Financial Planning Checklist- Part II

In Financial Planning Checklist- Part I (click here) we saw goal setting, Tax Planning & Managing Cash Flow’s we continue our checklist starting with Risk Planning.

• Risk Planning

There are two ways planning risk’s one is retaining the risk’s the other is to transfer the risk to insurance companies for example. If the risk of a stolen car worth 40000 is rate a person may decide not to take comprehensive car insurance & retain the risk. Another example is when a rich person whose monthly expense are covered by his investment’s & does not have any future liability like child’s education or marriage may decide not to take a life insurance & retain the risk.

Let’s look at the types of insurance to be considered & choose whether we wish to transfer the risk or retain it

1. Health Insurance

One of the most important types of insurance to have is health insurance. Your good health is what allows you to work and earn money and otherwise enjoy life. If you were to come down with a sickness or have an accident without health insurance you may find yourself unable to receive treatment or even in debt to the hospital.

2. Life Insurance

This type of policy is more important if you are married and/or have children. Your life is valuable because it is what allows you to work and earn an income to provide for your family. When you are gone you create an income gap which could put your spouse or children in financial trouble.
There are policies which combine the two like LIC Life Good Health Policy .For details look at product corner or click here

3. Property Insurance

One type of policy that for most people that is actually mandatory to have is homeowners insurance when you have a mortgage. If you borrow money from the bank to purchase a home they will require the asset to be insured. For many people this insurance premium is built into the mortgage payment. For many people their home is their greatest asset so it is vital to adequately protect it. However we recommend a separate term insurance to cover the loan .More on this in coming mailers

4. Auto Insurance

Another type of policy that is often required is auto insurance. Most states require by law that you have basic auto insurance. While it may be a law, too many people still drive around without it
The basic one is called third party insurance which is mandatory by law & the second optional one is the comprehensive one.

Investment Planning

After deciding on goals & managing the risks we come to investment planning.

• Risk Profiling

Everyone does not have the same risk appetite .For example a young person who has no liability & no need of immediate money can invest large sums of money in equity & can tolerate the negative return & wait till they turn positive.
Secondly a person struggling to meet the ends cannot invest in equity due to the risks associated with it. Hence risk profiling of the individual’s as well as product is a must

• Asset Allocation and Portfolio Construction

Golden rule never put all your eggs in one basket/.This rule easy to understand difficult to implement. Those who have earned in property wall always keep on investing in property. Similarly for other asset’s like Gold, Shares etc. One has to understand every asset growth has a life cycle

• Regular review of progress and Portfolio Rebalancing

Many make the mistake of initially investing in the wrong product & then make another mistake of not reviewing it. Always look at your investment’s at least once a year .My guess is that even Hindu ritual’s like Laxmi Pujan would be intended to bring this discipline in common person.

Coming Soon retirement planning, estate planning & more.

LIC’s LIFE GOOD HEALTH PLAN

A unique defined benefit Hospitalization Insurance Scheme

For you alone (Principal Insured) or all your family members including parents-in-law, from age 18 to 65 (75 for parents) and 3 months onwards for children
Cover up to 80 years for your family and 25 for dependent children

Hospital Cash Benefit (HCB) – for hospitalization = Initial Daily Benefit amount chosen by you (will increase by 5% every year and No Claim Bonus on completion of 3 years, and will be called Applicable Daily Benefit
Major Surgical Benefit – for major surgeries = 100 times of Applicable Daily Benefit
Day Care Procedure Benefit – for minor surgeries done within one day = 5 times of Applicable Daily Benefit
Other Surgical Benefit – for all surgeries not covered in above two benefits = 2 times of Applicable Daily benefit

Hospital Cash Benefit (HCB)
• For hospitalization of more than one day where surgery may or may not be involved
• Choose between Rs.1000 and Rs.4000 as initial daily cash benefit
• Increases by 5% every year
• Additional no claim bonus of 5% every fourth year
• Less than or equal amount for every additional member as per choice
• Can avail 30 days in year one, 90 days every year thereafter not to exceed 720 days total during the policy period
• Double the cash benefit for treatment in ICU

Major Surgical Benefit (MSB)
• For surgeries that require prolonged hospitalization
• 100 times of applicable daily benefit (including 5% increase and no claim bonus)
• Maximum annual benefit 100% of major surgical benefit per person insured
• Maximum life time benefit 800% or 8 times of major surgical benefit per person insured
• See annexure for full list of MSBs

Day Care Procedure Benefit (DCPB)
• For surgeries that may nor require hospitalization of more than one day
• 5 times of Applicable Daily Benefit
• Maximum annual benefit = 3 surgical procedures per person insured
• Maximum lifetime benefit = 24 surgical procedures per person insured

Other Surgical Benefits (OSB)
• Where surgery is required but does not fall under the MSB and DCPB category
• 2 times of Daily Benefit Amount for each person insured
• Maximum annual benefit = 15 days in the 1st year and 45 days in subsequent years for each person insured
• Maximum lifetime benefit = 360 days for each person insured

Other things to know:
• Optional accident benefit and term insurance benefit
• Initial premium fixed guaranteed for 3 years and revised every 3 years depending on age and health condition
• All members to be added at the beginning except where new members are through childbirth (next policy anniversary), marriage new spouse and parents in law within 6 months and risk cover starts from next policy anniversary)


Emergency Cash Facility:
Only for instances where the treatment is from listed network hospitals and for Major Surgical Benefits alone – 50% of the MSB credited to the bank account to be treated as an advance from the claim amount

Exclusions
• Pre-existing condition unless disclosed and accepted by the insurer
• Routine check ups, cosmetic treatments, epidemics, dental treatment, non-allopathic treatments, reopening of former surgeries, self-inflicted injury, dangerous sports, war, participation in illegal and criminal activities
Premiums:
• Yearly, Half-yearly, of monthly (ECS)
• 30 days of grace for all modes except Monthly where it is 15 days
• Cooling off cancellation 15 days
• Nomination available
• Approximate premium – Rs.1922/- (age 20) to Rs.3768/- (age 50) for males and Rs.1393 (age 20) to Rs.2849 (age 50) for females

What is different from Medi-claim

• Pre defined benefit- No reimbursement, but lump sum paid based on pre-defined benefit
• Not based on expenses incurred
• This will tend to indirectly reduce the Health care cost, which is rising due to cash less mediclaim benefit
• All benefit is dependent on HCB

Termination of Policy

• If policy is issued on a single life
1. Non Payment of premium within revival period
2. On death
3. On Date of cover expiry
4. On exhausting all the life time maximum Benefits Limits as specified above

• If policy is issued on more than one life

1. Non Payment of premium within revival period
2. On death or Date of cover expiry of the PI and if the Policy does not continue with the IS as the PI
3. On death or Date of cover expiry of IS after Policy continues with the IS as the PI after the PI dies or reaches his/her Date of cover expiry
4. On PI exhausting all the life time maximum Benefits Limits as specified above
Treatments in respect of Specific waiting period
1. Treatment for adenoid or tonsillar disorders
2. Treatment for anal fistula or anal fissure
3. Treatment for benign enlargement of prostate gland
4. Treatment for benign uterine disorders like fibroids, uterine prolapse, dysfunctional uterine bleeding etc
5. Treatment for Cataract
6. Treatment for Gall stones
7. Treatment for slip disc
8. Treatment for Piles
9. Treatment for benign thyroid disorders
10. Treatment for Hernia
11. Treatment for hydrocele
12. Treatment for degenerative joint conditions
13. Treatment for sinus disorders
14. Treatment for kidney or urinary tract stones
15. Treatment for varicose veins
16. Treatment for Carpal tunnel syndrome
17. Treatment for benign breast disorders e.g. fibroadenoma, fibrocystic disease

Financial Planning Checklist- Part I

A. Goal Setting

Step 1: Identify and write down your financial goals, whether they are saving to send your kids to college or University, buying a new car, saving for a down payment on a house, going on vacation, paying off credit card debt, or planning for you and your spouse’s retirement.

Step 2: Break each financial goal down into several short-term (less than 1 year), medium-term (1 to 3 years) and long-term (5 years or more) goals; which will make this process easier.

Step 3: Educate yourself and do your research. Read Money magazine or a book about investing, or surf the Internet's investment web sites.
Step 4: Evaluate your progress as often as needed. Review your progress monthly, quarterly, or at any other interval you feel comfortable with, but at least semi-annually, to determine if your program is working.

B. Manage Cash flows

Step 1: Pay Yourself First
By paying yourself first, you can ensure that you nearly always have a surplus to manage. Establish a fixed amount that you enter into your budget as surplus, or savings. It should be treated as a fixed, essential expenditure that cannot be changed. If, at the end of the month, your budget shows a deficit, then your first course of action is to find areas in your non-essential spending to cut.

A good option is a mutual fund sip or a recurring fixed deposit to discipline you in investment

Step 2: Balance Your Surplus
With a monthly surplus, the decision comes down to how to use it. This should depend on your budget and financial goals. If you have debt, you will want to commit a portion to accelerating your debt reduction. If you don't have a sufficient emergency fund, you will want to contribute to that so you can build up your safety net.

Step 3: Cheapen Your Debt
If your debt payments comprise a significant part of your monthly budget, you should consider finding cheaper forms of debt. If you are good standing with your credit card companies, you are will probably continue to receive offers to transfer your debt to low or zero interest cards. As long as you are not adding to your debt (and you shouldn't have to if you are managing your cash flow to a surplus each month), you can responsibly shift your debt to less expensive cards. This can effectively decrease your debt expense and add to your surplus.

C. Tax Planning

Step 1: Plan AHEAD
Most of the people plan their tax wither in the last month or when the company asks for the of the investment proof typically during the last quarter of the financial year, Planning at the start of the year helps avoid investment mistakes and is not a burden since investments can spread out during the year.

Step 2: Tax investment is like any other investment
Somehow people feel that when it’s tax investment it’s OK to invest in any product without evaluating the return’s or the benefits of the product .Treat tax investment’s like pure investments and invest thoroughly before investing


Step 3: optimize the deductions and exemptions
Know the tax rules .From the obvious ones like sec 80 C,80 D to not so obvious ones like 80 G donation 80 DD deduction for handicap dependents,

see all tax articles on tax :- click here

In the next part of “Financial Planning Checklist” we will see retirement planning, risk planning and more

Tax Special

What is Tax Planning ?

Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with your long term goals.

Tax Filing Tips To Avoid Tax Problems

Yes, its that time of the year again when we need to prepare our tax returns. The July 31 deadline is closer than we think. And, to get us in good shape for filing tax returns here is a handy guide with 10 tips to keep in mind.
Fill out your correct Permanent Account Number (PAN) number

We come across 100s of tax filers who fill their wrong PAN details and then get into complications as a result of this carelessness. It might sound obvious, but make sure you put the right PAN details on your form and on any challans used to pay taxes. An incorrect PAN number might also result in a problem in getting your tax refund. And finally, you might have to pay a penalty of Rs10,000 for not quoting or mis-quoting your PAN.

July 31 deadline – avoid coming close to it

Don’t wait till the July 31 deadline, file your return today. You will gain nothing by procrastinating. In fact, if you attempt to squeeze in your return in the last minute you will cause yourself a lot of stress, and are exposing yourself to careless errors that can be avoided if you were to start the process early and leave enough time to review your return to your satisfaction.

If you have any overdue taxes you can avoid paying penal interest on this overdue liability. By starting early, you are also giving yourself the chance to pay off these dues a lot sooner.

Also, keep in mind that closer to the deadline, the tax department servers get overloaded. If you are choosing to e-file your return, you might get delayed if you can’t get connected to the tax department’s server.

Fully disclose all sources of income

Why invite trouble by not disclosing all sources of income you might have? With increasing digitization of financial services and the use of your PAN number for almost all substantial financial transactions, its easy to investigate what are the different sources of income you might have. Yet, many tax filers willingly don’t disclose even interest income earned from one’s savings balance, fixed deposits or small savings schemes. Don’t expose yourself by omitting any obvious disclosure.
Annual Information Return (AIR) details must be filled

ITR forms require you to declare certain types of large transactions such as:

Even if you don’t make these disclosures, its likely that your counterparty might have already done so, and then the mismatch of disclosure might lead to an investigation into your finances.

Single purchase or sale of an immovable property valued at Rs.30 Lacs
Single payment of Rs.5 Lacs or more for acquiring bonds or debentures of a company Credit card payments aggregating to Rs.2 Lacs or more on a single card
Mutual fund purchase aggregating to Rs. 2Lacs or more in a single fund
Cash deposits aggregating Rs.10 Lacs or more in one bank account
Single investment of Rs.1 Lacs or more in shares of a company
Payment aggregating to Rs.5 Lacs or more for investment in RBI bonds

State your correct bank details to ensure timely refunds

You can file for a tax refund if you don’t have a taxable income and you have faced undue tax deduction. In case you are filing a return for a tax refund, then you need to ensure that you have mentioned your bank details correctly, because the refund amount will be credited directly to your account. The following details must be correctly stated on your return: Account type - Savings or Current, account number and MICR code of your bank branch (this is the 9 digit number at the bottom of your cheques).

Save Tax: Claim Deduction without HRA

With Tax Season on many of us would be calculating our tax liability & one of the deductions available is on rent in the form of HRA

Most of us are aware of the Deduction available with respect to the HRA,

Section 10(13A): House Rent Allowance

You can take advantage of the provisions under this section if you are renting an accommodation. These provisions will not be available to you if you stay in a rent-free accommodation or live with your family or in your own house.

Under Section 10(13A), HRA is exempt to the least of the following:

i) 50/or 40 per cent of basic salary= Dearness Allowance (if, applicable),

ii) Excess of rent paid over 10 per cent of basic salary; and

iii) Actual HRA received.

Now you have changed Jobs and the new company has a policy where they do not have a HRA deduction component in your salary structure making “Actual HRA received “ zero which means that though you may be paying rent you will not be eligible for the HRA deduction.

Recently one of our clients Mr. A Vasani came to us we suggested him to claim deduction under section 80 GG

Section 80GG – Deduction for rents paid.

Conditions for application of Section 80GG

1. The Assessee shall not be in receipt of any House Rent Allowance (Income) Income.

2. The Assessee shall be residing in a rental accommodation.

3. Such rental expenditure shall exceed 10% of the Net Total Income but before considering these expenses.

4. The Assessee shall not hold any residential property on his own name

5. The Assessee or Spouse or any children of the Assessee and in case of Assessee being a member of the Hindu Undivided Family (HUF) ay member of such HUF shall not hold any residential property in the place where the Assessee normally conducts his income earning activity.

This basically means the Assessee to have only one residential accommodation and that too only on rental basis.

The Family members can have property at places other than the place where the Assessee normally conducts the Income earning activity.

Deduction:

If the above conditions are fulfilled then, such amount of expenses exceeding 10 % of the Net Total Income shall be allowed as deduction from the Total Income

However, such an excess shall not exceed Rs. 2000 /- per month or 25 % of the Total Income.\

So if Mr. A Vasani is paying only Rs.12000 as rent per month he will be eligible only for Rs.2000 per month since there is a cap,

Meaning a maximum deduction will be 2000 x 12 = 24000 rupees per year.

If you belong to the highest Tax Slab you save more than 8000 rupees

So no worries if your company does not give HRA you have got section 80 GG for you.

This article is contributed by Suraj Trpathi & the inspiration is Mr.Anand Vasani

What are Futures and Options

.
First to understand F&O i.e. Future and Options we need to understand what is hedging?

Hedging is an activity which is carried out to reduce or limit a risk against an event .
Let me elaborate with the following examples

Example 1

Say you had a bet with your friend [Say Friend A] that it will rain after 2 days. You had a bet of Rs.100.The next day it becomes cloudy you feel that you will loose the bet.

However there is another friend [Friend B] who believes that due to these clouds it will rain today but will not rain tomorrow. He is willing to bet Rs.50.

So you bet with friend B that it will not rain hence you have reduced your potential loss from Rs.100 to Rs.50 .However in doing do you have also reduced the profit.

So if it rains you get Rs.50 from friend B and pay Rs.100 to friend A.
Thus losing Rs100-50 = 50 rupees.

Now lets take a case when it does not rain so you win Rs.100 & lose 50 Hence a net profit of Rs.50

Example 2

A more practical example is that of airline industry where you know the approximate business in the future and expect the oil price to rise one enters in to a contract that he will buy the oil at Rs. X per barrel. This helps him to manage his finance with more reliability and accuracy. The down side being that if the price decreases then he has to pay higher price as compared to his competitors.

Hence Futures and Options are risk management tool’s its when one enters an oil contract with an intention to sell or book profits the same tools become speculative tool.

This is dangerous when it is done without fully understanding the potential losses.

One of the reasons why sub prime in US occurred was due to the “ leveraging “ option available with the various institutions It’s like you have a job so you take a personal loan and buy an asset on that asset, say a house you take another loan .Thus you have leveraged twice the loan amount you can actually pay.

Even in future and options in stock market you just pay the margin money [the maximum money you can loose or profit like Rs.50 ] & you can trade on much more than the margin amount you can trade Rs.100 in the above example.

As a financial planner’s that an individual should be prepared to loose 100% of the money & this amount should not be included in the financial planning process. This is speculation and Presha Investments does not endorse speculation

We have explained Futures in this article
A related post on Futures and Options coming soon

It Can't Happen to Me

Dear All,

Taking a moment here for all those who were killed in the recent terrorist attacks and praying for peace to their souls.

It’s ironic how the world has not recognized the threat to terrorism our markets just flickered to that event.

"The tragedy in Mumbai is certainly a devastating blow to the exceptional characteristic of the Indian economy, but I am hopeful that it will not derail the improved macro performance." These are the words of Stephen Roach, the Chairman of Morgan Stanley’s Asian operations spoken in an interview with DNA Money.

It’s unfortunate though that most of us feel “It Can Never Happen to Me” we see it in all walks of life whether profit booking in Stock markets or it is crossing the road somehow we manage to convince ourselves “It Can Never Happen to Me”

Now, I am sure if we look around us some one’s cousin just escaped the ordeal, some one’s brother was in that area and condolences for those who have lost their dear ones. “This too shall pass” and soon RED FM will play regular songs, Candle marches will stop, people will move along.

As citizens of a country we should show our power by voting, as individuals for our dear ones it’s our duty to see that our risks are covered and our responsibilities are completed by us when we are alive. There is a learning from the corporate world we can take TATA’s have not only insured the Taj but they have also insured against losses. So if there is a loss to TAJ it will be borne by the insurance company.

“Some good news for the Taj Mahal Hotel (IHCL) and Oberoi Hotel (EIH) in Mumbai after the recent terror attacks. Insurers have finally decided to cover all the losses, irrespective of whether they were caused by the attackers or by the security agencies that battled them. Under terrorism insurance rules, insurers do not have to pay for the material damage caused by security forces, but only for that caused by terrorists. However in this case, the insurance companies have decided to pay all the losses because it was not easy to separate damage caused by the terrorists and the security forces. While Tata AIG is the main insurer for Taj, Trident is insured by New India Assurance Company. Cover against terrorism is typically offered as an add-on with property insurance that, along with material loss, also covers loss of business till the property is restored. For terrorism cover, Indian companies pay a premium of 22 paise per annum for every Rs 1,000 insured up to Rs 5 bn, 17 paise for every Rs 1,000 insured up to Rs 2 bn and 13 paise for every Rs 1,000 insured above Rs 2 bn. This insurance cover would aid IHCL and EIH in redeveloping their prime property, without further leveraging their balance sheet. It may be noted that the Insurance Regulatory Development Authority (IRDA), the industry regulator, has mandated that all general insurance companies collect premiums from terrorism covers in a common pool. Terrorism-related insurance claims are settled using funds from this common pool, created after the World Trade Center attacks in the US in 2001”

We leave you with a small check list which we feel is our duty to share with our clients

• Get Insurance for all assets:
• Start With life, heath and then wealth [property,car etc.]
• All assets have a nominee. [From Fixed Deposits to Dmat accounts]
• If possible make a will: Legally a nominee is only entitled to collect the money on behalf of the legal heir. So a will removed any ambiguity on which assets should go to whom

We should take efforts and pray that “it “never happens to us, but we should plan as if it will

Also See:

Do I need Insurance ?

RETURNS_ON_LIC.pps

FMP Misconstrue : A Conversation

Customer:  Hey did you read about the article in the FMP’s facing redemption pressure?

PI Representative: No, but I am aware of the pressures that fund houses are facing

Customer: So we have also invested in an FMP should I redeem?

PI Representative: I will not advise you that .You see FMP like Fixed Deposit will wither charge you on a redemption before the maturity date .which will cost you dearly.

Customer: But everybody is redeeming it’s in the news you see wait I will show you

Hindu Business Line

Redemption pressure 

On the redemption pressure on mutual funds, especially the FMP schemes, Mr Raman said, “Corporates that have put money in mutual funds are taking it back as lending by banks is under strain. Though the Government and RBI have stepped in to ease liquidity, it may take 15 days to one month for the situation to ease.”

Source: http://www.thehindubusinessline.com/2008/10/18/stories/2008101851710100.htm

Times of India

Sandeep Dasgupta, chief executive officer, Bharti-AXA Mutual Fund, admitted that liquid and FMP (fixed maturity plan) schemes have been under redemption pressure from corporate and retail investors. “As per the industry figure, around Rs 45,000 crore worth of funds have been redeemed in September,” he added. Redemption pressure picked up in the second half of September and has only intensified in October following the global financial crisis, he added.

Source : http://timesofindia.indiatimes.com/Ahmedabad/Investors_dump_equity_and_MFs_bank_on_good_old_fixed_deposits/articleshow/3610933.c
So I will also do that I think if people redeem the NAV falls right?

PI Representative: No the NAV falls when the value of the underlying asset falls when people redeem it’s the AUM [Asset under management] which falls. This will affect the NAV if the fund manager has not diversified enough, and “breaks” his “fixed assets” to give back the redemptions.

E.g. if the Fund manager has made an investment of 10 deposits of Rs.1 lakh his AUM is 10 lakhs ,When some one comes and redeems one lakh rupees he simply breaks his deposit of Es.1 lakh hence the AUM goes down but the yield will not .On the other hand if someone makes the redemption of Rs.90000 the fund manager has to invest Rs.10000 again which will cause a marginal dip in NAV typically the affect will be max to the extentent of 0.5% in a responsible fund house

If you remember in the previous article I had advised to check the rating and the underlying asset to decide whether you should invest in an FMP or not. And that’s the only thing that need’s your attention and care everything else is pure panic.

Let me explain “pure panic” with an example lets say you created a fixed deposit of Rs.1 lakh. Suddenly one of your relative comes and says that mr.x has met an accident and he / she needs 1 lakh on an urgent basis. You call your broker to check if you have some shares you can sell he says that you will have to book heavy losses and that he had planned for a  better opportunity .You have a housing loan and a credit card bill pending as you had some big expenses this month .You can’t sell the property as there is no such need even if you did it would still take a lot of time to sell a topup loan will also take some processing time. You are in a fix and suddenly….it strikes

You have a fixed deposit receipt in the investment file nicely ticked in which matures next year. its the best option and it’s cheaper than a loan as well. So you break it

Customer : Hey don’t tell me that’s what’s happening if I break a fixed deposit it does not come in papers right ?

PI [Smiling]: You are right it will not make to the papers coz 1 lakh does not make a dent in AUM of any depositor, bank or mutual fund house

Let me elaborate from the information that you have given in the above extract & if you observe the figures closely you will see that mostly corporates are redeeming and their redemption is due to a need of money we call “liquidity”

So when the company is redeeming it’s the company that’s bearing the loss [or reduced profit’s] coz it has other commitments to keep , because banks are not giving loans ,because they can’t sell shares so they are redeeming their FMP’s .

In fact since you are talking of news let me share this article with you:

“CPI-M takes mutual fund route for better returns”

But when it comes to money, the communists are also saying its money, honey.

Source: http://www.ibnlive.com/news/cpim-takes-mutual-fund-route-for-better-returns/74771-3.html

Customer :  So if a communist party can trust Mutual Fund .You can too …?

PI: Let me put it this way, trust or distrust with knowledge not news

Customer: OK !! So educate me why should I choose FMP over an FD and take that small but additional risk?

PI: Well for starters as mentioned earlier FMP do offer little better returns which justify the additional risk

Secondly even at same rate FMPs earn better returns than FDs because of the differential tax treatment meted out to them. The differential tax treatment ensures that the net yield of FMPs for individuals falling in the higher tax brackets is greater than FDs. This is because interest earned on an FD is treated as other income and hence, taxed at regular personal tax rates. So, for a person in the highest tax bracket (income more than Rs 10 lakh) the tax rate would be 33.66 per cent.  On the other hand, tax rates for FMPs are different. Following are the tax implications for FMPs:

·        Dividend received is tax free in the hands of investors. However, a Dividend Distribution Tax (DDT) of 14.165 per cent is levied on the mutual fund company.

·        Long-term capital gains (investment more than 365 days) enjoy indexation benefit.

·        Short-term capital gains (investment less than 365 days) are added to the income of the investor and taxed according to his personal tax rate. 

The illustration in the table below shows how the post tax return in FMPs is higher than that offered by FDs.

	Fixed Deposit	Fixed maturity Plan- Dividend
Returns	9 per cent	9 per cent
Income Tax	33.66 per cent	N.A.
Dividend Distribution Tax (DDT)	N.A.	14.16 per cent
Effective Yield	5.97	7.72

Note: For the sake of simplicity, it has been assumed that the FMP has distributed the entire yield as dividend. The DDT is deducted on the gross yield. In actual practice, the returns on the FMP-dividend would be slightly higher than indicated.

In case the maturity term of the FMP is more than a year, the growth option yields more because of the indexation benefit. To benefit from indexation, FMPs with maturity term more than a year structure the maturity term in such a way that you earn double indexation benefits- one for the year of purchase and another for the year of redemption.

Customer: Here is my cheque for FMP.

PI: Your asset allocation suggests its time for ……..  [rest is confidential];)

Conclusion: FMP's have an additional risk associated with them which is justified by the additional return and the tax treatment gives it an additional advantage however if you do not wish to take that additional risk or do not have guidance of a financial planner to advise you which is the right FMP then may be FMP is not your cup of tea

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How is Sensex Calculated ?

When the market started going down there were many who asked us what do you think is happening, why is the market going down, will it touch 9000 etc. Most of these questions were discussed in newspapers, TV Channels etc. There was one question by one Mr,Arun Tiwari which was “zara hut ke” [different] HOW IS SENSEX CALCULATED ?

Like all good things there is no one line answer to this one, To understand how is Sensex [Indian Context] calculated first we need to understand some terms.

1. Market Capitalization:

This term is popularly also known as “Market Cap” or not so known term “Capitalised Value”. It’s a measurement of economic size of a company.

Mathematical Representation

Market Capitalization = Number of Shares x Share Price
Depending on the value of the market cap, the company will either be a “mid-cap” or “large-cap” or “small-cap”. Interesting isn’t it ?

The second term we need to understand is “derived” from Market Capitalization.

2. Free Float Market Capitalization

Free-float market capitalization is defined as that proportion of total shares issued by the company which are readily available for trading in the market.

Meaning: The shares owned by government, directors, proprietors etc. are excluded .These shares are also known as “locked in” shares.

Mathematical Representation

Free Float Market Capitalization = Share Price x Free Float Shares

What is BSE-SENSEX (also known as BSE 30) composed of?

Now that you have understood the two major terms let us bring our focus to BSE SENSEX most of us know that BSE SENSEX is make up of 30 scripts These 30 scripts [Companies] are chosen and changed form time to time by BSE committee to accurately reflect state of stock market and has predefined criterions to fulfill before any company is included in the BSE 30.Details on these are outside the scope of this article.[You will probably get bored.]

Two Steps away from SENSEX:

1. Add the Free Float value of all the 30 shares.
(Infosys share price x No of free shares) + (HDFC Share price x No of free shares) …….and so on.
2. Map it to the base value to get today’s sensex value:
Like an NFO or an OLD IPO where the typical base price is of 10 rupees even BSE started with a base value of 100 in the year 1978-79.Everyday after that day we are mapping the index using “Index Divisor”

Meaning

If yesterday sensex was on 13055x with free floating market capitalization on 2855 crores [remember economic value of bse 30 shares] & today's free float market capitalization has increased to 3010 crores then today’s index value is :

Today’s Index Value = 13055x (3010 / 2855) the number 3010/2855 is the index divisor and is adjusted at times to accommodate corporate announcement’s which affect the market capitalization like share bonuses etc.
We have tried our best to explain the various concepts and calculations in the simplest form however we would love to hear from you to know that our efforts are in right direction and would like to hear from you how we can improve in the future.

References: wikipedia,bseindia
Based on a query from Mr.Arun Tiwari

FMP Fixed Maturity Plan Demystified

There is never a dearth of ideas among the AMC (Asset Management Company) think tanks, when it comes to drawing investors towards their offerings. The AMCs usually adopt innovative ways to promote their products. Often these ideas have the desired impact and get investors all interested.

While such promotional gimmicks have always been in vogue, they have become more visible over the years as AMCs scramble to mobilise assets. A glimpse of this can be seen in some of the recently launched FMPs (fixed maturity plans), with some AMCs projecting a relatively higher cost inflation index (CII) to make the FMPs returns more attractive.

Recently one of my client asked me about FMP’s / ELD’s he also shared with me one of the mailers which stated absolute return of 15% over three years with an entry load of 2.5%. With banks offering 9.5% pa and equities not doing so well it’s good isn’t it?

Well not quite you see the mailer “assumes” that you understand all the intricacies of financial terms. So the trick of the trade is “absolute”, with 15% absolute return means that 15/3 = 5% p.a. again please note that I have not yet considered an entry load.

So FMP’s are bad are they? No in fact fixed maturity plans are great when you understand the product. First of all decide what you need do you need an equivalent of a fixed deposit? If yes that see that the FMP’s are not linked to any equity, second study the offer document to see how secure is the FMP, one needs to understand that the money in FMP is then invested in instruments like company deposit’s and other debt instruments which have a variety of risk rating you may need a good financial planner to help you out here. Last but not the least always remember that the return is an indicative yield, if the underlying asset [e.g. a company deposit] defaults or does not pay the AMC your yield goes down.

So what’s the definition?

What is an FMP?

FMP stands for Fixed Maturity Plan. These are essentially close-ended income schemes with a fixed maturity date i.e. that run for a fixed period of time. This period could range from one month to as long as two years or more. When the fixed period comes to an end, the scheme matures, and your money is paid back to you.

The Tax Angle

FMP’s are taxed similar to a fixed deposit unlike equity based schemes which do not attract tax after one year .However they score over fixed deposit by giving the option to calculate tax using an indexation method. [More about indexation method in coming months] .

On more plus for FMP is that they give better rates even as compared to an equivalent FD’s and the penalties on premature withdrawal are less as compared to FDs.

Please remember that the above comparison is generic in nature hence you may find some product which is an exception to the norm. In case you are in a tax bracket you might also like to evaluate the dividend option. Please take help of a financial planner to evaluate a right product for you.