Monthly Archives: May 2017

Thursday Trivia ~ FD to MF (Wait and Read this first)

As we often see, that dreams do come true. Samar after years of hard work in engineering found a job with a multinational company. As the date of his first salary came near, Samar’s father sat down with him to offer some financial advice. His father had worked his entire life in a small private company, raised two children and in next 5 years his retirement was due. His golden words of advice were, ‘start investing your money into fixed deposits.’ Samar was thinking more in line with mutual funds. Words around the office were mutual funds provide higher returns than fixed deposits, they are tax efficient, plus can be withdrawn anytime if the relevant lock in period is over. Samar argued that his father is very conservative while he is more aggressive to take risks.

If sports can be used as a metaphor out here, then Samar’s father had grown up watching Sunil Gavaskar who batted slowly but surely. While, Samar had grown up watching Sachin Tendulkar who batted with more flamboyance and risk. Both have been legends in their time. In a way, even fixed deposits were a great option in a certain period of time and mutual funds also makes a lot of sense in a certain period of time.

During the argument, Samar noticed that his father has parked a substantial amount of his life’s earnings into fixed deposits. When a student of engineering background sees some numbers, he is quick to calculate. He could see, how much investment returns on a compounded basis his father lost by simply putting in fixed deposits. So now, there was a whole new argument to move that money into mutual fund as well. However, is the argument really valid?

First things first, most people think that mutual funds only invest in shares of companies. That’s why they are tremendously risky. It’s common to see that there are other forms of mutual funds too, like debt, gold and even real estate now. Hence, it becomes very important to know when money is being shifted from fixed deposits, it’s not necessary to have an exposure into equity. Other options are available too.

Asset allocation becomes the primary need. For that, goals need to be properly defined. If money is being saved and invested, it is working for you. There should be a pay off. If money is being invested without a future use then it will lose it’s value. Something like Public Provident Funds (PPF). Around 3/4ths of PPF are withdrawn not by the people who invested, but by their nominees after their death. Reason – Since money in PPF was invested just to save tax. Hence, putting a goal becomes the most important aspect before investing that money. If the goal is far into the future, then Samar’s argument of having a higher exposure to equity sounds valid. However, if the goal is in near term, say around 2-3 years then money can be kept into fixed deposits or some debt based mutual funds which will ensure stability until utilised.

While Samar was convincing his father of withdrawing money from fixed deposit, he said ‘interest rates are going down! That’s an enough reason.’ Off lately, we are being a party to such comments

from so called market experts. They often add an explanation which sounds music to a growth hungry country, ‘India is growing under the leadership of it’s current Prime Minister, interest rates are going down and investing in businesses is better than keeping that money in banks.’

Most of the times, people often end up trying to rationalise it, like whether it is right or wrong. Instead, focus should be to personalise, whether it makes sense for my money or not.

While looking at asset allocation, fixed deposits form a part of ‘Debt’ bracket. Since, they have received a cult like phenomena, often investors overlook debt based mutual funds. Since, mutual funds are always seen with risk plus growth, fixed deposits have always stole the limelight when the very first thought strikes to save money. Below mentioned are a few characteristics as to how Debt Mutual Funds can be considered as an alternative to fixed deposits.

Debt based Mutual Funds

  • Higher Returns: On average, debt mutual funds may have a potential to provide better return than fixed deposits.
  • Tax Efficient : Comparatively Debt Mutual Funds are tax efficient. They are not completely tax free but if sold after 3 years of investment they are subjected to taxation of long term capital gains. Indexation benefits are available in this scenario which are lined to inflation. Hence, the tax will be subjected to gains minus inflation resulting in lesser tax. If Sold within 3 years the gains are added to existing income and taxed at the marginal rate
  • No Tax Deducted at Source (TDS) : In case of fixed deposits, TDS is deducted on yearly basis whether interest is paid or accrued. This is not applicable in terms of debt mutual funds.
  • No Lock in period : In mutual funds, there is no lock in period as such. Exit loads apply on some schemes while some are even available without exit loads. However, in fixed deposits there is a definite lock in period which is to be engaged in while creating one.
  • Partial Withdrawal : In debt mutual funds, an investor can redeem units partially and use that money. While in the case of fixed deposits, an investor needs to redeem it fully. Partial withdrawal is not available.
  • Tax Outflow : When an investor chooses to have cumulative interest on fixed deposits, he still needs to pay tax on interest accrued. It looks like a better option in the long run but tax has to be paid for interest money which is not received currently. This puts additional tax burden and doesn’t make it an efficient investment decision. No such problems arise in case of debt mutual funds.

Money invested in just one asset class, increases the risk of concentration (such a risk emerges when few investment instruments are used). Hence, a diversified asset allocation should be adopted based on the goals and risk profile of an investor.

Equity as an asset class, in it’s unique ways provides for participation in the long term success of a business. When businesses boom, jobs are created and country as a whole flourishes. It helps beat inflation too. The most respected investor in the world, Mr. Warren Buffet quotes participating in equity as ‘If a business does well, stock (shares) eventually follows.’

Coming back to our argument of “because interest rates are going down’, doesn’t make it a valid argument to invest into mutual funds. As a thumb rule, asset allocation must be taken into consideration along with goals and risk profile of an investor. Hence, an investor needs to sit with his advisor and clearly chalk out the end use of that investment. Accordingly, money should be allocated among different asset classes. At the end of the day, when money is working hard for us then we should also give it a great proper direction.

To sum it all up, personalise your investment and look into what works for you and what doesn’t. Once that is achieved, rationalising investment will give better fruits. The reverse way will yield sour grapes. Just think about it, if that fox had personalised his decision of grapes then he wouldn’t have gone for something which is beyond his jump. It’s just that fox tried to rationalise it thinking grapes would quench his hunger, he remained hungry and in the end said grapes are sour. Well, context of story is not really intended to those who had a sour experience in the capital markets. Just thinking.

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– Jinay Savla

Thursday Trivia ~ Here’s everything you want to know about RERA

Real estate has been one of the unorganised sector in India. It has witnessed tremendous love and loyalty from people since a very long time. Having real estate properties in form of land, house, office or godown is naturally seen as wealth. A common statement can be heard, “Mr. X has 3 houses, 4 acres of land and 5 offices most of which are on rent. Hence, son of Mr. X doesn’t really need to work in his life. He can enjoy fruits of his father’s hard work.” For the generation that was born in 1940s to 1960s, an ideal retirement would be having a certain number of real estate which can generate rent income for them after they stopped working.

However, owning a real estate is not as smooth a ride as it is perceived to be. For years, it was perceived as a safe heaven for parking unaccounted money which would result in lower taxation. Yet, those downsides to owning a real estate have been overlooked.

  • History of a real estate property cannot be easily ascertained.
  • Complete reliance on broker for price as well as negotiation.
  • Finding an appropriate buyer.
  • Lengthy documentation process.
  • Legality of documents signed.
  • Allocating cash component while making payment.
  • Rate structures based on carpet area, super built up, etc.

To regulate this unorganised sector of real estate, government has finally come out with Real Estate (Regulation And Development) Act, 2016 (“RERA”). RERA has fully come into force as on May 1, 2017. It was first introduced in 2013 and finally the bill got approved in March 2016. Although, it being a central law, implementation will depend on state governments, as real estate is a state subject. Here are a few points which highlight how RERA will be beneficial.

Dispute Resolution

Each state will have to setup regulatory bodies as appellate tribunals to solve the disputes between buyer and builder within 120 days. Being a state subject, no central link is available for appellate tribunal. It needs to be awaited till states have fully adopted RERA and started functioning on the same.

Opening of an Escrow Account

Developer will have to put 70% of the money collected from a buyer in a separate account to meet the construction cost of the project.

Compulsory Registration of Projects

It is now mandatory for all commercial and residential real estate projects where the land is over 500 sq. mt. (think of a 100×50 ft site or more), or eight apartments will have to register with the regulator before launching a project

Timely Completion of Construction

Imposition of strict regulations on the promoter and ensure that construction is completed on time.

Calculations based on Carpet Area

Carpet area has been clearly defined in the bill to include usable spaces like kitchen and toilets imparting clarity which was not the case earlier. The buyer will pay only for the carpet area (area within walls). The builder can’t charge for the super built-up area, as is the practice at present.

Clauses for Repair on Developer

A developer’s liability to repair structural defects has been increased to 5 years from the earlier 2 years.

Clearances and Registrations

Developers will be able to sell projects only after the necessary clearances. Under RERA, builders and agents will have to register themselves with the regulator and get all projects with more than eight apartments registered before launch.

First hand information

To enable informed decisions by buyers, authorities will ensure publication on their websites information relating to profile and track record of promoters, details of litigations, advertisement and prospectus issued about the project, details of apartments, plots and garages, registered agents and consultants, development plan, financial details of the promoters, status of approvals and projects etc.

Ongoing Projects

As a thumb rule, all ongoing projects whether commercial or housing projects that don’t have a completion certificate, have to be registered within 3 months. However, there can be some other reasons for which each state can choose to include or exclude some projects. State of Uttar Pradesh and Gujarat has excluded ongoing projects under the purview of RERA based on a certain criteria.

Along with listing benefits, there are few questions that crop up.

Will calculation under carpet area method make any difference?

Previously, developers would talk about different prices based on different methods. Too many terms had surfaced as to built up area, super built up area, usable area, carpet area and what not. These calculations were extreme and so complex that usually buyers would just go by the rates which were prevalent in the area and not bother too much.A single method of calculation will bring clarity across the country. So no more intellectual terminology henceforth.

Should I buy a house now, since builder is offering lucrative property rates?

If property rates being offered are more lucrative then being true. Then, it’s better to beware. A buyer should wait for a completion certificate from builder and if the building is under construction then wait for the builder being registered under RERA. There maybe a strong chance, that builder / developer might be wanting to just sell the property which might not be as per RERA standards. Since, the law is in favour of the buyer, it makes more sense to wait and let the authority do it’s own due diligence and provide valuable insight to the buyer.

Will the builder / developer be able to divert funds as he used to?

On the face of it, the answer is straight away NO. As 70% of buyers money needs to be parked in a separate account while 30% of money will be utilised in paying daily labourers and buying things such as sand, stone, etc. to match any shortage in cash. This will leave very little room for builders to divert funds and start a new project while not worrying about ongoing one. This is what most builders did, while buyers lost huge money, builders bought themselves some nice goodies. As some wise old men say, this is India, builders will divert funds anyway.

Will I have to buy additional parking space for my car?

Parking space will now be directly included in cost of house, there will be no need to pay extra money in cash or cheque for the same. Earlier, builders would get away by not registering compulsory parking spaces with authority. This has changed now. Even recreational tools such as club house, pools, etc. will now have to be registered and it’s cost will be added for the buyer while buying that real estate. This will actually spike up the prices of real estate.

This is a step forward for regulating real estate. There would be issues in implementing the same by the government as coffers of some developers / builders run deep in the system. Yet, it’s a winning situation for the buyer.

– Jinay Savla

Incase you have any query, please write to us in the comment section below.

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Thursday Trivia ~ Stop Procrastinating on Tax and Investment Planning

I can’t change the direction of the wind, but I can adjust my sails to always reach my destination. ~ Jimmy Dean

Tax planning since ages has been left to year end. It’s not an easy feeling to share part of earnings with government. Tax slabs start to get bigger and exemptions from tax start to feel smaller with an increase in salary income. Salaried class have always felt a certain sense of disadvantage to the system. Is it really a disadvantage or just lack of planning? Both sides of the coin can be intensely argued upon depending on the side one chooses to be.

There definitely is a psychological disadvantage to the salaried class, since they have always felt business class gets major tax benefits.

  • Ability to declare whatever income they want to (it’s the most important one),
  • Charge extra business expenses,
  • Use cash and not cheque (situation has changed since demagnetisation),
  • Family vacations can be shown as business tours and charged as business expense,
  • Depreciation on a car (when taken for business), and many more.

On the contrary, business class feels that salaried class is always at a certain advantage then them. Such as,

  • Predictable cash flow,
  • Planned vacations with friends and family,
  • Tax already deducted at source from salary, so no need to worry at the year end,
  • No stress of business market fluctuations, and many more.

In their own ways, both these classes are correct at their standpoint. In this trivia, we are addressing tax planning for salaried individuals. Since the very habit of leaving tax planning and investment planning to the very end has entered everyone’s bones, it makes far more sense to change this habit and start to plan from the very start. As the famous saying goes, precaution is always better than cure.

The salary structure may differ in various organisations. Various allowances and perquisites are offered depending on the sector and location of the organisation. Therefore, at the start of the year, take these following steps to ensure proper tax and investment planning.

Step 1 : Compute your in-hand income for the year

Usually, incase of salaried employees, tax computation is done by the company itself. Accordingly, tax is deducted at source (TDS) while crediting the salary into employee’s account. However, there maybe occasions where employee has different source of income other than salary. For example, if a person has rent income from a residential or commercial property, or interest received on fixed deposits, etc. In such cases, employees can either disclose this information to the company and accordingly the company deducted TDS from salary and credits the tax with government. Or employee independently takes care of tax on other part of his income.

In both cases, tax must be computed on the total income, not just salary income. This step will ensure cash flow for the year.

Step 2 : Eligibility for Tax Deduction

Tax deduction helps in reducing taxable income (computed from above). Inadvertently, it decreases overall tax liability and helps save tax. Depending on the nature of tax deduction, it’s amount varies. It can either be claimed from the amount spent in tuition fees, medical expenses and charitable contributions. Or it can also be claimed by investing in various schemes such as life insurance plans, retirement savings scheme and national savings schemes, etc. to get tax deductions.

The most useful tax deductions which can be easily claimed are :

  1. For investment specified under Section 80C

A total tax deduction of Rs. 1.5 lakh per year can be obtained under this section. The amount being a combination of deductions available under section 80C, 80CCC and 80CCD (mentioned in point 2 below)

Some examples of the specified investments are :

  • Personal Provident Fund Account
  • Tax Saving Mutual Fund
  • Tax Saving Fixed Deposit
  • National Savings Certificate
  • Repayment of Principal on Housing Loan
  • Premium on Life Insurance Policy
  • Equity oriented Mutual Funds
  • Contribution to Employee Provident Fund
  1. For contribution to Pension Funds under Section 80CCC and 80CCD

80CCC – Deduction for contribution to Pension Funds (PF)

80CCD – Deduction for contribution to National Pension Scheme (NPS)

Financial year 2-15-16 onwards, an additional deduction of Rs. 50,000/- is allowed for investment in NPS Account. This additional deduction of Rs. 50,000 is over and above the deduction allowed to be claimed under Section 80C and Section 80CCC.

To sum it up, the cumulative total of these should not exceed Rs. 2,00,000.

  1. For Interest on Savings account under Section 80TTA

This section permits deductions to the tune of Rs 10,000 every year on the interest earned on money invested in bank savings accounts in the country. Such Interest Income is first added under head “Income from Other Sources” and then deduction from such income is allowed.

  1. For interest on home loan under section 24

If there is a statutory commitment of a home loan, the amount of tax deduction allowed is on the interest component of the loan. It should be noted that this deduction under Section 24 is for the Interest levied and not for the interest paid.

Please note that : the principal amount of Home Loan repaid is allowed as a deduction under Section 80C and the Interest levied is allowed as a deduction under Section 24.

  1. For payment of medical insurance premium and health check up under section 80D

Any payment made for medical insurance premium for self, spouse and dependent children, a deduction of Rs. 15,000 can be claimed under section 80D. In case, the payment is made by a senior citizen or anyone with dependent parents who are senior citizens, additional Rs. 20,000 can be claimed as deduction under this section.

To sum it up, following are three scenarios :

  1. For interest on education loan under section 80E

This deduction is only for the repayment of interest on education loan and not for the repayment of the principal amount of the education loan. The good part about this income tax deduction is that there is no maximum limit on the amount of deduction that can be claimed.

This Deduction is not only allowed for Education in India but also allowed for Education outside India as well.

  1. For rent under section 80 GG

If house rent is paid and a deduction from the same is not claimed under any other section, then it can be claimed under section 80GG. Incase, if an employee doesn’t receive house rent allowance (HRA) benefits under section 10(13A), then he/she is allowed for a deduction under this section.

Te Deduction allowed under Section 80GG for payment of rent shall be the least of the following:-

  • Rs. 5,000 per month
  • Rent paid (minus) 10% of the total income
  • 25% of the total income for the year.

Step 3 : Is there space still left for exhausting the tax deduction limit under section 80C

Often times, tax saving investments are done at the end of the year. Only to fulfil some pre-conditioned prophecy. It is common for salaried employees, at such times to go on tax saving hunt. Hence, there is not much thought inclined towards where that money should go. Most of the times, investments are done either in personal provident fund or some hot mutual fund amongst peer pressure. As a few years go by, there is an angst towards that investment incase it has not performed according to expectations or something else performed better.

Hence, it is advisable to fill any gap upto Rs. 1.5 lakhs at the beginning of the year. With a calmer mind, it becomes easy to identify different space of investments.

Step 4 : Investment Planning

After doing the above calculations, the next step is an obvious one ie. Investment Planning. Just deduct all the expected expenses for the year and the amount which remains can be comfortably allocated towards making long term investments.

When each day, we work for money, in the long run it’s also important to have money work for us. Hence, planning for investments become a very important activity. Investing into mutual funds, shares of a company, corporate or government bonds, etc. ensures long term growth of money. However, treating these as mere short term game plan to make quick money can also backfire. To enjoy the long term benefits, it’s important to marry your investments and only utilise them when no other source is available. It will ensure, safety and long term wealth creation.

It’s a good idea to retire rich, isn’t it?

–  Jinay Savla

Thursday Trivia ~ But this time, they’re different!

Recently, Equity Markets are going up by the day. Sensex and Nifty, premier indexes of Indian stock market are showing no signs of slowing down. During such bullish times, new investors are always born. However, like always, ‘But this time, they’re different’ applies perfectly well. Not only euphoric investors are born who feel equity markets will never go down even if it corrects slightly, but also a new breed of cautious investors are born. Let’s call them, ‘cyclically cynical investors’. This new breed, believes in everything that they listen and read. They are well informed about market / company data and market cycles.

Cyclically cynical investors are looking into a possible great crash. They have all the reasons which are no better than views available on internet or television. Just that some words are different, new jargons are used and conviction seems to have reached it’s peak. Have a look at this logic, “after a tech bubble and bust in 2000, 2008 saw a global meltdown. Hence, going by the same logic, 2016 was anticipated for a crash, however, there maybe a delay of 1-2 years.” Does it not generate an immense conviction when someone talks like this?

Talking about macro economics is a new way of showing an authority. These cyclically cynical investors are the founders of endless debates and detailed conversations that take place over a cup of coffee or dinner. However, there is no reason provided which can be converted into action with a sense of conviction. In the end, for them it’s about trying to clone the big investors and getting rich quick. Because let’s face it, when such investors don’t understand what they are doing, then whatever the big fishes say on media is the gospel of truth. It’s no surprise that often times, such investors put the blame of market performance right from Prime Minister of India to the Governor of Reserve Bank of India. Since, normal investors are highly prone to confirmation bias, such information with reasons outside their control sound like music to their ears. Confirmation bias  is the tendency to search for, interpret, recall information in a way that confirms a person’s pre existing beliefs. Hence, when the general belief is that government is at fault for stock markets, then it’s easy to fall into confirmation bias due to cyclically cynical investors.

Coming to macro economics, let’s face the truth, it is intense. Which means, it is not as easy as it sounds. There are tonnes of devils hidden inside details of macro economic data. Macro economics as a thumb rule, can always be argued on both sides of the coin.

Let’s take a small example, if markets are in a bullish phase, for reasons attributed to macro factors such as foreign investors then a parallel set of arguments can be drawn. First reason can be, markets will continue to go up as foreign investors will pump in more money or domestic investors have pumped in household money through different instruments of investments. Second reason can be (contrarian view), markets will crash because foreign investors want to take their profits home or domestic investors seems to have lost faith in our country hence pulling their money out. This argument can be coupled with many new sets of argument too. For example, problems in their home country of foreign investors, currency risk, anticipated world war, etc. Such confirmatory claims are usually based on limited amount of information obtained. Truth is, most cynically cynical investors don’t travel to such countries, so for them it’s impossible to exactly know the nature of problem. They receive such data and reasoning which is fed by their friends. brokers or media whether on online, offline or television. Yet, it’s appears to be a form of convincing mechanism since it sounds being intelligent to talk about problems in someone else’s house. These days, it’s known as being ‘well informed’.

Let’s spot these cyclically cynical investors around us. When they come in contact with you, these are few points which they will speak to you about.

  1. There are no fundamentals in the stock market, so no point studying balance sheets of the company.
  2. Rakesh Jhunjhunwala, Motilal Oswal, etc. entered the market at the right time. If they enter now, then even they won’t be able to make so much money.
  3. Intra-day trading is far better than taking delivery of shares. 2-3% can be made doing such trades a day.
  4. Concept of money management should be left to big investors, we don’t have enough money to buy a new Mercedes also.
  5. Mutual funds are subject to market risks, it’s better to invest directly into equity.
  6. Liquid funds, debt funds don’t generate any money, buy shares that will double your money quickly.
  7. Union Budget will set the trend of the markets.
  8. Governor of Reserve Bank of India doesn’t understand his job fully, look how his policies are hampering the stock markets.

The list can go on and on. For a novice investor, these reasons prove to be a confirmation of whatever little he has known about investing his hard earned money into stock markets. The truth of the matter is, stock markets provide a jazzy feeling to people. It is seen as machine which will churn out immense cash immediately. That’s why we see, novice investors rushing to buy into the market when it’s all time high and with a little crash they are the first ones to pull their money out. Resulting in massive disappointment while some of them swearing never to return.

As the title ‘But this time, they are different’ suggests that previously we saw a certain type of investors who wanted to make some quick money as some of their friends, relatives or some brokers had suggested. Stock markets were in an extremely bullish phase, nobody thought anything can go wrong from here, there were no contra opinions so on and so forth. But this time, it’s not the same. Cyclically cynical investors have taken the army of data, news and so called information as their weapons to induce everyone into believing that it’s easy to make that quick money.

In the recent years with the advent of social media, news reaches our computers, laptops and mobile phones in an instant. We are always connected to the external world. As a result too much of enough information being poured. Time to take rational investment decisions is always under a constant threat. There is always an external factor which wavers the minds of novice investors. It’s like, just when an investor finally decides to buy a mutual fund, a news flashes on his mobile phone which shows last week’s returns of a particular share in a company that just doubled in a few days. In such a world of instant gratification, slowing down has become extremely difficult. While bombarding of jargons in any topic seems to have become a new social status. It’s better to keep away and invest slowly and safely.

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–  Jinay Savla