Tax Trick for an ELSS MF

There is a particular ‘extra’ Tax advantage you can derive out of a Dividend Payout option of an ELSS Mutual Fund Scheme using a simple trick.

Usually mutual fund schemes lure investors in the months preceding the financial year end into ELSS schemes to boost their assets. They also declare huge dividends and set a date for the dividend allotment. When a dividend payout happens on the prescribed date, the NAV of the fund falls by the amount of dividend paid. The dividend thus paid is totally tax free.

Suppose, you have decided that you will put in say 50,000 Rs in an ELSS this year to avail tax exemption under sec 80C. Usually anybody will just go ahead and invest the full 50,000 in the scheme and the work is done. But there is a trick you can play which can save you even more money using the same investment! Suppose you find out a particular scheme which is giving you a 100% dividend this year after 15 days. So for a scheme of face value 10/- you get Rs 10 as dividend for each unit you hold in the scheme. So, if the NAV of the scheme just before dividend payout is 50, it will fall to 40 after payment of Rs 10 as dividend. Considering an entry load of 2.25 %, this is what you can do,

By doing this, you can avail a tax exemption on Rs.59,775 by only investing Rs. 50,000!!

If you hadn’t cared about the timing of your investment, you would have anyway paid the entry load and the value of your investment immediately after the purchase would have been Rs. 48,675 at an NAV of 50. Yes, I know you have lost around Rs 220/- because you paid the entry load once on Rs. 50,000 and again on Rs.9775 but this of course is a small price to pay for what you would save by having an extra exemption of Rs 9775 without investing anything more.

You can achieve the same results by opting for the dividend reinvestment option of the scheme when you bought it initially saving you all these hassles. But again, by opting for the dividend payout option, you always have an ‘option’ to keep the money with you, tax free, if need be.

How’s that?

P.S. I owe this to my father, who had this thought first and then I validated with some spreadsheets.

Life Insurance Jugglery - II

You must have heard the terms ‘Human Life Value’ (HLV) and must have been scared to death by insurance agents about how much risk you have and how much insurance you should take. There have been very popular advertisements on TV which show how everybody needs insurance, It portrays, “I don’t need Insurance” and then the ‘don’t’ word gets dropped off due to accident, fire or something and the sentence is re-phrased to “I need Insurance”. Remember that? While the intent and idea both are brilliant and true, nobody must have ever told you, “You don’t need Insurance” and if you thought so, you would be thought of as a crazy guy without the knowledge of the present times!!

So, do you need insurance? If yes, how much? You need to ask yourself these questions really hard because it is after all your hard earned money.

Let me show you some common decisions one has to make while buying Insurance policies.

1. Getting an insurance policy for a small child.
   Now this can be seen as a very prudent step for the parents, it actually overlooks a very important fact. A child does not have financial liability. There is no loan outstanding for him/her. Nobody is financially depended on the child. In an unfortunate event of the child’s demise, there aren’t going to be financial crisis. It’s going to be a great emotional loss, but not a financial loss. This argument has just one flaw. In an Indian society, a child may be seen as a financial future as well. If that is the reason (without going into the ethical part of it), then may be the child does need insurance. But this is rarely a thought for the parents. It is more to do with love and care for the child rather than future economic benefits.
2. Lessening your cover because you tried to get a ‘return’ on your investment.
   If you take Insurance policy because of your tax consideration, you probably did not think whether the Insurance is enough for you. You thought you need say 25L Insurance but the Investment + Insurance sort of a deal costs you a whooping amount greater than 70-80K per year. So you decide to take a policy of just 5L. Did this solve your purpose? It didn’t!! A term policy would have cost much lesser.
3. Too less insurance.
   The amount you are covered for should cover your immediate liabilities as well as long term liabilities which may include all types of loans, average credit card bills, maintenance costs for your car, and house for a period of time, education costs of your children, and living expenses for people who are dependent on you etc. You need to take a call on the future value of all these liabilities and decide on an amount of cover you need. Then pay the premium for the same and forget about it. As said earlier, a term policy would be best.
4. Getting insurance at the wrong stage of life.
   Say, you and your wife both are earning, your parents are also not financially dependent on you. You do not have any big loans on yourself, you do not have children. Do you still need insurance? I don’t think so. Insurance should be there only if there is a financial liability which you have and it would be jeopardized in the case of your death. It’s as simple as that. Some people may be of an opinion that in the event of death, all future earnings extrapolated until retirement should go to my family. That is how HLV is calculated. While this is a valid enough thought, you need to think really hard whether you really support this thought. I do not.
   
   
   So, analyze, think, and decide. It’s after all, your money boss!!

Life Insurance Jugglery

Insurance has always been the front runner amongst all the financial products in the Indian market place. The latest upsurge in the middle class income, a buoyant economy and a bull market has led to an even more increase in the Insurance products available today and the darling among them has always been Life Insurance.

Life Insurance is actually a very uncomfortable thing to digest. It is a contract between the Insurer (the insurance company) and the Insured (the consumer). The insured bets that he may die in a specified period and the insurer bets that he would not die. So the risk of death is transferred from the insured to the insurer at a certain premium. Simple? Not so. Not many people can digest the fact that, “I will pay premium every year for the next 25 years and if I die, you give the whole sum assured to my dependents while if I lose the bet and do not die, I do not get anything back!”

To overcome this uneasiness, the insurance contract is many times clubbed with Investment to give it a more acceptable look because the original concept is hard to digest. But unfortunately, this clubbing of Insurance and Investment leads to one of the most ridiculous financial products today. (Spare me if you are hurt but the truth is this!)

Let me prove it to you. Usually, traditional insurance policies come in three flavors. We will leave the discussion on ULIPs for some time later.
A Recurring returns policy where you get a part of the sum assured after every few years and the balance sum assured plus bonus on maturity.
A one time return policy where you get the sum assured plus bonus on maturity.
A pure term insurance policy where you pay the premium but do not get anything back if you live till the maturity period.

In all the above three policies, you still get the sum assured if you die during the premium paying term.

For example, A 25 year old takes a single cover Insurance policy of Rs. 5, 00,000/- for a period of 25 years, this is what happens.

# This is an example premium and it differs from company to company and policy to policy.
* This is an approximation because it does not consider that the money has been paid in installments. The bonus is in some policies 3 times the sum assured (un-guaranteed) which will make the return on investments 7-8 % annually but then the premium is higher and risk prone.

As you can see from the table, the first two insurance policies while posing as investment avenues give an abysmally low return in the range of 4-5 % annually!! If you know that the inflation is hovering around 6 % today, you surely know your money is going down the drain. Instead if you had taken a term insurance and invested the amount you saved coz of the difference into a fixed return Public Provident Fund which is guaranteed by the GOI, you could have accumulated a cool 13-18 Lakh if you survived the term and would have continued to have the same ‘life cover’ during the term which you desired ! Rather than paying every year, you could have also achieved this by just paying a one time premium of 17,190/- and enjoying insurance for 25 years without any premium there after!

Now you would think if all this is so obvious, why is it that so many people do not even know that a ‘term life insurance’ exists and some even after knowing it do not take it? There are multiple reasons for this.

1. The Insurance agent gets a very fat commission on the return bound insurance products. As against this, the commission for a term insurance is very low. Obviously, the agent is in a great professional dilemma having to choose between his income and yours!
2. Term insurance is hard to get as there are a lot of restrictions on age, sum assured and health. You need to have a long array of health check ups before you are granted a term insurance. It’s even harder and a little more expensive for smokers and people in high risk jobs.
3. The third and most important reason is psychology. As I said earlier, people cannot imagine putting in money in Life Insurance and not getting anything in return. If you want the money, you die or you do not get anything. This wrongly seems to be lose-lose strategy for many people. Unfortunately, they are unaware what an insurance policy is all about.
4. Another reason is that a high premium paying Life insurance policy seems to do ‘forced investment’. You cannot just skip paying the premium some year because you need the money for something ‘urgent’ in life, without risking the life cover. In my illustration, the amount to be deposited in the PPF, is after all voluntary and a person can anytime decide to just pay the small term insurance premium and not put in the money in the PPF. This would lead to non – investment. But for strong willed investors, should this be a concern? I feel this psychology of forced investment is like enrolling your child for a ‘tuition class’ because he would not study on his own. So the class is just for the sake of forced study rather than any extra help.
   
   So, the next time you decide to go in for a Life Insurance product, do check out ‘Term Insurance’ if you want to have your cake and eat it too ;)
   

Money

Money is an amazing thing. Although understanding money and financial instruments is so fascinating and so rewarding, it still remains an area which is studied and implemented only by specialists. The common man either ignores it or the little more concerned one at least listens to the life insurance agent. And of course everybody goes to a CA at the end of the year! (Assuming you aren’t like one of the guy I met, who even after earning for 3 years never cared to file his income tax refund and got his PAN card only after the company deducted 10,000 bucks to comply with the GOI rules).

I heard one person say, “I don’t understand banking. I only know how to withdraw money from my ATM and that is all that I need”. Few people know or really want to know about the financial instruments they can take advantage of. Alas, these people are missing out on one of the most enriching and rewarding things in life.

I started my journey with formal financial training when I was 9. My grand father (GF) opened a savings account for me in the Bank of Baroda. It was thrilling for me to have a bank account of my own. By then I only had a vague idea what a bank was, but that act of my GF changed everything. At the time of festivals, birthday, examination results, I used to get small amounts of money from all my close relatives. Those 10, 50, 100 bucks you get when you reluctantly bend to take the blessings of your elders ;) My father had also got me an earthen savings pot at home. It was an earthen pot with a slit at the top to put in money, usually change money in terms of coins. And the ‘catch’ was the pot had to be broken to take the money out, so everybody including my parents themselves were restrained to take it out before it filled up. Once in a while, my parents used to put in the coins there and I anxiously waited for the pot to fill up and then do the honors ;) When the pot finally opened, it poured out such a sum of money actually unimaginable considering the amount which was put in at a time. Counting these coins by making separate ‘buildings’ of them of 25ps, 50ps, 1rs , 2rs made a good time pass and the best thing was I exchanged these ‘buildings’ with my grand mother to get crisp notes which I happily went and deposited in my bank account.

My GF had told me that yours is a ‘minor’ account with him as the guardian so both of us could put in the money but only he could withdraw it. That you will say was unfair but I had complete faith on my GF, even so more than my parents ;) Year after year I kept on increasing my bank balance until I realized when I was old enough that I was not left with anything at hand! So by the time I was in say 7th, I cheekily set aside some of it for my personal expenses and put the rest in my account. All this while, GF used to give me checks which I needed to deposit in his account. He made me do operations of Demand Drafts, Fixed deposits, his pension account and also updating of passbooks a whole lot of times. What this did to me is that I learned all simple banking transactions quite early in life. And now I know that I was eligible to withdraw money when I was 10!! My GF must have done this for all the good reasons ;)

Maturing from here to FDs, RDs, Insurance, MFs, Income Tax was all that more easy and interesting to me. I owe a lot to my GF and my parents who taught me the basics of money.

Learning to value, save and grow money is one of the most important things one should learn in life.

Three cheers to SRK

An overtly rude lady was the lucky one yesterday in the immensely popular KBC. Throughout the show, she behaved very aggressively, too overconfident and showing little respect to one of Bollywood's greatest superstar. One one occasion, when asked how many numbers are there with 9 in them from 1 to 100, she took an audience poll ! After the poll, when SRK suggested that she could have counted it herself, she said, "Maine audience ko ginane ka waqt diya tha, ki farak peenda hain!". You couldn't but LOL !!

SRK, started a practice in which he asked participants to give him a hug and leave when they wanted to quit with the sum of money they had already won and did not wanted to take any risk. When this lady wanted to quit, she said, "Mein koi risk nahi lena chahati, magar mujhe tumse yaha gale milane ka koi showk nahi, I Quit." SRK was obviously taken aback by such a rude statement, may be he felt intimidated too and his face showed it all.

I thought , that lady has got the better of shahrukh. He had been ruthlessly shown disrespect to him on national television. Stepping into the shoes of the Big B, questions were already being raised about SRK's capabilities. He had to do something to maintain audience appeal.

As the lady got up to receive her check of 12,50000/- SRK cheekily said, "Agar mein ye check apaki mataji to du to theek hain ?" on which the lady caught unawares, casually agreed and then came the strike of a master. "Kyoki vo mujhase jaroor gale milegi!". The crowd rose in laughter, cheer and applaud for the witty comment. After this, SRK came back to the lady and delivered the final blow, "Beti ne nahi diya to maa ne de diya, ki farak peenda hain ! ".

SRK did this in tremendous style, attitude and humour. It was surely difficult to come out of such a situation, but he did that with panache. He got his late life lessons of TV hosting but also received cheers from a million hearts ;)