Category
Taxation
**Tinkering with the horizon**
When an investment allows to claim deduction from your taxable income under some section, then it often comes with some lock-in period. In other words, you have to sacrifice liquidity for availing the tax benefits. This can be problematic. If you may need money in short-term, then locking-in majority of your investment will make you feel helpless and force you to take desperate measures. Or, if your financial goal may require money sooner or later than the pre-decided timeline – then you will be stuck with your locked-in investments.
**Ignoring Risk Profile**
If I say capital gains that you made from your equity investment is taxed much lesser or not even taxed at some situations compared to your investment in other asset classes (debt or commodity) – does that mean you ignore your risk profile, goal horizon and invest maximum in equity? You should not.
**Compromising Asset Allocation**
Investing separately in Gold Fund, International Equity Fund or Debt Fund is not that tax efficient. But that does not mean that you ignore your exposure in such funds and instead invest only in multi-asset allocation fund just because that is tax efficient (though that can be a topic on its own for some other day).
**What should be done?**
Give achieving your financial goal the topmost priority. Check your risk profile, consider your surplus, find out how much return you should earn – choose your asset class and investment product accordingly. If features of a tax saving product get perfectly aligned with your goal and risk-return profile – then of course go ahead and make that part of your portfolio. Otherwise not.
If your decision of making investment or choosing insurance policies has often been taken for the sole purpose of saving some tax – then you have reasons to worry. This tendency of jumping on the bandwagon i.e. saying ‘yes’ to a product just because it offers some tax saving can backfire or do harm to your overall portfolio of investments and insurance. Let us see, how.
Read More →
Category
Taxation
**SIP – Systematic Investment Plan**
It is a nice, convenient package solution for making repeated additional purchases in a mutual fund scheme. We need to choose a particular date of the month, how long we are going to invest and a fixed amount that should get debited from our bank account and get invested in the chosen scheme.
Through SIP investments, we purchase some units of the scheme in the current NAV i.e. price per unit. Now suppose, you are doing SIP in an ELSS (Equity Linked Saving Scheme). In that case, number of units that you buy in each SIP transaction, will remain locked for 3 years. So, if you do a 12 months’ SIP in an ELSS, you would be able to redeem all the purchased units only after the end of 4 years from the starting date of your SIP.
SIPs can be topped-up i.e. instalment amount can be increased after every 12 months. This is a very powerful and practical feature of SIP investment that not many investors exercise. This way a goal can be achieved with less strain on your pocket at start.
**SWP – Systematic Withdrawal Plan**
It is a nice, convenient **package solution for making repeated withdrawals** / redemption from a mutual fund scheme. We need to choose a particular date of the month, how long we are going to withdraw and a fixed amount that should get credited to our bank account and get redeemed from the chosen scheme. This will go on till the time your fund lasts or the mentioned fixed tenure – whichever is earlier.
Like step-up SIP, step-up or **inflation adjusted withdrawal** through SWP is not that straightforward, but still can be achieved with some minor adjustments and tweaking. But it makes perfect sense, that your withdrawal amount does not remain fixed, and you get to withdraw slightly larger amount after every 12 months to support the increased household and lifestyle expenses for instance.
Very few investors know / understand / realize that the entire withdrawal amount from SWP is not taxed but **only the resultant capital gain part**. Let me explain it. In every withdrawal, you redeem some number of units, say X. Now, these X number of units have some purchase NAV and as well as sale NAV. Your capital gain will thus be calculated as – Number of Units Redeemed * (Sale NAV – Purchase NAV).
**STP – Systematic Transfer Plan**
Suppose you are not feeling that confident in investing a large lump-sum amount of money into an equity scheme at a go. Instead, you want to get it invested within, say, next 6 months’ time in a systematic manner while earning interest on the not-invested money **higher than the savings bank account**. Again, it may happen that you change your mind after 4 months and want to invest the rest amount immediately as you feel that the market has reached its bottom. Such flexibility can only be offered by STP.
To make STP work, you need to park (i.e. invest) your money first **into a liquid scheme of the same mutual fund house** whose equity scheme you have chosen as the final destination of your money. Thereafter based on your given instruction, a fixed amount of money will get invested into that equity scheme from the liquid fund where you have parked your money into, every month in a particular date or at whatever chosen frequency.
STP work best when market keeps on tanking from your date of investment. Thereby, you keep on buying larger sum of units with the same investment amount. Or in other words, if you are **feeling bearish about the market in near term or expecting huge volatility**, then STP could be the right choice. Otherwise not.
An informed investor is always a better investor. Systematic Investment Plans (SIP) into mutual fund scheme is now so commonplace that many of us overlooks some of its features or characteristics. Thus, we remain not-so-informed investors after all. Same goes true for its cousins – SWP and STP. Let’s understand some of the not-so-common features of SIP, SWP and STP here. Let the fun ride begin.
Read More →