FMP and FD

July 19, 2007

The cycle of debt and equity instruments are at work again. The bank fixed deposit rates are rising once again and people are reportedly flocking back to saving avenues from small savings schemes which are about 2% less than commercial /scheduled bank rates.

Investors are also being offered fixed maturity plans (FMP’s) by allmost all fund houses. This is a mutual fund which can NOT be redeemed until the expiration of the term and hence locks up the funds of tenures offereing good/decent returns. Some are touting this instrument and this post is to clear up the differences between both the bank fixed deposits and mutual fund house FMP’s.

FMP

  • Most of them can not be broken, you can not take loans and depending on the AMC, there may be steep exit loads for window period ( time when the AMC is ready to buy back units) too.
  • You tend to get decent returns about 1% or 2% compared to bank FD’s but have the potential to do better.
  • Since the AMC already pays 14%++ tax to government, depending on the holding you need to pay 10% one time or index it over time. Talk to your advisor about indexing option.
  • You have the RISK of loosing money here.
  • Very much like bank FD’s, there are tenures from 30 days to 3 years!
  • Most AMC prefer this due to SEBI guidelines which state the AMC can NOT collect fat commissions on New fund offers for open type – so the fraud occurs through back door of FMP’s – unless its suited for the customer.
  • Suggested currently for people to park money for short terms falling in highest tax bracket.

Bank Fixed Deposits

  • There is no RISK involved in losing principle if its in a scheduled bank. In other banks, your principle is gauranteed only upto 1 Lakh INR provided the bank has taken insurance for the same. The net total will include all monies from savings bank and fixed deposits. Beware of this!!
  • Suggested for people with lower tax brackets at current scenario.
  • Taxation is done at your levels and could range from 10% to 30%++.
  • Nomination is very important. Ideally a joint account is suggested as in case of death of primary holder, the nomination does not hold much water over a will.

The reason why FMP is touted is that its post tax returns are good compared to FD’s but Risk in both cases need to be considered.

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Insurance, Taxes and Investments

July 18, 2007

Strange as it sounds but many people confuse themselves in the name of the above 3 items and either land up with what the agent suggested, invest some where it is GOOD to invest as heard from somebody or crib about it after 2 years!!!

Its amazing how a human being functions when it comes to money matters. I see on an average people fighting and haggling for 1 Re with a vegetable vendor or 1Re at petrol bunk but loose out 100’s of rupees in the above games!.

Games – Off course, unless you dont take to educate yourself about it, most people out there are ready to do a fast con job.

Insurance.

Your agent is only interested in selling you a money back/endowment policy with high premiums and low coverage – do you need it?

Your agent tries to insure everybody in family including your spouse and even the Kid in the name of future returns – what nonsence. Insurance is puraly needed to replace the financial liability which araises in the key earning memebers death or disability – I laugh when policies are taken on one housewifes and 5 year kids!!

Golden rule – “Dont mix investments with insurance”. Treat and respect them seperately. Period.

Ask the agent for term policy which is low premium but gives high coverage and watch the agent disapper never to trouble you again.

Taxes

Yes, upto Rs 1 Lakhs, you need to plan for it.

a) Most people including me forget our salary PF contribution, this by default is ignored and we invest. Kindly take this amount as the starting point.

b) Remove all the LIC, medical policy premiums. If anything is still left – sit down and calculate how much you can save and for how long – All 6 year stuff can go to the popular NSC, PPF types of issues – dont forget that anything deposited in PPF is not taxed, its interest is NOT taxed, its final withdrawal is NOT taxed – the only golden instrument which locks up things and gives it back safely.

c) A wiff of Mutual funds would do good too – save every month from April to next march so that you dont try to time the market and ride out all the ups and downs easily. As any broker would say “tax saving is not done ONLY in march”.
Investments

Now – A Equity Linked Savings Scheme ( ELSS) is NOT the recomended mode of saving and insurance as your agent brain washes you.

Investment needs to be split into debt or safe instruments which are gauranteed NOT to loose money and equity linked instruments for beating that deadly inflation followed by asset class things like land, egoistic entities like gold…

Everybodies ability to save depends on their incomes but the golden rule is a mix is allways suggested based on time horizon one can save money. Your age plays a direct role here. Younger you are – more risk you can take, older you are – debt instruments are preferred.

The pyramid rule applies here very much. First the solid base like savings bank account. This is followed by medium risk investments like Mutual funds etc. The last segment or the cream is the top – pure equities.

So next time, you know what you need and how to evade that salesman!


Equity,MF and profits

July 17, 2007

A couple of days back, the distributor was doing the rounds and met my collegue informally. He was all smiles like the SENSEX gaining weight. He said “Sir, time is right to redeem funds as SENSEX is going very high – you have some MF investments right?”

The human being is an animal with something called “Greed”. This forces like all emotions to make and commit errors. Immideatly my collegues calculator came out.  He beamed like a  40W bulb about to fuse due to high voltage.

Mohan – My investment 13 months back is grown by 51%. He got busy signing the redemption form, the friendly distributor produced and both my collegue and distributor was away happy.

Some thing is queer here isn’t it? My collegue had all reasons to enjoy 51% gains but why the distributor too? On a redumption for which he does not get commission?

The answer lies in greed factor once again. Here is how it works

First, the redemption is done minus Securities Transaction Tax (STT) and since its held for more than 13 months, its tax free at hand of investor ( Long term Capital Gains). My collegue proceeded to encash his 50,000 INR plus 51% gain which was a good sum at approimately 74,000 INR. Next he went on to invest the entire amount in another Mutual fund as he wanted to invest, grow and prosper – possibly to another 51%!

The biggest gainer for sure here is the distributor who gets more commissions for new investments – the catch due to which he forced the redemption with that wonderfull gains!. But hold on, whats wrong in that – allmost a couple of things.

Unless the redeemed money is going to help you in some way like solving a debt issue, purchase of some asset or services at least, you put back the money paying extra entry loads, not to talk of tax implications. The sensex is again a notion. When the equity markets fall, all your securities, MF fall. So 74 K invested once again is then only a notional gain!!! Think about it.

So, remember its important to have goals while investing – Like I will purchase that new bangles once my 3000 investment hits 51%, I will take that Hawaii trip the minute my 1000 Rs investment per month touches 12,000 etc…

Please dont ask me which fund it was 🙂 There are enough astrological pundits around the net with fact sheets to lead and mislead you all.


Operation Khedda

July 13, 2007

I had heard of elephants which get lured into eating sugar cane in deep forests where a deep pit is covered with bamboo shoots and sugar cane’s so that elephants come to eat it and fall into the pit. Once the elephant is caught like this, it lands up doing hard labour in the jungle, lifting wood,rocks or move over to temples, zoo’s….

This operation is called Khedda operation where elephant falls into the pit. The reason am remembering this is for the offer given by a private bank for its customer.

Upfront it looks quite nice and simple – you get 2 Lakhs INR without questions and you repay in small EMI…

Loan (In Rs) : 200000

Tenure(months):48

EMI(In Rs): 6520
Some back of hand calculations..

What you get as loan : 2 Lakhs
Amt paid by you at end of 4 years : 312960 [ 6520 x 48]

The excess money paid as interest to bank : 112960 INR

Thats a whooping 56.48%!!!

So before you fall for this khedda operation, think – infact you can deposit this amount like a EMI for that period and enjoy your own money but the young ones fad theme is ‘we live now’, in that case welcome to the operation!


Reliance – A misnomer

July 12, 2007

BSNL land lines in our area has been perpetually giving headaches to every user. The phone is more dead than alive. I personally went to the exchange after umpteen complaints and fixes to figure out what the problem was.

The officials confessed that the exchange is too overloaded and hence at the drop of a pin the lines get out of order – no complaining or escalation worked. In fact the line man privately confessed that he make the phone go dead in “round robin leauge – so that other phones get some dail tone too”.

Instead of fuming and raising my blood pressure – decided to celebrate the 13th day of the departed telephone and surrender it with full state honour and pomp this week.

Alternatively I just purchased a Reliance handset with connection to use at house as it was costwise cheaper but never knew quality was at its worst.

The final joke dawned on to me what reliance meant when I was accidental in overhearing a customer who came and requsted that customer care is not picking his phone but saying “Punch a SMS query and send to some number”.

The reliance outlet dealer smiled and told him to try from another number. After he was gone and while I was still waiting to be serviced, another guy asked the owner of the shop why that had happened.

The shop owner with full smile told like the oracle “He would have called too many times and ate their heads…so they put such idiots on SMS to ensure they dont trouble the customer care with stupid questions”.

So – this is the deal you get for having paid and asking the right questions. No consumer can be treated like this but it was too late for me to realize. However the reliance network sucks – you can not make a call in most of the time and now am wondering why I have purchased it in the first place.

The moral of the story is “You just cant relay on reliance for your communication needs”. So between the BSNL (devil) and Reliance(deep sea) who is the best of all?


Kids and Tution

July 11, 2007

The word tution was heard by us when students consistenly fell behind in studies and got scoldings from teachers, parents labelling them “week”, finally to be pushed into extra boaring classes around high school times.

This is a fancy word- dont know if it rhymes with fashion!! I hear 1st standard kids, hardly out of pre-nursery join such tutions!!

Little alarmed at the prospect of that, did some ground scratching and came up with the following answers:

a) Most home works are to be done by parents – who dont just have the time for it and transport the workload to paid tution teachers. The essential bonding with parent /kid and real time feedback is missing here.

b) Some send them to tutions as the teachers at school are not properly trained. Many school principals openly confess and blame the IT/BT shift business who pull away good english speaking teachers by doubling their salaries and they have to make do with Graduate teachers in private schools who dont know how to handle the kids.

c) Its a sense of false alarm for many parents. This minsicule but growing group try to forsee an engineer or something and in thier mad rush, pressurize the kids.

d)There are some kids who have to be taught differently and tutions dont help there. This goes un-noticed. Not all kids are blessed equally but some are more equal.

Does your ward attend tutions for any of other reasons? My junior does NOT.


Death and Holidays

July 9, 2007

It is in Indian tradition not to speak ill of a person when he/she is dead and departs. The soul is considered supreme menifestation of the God and hence no prejudice attached.

Junior was the most thrilled person as there was a holiday today due to the demise of ex-prime minister of India. I could see the effects early morning itself. There was no Government offices functioning, roads were quite free, lesser pollution. But pray, do we need this?

The kids get these kinds of accumulated holidays for various reasons of death due to destiny or death due to man making types we witnessed when another kannada idol departed this world. Ultimately these kids land up doing double study by year end leading to a snow ball effect. Doesnt our ministers understand this or too naive to ignore it?

Coming to the holiday part – its supposed to be spent in honour of the person and one and all should imbibe those good aspects in their day to day life – OK stop laughing please, that kind of idols dont exist anymore, even if they did – we ignore them and say “times of have changed you see”. But then what use is these holidays for kids, banks etc?

The Global climate increase has been dented by a days off!!