TIMES PERSONAL FINANCE

20

BEST
FUNDS
TO BUY

Equity: Large Cap

1 Year

3 Year

5 Year

1 Year

3 Year

5 Year

3 Year

5 Year

Religare Invesco Growth Fund

-4

18.52

11.02

ICICI Prudential Value Disc

-1.14

27.61

17.76

L&T India Prudence Fund

1.89

21.45

13.54

Birla Sun Life Frontline Equity

-2.17

18.1

11.81

Franklin India High Growth Co

-4.41

27.12

16.54

Tata Retirement Savings Fund

-0.37

21.12

--

IDBI India Top 100 Equity Fund

-2.96

17.05

--

Religare Invesco Contra Fund

0.13

24.8

13.33

HDFC Balanced Fund

0.56

21.11

13.91

Equity: Mid Cap

Equity: Multi Cap

THE TIMES OF INDIA, MUMBAI

MONDAY, APRIL 25, 2016

Equity: Tax Planning

UTI Mid Cap Fund

Mirae Asset Emerging Bluechip
Birla Sun Life Pure Value

Hybrid: Equity-Oriented

1 Year

Debt: Income

28

return in
past three
years

-1.18

34.56

19.56

Axis Long Term Equity Fund

-3.28

27.61

18.87

Kotak Medium Term Fund

9.6

--

--

6.3

34.24

22.81

Reliance Tax Saver Fund

-6.67

25.68

15.42

ICICI Pru Banking & PSU Debt

9.48

9.26

9.41

-3.76

32.68

18.04

Birla Sun Life Tax Relief 96

-0.69

24.62

13.52

Escorts Income Fund

9.05

9.23

10.34

The three-year returns of Axis Long

Term Equity are the
highest in its
category

Figures are % returns. 3-year and 5-year returns are annualised.

Eight moves you will regret at 50

When change is painful

With next generation not wanting to be part of it,
small family-owned businesses face uncertainty

These financial choices may appear correct today but you will rue them 15-20 years later
Babar Zaidi

PRAKRITI OJHA

mit Acharya bought his first

policy in 2000, when he was 29,
and added four more plans as
his income grew in the following years. Now 45, he regrets
the investments made on his fathers
advice. The life insurance plans he recommended will give barely 6% returns,
says the Raipur-based MNC manager.
In Delhi, 43-year-old Ashok Vishwakarma is ruing his decision to join
SpeakAsia. He poured `33,000 into the
scam. Had I not been greedy and put the
money in a fixed deposit, it would have
grown to over `50,000 by now, he says.
Many people make such investing
mistakes in their youth, only to regret
the decisions in later years. You cant
turn the clock back, so its better to avoid
these mistakes now. Here are eight such
money moves you might regret 15-20
years from now.

Delay investing till income is higher

For young earners, spending is more
important than saving. A study of 2,000
professionals by Hyderabad-based financial planning firm, Arthayantra, found
that more than 90% dont start planning
for retirement in the first five years of
their careers. Even by the 10th year, less
than 20% would have a retirement plan
in place. The consequences of this delay
are mind boggling. If an investor starts
an SIP of `5,000 in an equity fund that
gives 12% returns, he will accumulate
`1.77 crore in 30 years. But if he waits till
28 to start investing, his corpus will be
smaller by `56 lakh. What he puts away
in the first 10 years will account for almost 72% of the total corpus. The longer
the delay, the smaller is the corpus.
Taking too little risk with investments
Though there is irrefutable empirical
evidence that equities can give high returns in the long term, small investors
continue to rely heavily on fixed income
investments. Equities account for a very
small proportion of the total household
savings. Surprisingly, even young investors who are in a position to invest in
stocks, opt for the safety of bank deposits
and small savings schemes. This aversion for equities could prove harmful in
the long term. If you spend `40,000 a
month on household expenses today, even
6% inflation will push that up to `72,000
a month by 2026. By 2031, the requirement will surge to `96,000 and by 2036, it
would be `1.28 lakh a month. This is why
even risk averse investors should consider allocating at least 10-15% of their
portfolios to equities.
Not following an asset allocation
Not many investors believe in rebalancing. Less than 10% respondents to an
online survey said they rebalanced their
portfolios regularly. Yet, it is the mantra
that ensures high returns at low risk. We
backcalculated and found that if an investor had put 60% in stocks, 30% in fixed
income and 10% in gold in 2006 and not
touched the investment, his portfolio
would have earned overall returns of

31 years, Mumbai
INCOME
`1.1 lakh a month
EQUITY EXPOSURE: Nil

She is young, earns well and

has a steady job. Yet she
invests primarily in PPF and
bank deposits, something
she may regret later in life.

AMIT ACHARYA
45 years, Raipur
PREMIUM PAID: `1.5 lakh
per annum
RETURNS EXPECTED: 6%

He invested in life insurance

policies on the advice of his
father. The high premium of
these plans prevent investing
in other lucrative avenues.

DELAYED INVESTING CAN BE COSTLY

YOUR CORPUS IS
SMALLER BY

YOUR CORPUS
AFTER 30 YEARS

`56 lakh

`82.1 lakh

`1.77 cr

`1.21 cr

`94.9 lakh

IF YOU
START NOW

3 YEARS
LATER

5 YEARS
LATER

ASSUMPTIONS USED IN
ABOVE CALCULATION

Investors make SIP

of `5,000 per month

10.1%. However, if he had rebalanced

the portfolio every year in January, his
returns would have been higher at 12%
Rebalancing is not easy because it
takes a contrarian call. Few investors
would have reduced their equity exposure when the markets were making
new highs between 2004 and 2007. If they
had, their portfolios would not have bled
so much in 2008. If you rebalance regularly, you will not have any regrets.

Getting lured by dubious schemes

SpeakAsia and Stock Guru are just two
examples of how investors can be lured
by greed and easy money. The fantastic
returns promised by the fraudsters

`1.27 cr

`49.9 lakh
10 YEARS
LATER

Investment earns 12%

compounded annual returns

should have been a red flag for investors.

It is virtually impossible to churn out
10-20% returns every month. The other
basic check is to see whether the scheme
is approved by the regulator. All investment schemes must have Sebi approval.
Stock Guru had nothing to show in this
regard. Fraudsters try to mislead investors by uploading images of PAN cards
and certificate of incorporation. But
these documents dont mean that the
scheme has been approved by Sebi.

Dipping into PF account

The Employees Provident Fund (EPF)
is Gods gift to investors. If you are diligent, it can make you a crorepati. A

Best ways to use your bonus

There are several productive ways to use it for a better financial life
OPTION 4: Invest for your daughter
If your daughter is less than 10 years
old, Sukanya Samriddhi Yojana (SSY)
is the best debt option to invest in for
her future. At 8.6% yearly compounded
rate, this is among the highest paying
small savings schemes. Investment in
SSY is tax deductible under Section 80C,
and you can invest up to `1.5 lakh per
financial year. The principal invested,
the interest accumulated and the payout
are all tax-free. However, you have to
stay invested till your child turns 21.

Chandralekha Mukerji

t is the time for annual appraisal

letters and the bonus. Many of you
might have got your tax refunds too.
While you may be happy to have
some extra cash, handling it can be
tricky. You need to juggle multiple aims
and concerns to maximize your yearly
perk. Here are suggestions for getting
the most from that extra money.

OPTION 1: Reduce your debt burden

Before you start investing your surplus,
pay off your debt. It could be outstanding credit card payments, car loan, personal loan, etc. Start settling your debt
in the order of interest rates. The ones
with no tax benefits and higher interest
cost should be paid off first. Loans that
offer tax benefits should be the last on
your list.

OPTION 2: Invest in NPS

Upto `50,000 invested in the NPS, under
Section 80CCD (1b), can be claimed as
deduction, over and above the `1.5 lakh
investment deduction limit under Section 80C. At the highest tax bracket of
30%, this could mean a savings of `15,000
on your next tax bill. Under NPS, it is
mandatory to buy an annuity plan with
40% of the corpus at maturity. The remaining 60% can be withdrawn. The

Finance Minister has made withdrawals up to 40% of the corpus tax exempt,
adding to NPS appeal.

OPTION 3: Increase equity exposure

The Sensex has fallen around 12% in the
past year, and this provides an opportunity for long-term buyers. You can invest your lump sum in a debt fund and
use a systematic transfer plan to move
the money into equity funds. You could
also earmark this corpus for a goal that
is 5-10 years away. For instance, you can
use the money towards increasing your
down payment for an asset purchase and
reduce your future loan burden.

OPTION 5: Build corpus to buy a house

An extra `50,000 in tax break has been
introduced for first-time home buyers
where loan amount is less than `35 lakh
and the propertys worth is not more
than `50 lakh. Use the bonus to increase
the size of your down payment. It will
bring down your loan requirement,
which means lower EMIs and, if it falls
below `35 lakh, theres the extra tax benefit as well. Put the bonus in an income
fund if purchase is less than a year away.
OPTION 6: Build an emergency corpus
If you do not have an emergency fund,
you should use your bonus to build one.
You should invest the money in highly
liquid options such as short-term debt
funds. The corpus will help you manage
sudden, unplanned expenses.

BROUGHT TO YOU BY

Treating insurance as investment

The cardinal rule is not to mix insurance with investment. Yet, millions of
traditional insurance policies that give
the triple benefits of life insurance,
long-term savings and tax benefits are
bought every year. These policies not
only give sub-optimal returns of 5-6%,
but also force the policyholder into a
multi-year commitment. Is there a way
out? Yes, you can surrender a policy if
you have paid premiums for a minimum number of years. Be ready to
suffer a loss when you do this.
You can also convert an insurance
policy into a paid-up plan after three
years. The policy will continue with a
reduced sum assured but you wont
have to pay the premiums any further.
This is an option Amit Acharya (see
picture) can explore. It is better than
paying premiums for the full term and
earning 5-6% returns.
Splurging on items you dont need
As mentioned earlier, young people
spend more than they save. But in
many cases, they even spend more than
they earn. Easy financing options and
plastic money prevent young individuals from distinguishing their wants
from their needs. They may need to
save for retirement, but the newly cell
phone they want has come in the way.
If this urge to spend gets out of hand,
it can prove catastrophic. Rein in your
spending now if you dont want to regret later. Many young people dont
save because there is nothing left after
all their expenses. Their equation is:
Income - Expenses = Savings. Legendary investor Warren Buffett offers a
simple solution. Change the equation
to Income - Savings = Expenses. Instead
of saving what is left after expenses,
spend what is left after savings.
Not setting up an emergency fund
Everyone needs an emergency fund.
You could lose your job, or somebody
in the family may need medical care
you never know what lies ahead. It is
often argued that you dont need emergency cash if you have a credit card.
Though a credit card does come in
handy when you face a financial crisis,
the cushion that plastic money provides lasts only 15-30 days, till the bill
arrives. If you dont have an emergency fund, you could be forced to liquidate other assets to tide over the crisis.

TA X O P T I M I Z E R

Uma Shashikant

oday while young entrepreneurs are dreaming about valuation, the aging small business
owners are a worried lot. These
50-year olds entered business
as youngsters, inheriting from their parents and taking off in their own ways.
Their children, however, are not interested in the family business. Recently we
hosted a few friends who have been running their business for over 30 years and
now wonder what the road ahead is.
One is a wholesaler of upholstery and
carpets. He inherited his fathers business along with four brothers and they
converted it into a fairly successful enterprise, riding the demand for better
interiors. His son is a doctor, and daughter an engineer who lives in the US.
While the parents are proud of their
children and do not grudge their choice
of profession, they do not know what
would happen to their business.

Another couple runs a small export

business in chemicals. They have been a
team since they married, managing the
business and two children. The children
want to set up their own business but are
not interested in the pure commodity
trade. The third couple manages a sweet
shop which has been with the family for
generations. They work over 14 hours a
day, managing the hugely popular shop.
The children see the business as too labour-intensive and want to do something
else. Our friends have tried telling their
children stories about the new generation turning around an old family business, but the children are not interested.
Small business owners do not have
the time or energy for personal finance
or wealth management. They typically
invest all that they havetime, money
and energyinto their business. If they
have a financial adviser or broker they
trust, they end up with some investments
and shares. The performance is a mixed
bag, but as long as the business is generating enough cash, they do not worry.
They find it tough to divert large sums

The author is Chairperson, Centre for

Investment Education and Learning

TAX OUTGO REDUCED BY OVER 50%

Though his salary is not very high and the tax is reasonable, Ranjan Kaushik wants to reduce his tax further. If he invests
more for retirement, he can cut his tax by half. But NPS funds are locked till he is 58. Heres what Taxspanner has advised:

RANJAN KAUSHIKS INCOME

CURRENT

SUGGESTED

Basic salary

4,84,000

4,84,000

House rent allowance

2,42,000

2,42,000

Taxable allowances

1,32,000

83,600

Tax-free allowances

84,000

84,000

NPS (through employer under 80CCD-2)

48,400

TOTAL INCOME

9,42,000

9,42,000

CURRENT

SUGGESTED

DEDUCTIONS AVAILED
HRA exemption

1,85,000

1,85,000

Sec 80C

1,50,000

1,50,000

NPS (under new Section 80CCD1B)

Nil

50,000

Health insurance for family and parents

Nil

15,000

TOTAL

3,35,000

4,00,000

CURRENT

SUGGESTED

30.488

14,379

Nil

Nil

30,488

14,379

KAUSHIKS TAX
Tax on salary
Tax on other income
All figures are in `

TOTAL

SAVE AND INVEST FOR

YOUR CHILDS
HIGHER EDUCATION
Higher education costs are shooting up. Find
out how you can accumulate enough to fund
your childs education

THIS WEEK

into investments they do not know much

about, especially when they can use the
money in their own business. They, however, own physical assetsproperty, land,
jewellery and such in multiple combinations in the names of family members.
None have a half-decent exit plan.
They have not built the business with the
intention of going public, selling to someone else or putting it up for acquisition.
They hold assets in various names and
formats, do not have clean books and are
controlled too tightly and centrally. Money is tied in assets and cannot be easily
retrieved. Our friends told us about the
children being upset that the parents are
unable to fund their new business ideas.
Our friends in the chemical business
enjoy a decent cash flow, but have persistent working capital requirements. The
upholstery businesses biggest assets are
the owners reputation and relationships,
which are not convertible into cash to
enable his sons plan for a speciality hospital. The sweet-meat owners most valuable asset is the real estate on which the
shop is located and it cannot be sold.
Except for personal guarantees against
property and loans against jewellery,
there was no scope for raising funds.
The primary source of funding for
these small businesses has been the network of family and friends, which offered hand loans at reasonable costs. The
parents did not therefore structure their
business for formal funding, or create
assets that can be liquidated or offered
as collateral. Despite their success in
business, they were unsure about their
own future. Here are the few points we
were all able to agree upon:
First, they will accept and work with
the reality that their business would last
just their own lifetime, or less. They will
create management structures that reduce their burden of work, while securing their ownership and income. This
will require hiring, training and incentives for employees and better housekeeping. Second, they will choose investing for themselves and in diversified financial assets, over ploughing money
back into the business. They will explore
working capital loans from banks and
finance companies to free capital and
cash. In a 10-year time frame they will
build a retirement corpus. Third, they
will streamline the assets they own, complete paperwork to ensure clear titles to
every asset and complete the estate planning process so that the assets are utilised by them and their children amicably. Everyone agreed that streamlining
the books of account, assets and titles to
properties should be a priority. Fourth,
adequate insurance cover for health, accidents and theft would be taken to secure the parents and the business. Fifth,
funding for the childrens businesses will
come from personal physical assets, even
if it means liquidating some of them.
Business income will be used to build
personal financial assets for the future.
There is indeed a lot going on in this
sandwich generation of small entrepreneurs in their 50s and their children.

Nearly everybody thinks that he pays too much tax. But in most cases the taxpayer does not
make the best use of the tax benefits avaliable to them. Sudhir Kaushik of Taxspanner tells
readers how they can restructure incomes, investments and expenses to optimise their tax.

WHAT HE SHOULD DO

TAX SAVED

Reduce this taxable

portion.
Up to 10% of basic put in
NPS is tax free.

9,414

Invest in this new tax

saving option.

5,150

Hike medical cover for

self and parents.

1,545

TOTAL TAX SAVED

16,109

Paying too much tax? Write to us at

etwealth@timesgroup.com with
Tax Optimizer in the subject line.

WHAT TO DO WHEN
FUNDS LAG

COVER STORY
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person with a basic salary of `25,000 a

month at the age of 25 can accumulate
`1.65 crore in the EPF over a period of
35 years. This assumes that his income
will rise by 10% every year and the EPF
will earn 8.7% returns. Yet, many people are unable to reach the `1 crore
milestone in their EPF accounts. Every
time they change jobs, they withdraw
their EPF balance. Withdrawing your
EPF is financial hara kiri. The money
goes into unnecessary expenses and
the retirement corpus is back to zero.
Its a decision you will regret when you
are close to retirement.

Source: Value Research

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