Understand investing options

Summarized below are the short-term and long-term financial investment options available for Indian investors.

1. Savings Bank AccountUse only for short-term (less than 30 days) surpluses

Often the first banking product people use, savings accounts offer low interest (4%-5% p.a.), making them only marginally better than safe deposit lockers.

2. Money Market Funds (also known as liquid funds)Offer better returns than savings account without compromising liquidity

Money market funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns.

Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. With the flexibility to issue cheques from a money market fund account now available, explore this option before putting your money in a savings account.

3. Bank Fixed Deposit (Bank FDs)For investors with low risk appetite, best for 6-12 months investment period

Also referred to as term deposits, this product would be offered by all banks. Minimum investment period for bank FDs is 30 days.

The ideal investment time for bank FDs is 6 to 12 months as normally interest on bank less than 6 months bank FDs is likely to be lower than money market fund returns.

It is important to plan your investment time frame while investing in this instrument because early withdrawals typically carry a penalty.

4. Post Office Savings Schemes (POSS)Low risk and no TDS

POSS are popular because they typically yield a higher return than bank FDs. The monthly income plan could suit you if you are a retired individual or have regular income needs.

Besides the low (Government) risk, the fact that there is no tax deducted at source (TDS) in a POSS is amongst the key attractive features.

The Post Office offers various schemes that include National Savings Certificates (NSC), National Savings Scheme(NSS), Kisan Vikas Patra, Monthly Income Scheme and Recurring Deposit Scheme.

5. Public Provident Fund (PPF)Best fixed-income investment for high tax payers

PPF is a very attractive fixed income investment option for small investors primarily because of -

1. An 11% post-tax return - effective pre-tax rate of 15.7% assuming a 30% tax rate

2. A tax-rebate - deduction of 20% of the amount invested from your tax liability for the year, subject to a maximum Rs60,000 for a tax rebate

3. Low risk - risk attached is Government risk

So, what's the catch? Lack of liquidity is a big negative. You can withdraw your investment made in Year 1 only in Year 7 (although there are some loan options that begin earlier).

If you are willing to live with poor liquidity, you should invest as much as you can in this scheme before looking for other fixed income investment options.

6. Company Fixed Deposits (FDs)Option to maximise returns within a fixed-income portfolio

FDs are instruments used by companies to borrow from small investors. Typically FDs are open throughout the year. Invest in FDs only if you have surplus funds for more than 12 months. Select your investment period carefully as most FDs are not encashable prior to their maturity.

Just as in any other instrument, risk is an embedded feature of FDs, more so because it is not mandatory for non-finance companies to get a credit rating for this instrument.

Investors should consciously (either though a credit rating or through an expert) select the companies they invest in. Quite a few small investors have lost their life's savings by investing in FDs issued by companies that have run into financial problems.

7. Bonds and DebenturesOption for large investments or to avail of some capital gains tax rebates

Besides company FDs, bonds and debentures are the other fixed-income instruments issued by companies. As a result of an illiquid secondary market and a lack-lustre primary market, investment in these instruments is largely skewed towards issues from financial institutions.

While you might find some high-yielding options in the secondary market, if you do not want the problems associated with bad deliveries and the transfer process or you want to invest a large sum of money, the primary market is the better option.

8. Mutual FundsHave you ever made an investment in partnership with someone else? Well, mutual funds work

on more or less the same principles. Investors pool together their money to buy stocks, bonds, or any other investments.

Investing through mutual funds allows an investor to -

1. Avail the services of a professional money manager (who manages the mutual fund)2. Access a diversified portfolio despite making a limited investment

Our primer Investing in Mutual Funds should educate you a lot more on the benefits of investing in mutual funds and strategies you could employ.

9. Life Insurance PoliciesDon't buy life insurance solely as an investment

Life insurance premiums, depending upon the policy selected, include the costs of -

1) death-benefit coverage

2) built-in investment returns (average 8.0% to 9.5% post-tax)

3) significant overheads, including commissions.

This implies that if you buy insurance solely as an investment, you are incurring costs that you would not incur in alternate investment options.

It is, however, important to insure your life if your financial needs and profile so require. Use our Are You Adequately Insured planning tool to find out if you need life insurance, and if yes, how much.

10. Equity SharesMaximum returns over the long-term, invest funds you do not need for at least five years

There are two ways in which you can invest in equities-

1. through the secondary market (by buying shares that are listed on the stock exchanges)2. through the primary market (by applying for shares that are offered to the public)

Over the long term, equity shares have offered the maximum return to investors. As an investment option, investing in equity shares is also perceived to carry a high level of risk.

Where to invest for retirement?WHOEVER said variety is good for consumers had no marketing sense.

An experiment with jams showed that when a customer had six options to choose from, the conversions were much higher than when he had 24 options to choose from.

With so many options, the consumer gets paralysed with the burden of selection. Is this what is happening to retirement planning? Is that the reason why sensible people are procrastinating?

There are various reasons why retirement planning has become imperative today: longer life span, increased medical costs, inflation etc. Even so, there are just a few takers.

Why don't you look at the options available?

Equity: Traditionally discouraged as a retirement planning tool, it could give your investments a boost if you start early.

Insurance: This one is popularly used for retirement planning. Experts say it should only be used as a risk cover, and not as an investment tool.

Provident Fund and Public Provident Fund: The all-time favourite option. Our grandfathers believed in these low-risk schemes implicitly.

Fixed deposits: Safe and secure, but may cower under inflation with their low returns.

Mutual funds: Preferable one, this. There are the professionals whose experience and expertise will come handy.

Property: Totally ever-appreciating asset in the long run, especially with the real estate boom. Small catch: the liquidity concern. Not everyone has money on hand to invest.

So what are your options?

Option 1. Pension plans

They are ideal for retirement because they provide a cushion of debt in your portfolio and help you diversify. The advantages:

i. If you invest up to Rs 1 lakh in these plans, you are eligible for a deduction from your taxable income. What this means is, your taxable income comes down by Rs 1 lakh, and you stand to pay lesser tax.

iii. After you retire, you can withdraw one-third of the fund balance as a lumpsum, tax free. The rest of your money will be invested in an annuity plan. You could choose to have a monthly or quarterly income from it. (Note: annuity is taxable.)

Option 2: Unit Linked Pension Plans

These are good if you don't mind a little risk and policy monitoring. Here are some ways you could go about them:

i. You could invest your funds in aggressive equity schemes.

ii. You could switch funds across schemes (from debt to equity and vice versa), as and when required. Switches are exempt from capital gains tax and transaction fees (some companies do charge though).

iii. Unlike mutual fund investments, you could stay away from entry loads when you re-enter equity funds in your ULIPs.

These are just some of the options. Debt products, bonds, debentures, National Savings Certificates are also available depending on how you want to invest your money and how much risk you are willing to take.

Are the choices overwhelming? Here's a tip: a mix of these could give you the best returns.

Risk versus Returns

Every investment has an attached risk'Just buy this blue-chip stock, there's no risk at all. For most people who invest in shares there is a good chance that you've heard someone say this before. For most people who just put their money away in bonds or deposits, one of your main reasons for this probably is -I don't want to take any risk at all, I just want my money safe.

Are these statements true? Is investing in bonds or deposits completely risk-free? Or investing in blue-chip stocks necessarily very low risk? NO.

Whenever more than one outcome is possible from an investment, there is always some amount of risk. Only the level of risk is different.

Use risk to analyse expected returnsWhile investing, risk is measured to evaluate the kind of returns you should expect from the investment. Or your return expectations should be based on the level of risk you can bear. In principle, the higher the risk, the higher the returns that should be required.

Empirically returns across various asset classes show that investment in equity shares give the highest level of returns in the long-term, followed by corporate bonds and deposits and lastly bank deposits and government debt. Not surprisingly, the level of risk is also in the same order.

You might be saying - how can debt be risky? It is.

Companies that run into financial trouble could delay your interest payments or even default on paying back your money. Even government debt has some amount of risk. How? Simply put, governments like companies also face the risk of financial problems. However, lack of funds for

a company could result in the company defaulting on a loan repayment. But a government can always print more currency and repay its borrowings. So you will get your money back. BUT, there is a hidden cost (risk). Printing more currency is likely to lead to higher inflation and hence lower real returns on your investment (see our article Impact of Inflation to understand about real returns).

Agreed that the chances of governments or well-managed companies getting into serious financial troubles are low. But that is only difference in the level of risk. There is a risk attached, and that cannot be questioned.

Understanding risk vs return essential for good financial planningYou might ask - why is it so important to understand the risk versus return relationship? Because if you don�t, it is quite likely that your investment returns will not match your risk profile and consequently you are not managing your hard-earned money well. A wasted opportunity, as even a small difference in your investment returns (at the same level of risk) can make a BIG difference to your financial wealth (due to the astounding Power of Compounding ).

To understand the importance of managing your money well read Guide To Financial Planning . This article highlights why financial planning is not as difficult as it sounds and how you can easily make your hard-earned money work for you.

Also you can use our Risk Analyser to understand your risk profile (both your risk-taking capacity and your risk tolerance level) and read The Need To Diversify to understand how you can increase your expected returns while not increasing your level of risk.

Can a healthy portfolio be created without equity?

Is equity must in every portfolio? Is it essential that you should invest in equity directly or through mutual in order to generate wealth? The answer to the question is debatable but the fact remains that majority of the people in India create their wealth without using equity as an investment option. This information is not based on gut feeling or general analysis of trends in savings and investments.

As per RBI report, much of the financial savings of the household sector are in the form of bank deposits (around 30 per cent in the 2000s), life insurance funds (22 per cent in the 2000s as against 9.6 per cent in the 1980s), and pension and provident funds (16.5 per cent in the 2000s as against 23.6 per cent in the 1980s). Another startling fact that comes out from RBI report which says shares and debentures accounted for 8.3 per cent of total financial savings in the1980s; their share increased to nearly 13 percent in the 1990s before declining to 4.8 per cent in the 2000s.

So how is wealth getting created in India? There is no doubt that people are getting richer. We have a sizeable and growing middle class population in the country which is earning more and becoming wealthier. What are sources of wealth creation for these people? Let us look at some of these sources which helped people in India create wealth without equity being included in portfolio.Real Estate: The largest wealth creator in India has been land and houses built on these lands.

People have created wealth in two ways using land and houses. For a simple reason that real estate makes sense in a country like India is ever increasing population and limited land supply. While real estate may involve huge investments in large cities, it is still possible to invest in land and houses in remote location a relatively cheaper cost.

One of the constraints in case of real estate is that it very illiquid and may be difficult to sell immediately like equity or other traded assets. But investments in real estate should be done with long term perspective. Also while making investment in real estate, never stretch your limits which means that maximum 30% percent of income should be allocated as EMI. If you are a first time home buyer recently announced budget has a sop in form of extra tax benefit as well.

Gold: Gold as an asset has given unprecedented returns during last ten years and looking at the shaping of events in the days to come, it won’t be a surprise to find gold offering similar kind of returns. Gold can be invested in form of ETF or physical gold, but the return remains better than other asset class like bank deposits, mutual funds and shares in many cases. There are some arguments given against investment in gold. One of the factors considered for this argument is illiquidity of gold. If you invest in gold ETF, this negative aspect is taken care of.

High Coupon Corporate Bonds: For an investor, who is willing to take risk of investing in equity shares, idea of investment in high coupon corporate bonds cannot be a bad proposition at all. In 2012, many companies floated bonds which offered rate of interest between 11.5% to 13.5% interest. No doubt that these bonds had risk elements, but by putting a part of corpus in these funds an investor can mitigate risk.

Government Securities: Government and public sector undertakings continue to come out with attractive fixed income instruments from time to time. For instance there is a 8.97% coupon GOI Bonds which is maturing in 2030 which if bought at the time of issuance could have made an attractive investment idea. Two years back SBI offered 15 years bond at 9.95% bond. Parking funds in such investment option is very attractive from return perspective. In spite of being taxable, these bonds offer decent post tax returns.

Public Provident Fund and Voluntary Provident Fund: For a person looking for decent and almost risk free return, there is no investment option like a PPF or VPF. PPF currently gives a return of 8.8% return which is tax free. For a person in the highest tax slab, this rate is quite high considering the tax benefit. To build wealth, it is important that we keep on investing in PPF upto the maximum permissible limit as it will help us create wealth as power of compounding work in our favor.

There are many other investment options which can help us create wealth like tax free bonds or debentures of companies (these instruments are relatively risky). Now even investments can be done in commodities through National Spot Exchange. Also those having risk appetitive can invest in currency .It is not always essential that you put your money in equity or mutual funds. Portfolio is a matter of choice and risk appetite driven by goals set by an individual.

Why you need to diversify your investmentsReduce risk without compromising returns.In our article Risk versus Return we highlight how every investment has a risk attached. And how the higher the risk, the higher should be the expected return from any investment. This probably then imply that if you want to reduce the risk in your portfolio, the only choice for you is to move your investments into low yielding investments. Right? Wrong.

Diversification across investments is another way to reduce the risk of your portfolio.

To understand how, look at this simple example (it involves some basic statistical concepts but don�t get turned off, its simple to understand and you can get into the calculations only if you want) -

Say, there are two assets A and B. Both assets have a potential return of 10% and a standard deviation (a statistical measure which measures the variability (i.e. risk) of the potential returns) of 20%. Also, the returns of both these assets are uncorrelated i.e. the performance of Asset A is not dependent at all on the performance of Asset B.

Now assume you invest equally in both these assets. Your weighted potential return (0.5 * 10% + 0.5 * 10%) will equal 10% - this is the same return as that for the individual assets. However, due to the fact that you have now spread your risk over two uncorrelated assets, the standard deviation (i.e. risk) of your portfolio will be 14.1% (lower than the 20% for each individual asset).

It is important to understand what this means.

You would have been able to reduce the risk profile of you�re the returns on your portfolio to 14.1% (from 20% for an individual asset) without having to compromise on your returns, merely by diversifying. So, by choosing two assets whose returns are not correlated (this is important) like say Stock A which is a pharmaceutical company and Stock B which is a software company, you can reduce your risk while not necessarily having to reduce your returns.

In summary, there are two things that are important to keep in mind while planning your investments -

1. Every asset has a risk attached to it.And, the higher the risk, the higher should be its expected returns.

2. Don't put all your eggs in one basket.By diversifying across assets, you can reduce your risk without necessarily having to reduce your returns. You don�t have to get into calculating standard deviation of the return of your assets, you need to just be aware that if you diversify your portfolio, your overall portfolio risk will be lower.

To get the maximum benefit of reducing your risk through diversification spread your portfolio across different assets whose returns are not 100% correlated. Different assets should ideally span across different asset classes such as fixed income, equity, real estate, gold as well as different investment options within these asset classes e.g within equity shares, your exposure should be to companies in different sectors; or within fixed income investments, partly government risk and partly corporate risk.

As a thumb rule, diversify your investments across 15-20 different individual assets.

Investing in equities

INVESTING in equities is riskier than and definitely demands more time than other investments. However, it can probably be more rewarding than you can imagine and certainly very exciting! World over, and even in India, stocks have outperformed every other asset class over the long run. Stocks are probably your best bet against inflation too.

If equities tempt you but you are scared to take the plunge during these volatile times, here's a complete step-by-step guide on investing in equities.

Step 1: Understand how the stock market works

When you read you begin with A-B-C. When you sing you begin with Do-Re-Mi. And when you invest in stocks you begin with business-company-shares.

Before you embark on your journey to invest in equities, teach yourself how the stock market works. Read this easy guide .

Step 2: Learn how to choose a stockHaving understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some smart diversification and proper monitoring will ensure that things seldom go wrong.

It's not that difficult: Just follow these 4 golden rules. And while you are at it< why don't you also check out How to buy low, sell high.

Step 3: Decide how much to investSince equities are high risk, high return instruments, how much you should invest would really depend on how much risk you can tolerate.

Once you have done that, use this asset allocation test to calculate exactly how much of your savings you should invest in equities.

Step 4: Monitor and reviewMonitoring your equity investments regularly is recommended. Keep in touch with the quarterly-results announcements and update the prices on your portfolio worksheet atleast once a week. You can use Moneycontrol's Portfolio to update the prices of your equity holdings.

Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the RiskAnalyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.

Finally, ensure that you avoid these seven most common investing mistakes and sail smoothly into your financial bright future.

Investing in mutual fundsMUTUAL funds are investment vehicles, and you can use them to invest in asset classes such as equities or fixed income. wealth recommends that you use the mutual fund investment route rather than invest yourself, unless you have the required temperament, aptitude and technical knowledge.

If you would like to familiarise yourself with the basic concepts and workings of a mutual fund, this would be a good place to start. Just follow this simple step-by-step process.

Step 1: Understand why mutual funds are recommendedWe are not all investment professionalsMutual funds are like professional money managers, however a key factor in their favour is that they are more regulated and hence offer investors the ability to analyse and evaluate their track record.

Investing is becoming more complexThere was a time when things were quite simple - the market went up with the arrival of the first monsoon showers and every year around Diwali. Since India started integrating with the world (with the start of the liberalisation process), complex factors such as an increase in short-term US interest rates, the collapse of the Brazilian currency or default on its debt by the Russian government, have started having an impact on the Indian stock market.

Mutual funds provide risk diversificationDiversification of a portfolio is amongst the primary tenets of portfolio structuring. And a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option.

7 things you should know about PPF1. PPF - a government backed long term small savings scheme

Public Provident Fund (PPF) is a scheme of the Central Government, framed under the PPF Act of 1968. Briefly, the PPF is a government backed, long term small savings scheme which was initially started by the Government because it wanted to provide retirement security to self-employed individuals and workers in the unorganized sector.

It is today the most popular investment made by Indian citizens. If you are keen on a safe investment, a decent rate of return, tax benefits (deduction and tax free interest) and have a long term investment horizon, then the PPF is for you. It is a disciplined investment avenue as your money is blocked for 15 years.

2. How do I open a PPF account? What should I keep in mind when opening my PPF account?

Head over to your nearest State Bank of India branch, or a branch of any of State Bank’s subsidiaries. You can also open an account in select nationalized banks, and the post office. Fill in the form, attach a photograph, state your PAN Number, and you’re done. Once your formalities are completed, you will receive a pass book which will record all your PPF transactions.

At any point in your life, you are allowed to have only 1 PPF account in your name. You can also have an account in the name of a minor child of whom you are the parent / guardian. However that will be the child’s account, you will simply be the guardian. You can never have a joint account. If at any time it is seen that you have more than 1 account in your own name, the second account will be deactivated, and only your principal will be returned to you.

If you have a General provident Fund account, or an Employees Provident Fund account, you can still have a PPF account there is no restriction.

3. Can an NRI open a PPF account?

The rule of 25th July, 2003 states that ‘Non Resident Indians are not eligible to open an account under the PPF Scheme’. However ‘Provided that if a resident who subsequently becomes a Non Resident during the currency of the maturity period prescribed under the PPF scheme may continue to subscribe to the Fund till its maturity, on a Non Repatriation Basis.’ So if you open it as an RI, and during the 15 year tenure become an NRI, you can continue to invest, but on a non-repatriable basis.

4. When is the best time to invest in PPF account?

The best time to invest is between the 1st and the 5th of any month, preferably April each year. Interest is calculated for the calendar month on the lowest balance at credit of your account,

between the close of the 5th day and the end of the month, and is credited at the end of every year.

5. Is a Loan against PPF account allowed?

Yes loan facility is available against a PPF account. The first loan can be taken in the third year of opening the account i.e., if the account is opened during the year 2010-11, the first loan can be taken during the year 2012-2013. The loan amount will be restricted to 25% of the balance including interest for the year 2010-11 in the account as on 31/3/2011. The loan must be repaid in a maximum of 36 EMIs. You can take a second loan against your PPF account before the end of your sixth financial year, but your second loan can be taken only once your first loan is fully settled.

6. Are withdrawals from PPF account allowed?

Any time after the expiry of the 5th year from the date that the initial subscription is made, you become eligible to withdraw an amount of not more than 50% of the previous year’s balance or of the 4th year immediately preceding the year of withdrawal, whichever is less. If you have taken any loan on your PPF, this also gets factored in and reduces your balance. You cannot make more than a single withdrawal in the year. You need to apply with Form C for any withdrawals.

7. What happens after PPF account matures?

You have 3 choices.

Either you can withdraw your maturity amount, or you can extend your account by a 5 year block, as many times as you want and make fresh contributions, or you can extend the account without making any further contributions, and continue to earn interest on it every year. If you decide to withdraw your money, your maturity value is exempt from tax. If you decide to extend your account and continue making fresh contributions, you can extend it for a block of 5 years at a time, as many times as you want, you can also make withdrawals from the account, up to 60% of the account balance that was there at the beginning of the extended period. Just remember, if you choose to extend your account, submit the necessary documentation for extension before one year passes from the maturity date. If you choose to extend your account without making any fresh contributions, you can do so. In this case, any amount can be withdrawn without any restriction; however you can only withdraw once per year. The balance will continue to earn interest till it is withdrawn.

Dollar Cost AveragingEverything that goes up can come down, even good investments

You're dead sure that shares of Unbeatable Software Ltd at Rs 50 are a great investment. Your broker agrees and so you buy a 1,000 shares for Rs 50,000. A week later, the stock's down to Rs 40 and you are carrying a potential loss of Rs 10,000 on your decision. Don't be surprised. This happens to everyone. And, very often.

Buying at Rs40 would have clearly been the smarter thing to do. Unless, the stock's heading to Rs35. The lesson here is 'dead sure' doesn't exist and stock prices (or for that matter, bonds, mutual funds, or anything that has a price) go up and down.

At what price do you buy? Where's the bottom?

Nobody knows, not even your broker. But there is a way around these issues. And it is a strategy that most smart investors adopt. No, it is not complicated. In fact it is quite simple, most practical and could be quite profitable too. Especially, if you are an individual investor.

Let's see how it works.

Instead of investing your Rs50,000 in one lump sum, suppose you had invested a fixed sum of Rs10,000 at the beginning of every week. Your first Rs10,000 would have bought you 200 shares at Rs50. Your second of Rs10,000 would have allowed you to benefit from the lower share price and you would have bought 250 shares this time around, given that the price was down to Rs40. To understand how this investing approach works, refer to the table below. The table depicts likely stock price movements.

In the above example, by following this strategy you would have ended up owning 1,140 shares of Unbeatable Software Ltd as against 1,000 shares if you had bought in one lump sum investment.

The difference is significant - your Rs50,000 goes a bit further. In fact, 140 shares further. This approach of spreading out your investments over time and investing a fixed amount periodically

Dollar cost averaging

Period Share Price (Rs) Amount Invested (Rs) Shares Bought

Week1 50 10,000 200

Week2 40 10,000 250

Week3 35 10,000 286

Week4 45 10,000 222

Week5 55 10,000 182

Total < 50,000 1,140

is referred to as Dollar Cost Averaging. The important principle here is that you should invest a fixed amount (dollars, rupees, whatever) and not a fixed number of shares.

The above example represents a fluctuating market. While this approach will clearly further increase the number of shares you own with the same Rs50,000 in a one-way downward trended market, you would lose out in a rising market. But then, none of us can predict short-term price movements consistently and perfectly time ups and downs. Which is why this approach will work quite well most of the time. Basically, Dollar Cost Averaging helps you smoothen the market fluctuations to your advantage and removes the uncertainty of answering the question - At what price do you buy?

The psychological attitude to adopt in practicing Dollar Cost Averaging is simple. If prices are falling, you are better off; if they are rising, Dollar Cost Averaging is the price you pay to minimise losses should the market have gone the other way.

Remember, Dollar Cost Averaging - 1. works equally well for both buying and selling decisions

2. increases your potential gains when acting against the market trend

3. reduces risk when you are playing the market trend

4. can effectively convert a regular savings plan into a regular investing approach

5. helps you to adopt a disciplined approach to investing

6. relieves you from the pressures of forecasting tops and bottoms

Why it makes sense to start investing early in your career!

Investing for your retirement may not be the most important thing on your mind when you start your career. For most people, investing may not even be on the priority list when they start their career. When you start your career, your saving capacity may not be much in absolute terms, as your salary itself may not be much. But this should not deter you from making investments. This is because the first few years of your earning life has a huge impact on your future finances.

As with anything else in life, investing also benefits with an early start. The earlier you do your retirement planning, the greater will be your return on investment. There are more reasons than one for you to start investing early in your career. Let’s look at the various benefits of early investing.

The effect of compounding:The most important reason for you to start investing early in your career is to get the benefit of compounding. Compound interest works magic for any investor. As you know, compound

interest means the interest earned on interest. If you continuously reinvest your earnings, your return on investment will increase exponentially.

When you regularly invest from the start of your career, you are increasing the return you receive on your returns. A monthly investment of as low as Rs.1,000 or Rs.2,000 will have a large impact on your financial position. Let’s understand the effect with a few examples:

Example 1: X is 25 years old and has 35 years left for retirement. He starts to invest Rs. 1000 per month for 35 years at a return of 12% per annum. The corpus left with X at the end of 35 years will be Rs. 64 lakhs.

Y is 30 years old and has only 30 years left for retirement. He also starts to invest Rs. 1000 per month. But as he has started investing late in his career, he can invest this amount only for the next 30 years at 12% per annum. The corpus left with Y at the end of 30 years will be Rs. 35 lakhs. This is the difference 5 years of investment has made to the final corpus value. If Y needs the same Rs. 64 lakhs for his retirement, he will need to shell out Rs.1830 per month instead of Rs. 1000.

To understand the wonder of compounding, let’s look at another example:Example 2: Both X and Y are 30 years of age and have 30 years left for retirement. Now, X invests Rs. 2000 every month for the first 15 years at a return of 12% per annum. He totally invests Rs. 3.6 lakhs. At the end of 15 years of his investment, he does not invest further and also does not withdraw the money. His total corpus at the end of 30 years will be close to Rs. 55 lakhs.

Now Y invests only Rs. 1000 per month at a return of 12% per annum. But he invests for 30 years. Y’s total investment is also Rs. 3.6 lakhs - same as X’s total investment. But his corpus after 30 years is only Rs. 35 lakhs. Thus for the same total investment, X’s corpus is much higher than Y’s corpus. This is because X had invested more in the initial years and had allowed this money to get compounded for the total period.

Thus, the most important advantage of beginning to invest early in your career is to realise the full benefits of compounding. There are other reasons why it makes sense to start investing early in your career -

Improvement in spending habits: As you begin to save early in your career to start investing, you have lesser disposable cash with you. This helps you in being more prudent and brings about a discipline in your spending habits.Ability to take risk: Not all of us get our investment options correct the first time. When you begin exploring investment avenues early in your life, you have a greater ability to take risk and experiment, compared to someone who starts investing later. This is because, at a later stage in life, if you realise you do not have sufficient savings; you will be more cautious in your choice of investments.

Money available during emergencies: When you begin to invest early, you would have a comfortable cushion backing you up. Thus, you can be rest assured that your savings will be of use to you in times of need.

Better choices in life: As seen in the examples above, the corpus built by investing early in life is much bigger than the corpus built by someone who starts a little later. As a result of the savings back-up, you can afford a better lifestyle and an improved quality of life, helping to fulfil your financial goals.Thus, beginning to invest early in your career can help you in building a secure future.

Why you should maintain an investment dairy

Whether it is living on a budget or eating to a diet plan, or having a running program the most important (and often neglected) portion is RECORDING your thoughts and actions. Let us assume you ‘think’ you know what is happening to your eating, running or saving, that is enough, right?

Wrong. Completely wrong. You need to write down the actual proceedings as it happens. Corporate World has a Budget, and a Budget Compliance committee. This committee makes a continuous comparison of the actual with the budgeted numbers. This gives us a basis for

a) Corrective action or b) Revising the Budget.

If you ‘thought’ that equities will give you ATLEAST 18% p.a. you were proved wrong from say 2007 to 2012. So maybe you need corrective action.

Let us say you DECIDE to maintain an Investment Diary similarly for all your investing…

Assuming a diary is a place where you will write down your darkest, best, an investment diary is a must.

These 5 things MUST, MUST, MUST go into a diary if you really want to improve as a stock picker:

a) Log all ideas - history tells you which were good and which bad. A diary will be cruel enough to tell you that your best pick was a fluke, or whether it was a product of some effort. A diary is much more honest than your brain. A brain lets you remember events as you wish it had happened, rather than how it actually happened.

b) Learn your lessons! losing money in the market is fine, losing the lesson is NOT. Losses get registered in the mind better than the profits...so it is important to know WHY you lost money. Was it a decision taken over 3 pegs of whiskey? was it a decision taken to please a broker? Or was it on the basis of information from a poorly informed member of the Board of Directors? Et el Rajat Gupta?

c) List advice from people YOU think are good advisers or people who can or are mentors. also if you find an expert from the media and to keep it a little light even whom the media thinks as experts...and see what really works. Write down all the ideas that people give and see what works. Also see the logic. See the hype - and separate it from the reality. All these things help you MATURE as an investor.

d) Give vent to whomsoever but be careful if it is in a public forum / electronic media - do not maintain it in an electronic form. You may want to edit the language if you know about 100,000 people are going to see it.

e) Collect compliments

f) Write down what do YOU think will happen in the immediate future...and why. Then see whether you were right, and if you are right whether it was luck or skill.

Doing all this helps you be a better investor. Just the process alone is worthwhile!

Keeping all this in an electronic form...and updating makes NO SENSE...because you cannot know how u modified it...so a hard copy makes more sense....

Check out: 16 most important financial details

This is a true story. At PersonalFN, we once faced a situation of the sudden unfortunate demise of a client who passed away at a fairly young age, leaving behind a wife and a young son.

At times like these, apart from dealing with the shock and grief of losing a loved one, the family is often additionally burdened by having to deal with paperwork that is difficult to handle.

To help us all keep our financial lives more organized, for the sake of our loved ones, here is a list of the 16 most crucial financial documents and other items that our families should have, preferably compiled in one place, such as a file, folder or Life Book.

But before we start the list, we would like to tell you about the repeat telecast that is airing tomorrow, of the WebSummit with Ajit Dayal on Ideal Asset Allocation in Current Market Conditions, for which you can Register Now for FREE.

And now on to the list of documents and other items that are vital for your loved ones to know:

Inheritance Documents

1. Your WillThis is by far the most important document for any individual. If you don’t already have a Will, please make a Will this weekend without fail. It is not difficult, and is very important to do. If you have a Will, ensure that it is relevant even today i.e. it does not exclude any further assets you may have accumulated or any changes in your personal and financial circumstances.

Keep the original Will in a safe place and keep a copy with a trusted loved one. Make a note of both these in your Financial Life Book.

Asset DocumentsHere is what you need to enumerate, moving through the list from cash and debt to equity and property:

2. Bank Accounts: bank name, account number, passwords to operate the online account (if applicable), name and number of the bank Relationship Manager, credit card / debit card number, ATM PIN, holding patterns of the bank accounts.

3. Bank and Corporate FDs: include a list of your currently held bank and corporate deposits, with details of date of investment, date of maturity, rate of interest, interest payment schedule, and mention the storage place of the original FD certificates.

4. PPF and EPF: your Public Provident Fund passbook, a photocopy of your passbook (we recently faced the case of 2 separate clients who have misplaced their passbooks while shifting houses), your EPF slip from your employer (if applicable).

5. Mutual Funds and Shares held: this should include details of your current stock brokers, mutual fund distributors, their contact numbers and the name of the person you deal with, the latest portfolio held with the broker and the holding pattern of the investments within these separate portfolios.

6. Property: property title deeds, share certificates, nomination details of any properties held. This along with other original documents should be kept in a safe place such as your bank locker.

7. Other Assets: vehicles owned, their papers, other assets such as jewellery or gold and other metals, their documents and holding brokers.

Liability Documents

8. Home Loan / Personal Loan / Car Loan / Other LoanYou need to keep the following details in one place:Original Loan Document stating loan amount, start date, rate of interest, whether fixed or floating, tenure, lender details i.e. name of bank or organization from which the loan is taken, name and number of contact person at the organization, contact email of the organization.

Also keep handy a record of all the payments (EMIs) made including the latest one. If the lender sends you email receipts of your payments, take print outs and keep them in your liabilities file.

Also make a note of any additional capital that you have repaid early (Perhaps you have chosen to partly prepay your loan, this should be recorded as well)

Insurance Documents

9. Loan related insuranceYou may have taken (or been sold) insurance along with your loans, if you have any. Keep a record of the insurance policy number, premiums paid and contact person at the insurance company.

10. Life InsuranceYou possibly have multiple life insurance policies . Keep the policy document in a safe place, make a note of the beneficiaries. And have a record of the premiums paid. Be sure to pay your premiums on time so that your policy does not lapse.

11. Health InsuranceYour families and your health insurance policies should be kept carefully. Some policies these days provide health ID Cards, which can be carried in your wallet. You and your family should know the number to call in case of a medical emergency, to inform the insurance company within 24 hours so that the insurance can be processed smoothly. Keep a record of the policy number and the number and email address to contact in case of a medical situation.

Relevant Professionals Contact Numbers12. Your Lawyer and / or your CA13. Your Stock Brokers14. Your Financial Planner15. Your Insurance Agents16. Your Bank Relationship Managers

Also make a note of the customer relationship department’s number for all the companies concerned.

How do I go about gathering all this information and storing it?This exercise might seem like a task, but if you take it one piece at a time it will not be tiresome at all, and the sense of accomplishment and control that you will feel over your financial life and protection that you will be offering your loved ones will be immense.

For example, start with your assets and your bank accounts, as these are what will be enumerated in your Will. Over the course of 1 week, list out all the details mentioned above for bank accounts and assets. Immediately after that, next week, move forward to your Will.

Going forward you can complete your insurance details and last but not least your liabilities. Do be sure to undertake the exercise immediately, as those who delay will end up most likely not doing it at all, and you don’t want to be lazy, and then find yourself or your loved ones in an unfortunate situation. Also it is always beneficial and sensible to build a financial plan for yourself to connect all the dots in your financial life and give you a clear roadmap and good visibility on where you are headed financially, so be sure to do so immediately.

Capital Gains are divided into Short Term and Long Term.

Indian Tax payers can use CII (Cost Inflation Index) to reduce taxes. CII helps in inflating the cost of the acquired asset and thus help tax payers to show lower gains. This CII data for every year is published by GOI. Investors in India should learn to use this table effectively.

LTCG on stocks and stock mutual funds - exempted from Taxes u/s 10(38). This law was made only in Financial Year 2004. Before that, LTCG was taxed in India. This is important to know. Because law can change in future. Also since the gains are exempted, the losses are lost and not available for adjustment. [ Few years back, I had some confusion on the subject. Now I am sure the losses are also lost. Later more details on this subject]

Please note Long Term losses arising from other asset classes like real estate, gold, foreign assets can be adjusted with other Long Term gains and if the net is still loss, this can be carry forward. Only the LT loss from equity is lost for ever, that too only if STT is paid. More later.

STCG on stocks and stock mutual funds are taxed at 15% u/s 111A and 115AD. Few years back it was 10%. So, remember law can change. If you read this after few years, don't take all the information are still valid, you have to keep up with current laws and regulations.

LTCG on stocks/stock mutual funds will be tax exempted only if STT is paid. If STT is not paid, for example, if stocks are traded using off-market trades, LTCG tax is payable and not exempted. Not only tax on gains are payable, even losses can be used. This can be used as an effective tool in tax minimization.

Wash Sale

A wash sale is a sale of a security (stock, bonds, options) at a loss and repurchasing the same or substantially identical stock soon afterwards (Internal Revenue Code Sec. 1091). The idea is to make an unrealised loss claimable as a tax deduction, by offsetting against other capital gains in the current or future tax years. The security is repurchased in the hope that it will recover its previous value. In some tax codes, such as the USA and the UK, tax rules have been introduced to disallow the practice, e.g., if the stock is repurchased within 30 days of its sale. The disallowed loss is added to the basis of the newly acquired security.

Indian tax laws does not recognize wash sales. So, an individual can have two brokerage accounts and sell in one and buy in another simultaneously and thus realize short term losses for tax management and continue to hold it for future appreciation. Even though I have not come across anywhere any Indian regulation preventing this practice for tax minimization, there are other clean methods that can be employed as well.

1) Husband and wife both have two demat accounts. Husband sells from his account and wife buys in her account simultaneously. 2) Individual sells from his account and buy it on the next day back.3) Individual buys in his account and sells old lot next day.

What won't work ?

Some try to play it aggressively by selling the old lot and buying new lot back on the same day in the same account. Some time they may escape audit but this method has inherent accounting issues unique to Indian brokerage system. Same day trades are settled in

exchange as intraday trades and they dont hit your demat account. So, it is not possible for the tax payer to prove he sold the old lot. Because old lot still stays in his demat account and never sent for delivery. If the old lot is not delivered, the cost basis still stays with that lot.

FIFO

Indian tax laws does not allow the investors to use any other method than first in first out in demat account. So, it is tax payer's responsibility to keep the cost basis of all the lots they bought and sold in chronological order and use it for tax computation.

FIFO is applied on per account basis and not across the accounts for the individual. This opens up some possibilities for tax minimization. If the tax payer maintains 2-3 demat accounts, he has option to choose the lot by selecting the right demat account and sell.

Also keeping the shares in material form (paper certificates) also can help in specific lot accounting. Eventhough technically this is possible, you will find it very cumbersome to work with paper certificates. But if the specific lot size is running into crores, it is worth attempting it.

Losses Carry Forward

Both Short term and Long Term losses can be carried forward and adjusted in 8 years time.

The Income Tax return has a chart to enter tax losses for the preceding 8 years only. They are not combined into one number. In USA, all short term losses of all preceding years are combined into one number and all long term losses are combined into one number and thus you lose year to year breakup. This is ok, because US allows the tax payer to carry the tax loss till their death. Since India allows only 8 years limit, this distinction is necessary.

Classification of Assets for Determination of long term capital gain/loss

In a particular year, an investor may have gains and losses arising out of following accounts:

1. Stocks/Stock Mutual funds2. Debt/liquid funds3. Bonds4. Real estate property5. Gold/commodities6. Foreign assets

Further all these transactions can be split into short term and long term based on the holding period. Let us group these asset types into following categories.

Class-A Class-B Class-CInstruments Stocks/Stock

Mutual fundsBonds, zero coupon bonds, debentures and other Indian mutual funds, gold ETF, e-gold

Real estate, gold bullion, foreign assets, commodities,

Minimum holding period to enjoy long term

1 Year 1 year 3 years

capital gain tax benefitsShort Term Gains 15% Slab rate Slab rateShort Term losses Can be carried

forwardCan be carried forward Can be carried

forwardLong Term Gains Exempted 10%, 0r 20% with indexation 10%, 0r 20% with

indexationLong Term losses Can’t be

carried forward

Can be carried forward Can be carried forward

1. Computation of Gains

1. For every capital asset item, get buy date and sale date; compute holding period. If that item is eligible for long term taxation benefits as per the above table, you can include other costs incurred at the time of purchase and costs incurred at the time of disposal of the assets. This may include taxes, brokerages, statutory, and other costs. By inclusion of these costs, the taxable gain reduces.

2. Separate each item into short term and long term tax groups.3. Compute loss/gain for each item in short term tax group.1. For long term tax group, compute taxes individually on each item using both methods –

with indexation and without indexation. 2. For calculating indexed cost, use Cost Inflation Index table published by GOI. Without

indexation the tax rate is 10%. With indexation, the tax rate is 20%. 3. Please note an item with capital gain may end up as capital loss after the application of

indexation, which not only eliminate tax for that item but also end up reducing tax from another item that has gains.

4. Take lesser of the two in each item.4. Total up losses and gains for each Class5.

2. Income heads and special setoff conditions

Income is classified into following 5 types.

1. Salaries2. Income from house property3. Profits and gains from business or profession4. Capital Gains5. Income from other sources

Sec 70 allows setoff of loss from one head to be adjusted with income from same head. Sec 71 allows setoff of loss from one head to be adjusted with income from another head. The excess losses can be carried forward to 8 years.

Loss incurred during a particular financial year can be adjusted against any other head but carried forward losses can be adjusted only against income from the same head in future.

If there is a failure to adjust carried forward loss in a subsequent year(s) with income,

it can’t be set off at a later date. [ Ref case 179ITR137]

3 exception to general rule of set-off:

(i) Business loss can be setoff against capital gains; but not against salary income.

(ii) Losses from gambling, race horses or speculation can be adjusted only against income from the same business. This loss can be carried forward only for 4 years and not for 8 years like other losses. [ u/s 73, 74A(3) ]

(iii) Capital Loss can be setoff only against capital gains and not under any other head. Further any LT loss can’t be set off against ST gains.

1. Capital Losses Set-off Procedure

A tax payer may have short term loss/gains and long term loss /gains in a particular year. In addition to the current year losses and gains, the taxpayer may or may not brought forward losses from previous years for adjustment in current assessment year. Let us see the procedure for adjusting these losses. This loss set-off is done in three stages. And we have 3 schedules to fill up in the order of CYLA, BFLA and CFL.

1. Schedule-CYLA: Statement of income after set off of current year’s losses 2. Schedule-BFLA: Statement of income after set off of unabsorbed loss brought forward from earlier years. 3. Schedule- CFL: Statement of losses to be carried forward to future years.

Short Term

Long Term

1 Loss - Carry forward to next year2 Gain - Short term gains from Class-A will be taxed at 15% u/s 111A. Short term

gains from all other asset types added to income and taxed at slab rate.3 - Loss Discard losses from stock/stock funds if STT is paid. Remaining losses need

to be Carry forward to next year.4 - Gain 1. Long term gains from stocks/stock mutual funds are tax

exempted u/s 10(38).2. Long term gains from all other asset types – compute taxes

individually on each item using both methods – with indexation and without indexation.

3. Take lesser of the two in each item and add them together to arrive at total tax.

4. Please note an item with capital gain may end up as capital loss after the application of indexation

5 Gain & Loss

For each asset type all gains and losses are totalled. But it is possible to have ST gain in one asset type and ST loss in another asset type.

In that situation, gains and losses are netted against each other and if the result is loss, it is carried forward to next year; if the result is gain and if the gain is from Class-A, it is taxed at 15% and it is of other type, it is taxed at slab rate.

6 Gain For each asset type all gains and losses are totalled. But it is possible to

& Loss

have LT gain in one asset type and LT loss in another asset type.

As mentioned earlier discard any gains or losses in stocks/stock funds if STT is paid.

Gains and losses are netted against each other and if the result is loss, it is carried forward to next year; if the result is gain, tax is to be paid on such adjusted gains.

7 Loss Gain ST loss can be adjusted against LT gain. If the result is loss, it has to be carried over as ST loss.If the result is gain, treat it like #4

8 Gain Loss This can’t be adjusted against each other. Pay tax on ST gain and carry forward the LT loss.

9 Loss Loss Carry forward both separately.10

Gain Gain For ST gain, apply case #2. For LT gain, apply case #4.

Any business losses can be set-off against Short term gains or Long Term gains.