 years 31.05 77.62 155.23 388.08
20 years 56.88 142.2 284.41 711.02
* Gold calculations expected on an average 10% appreciation
* 1 tola taken as 10gms as per currently followed market norms
* Price of 1 Tola = 26500 approximate price as on 30th Sep 2011
SIP OPTIONS:
RELIANCE, HDFC, SBI, ICICI.

KEEPING CASH AND WATCHING IT GROW OUTSIDE SAVINGS ACCOUNT

October 7, 2011 1 comment
As Indians we have this habit of keeping cash in our savings accounts for use in case of any emergency.  Emergency can be a real emergency like paying for medical bills, or emergency can be something which could have been planned like a real estate or stock purchase.  But we as Indians have habit of keeping lakhs of rupees idle in our savings account which earn only 4% per annum interest because we feel safe that we have money in our bank.
Big corporates use the cash funds of mutual funds companies to park their deposits to get value out of their money.  Due to the opening up of the mutual fund industry with time the same cash funds are available for retail investors like us too but due to lack of knowledge we tend to discard them.
What is a liquid fund(cash fund)?

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.
Secondly liquid funds do not have entry or exit loads so its as good as savings account.  Liquid funds give more returns than savings account normally as per the scenario of interest rates in the market.  For e.g. last one year returns of liquid funds is around 8%.  Whereas last 2 years per annum return is around 6.5%.
Can be easily liquidated and dividend re-investment/payout option saves tax to a person in the highest tax bracket.

All major AMC’s eg. ICICI, HDFC, UTI and RELIANCE have liquid funds.

So let your idle money which you have put in savings account grow through liquid funds.

Categories: Mutual Fund Articles
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