Investment avenues explained – The comparators!

Many a time people ask, “Tell me a good mutual fund?” This question is similar to asking a doctor, “Give me a good medicine?” How could the doctor suggest anything without knowing the problem?

Right Answer to Wrong Question

Though the question is wrong, immoral sales people take advantage of the gullibility and lack of knowledge of the person raising the question to sell their products. They cannot be taken to task as well, since they have in one way given the right answer. Problem is that the question is wrong.

Major investment decisions have been proven to be wrong leading to financial goals not being achieved by great margins. Imagine a father investing for his son’s engineering education for 18 years and falling short by 75% – where he needed 4 lakhs; he got 1 lakh!!!! The problem was with a mix-up with respect to the asset class. He was sold a pure debt investment when an equity based fund would have served him better.

The Questions

This article will cover most of the relevant methods to compare investments. The idea is to arm ourselves with the right questions so that we can get the right answers to achieve our financial goals.

The comparators used for financial investment tools analysis are not the same for all tools. So we will in this article see all the comparators and how they are suitable for different tools.

The Returns

Is the financial instrument / tool / investment that give the highest return the best one? No, Not necessarily!!!!! This is due to the fact that return has different components and their values depend on a number of other factors too.

There are two components to returns: Current Income and Capital Appreciation. Current income is the regular cash flow that we get from the investment. These are like interest from a bank deposit, dividend from a company or mutual fund, rent from a house or commercial building. This cash coming to us can be regular and a known quantity like a bank deposit and rent. In case of dividends the quantum of incoming cash and time when it will be paid out is not always known in advance.

Current income may be more important to some people than others. A regular known income is more needed for a pensioner than a fresher.

In most cases (except real estate, shares and some mutual funds) the investment itself will not grow in its value when there is a Current Income. The bank deposit of Rs.10 lakhs remains the same at the end of the term. Even in case of a cumulative deposit, the face value of the deposit is the same Rs.10 lakhs, the interest is the rest.

Current income is always taxed, either in our hands (in the case of interest) or in the hands of the person paying it (in the case of dividend).

Capital Appreciation

This is the growth in the value of the investment itself. The land that we had bought appreciates in its value itself. So does the share and the mutual fund bought with the “growth option”.

As with the current income, capital appreciation is preferred by some more than the others. A young person would want more of capital appreciation than a person nearing retirement. The issue with any investment that can give capital appreciation is that there can also be capital depreciation – reduction in value of the investment. So anyone with a firm short term commitment should look to preserve the capital than look for appreciation.

Risk

Risk is the deviation of actual returns from the expectation. So in one way the risk that we face from any investment depends on us (we are the ones who have the expectations). One of the measures of risk for an investment is its variation in returns from time to time (volatility). If the variation is high, the investment is said to be risky.

That way a bank deposit though giving lesser returns is less risky as it has lesser variation in returns. However the risk with bank deposits is the interest rate risk. This is so because after I made my investment for 5 years, the bank may increase the interest rate. Or the interest rate today is lower, so I am not able to reinvest gainfully.

The other risk is with the slowness of growth itself. What if the capital is preserved, but the growth is lesser then inflation. Here again we are losing the value or money. So there is no instrument that can be called RISK FREE. We need to choose an instrument based on our time frame and our ability to take the risk.

Liquidity

This is the speed at which an investment could be converted cash quickly. Gold has the highest liquidity as it can quickly be pledged for cash. Selling gold though may not be as easy. Shares have the next highest liquidity (2 days to cash in bank). Mutual funds come next (1 to 3 days for liquid or equity funds).

Real estate has the least liquidity among investments.

Tax treatment

A very important aspect to be considered when investing is the tax treatment. Some investments today in India still enjoy Exempt-Exempt-Exempt. This is basically getting favorable tax treatment at the time of investment, at the time there is income and also at the time of maturity. We are moving towards the Exempt-Exempt-Tax regime where investment maturity proceeds will be taxed. The first to come under the EET regime is our pension funds.

Convenience

This is the final measure for comparing investment. Convenience is a broad heading under which the ease of understanding the investment; ease for investment in quantum of money, frequency of payments; specialist support to manage the investment; ease of maintenance; etc, come up.

A mutual fund has very high convenience factor because investments can be as low as Rs.500 per month (even lower in some cases), has professionals who manage it, gives the advantage of diversification, can be redeemed very easily (except those with lock-in period). Real estate has the least convenience as it requires huge investments, and in India has to be managed by ourselves (only very recently do we have some professional support to manage real estate).

Summary

The article gives an overview of the different ways in which we can compare the investments. The objective is to ask the right questions to the sellers of products so that we get the right answers.

Extracts from : http://www.bankbazaar.com/

Cheques to be uniform across banks!

The Reserve Bank of India in the beginning of September 2012 has directed all banks in India to issue uniformed featured cheques which as per specifications of the Cheque Truncation System (CTS) 2010. This is with a view to standardize the procedures and provide a safeguard against frauds through uniform security features. The RBI also stated that this move would facilitate the fixed field placement specifications facilitate straight-through-processing at drawee banks’ end through the use of optical or image character recognition technology.

What is Cheque Truncation?

Cheque truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point with the presenting bank en-route to the drawee bank branch. In its place an electronic image of the cheque is transmitted to the drawee branch by the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across branches, other than in exceptional circumstances for clearing purposes. This effectively eliminates the associated cost of movement of the physical cheques, reduces the time required for their collection and brings elegance to the entire activity of cheque processing.

How the Cheque Truncation System has come about to be Implemented?

The Reserve Bank has implemented CTS in the National Capital Region (NCR), New Delhi and Chennai with effect from February 1, 2008 and September 24, 2011. After migration of the entire cheque volume from MICR system to CTS, the traditional MICR-based cheque processing has been discontinued in these two locations.. Based on the advantages realized by the stakeholders and the experienced gained from the roll-out in these centers, it has been decided to operationalise CTS across the country. Accordingly, Grid based CTS clearing has since then been started in in Chennai by including a few banks from Coimbatore and Bengaluru with effect from March 2012. It has also been envisaged to bring all the bank branches in the states of Tamilnadu, Kerala, Karnataka, Andhra Pradesh and the Union Territory of Puducherry under Chennai Grid in a phased manner.

What is New about this Approach to Implementation of the Truncation System?

Under this approach the entire cheque volume in the country cleared across numerous locations will be consolidated into a much fewer number of grids. The concept of region wise grids will be replaced and operational freedom will be given to the operator in deciding the number of grids required to expand the reach of CTS Pan-India and also on choosing the locations for each grid for optimum use of the resources. Each grid will provide processing and clearing services to all the banks under its jurisdiction. Banks, branches and customers based at small / remote locations falling under the jurisdiction of a grid would be benefited, irrespective of whether there exists at present a formal arrangement for cheque clearing or otherwise.

What are the benefits of such a System to Customers?

The basic purpose of RBI introducing this system is to help the customers better by:

§ Reducing the scope for clearing-related frauds or loss of instruments in transit.

§ Lowering of the cost of collection of cheques.

§ Removal of reconciliation-related and logistics-related problems.

§ Creation of the capability to enable inter-bank and customer payments online and in near-real time.

§ Superior verification and reconciliation process.

§ No geographical restrictions as to jurisdiction.

§ Operational efficiency for banks and customers alike.

§ Reduction in operational risk and risks associated with paper clearing.

What are the Cheques that can be presented through the CTS?

All types of cheques can be presented for clearing through CTS. It is in no way different from the use of traditional clearing infrastructure which has been used for clearing paper cheques. Cheques presented as part of Speed Clearing are handled in CTS as well. Incidentally, given the fact that images of cheques (and not the physical cheques) alone need to move in CTS, it is possible for the removal of the restriction of geographical jurisdiction normally associated with the paper cheque clearing. For reaping this benefit, the concept of Grid-CTS clearing is being envisaged as part of roll-out of CTS at Chennai. Under the grid clearing, cheques drawn on centers included in the grid will be cleared as part of local clearing.

What are the Changes for the Customers?

There is no change in the clearing process for customers who can continue to use cheques as at present, except to ensure the use of image-friendly-colored-inks while writing the cheques. Of course, such of those customers, who are used to receiving the paid instruments (like government departments) would also receive the cheque images. Cheques with alterations in material fields (explained in detail later) are not allowed to be processed under the CTS environment.

The RBI has made it mandatory for all banks in India switch over to this new system by 30^th September 2012 and ensure that all non-CTS-2010 standard cheques in circulation are withdrawn by 31^st December 2012.  This move shall usher a new era of banking with cheques in India.

Extracts from : http://www.bankbazaar.com

What are the rights of an insurance policy buyer?

It is a known fact that one cannot foresee what future has in store! Life is so uncertain that one cannot predict whether the next moment he/she will be alive or not. Keeping this perspective in mind, it is better to be prepared to face future uncertainties ahead! An excellent way to do this is to own an insurance plan. Remember it works best for those who are aware about their privileges as an insurance buyer. Awareness about insurance comprises of the various rights that are provided to the buyer. A review made by leading finance analysis company shows that the level of awareness of rights among policy holders is quite appalling.  This article is dedicated to provide information regarding the rights one possesses as an insurance buyer.

Be aware of your rights as an insurance policy holder

Portability of a plan, what is free look period, within how many days one can settle the claim, etc are some of the questions that every policy holder must know about. To help you ask the right questions here is a check list approved by the IRDA for you to get started!

Right to get information on your insurance policy

As per the guidelines stated by IRDA, all policy holders must provide the information they ask regarding their insurance scheme by the insurer. A buyer possesses the right to enquire about all the relevant information including the benefits that he/she is liable to get from the purchased policy. To certify whether the buyer is aware about necessary information and features of the policy or not he is provided with a certificate form that is to be filled by him. IRDA guidelines clearly disclose that when a policy is sold, the particular insurance firm or one of its agent must present all the required information about the scheme to the buyer, so that he/she can foresee whether the plan is in his interest or not.

Rights regarding the Termination of Insurance Policy

If due to some reason, the policy holder is not pleased with the insurance scheme after buying it, he/she holds the right to cancel it within 15 days of inception and is also liable to get the whole amount back. In such a situation, insurance companies deduct only the surrender charges.  Most buyers remain unaware about this right and often face difficulties in such cases.

Most of the complaints regarding surrender of policy are only due to one reason and that is, the buyer doesn’t get what was promised at the time of purchasing the policy. Some agents make false commitments just to tempt the customers into purchasing a policy, so it is critical for the buyer to do his own research online and also ask friends and associates about the scheme before going ahead with it!

Rights regarding Payment of Premium

Some policy holders find it difficult to pay premium in lump sum. So IRDA has defined a right for those policy holders to change the frequency of payment of premium. To change the amount of premium one can apply in the commencement of the respective policy year.

Rights regarding Filing a Complaint against any Insurance Company:

Insurance Policy buyer holds the right of filing a case against an insurance company if he/she finds anything wrong in the procedure. Such types of issues arise mostly when a company over charges the premium from their policy holders or makes excuses at the time of maturity. In case such a situation should arise buyers often fail to take up the issue and file a case against the insurance company as no one wants the hassle of taking up such a responsibility. There is also common myth that it is next to impossible to win a case against any insurance company. If the intentions are correct and the reason to file a case is legally valid then the insurance company in question will surely be pulled up by the IRDA. To file such a case, one can contact IRDA on IGMS.  Consumer forums can also assist in this regard.

There are several fraudulent companies existing in the market today and if one’s research and understanding of one’s rights is not sound, it can be easy to get deceived. If any insurance agent makes excuses in showing policy documents, then one must force them to do so as it is one of the primary rights given to buyer.

To spot any discrepancy, it is always recommended to go through the whole policy documents or take the assistance of an insurance expert.  An insurance policy is supposed to bring financial relief in one’s life and the benefits can be better utilized if everyone who wants an insurance policy is aware of the rights they are entitled to!

If you evade tax what will happen?

Individuals have the freedom to self assess income and pay taxes. That doesn’t mean that if you do not declare a particular stream of income to evade taxes, you will go scot free!

Tax evasion is an illegal activity which entails not filing income tax returns altogether or misrepresenting the tax payable amount. It is different from tax avoidance, which is a legal activity because tax laws are used to reduce the tax amount payable.

tax returns are scrutinized only if income tax authorities feel that there is tax evasion. If they conclude that you have deliberately concealed income to reduce tax liability, you will be penalized.

What does scrutiny of income mean?

Scrutiny essentially means evaluating the income tax return for its authenticity i.e. the income tax assessing officer will go through the returns filed and various other documents such as bank statement, Form 16 among other things to check if there is any mismatch in tax liability assessed by the individual and the actual tax liability. The income tax officer will request all bank account statements, credit card statements, details of all family members, Form 16 and other relevant documents as part of the scrutiny process.

In most cases, if a return is picked up for scrutiny, a scrutiny notice will be served within a period of one year from the month in which returns have been filed. So if you file your returns on 30^th July, 2012, then you may get a scrutiny notice anytime on or before 29^th July, 2013. The notice is in a standard format and it will contain relevant details of the tax payer and also will contain a date on which the tax payer needs to appear before the concerned income tax officer.

The tax payer need not attend this meeting in person. He can send across a representative to plead his case, which in most cases will be the chartered accountant of the tax payer.

How is an income tax return picked up for scrutiny?

There are various guidelines/thresholds in place which will determine the selection of income tax return for scrutiny. Some of them include

§     All assessments pertaining to search and seizure cases

§     All returns where deduction claimed under chapter VI-A of the Income tax act is Rs. 25 lakhs or above

§     All returns where refund claimed is Rs. 5 lakh and above

§     Withdrawal of less than Rs. 50,000 p.a. will be picked up for scrutiny. The logic being that you may have access to black money which you may be using for your daily expenses and hence withdrawals from the bank account are minuscule.

§     In addition, cases will be picked through a Computer Assisted Scrutiny System (CASS) by giving specific instructions.

What are the implications?

If the income tax officer figures that you have concealed income, a penalty will be levied which can be anywhere up to 3 times the amount of income concealed. So if the tax evaded amount is Rs. 10,000, you can be charged a penalty of anywhere between Rs. 10,000 to Rs. 30,000.

What should you do to avoid such a situation?

Many salaried individuals believe that since Tax is deducted at source for salary and for other streams of income, when it crosses a particular threshold, their tax liability is nil. That may not necessarily be the case.

There are several other streams of income, where tax may not be deducted at source. For e.g. Post office saving deposit interest, interest on bank savings account, rent received from property among other things. Also if you have switched jobs, it is likely that if you haven’t declared that your old organization has taken into consideration deductions under Section 80 while calculating TDS, the amount of TDS charged by the new organization may be lower as they would consider the full quantum deductible under Section 80, resulting in you paying lower tax.

Therefore while filing returns make sure you consider all these factors. It is better to take precautions while filing returns because if your return is picked up for scrutiny because of some anomaly, apart from the financial impact, you will witness a lot of mental stress.

Insurance as a social security tool !

Insurance today has several implications for people from different economic backgrounds, however the basic concept of life insurance still remains the same and universal – to provide for unforeseen contingencies of death and disability of a working or earning member of the family.

Scope

The term life insurance has financial as well as legal implications which need to be understood categorically before delving into the details of any polices.

Financial Implications: Life Insurance is a financial arrangement, which redistributes the costs of unexpected loss of life among the members of the pool. The pool is a collection of people facing common risks. All members contribute a fixed amount towards a pool called premium. In exchange for the premium payment, the person gets an assurance that a certain sum of money is to be paid to him or his nominees on the happening of the event insured against

Legal Implications: Life Insurance can be defined as a contract between two parties by which one party undertakes to make good or indemnify any financial loss suffered by other party, in consideration of a sum of money, on the happening of a specified event e.g. accident or death.

The scope of life insurance can be broadly stated under the following aspects:

§  Insurance of life is a risk sharing instrument.

§        Life insurance is essentially a cooperative process in which a large number of people have to taken into the fold of the insuring agency and create a pool.

§      The value of the life has to be estimated in order to estimate the share of each individual in terms of premium.

§      Payment contingency in case of life insurance is either at death or at the expiry of term either of which will definitely occur. Thus this contract is a contract of certainty.

§ Insurance is not a form of gambling and it rather serves the purpose of eliminating uncertainty of financial situation by providing for unforeseen events. It additionally serves to increase the productivity of the community by eliminating worry and increasing initiative.

§       Insurance is not a form of charity as the sum assured is paid out against regular payment of stipulated premium.

A Tool for Social Security

Life insurance is one of the most effective tools of social security across the globe. In the absence of such a provision to the common people, the society will have no redressal for pitiful elderly masses, helpless widows, unprotected orphans; the factories will have to be scrapped after a fire; the houses will not be rebuilt after being struck by any calamity. With such events and more any economy cannot be stable leave alone the growth.

Our state, unlike the socialist or a developed capitalist society where states are responsible for the deprived and destitute, is ill-equipped to do so. Constitution of India has relevant clauses under the directive principles of the state policy. In article 41, it clearly dictates the state within its monetary and development capacity shall take effective measures to secure the elementary right of work, education, employment, health and any other undeserved want of every citizen.

Nevertheless, the failure of states is evident to all, with only a few schemes floated like the one for socially disadvantaged. Providing equal rights and opportunities for all is easier said than done. In the absence of the bread winner of the family there is little that the government or other social agencies can do to look after the welfare of those left behind. The same is true even in the most economically advanced nations.

Thus in order to ensure that the people left behind continue to enjoy the same privileges in society as before and thus stay with the mainstream, life insurance is a probably the best and only social security tool against unforeseen eventualities. It not only creates security but also goes ahead to foster a respect for savings to be able to secure future of the entire family.

A Tool for Independence

One has only three resources to fall back upon when a calamity strikes: savings, charity and insurance. Savings is a slow and tedious process as on average one saves only 10% of the earnings and they consume a life time to accumulate into something meaningful that can really come handy in a crisis. Additionally the exact amount that will be required is quite unpredictable making savings insufficient at most critical junctures. Charity on the other hand is demeaning and unreliable since it is completely at the mercy of the provider. Thus insurance remains the only and most viable option to fall back upon whenever crisis takes place.

Insurance is a product of ones farsightedness and present sacrifice for future anticipated gains and is thus commensurate with his self-respect and dignity. It encourages economic independence and is thus a tool of social security par excellence. The concept of life insurance has come a long way from its inception and today also provides a smart avenue for investment where the policy holder not only secures himself against unforeseen contingencies but is also able to create wealth over a period of time by letting the money paid towards insurance be invested in market oriented instruments.

Life insurance – An Overview

Life insurance is a commercial contract between the insurance policy proposer and the insurance service provider. However, apart from customized plan of insurance policy and its coverage, there are wide ranges of insurance policies available in market under different flagship brands. Although the aim of all insurance policies are almost the same, which is providing best quality life coverage and return value of investments in the form of premium, it is extremely essential to learn the basic details about the life insurance plans and the coverage provided by these plans.

Depending on the major aim behind taking these policies, there are two basic variants:

§    Protection policies - are mostly known as term insurance, the benefit of these insurance policies involve a lump sum amount against the death of the proposers.

§    Investment policies – where the chief objective of the insurance policies is to assist the increase of capital by recurring/regular or single premium; whole life, variable life, and universal life policies are included in investment life insurance policies range.

The Inherent Policy of Life Insurance

Life insurance policy is meant for life coverage. Although in all sense human life is priceless, but when a bread earner of a family passes away all on a sudden it simply creates a catastrophe that is hard to withstand for rest of the family members. The coverage of life insurance cannot bring back the life but can protect the family with financial security and ensures safety of them. Hence availing life insurance policy is no doubt an extra protection for an individual and for his/her family in dire distress and in case of life penalty even.

Why to Buy Life Insurance Scheme

Security and safety are the two primary aims behind availing life insurance schemes. In some cases it is the initiative to protect kids and family in case there is any death or dire accident causing disability, etc. Insurance policy can help in two extreme conditions where an individual lives too long or dies too early. To prevent this kind of distress, life insurance policies are taken for ensuring extra protection.

§    A life insurance policy provides excellent financial support for a family where the bread earner or a significant earning member has suffered from death penalty

§    An apt children’s policy can finance child education and other financial needs of the family

§    Availing a life insurance savings plan helps in creating a consistent flow of income in post retirement period.

§    Creating extra income for improving life style

§    Managing finance portfolio better

§    Availing increased income tax deduction out of availing insurance policy

Life Insurance Cover: How much is Required

The actual level of cover that can be considered adequate is a highly fluid and dynamic figure as it changes from time to time and is also different for different individuals depending on their personal situations. However, the factors, which are to be taken in consideration, are,

§    The  number of dependants

§    The number of liability and responsibility of mortgage

§    The standard of living a family is leading

§    The plan for children education

§    General health of the family members

§    Detail analysis of the affordability

§    Detail analysis of the standing asset and asst liabilities

§    Forecast rates of inflation

§    Forecast cost of living to maintain the current standards.

Types of Life Insurance Available

Currently the public and private players in the life insurance industry of India are offering a array of life insurance products with a host of benefits for the policy buyers. Some of the basic types of policies available in the Markey are listed below.

§    Pure Term Insurance Policy: is a basic risk cover policy which protects the life insured for a pre-determined period of time as stated in the contract.

§    Whole Life Policy: is a basic risk policy that provides cover throughout the life of the insured irrespective of any time fame.

§    Endowment Policy: Is a policy that combines insurance cover along with savings for the insured.

§    Money Back Policy: is a policy in which periodic payments of certain sum assured are made to the policy holder. In case the policy holder survives the term then the balance of the sum assured is paid to the insured.

§    ULIP: is a market linked policy that provides basic life cover along with a host of investment options for creating better returns.

§    Annuities and Pension: are policies that provide the insurer with stipulated sums periodically to protect against financial risks and give pension at regular intervals.

Life insurance is an essential ingredient to any kind of personal financial planning as it caters to the basic issue of security for the dear ones. Seeking professional help while deciding on the type and amount of life insurance is a smart way for beginners as it will help them appreciate the various nuances of plans and policies available in the market currently. A little research on the internet will also provide detailed comparative studies from all desired angles regarding the various policies along with the associated benefits and pitfalls.

Aadhar to be treated as a valid address proof for investors

Aadhar cards seem to be gaining ground. The card issued along with 12 digit unique identification number by the government is a valid proof of address to operate accounts with brokerage firms, mutual funds, portfolio managers and capital market entities, India’s securities market regulator has said. [via]

This is another significant announcement from Government bodies hailing Aadhar as a valid address proof. Prior to this Chandigarh administration recognized Aadhar as a valid proof for various welfare schemes being run by departments, boards, corporations, public undertakings and agencies in July this year. Aadhaar cards can also be used to open bank accounts and avail gas connections.

The Securities and Exchange Board of India’s (SEBI) move to recognize unique identification (UID/ Aadhaar) card is certainly a good step for the Asset Management Companies (AMCs), and it will help them to streamline the Know Your Customer (KYC) process and reducing operational challenges.

Earlier in April this year, Government had initiated a project to integrate both Aadhar and PAN card database with the intention of doing away with fake PAN cards and ensuring an accurate biometric data. However, even after SEBI decision to recognize Aadhar as a valid address proof, it is merely an additional facility for KYC. PAN will still be required for KYC purpose because it is a SEBI and Finance Ministry guideline. It is worth noting that now PAN would work as a common financial market denominator and the Unique Identification Authority of India (UIDAI) will be a KYC enabler for investor’s accounts with Asset Management Companies.