Systematic Withdrawal Plan

Systematic Withdrawal Plan (S.W.P.)

Systematic Withdrawal Plan brings to you a host of investment conveniences. It is a package of transaction options, which aim towards offering you a hassle free, disciplined and efficient investment solution in mutual fund schemes.

How to avail SWP?
You may opt for any of the schemes by filling a simple form provided in the common application form. The same facilities can also be availed by filling the transaction slips.

What does SWP offer?
Through SWP you can redeem sums at a monthly or quarterly frequency by giving a one-time instruction to us. You may choose to regularly withdraw either a fixed sum or just the appreciation part of your investment. As the capital gain tax would be levied only on the number of units you withdraw, SWP becomes a tax efficient way of getting regular income from your investments

SWP is for whom:
This facility is suitable for two types of needs.
1) Investors wanting regular funds inflow from their investments. 2) Investors interested in booking their gains at a regular interval. If you require an exact amount regularly then the Fixed Option is suitable for you. If you do not want this withdrawal to disturb your capital contribution and would like only to reap the appreciation generated in the investment, you should opt for the appreciation option.
Ideally SWP should be opted from the growth options of mutual fund schemes

What are the advantages of SWPApart from offering you a great convenience in managing your funds inflow and profit booking, you also benefit by saving on the tax liability if a similar inflow would have come from dividends.

Is Low N.A.V. Cheap?

Is Low NAV Cheap?

Is a fund with a low NAV a better investment option than a fund with a higher NAV? Since you can buy more units when the NAV is low, isn't it cheaper? Should mutual fund schemes with a higher NAV be avoided? These are questions, which trouble many first time investors in mutual funds.The answer to these questions is that - it is irrelevant how high or low the NAV of a fund is. The amount of your investment remaining unchanged, between two funds with identical portfolios, a low NAV would mean a higher number of units held and consequently a high NAV would mean lower number of units held.But under both circumstances the product of the number of units and the applicable NAV, which is the value of your investment, would be identical. Thus it is the stocks in a portfolio that determine returns from a fund, the value of the NAV being immaterial.When one sells those units, the return will be the same as that of another scheme, which has performed similarly. The 'cost' of a scheme in terms of its NAV has nothing to do with returns. What you want to buy in a scheme is its performance. The only instance where a higher NAV may adversely affect you is where a dividend has to be received. This happens because a scheme with a higher NAV will result in a fewer number of units and as dividends are paid out on face value, higher NAV will result in lower absolute dividends due to the smaller number of units. But even here, total returns will remain the same.So from whichever angle you see it, the NAV makes no difference to returns. Mutual fund schemes have to be judged on their performance. And the simplest way to do this is to compare returns over similar periods.

Why Mutual Funds Are Still Not Popular

Why MFs Are Still Not Popular

Mutual funds are still not the first choice of most Indians when it comes to investing. The foremost reason for this is the availability of government backed savings instruments that offer a high rate of assured returns.Not only do instruments like National Savings Certificate and public provident fund guarantee a high rate of interest, but they also come with the backing of central government, thus assuring capital safety of the highest order. Add to this, such instruments come with powerful tax saving incentives.High returns, coupled with the risk-averse mentality of the average middle-class that constitutes majority of our population, have kept the bulk of savings away from mutual funds.Long-term savings find their way into instruments like NSC and PPF, while bank fixed deposits are preferred for short-term investments.On the other hand, when it comes to investments in instruments having no assured returns, people prefer to invest directly into stock markets. One of the reasoning is that 'why should I pay for a fund manager when I can invest in the stock market on my own?' Secondly, the lack of penetration of the mutual funds across the country also keeps them from tapping the savings potential of smaller towns.However, certain developments in recent years have been encouraging for the mutual funds industry. First, the rates of return offered by the assured return instruments have come down significantly, inducing people to look beyond them.Second, the mutual fund industry has become more transparent in terms of disclosures. Third, the ELSS category of funds has come at par with other instruments in terms of tax saving incentives.These developments are likely to attract more people towards mutual funds. SEBI's initiatives to widen distribution of mutual funds across the length and breadth of the country might just provide them the well-needed kickstart.

Why Mutual Fund IPOs should be avoided....

Investors often tend to think of fund IPOs in the same vein as they do of stock IPOs. However, there are some fundamental differences that they need to take into consideration. The price of a stock is based on its supply and the demand for it. IPOs often get listed at a premium because when a stock opens, its demand is sometimes much larger than its supply.This is not true of mutual funds. In case of mutual funds, a separate unit is created at the time of investment and it is destroyed at the time of redemption. Thus, the supply of mutual fund units is unlimited and so any appreciation in the value of a fund's NAV can never be due to an increase in the demand for a fund's units. Moreover, in the case of funds, your gains depend on how well the fund manager invests.All things considered, it is generally a good idea to stay out of fund IPOs. A new fund is an untested entity without any track record. Your investment call will have to be made purely by looking at the fund manager and the AMC. Another issue is that of a possible opportunity loss. Your investments may be locked in for up to a month. This money could instead be kept in a liquid fund for a month and then invested once the fund opens for daily sale and repurchase post its IPO.There are some exceptions to this. An obvious one is closed-end funds. Even though these are no longer in vogue, there are special funds called fixed maturity plans, which are similarly structured. If you want to invest in one of these, then the IPO may be the only option available.Investors need to understand that fund IPOs are purely a marketing device that creates some excitement. AMCs always communicate strongly during an IPO. A discerning investor should absorb this information carefully and invest later when the fund opens for sale and repurchase on an ongoing basis.

Tax Panning for Different Stages of Life

Tax Planning for Different Stages of Life

Some people have a wrong notion that tax planning is useful only once you are well settled in a business or profession. That is not true. In fact, the best time to start tax planning is right from the day you start having any income in your name. And, it should be continued in right earnest, year after year. Here is how ...
Tax Planning upon Becoming a Major
Your first lesson in tax planning should start when you complete 18 years of age. Obviously, at 18, you won’t have too much income in your name. However, the first step when you are 18 is to start documenting any big or small amounts you receive as gifts. The small cash presents you receive on various ceremonial occasions should be put into the bank in the initial years of your life after becoming a major. It is time now for you to adopt the first lesson in tax planning, namely separate income tax files for each individual so that one’s income is not added with that of other family members. Once you turn 18, you should file a separate income tax return and you are also eligible to enjoy the benefit of various exemptions, deductions and tax rebates available to all tax payers.
Tax Planning Once You Start Earning
As soon as you start earning, either by doing a job or through your business or profession, it is time for you to systematically maintain your withdrawals, banks deposits, etc. Typically, one is single when you start earning, you are single. This is therefore the right time for you to save as much as you can because you have fewer financial commitments. A better course would be for you to invest your savings in a public provident fund (PPF) account so that the money is saved and blocked for a minimum period of 15 years. From the point of view of tax planning, lavish spending would be a waste. Also, you can now go in for some insurance policy with a long period of maturity.
Tax Planning When You Get Married
Tax planning for your married life should start a few months before the actual date of your marriage. This is because you should not make any gift to your spouse after marriage otherwise the income arising from the gifted amount will be clubbed or added with your income. The best tax planning, therefore, would be to make a gift to your prospective spouse just a few months before marriage when she is not legally your wife but simply your friend or fiancee. After marriage, you need to plan the income tax file of even your spouse.
If your spouse is not working, then it is better that you do not make drawings for household expenses, etc. from the income arising to your spouse. The simple reason for doing so is that her income and funds are lower in comparison with yours. It, therefore, makes a sense to withdraw money for household expenses and for holidays from funds of the person having a higher income in his or her name. It is better from the point of tax planning to invest and spend wisely the funds belonging to the spouse whose income and wealth is small.
However, if yours is a case of DINKS (i.e., Double Income No Kids), then you can think of joint systematic withdrawal plans for expenses.
After marriage, both the husband and wife should take full advantage of income tax rebate and deductions. It is also time to have a look at long-term insurance and pension plans. While investments in insurance and pension plans may not be found immediately beneficial soon after marriage, but in years to come these will have a very good effect on your personal finances. The focus should be for twenty-year tax planning.
In case you are contemplating to have a house of your own, the best time is to start saving right at this stage. Later, your own money as also loans will help in acquiring a residential house property. The biggest advantage of putting your money in residential house property is the tax haven on the one hand while on the other hand you get a secure place of your own to live in. It is suggested that you should go in for a self-financing scheme of residential house property with long time frame in mind so that payment of installments will result in tax saving for you.
Tax Planning after a Decade of Your Marriage
Generally speaking, after a decade of your marriage your family would be complete. You should now look at tax planning in a more serious manner. It is time now for you to plan for some investments and funds in the names of your minor children. Even if you have some constraint as regards the funds available at your disposal, it is worthwhile now to take some insurance policy in the name of your minor children for their education and marriage purposes. This should be a long-term policy with a small amount of premium payment year after year.
Tax Planning after the Marriage of Your Children
Once your children are grown up and settled in life, most of your responsibility towards them is over. It is now time for you to relax. Now you should plan your investment strategies in such a manner that the income in your family group is distributed from the point of view of tax planning, not merely in your name and that of your spouse but in the names of your son, your daughter-in-law and your grand children. You should also now start focusing on the investment decisions which will have a long-term repercussion relating to your succession. Thus, it is recommended to you that you should prepare your Will and adopt tax planning relating to the wills and achieve ultimate tax saving for family members who are going to be a part of your succession plan.
Tax Planning for Senior Citizens
Your tax planning should now be such that you have no hassles and tensions in these golden years. Your aim should be to have an easy flow of money from your investments. The thrust should be on safety of your capital as against higher returns. Your focus should be only on 100% safe and secured investments. Try to have a joint bank account and joint investments which will help smooth succession in the years to follow. Your tax planning should now be in such a manner that you are required to spend less time managing your affairs and have more time available for your personal pursuits.
Conclusion
Intelligent tax planning calls for changes in approach every few years. It is, therefore, recommended that you must review your investment and tax planning perspective at least every decade and reorient it depending on the facts and circumstances of the situation.

Tax Saving Investments in Mutual Funds....

Union Budget 2005-06 proved to be a watershed event for tax-savings funds. Hitherto, investments for the purpose of tax deduction (under the erstwhile Section 88) were subject to upper limits. For example the cap on tax-saving funds was placed at Rs 10,000; as a result conventional avenues like the Public Provident Fund (PPF), National Savings Certificate (NSC) and life insurance policies dominated investors' tax-planning kitty. By removing sectoral caps on investments eligible for tax benefits, a level-playing field has been created. Tax-saving funds in their new unbridled avtaar look all set to emerge as a strong reckoning force in the tax-saving space.
A tax-saving fund (also referred to as Equity-Linked Savings Scheme or ELSS) is a diversified equity which offers tax benefits. However unlike typical diversified equity funds, they are subject to a mandatory 3-Yr lock-in period. From the tax-planning stand-point, the biggest advantage offered by tax-saving funds is the opportunity to invest in sync with one's risk appetite. Investments for the purpose of tax-saving are no different from conventional investments and the principle of investing in tune with the risk appetite is equally applicable.
Tax-saving funds are similar to diversified equity funds in terms of risk profile i.e. they are high risk - high return investments. Investors with a flair for instruments of the aforesaid variety would approve of tax-saving funds.
Investing in equities should always be conducted with a long-term horizon; it is over this time frame that equities have the potential to truly unlock their value and outperform other comparable assets. Tax-saving funds (courtesy the mandatory lock-in period) propagate this cause. The fund manager is not bothered by factors like the fund's performance over shorter time frames or redemption pressures (which the fund manager of a conventional diversified equity fund is subject to) and can go about doing his job with a long-term perspective. From the investors' perspective, tax-saving funds instill a degree of discipline in the investment activity.
Tax-saving funds offer a unique investment proposition since investors are granted the opportunity to invest in a market-linked investment avenue and yet claim tax benefits. Conventionally the domain of tax-saving instruments has been populated by assured return instruments like PPF and NSC. The higher risk profile in turn also means that tax-saving funds are better equipped to clock superior returns vis-à-vis their assured return counterparts like PPF and NSC. For investors who attach more importance to returns and have the ability to take on higher risk levels, tax-saving funds are the place to be.
Another area where tax-saving funds (despite the 3-Yr lock in period) score over their counterparts from the tax-saving domain is liquidity. While investments in NSC run over a 6-Yr time frame; it scores very poorly in terms of liquidity. Premature withdrawals are not permitted except in special circumstances like the investor's death or on order by the court of law. Similarly the PPF has tenure of 15 years; however premature withdrawals are permitted only from the 7th year based on a preset formula.
Having established tax-saving funds' credentials as an efficient device for tax-planning, now let's find out how they score as a pure investment vehicle. For the purpose of this comparison, we shall consider the top performers from the diversified equity funds vis-à-vis those from the tax-saving funds segment over a 3-Yr period.

Diversified Equity Funds

Diversified Equity Funds 1-Yr (%) 3-Yr (%)
RELIANCE GROWTH (G) 103.92 78.86
FRANKLIN INDIA PRIMA (G) 94.80 76.50
RELIANCE VISION (G) 68.95 62.57
MAGNUM CONTRA 110.43 74.00
MAGNUM GLOBAL 117.80 70.99
TATA EQUITY OPP. (G) 79.58 N.A.
HDFC CAP BUILDER (G) 78.21 60.33
DSP-ML OPP. (G) 70.14 61.08
HDFC TOP 200 (G) 65.41 57.13

(Source: Value Research Online. NAV data as on August 23, 2005. Growth over 1-Yr is compounded annualised)(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)
Over the 3-Yr period, leading diversified equity funds have had an impressive run. Funds like Reliance Growth (78.86%), Franklin India Prima (76.50%) and Reliance Vision (62.57%) have outperformed (albeit marginally) their tax-saving funds counterparts i.e. HDFC Long Term Advantage (69.73%) and PruICICI Tax Plan (75.45%). At the same time, Magnum Tax Gain (85.93) has outperformed other diversified funds as well as tax saving funds over the 3-Yr period. However if the tax benefits acquired by investing in tax-saving funds were to be factored in, the latter can match the returns clocked by diversified equity funds.

Tax-saving Funds

Tax-Saving Funds 1-Yr (%) 3-Yr (%)
HDFC LT ADVANTAGE (G) 82.18 69.73
MAGNUM TAX GAIN 159.13 85.93
PRU ICICI TAX PLAN (G) 121.62 75.45
HDFC TAX SAVER (G) 116.26 72.16
BIRLA EQUITY PLAN 77.38 66.75
TATA TAX SAVING FUND 82.43 60.70
SUNDARAM TAX SAVER 94.65 58.09
PRINCIPAL TAX SAVINGS 65.67 52.29
FRANKLIN INDIA TAX. O (G) 68.74 53.67

(Source: Value Research Online. NAV data as on August 23, 2005. Growth over 1-Yr is compounded annualised)(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)
There is very little differentiating tax-saving funds and diversified equity funds when comparisons are made on parameters like Standard Deviation and Sharpe Ratio. Standard Deviation measures the degree of volatility which the fund exposes its investors to; conversely Sharpe Ratio is used to measure the returns delivered by the fund per unit of risk-borne. Even if tax-saving funds were to be considered purely from an investment perspective (i.e. without the tax-planning angle) they emerge as feasible options.
Finally we present an investment strategy for investments in tax-saving funds,
1. Your risk appetite should at all times determine the total investments in tax-saving funds. Don't go overboard in the segment simply because of the opportunity to rake in impressive returns at the cost of higher risk.
2. Use the SIP route for investing in tax-saving funds. Not only does it do away with the need for timing markets, it reduces the strain on your wallet at the end of the financial year when most investors conduct their tax-planning exercise.
3. The dividend option can help. Despite the 3-Yr lock-in period, the dividend option ensures that investors have access to liquidity and the opportunity to capture any gains during the lock-in period.
4. While selecting a tax-saving fund, take into account its performance over longer time frames like 3 years and more. Also monitor how other diversified equity funds from the fund house have performed over longer time frames. Shorter time periods like a 1-Yr period can be misleading while evaluating a tax-saving fund.

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Please get back to me for any further queries at ninad.mairal@gmail.com
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Ten Steps to Financial Success

The Ten Steps to Financial Success


Some people dream of success...while others wake up and work hard at it.

"If you've tried to do something and failed you are much better off, than, if you tried to do nothing and succeeded.”

Well now is a great time of the year to reflect on past happenings and plan ahead for 2005. Some points to "kick off"...

The Ten Step Plan to Financial Independance and perhaps even Wealth.

1. Accept that you can achieve financial success and make a COMMITMENT to yourself to attain it. It is within your grasp. If you really want it. Really BELIEVE it - that is the most important step. Only then will the incredible power of the human mind work out a means of achieving it. Reject the idea that work is simply something you have to do until the age of retirement.

2. Ask yourself this: Where do you want to be in 2, 5, 10 years time? Set goals that excite you. If you could do absolutely anything with your life, what would you do? If you had unlimited money or found out you only had a month to live, what would you do? Write your answers down.

3. Establish your current financial position. What is the cash inflow and outflow. Horrors! Which areas can be improved upon? Everything!

4. Develop your NEW plans. Decide what action you are going to take that will move you closer to the achievement of your goals? All goals should be specific and have a time constraint.

5. Closely monitor the performance of your investments and your rate of savings.

6. Try to put extra savings into investment (it could be your own business).

7. Review and reward yourself annually if your targets are met.

8. Pursue your personal goals and business ideas with all you've got - with real PASSION and PURPOSE. If you really BELIEVE In them, they are far more likely to be achieved.

9. Still try to live a BALANCED life... or as balanced as you can make it. Money doesn't buy happiness; yet I'd rather be unhappy in comfort!

10. The highest cost of all is the cost of waiting to TAKE ACTION to change your current circumstances in life (as 94% of the population apparently is dissatisfied with their situations). It is up to you to do things differently. So take ACTION now - to change course. You get only one shot at life, so make the most of it.



© N.M. Finserv ---- www.nmcomp.com/finserv
December 2004