Did you know | You can use your short-term capital loss to your advantage (Mint Dec 19 2011)

This has been a disappointing year for domestic equity markets with the Nifty declining at least 20% year-to-date. Investors are likely to have both unrealized and realized loss in their portfolios. Realized capital loss arises when you sell a stock or mutual fund (MF) at a price lower than your purchase price; hence, you book loss. While this isn’t anything you can rejoice about, you can set off or deduct capital loss from capital gain in the same year. This, in turn, means your tax liability stands reduced as the net capital gain reduces.

What is a capital asset?

Capital asset means property of any kind (the Income-tax Act clearly identifies exceptions). The Act doesn’t define “property” as such. Judicially, property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others and is entitled to use and enjoy as he pleases, provided he does not infringe any law. Once something is identified as property, it is a capital asset unless specifically exempted under the Act or if it figures in the exceptions mentioned in the Act.

What is short-term and long-term capital asset?

A short-term capital asset is that which is held for 36 months or less and long-term capital asset is one held for more than 36 months. In case of shares, any specified MF unit or units of Unit Trust of India or any security listed on a recognized stock exchange, short-term capital assets are those held for less than a year and long-term capital assets are those held for more than a year.

How can the loss be set off?

Realized short-term capital loss (asset held for less than a year in case of MF units and shares and less than 36 months for other capital assets) can be set off against gain from transfer of any other long-or short-term capital asset. Additionally, loss from transfer of a long-term capital asset (held for more than a year in case of MF units and shares and more than 36 months for other capital assets) can be set off against gains from transfer of long-term capital asset in the same year. This means if you have booked a loss of Rs 100 in a short-term capital asset and you have booked a gain of Rs 200 in a long-term capital asset, your net long-term capital gain on which you will be taxed is Rs 100. Similarly, if you booked a loss of Rs 200 in a long-term capital asset and booked a gain of Rs 100 in a short-term capital asset and Rs 200 in a long-term capital asset, your capital gains tax will be calculated for the gain of Rs 100 in the short-term capital asset. Note that long-term capital loss can only be set off against long-term capital gain from any capital asset and not against short-term capital gain.

Capital loss computed in an assessment year (AY) can be carried forward for eight AYs if it isn’t utilized fully in a given year. So if you booked a capital loss in the AY 2010-11 but didn’t earn any capital gains in that year, the loss can be set off against any other capital gain in the same AY or carried forward till AY 2018-19. Also, capital loss can’t be set off against any other income.

My Add-on:

Investors can also use Section 94 (8) on the Income Tax Act to their advantage, this sections states the treatment of Tax regarding Dividend and Bonus. For the purpose of explanation section 94 is mentioned below:

--- ITA - Income Tax Act ---

SECTION 94: Avoidance of tax by certain transactions in securities

Avoidance of tax by certain transactions in securities.
3 94. (1) Where the owner of any securities (in this sub-section and in sub-section (2) referred to as "the owner") sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this sub-section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.
Explanation.—The references in this sub-section to buying back or reacquiring the securities shall be deemed to include references to buying or acquiring similar securities, so, however, that where similar securities are bought or acquired, the owner shall be under no greater liability to income-tax than he would have been under if the original securities had been bought back or reacquired.
(2) Where any person has had at any time during any previous year any beneficial interest in any securities, and the result of any transaction relating to such securities or the income thereof is that, in respect of such securities within such year, either no income is received by him or the income received by him is less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, then the income from such securities for such year shall be deemed to be the income of such person.
(3) The provisions of sub-section (1) or sub-section (2) shall not apply if the owner, or the person who has had a beneficial interest in the securities, as the case may be, proves to the satisfaction of the 4 [Assessing] Officer—
(a ) that there has been no avoidance of income-tax, or
(b ) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred to in sub-section (1) or sub-section (2).
(4) Where any person carrying on a business which consists wholly or partly in dealing in securities, buys or acquires any securities and sells back or retransfers the securities, then, if the result of the transaction is that interest becoming payable in respect of the securities is receivable by him but is not deemed to be his income by reason of the provisions contained in sub-section (1), no account shall be taken of the transaction in computing for any of the purposes of this Act the profits arising from or loss sustained in the business.
(5) Sub-section (4) shall have effect, subject to any necessary modifications, as if references to selling back or retransferring the securities included references to selling or transferring similar securities.
(6) The 5[Assessing] Officer may, by notice in writing, require any person to furnish him within such time as he may direct (not being less than twenty-eight days), in respect of all securities of which such person was the owner or in which he had a beneficial interest at any time during the period specified in the notice, such particulars as he considers necessary for the purposes of this section and for the purpose of discovering whether income-tax has been borne in respect of the interest on all those securities.
6 [(7) Where—
( a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
7[( b) such person sells or transfers—
(i) such securities within a period of three months after such date; or
(ii) such unit within a period of nine months after such date;]
(c ) the dividend or income on such securities or unit received or receivable by such person is exempt,
then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.]
8 [(8) Where—
(a ) any person buys or acquires any units within a period of three months prior to the record date;
(b ) such person is allotted additional units without any payment on the basis of holding of such units on such date;
(c ) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b),
then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.]
Explanation.—For the purposes of this section,—
(a ) "interest" includes a dividend ;
9[( aa) "record date" means such date as may be fixed by—
(i) a company for the purposes of entitlement of the holder of the securities to receive dividend; or
(ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to clause (35) of section 10 , for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be;]
(b ) "securities" includes stocks and shares ;
(c ) securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or in the manner in which they can be transferred;
10[( d) "unit" shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB .]

3. For relevant case laws, see Google.com.
4. Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.
5. Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.
6. Inserted by the Finance Act, 2001, w.e.f. 1-4-2002.
7. Substituted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005. Prior to its substitution, clause (b ) read as under :
"(b) such person sells or transfers such securities or unit within a period of three months after such date;"
8. Inserted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005.
9. Substituted by the Finance (No. 2) Act, 2004, w.e.f. 1-4-2005. Prior to its substitution, clause (aa ), as inserted by the Finance Act, 2001, w.e.f. 1-4-2002, read as under :
‘(aa) "record date" means such date as may be fixed by a company or a Mutual Fund or the Unit Trust of India for the purposes of entitlement of the holder of the securities or the unit-holder, to receive dividend or income, as the case may be;’
10. Inserted by the Finance Act, 2001, w.e.f. 1-4-2002.

Location in ITA: CPC\Chapter X\Section 94
Location in App: ITA\Chapter X\Section 94

-Shared from 'ITA - Income Tax Act'

Are NRE FDs better than FMPs for NRIs? (www.onemint.com 7th Oct 2012)

In a prior post I compared FMPs (Fixed Maturity Plans) with bank fixed deposits, and said that if you are in the higher tax bracket, the tax advantage of FMPs tilt the balance in their favor somewhat (if you can live with the uncertainty).

That’s true for domestic investors but what about NRIs?

Allwyn left the following comment on the Suggest a Topic page a few days ago:

allwyn September 4, 2012 at 12:59 am [edit]

Hi,
Could you pls. explain the advantages/disadvantages of FDs(presently int. rates of over 9% tax free) over FMP/Debt funds for NRI’s

Thanks in advance

Allwyn

This is an interesting question, and in my mind since it’s only the tax advantage that makes you think of FMPs over fixed deposits for domestic investors, you need to look at the tax angle to answer this question for NRIs as well.

For close to a year now, NRE fixed deposits are tax free, and this was one step by RBI to arrest the Rupee slide. This means that NRE fixed deposits are currently better than NRO fixed deposits, and they are an obvious competitor to NRI investments in FMPs.

I didn’t know how FMPs are taxed for NRIs but this DSP BLACKROCK page on NRI taxation states that NRIs will be taxed at their applicable assessee rate in case of short term capital gains, and will be taxed at 10% without indexation or 20% with indexation for long term capital gains on non – equity mutual funds.

Since most FMPs are slightly over a year to make them count under long term capital gains, this means that most of the time your NRI FMPs will taxed at 10% whereas the returns from your NRE fixed deposits are tax free.

I think in general it is easier to open a NRE fixed deposit than it is to buy a FMP for NRIs, so that’s another thing in their favor along with the fact that you know before hand how much your fixed deposit will earn.

If the tax situation for NRIs change as far as FMPs are concerned then this might be worth a re-look but until then I can’t think of a good reason to favor FMPs instead of FDs for NRIs.

Tips to ensure your child becomes a financially savvy adult (ET 22 Oct 2012)

Here's how to hold your child's hand through the various monetary milestones in his life in order to ensure that he grows up into a financially savvy adult:

1) 5-6 years:

Kid's milestone: > Understand the concept of money.

> Know that money buys things, services.

Parent's role: > Help the child identify various denominations, sort coins by sizes, play money-based games.

> Take him shopping, make him pay for small things.

Pitfall: The child has a very small attention span. So if money learning is not made fun, he will switch off instantly.

2) 7-9 years

Kid's milestone: > Start the saving habit.

> Shoulder fiscal responsibility and make spending decisions.

> Set short-term goals.

Parent's role: > Buy him a piggy bank to collect change. Open a bank account for depositing monetary gifts.

> Start a weekly allowance. Fix the things you will not buy for him like candy, ice cream, etc. Give him the freedom to decide what he wants to buy.

> Explain how he can buy an expensive toy by saving as opposed to spending it on snacks on the first day.

Pitfall: If the kid finishes his allowance before the stipulated time, do not offer him an advance or pay for things he needs. He will never learn fiscal discipline.

3) 10-12 years

Kid's milestone: > Carry out financial transactions.

> Learn the value of money.

> Set medium-term goals.

Parent's role: > Open a bank account that allows your child actual transactions like signing a cheque or making deposits.

> Pay the child for minor errands such as washing a car or taking care of a younger sibling.

> Ask the child to buy shoes or gizmos fro savings.

Pitfall: The child is likely to lend money to his friends. Stress the importance of getting it back.

How earnest money impacts your tax (ET Wealth 8th Oct 2012)

You don’t have to pay income tax on earnest money received from a failed deal, but there are other tax implications you should be familiar with says M K Agarwal

When you buy or sell a tangible asset, there is usually some earnest money given by the buyer before he arranges for the full payment. This can range from 5,000-10,000 for a used car to a couple of lakhs of rupees for a real estate transaction. The payment is meant to seal the deal and the rules of arrangement are simple. If the buyer backs out, the earnest money given to the seller is forfeited. If the seller changes his mind, he gives back double the amount to the buyer. To ensure that both the parties play fair, there is typically an intermediary who is known to both. 
In normal circumstances, any amount received as advance for the purchase of an asset is a revenue receipt and is taxed in the year that it is received. What happens if the money is received from a buyer who fails to keep his commitment and the deal falls through? Will the forfeited amount become the income of the seller and will he have to pay tax on it? Under which income head will the amount have to be declared in the tax return form? 
As per Section 51 of the Income Tax Act, 1961, if the owner of an asset has received money by forfeiting any advance money for the asset, this amount will be deducted from the purchase price of the asset. This is the cost for which the asset was acquired or its fair market value (if the property was purchased before 1 April 1981). Suppose you bought a property for 10 lakh about 15 years ago, and two years ago, you decided to sell it for 40 lakh. The deal was struck and the buyer gave you earnest money of 2 lakh, but later backed out. The 2 lakh will be treated as capital receipt and you will not be taxed in that year, but the amount will be deducted from the purchase price of your property when you sell it in the future. In this case, the purchase price will be taken as 8 lakh ( 10 lakh— 2 lakh). 
In some cases, the deduction of earnest money from the cost price of the asset pushes up the capital gains tax of the owner substantially. In the example (How much tax...), the owner would not have had to pay any tax had he not forfeited the earnest money. The indexed cost of acquisition without deducting 50,000 from the cost price would have been 8.3 lakh. One would be better off including the earnest money in one’s income from other sources and paying tax on it. Is this possible? The law is silent on this because the earnest money is a capital receipt, not income. 
Also, the seller must know that this is a one-way street. If you backed out of the deal and paid the buyer 2 lakh compensation, it would be treated as a capital loss and not added to the purchase price of the property. You can claim tax benefit on this only if you were in the business of sale and purchase of the property. In such a case, the loss due to forfeiture would be treated as a revenue loss. 
Earnest money is usually a very small percentage of the total value of the transaction, but sometimes it can be higher than the cost price of the asset. Under Section 48 (read with Section 51), if the amount forfeited is greater than or equal to the cost of acquisition, the cost of the asset will be taken as nil. In one such case involving Sunita N Shah (2005) 94 ITD 492 (Mumbai), the forfeited amount was higher than the cost of acquisition. In such cases, the excess amount is considered capital receipt and is not chargeable to tax. The same ruling was given in the case of Travancore Rubber & Tea Co. Ltd (2000) 243 ITR 158, wherein the Supreme Court ruled in favour of the assessee. 
Tax impact on buyer In case the buyer defaults and the earnest money is forfeited, he will not be allowed to show it as a capital loss. This was the verdict in the case of CIT vs Sterling Investment Corporation Ltd (1980) 123 ITR 441. However, if the seller fails to honour the deal and pays the buyer double the compensation, this will be treated as capital gain because it amounts to relinquishment of a right by the buyer. In the case of CIT vs Vijay Flexible Container (1990) 186 ITR 693, it was held that giving up the right to obtain conveyance of immovable property amounts to transfer of a capital asset. 
What happens if the advance money was for the purchase of a commercial property? Can the loss be treated as business expenditure incurred by the purchaser? The amount cannot be claimed as revenue expenditure. In CIT vs Jaipur Mineral Develop Syndicate (1995) 216 ITR 469 (Raj), it was held that if the payment is made for the pupose of acquiring a capital asset, the amount lost upon forfeiture will not be considered as revenue loss though the amount may not have the same consequence or character in the hands of the recipient or beneficiary. 
How much tax does a seller pay? Mr X bought land in January 1987 for 2 lakh. He agreed to sell it to Mr Y in January 1998 and received 50,000 as earnest money. However, Mr Y backed out and his 50,000 was forfeited. Mr X sold the land on 1 January 2009 for 8 lakh to Mr Z. Here’s how his gains will be taxed: 
Purchase price: 2 lakh 
Earnest money received: 50,000 
Deemed purchase price: 1.5 lakh 
Indexed cost (in 2008-9): 6.23 lakh 
Selling price: 8 lakh 
Capital gain: 1.77 lakh 
Tax payable: 35,400 (20%)

The author is a chartered accountant and senior partner at Mahesh K Agarwal & Co and can be reached at mkcacs@gmail.com.

Fidelity Unitholders Get 30 Days to Redeem Holdings without a Fee (ET 10 Oct 2012)

SHAILESH MENON, MUMBAI 

Fidelity Mutual Fund, which sold its Indian assets under management to L&T Mutual Fund in March, will open a 30-day window from October 15 to allow unitholders to redeem their holdings without a fee. The Securities and Exchange Board of India (Sebi) mandates that mutual funds which have been acquired should give unitholders uncomfortable with a new fund management team the option to pull out without an exit load.

L&T Mutual Fund, part of the engineering-to-construction conglomerate Larsen & Toubro, had acquired Fidelity’s assets under management but did not rope in the fund management team. Now, a big worry for L&T Mutual Fund is that unitholders, who are clients of large foreign banks — big distributors of mutual fund products — may pull out money from Fidelity schemes during the 30-day period. 

Top officials of two leading foreign banks said L&T Mutual Fund is yet to garner support from foreign distributors. “We’ve not taken the mandate to sell L&T Mutual Funds as yet. Our audit offices are reviewing the fund house, their processes and performance track record,” said the distribution head of a foreign bank on condition of anonymity. 

Foreign banks sell only funds that are approved by their global audit committees, which usually prefer mutual fund schemes with a good track record or those belonging to Indian arms of international mutual funds. While Fidelity Funds appear on the distribution list of most foreign banks, L&T Mutual is a relatively new and ‘undertracked’ fund house. 

L&T Mutual officials, however, brushed aside these concerns. Speaking about distribution tie-ups with foreign banks, N Sivaraman, president & wholetime director, L&T Finance Holdings, said, “Revised empanelment process is on. I don’t see why foreign distributors would not want to sell L&T funds.” 

The fund management team and risk management of L&T MF have been beefed up to handle large investment inflows, he said. L&T Mutual recently hired Soumendra Nath Lahiri and Shriram Ramanathan as heads of equities and fixed income, respectively. “We’ve a good equities team now... Fixed income vertical has also been structured well,” Sivaraman said. “Critical segments like risk management and processes will be manned by the Fidelity team. There’s no need for investors to worry. Their money is in good hands.” 

Some distributors looking to make a quick buck could push clients to redeem during ‘no-load period’ and shift the proceeds to schemes of other fund houses. Rival fund houses are also looking at the ‘no-load’ window closely as fishing out Fidelity’s assets could be a cheaper way for them to acquire some assets. 

Fidelity Funds have returned well over the past 10 months and better still after the announcement of asset sale to L&T Mutual Fund. Equity funds like Fidelity Equity, Fidelity India Growth, Fidelity India Special Situations and Fidelity India Value have returned 20-30% since January, Value Research data show.

SEBI gives MFs time till October 31st for discontinuing SIPs, STPs under single plan structure (Cafe Mutual 3rd Oct 2012)

Ravi Samalad

AMCs get time till October 31^st to inform all their investors who will get affected due to SEBI regulation on implementing single plan structure. 

SEBI has acceded to AMFI’s request to allow fund houses to implement discontinuance of existing SIPs, STPs and dividend reinvestments under schemes which run separate plans for retail and institutional clients from November 01, 2012 instead of 01 October, 2012.

As per SEBI’s September 16, 2012 circular, AMCs are supposed to accept subscriptions only in one plan – either retail or institutional from 01 October 2012. The AMC has a choice to choose which plan they wish to continue. Take for instance, an AMC wants to accept subscriptions only under institutional plan. Thus, the retail plan needs to stop accepting fresh money or add units from 1^st October. However, the retail plan could have existing SIPs, STPs and dividend reinvestment mandates from investors. In this case, AMCs need to discontinue such SIPs, STPs and dividend reinvestments which would add units. However, implementing this rule was a tall order for AMCs in such a short span of time.

Institutional plans usually have a higher minimum application size. Thus, retail investors are not be able to invest in such schemes. In case an AMC wants to discontinue retail plan, they may lower the minimum investment size of institutional plan in a bid to attract retail investors.

From today onwards, AMCs have stopped accepting fresh subscriptions under the plans which they want to discontinue. These plans will never accept fresh inflows till the last investor redeems. These schemes would cease to exist thereafter. Now AMCs have one month’s time to inform all their investors about the new rule.

My Comments : It seems that our regulator has no other work other than increasing work of the Investors, Distributors and AMCs. After major changes in the KYC process, this step will lead to substantial increase in unproductive paperwork for all the entities involved in the process.

Explore loan against collateral like gold, shares to raise money at softer interest rates (ET 2nd Oct 2012)

Many of us opt for personal loans — when we can't (or don't want to) turn to friends or relatives for a soft loan — to tide over unseen shortfall in funds.

Sadly, most of us don't even consider other options available like loan against assets, shares, gold, property and so on. It is strange considering goldfinance companies have been on an overdrive in the last few years. Even moneywise, it makes perfect sense to take a close look at asset-backed loans.

Compared to the interest rate of 16% to 24% on personal loans, loans against assets come much cheaper at 12% to 14.5%. But the problem is you can't club all these asset-backed loans in one bracket. "Each one of these asset-backed loan has its own advantages and disadvantages.

You have to choose one of them only after analysing your needs in detail," says Satish Mehta, co-founder and director, Credexpert, a credit counselling entity. And the needs could be — the purpose of the loan, documentation requirement, time you have and how much money you want to raise.

PURPOSE OF THE LOAN

Loan against gold and securities work for relatively smaller amounts that you would like to pay off within a short timeframe. For example, if you are keen on a loan to fund your holiday, you may be better off borrowing against gold or securities.

But for larger expenditures, like a marriage, loan against property works better. Typically, repayment tenure is longer for a loan against property compared to a loan against gold, which helps fund larger expenditures.

For an average individual, market value of movable assets such as gold and securities is generally lower than the market value of the property. Hence in most cases large expenses are funded using loans against property. You can choose to take an overdraft facility against your house, where the bank approves the borrowing limit against a house.

If you plan it well, you can use this facility to meet any contingency, too. This works for those who do not have much of free cash flow each month and cannot maintain emergency funds. Though you may not use the overdraft, still you may have to pay the processing fee of around 1% of the overdraft limit.



DOCUMENTATION REQUIRED

Bankers differentiate between loans against movable and easily realisable assets, such as gold and securities, and loans against immovable and illiquid assets, like property. "In case of gold loans, lenders will be keen on 'know your customer' requirements than documentation pertaining to loan repayment ability," says Harsh Roongta, CEO, apanapaisa.com.

Set Financial Goals, For A Prosperous Tomorrow! (Free Press Journal 23 Sep 2012)

FORAM SHAH explains the importance of setting financial goals, with an outcome leads to abetter future.

Everyday we hear people around us saying “ Arre aaj market upar hai shares kharidne chahiye” ( the stock market has gone up and hence we should buy shares) or “ FD ka rate kitna badh gaya hai saare paise FD mein daalne chahiye” ( interest rates have gone up and hence should put money in Fixed Deposits) or that gold prices will increase and hence invest in gold now. But seldom do we ask ourselves why are we saving money? The obvious answer that comes to most of us is – for our future. Have we ever probed a little ahead and asked what is this future or when will the future come? Investing without knowing what we are saving for, leads to anxiety and hence at every increase or decrease in price/ rates we fall prey to the ‘ tips’ we get from our friends, relatives, colleagues. Most of us would react irrationally when it comes to our money. A friend of mine told me an incident where a person boarded a train from Churchgate station without knowing where he wanted to go. And thus at every station he would ask fellow travellers whether he should alight or continue his journey.

One would laugh at him thinking what a foolish person is he. But don’t we do the same with our money? We invest it without knowing our financial needs. Imagine this person had to go to Borivali.

He was atleast in the correct train.

Had his final destination been Dombivali, he was travelling in a wrong train altogether. One can imagine the hassles he will have to undergo to reach his destination.

( Churchgate, Borivali and Dombivali are stations on the western and central railway in Mumbai).

Someone may want to buy a laptop worth Rs. 40,000 for his son’s birthday two months away or accumulate Rs. 5 lakhs for daughters marriage or create a corpus for own retirement a decade away. These are simply nothing but the future events for which we save. In other words they are financial goals one wants to achieve.

Goals can be two months away, 2 years away or maybe a decade away. They are the destination one wants to reach. Defining goals is the first step to deciding where to invest. We understand how much money will be required and when.

Thus with every change in the market condition, there will be less apprehensions as the ultimate destination is known.

Very rarely do we find people who have listed down their financial goals. We always feel that it is at the back of our minds. We don’t realise the importance of actually writing them down. A person who has listed goal of taking parents for a pilgrimage after 8 months is less likely to spend a windfall gain, on any other thing. Thus defining goals also brings in focus.

Goals could be either responsibilities or dreams. While listing the goal if you feel that you have to do this – it becomes a responsibility. E. g. I have to provide for my child’s education.

Likewise if you feel that I wish to do this – it is your dream.

E. g. I wish to own a holiday home.

This exercise will enable you to prioritise among various goals and thus know which to postpone or which to not. We live in a dynamic world where “ Nothing is constant but change”. Our goals will also change with the change in life stage. Let me elaborate this with an example.

Mr. Malhar aged 25 approached us for financial planning. He was doing well in his job. He had already purchased a house by taking a loan. The main focus for him was to plan for his wedding and honeymoon. After his marriage, he was advised to undertake the exercise of goal setting with his wife.

Their combined goals changed and focus shifted to repayment of home loan, retirement, responsibility towards parents, buying a car and regular vacations. Life was running smoothly. Few years later when his wife was pregnant, their goals had to be revised to include corpus for child’s education and marriage.

Slowly the economic conditions changed and recession hit the market. Due to recession, Mr. Malhar had to face pay cut. He was still able to pay the EMI for the home loan. Most of his responsibilities were 10- 15 years away and hence there was no need to change the strategy. His near term goals of vacations and buying a car were affected. He was clear about the priorities assigned to goals and hence decided not to take a vacation or buy a car. These were postponed for a later date.

It is thus seen that goals should be revised with the change in life stage, birth/ death of family member, marriage, etc. Goals also need to be revisited during recession.

However in such case only the strategy to achieve the goals will change. Changes in economic conditions will lead to anxiety; however, one should keep in mind the duration after which the goal needs to be fulfilled before taking any corrective action. Finally to conclude, we all set goals for us in different walks of life so why not set our financial goals? 

Ms. Foram Shah is a Certified Financial Planner.

foramrs@ gmail. com

Ulips with health benefits are a costly affair (BS 25 Sep 2012)

YOGINI JOGLEKAR Wealth creation plus medical cover – the new theme of Tata AIA Life Insurance ‘Suraksha Kosh’ – tries to attract customers with twin covers through a unit-linked insurance plan (Ulip) and health benefits. But in its attempt to offer too many things, it ends up being more expensive, even if one were to buy both the covers separately. The premium of Tata AIA’s ‘Suraksha Kosh’, is ~25,000 for a40-year term. This product will pay a sum assured (SA) of ~10 lakh each for death benefit, critical illness and accidental benefit. Additionally, it also offers to pay a sum assured of ~3.5 lakh for surgical benefits. In total, it covers an individual for ~33.5 lakh, provided you pay the stipulated premium every year for 40 continuous years. Suresh Sadagopan of Ladder 7 Financial Advisory Services says such plans turn out to be expensive instead. “One should rather buy a pure protection plan and a medical policy, which will offer other benefits at a lower cost, too. If one wants to create wealth, investing in Ulips is not the only way.” One can save as much as up to ~10,000, if the benefits are bought separately from specialists. Taking a similar example mentioned above, one has to pay ~3,540 towards alife cover (for SA of ~30 lakh), ~3,052 for accidental benefit (for SA of ~25 lakh), ~2,809 for critical illness (for SA of ~10 lakh) and ~800 for surgical benefits (for SA of ~3 lakh). In total, one pays ~10,000 approximately for the same benefits with an equivalent or more sum assured/cover. There are others such as ICICI Prudential Life Insurance which has a similar product ‘ICICI Pru Health Saver’ which gives hospitalisation benefit as well. Whereas HDFC Life and Kotak Life Insurance are among few other life insurers who offer similar Ulips but benefits have to be bought in the form of a rider unlike in Tata AIA where the benefits are in-built. Also, HDFC’s ‘SL ProGrowth Super II’ doesn’t give surgical benefits. Some also offer waiver of premium and hospital cash. In other words, these are savings and wealth creating plans built on protection products. One has the option to choose from these plans. That is, death benefit remaining constant in such products, one can choose to combine it by adding one or all of these benefits (surgical, accidental and critical illness). These benefits in Tata AIA are in-built in the product and are not sold separately as riders. Suresh Mahalingam, managing director, Tata AIA Life, says, “Our new product gives people an opportunity to get the best from their investments on a marketlinked platform, without worrying about the risk of death, dismemberment and onslaught of medical exigency like a critical illness.” Experts say, investing in such wealth creating products has its flip side, too. They require a long-term commitment as compared to yearly renewals required in aterm and a medical policy. For instance, your Ulip policy gets lapsed, there are chances you will lose out on all the benefits you paid for in the previous years. However, the new rule now enables policyholders to revive a lapsed Ulip policy within two years from its premium due date. However, these policies offer a term, which is usually from 15 to 40 years and is available to individuals from the age 18 to 50 years with maximum maturity age of 65. Premiums paid under such plans are eligible for tax benefits under Section 80C, 80 D and 10(10D) of the Income Tax Act, 1961. Buy health and life policies separately

Investment ideas for the home maker (Yahoo.com : By BankBazaar.com | Strategic Moves – Wed 22 Aug, 2012 8:58 AM IST)

It is essential for women, be it working women or homemakers to keep themselves and their family financially secure. In the olden days, women generally had a habit of keeping savings in containers in their kitchen, but today that is not going to get our savings anywhere when confronted with ever-growing inflation. It is wise to choose to invest and wiser to choose the best investment in order to keep our family and ourselves financially secure. A good investment gives you better returns than merely saving in a bank deposit or in our piggy bank and helps us to cope up with inflationary pressures.

Homemaker and Investments?

Not a good combination, most people would say. Many people think homemakers make very bad investors, as they do not have knowledge about the share markets and the technical aspects of investing. That's completely false notion. Looking from a fundamental analysis point of view, they are the ones who could be good investors as they make all purchase decisions for the entire family and they are aware which company performs better for what reason.

They may not have to make a decision by looking at the balance sheet of the company; they are the main consumers of most of the products around. This is a strength, which can help them analyze stocks and invest in shares and equity. They are uniquely qualified to buy and sell shares.

How does a homemaker choose appropriate investment options?

The best way to plan your investment is to know your goals. Try to take a piece of paper and write down what you would like to achieve in your life time, you might want to have a house of your own, probably a luxurious car, a world tour etc. These are your long-term goals.

There may be a few other things that you need to achieve in the next two to three years or more, for example higher studies, marriage, purchase a two wheeler etc., these are your short term goals. Remember, your short term goals keep changing as you move on in your life. Your short-term goals today are not going to be the same when you become a mother. The article discusses in detail about the investment options for homemakers at different stages of life.

Where to invest in your 20s

In your 20s, you are likely to be in your college or at your first job, so your income is definitely going to be very less. You can choose to invest them in a recurring saving deposit or bank deposits where you can earn low but regular and fixed returns. You can also choose to invest your money in mutual funds because the risk involved is lesser and you can invest very small amounts of money. Once you have started earning good money in your late 20s you can start investing your money in equities where the risk and returns are higher.

Where to invest in your 30s

In your 30s as homemakers, you might not have plenty of money to invest in, but make sure you have a term insurance for yourselves and your family. A health insurance will help keep you more secure during times of emergency. Try to cut down unwanted expenses and invest in education funds for your childrens' higher education, take up a suitable retirement plan for yourselves and your spouse. Avoid endowment plans; they carry higher charges and may not give high returns.

Avoid buying gold ornaments, they are only going to eat away your money in the form of wastage and making charges. Instead, invest in gold-based funds and buy gold in the form of coins/bars.

Where to invest in your 40s

In your 40s, you need to boost your children's education and wedding investments and your investment for retirement. If you are planning to build a house for 1500 Square feet, take only 1000 Square feet for your accommodation, rent the 500sq feet space, and use the money for investments. You can also take in a paying guest and use the rental and food charges for your short-term investments avenues.

Where to invest in your 50s

In your 50s you should invest in risk free investments. If you need to withdraw your long-term investment for your son's higher education, withdraw it or switch it to a debt fund at least a year before he gets the admission. Do not wait until the last minute, as you will be at risk if there is a sudden fall in the market.

In the 60s and beyond

Transfer the amount of money you have into bank deposits or into a recurring deposit (RD) so that you will receive good returns and your money will be safe. Avoid risky investments in your 60s.