Debt Fund: An alternative to bank Fixed Deposit

Many people have an inclination towards bank Fixed Deposit as an investment option. Very few people know that investment in Debt Fund can be more tax efficient than bank Fixed Deposit. Interest earned on bank FD is added to your yearly income and taxed as per applicable tax slabs. However if you stay invested in debt fund for more than one year, it is considered as long term capital gain. In current scenario, it is taxed at 10.3% without indexation. You can even take the benefit of indexation to lower your tax.

Let’s look at the following comparison

 

If a person has invested Rs 1,00,000 for 5 years in Bank FD vs Debt fund

Fixed Deposit vs Debt Fund
Fixed Deposit Debt Fund
Investment 1,00,000 1,00,000
Tenure (years) 5 5
Interest Rate (%) 9 9
Interest Earned in 5 years 56,568.000 56,568.000
Income Tax Rate (%) – (depends on your tax slabs) 30.9 10.3
Total Taxes Paid 17,479.512 5,826.504
Post Tax Returns 39,088.488 50,741.496
Interest Earned Post Tax Return (%) 6.6 8.2

 

In addition to better return, you can get advantage of postponing your tax liabilities i.e. in fixed deposit, you need to pay tax every year on interest earned however in debt fund you will have to pay tax only at the time of withdrawal.

For short term FD, interest rates are very low, sometimes not even beating the inflation however, if someone invests in short term or ultra short term debt fund, he can expect better returns without compromising the liquidity.

Income Tax Slabs for Financial Year 2012-2013 (Assessment Year 2013-2014)

A quick look at income tax slabs in India for Financial Year 2012-2013 and Tax Assessment Year 2013-2014. The slides show tax slabs for general tax payers (age below 60 years), senior citizens (age between 60 to 80 years ) and super senior citizens (age above 80 years).

 

Investment Without Insurance = ZERO

Investment and Insurance go hand in hand. Many of us try to explore different options of investment but give very little importance to insurance. However investment planning without giving due consideration to insurance is a zero sum game. Let’s take a look at this real life example.

Amol and Vikas are two friends earning a salary of around Rs. 60,000 per month. Both are investment savvy and invest regularly in Mutual Funds through SIP (Systematic Investment Planning). They have decided to keep aside Rs. 30,000 per month to make their future secure. They selected an excellent mutual fund and decided to invest regularly.

Vikas started investing the entire amount in the mutual fund where as Amol decided to invest a part of the amount in the same mutual fund and the remaining amount in a term insurance and a medical insurance plan. After 10 years Vikas’s investment grew to 70 lacs with an annualised return of 12%. Amol also earned a decent return but it was little bit lesser than Vikas since a small portion of his money went into insurance plans.

One day uncertainty struck Vikas. He suffered a massive heart attack and was hospitalized. His family had to spend 10 lacs on his critical illness. But all these efforts were futile…… Vikas was no more!

Apart from the shocking personal loss, Vikas’s family now had to face his liabilities too (home loan, car loan, etc..) They had to liquidate all his investments in order to repay the loan amount. Even though he had made a proper investment, it turned out to be worthless! Most of his savings were spent on his hospital bills and towards repayment of the loans.

If only he would have opted for the medical insurance, all medical expenses would have been taken care off by the medical insurance company. Also his family would have received the insurance amount, had he opted for a term insurance. In the end, his entire investment of 10 years just vanished.

 

Life is very uncertain. When you plan for a better future, be ready to tackle uncertainties too. Insurance is one option which helps you to take care of such uncertainties.

So next time, when you plan for any investment, make sure to prioritize your insurance need before investment.

Petrol Car vs Diesel Car

As petrol prices keep on increasing, many new car buyers are seriously looking at an option to buy a diesel car. In fact, some of the petrol car owners started selling their old petrol car and are going for a diesel car. Most of the buyers take a decision based only on the difference in the fuel price. But I feel that this decision actually depends on multiple factors.

Factors to be considered while choosing between a petrol and a diesel car

Petrol Car vs Diesel Car
Factor Petrol Car Diesel Car
Initial Cost
Economical
Costlier
Fuel price
Costlier
Economical
Daily Running
Economical for short runs
Economical for long runs
Mileage
Low
High
Waiting Period
Less waiting period
More waiting period
Available Options
In small segment, many options are available
In small segment, very few options are available
Maintenance Cost
Usually less
Usually more (depends on model too)
Pickup
More
Less

Few days ago, Vaibhav (a friend for mine) wanted to buy a new car but he was unable to decide whether to go for petrol or a diesel one. He was looking for a small car for which a petrol version would cost around 5 lacs and diesel version would cost 6 lacs. He also noted that his daily run would be around 20 km.

I tried to make some sense out of these numbers and quickly built a Vehicle Compare Calculator. This calculator will help you decide between any two comparable vehicles.

 

Petrol vs Diesel Car Inputs
Petrol vs Diesel Car Inputs

 

Looking at the usage, break even point will reach only after 4 years. That means, a diesel vehicle will be more affordable only after 4 years.

 

Petrol vs Diesel Car Graph

 

Are you going through similar confusion? Try our Vehicle Compare Calculator to make a more informed decision.

Dare to talk about Life Insurance?

Life Insurance is one of those topics which many of us do not want to discuss. We simply do not want to face the darkest side of life. Some people buy insurance as an investment option or just for saving tax without actually understanding the primary purpose of it. Let’s try to answer some of the most common questions about a Life Insurance.

Why do I need a Life Insurance?

In an unfortunate event if you are no more in this world, imagine the life of your near and dear ones without you or your support. So if you are the only earning member and your family completely depends on you, insurance is a must. However, there are a few scenarios when one may not need an insurance like for e.g.

1. If you are single and don’t have any dependants
2. If both husband and wife are earning enough and are financially independent of each other
3. If you and your family is super rich and accumulated enough wealth for maintaining a steady lifestyle, then you may consider not buying a life insurance. If you’re reading this article, most likely you don’t fall under this category 🙂

Do I have enough insurance?

Insurance amount varies for different individuals. It depends on the standard of living, financial liabilities etc. Experts say that on a broader basis person should have at least 10 years in hand salary or cover all the liabilities including home loan, personal loan, car loan, child education etc. for calculating the insurance amount. You may work out the exact amount with your financial planner.

Which type of insurance do I need?

For buying the life insurance, one can choose Unit Linked Insurance Plan (ULIP), Endowment Plan or Term Plan.

Unit Linked Insurance Plan (ULIP):

Unit Linked Insurance Plan is a combination of insurance and investment. Depending on the plan, payment made is invested towards equity or debt products or a combination of both. One is entitled to receive some maturity amount plus bonus when the policy matures, however it is not guaranteed. On the down side, charges associated with ULIP are generally very high. If you are planning to buy any ULIP, please pay attention to various charges like allocation charges, fund management charges, administration charges, fund switching charges, surrender charges, mortality charges etc.

Endowment Plan:

Similar to ULIP, saving component is associated with this type of insurance too but charges are not disclosed in these products. All these policies have surrender value or individual will get the maturity amount when the policy ends. The investment return on these policies are low as most of the funds are allocated to debt products. As an investment option, endowment plan returns may not even beat the inflation.

Term Plan:

These plans are the pure life insurance product. The premium you pay for a term plan goes towards mortality charges. This is cheapest of all but least marketed or advertised product compared to ULIP or endowment plans for a simple reason – agents do not earn fancy commission by selling term insurance. You may earn some handsome discount if you buy term insurance online. Term insurance does not have any surrender value, these are useful to your family only in case of an unfortunate event.

Think before you invest in a second home

Investment in property is one of the high risk, high return avenues of wealth generation. As disposable income is increasing, many people started investing in the second home. Are you thinking on the same lines? How about streamlining your thoughts to make a better decision? Yes? read on…

1. Your appetite and eligibility for a second home-loan

The most important thing is the availability of funds for the initial down payment. Initial down payment is generally 20% of agreement value and charges towards stamp duty and registration. For this amount it not advisable to go for any loan. Also check your EMI for the new loan before booking property. Generally Cumulative EMI of all your loans (Home loan for 1st, 2nd home, car loan, personal loan etc.) should not exceed more than 40-50% of your in-hand salary. Banks would definitely verify this before approving your loan.

2. The appreciation in property cost

Any city area can be categorized into 3 types, a developed area, a developing area and an under-developed area. As an investor it is good to focus on projects in developing area. There is very little room for appreciation in Property prizes in developed areas. Properties in an under-developed area might be cheaper in terms of valuation but the risk associated with it is very high. Also capital appreciation in this area might take more years than once can predict.

3. Do your financial math

If you are planning to buy under construction property calculate the value of your property when completed or at the time of possession.  Let’s look at following case study. Investor A booked flat in a project for 40 lacs with lead time of 2 years. Disbursement of payment will happen in a staggered manner based on the progress of the project.

* For simplified calculation, consider all charges included in 40 Lac (Sales tax, VAT, Stamp duty, Registration, infrastructure charges etc.) 

 

Home Loan Calculation
Disbursement Month Payable Amount Disbursement Amount Actual payment including interest (@ 10%) as on Jan’2014
Month 24 Jan’2012 25% 1000000 1220391
Month 22 Mar’2012 10% 400000 480121
Month 19 Jun’2012 10% 400000 468315
Month 16 Sep’2012 10% 400000 456800
Month 13 Dec’2012 10% 400000 445568
Month 10 Mar’2013 10% 400000 434612
Month 7 Jun’2012 10% 400000 423925
Month 4 Sep’2013 10% 400000 413501
Month 1 Dec’2013 5% 200000 201667
Total Payable 4000000 4544899

 

In the above case, even if property cost is 40 lacs only, investor A actually ended up paying around 45.5 lacs, assuming he received the possession of flat in 2 years. More delay in construction will increase the cost of property and will reduce the return on investment.

4. Long-term horizon

If you want a higher return on investment, hold the property for longer duration. Generally holding flat/house for 5-10 years will give better returns with few exceptions. After 10 years, maintenance of the building will increase; also finding a buyer for the older property is relatively difficult.