Prajna Capital

Investing for our children Part 1
Credit Card Late Payment Charges
Investing for our children Part 2

Posted: 31 Jan 2016 04:21 AM PST

Financial Planning article in Advisorkhoj - The best investment choice for our children: Part 1 of 2

The future of our children is probably the biggest concern for most parents. Many parents start saving for their children's education and marriage, soon after the child is born. This is, of course, the right thing to do, because the parents can benefit from power of compounding while the child is growing up. As far as investment choices for their children are concerned Indian parents are mostly conservative. Public Provident Fund, National Savings Certificate and life insurance endowment plans have traditionally been the preferred investment options for the children's education and marriage. These investment options continue to be preferred choice of a majority of parents today. While these investment choices offer safety of capital, on the flip side the yield of these investments is quite limited. Cost of living in general and cost of education in particular has been increasing at such a pace in India, that relying on low yield investments may leave parents short of the goals they have set for their children or force them to compromise on other important goals like retirement planning. In this two part series, we will discuss investment choices that will help parents meet the financial goals for their children's future.

The cost of professional education in India nowadays is easily in the range of र 10 – 12 lacs. As per market surveys, education cost is growing at a rate of 20 - 25% per annum. PPF interest rate is currently at 8.7%. NSC interest rates are 8.5% and 8.8% for the 5 year and 10 year schemes respectively. PPF returns are tax free, but NSC returns are not. You can get 80C tax benefit for the accrued interest deemed for reinvestment in NSC, but the accrued interest for the final year of your NSC scheme is taxable as per your tax rate. Returns of life insurance endowment plans are tax free, but it is only around 6%. You can do the math yourself to see how much you will need for the higher education of your young child factoring in inflation and the maturity amount of your investment at your current savings rate or even at an accelerated savings rate. Simply put, the gap between the cost inflation in education and returns of low risk investment options is just too large. The thought of falling short of our children's goals is difficult for any parent. Fortunately many young, financially savvy, parents are investing in equity mutual funds which over a horizon of 10 to 15 years, when the children are growing up, can give sufficient returns to beat inflation and with proper planning can help the parents meet the financial goals for their children, without having to compromise on other important life goals. However, when it comes to equity investment the biggest worry of the average investor is risk, the worry about the safety of your capital. When it concerns the future of our children, can we take risks? There two points that parents need to consider regarding risk of equity investments. Firstly, the yields of low risk investment (e.g. PPF, NSC etc.) falling substantially short of cost inflation, leave you with the risk of not meeting the financial goal for your children. Secondly, we need to understand risk and return in the context of long investment horizon. While the notion of risk is largely psychological for the average investors, thankfully there are quantitative measures of risk, which can enable the investors get a sense of expected returns and deviations thereof from a probabilistic standpoint.

Risk and return in equity investing

Mutual funds are subject to market risks. The net asset value (NAV) of your mutual fund investment goes up or down on a daily basis. This is also known as volatility. But should you worry about daily volatility, if you are a long term investor? Over the last 10 years, the Sensex has given an annualised return of 16.8%, despite through big crash in 2008. Over the last 15 years, the average rolling 10 years (i.e. average point to point returns of all 10 year periods starting November 1999 to November 2014) is about 17%. The standard deviation of rolling 10 year returns over the last 15 years is 2%. Standard Deviation is a measure of risk or volatility and measures the deviations from the average return on investment. Standard deviation gives us the sense of downside risk within the context of a probability distribution of Sensex returns. Probability distribution is nothing but the probability or likelihood of all possible returns of the Sensex. It has been observed that equity returns follow a probability distribution called Normal or Gaussian distribution, in which most of possible returns are clustered around the average return and then tails of symmetrically from the average. The shape of the distribution is therefore like a bell and this distribution is more popularly known as the bell curve. The diagram below shows the bell curve and probability of returns exceeding or being less than 1 standard deviation, 2 standard deviations and 3 standard deviations from the average.

In the diagram above, µ is nothing but the average and σ is the standard deviation (SD). The average Sensex 10 year rolling returns (µ) since 1999 is 17%. The standard deviation of 10 year rolling returns (σ) is 2%. The probability that the expected 10 year rolling returns is less than 2 standard deviations from average is 2.28%.Therefore while the expected 10 year annualized Sensex returns is about 17%, the probability of Sensex returns being lower than 13% is only 2.28%, based on the last 15 years data. Nobody can predict the future, but a statistical analysis of last 15 years Sensex returns can give you a probabilistic perspective of what to expect. The analysis of historical Sensex returns gives us a high degree of confidence (over 97%) that equities can beat inflation and provide much higher returns than risk free or low risk investments in the long term. Equity markets are volatile in the short term depending on the demand and supply situation, but in the long term markets are driven fundamental factors like GDP growth, corporate earnings growth etc. In a developing economy like ours, it can be expected with fairly high degree of confidence that equities will give good returns in the long term.

Mutual funds are ideal investment options for planning your children's futures

We have seen that equity is the best long term investment choice for your children. As such good equity mutual funds through systematic investment plans (SIPs) are ideal investment options for your children as they are growing up. Long term capital gains in equity funds are tax free. You can even save taxes under Section 80C by investing in Equity Linked Savings Schemes (ELSS). Financial planning for your children is a dynamic process. As your children approach their life milestones like higher education or marriage, you need to rebalance your investment portfolio to have a greater allocation to debt investments where the risk is considerably lower, while you still earn a decent return. There are enough mutual fund products across risk profiles like equity funds, balanced funds, monthly income plans, income funds etc, that parents can choose when their child is growing to optimize the returns while ensuring that the risk profile of their investment portfolio is consistent with the financial plan for their children.

Parents can also opt for mutual fund child plans. Mutual fund houses like HDFC, ICICI Prudential, UTI, Templeton, Tata and SBI offer a variety of choices as far child plans are concerned. Child plans also help earmark funds for specific goals, dividing the portfolio into several categories. This makes it simpler for a parent to monitor the investment for a particular goal. This segregation is important because each goal has a different time frame and, therefore, requires a different investment mix. For example, your child's college or higher education may only be two or three years away and while his or her marriage may be five or six years away, prompting different investment choices for these two goals. We have discussed child plans in our article, Investing for the future of your children.

When your children reach their milestones, you can redeem your investment either through systematic withdrawal plans (SWP) to meet the cash flow needs of your children's higher education or in lump sum to fund the expense of their marriage.

Conclusion

In this article we have discussed why you should invest in equities to meet your children's financial goals. We have also discussed in brief how mutual funds can help you plan for your children's future. In the second part of this series, we will discuss how you can use mutual funds and life insurance to meet the financial goals of your children.

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Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds
Top 10 Tax Saving Mutual Funds to invest in India for 2016
Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund
2. Axis Tax Saver Fund
3. Franklin India TaxShield
4. ICICI Prudential Long Term Equity Fund
5. IDFC Tax Advantage (ELSS) Fund
6. Birla Sun Life Tax Relief 96
7. DSP BlackRock Tax Saver Fund
8. Reliance Tax Saver (ELSS) Fund
9. Religare Tax Plan
10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online
Invest Online
Download Application Forms
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
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You can write to us at
PrajnaCapital [at] Gmail [dot] Com
OR
Leave a missed Call on 94 8300 8300

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Credit Card Late Payment Charges

Posted: 31 Jan 2016 03:38 AM PST

Credit card is loved by many, as you get to borrow money and yet have sufficient number of days to pay the bill and even an option to pay minimum balance. In addition to this, there are many benefits offered by card issuers to their customers such as discounts while shopping online, cashback, reward points, fuel surcharge waiver and many more. For those who pay credit card bills on-time the benefits are further more. But there are individuals who miss paying the credit card bills before the due date. There could be many reasons for this missed payment such as:

Paucity of funds: This is the most common reason for credit card late payment. Again this condition can arise due to medical emergency, lay-off and many other reasons.
You did the payment on the last date but through cheque/demand draft which took time in processing.
You made the payment but due to technical reason the same was not processed. Again this can be a fault at your end or at the bank's.
You are travelling at the time of due date and did not have access to make payments.
You forgot to make the payment. Check out how to avoid missed payments.

What happens when credit card payment is made late?

Frequently missing your card payment knowingly or unknowingly is an invitation to the lenders to tag you as a defaulter.

Effects of late credit card payment are:

Credit score is impacted increasing the chances of loan or credit card application denied. A poor or low CIBIL score is an invitation to future financial trouble. Read tips on getting credit card when you have poor score.
Credit limit is slashed
Credit card can get cancelled
Interest rate will be increased
Your card account will be classified as a non-performing asset (also called as delinquent in banking terminology).
You will be blacklisted by the banks.
Recovery agents (in-house by the banks or third party agencies recruited by the banks) will start harassing you over phone any time during the day. This mostly happens when the overdue payment is very high.

Apart from the above effects, late payment charges are levied by the banks as follows.

CARD ISSUING BANK	CREDIT CARD NAME	TOTAL AMOUNT DUE	LATE PAYMENT CHARGES
State Bank of India	Signature Card/Platinum Card/Signature Contactless Card/Gold Card/Advantage Gold Card/Advantage Plus Card/SimplySAVE/SimplySAVE Advantage SBI Card	Rs. 0 to Rs. 200	No Charge
	""	Between Rs. 200-Rs.500	Rs.100
	""	Between Rs. 500-Rs.1000	Rs.200
	""	Between Rs. 1000-Rs.10,000	Rs.500
	""	Rs. 10000+	Rs.750
Citibank	Rewards Card/Cash Back Card/Rewards Domestic Card	Upto Rs. 10,000	Rs. 300
	""	Between Rs. 10,001- Rs. 25,000	Rs. 600
	""	Rs. 25,000+	Rs. 700
Citibank	PremierMiles/Prestige Card	NA	Rs. 100 per month
ICICI Bank	For most of the cards	Less than Rs. 100	No Charge
		Between Rs. 100-Rs.500	Rs.100
		Between Rs. 500-Rs.10000	Rs.500
		Between Rs. 10000-Rs.20,000	Rs.600
		Rs. 20000+	Rs.700
Axis Bank	Privée Infinite Credit Card/Wealth Signature Credit Card/Signature Credit Card/Platinum Advantage/Platinum/Titanium/Gold/Silver	Upto Rs. 2000	Rs.300
	""	Between Rs. 2001-Rs.5000	Rs.400
	""	Rs. 5001+	Rs.600
Kotak Mahindra Bank	Royale/Privy League/League/Delight/PVR Platinum/NRI Card/Aqua/PVR Gold/Urbane/Feast/Easyday/Easyday-Titanium	NA	Rs.550
HSBC	Visa Platinum Card/Advance Platinum Credit Card/Platinum	50% of the minimum payment	Minimum Rs. 400 to Maximum Rs. 750 per month)

Showing 1 to 19 of 19 entries

As mentioned in the above table, as the due amount increases the late payment charges also increase. the charges also depend on the due amount and type of card you have chosen. Readers are requested to verify the details as card companies often keep on changing their terms and conditions.

Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saving Mutual Funds to invest in India for 2016 or Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

Leave a missed Call on 94 8300 8300

Investing for our children Part 2

Posted: 31 Jan 2016 01:39 AM PST

Financial Planning article in Advisorkhoj - The best investment choice for our children: Part 2 of 2

In our previous article, The best investment choice for our children: Part 1 of 2, we had discussed why you should invest in equities to meet your children's financial goals. There are plenty of investment products in the world of mutual funds that can help parents fulfil the financial goals for their children. While starting your investment early when your child is young is essential in ensuring the success of financial goals for your children, you should also ensure sufficient financial protection for your children in the event of an untimely death, by buying adequate life insurance. In this article we will discuss, how you can use mutual funds and life insurance plans to meet the financial goals of your children.

Financial Planning for your children

When planning investments for your children, it is important to differentiate the investments made for your children from other investments in your portfolio. Goal based investing helps parents stay disciplined and is key to the success of the financial objectives for their children. You should identify different goals for your children like college education, foreign higher education, marriage etc and allocate investments to each of these goals. When your children are very young, you should start investing in equity mutual funds through the systematic investment plan (SIP) mode. As discussed in part 1 of this series, over a long term investment horizon equities can provide superior returns compared to other asset classes and investors can benefit from the power of compounding of their SIP investments. The table below shows a scenario analysis of the corpus built over various periods of time at different investment return rates, with a monthly SIP amount of र 5000/-

Financial Planning - Expected retirement corpus of a monthly SIP of Rs.5000

Further, we had discussed in part 1 of the series that, financial planning for your children is a dynamic process. As your children approach their life milestones like higher education or marriage, you need to rebalance your investment portfolio to have a greater allocation to debt investments to optimize risk and returns.

Financial Planning when your child is 0 – 10 years old

Life Insurance: You should buy life insurance to provide financial protection for your children's goals in the event of your untimely death. Term plans are straightforward protection policies and is the purest form of life insurance. Term plan is a much better option than traditional insurance cum savings plans like endowment or money back plans. Endowments and money back policies will offer a return of between 5 to 6% per annum. Term plans are more cost efficient than traditional insurance cum savings plans. The cost savings in premiums can be invested in mutual funds which offer much higher returns than endowment plans. You should also avoid child plans. The maturity benefit of child plans is much less then what you can get from a combination of term plans and mutual funds for the same monthly investment.

Investment: Since your child is very young, you have a long investment horizon to meet financial objectives for his or her higher education and marriage. You should invest in equity mutual funds through monthly systematic investment plan (SIP) mode. SIPs helps the investor stay disciplined towards their financial goals and also helps with the rupee cost averaging of the units purchased in volatile markets. Among equity funds, diversified equity funds which invest in both large cap and midcap companies are ideal for investors with a long time horizon. Diversified multi cap funds outperform large cap funds in the long term, but their downside potential is limited compared to midcap funds. Usually during this stage, parents also look for tax saving investment options under Section 80C of Income Tax Act. Equity Linked Savings Schemes (ELSS) is the best investment option for young parents looking to save taxes and investing for the children's futures. An ELSS is essentially a diversified equity fund with a lock in period of three years from the date of the investment. Investment in ELSS qualifies for deduction from your taxable income up to the overall limit of र 1.5 lacs allowed under Section 80C in the last Union Budget. Top ELSS funds have given over 30% annualized returns in the last 3 years.

Investing in gold has huge cultural significance for Indians. Many Indian parents start buying gold for their children's wedding even when their children are quite young. Apart from buying gold for weddings and other auspicious occasions, gold is also a good investment in the long term. Over the last 10 years investment in gold as a commodity has given nearly 17% annualised returns. Gold is an effective hedge against inflation and serves to diversify your portfolio since it has a negative correlation with equities. Buying gold jewellery is the traditional and popular form of investing in gold. While gold jewellery has its own aesthetic and cultural appeal, it is disadvantageous from an investment perspective. The making charges of gold jewellery can be 15 – 20% of the total cost. When you sell the jewellery, the jeweller will deduct the making charges from the selling price. The jeweller may also deduct an additional amount for impurities when you sell gold. Gold in physical form usually involves storage costs, since security is an important concern. . Physical gold also attracts wealth tax, if its value is over र 30 lacs. Gold ETF is the most cost efficient, safe and secure form of buying gold. A gold exchange-traded fund (or GETF) is an exchange-traded fund (ETF) that aims to closely track the price of gold. Gold ETFs are units representing physical gold which may be in paper or dematerialised form. The units of the gold ETFs are traded on the stock exchange like shares of a company. SIP is an excellent investment option for investing in Gold ETFs because SIPs can benefit the investors by taking advantage of volatility in commodity prices.

Financial Planning when your child is 10 – 18 years old

Life Insurance: Buying life insurance is not a one-time exercise. At every stage of life, you should evaluate, if you have adequate life insurance to meet the aspirations you have for your children, in the event of an unfortunate death. Your life insurance should cover not only the current expenses of your children, but also the future obligations towards your children's education and marriage. If your life insurance is not adequate you should buy additional term policies. ULIPs are more suited for younger investors with high risk appetite. Since ULIPs invest in equity markets, the returns can be very volatile. ULIPs give much lower returns than mutual funds over a shorter investment horizon due to the high charges like premium allocation charges, policy administration charges, mortality charges etc. Generally in this stage of life you should avoid ULIPs

Investment: When your children are in the age group of 10 – 18 your risk tolerance level is moderate and gets lower as your children approach college and higher education. Balanced funds are excellent investment choices for parents with children in this age group. These funds typically have 60 – 70% of the portfolio invested in equities and the rest in fixed income securities. Due to the equity component these funds can give attractive returns, while the risk is substantially lower compared to equity funds due to debt component. Parents should switch their assets from equity funds to balanced funds when their children reach this age group. Parents should use systematic transfer plans (STPs) to transfer their accumulated corpus from equity to balanced funds. STP is a mechanism to transfer your assets from one fund category to another gradually over a period of time. STP is effective in volatile markets and negates the need to time the market. In addition to switching your accumulated equity fund assets to balanced funds, you should continue to grow your corpus by investing on a monthly basis through SIPs. Typically parents of children in this age group have higher income than younger parents. Your contribution to employee provident fund, principal component of your home loan EMIs, children's school tuition fees and life insurance premiums typically constitute the major portion of your 80C tax saving. If you need to make additional tax saving investments to meet your 80C investment limit, you should invest in ELSS for your children's longer term goals like marriage. As your children approach their college education you should switch to more conservative investment options like income funds or monthly income plans, depending on your risk profile and financial objectives. As discussed earlier, STP is an effective mechanism for transferring your assets from equity or balanced funds to debt funds or MIPs. For your children's marriage you should continue to invest in Gold ETFs through SIPs. Use one time cash flows to top up your investment in Gold ETFs.

Financial Planning when your child is 18 – 25 years old

If you had planned carefully and stuck to your plan diligently, you should be able to accumulate a sufficient corpus to meet your children's education needs. Now is the time to fund your children's college or higher education expense, from your accumulated assets. Since you need to fund your children's college and higher education over several years, you should use systematic withdrawal plan (SWP) to fund your children's educational expense. With SWP you can withdraw a fixed sum very month to meet your children's tuition fees and other expenses, while the balance assets continue to earn returns. You should be mindful of the holding period for the new long term capital gains tax regime. In the last Union Budget, the holding period of debt funds and MIP for long term capital gains is 36 months. Long term capital gains for debt funds are taxed at 20% with indexation benefit. For your children's marriage you should continue to invest in Gold ETFs. For other wedding expenses continue to invest in balanced funds and switch to debt funds when your child's wedding is near. Before your child's wedding, you can redeem your ETFs and other investments to buy gold for the wedding and fund other marriage related expenses.

Conclusion

In this series, we have discussed the best investment choices for your children. Remember that while the future of our children is probably the biggest concern for most parents, other financial goals like retirement planning are also important. Failure to meet other financial goals may indirectly have an impact on your children. The key to success in meeting your financial goals is planning and disciplined investing. You should discuss the financial goals for your children with Prajna Capital what investment options are best for your children's future.