Your insurance agent may be pushing life insurance as the best option, while your friend extols the benefits of a plain vanilla PPF account or even a tax saving FD with a bank.
And yet, there’s an 80(C) instrument that not just has a relatively short lock-in period of just 3 years – but has delivered a 5-year category average return exceeding 15% per annum and a 10-year annualized return of more than 17% per annum.
These are tax saving mutual funds or ELSS (Equity Linked Savings Schemes. These numbers may seem tempting, but make sure you’ve understood a few things about ELSS funds before you say “Tax Saving Mutual Funds Sahi Hai” and jump in with both feet!
1. They Have no Premature Exit Option
Tax saving mutual funds have a hard lock-in period of 3 years, and there are no options for partial or complete withdrawal. If you’ve invested in more than once tranche over the course of a year, each tranche will be treated as a separate purchase and will have to complete three years before you can access them.
2. They are High Risk in Nature
Being equity-oriented in nature, ELSS funds tend to be quite volatile. In a sense, that’s the price to pay for a significantly higher long-term return compared to low-risk products.
However, if you’re not willing to withstand ups and downs in your fund value, give ELSS funds a pass.
3. Their Returns Are Non-Linear
Many investors who are used to the linear returns associated with traditional products tend to get quite disconcerted by ELSS funds.
Understand that ELSS funds may go through phases of flat or even negative returns, but things tend to average out over the long term as cycles reverse. It’s vital to set your expectations right while investing.
4. The Dividend Option isn’t a Very Smart Idea
You may be tempted to go for the dividend pay-out option in an ELSS, but know that this isn’t a good idea.
First, you’ll take a hit of 15% in terms of dividend distribution tax. Second, dividends from ELSS funds are non-predictable in both timing and quantum, so you can’t really base any plans around them.
5. SIP’s are a Better Idea Than Lump Sums
For the next fiscal year, start a SIP in an ELSS fund instead of investing your money as a lump sum at the end of the fiscal year.
Your unit costs will get averaged out neatly, and it’ll be a lot easier on your pocket too!
In India, gold has traditionally been used as an instrument of saving along with its use in jewelry for marriages and festive occasions.
Over the last few decades, gold coins and bricks are being used as a saving medium. In general most of the gold that is imported into the country was rarely put to use regularly.
To take advantage of this habit, the government came out with a novel scheme that would incentivize gold saving as well as prevent the
import of gold.
The government decided to launch a Sovereign Gold Bond scheme where instead of purchasing gold in physical form one can do so in electronic form, just like shares.
Date of Issue
The date of issuances shall be as per the details given in the calendar below:
Sr. No Tranche Date of Subscription Date of Issuance
2020-21 Series IX Dec-28-2020 – Jan 01-2021 January 05, 2021
2020-21 Series X Jan-11-15-2021 January 19, 2021
2020-21 Series XI Feb-01- 05-2021 February 09, 2021
2020-21 Series XII Mar-01- 05-2021 March 09, 2021
What is the Gold Bond Scheme?
Sovereign Gold Bonds, hereafter referred to as SGB, are government securities denominated in grams of gold. The Bond is issued by the Reserve Bank of India on behalf of the Government of India.
Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. These bonds act as a proxy for holding physical gold.
Why are SGB called Bonds?
SGB’s are just like any other bonds as the bearer of the
the instrument is entitled to interest payment.
The Bonds bear interest at the rate of 2.50 percent per annum on the amount of initial investment.
This interest will be credited semi-annually to the bank account of the investor and the last final interest will be payable on maturity along with the principal. The tenure of each SGB is for eight years.
At what price is the SGBs sold?
The nominal value of SGB will be fixed based on a simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Ltd, for the last 3 business days of the week preceding the subscription period.
The price of gold for the relevant tranche will be published on the RBI website two days before the issue opens.
What are the advantages of SGB over physical gold?
The risks and costs of storage are eliminated.
The SGB offers a superior alternative to holding gold in physical form.
The bonds are held in the books of the RBI or Demat form eliminating the risk of loss of scrip, etc.
SGB is free from issues like making charges and purity in the case of gold in jewelry form.
These bonds carry a sovereign guarantee since they are issued by the government.
The SGB can be used as collateral.
The buyer gets paid interest on the money invested, which is not possible when holding physical gold.
Who all are eligible to invest in SGB?
A resident Indian as defined under the Foreign Exchange Management Act (FEMA), 1999 is eligible to invest in SGB.
The set of eligible investors include individuals, HUFs, Trusts, Universities, and charitable institutions.
Joint holding and minors are also eligible to invest in SGB. If an individual investor changes his residential status from resident Indian to non-resident he may continue to hold SGB till early redemption/maturity.
What are the tax implications of investing in SGBs on both – interest and capital gains?
Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961.
The capital gains tax arising on redemption of SGB to an individual has been exempted.
The indexation benefits will be provided to long terms capital gains arising to any person on transfer of SGB.
Is there a minimum and maximum limit of investment for SGB?
Yes, the SGB are issued in denominations of one gram of gold and multiples thereof.
The minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the government.
Each member of the family can buy 4 kg of SGB in her or her name. In the case of joint holding, the limit applies to the first applicant.
Is premature redemption allowed?
While the tenor of the bond is 8 years, early redemption or encashment is allowed after the fifth year from the date of issue on coupon payment dates.
The proceeds will be credited to the customer’s bank account provided at the time of applying for the SGB. The SGB investor also has the option of selling the bonds prematurely anytime on stock exchanges.
Such sales would attract capital gains tax at the same rate as for physical gold.
So in this blog, I will talk about what you should do to extract the maximum value from your policy during claims and come out of the process truly satisfied
One of the biggest reasons for dissatisfaction with claims is a lack of awareness of the policy terms and conditions.
It can’t be stressed enough that every policyholder should read one’s policy document as soon as you receive it and if any terms and conditions are not clear, you should call us up at your insurer to understand more about it.
1. Limits on certain procedures
Your policy will have limits of certain procedures like the maximum price of the room that you can avail of.
Now you might want to go for a higher-priced room and you’ll assume that you can simply pay the difference between the actual rent of the room and the allowable limit. Please don’t do that.
Contact your insurance company before you do something like this. Insurers often treat room up-gradation as a partially payable claim. In other words, never decide to alter the terms of your insurance contract unilaterally.
2. The minimum hospitalization required is 24 hours
Most health insurance policies require the patient to be admitted for a minimum of 24 hours or more to avail of the policy benefits.
This is a firm rule but excludes a few day-care procedures which will be clearly mentioned in your policy document. So if you were to go to your hospital for a tetanus shot, for example – you won’t be able to file a claim on that basis.
3. Waiting period on certain diseases
The third area you need to pay attention to is your waiting period for certain diseases. A waiting period is a sort of a hibernation period during which any claims made will not be admissible
A good number of consumers are not aware that claims for certain conditions are inadmissible for up to two years.
While these are a handful of conditions but it includes popular ones like tonsils, hernia, cataract, etc. A list of these medical conditions will be available in your policy wordings.
And finally, there is a waiting period on pre-existing conditions where there is a wait of 3 -4 years.
This is another clause that several policyholders are not aware of because they did not read the policy document and leads to dissatisfaction when they apply for claims within the waiting period for pre-existing ailments.
A common problem related to this is that consumers don’t state their pre-existing condition while taking the policy. This generally happens under two circumstances.
One, when consumers allow agents to fill the proposal form on their behalf. Two, when they make the application process very lightly and leave these details accidentally or on purpose.
This is a very difficult situation for the policyholder and the insurer. But because every insurance contract was agreed upon based on good faith, there is every probability a claim will not be admissible in case the declaration made by the policyholder is false or partial.
4. Examine the plan’s co-payments, sub-limits, and exclusions
The fourth area and the last of the key clauses that have a major impact on the claims are limiting conditions like co-payments, sub-limits, and exclusions.
Co-payments:
Co-payments are where you will have to pay part of the claim and the insurer will pay part of the claim.
If you have ever made a car insurance claim without having zero depreciation on your car insurance policy, you would have noticed that you had to pay like 30-35 percent of the total bill to the workshop and the insurance company paid the rest.
Similarly, co-payment may be triggered in your health insurance contract in some situations which is why you should read the policy document carefully once you receive it.
Sub-limits:
The same is true for sub-limits which by definition mean that the insurance contract has a capping on how much is payable for a particular illness.
Sub-limits are used for procedures like cataract, total knee cap replacement, and kidney dialysis. These too will be in your policy document and will go something like Rs 20,000 per eye for cataract removal.
Exclusions:
And finally, the exclusions, which becomes the cause of a lot of hardship. Most health insurance policies don’t cover maternity and childbirth, yet a huge number of claims are lodged toward these due to a lack of awareness of policy exclusions.
Other exclusions in the policy include participation in adventurous activities, abuse of intoxicants like alcohol, mental disorder-related ailments, etc.
Some smaller payments are generally not included. Again, most policyholders assume that these expenses are claimable but that is not the case.
Some expenses which are not payable by health insurance include registration and discharge charges, cost of hearing aid, any toiletries, donor screening charges, etc.
Understanding co-payments, sub-limits, and exclusions are a must to ensure you are claiming for the right procedures as contracted under your health insurance contract.
The secret to a happy claims experience is to have a clear understanding of what is claimable and what is not under the terms of your policy – most of which are available in the policy wordings. This includes inclusions, exclusion, waiting period, sub-limits, etc.
Conclusion
If you are thorough in your research, you wouldn’t have to worry about claim rejection. And when you know what is in your policy, then it also gives you the necessary knowledge to fight for any unjust calls made by the insurer’s claims team.
Liquid Funds are debt mutual funds that invest in debt securities with very short maturities. The residual maturities if bonds held by liquid funds cannot exceed 90 days, as per the rules defined by the regulator. In fact, most liquid mutual funds hold securities that are due to mature in the next 30 days or so.
Bonds maturing within two months need not be ‘marked to market’ – only their interest component needs to be factored in while calculating NAV’s (net asset values). Hence, the NAVs of Liquid Funds remain relatively steady compared to other debt funds.
Why are Liquid Funds used in STP’s (Systematic Transfer Plans)?
Their low volatility, steady returns, and zero exit costs make liquid funds an ideal choice as a deployment vehicle for STP’s (Systematic Transfer Plans) into equity funds.
Instead of investing a lump sum into an equity mutual fund, you could choose to park your money into a liquid fund and initiate an STP into an equity fund from it.
Over time, your liquid fund balance would be transferred to the equity fund. In this way, you’ll be protected from the risk of investing your entire money at an interim market peak.
You’ll benefit from corrections as you’ll be making a staggered entry into the equity fund. At the same time, your idle balance will earn better returns than your savings bank account.
How are Liquid Fund Returns Taxed?
Profits earned on your liquid fund units (at the time of redeeming or switching them) are taxed per your income tax bracket if the units are redeemed within three years – a highly likely scenario, given that liquid funds are meant for short term investments).
In the unlikely scenario that you hold on to your liquid fund units for more than 3 years, the profits will be indexed for inflation and taxed at a flat rate of 20%.
Do Liquid Funds Provide Guaranteed Returns?
Contrary to popular belief, Liquid Funds do not provide guaranteed returns. However, they do provide relatively steady returns compared to all other classes of Mutual Funds, owing to the nature of their portfolios.
Liquid funds typically provide returns that are similar to ‘call money’ rates, meaning that they can be expected to provide annualized returns in the range of 5% to 6% in the immediately foreseeable future.
Are Liquid Funds Risk-Free?
Liquid funds are very low risk, but not risk-free. There’s a chance that bonds held by liquid funds can default if the companies that issue them are in severe financial distress.
Owing to the very short maturities of the bonds held by liquid funds, his remains a remote possibility – but the risk still exists on paper.
When a bond held by liquid fund defaults and is subsequently downgraded to a “D” rating by any leading rating agency, the fund needs to write off its value entirely.
This results in a hit on the fund’s NAV. A case in point was the relatively recent Taurus Mutual Fund fiasco, wherein the fund had to write off close to 10% of its holdings in BILT after the latter defaulted and was downgraded.
So, liquid funds are very low risk, but not risk-free. It’s best to stick with liquid funds of large and renowned AMC’s, which employ more robust research teams.
How Liquid is Liquid Fund?
As their name would suggest, liquid funds are highly liquid in nature. If you place your request for redemption before 3 pm today, you’ll get your money in your account the next morning.
However, SEBI has recently mandated that AMC’s should allow instant redemptions of up to Rs. 50,000 from Liquid Funds.
Many AMC’s have already implemented this. Your Financial Advisor can help you clarify which funds currently offer this facility, and which ones do not.
With the growing awareness about Mutual Funds more than doubling the industry’s assets in the past three years, more and more people are catching on to the fact that for tax saving, Mutual Funds Sahi Hai! ELSS (Equity Linked Savings Schemes) funds have shot up in popularity in the past year or two. Here are a few reasons why you should consider starting a SIP in an ELSS.
No Year-end rush
So many of us get caught up in the struggle of putting together enough funds to invest in tax saving schemes at the very end of each fiscal year. Not only is this stressful; it also puts you at risk of taking ill-thought-out decisions that you could potentially end up regretting later.
By running a SIP in an ELSS throughout the year, you’ll have completed the lion’s share of your tax-saving investments well in time – so while your friends and colleagues are fretting, you can sit back and relax!
Long Term Compounding
It’s a well-known fact that investments that are linked to the stock markets need the magic element of time to compound and grow.
By continuing your SIP in an ELSS over the long term, you’ll ensure that your money compounds – that is, earns ‘returns on returns’, and therefore outpaces inflation over the long run.
Compare this with tax saving FD’s or PPF accounts, which do not compound your money, and you’ll see the difference that a SIP in an ELSS Mutual Fund can make.
Rupee Cost Averaging
Since ELSS funds are linked to the equity markets, they can potentially be volatile. For this reason, you may find yourself in the unlucky position of having invested in an ELSS just before markets begin to correct, as many investors who deployed lump sums in ELSS Mutual Funds on or before 31st January this year realized.
By running a SIP in an ELSS, you’ll ensure that the average cost of your ELSS units gets averaged out neatly through the ups and downs of the markets.
As much as it is important to make plans for your family, it is equally important to ensure that they are achieved even if you are not there.
And Term Life Insurance is the only financial tool to protect your family and your plans for them in your absence. Hence, it is an absolute necessity for every earning individual of a family.
However, while buying a term life insurance or if you have one already, there are a few things that you need to be mindful of.
1. Not buying enough coverage to replace income
While buying term life insurance, the topmost question in our mind is – How much cover do I need? Though a very popular number these days for term life insurance policy is Rs 1 crore, it is a random number without any proper math behind it.
The things that need to be considered while arriving at an amount of coverage are – future household expenses (minimum36 times your current monthly expenses), your liabilities, important goals, and life events, and if married, then a retirement corpus for your spouse.
First, calculate the total amount your family would need considering all the factors mentioned.
Next, if you have any financial assets – mutual funds, provident fund, fixed deposit, etc. – deduct that from the amount needed. This is the easiest way to come to a number while determining your term life insurance coverage.
Do not pick a random number no matter how big it sounds, instead, do your math correctly to find out how much coverage you would need.
2. Not reviewing term life insurance cover
You might believe that the term life insurance policy coverage that you have is enough for life, but that’s not the case. What may sound sufficient today, might not be adequate for your future needs.
Hence, it is necessary to review your term life insurance every 3rd year, to check whether it still matches your requirement.
Then if you feel your life insurance needs are more than the coverage, you can buy another policy to fill that gap.Situations when you need to review your term life insurance policy:
• When your parents or spouse stops working
• When you take a big loan like a home loan
• When you get married
• When you have a child
• Change in your income level
If anyone in the family (other than you) has contracted a major illness and household expenditure goes up due to treatment.
3. Getting term insurance for too short/long period
If you buy term insurance for too short or a too-long period it completely loses its purpose. Let’s see how.
Let’s assume you buy a 20-year policy at 30, and its tenure would end when you are 50. At that stage, you still would have several milestones to be achieved like children’s higher education, their marriage, a sufficient retirement corpus for your spouse, etc. These goals need to be protected until they are achieved.
Similarly, buying a term life insurance policy for too long a tenure is also pointless. Suppose you have bought a term life insurance policy that will provide you cover till you are 80, but you retire at 60.
There are two points to consider here. Considering the life stage, most of your life goals would have been achieved by then, hence the life insurance requirement is not high. Second, you have to keep paying the premium amount for 20 years, even though you will stop working.
Conclusion:
At every life stage of an individual, the requirement may vary but having a term life insurance cover is a must. But if one is not careful enough, it might not provide enough benefit to the family in his/her absence even though he/she might have bought the right product.
Hence, to ensure that your family is financially protected when you are not there, be mindful of a few things regarding your term life insurance – like buying early and also enough cover, its tenure, and reviewing it when necessary.
Of late, ELSS (Equity Linked Savings Schemes) or “Tax Saving Mutual Funds” have gained tremendous popularity. More and more investors are starting to believe that for saving taxes, ELSS Mutual Funds Sahi Hai!
And why not? As a category, Tax Saving Mutual Funds have grown investor wealth at nearly 18% per annum between 2013 and 2020 – nearly twice as fast as traditional choices such as NSC and PPF, and almost three times faster than traditional Life Insurance.
Their shorter lock-in period of three years has added to their allure.
All the obvious advantages of ELSS Funds as an 80(C) instrument notwithstanding, they possess a few all too common pitfalls too. Here are three of them that you must avoid at all costs.
1.Not understanding the risks
Unfortunately, there are no free lunches in the investment world. Increased return potential will invariably be accompanied by an increased risk of capital erosion. Being equity-linked, ELSS funds are high risk in nature – during the crash of 2008 & Covid’19 crisis many ELSS funds fell to nearly half their value!
As an investor, you would do well to understand the risks associated with ELSS funds before taking a final decision.
If you’re very risk-averse, you may want to consider splitting your tax-saving amount between ELSS funds and other lower-risk instruments such as PPF or Tax Saving FD’s – lower returns notwithstanding.
Respecting your unique investment preferences and risk tolerance levels and critical for long-term investing success.
2.The Investing in one shot
A common ELSS Mutual Fund related mistake – is to hold back until the last moment and make a lump sum investment into a tax saving mutual fund and the very end of the fiscal year.
While this approach would benefit you if you luckily end up catching a market bottom; it could work against you if you end up investing at a market peak (neither of which can be predicted).
A much smarter approach would be to start a Mutual Fund SIP (Systematic Investment Plan) in an ELSS Mutual Fund at the start of the financial year, after computing your projected deficit for the year.
For instance – start a monthly SIP of Rs. 12,500 in 12 months will make 1,50,000. In doing so, you’ll be benefiting from a mechanism called “Rupee Cost Averaging” which greatly mitigates the risks associated with the stock markets.
In the long run, your returns will be a whole lot smoother and less volatile, and you’ll worry about your investments much less.
3.The Fixating on the 3-year lock-in
By fixating on the three-year lock-in, many investors harbor the mistaken belief that three years is a sufficient time horizon to invest in ELSS Mutual Funds. In reality, a time horizon of five to seven years is a lot more appropriate, since a Tax Saving Mutual Funds is essentially a 100% equity-oriented investment.
In situations where lump sum investments are made when market valuations are already stretched (such as today’s scenario), it is quite likely that ELSS returns could be flat to negative over a three-year period, with a couple of rough-rides thrown in during the course too.
In such situations, investors need to be willing to extend their time horizons by a further three to four years (beyond the mandated three-year lock-in) to really reap rewards. While you can derive a degree of comfort that the mandated lock-in will finish within 36 months, you need to mentally commit yourself to a longer investment horizon if you’re opting for a Tax Saving Mutual Fund.
Several reasons why you should start investing and also get insurance at a young age. But, at the time when we start our career, with a little income and too many expenses, the dilemma that we often face is should we invest or insure first?
Through this blog, I will try to help you get over this dilemma, i.e. whether to invest or insure first.
Before I get it into explaining whether to invest or insure first, it is important to understand why it is important to start investing and also buy insurance (health and life) early in life.
2 reasons why you should start investing early
Starting your investments early improves your spending habits
At the time when we start earning, our income is quite low. And if we want to save from that little amount of salary that we get, then we have to put restrictions on our spending by creating a budget. Over the years this simple practice becomes a habit, eventually improving our spending habits.
To adopt the simple habit of saving/investing, put away the part of the salary at the start of the month. And, then make a monthly budget with the rest of the money you have in hand.
Say you earn Rs 30,000 monthly and out of that you want to save Rs 10,000 every month. So as soon as you get your salary, put Rs 10,000 away, and then create a monthly budget with the rest Rs 20,000.
You enjoy the benefit of compounding For starting your investments early, you stay invested for longer, which automatically increases the benefit of compounding. Let’s understand this with 2 simple examples.
Say you want to save Rs 5 crore for your retirement. Now, with that goal in mind, you start investing in an equity mutual fund from the age of 22. For this, you will have to keep investing Rs 5,500 for the next 38 years, and your total investments would be Rs 25 lakh.
In the second case, the goal remains the same but you start investing in the goal much later, let’s say at 45. For this, you would need to invest Rs 1 lakh every month for the next 15 years and your total investment amount would be Rs 1.8 crore.
This is how compounding works in favor of money over the years.
After looking at the reasons why one should start investing early, let’s understand why it is equally important to get insurance at a young age.
Here as we speak about insurance, we mean both health and life insurance. Speaking about health insurance, no matter what your age is you should always have health insurance.
Sickness or some health emergencies can come at any time and if you do not have health insurance, medical expenses can burn a huge hole in your pocket. So you should never delay the process of getting health insurance.
However, we often delay the process of buying a term life reason for very simple but foolish reasons. The common notions are since we are young and healthy or at this stage, as the responsibilities are less, we do not need term life insurance. However, contrary to the popular belief, buying term insurance early on is always favorable.
2 reasons why you should buy term life insurance early
The premium amount is low The biggest advantage of buying term life insurance early on is the premium amount that you pay is much less as compared to what you would pay if you buy it at a later stage in life.
For example, say you want to buy a policy of Rs 1 crore that would give you coverage till 75 years. If you buy it at 25, the premium amount would be Rs 8,000 annually. At 30, it would be Rs 10,000. And at 45, the premium for the same policy would be Rs 30,000.
Your family gets covered early on The sooner you buy the term insurance, the sooner your family gets covered. Even if you are not married, your parents might be dependent on you or you might have a loan (vehicle loan, student loan),
In case you die early then your family will have to bear that burden. Having term insurance ensures your family will not have to go through financial hardship in case something happens to you
So finally, whether to invest or insure first? So, this is typically a chicken and egg situation – who came first. To put more aptly, here it would be which one to do first, buy insurance, or start investing? Now, the best thing to do is to do both things simultaneously.
For example, let’s suppose Rajeev is a 25-years-old, and given his monthly income of Rs 40,000, he can take out Rs 10,000 each month, i.e. Rs 1.2 lakh annually, for savings/investments/insurance. So what should he do?
Here is how you can allot the money towards insurance and investments
Health insurance: It is a good practice to have at least 6 times your monthly salary as your health insurance coverage. By that logic, since Rajeev’s monthly income is Rs 40,000, his health coverage should be between Rs 2.4 to Rs 2.5 lakh. At the age of 25, the yearly premium amount for Rs 2.5 lakh health insurance would be about Rs 5,000.
Term life insurance: Since Rajeev doesn’t have a lot of liabilities, a term cover of Rs. 1 crore would be enough. Say the term life insurance cover that you need at this stage is Rs 50 lakh. The premium for a Rs 1 crore term policy would be around Rs 8,000 annually.
Investments: The rest of the Rs 1.1 lakh you can invest in Mutual Funds. Since Rajeev is young, he can take risks, and therefore you should invest in equity mutual funds. He can consider large-cap mutual funds or multi-cap funds and start a monthly SIP in these funds.
Now, as and when the income increases, he should also increase your investment amount. Rajeev should also review his health and term cover at regular intervals to ensure the cover is sufficient.
