Tax Efficient Monthly Income

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For regular returns, investors opt for fixed deposit, company deposit or small saving schemes. These suffer from disadvantages when it comes to taxation, falling interest rates & liquidity in case of some emergency.

Unfortunately in India we don't have a very prominent social security scheme, which takes care of you in your retirement days by paying a steady pension. Over your entire work life you ideally have to save money to make sure your standard of living does not drop post retirement when your active income stops. The biggest requirement when you retire is to generate a regular income from the corpus accumulated till retirement, enough to meet your monthly living expenses considering inflation.

For most investors the obvious choice is fixed deposit, company deposit or small saving schemes. This category of investment, however, has its own disadvantages when it comes to taxation, falling interest rates & liquidity in case of some emergency. The interest income is added to the individual's income and taxed at a marginal rate in which the individual falls, therefore eating into the already low returns even further and unable to protect the investor from the effects of inflation. I wrote about the same in more detail in my last article.

Is there a better alternative available to the investors where the product can be matched to the investors risk profile and generate regular, tax efficient cash flows for an extended period? Yes, systematic withdrawal plan, popularly known as SWPs, in mutual funds.

How does SWP work?

Firstly, SWP is not a type of fund but an option available in the fund. So depending on your risk profile a fund can be chosen, ideally in the growth option and apply the SWP to it. The table below explains the impact of a monthly SWP from the growth option of a debt fund.

Following are the assumptions taken for the calculations:

# Invested Capital of Rs 10,00,000

# Withdrawal of Rs 6,250 every month (Rs 75,000 per year) to match 7.5 percent returns from a traditional product

Assumptions
NAV Growth	Short Term Capital Gains Tax (STCG)	LTCG with Indexation	Inflation Rate
8.5%	30%	20%	6%

Date	Amount Invested/Withdrawn	Fund Value	Yearly Capital Gain	Annual Tax Rate
01/01/13	10,00,000	10,00,000
01/01/14	-75,000	10,07,121	967	1.29%
01/01/15	-75,000	10,14,848	2654	3.54%
01/01/16	-75,000	10,23,231	4208	5.61%
01/01/17	-75,000	10,32,327	1614	2.15%

 

If we observe the table carefully, the cumulative tax liability over the first three years result in an average 3.48 percent Short Term Capital Gains Tax (STCG), which is an effective 7.25 percent, post tax return v/s roughly 5.25 percent in a Fixed Deposit offering 7.5 percent return to the same investor in the 30 percent tax bracket. For the fourth year when the effect of indexation sets in, the investors tax liability would fall to 2.15 percent and hence an effective post tax return of roughly 7.34 percent.

Here the investor does not only save heavily on taxation v/s the traditional products but also his invested capital can grow over time like we see in the above table at Rs 10,32,326.60 at the end of the fourth year.

A note of caution here is that the actual outcome may differ from the one illustrated above, with the greatest risk being in the returns generated by the scheme, some would have exit load and hence it is extremely important to select the right scheme for the said goal and also moderating our expectations.

SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

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How to manage Volatility in Debt Mutual Funds

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The debt mutual fund space is creating a lot of confusion among investors, especially the new ones. After a series of cuts in bank deposit rates and small savings, many new investors have started investing in debt mutual fund schemes. However, the complexity of the space is challenging most investors.

Top mutual fund managers believe that these investors would fare well if they stick to an asset allocation plan in debt. The best strategy to avoid volatility in the debt space at this point is having an asset allocation

Many investors are familiar with the concept of asset allocation. However, most of them do not associate it with debt investments. So, is there a formula? There should be three baskets in which you put your debt investments: short/ultra-short term funds, credit opportunities funds and bond funds. But, at this time, when the interest rates are not headed anywhere, it is good to stay away from long-term bond funds

Debt investors should resist the temptation to take extra risk for extra returns. Debt investors who are looking for an alternative to their fixed deposits shouldn't get into riskier products like long-term gilt and try to take calls

20 per cent of the portfolio should always be in short-term funds. Invest 20-30 per cent in regular savings funds and rest in credit opportunities or dynamic bond funds

Short-term bond funds are a must have in your debt fund portfolio. If you are investing without the guidance of a planner, you might consider dynamic bond funds, but don't take calls on the interest rates. It can be risky

Investors to play it safe if they want to invest in long-term debt funds. Don't be out of duration funds. The exposure should be lower than what it was last year but you should be there. Also, a top-up of low-risk credit opportunities should also be there. Stay mostly in short-term funds

Planners like them believe that credit opportunities funds are a good bet for investors who can study the portfolio very well before investing. "Credit opportunities are risky but if you have the stomach and the knowledge, you should incorporate them in your portfolio. If an investor can look at the portfolio of the credit funds they should definitely invest in them. If you can study the quality of the papers or going through a seasoned planner, credit opportunities are a good bet

SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

How to Help Parents manage Money

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As parents age, it is important that as their children you help them organize their finances efficiently without attacking their independence

It is a matter of time before you may have to add managing your elderly parents' finances to your list of money responsibilities. It is not so much about your finding the time and energy to take on the additional responsibility, as it is about it being acceptable to your parents to accept that they need help and give up control over their finances.

Don't wait for a crisis to happen before you get involved to protect them from losing their hard-earned money to a scam or merely poor management. It is better to initiate the conversation as early as you can. The trick is to be able to do it without making them feel incompetent or treading on toes.

First steps

You cannot swoop in one day and take over your parent's finances. They are likely to see it as an attack on their independence and resist the idea. Approach the issue in stages. The first step is about earning their confidence that you are there to help when they need it. And from your point of view, it is about organizing their financial affairs so that it is easier to manage later when you have to take a more active role in it. This step is best taken when the parents are still capable of managing their finances and they are not as defensive as they would be later in life when they feel less in control.

Discuss your own money matters with them so that they see you as someone who is familiar with these matters, as well as build empathy and confidence in you. Retirement offers a good opportunity to get involved. Offer to help them consolidate and organize their financial affairs as they start on this new phase in life. Most people appreciate help with getting some order in their finances.

These include:

• consolidating bank accounts,
• listing investments and assets so that they (and you) know the accumulated wealth at that point,
• organizing all the documents related to the investments and assets,
• bringing together all the insurance policies and eliminating those that are no longer necessary, and
• putting all the documents related to retirement and
• retirement benefits together.

Once this is done, it is easy to update it as an annual exercise. It also gives you an opportunity to engage with them on a regular basis. This is the stage in life where you can also help them make a budget so that they can be sure of adequate funds to do the things they were looking forward to in retirement. It will give you an idea of their income and expenses and help them make better choices. Or, take small steps by volunteering to help them with a chore that they do not enjoy, such as filing taxes or organizing the paperwork or technology-related activities such as setting up online banking and payment facilities. Don't wait till they have significantly lost the ability to manage their affairs before you intervene. They may not be in a position to remember much of what they have and or have lost.

Estate planning is another aspect of old age that elderly parents have to consider. But it is again a very sensitive topic to broach. One way to do it is to discuss your own actions such as making a Will, and use that to encourage them to think about it too. At the very least, make sure that investments have nominations and joint holders to help make it easier to deal with them at a later point in time.

Once you have gained their confidence that you mean well and just want to work in their interest, make sure you keep the involvement going. Overtime they may themselves assign more responsibilities to your care. If there are things where you are not sure of your own expertise, it is a good thing to get outside help, obviously with your parents' approval. It may also give them the confidence that you intend to get them the best advice possible.

The signs

Watch out for signs that tell you may need to make a more serious and regular intervention in your parents' financial affairs. You may see reckless spending or overt caution with money, willingness to invest in dubious schemes on one hand while being excessively risk-averse on the other, excessive charitable giving, reluctance to take money-related decisions and balances building up in savings bank accounts, unpaid bills and forgetfulness, among others. Take these seriously as signals that cognitive abilities are deteriorating. If you have been able to establish a relationship of trust on money matters, it becomes easier for you to expand your role in their affairs. A power of attorney in your favour will make it easy for you to execute matters for them especially when both parents are not in a physical or mental situation to make their own decisions.

You are serving a fiduciary relationship when you take over the responsibility of your parent's finances. Remember, it is their money you are handling, not your own. All decisions should be made in their interest, and it important that they must see it as such too.

Keep a record of all your activities and decisions so that you can prove, if necessary, that you acted in their best interest. If there are siblings, then it should be a collaborative effort with everyone's knowledge, if not approval.

There are multiple skills you need to bring into play while dealing with your parents' finances in their old age. You should be tactful when trying to find information, focus on the positive aspects of the situation instead of disparaging their efforts, be patient in listening to their views and deal with their concerns in a respectful way. It will take a load off their mind and make it easier for you to manage the stressful situation.

SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com