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PERSONAL TAX: No penalty on change of income head in ITR

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A taxpayer, engaged commodities trading, filed his return of income for the year ended March 31, 2014 declaring a total income of Rs 1.61 lakh. In the return, the taxpayer claimed that the transactions relating to mutual funds constituted a part of his business and therefore loss arising out of the transaction in the mutual fund units should be treated as business loss.

During the course of assessment, the tax officer did not agree with the taxpayer’s claim and held that the transaction in the MFs did not constitute the taxpayer’s business transaction. Accordingly, the tax officer treated the loss as short-term capital loss of the taxpayer. Consequently, the assessment order was passed determining the total income of the taxpayer at Rs 3.5 lakh. The taxpayer did not prefer to file an appeal against this assessment order. However, simultaneously the tax officer also initiated penalty proceedings on the ground that the taxpayer had furnished inaccurate particulars of his income. After giving the taxpayer an opportunity of being heard on this matter, the tax officer imposed a penalty of Rs 44,500.

The taxpayer was not happy with the penalty order and filed the first level of appeal with the Commissioner of Appeals. The first level appellate authority, on the basis of representations made, dismissed the taxpayer’s appeal and agreed with the levy of penalty.

Before the second-level appellate authority, the taxpayer argued that the claim for treating the loss from mutual fund units as a business loss was a bona fide claim and the same was presented with documentary evidence before the tax officer. The taxpayer contended that there was no malafide intention on his part while raising this claim in the return of income.

On the basis of the facts of the case, the Honourable Mumbai Tribunal observed that the taxpayer had duly disclosed the loss in his return of income. The tribunal relied upon a Supreme Court decision wherein it was held that any disallowance made by the tax officer in the assessment order, only on account of a different view taken on the same set of facts, could be at the most termed as a difference of opinion and would not amount to furnishing of inaccurate particulars of such income by the taxpayer. Hence, no penalty is leviable.

The tribunal also placed reliance upon a Bombay High Court decision wherein it was held that if a taxpayer makes a purported wrong claim in the return of income, but as the same is disclosed in the return of income, penalty is not leviable.

While deciding this case, the tribunal was of the opinion that a mere change of head of income by the tax officer during the course of assessment should not result in an automatic levy of penalty. In the present case, details about the ‘business loss’ or ‘short-term capital loss’ were available on record. Therefore, it cannot be said that the taxpayer has filed inaccurate particulars of income. A difference of opinion between the tax officer and the taxpayer about the head of income under which particular income has to be assessed may remain as a point of disagreement between the two parties, but such differences should not result in invoking penalty provisions under the Income Tax Act.

The Mumbai Tribunal accordingly ordered for deletion of the penalty in this case and thus ruled in favour of the taxpayer.

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Nisha Shiwani hails from the pink city of Jaipur and is a prolific writer. She loves to write on Real Estate/Property, Automobiles, Education, Finance and about the latest developments in the Technology space.



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Personal

Benefits of filing ITR (Income Tax Return) even if you are below taxable limit

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ITR Receipt is an important document
Having an ITR receipt is important because it is more detailed than Form 16, entailing your income and taxation along with revenue from other sources.

Use as address proof
ITR receipt is sent to your registered address, which can serve as residential proof.

Helps the bank loan documentation process easier
Being a diligent income tax filer makes it easier for banks to assess your source of income when you apply for loans like an auto loan, home loan, personal loan, etc.
“Banks usually ask for copies of tax returns filed for previous 2-3 years at the time of applying for the loan to ascertain the income capacity of the individual. Hence, to apply for loans a tax return would be required to be filed”.

Avoid penalties or scrutiny from the tax department
From FY 2017-18, up to INR 10,000 would be levied for non-filing of ITR. This black mark will remain for years to come.

For a hassle-free visa application procedure
At times visa authorities ask for copies of past tax returns, hence to apply for a visa a tax return would be required to be filed. Embassies, especially those of US, UK, Canada, etc. when processing your foreign visa application, are particular about your tax-compliance.

To buy an insurance policy with a higher cover
If insurance companies have reasons (non-compliance) to believe that you are a tax-evader, they will not give you policies with more cover.

Refund
When employed, your employer will deduct TDS on your income. However, if you have made investments that are tax deductibles, it reduces your taxable income. So, the TDS deducted can be refunded, but only if you file your return. The same holds true for TDS deducted by any other sources.

Makes life easier for freelancers and independent professionals
Freelancer or self-employed people don’t have Form 16. This is the only document they have to show that he has filed the ITR. Without this, they can face funding issues and transactional problems.

Government tender
Experts say that if one plans to start their business and need to fill a government tender or two for the same, they will need to show their tax return receipts of the previous five years. This again is to show your financial status and whether you can support the payment obligation or not.
However, this is no strict rule. It may vary depending on the internal rules of the government department. Even the number of ITRs required can vary.

Credit Card Processing
Banks can reject your credit card application if you haven’t filed your ITR.

Compensate losses in the next financial year
Unless you file the ITR, you cannot recompense your expenses/losses in the previous financial year to the current. As per the income-tax provisions, if tax returns are not filed on time, unadjusted losses (with some exceptions) cannot be carried forward to future years. Hence, to ensure that the losses are carried forward for future adjustment, a tax return would be required to be filed.

Helps to avoid extra interest
If you don’t file ITR, the belated return could lead to extra interest at 1% per month for the remaining tax payable by you. For example, banks would deduct tax from interest on fixed deposits exceeding a certain threshold. To claim a refund of tax deducted by the bank (if any) on the interest income, a tax return would be required to be filed regardless of the taxable income.

This helpful article curated from the web.

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Personal

FINANCIAL PLANNING: Learn to manage money stressors

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It’s been five years of being a financial educator and teaching people how they can manage money better. While it has been great to have impacted thousands of educated people in India, I find the level of financial literacy among the educated to be actually deteriorating. Knowledge levels on money management continue to be low and an investment bias towards traditional investments, which do not beat inflation, continues to exist.

Further, lifestyle and consumption-based spending and the feeling that as long as one can see the money, one will have enough for the future is stopping people from planning for their future. This attitude is prevalent in people up to their early forties. It is only when the big financial goals (like children’s higher education) are four to five years away, do people start thinking of doing something about their finances. This is a sure shot recipe for disaster.

If you do want to have a better financial life, you would need to start by attacking the five main money stressors.

Not being able to save – Are you sticking to your budget? Are you saving and investing at least 30% of your take home? If not, you need to keep an expense tracker and figure out where you can cut expenses. Stop using credit cards for a while and only spend on debit card. Keep a limit on how much you can spend on the debit card in a month.

Too many loans – How much of your income is going towards EMI? Do you have a plan for paying off debt? If not, make a list of all outstanding loans and start by paying off the most expensive one first. Set milestones for yourself and have a single-minded focus to pay off loans (except home loan) at the earliest.

No money for emergencies – So often I hear that at times of emergency, people use their credit cards and do not have access to their money. This is because of the tendency to tie up money in real estate and insurance policies, thus being left with very little liquidity. You need to have six months of expenses kept aside as a contingency fund. This could be in a liquid fund or a fixed deposit for those in lower tax bracket.

Not enough funds for financial goals – people sometimes give up on financial planning because they feel that they will not be able to build up the required corpus for financial goals simply because they don’t earn enough. Well, something is better than nothing. There are no loans for retirement and if you start saving for retirement early, you would still be good. Building up knowledge on investment products is important, as you need to invest in products, which beat inflation, compound and give tax efficient returns.

Too taxing to manage everything – help is available. But you need to pay for it. Just like you pay for every service you use elsewhere, you need to pay for financial advise. Find a fee only financial planner who can help you with creating a financial plan around your needs and your life plan. A financial advisor can also help navigate through the myriad of investment options especially, mutual funds.

Finally come up with your own money mantra that will motivate you to manage money better. Mine is “being debt free and using my money to create more time for myself to pursue my interests”.

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Personal

INVESTMENT: Smart options to park short-term money

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Investors meticulously plan their medium- and long-term investments, but short-term investments do not get the attention they deserve. This gets corroborated by the fact that savings bank account and short-term FDs remain the preferred options to park short-term money. Most investors do it to avoid any volatility and maintain liquidity at all times. While the reasons are perfectly valid, investors must realise that there are options with the potential to offer higher returns and that without compromising much on these important parameters.

To begin with, there are liquid funds, ultra-short duration and low duration debt funds that are ideal for a time horizon of up to three, six and 12 months respectively. For a slightly longer time horizon, there are short-term income funds. One has to contend with some amount of volatility and certain risks like interest rate, default and liquidity risks. However, a careful selection of funds can mitigate risks to a large extent.

Arbitrage funds, too, haven’t caught the attention of investors, despite being an effective and tax-efficient option. An arbitrage fund is an equity-oriented scheme which seeks to generate income through arbitrage opportunities emerging out of mis-pricing between the cash market and the derivates market.

For example, a fund manager of an arbitrage fund may buy a stock ‘A’ at Rs 100 and sell its future at Rs 105. As a result he would lock a return of Rs 5 at the time of initiation of the trade. By the end of the expiry, their prices would generally converge to Rs 110. On unwinding the position, that is, by selling stock and buying future, the profit earned on the stock would be Rs 10, whereas the loss from the future market would be Rs 5. Therefore, the net profit from the transaction would be Rs 5.

As is evident, the fund manager is usually able to make money for investors regardless of the market movements. However, the ability of these funds to generate higher returns depends on the volatility in equity markets. While arbitrage funds have the potential to provide healthy returns, there are pitfalls too. A depressed stock market may not provide enough opportunities for an arbitrage fund. Besides, it is not necessary that on the day of expiry the price of the stock and its future contract will coincide.

Although arbitrage funds fall in the category of equity funds, the risk associated with equities gets eliminated as the fund manager invests in stocks and their futures simultaneously. Moreover, arbitrage funds score over income funds and traditional options in terms of tax efficiency. Any capital gains arising out of sale of units after one year are taxed at 10%. Short-term capital gains on units sold within one year are taxed at a flat rate of 15%. In comparison, for debt funds, the period for STCG is three years and gains are taxed at one’s applicable tax rate. In addition, the applicable dividend distribution tax (DDT) for arbitrage funds is 10%, as against 25% for income funds.

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Banking

Investment: Do you need to invest in bank FDs

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Bank fixed deposit is one of the most popular investment product. It is liked by many, especially the conservative investor. Reasons being high liquidity and lower risk along with a fixed return. But have you ever thought about the fact that a higher exposure to FD eats into your returns big time because, one- it is not tax free and two- it cannot beat inflation.

Indians conventionally have been parking their money majorly in bank deposits or even postal deposit schemes. Due to the lack of awareness about equity and for a desire to protect their principal investment and returns, deposits are considered safer options.

In the past, it may have been fine to invest in FDs. But given the upgrade in lifestyles, it has become tough for people to manage expenses by continuing investments in the same old-fashioned low returns bearing financial products. That too needs an overhaul. Investor fail to realise that their returns are being compromised on account of their fear or need of safety. This does not allow their money to grow at a faster rate.

The first big dent that FD returns do to you is the tax you pay on it. Investors often look at the gross rate of FD return, rather than the net post-tax returns. So, even if a bank FD is offering say 7.50% returns and if your total income is already more than Rs 10 lakh in a financial year, then you would end paying 30% tax (excluding cess) on this return. So, your net returns would be only 5.25% (that is, 7.50% – 30% tax). This happens because your FD is subject to your normal slab of tax rate. This single disadvantage should keep you away from investing in FDs. Rather, you should focus tax planning which can help you save the tax on FDs. The same can then be invested elsewhere to earn better returns.

The second big turn off is the inflation rate. Your FD returns will only be able to match or hover around the inflation rate. In fact, it is already established that FDs returns cannot beat inflation. The typical inflation rate may range from say 6 to 7%, but that does not take in to account your lifestyle inflation that is, the change in your standard of living, emergent or sudden expenses, things you spend your money on such as, foreign travel, gadgets, apparels, etc, which were not there earlier or were nominal. Given the lifestyle and other higher expenses on education, medical, etc, your money has to work harder than you think and beating inflation is no longer a choice but a necessity.

Given that there is a growing concern about banks going bankrupt, due to issues like bank scams and rising non-performing assets, even the safety part of FDs is no longer valid. In fact, you be aware that only Rs 1 lakh of your FD investment is insured by the government.

The most important thing is to do a comprehensive financial planning to meet your financial goals. This will help you figure which goal requires which combination of financial products to invest in. So, focus on investing in a good mix of products offering higher returns, more tax efficiency and the capacity to beat the inflation evil. Invest in FDs only if you are in a stage of your life when you seek very safe return, say post retirement. But a young investor can take higher risk and invest more in other assets such as mutual funds or stocks that offer higher returns.

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Personal

How to fulfil your dream of own home

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For most Indians, purchasing a house is a big deal and tops the priority list. With the rise in income of working class and growing accessibility of home loan applications, today one can easily make an attempt of making their dream come true – buying a home. However, the most important part of buying a home is getting the right loan with a manageable interest rate through banks and other financial institutions.

Before applying for a home loan, it is advisable to keep a track of financial institutions’ rate card. Do your research by checking with your friends and family for their feedback and opinions about interest rates and services. Different banks and financial institutions offer home loans at different interest rates but interest rates alone should not be your sole criteria for selecting a lender.

Once you apply for a home loan, the lender checks your credit history before deciding to lend you money. Credit history provided by the Credit Information Company or Credit Bureau helps the lender assess risk as a borrower and accordingly decide on your loan application. Financial institutions have varied set of interest rates for different types of loans. But if the applicant has a good credit score and his credit worthiness is high, then it would be safer for banks to lend money.

To build a credible credit footprint it is important to consider these five steps that will help your dream of buying a home come true.

Timely payments: First and foremost step to build a credit history is timely payments of your bills and other Equated Monthly Instalments. If you don’t pay the minimum amount of your bills on time, it can have a negative impact on your credit score.

Be prudent and avoid defaults: The new lender can see all your previous defaults in your credit report. Hence, it is advisable to avoid default payments on a credit card or a loan instalment. The credit report also reflects details about the settlement of default payments with your previous bank.

Be smart while spending: Be wise by not going overboard with spending and shopping. You need to weigh the offers judiciously keeping in mind your income and ability to pay. Maxing out the credit card limit will have an adverse impact too.

Limit unnecessary inquiries: It is advisable to limit your inquiries for loans or credit cards as it may have minor impact on your credit score. Each credit application inquiry becomes part of your credit report and can potentially drop your credit score.

Check your credit report regularly: Start making a habit of checking your credit report regularly and thoroughly. You can access your credit reports from the credit bureaus through their websites. If you find any discrepancies in the report, immediately contact the respective credit bureau to have clarity. Checking your credit report works as an early-warning before the rejection of your loan. Also, only apply for credit that you can afford to pay back.

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Personal

PERSONAL TAX: Cash in locker may have to be explained

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A search operation was carried out by the Income Tax department in the business premises of a taxpayer, who was working as a liaison officer with a builder. The search revealed cash of Rs 925,000 in a bank locker in the name of the taxpayer and his wife.

During the course of assessment, the tax officer asked the taxpayer to explain the source of the cash found in the bank locker. The taxpayer submitted vide a written reply that the cash found was his and his wife’s savings, that was retained for their daughters marriage. He further submitted that these amounts were deposited in the locker out of their savings over a period of more than five years. This explanation was not acceptable to the tax officer as the cash found in the locker was not reconciled with the cash as per the books of accounts. The officer was of the view that if there would have been cash balance in the cash book, the taxpayer could have explained the same at the time of the search itself. Accordingly, the tax officer was of the view that the explanation offered by the taxpayer was an afterthought and accordingly assessed the entire income of Rs 9,25,000 as unexplained cash.

The first appellate authority observed that the explanation given by the taxpayer was not convincing. It seemed absurd that a person would operate the bank locker and keep cash there from time to time, instead of depositing it in a savings bank account or fixed deposit, since that would earn interest too. In view of the same, the appellate authority agreed with the tax officer’s view.

Before the second appellate authority, the taxpayer argued that both he and his wife were working and have been regularly filing their tax return. The amount of cash found in the locker represent their past savings and was commensurate as per tax returns filed in the past years. The taxpayer submitted that the tax officer without considering the taxpayer’s explanation made an addition as unexplained cash. The taxpayer further submitted that it is for him to decide whether to keep the money in the locker or whether it should be deposited in the bank. The taxpayer chose to deposit the cash in the locker with which he performed his daughter’s marriage and therefore it is not correct to make the addition on the basis of the tax officer’s personal presumptions and assumptions.

The honourable tax tribunal observed that the assessee and his wife have filed their returns of income and the same have been duly accepted by the tax officer. The taxpayer has been clear that the cash in the locker has been deposited out of the savings from the past years’ income. The tribunal was of the opinion that the taxpayer has fully explained the sources and accordingly discharged the burden cast upon him. The tax officer without giving any reasons has rejected the explanation offered by the taxpayer, which in the tribunal’s opinion is not correct. Further the tribunal agreed with the taxpayer’s plea that it is his prerogative to decide whether to keep the money in the locker or deposit it in the bank to earn interest. In the present case he chose to keep the money in the locker for the purpose of his daughter’s marriage which cannot be challenged. The tribunal accordingly decided the case in favour of the taxpayer and ordered for deletion of the addition on account of unexplained cash deposits.

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Personal

INVESTMENT: Smart options to park short-term money

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Investors meticulously plan their medium- and long-term investments, but short-term investments do not get the attention they deserve. This gets corroborated by the fact that savings bank account and short-term FDs remain the preferred options to park short-term money. Most investors do it to avoid any volatility and maintain liquidity at all times. While the reasons are perfectly valid, investors must realise that there are options with the potential to offer higher returns and that without compromising much on these important parameters.
To begin with, there are liquid funds, ultra-short duration and low duration debt funds that are ideal for a time horizon of up to three, six and 12 months respectively. For a slightly longer time horizon, there are short-term income funds. One has to contend with some amount of volatility and certain risks like interest rate, default and liquidity risks. However, a careful selection of funds can mitigate risks to a large extent.
Arbitrage funds, too, haven’t caught the attention of investors, despite being an effective and tax-efficient option. An arbitrage fund is an equity-oriented scheme which seeks to generate income through arbitrage opportunities emerging out of mis-pricing between the cash market and the derivates market.
For example, a fund manager of an arbitrage fund may buy a stock ‘A’ at Rs 100 and sell its future at Rs 105. As a result he would lock a return of Rs 5 at the time of initiation of the trade. By the end of the expiry, their prices would generally converge to Rs 110. On unwinding the position, that is, by selling stock and buying future, the profit earned on the stock would be Rs 10, whereas the loss from the future market would be Rs 5. Therefore, the net profit from the transaction would be Rs 5.
As is evident, the fund manager is usually able to make money for investors regardless of the market movements. However, the ability of these funds to generate higher returns depends on the volatility in equity markets. While arbitrage funds have the potential to provide healthy returns, there are pitfalls too. A depressed stock market may not provide enough opportunities for an arbitrage fund. Besides, it is not necessary that on the day of expiry the price of the stock and its future contract will coincide.
Although arbitrage funds fall in the category of equity funds, the risk associated with equities gets eliminated as the fund manager invests in stocks and their futures simultaneously. Moreover, arbitrage funds score over income funds and traditional options in terms of tax efficiency. Any capital gains arising out of sale of units after one year are taxed at 10%. Short-term capital gains on units sold within one year are taxed at a flat rate of 15%. In comparison, for debt funds, the period for STCG is three years and gains are taxed at one’s applicable tax rate. In addition, the applicable dividend distribution tax (DDT) for arbitrage funds is 10%, as against 25% for income funds.

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Personal

INVESTMENT: Robo-advisor better for younger investors

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I believe, as most of you would agree, that each one of us needs an advisor to help us take the right financial decisions. Now with technological advancements, the shape, size and form of a financial advisor has undergone a change and what we call the robo-advisor is gaining lot of momentum.

This will make you think whether to use your old known trusted financial advisor or go for a robo-advisor? But to answer this question you need to first assess your situation and financial goals, because each has its own pros and cons and it works both positively and negatively under different circumstances. It is also driven by an individual’s behaviour plus investment pattern.

The job of a robo-advisor is to use algos in doing your investment planning and to come out with the best asset allocation suiting an individual’s risk profile. It works on the foundation which is passive in nature but the same will change with constant machine learning. Whereas your financial advisor’s job is to look at your investments in depth and arrive at timely calls for generating greater returns and always aim to outperform.

The main factor we need to consider in this entire debate is the level of wisdom as against the algos. The robo-advisor will work on algorithms and does complicated calculations to dish out various analytical solutions and patterns, but it only works on the basis of the inputs that are fed into the system. What this input needs to be requires wisdom, and that can come from experience. This is not to say that robo-advisor will not learn or evolve. In fact, that is called machine learning and with time these algos will learn and become more robust.

What the robo-advisor lacks is tackling emotions that drive an investor. This is one of the critical roles for an advisor, because investing has to do more with behavior than science. For instance, what would a person do if they win a lottery or get a salary bonus? More often than not many of us would go on splurging this sudden cash than making additional investments.

Robo-advisory will work well when your financial goals and the priorities are clearly laid out as against the customised planning when you should seek the help of a financial advisor.

Ideally, robo-advisors will suit young investors because they are new to the investing world. The lower cost of this model too will suite them better. They will also be more at ease using this model. So, while starting your journey towards investing, robo-advisor will work best and the moment your investment needs more customised handling, a financial advisor will work better. An advisor who brings the required expertise and experience in helping you achieve your desired goals. The best part is you can make them accountable for their work and secure your financial future.

With time, robo-advisors will also establish the required credibility and will also carry the inherent knowledge as required to give you customised advice. But until then just be aware about the pros and cons of both the options. After all, it’s your hard earned money, so stay smart, stay careful when it comes to deciding which one to choose.

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Personal

Don’t ignore fixed income while building retirement portfolio

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Retirement planning is still a developing field in India. In the older days, retirement planning was not a big concern on two accounts – first many organised jobs offered pensions post retirement, which de-risked individuals from planning themselves and secondly the presence of the family safety net. However, both these are gradually fading in importance and, hence, for individuals who are currently working, there is a pressing need to start thinking about planning for funding their post-retirement expenses.

A retirement portfolio is a function of two life stages – wealth accumulation and spending phase. During the wealth accumulation phase, active earnings (earnings from employment or business) take care of expenses and a portion of this income should be saved to build a retirement pool. The earning years are the accumulating years and proactive planning is key to harnessing the power of compounding. Given the longevity of this stage and the risk-taking ability of the individual, equities make for an ideal investment tool. However, the need for debt cannot be understated given the inherent market volatility of equities.

How debt funds help in retirement portfolio

Apart from being a relatively new field, retirement planning in India also suffers from not having a single, clearly earmarked retirement planning product that can take care of individual needs. Hence, investors need to get their hands dirty to set up their own investment policies that can take them through this stage. Given that backdrop, it is important for investors to look at all the tools available for them. Now, the role of equity as a long term investment is well understood. So its role in retirement planning becomes obvious. However, what is less obvious is the role of debt funds in a retirement portfolio.

Aggressive hybrid funds offer a one stop allocation tool for investors looking for a simplified approach to allocating between equities and debt. Since these funds are treated as equity funds for the purpose of taxation, they offer stability of debt all while maintaining tax efficiency.

Life-stage approach to asset allocation

A life-stage approach to asset allocation is a universally accepted model for retirement corpus as it caters to changing needs of investors as they progress. Retirement funds offered by Mutual Funds today offer solutions catered specifically to retirement planning. The exit load structure also aims to dissuade investors from redeeming such funds till retirement, furthering their appeal for temperamental investors. A retirement fund typically has multiple plans which vary the equity and debt component thus allowing seamless transitioning between plans as investor risk profile changes.

Suitable for pensioners with limited risk appetite

The spending phase is retirement. Passive earnings (income from your investments – that is, capital appreciation, interest and dividends) take a front seat. Some would say this is the phase where one would now enjoy the utility of the wealth they have created. Risk tolerance tends to be significantly lower as asset fluctuations are less desirable. With longer life expectancy, income generation or passive earnings have become imperative to sustain the retirement pool, to meet monthly expenses and other ancillary expenses. Passive earnings also help manage the effects of inflation to some extent. Given high real rates in India, debt funds today offer a material hedge to inflation in the current environment and hence offer an attractive investment opportunity for pensioners with limited risk appetite.

Diverse debt strategies

MF offer a diverse set of debt strategies for investors on the basis of the type of instruments they invest in and the maturity profile of funds. For investors looking for an equity kicker, conservative hybrid funds (80% debt and 20% equity) offer potential investment opportunities for capital appreciation while maintaining a predominantly stable debt portfolio. Another tool especially during the drawdown phase could be the use of an SWP (Systematic Withdrawal Plan). Just like an SIP, an SWP offers the ease of convenience for withdrawals.

Though every investor has different needs, goals and responsibilities, one should look at a long-term perspective towards their investments, as you need this money at the time of retirement. Time in the market is more important than timing the market, to get maximum benefit of compounding.

Markets do not generate wealth, responsible investing does. Be a responsible investor.

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Finance

Change your bad money habits to make good investment decisions

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Investors often face several confusions while investing due to lack of understanding about the suitability of different investment avenues. If these problems are not tackled initially, they could lead to a flawed investment decision, which can prove disastrous for your finances.

Lack of knowledge

To be in control of your hard earned money, the best way is to educate yourself about your investment. There’s no substitute for knowledge. It’s the starting point for building long-term wealth. Getting educated and staying in-control of your investment aids in defending your portfolio from unnecessary losses and the biggest benefit is that it provides peace of mind around money. Financial literacy will bring you not only financial wealth but also social wealth.

Bad habits

We are creatures of habit, even when it comes to our money matters. While some habits can pave the way for wealth and prosperity, others can lead to financial ruin. Bad money habits become so ingrained in us that they have the power to ruin future investment plans. Let us look at some of them:

Avoid random shopping – Shop with a list that will help you save your money from being spent on unwanted stuff

Make a budget – If you don’t keep track of your spending pattern, you will never know where the leaks are and how you can stop them. If you find it difficult to stick to your plans, you can start by keeping a track of your cash flow, segregate your expenses between need and luxury and carefully re-evaluate where every penny goes. An average of 30-35% of your monthly income should be directed towards investments.

Just because syndrome

Always remember one size doesn’t fit all. This applies as much to clothes and shoes as it does to investments. Stop making irrational decisions related to your investment only because your friend or relative told you or they themselves are invested in it.

Inflation

Inflation is like a bug that eats into your savings and leaves your bank balance hollow. A lot of people grapple with how to insure oneself against inflation. It is important to understand the meaning of real rate of return, which is after deducting the expected rate of inflation from the nominal rate of return.

If you expect your investments to grow at 12% per annum and inflation to grow at the rate of 7% per annum then the real rate of return would be positive 5%. On the other hand if you expect your investment to grow at 5% and inflation to grow at 7% then the real rate of return would be negative 2%, that is, inflation is eating up your money, your money is de-growing by 2% per annum. In order to maintain the same standard of living you enjoy today your investments need to grow at a substantially positive real rate.

Behavioral biases

All investors are prone to behavioral biases which can have an adverse impact on their investment returns. These biases affect our behavior and prevent us from acting in our own best interests. Some biases to avoid include:

Due to loss aversion bias the pain of losses is twice as much as the pleasure of gains and investors are adamant to avoid entering the markets in the same fear.

As a result of bandwagon effect, when we rely too heavily on social information — listening to what our neighbors and friends say — we slowly begin to ignore our instincts.

The real challenge for being financially successful is fighting your enemies that block your path and pull you down. It is those who overcome these enemies and keep on the course that find financial security and, eventually, financial independence.

You won’t be successful in every battle. However, if you manage to turn a few losses into wins, you’ll find yourself moving faster and faster on the path, with more confidence and momentum than ever before, and that alone will go a long way toward bringing you the success you desire.

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