Are you saving enough?

The most common question that comes up during my client meetings, especially with the younger executives, is whether one is saving enough.  A lot of different formulas or rules of thumb exist however there is no one size that fits all.

Most of clients that I meet have some form of investments that are generally a result of their random visit to the bank or a recommendation by a friend or relative. Needless to say such ad-hoc approach to investing is value dilutive and reduces the worth of your investments over long period of time.

I have observed that people worry a lot about their distant future (read retirement) without actually doing anything about it and generally cite unavailability of information and procrastination as the main reasons.

The primary task before embarking on wealth planning is identifying an investment objective which could be anything from raising a retirement corpus to planning a family holiday or perhaps marriage of the children. With a goal in mind, the time horizon required to achieve your goals can be determined. One cannot stress enough the importance of personal risk preferences – all of us have different appetite for risk and knowing how much risk, one is willing to be exposed to, is a very critical factor in achieving your financial goal.

Knowledge of your goals, timelines and risk appetite will enable a financial advisor to suggest the best asset allocation strategy. Periodic review with your financial advisor will help you further fine-tune the asset allocation. And sure enough, always keep advisors aware of major changes or life events that may alter your risk profile.

You can also visit the Goal Setting section (accessible at www.divitascapital.com/private-wealth/risk-profiler) of our website to use financial calculator to determine various quantum of savings necessary to achieve your goals. You can also make use of our risk profiler (accessible at www.divitascapital.com/private-wealth/financial-calculator) to ascertain your risk appetite.

For example, if you were to buy a house in 10 years time, the down payment for which is about Rs. 50 lakh. Assuming a 13% annual rate of return you will require an SIP of Rs. 20,000 per month or a one-time investment of Rs. 1.4 lakh.

Feel free to customize these calculations to suit your needs by changing the time period, investment amount, annual rate of return and the required amount.

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BENEFITS OF INVESTING IN TAX SAVING FUNDS

Mutual funds can be tax-efficient investment avenues that can help reduce your tax burden and at the same time increase your wealth.

Income tax benefit – Investments made in tax-saving schemes up to Rs 1.5 lakh are eligible for deduction from taxable income under Section 80C of the Income Tax Act.

 

Lower lock-in period – In comparison to traditional investment avenues like PPF, NSC under section 80C of the Income tax Act, these funds have the shortest lock in period of 3 years.

 

Tax-free dividends/Capital gains – Dividends declared under the tax-saving schemes during the investment period are tax-free. The profits on the sale of these units are treated as long-term capital gains, and are not subject to tax.

 

Higher return potential – Tax-saving funds invest a large part of the fund in equity, which despite short-term volatility has the potential to build wealth over the long term.

 

WHO SHOULD INVEST?

  • Investors looking for wealth creation over the long term.
  • Investors looking for tax deductions under Section 80C.
  • Investors having a time horizon of 3 years or more.

 

 Additional Note on Dividend Stripping

 

The tax provisions now states that when a person buys any units within a period of three months before the record date, sells such units within nine months after such date, and then the dividend income on such units is exempt from tax. But the capital loss on such sale to the extent of the dividend income cannot be set off against other gains.

 

The notional loss caused by the dividend payment can be claimed as loss only if the units were bought three months before the record date or are held for at least nine months after dividend payment. “If the units are sold before 9 months, the loss will be disallowed under Sec 94(7) of the Income Tax Act.”

 

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Investing in Gold

In this current environment, where we’ve witnessed a bull run across asset classes over the last five years, to deploy a certain amount of capital as hedges to protect one’s investment is a prudent choice.

Though Indian domestic scenario remains robust, given the increased pace of government reforms, a stable inflation rate and a good monsoon boosting demand, our financial markets are still heavily influenced by foreign fund flows.

On the horizon there are global headwinds – rising bond yields, tightening of monetary policy by the Federal Reserve, a possible banking crisis in Europe and a secular slowdown in global trade. All these factors indicate a significant downside risk; even for portfolios in India.

And though the metals are not standard return generating assets, in times of crisis they tend to conserve capital and even generate real returns.

To effectively invest in precious metals AMCs offer a good avenue through their funds of funds. Here the expense ratios might be a pinch but they offer ease of exit and do not keep your capital locked-in, which is the case with Gold bonds. If you trade often Gold ETFs are another option and for leveraged individuals, Gold and Silver futures on MCX offer yet another option.

Below we’ve listed out, in detail, various options to invest in Gold and Silver.

 

 

  Physical Gold Gold ETFs Gold Funds Sovereign Gold Bonds Gold Monetization Scheme
Investment Limit No limit No limit Minimum Rs. 1000, no upper limit 2,5 and 10 gm denominations, max 500 gms Minimum 30 gms, no upper limit
Liquidity Can be sold anytime to jewelers, but at discount Can be sold on exchange, subject to volume Can be redeemed whenever Can be sold on exchange, but liquidity an issue Can be sold before maturity at penal interest
Tenure/Lock-in No No No 8 years, with exit option from 5th year Varying deposit tenures
Interest Earned None None None 2.75% on initial value of purchase, payable semi-annually 2.25% medium term, 2.5% long term and Bank denominated for short term
Expenses

 

Making charges of up to 20% of purchase value; locker charges Expense ratio around 1%,; demat maintenance charges Expense ratio around .5% over and above ETF expense ratios around 1%; no demat required None None
Taxation

 

Long term capital gains at 20% after 3 years,  before 3 years taxed at income slab Long term capital gains at 20% (post indexation) after 3 years,  before 3 years taxed at income slab Long term capital gains at 20% (post indexation) after 3 years,  before 3 years taxed at income slab No tax on capital gains on maturity, Long term capital gains at 20% (post indexation) after 3 years on exit Both interest income and capital gains are tax free
Pros

 

Allows physical ownership, can use the asset while holding for investment No hassle of safekeeping, allows for purchase in small denominations No hassle of safekeeping, allows for purchase in small denominations Enjoys dual benefit of coupon plus capital gains Idle jewelry can earn tax-free interest’; safekeeping by bank
Cons

 

Safekeeping a headache. May not fetch best price on redemption Insufficient trading volumes can lead to NAV differing from spot price Dual expense ratios 500 gms limit. Long duration Possibility of getting lesser amount of Gold owing to impurities
  Physical Gold Gold ETFs Gold Funds Sovereign Gold Bonds Gold Monetization Scheme
Investment Limit No limit No limit Minimum Rs. 1000, no upper limit 2,5 and 10 gm denominations, max 500 gms Minimum 30 gms, no upper limit
Liquidity Can be sold anytime to jewelers, but at discount Can be sold on exchange, subject to volume Can be redeemed whenever Can be sold on exchange, but liquidity an issue Can be sold before maturity at penal interest
Tenure/Lock-in No No No 8 years, with exit option from 5th year Varying deposit tenures
Interest Earned None None None 2.75% on initial value of purchase, payable semi-annually 2.25% medium term, 2.5% long term and Bank denominated for short term
Expenses

 

Making charges of up to 20% of purchase value; locker charges Expense ratio around 1%,; demat maintenance charges Expense ratio around .5% over and above ETF expense ratios around 1%; no demat required None None
Taxation

 

Long term capital gains at 20% after 3 years,  before 3 years taxed at income slab Long term capital gains at 20% (post indexation) after 3 years,  before 3 years taxed at income slab Long term capital gains at 20% (post indexation) after 3 years,  before 3 years taxed at income slab No tax on capital gains on maturity, Long term capital gains at 20% (post indexation) after 3 years on exit Both interest income and capital gains are tax free
Pros

 

Allows physical ownership, can use the asset while holding for investment No hassle of safekeeping, allows for purchase in small denominations No hassle of safekeeping, allows for purchase in small denominations Enjoys dual benefit of coupon plus capital gains Idle jewelry can earn tax-free interest’; safekeeping by bank
Cons

 

Safekeeping a headache. May not fetch best price on redemption Insufficient trading volumes can lead to NAV differing from spot price Dual expense ratios 500 gms limit. Long duration Possibility of getting lesser amount of Gold owing to impurities

 

 

Additionally, for trading purposes one can look at Gold futures on MCX-

  • Gold-
    • Expiry on 5th day of the month
    • Lot size 1 kg, quote 10 gms
    • Fresh contracts every 2 months
    • ~4% margin
    • Near month futures trade around 2k-3k contracts a day

 

  • GoldMINI-
    • Expiry on 5th day of the month
    • Lot size 100 gms, quote 10 gms
    • Fresh contracts every month
    • ~4% margin
    • Near month futures trade around 2k-3k contracts a day

 

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