The Finance Bill, 2023, with 64 official amendments, was approved by the Lok Sabha without discussion on 24 March. The key amendment that will affect all fixed income investors is about debt mutual funds. These funds have been stripped of the long-term tax benefit if they invest less than 35% of their assets in equities. Such mutual funds will attract short-term capital gains tax.
I would still invest in target maturity funds even after 31 March because fixed deposits (FDs) don’t give me these flexibilities. Here are my three simple reasons.
If I were to decipher the key amendment in simple words, all the gains will now be taxed as income and you will have to pay income tax. This is a big jolt, especially for debt investors.
There is a chatter that a few categories of debt funds, especially the recently introduced and hugely successful target maturity funds, will not attract investors now as they will move to FDs. Few will but I will still look at investing in them for these reasons:
Higher returns if yields come down
The data on 10 years government security yield from 1998 points out that yield mostly moves in a tight band of 5.5%-7.5%. In fact, over 80% of the time, it’s between 7%- 8.5%. The bond price is inversely co-related to yields. This means if the yields go down, the bond prices go up and if the yields go up, then bond prices go down potentially leading to capital losses too.
Our view is the yields offered by government securities are near their high. So, if I capitalize on higher debt yields and the yields fall, I can make higher returns than just the expected regular yields.
The yields have fallen from high before too and happened in 2008, 2014, and 2019. The total returns from debt funds were close to double the returns of the yield.
Deferral of tax
Investing in target maturity funds that have maturities matching my retirement age or post-retirement age is a smart way of reducing the tax impact. As per the current law, one must pay income tax on accrued interest income out of the investments made in FDs.
Many of you will fall in the 30% tax bracket and this would mean low post-tax returns. My deferral of tax point was more to do with my income levels. If I am, let’s say 50, and plan to retire at 58, where I would have no income, I would invest in debt funds as the redemption will come to me as an income only after I retire thereby helping me reduce my tax liability. Here I pay taxes at much lower rates than what I would have paid during my prime working years leading to higher post-tax yields.
Longer duration
Many banks offer attractive FDs rates only for a maximum period of five years. I also have seen the pattern where the longer the duration of deposits, the lower the rates. For example, the difference in rates between a 1-year FD and a 5-year FD is over 25 basis points. One basis point is one-hundredth of a percentage point.
In the case of a few target maturity funds, the holding duration can go up to 15 years holding too. I think India’s interest rates currently are high enough and hence I would like to lock it in for longer years.
The final point which is applicable to all asset classes that have been forgotten in the last 4-5 days is the fact that the investors can smartly avail the benefits of setting off.
Set off is an option where investors can use the benefits of any losses that they carry to be adjusted against the gains made during the same or different financial year.
While it is mandatory that short-term gains can be set off against short-term losses, for long-term gains both short- and long-term losses can be set off. This can be a big reason for investors to invest in debt mutual funds if they carry some short-term losses or create during the years of investment to adjust later. The losses can be carried forward for seven years. So, the immediate worry of debt mutual funds seeing huge outflows is just a mere exaggeration. Now it’s a level playing field, and this augurs well for the industry and especially target maturity funds.
Buying a house is a significant investment and a major milestone that provides us with a place to call our own. In the long run, property prices generally appreciate, which can increase our wealth over time. However, since owning a house is a big investment, many of us explore borrowing options to make a home purchase. A home loan is an ideal financial solution that can help you achieve your dream of owning a home with manageable monthly payments and a choice of repayment terms that suit your needs.
Nevertheless, for first-time home loan borrowers, certain aspects, such as interest rates, processing fees, down payments, loan agreements, etc., may be bewildering, which can make getting your first home loan to seem like a daunting task. This article serves as an ultimate guide for first-time home loan borrowers to help streamline the home loan process and ensure a smooth borrowing experience.
What Are the Types of Home Loans?
First of all, understand that there are several types of home loans that cater to specific purposes. Here are some of the commonly seen home loans in India:
1. Regular Home Loans:
This is the most common type of home loan in India, where an individual avails of a home loan to buy a newly constructed or pre-built property. While almost all the banks and housing finance companies in India offer this type of loan, the interest rates and loan terms may vary from lender to lender.
2. Land/Plot Purchase Loans:
As the name suggests, this loan is availed to purchase land or a plot where the borrower intends to construct a home. Lenders typically provide up to 85%-90% of the land’s cost, while the remaining 15% needs to be arranged by the applicant.
3. Home Construction Loans:
Banks and HFCs offer these loans to individuals who plan to construct a house on their own land. The application and approval process for a Home Construction Loan can be complicated to understand for a layman.
4. Home Renovation Loans:
These loans are ideal for individuals who cannot gather sufficient funds to renovate their existing homes. The maximum amount that one can borrow for a home renovation depends on several factors, including the applicant’s repayment capacity and debt-to-income ratio.
What Are the Eligibility Criteria for a Home Loan?
Before applying for a loan, it is crucial to have a thorough understanding of the loan basics and eligibility criteria to avoid any surprises. It is advisable to equip yourself with knowledge of banking procedures to prevent any discrepancies from arising at the last minute.
Each bank and NBFC has its own eligibility criteria for home loans. Here are the primary requirements that typically remain constant with all the lenders:
Age – The applicant must be between 21 and 60-65 years old.
Employment Status – The applicant must be either a salaried or self-employed individual with a stable income.
Minimum Income Requirement – The applicant must earn more than the minimum income set by the bank. For example, HDFC Ltd. has minimum salary criteria of Rs 10,000 per month and minimum business income criteria of Rs 2 lakhs per annum.
While these factors make you eligible for a loan, there are many other additional aspects that decide the final application approval, such as the applicant’s repayment capacity, debt-to-income ratio, down payment, present and future income, credit history, credit score, etc.
You Can Enhance Your Home Loan Eligibility By:
-Including a family member who earns as a co-applicant
-Making a larger down payment
-Opting for a structured repayment plan
-Having a steady income and regular savings
-Providing information on your additional income sources that are regular, e.g. such as income in the form of rent
-Fixing any mistakes in your credit score
-Paying off your ongoing loans and short-term debts
What Are the Documents Required for a Home Loan?
Personal Documents:
-Application form
-Passport size photographs
-Photo ID proof, such as PAN Card, AADHAR Card, Passport, etc.
-Current residential proof, such as AADHAR Card, Passport, Driving License, Voter ID, etc.
-A cheque for the processing fee
Income Documents:
For Salaried Individuals:
-Last three months’ salary slips
-Form 16
-Bank statement for the last 6 months
For Business Persons:
-Proof of business existence
-Educational certificates
-Bank statement for last 6 months (both; business account and personal account)
For Professionals – Last three years’ IT returns (self and business; with computation of income), Last three years’ balance sheet, and Profit and Loss statements
For Business Owners – Business profile, Last three years’ IT returns (self and business; with computation of income), Last three years’ balance sheet, and Profit and Loss statements
What Are the Types of Home Loan Interest Rates in India?
The home loan interest rates are based on the Marginal Cost of Lending Rates (MCLR) and the bank’s base rate. While the MCLR is decided by the RBI, the banks set a base rate based on their cost of lending. The banks can quote a home loan interest rate above the base rate considering the borrower’s risk factor. If the RBI makes significant changes to the Repo Rate, banks and financial institutions adjust their base rate accordingly.
There are primarily two types of interest rates available for home loans in India: Fixed Interest Rates and Floating Interest Rates.
Floating Interest Rate: A Floating Interest Rate, also known as a variable interest rate, is linked to the current lending rates and hence, can fluctuate during the loan period. Consequently, your EMIs will change accordingly. Since home loan interest rates have been increasing for a long time, they are expected to stop rising soon. Hence, it makes sense to choose a floating interest rate.
Fixed Interest Rate: A Fixed Interest Rate home loan has a consistent interest rate throughout the loan tenure, which means that your EMIs remain the same. Opting for a fixed interest rate loan is advisable when the interest rate is low, and an upward trend is expected in the future.
What Are the Things to Consider When Applying for a Home Loan for the First Time?
1. Interest Rate:
The home loan interest rate plays a significant role when it comes to determining whether or not to take out a loan and which lender to select. We all are aware that you should conduct thorough research before settling on a lender. In addition, as discussed earlier, you should have knowledge about the various interest rates charged by banks and HFCs.
2. Loan Amount:
Your home loan amount has an impact on various factors, especially the rate of interest. The interest rate typically differs for the loan amount up to 30 lakhs, between 30 and 75 lakhs, or over 75 lakhs. Since a home loan is a long-term financial obligation, it is advisable to choose a loan amount that you can comfortably repay over an extended period.
3. Loan Tenure:
Home loans can typically be availed for a longer duration of up to 30 years, depending on the applicant’s eligibility. Opting for a longer loan tenure can lead to smaller monthly repayments but will result in higher overall interest payments. Alternatively, selecting a shorter loan tenure may result in larger EMIs, which can create a financial burden. It makes sense to choose the appropriate loan tenure to facilitate easier monthly repayments and avoid spending huge sums on interest payments. If the property is still under construction, the loan will be disbursed in stages based on the developer’s instalment schedule. During this time, only the interest amount, known as pre-EMI interest, needs to be paid. However, if you wish to begin repaying the principal amount, you may choose to pay the EMIs.
4. Down Payment:
Let’s say you have applied for a home loan worth Rs 70 lakhs, but the bank only approves Rs 50 lakhs due to your eligibility. In this case, you will be required to pay Rs 20 lakhs on your own. This payment made by you is referred to as a down payment. It is advisable to make the highest possible down payment that is feasible for your budget, as it will reduce the loan amount. A lower loan amount means lower interest payments. While some banks may offer 100% of the property value as a loan based on your eligibility, it is recommended to make a down payment of at least 20% to avoid excessive interest charges and ensure manageable repayment.
5. Processing Fees And Other Charges:
When you apply for a loan, the lender will charge you a processing fee for handling your application. Generally, for a home loan, the processing fee falls between 0.5% to 1% of the loan amount. However, certain lenders offer a flat processing fee regardless of the loan amount. As home loans typically involve large sums of money, even slight variations in the percentage charged for the processing fee can lead to a significant difference in the total fee amount.
For many people, buying a home is a significant financial commitment, and as a result, they are emotionally invested in owning a debt-free property. Individuals often prefer to repay their home loans as soon as possible to reduce the debt burden. This can be achieved through either part-payments, where a lumpsum payment is made towards the principal amount, or foreclosure, where the entire loan amount is repaid before the end of the loan tenure. By making part payments whenever feasible, you can significantly reduce the interest payments and become debt-free sooner. Most banks and housing finance companies do not charge pre-payment or foreclosure fees after a specific period or once a certain percentage of the loan is repaid. However, some lenders do charge a certain amount for pre-payments and have restrictions on the number of pre-payments allowed and the amount that can be prepaid. Therefore, it is essential to understand the pre-payment charges before taking out a loan and select a lender that offers pre-payments with little to no charges.
6. Home Loan Insurance:
Home Loan Insurance Plan or Home Loan Protection Plan offers financial protection against an unpaid home loan amount to your family in the event of your untimely demise. The insurer repays the outstanding loan amount for which the insurance policy was purchased. This ensures that your family is not left with the financial burden of unpaid dues. Many banks and HFCs require borrowers to purchase a Home Loan Insurance Policy to avoid any defaults that may arise in case of an unfortunate event.
To conclude:
Purchasing a house is a significant financial and emotional decision. Hence, before taking a home loan, it is crucial to understand all the aspects of it and take into account the important factors mentioned above so that you select the appropriate loan type and the amount that will not cause financial strain in the future. Additionally, it is advisable to conduct comprehensive research online to find the best deals on interest rates and fees. However, it is also recommended to consult with your primary banker as they may offer the best deals and services. This will help you make an informed decision and ensure that your first house purchase is a positive and financially sound experience.
If cricket is a religion in India, the Indian Premier League (IPL) is surely its Kumbh mela or Maha Kumbh. Millions of people in India and beyond will watch the cricket carnival that begins March 31.
Lots of talent to watch and cheer for; many current players and many more emerging cricketers who hope to crack the tournament and make it to the national team.
But what is in IPL to do with personal finance? There’s much in common; in fact here’s what IPL can teach us all about how we should manage our money.
1. Past success is past
Mumbai Indians, the winners of IPL 2021, did not qualify for the playoffs of 2022. Three-time champions Chennai Super Kings, have not played the final for two consecutive seasons.
What does this suggest? The fact that past performances count for nothing in IPL. It’s the same in personal finance. Many investment options may have performed well in the past. But that doesn’t necessarily mean they will perform as well in the future.
2. The best cut out the noise
There is a lot of glamour involved in IPL. It’s all about fame, money, endorsements, media, fans, cheerleaders and so much more.
A new player may be overwhelmed by all the hype. But have you noticed how the best players keep their cool and go about their job quietly and efficiently? The best players, often, perform by cutting out the noise around them.
That’s what wise investors do with their money. Often, we are overwhelmed by all the advice, tips and suggestions from our parents, friends, colleagues and the social media. For instance, our parents may recommend the age-old life insurance policy they’ve been investing in for generations to save tax. Never mind if such policies yield returns of only up to 4-5 percent. Or tons of money-making advice about the next best stock to buy or tips doled by social media influencers.
Turning a deaf ear to such noise and understanding our needs is important to achieve our goals.
3. Wait until the last bowl is bowled
IPL is a classic example of matches that go down to the wire. If there is one truth that cricket lovers have learned, it is that the game goes on until the last ball is bowled. IPL has its fair share of last-ball climaxes or even super overs where one over decides the fate of the match.
Similarly, in personal finance, it’s never too late to start. Just because you didn’t start investing in the first 10 years of your working life doesn’t mean all is lost. Just because your salary is low doesn’t mean you cannot build wealth.
Never give up on your financial planning until your objectives are achieved. Sticking to your plan and consistently implmenting it until you reach your destination is the only way to success.
4. Hard work pays off
Two years ago, very few people knew players like Ruturaj Gaikwad, Arshdeep Singh, Umran Malik and Rahul Tripathi. Today two of them have made it to the national team.
Every year, IPL introduces us to a new cricketing sensation who made it because of hard work, perseverance and patience. Be it IPL or personal finance, hard work is rewarded at some point of time.
Here’s a tip: If your salary is low, start a systematic investment plan with as little as Rs 500. Patient, regular and disciplined investing with small amounts to begin with can build a sizeable corpus; you’d be surprised to see how much money you’ve accumulated after a few years. Try it out.
5. Review your finances regularly
From winning the toss to setting your field and choosing the line-up, IPL is a game of strategy. Each match has two strategic time-outs wherein the captain and coaches combine to design a strategy — one at the beginning and one near the end.
In personal finance, with factors such as age, risk appetite, income source and dependents, each individuals needs to ascertain his or her needs and save and invest in different instruments.
Over a period of time and depending on personal milestones such as marriage and birth of a child, you will need to alter your strategy.
6. A good start is work half done
IPL being based on a T20 format, a good start to the game makes the win nearly certain. If it is batting and the batting team scores 200 runs without loss of any wicket or if it is bowling and if half of the batting team is sent to the pavilion within the first 10 overs, the spirit of the team soars and their supporters are jubilant.
Similarly, in personal finance, early financial planning not only ensures early achievement of your objectives but also results in greater returns.
We don’t know who will win this year’s IPL, but if you start saving early, plan your finances well and be disciplined, you will end up the winner in achieving your financial objectives.
SIP step-up strategy: Systematic Investment Plan or SIP is one of the most convenient and effective methods to invest in mutual funds. This feature in mutual funds helps investors in planning their financial goals and slowly working towards them. There are various strategies used while investing through SIP — one of them being step-up strategy.
What is a SIP step-up strategy?
A step-up SIP entails automatically increasing monthly SIP contributions on a periodic basis. According to Tanvi Kanchan, Head Corporate Strategy at Anand Rathi Shares and Stock Brokers, with a ‘Step up SIP’ strategy or a ‘Top Up SIP’ plan, investors can gain the benefit of increasing their contribution in SIPs, either by a fixed percentage or a fixed amount.
She added that investors can do this in line with their current income, expected yearly increments, and financial goals. This lays down a set plan for the investor to reach the predetermined investing amount over a period of time and increase their investments in a systematic manner.
How does SIP step-up strategy work?
For example, if an investor starts with a monthly SIP of Rs 5000 with an annual step-up of 10 per cent, at an expected rate of return of 12 per cent and an investment horizon of 10 years:
That is the impact of systematic investments and gradual increase in the same.
According to Tanvi, investors can also put a cap on the maximum amount they wish to invest per month. For instance, if an investor’s current SIP is Rs 5000 per month, then they can define in the step-up SIP plan that they wish to step up the monthly investments in SIP to Rs 10,000 per month. So, as soon as the step-up plan reaches this amount, it stops adding any further and the normal SIP amount continues.
When is the right time to step up the SIP?
According to experts, these are the best times to step up the SIP:
-Post-appraisal time
-When there is an increase in compensation or reduction in expenses
-When markets are going through a bad phase
“Increasing your monthly SIP installment in proportion to investors’ income boost is wise, especially if their expenses are yet to increase correspondingly,” said Varun Girilal, Managing Partner at Scripbox.
How does SIP step-up strategy benefit investors?
Experts believe that following are the benefits of the SIP step-up strategy:
-Getting inflation-beating returns
-Building a more substantial investment corpus to achieve future financial objectives.
-Achieve your goals sooner than anticipated
-Helps in translating increased earnings into their already ongoing SIPs
He believes that increasing the SIP amount by 10 per cent for a 15-year investing period can help investors get a corpus that is 70 per cent higher for the same time frame of 15 years of SIP investing.
What are the drawbacks of SIP step-up strategy?
– Increased complexity: The SIP step-up strategy requires more planning and preparation than a standard SIP strategy because investors must periodically change the amount of their investment.
– Higher costs: Depending on the investment product used for the SIP, higher investment amounts may attract higher fees, leading to increased costs.
– Market timing risk: The SIP step-up strategy is dependent on the market continuing its upward trend; but, if the market experiences a downturn, then the investors may compound their losses by increasing their investment in a market slump.
– Behavioral biases: Investors may be tempted to stop or reduce their investments during market downturns, which could lead them to miss out on potential gains in the long run.
– Limited liquidity: The SIP step-up strategy typically involves committing to regular investments over a set period of time, which can limit liquidity and flexibility in the short term.
Do you wonder whether you need to make a financial plan with a financial planner to achieve your life goals? Some individuals believe that saving regularly through bank recurring deposits or investing in mutual funds through SIPs qualifies as financial planning. However, such ad hoc allocation of savings and investments is insufficient to accomplish your financial goals and may result in inefficient utilisation of financial resources. If you want to become wealthy or achieve various life goals such as purchasing a dream home, going on a foreign vacation, or funding a child’s higher education, solely relying on salary or business income may not be enough. This is where financial planning becomes valuable. With a financial plan, you can create a roadmap to fulfil all your financial goals, including building a contingency fund for unexpected expenses. This article elucidates why financial planning is necessary and why you should work with a financial planner for effective financial planning.
What is Financial Planning & Why it is Necessary?
Financial planning is a process that assesses your current and future financial situation, enabling you to systematically achieve all of your goals. This process includes creating a roadmap to cover all of your expenses; both anticipated and unforeseen. To achieve this, financial planning involves budgeting your expenses, setting S.M.A.R.T. goals, selecting the appropriate asset allocation, creating a retirement plan, and more.
Even if you have savings, you need to have a financial plan because inflation can significantly erode the value of your money over time. Inflation refers to a general increase in the prices of goods and services over a period, which can reduce the purchasing power of your savings. For instance, a chocolate bar that costs Rs. 100 today could cost Rs. 110 tomorrow, and the cost will continue to rise over time. A financial plan can help you combat inflation by developing a sound investment strategy.
Financial planning also involves setting and achieving specific life goals, such as retirement, children’s education and/or wedding, purchasing a house, buying a car, and family vacations. Your planner will assess your cash flow and quantify your goals, creating a plan to allocate your funds towards achieving them in a systematic manner. Finally, the plan will recommend suitable investments, which may also include tax-saving investments.
Why Do You Need a Financial Planner to Manage Your Finances?
Now that we know why financial planning is necessary to achieve your life goals and create wealth in the long term, the question arises, how to start financial planning? Well, if you have been reading our articles, you might have come across several articles we published that are about how you can start financial planning by yourself. However, the majority of investors either lack the required knowledge to make a such crucial financial decision or do not have sufficient time to do the intensive research necessary to make informed financial decisions.
By sticking to the fundamentals, you can achieve your life goals. You might assume that if this is true, then there is no need to hire a financial planner and that financial planning is just another task you can handle on your own. However, that’s not entirely true.
A competent and honest financial planner can play a crucial role in helping you reach your financial objectives sooner than expected. With their guidance, the financial planning process can become much easier and more manageable.
However, having a trustworthy financial planner who always meets high fiduciary standards is very important. They should handle your money with care and responsibility, just as they would handle their own personal finances. Their recommendations should be based on research, and their approach should be unbiased. Nevertheless, there is a fee associated with this service that you would need to pay.
In India, financial planners operate under one of three revenue models:
1. Pure commission model – Financial planners are compensated based on the commission they receive from the financial products in which you invest.
2. Pure fee-based model – Financial planners are compensated solely by the fees you pay for their advice and services. They do not earn any commissions on the financial products in which you invest.
3. Fee + Commission model – Financial planners are compensated by both the fees you pay for their advice and services, as well as the commissions they earn on the financial products in which you invest.
Here Are 5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning:
1. Managing finances can get increasingly complex:
With time, managing finances can become more complex, even without major life changes. It can become overwhelming to keep track of your income, investments, insurance policies, debts, etc. This is where a financial planner comes into the picture. A competent financial planner will aim at optimising your investment returns while reducing your investment risk.
Managing money can be like having a second job that you may not have the time or desire to handle on your own. If you do not have time to research and monitor your investment portfolio, you can hire a financial planner to do it for you. He/she will take care of the tedious work, and you can get involved when it is time to make decisions.
Furthermore, you might not feel comfortable making financial decisions due to the confusing nature of investing. A good financial advisor can support sound decision-making and help educate you on best practices for money management.
2. The one-size-fits-all approach does not work in financial management:
Personal finance advice is often presented in an oversimplified manner, especially by conventional agents and commission-based planners who give the same investment advice to each of their clients. However, you need to realise that a particular financial strategy or recommendation may not be suitable for everyone. This is because we all have our unique objectives, aspirations, and challenges that require personalised financial solutions. Additionally, after the emergence of COVID-19, there has been a lot of instability in the markets. With the abundance of financial information available, it is easy to react impulsively to the news and the fluctuations in the value of our investments. Unfortunately, this can lead to unfavourable outcomes. Engaging the services of a financial planner can help you manage your finances from the right perspective.
3. You will receive unbiased financial advice:
If a financial planner is charging a fee for creating a financial plan without any obligation for you to invest in it, the advice they provide will likely be impartial and unbiased. However, if an agent or advisor is offering a free financial plan, you may need to be wary. There may be underlying motives for this free service, such as a desire to earn commissions from recommending certain financial products. As a result, the recommendations provided may not align with your investment objectives and financial goals.
It is essential to understand that nothing comes for free, and a free financial plan may pose a risk to your financial well-being. It is possible that the planner offering this service is pushing unsuitable financial products that are in their interest to sell, resulting in a disadvantage for you.
To ensure that commission income does not influence the advice provided, it is advisable to choose a fee-based financial planner. This will guarantee that the recommendations made are solely in your best interest.
4. A financial planner will maintain a professional relationship:
Our emotions often influence how we handle our finances, thus, leading to unconscious biases. A financial planner can make informed decisions based on rationale and prioritise our financial well-being.
In addition, financial planners are experts in their field. They have the necessary qualifications to handle financial problems and unexpected situations. Financial planning goes beyond simply investing in a few products. It’s like a test match in cricket, where patience is key and finances must be managed for the long term. You need to navigate short-term volatility, economic downturns, and favourable periods to build your wealth. Working with a professional who can manage your assets under different circumstances and variables is the best approach.
Financial planners guide and support you in the journey towards building wealth and improving your financial health. They uphold strong ethical standards and professionalism, which helps to establish trust in a time when it can be difficult to trust others. When you work with a fee-based financial planner, you can ask important questions and they will be happy to answer to the best of their ability, always keeping your best interests in mind. This can be challenging to do with friends or relatives, and there is also no emotional bias when working with a financial planner.
5. You will need guidance even after investing your money:
It is important to remember that investing is only the beginning – it is crucial to evaluate whether your financial planner offers reliable and sensible support after the initial investment.
Typically, a financial guardian who is readily available and guides you throughout the process of achieving your life objectives with the necessary care and understanding is the most favourable choice.
To conclude:
Finding a competent, experienced, and trustworthy financial planner may seem like a difficult and nearly impossible task. However, it is not. You just need to be patient and willing to take responsibility in the financial planning process. Before hiring a financial planner, ask for references and verify their credentials. Ask relevant questions about how they plan to help you achieve your goals, question their recommendations, and ask for alternatives and backup plans in case their plan fails to meet your expectations.
Furthermore, it’s important to stay actively involved in the investment process. While it’s important to have confidence in your financial planner’s abilities, it’s crucial not to blindly trust them. Always stay within the realm of confidence and avoid crossing over into blind faith.
A big outcome from the Finance Bill amendment on March 24 is that post-April 1, mutual fund schemes will be subject to three different types of taxation. On schemes that invest 35-65 percent in equities, you will now pay Short-Term Capital Gains (STCG) tax in line with your income tax rates; long-term capital gains (LTCG) will attract 20 percent tax with indexation.
To be sure, the Finance Bill has removed the capital gains tax and indexation benefits for debt funds that invest less than 35 percent in equity. In the third category of taxation, nothing changes for funds that invest at least 65 percent in equities.
For the Rs 40 trillion mutual fund industry struggling to come to terms with the latest tax shocker, this new category of taxation has changed little. The fact that hybrid funds were left untouched by the Finance Bill amendment actually opens new opportunities.
The question is: should you really switch to hybrid funds, if you’re affected by higher taxation on you debt fund investments?
MF industry officials and experts say that the 35-65 percent equity category, which largely makes up hybrid mutual fund schemes, would be under the spotlight.
Hybrid funds comprise six categories: Conservative Hybrid, Balanced Hybrid/Aggressive Hybrid, Balanced Advantage, Multi Asset Allocation, Arbitrage, and Equity Savings.
Hybrid schemes with total Assets Under Management (AUM) of Rs 4.87 trillion are the second-lowest open-ended mutual fund category after Solution Oriented Schemes. Compared to this, Growth/Equity Oriented Schemes commanded AUM of Rs 15.01 trillion as of February-end.
Dynamic Asset Allocation/Balanced Advantage funds, which are expected to benefit from the tax changes, are the most popular categories among the hybrid schemes with AUM of Rs 1.91 trillion.
A better alternative?
Experts say that with a slight upgrade in their risk profile, hybrid funds can offer a better alternative when it comes to generating returns, over and above fixed deposit rates.
In this category, equity allocation can move anywhere between 20 percent and 80 percent or even 0-100 percent depending on market conditions. Currently, 30 such funds are available in the market, but most are keeping their equity exposure in the range of 65-100 percent and debt in range of 0-35 percent.
Equity Savings is a neglected category among hybrid schemes with the lowest AUM of Rs 16,445 crore. But that could change soon.
“For retail investors, hybrid funds would make more sense. BAFs and Equity Savings may come in handy for retail investors as they can take debt allocation in a tax-efficient way,” said Niranjan Awasthi, Head of Products Marketing and Digital Business at Edelweiss Asset Management Company.
Equity Savings and Arbitrage Funds
In Equity Savings, minimum investment in equity is 65 percent and minimum investment in debt is 10 percent while arbitrage is also allowed.
In mutual funds, arbitrage is the simultaneous purchase and sale of a stock to take advantage of the price differential in the spot and futures markets. This helps in increasing the equity exposure in the scheme while avoiding a rise in the risk profile.
Experts say that Equity Savings have largely remained neglected as retail investors generally look at equity allocation in hybrid funds. Case in point, Conservative Hybrid, where equity allocation can stay between 10 percent and 25 percent, has a total AUM of just Rs 22,716 crore.
Kirtan Shah, founder of Credence Wealth Advisors LLP, believes that a lot of money will start flowing into Equity Savings.
“Asset management companies will start pushing Equity Savings as a category for fixed income kind of investments. These funds, in four or five years of history, have kept equity in the 20-30 percent range. If you look at all the other hybrids, the equity range is much higher,” he said.
Apart from Equity Savings, the expert also sees money starting to flow into Arbitrage Funds.
“A pure debt replacement will move to Arbitrage and Equity Savings. However, the problem is that in both these categories, if a lot of money starts flowing in, then automatically the spreads will reduce on the arbitrage. That is one big problem that can arise in the future. If we are anticipating that Arbitrage and Equity Savings will see a lot of flows, then the return expectations have to be slightly tempered,” Shah added.
Can hybrid replace debt?
Over the past few days, fund houses have gone on an overdrive suggesting that investors put as much money into debt funds as they can until March 31 to take advantage of lower taxation.
Many experts say that while some people may feel the urgency to shift out of debt mutual funds to save some taxes, they will realise eventually that debt funds can still outperform traditional FDs. There may just not be other credible options available in their risk profile.
Dhirendra Kumar, CEO, Value Research, said, “In terms of taxation, nothing changes for Liquid funds, Ultra-Short Term and Money Market Funds. Debt funds can give investors great convenience, and also a little better return. Plus, for a fixed income investor, equity is risky. In March 2020, the equity went down by around 30 percent in a few days, and that time people were running for cover and they hate equity for that.”
Experts are also of the opinion that investors shifting from debt to equity will risk having a complete change in their risk profile.
Swarup Mohanty, director and chief executive officer (CEO), Mirae Asset Investment Managers (India), does not like selling a hybrid fund to a debt fund investor. “That’s the worst thing that can happen.”
Edelweiss’ Awasthi added: “Specifically, for longer-tenured bond funds and Target-Maturity Funds, there will be times, even like now (high interest rate regimes), where funds which are closely comparable to a fixed deposit, would still do well.” When interest rates fall, bond prices rise; this benefits your debt funds.
What should mutual funds do?
According to Mohanty, the mutual fund industry used to talk about fixed deposits versus income funds in the early 2000s.
“Maybe we have to start from there now, now that the taxation is similar,” he said.
Deepak Chhabria, CEO of Axiom Financial Services, says that if the debt industry has to survive, it has to bring in alpha compared to other fixed-income products.
“In early 2000s, the return on say a long bond fund used to be around 1 percent higher than the corresponding deposit rate. With indexation and tax benefit, it used to be a decent 1.5-2 percent alpha. That alpha over a period disappeared because of the competitive pressure. The pitch has to change, there has to be an additional return and safety will have to come in too,” said Chhabria.
Another aspect debt mutual funds may look to work on is simplification of language so that they can make themselves understood to lay investors.
“The language that we speak; long debt, duration, CAGR (Compounded Annual Growth Rate), compared to a simple FD 8 percent interest is very complicated. We have had the benefit of taxation until now, but debt sales will continue as usual,” said Mohanty.
Income Tax: As the new financial year is about to start from April 1, there are major changes in the income tax that will come into effect. From changes in the income tax slab to the latest rule of no Long-Term Capital Gain (LTCG) benefit on debt mutual funds, here are 10 big changes that will come into force from April 1.
1. No LTCG benefit on debt mutual fund
The government recently scrapped LTCG—tax applied on long-term gains benefit on debt mutual funds which will be applied to investors who invest in debt mutual funds after March 31.
2. Default Tax regime
The New Tax Regime will become the default income tax regime from the beginning of the new financial year. However, taxpayers will still have a choice to toggle and select between the old tax regime and the new tax regime.
3. Tax rebate limit extended
The government extended the tax rebate limit from Rs 5 lakh to Rs 7 lakh in Budget 2023. A tax rebate is a refund that taxpayers are eligible for if the taxes paid by them exceed their tax liability. Simply put, taxpayers with an income of up to Rs 7 lakh in a financial year need not invest anything to claim exemptions and the entire income would be tax-free irrespective of the quantum of investment made by such an individual.
4. Standard deduction
Under the new tax regime, a salary exceeding Rs 15.5 lakh will get a standard deduction– a flat deduction from the gross salary, of Rs 52,500. For pensioners, the finance minister has announced the extension of the benefit of the standard deduction in the new tax regime.
5. Tax slab changes
In Budget 2023, Finance Minister Nirmala Sitharaman announced a new break up for tax slabs under the New Tax Regime:
0-3 lakh – nil
3-6 lakh – 5%
6-9 lakh- 10%
9-12 lakh – 15%
6. LTA
The government has hiked the tax exemption on leave encashment on the retirement of non-government salaried employees to Rs 25 lakh from Rs 3 lakh.
7. Market-linked debentures (MLD)
Market-linked debentures will be taxed under short-term capital gains – a tax levied on capital gains from the sale of an asset held for a short period.
8. Life insurance policies
Maturity proceeds from life insurance premium which exceeds Rs 5 lakh will be taxable from April 1. This new income tax rule will not be applied to ULIP (Unit Linked Insurance Plan) – an insurance plan that offers the dual benefit of investment to fulfill your long-term goals, and a life cover for financial protection.
9. Gold to e-gold receipt conversion
Physical gold conversion to e-gold receipt will not attract capital gains tax.
10. Advantages to Senior Citizen
The maximum deposit limit for the senior citizen savings scheme will be increased to Rs 30 lakh from Rs 15 lakh.
The maximum deposit limit for the monthly income scheme will be increased to Rs 9 lakh from 4.5 lakh for single accounts and Rs 15 lakh from Rs 7.5 lakh for joint accounts.
It is critical to plan your finances and investments at the start of the fiscal year in order to avoid a last-minute scramble and to invest based on your needs and financial goals. Every year brings new challenges that we must overcome, learn from, and move forward. As a result, it is prudent to revisit our financial decisions from last year in light of our present financial status and market conditions. Learning from our mistakes in the past can help us make better financial decisions in the future.
Financial planning has evolved in recent years, and more people are recognising the importance of having a long-term financial plan. Today’s digitally-savvy generation prefers to manage their finances using digital platforms or apps. A one-stop solution that allows them to plan, manage, grow, and address their financial needs.
Financial planning plays a pivotal role in allocating funds to the best-suited investment vehicle to add value to your overall financial portfolio. The beginning of the new financial year 2023-24 is the perfect time to reflect on your financial practices or mistakes from the previous year 2023-22 and get started with smart financial planning.
Recently, on the occasion of Gudi Padwa, I met all my cousins. Rohit and Madhu were discussing ITR filing, their investments and how they are struggling with the finances due to last-minute hassle. While our youngest brother Rishi said, “All these financial planning swing like a bouncer over my head. I wish there were a simple concept or theory to understand this.”
To which Rohit replied, “These Gen Z’s want everything readymade and easily available at their fingertips. Rishi, the new financial year is approaching, and you must emphasise on financial planning rather than splurging on irrelevant gadgets online; the early you start the better it is.”
Rishi replied, “Yes, bhaiya, I too, intend to put my finances in place and have better control. But I don’t know where to start. The basic I understand about personal finance management is earning enough to manage one’s daily or monthly expenses and saving enough for the future.”
To which I responded, “Rishi, there is more to financial planning than simply saving from monthly expenses; however, it is one of the elements. The practice of financial planning should be considered as a scientific approach to achieve life’s milestones rather than seeing it as an ad hoc process only to save maximum tax at the end of the financial year. The goal of developing a financial plan is to understand your financial situation, prioritise your goals, and maintain stability even during challenging times.”
Let me help you understand financial planning with a unique approach. You need to follow these 5Ps to take control of your finances.
1. Planning
If you create a plan for any event in life, it is easier to manage; for instance, if you are going on a vacation, proper planning is required. Similarly, your personal finances require structured planning to stay in control and manageable. You can begin with 2 simple steps:
Step #1 – Goal Planning – You need to create S.M.A.R.T (Specific, Measurable, Achievable, Realistic, and Time-bound) goals. A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you, whether to buy a house or help you retire early, it will assist you in saving efficiently towards your goals.
Step #2 – Budgeting – Budgeting is an important aspect of financial planning; developing a budget helps you manage your cash flows, and you can cut back on non-discretionary costs to save more and meet your goals. An accurate picture of your finances is the key to creating a strong financial plan and can reveal ways to direct more to savings, investing, or debt pay-down. There are various budget planning apps available online that can assist you in prudent budgeting exercises.
2. Protection
A common goal that every individual holds is providing a secure financial future for our loved ones and protecting them from any financial challenges. You need to protect your financial worth, to maintain financial stability. An adequate insurance cover helps you do that and is thus considered a vital aspect of financial planning.
You have all seen the necessity of having life and health insurance during the pandemic. One must remember that as we age, the probability of getting insurance coverage at an affordable premium decreases. Therefore, if you already hold insurance coverage for life and health, take a close look at it, and enhance the coverage wherever needed. The best way to cover your life risk and provide financial security to your family in your absence is by getting appropriate health, term or life insurance.
Insurance has several aspects like protection, wealth generation, and a select few that offer the policyholder a combination of both. This is an essential element of your financial planning and should be of utmost importance to avoid having a dent in your savings due to unforeseen contingencies.
3. Provide
Many individuals are charged with the responsibility of managing finances and providing for household expenses and others. With this step of financial planning, you can ensure a better plan tailored for emergencies as well. A major component of financial planning is liquidity management to sustain unforeseen events.
You need to create a financial cushion or safety net to maintain your financial stability in times of emergencies. The future is uncertain; a sudden job loss or an unexpected medical emergency can shake up your finances considerably. Ideally, you need to keep an amount equal to 6-12 months of expenses, including loan EMIs, as a contingency fund. You can start small, and the money can be invested into liquid funds so that you can access the money quickly in case of an emergency.
4. Power
One of the benefits of taking control of your finances through financial planning is the sense of empowerment it brings to you. There are two aspects of financial planning that can strengthen your overall finances.
Investment Planning Your finances are powerful once you indulge in prudent investment planning. Your savings are best utilised when they are invested in rewarding investment avenues like mutual funds. Starting investments at the beginning of the year through ELSS or SIP in the best suitable mutual funds is a convenient way for novice investors to start off.Do note you need to pick mutual fund investments that meet the risk-return expectations and, eventually, your investment objective. It is essential that you begin investing early so that you can take full advantage of the power of compounding, which has the potential to help multiply your returns exponentially over time. Investments in worthy mutual fund schemes will give you the power to beat the cost of inflation as well.Ideally, investors need to identify their financial goals and align their investments accordingly. I would recommend PersonalFN’s SMART Fund Explorer ; it is a tool that can help you plan your mutual fund investments smartly based on your risk profile to achieve your financial goals. It provides a list of the best suitable mutual fund schemes recommended by our research team that will help you reach your financial goals.
Debt Reduction You may have debt that you created to fulfil various financial requirements; however, repaying your debt on time is crucial. You need to focus on clearing/paying off your debt burden to be in the pink of your financial health. Eliminating the debt burden gives you the power to have more disposable income to save and invest in rewarding avenues.You need to tackle a high interest debt that pulls out the major portion of your income, leaving you with a small amount to manage the rest of your financial needs. There are numerous approaches to dealing with high interest debt, including the well-known snowball method, which focuses on paying off your smaller bills first. The avalanche method, on the other hand, prioritises paying off your highest interest loans first. You should aim to maintain a debt-to-income ratio of below 40%.
5. Promote
To promote a financially secure life for yourself and your loved ones, you need to be financially literate. All the factors and processes of financial planning will only work for you if you are financially aware of how to implement them.
Financial literacy is the enhances your capability to use knowledge and skills to manage financial resources effectively for your financial wellbeing. Major financial decisions like opening suitable bank accounts, planning for retirement, paying off personal debt from loans or credit cards, and developing a strong investment portfolio for wealth creation are difficult to make when one lacks financial literacy.
Thus, it is vital to bolstering your financial knowledge, and I suggest you consider to enrol for PersonalFN’s latest special initiative, the “Certified Family Guardian,” that offers you an exclusive opportunity to learn the finer nuances of financial planning. Organised into eight modules with 24 extensive videos, the “Certified Family Guardian” will help you with all the relevant tools and learning modules needed to get better at money management.
To conclude…
Personal finance management is crucial for every person mainly to ensure that they have a comfortable present as well as a secure financial future. The beginning of the new year is a perfect time to reflect on the areas of improvement and get a head start on building strong financial health.
