INVEST and therefore SAVE TAX and not vice versa...

Confused about the heading of this article…

What is the biggest mistake people commit in the month of March???

The first financial agent to knock on your door in March gets to sell any damn financial product to you.

Any damn financial product with any amount of commission and expenses?

And all his hefty commission and his company’s expenses go from whose pocket?

Obviously from your pocket…

So why do you commit this hara-kiri? (Hara-kiri is a Japanese term for Suicide done in a violent fashion)

Because of the following reasons:

1. 1.     It is March and just like all previous years, you just could not manage to get hold of a good Financial Advisor who can help plan your tax saving investments (What, do you really think you do not need professional help to decide where to Invest that 1 lac every year?)
2. 2.  Your CA had strictly instructed you last time to invest in some or the other financial product under sec 80C of The Income Tax Act if you want to save on taxes
3. 3.     Since you have not planned anything and its fag end of March, the financial or commission agent who has come knocking at the door has been god sent. Or that’s what you think…

So, just like all previous years, you end up buying an unwanted, undesirable, expensive financial product not because you wanted to buy the same but because it is March and the Income Tax Act requires you to invest up to Rs. 1 lac each year to save tax….

And if it happens to be an Insurance product (which would be the case more often than not), then you have promised commitments for not only this year but for the next 5, 10 or even 15 years…

So you buy an insurance product and if you are very unlucky, the commission agent’s favourite insurance product, a Unit Linked Insurance Plan (ULIP) to save tax this year but knowingly or unknowingly you have bought an insurance plan on which you will have to pay hefty Insurance premium for the next 5 to 10 or even 15 years. And you are not even sure whether you need this product in the first place….

So what is the solution…?

Can I manage to teach you about the various Investment avenues available to us under Sec 80C of the Income Tax Act 1961 and help you to pick the right product for yourself?

Well, if you promise me that you will read this article properly and the links provided, I can at least attempt to make you understand the pros and cons of various tax saving avenues…

Well let us start then…

To begin with, since I have already written a lot on Tax Saving Investment previously, and since till date not much has changed in the Income Tax laws pertaining to Sec 80C, I would insist that you go through my previous articles on this subject by clicking on the links below:

Read the following 3 articles on my BLOG and return here:

No.	Article Heading	Link to the article
1	Death and Taxes	http://niravpanchmatia.blogspot.in/2010/09/death-taxes.html
2	4 Strong Reasons to Invest in Tax Saving Mutual Funds	http://niravpanchmatia.blogspot.in/2011/03/3-strong-reasons-to-invest-in-tax.html
3	Tax Saving Mutual Funds: Grab them with both hands	http://niravpanchmatia.blogspot.in/2010/09/tax-saving-mutual-funds-or-elss.html

The first article, titled “Death & Taxes” helps you to break various Tax Planning Myths and introduces you to various Investing options available u/s 80C:

Tax planning myths

·                     I invest only to save tax

·                     I buy Insurance only because I need to save taxes

·                     PPF / NSC are still the best tax planning instruments available

·                     Unit Linked Insurance Plan's (ULIPs) are good for tax planning & give great returns too

·                     Rs. 100,000 is the maximum I can invest to save taxes

·                     Repayment of loans do not qualify for any tax deduction

·                     Tax planning needs to be done only at the end of the year around Jan-March

The right approach Tax planning investments have to be planned in a way that it helps you create WEALTH and in the process help you reduce your tax liability. Further, your risk taking capacity & asset allocation should decide what tax planning instrument you choose. Last minute rush to buy insurance or investing in PPF disregarding your actual needs is not the right approach towards tax planning. A good financial advisor can help you decide on the right tax planning instruments for you based on your financial goals.

The second article titled “4 Strong Reasons to Invest in Tax Saving Mutual Funds” introduces you to the merits of investing in Tax Saving Mutual Funds or Equity Linked Savings Scheme (ELSS) as they are commonly known, which according to me, is one of the best tax saving investment available to us u/s 80C of The Income Tax Act…

Why, because it has following advantages...

Merits of Tax Saving Mutual Funds or Equity Linked Savings Scheme (ELSS):

1. Tax Saving Mutual Funds, also known as ELSS, have minimum lock-in period of 3 years compared to any other tax saving avenue; PPF has 6 yrs, NSC has 5 years, ULIP has 5 years, Bank FD has 5 years etc…
2. It is one of the few marked-linked (investment in stock market) Investment avenue available under sec 80C and much better than the other market-linked product like ULIP
3. You only have to Invest once in this product and there is no binding on you to continue investing for a few years in the future which is the case with practically all other Sec 80C products; what a relief! It works like a Single Premium insurance plan…
4. It has amongst the best returns as returns are linked to market and over a longer time frame, Tax Saving Mutual Funds have usually given double digit returns, post tax, post expenses…
5. Also, after the abolition of entry load on Mutual Funds, weft Sep 1, 2009, the commission on this product is zero and the expenses ratio is also minimal in the range of 1 to 2% per annum…
6. Most important, the returns from Tax Saving Products are tax free….yes, the Long Term Capital Gains or ELSS is tax free as per the current law…

What more do you want from a Tax Saving Investment avenue?

No long term commitment, onetime payment only, zero commissions and minimal expenses, minimum lock-in period of 3 years and tax free double digit returns…

Well, you are a very greedy person, if you are demanding something more from a tax saving product then what an ELSS is already offering you…

Now, it is known that in the coming budget, The Income Tax Act 1961, in all probabilities will get replaced with the Direct Tax Code… if that happens, the tax planning game will change completely.

However, that will have effect next financial year (FY 2012-13) and will not have any impact whatsoever this financial year or your tax planning strategy for this year (FY 2011-12). Also, it is likely that this might be the last year for Tax Saving Mutual Funds or ELSS. In all likelihood, ELSS will cease to exist under the DTC regime. (Although I wish this should not happen). If that is the case, this is the last year when you can invest in this wonderful Investment & tax saving avenue…

So please grab Tax Saving Mutual Funds or ELSS with both hands and after Home Loan Principal amount and Term Insurance premier and PPF/EPF/GPF, every penny left u/s 80C out of Rs. 1 lac should go into ELSS or Tax Saving Mutual Funds…

Yes, one caveat here, there are more than 35 Tax Saving Mutual Funds or ELSS schemes out there in the market. And you should be investing in the top 1 or 2 schemes. Which are these?

Well, you have 2 options:

1. Consult your Financial Advisor or Financial Planner (not the commission agent, I hope you know the difference by now) OR
2. Read my BLOG regularly…

Plan your taxes wisely…

I am closing this article with Chanakya’s quote on Taxation…

According to Chanakya, “a King should collect Tax like a bee collects nectar from flower, without harming the flower and collecting only that much nectar from a flower as is necessary and without harming the flower so that it can come again to collect the nectar from the flower next season”…

Wise words from one of the wisest political minds India has seen…Hope our beloved pranab da is listening and has read Chanakya’s Arthashastra…

Subbu liquid fund ke bare main nahin jaanta hai

You must have seen or read about this wonderful advertisement appearing since december on TV as well as print media...

“SUBBU SAB JAANTA HAIN”....

It is an advertisement by Kotak Mahindra Bank intending to attract money in it's savings bank account on which it recently increased the interest rates from 4% per annum to 6% per annum. And their pitch is that do not see it a mere 2% increase but look at it as 50% increase over & above what you were getting on your savings bank account earlier...(a 50% increase from earlier 4% per annum to now 6% per annum)

I want you to see this advertisement first before we proceed with this article...

http://www.moneycontrol.com/news-topic/kotak-50/video-kotak-mahindra-bank---subbu-sab-jaanta-hai---laughmp4_U2cSYfnZyDE.html

I don’t know about you but I kind of like this guy SUBBU….

What a wonderful way to explain the concept….

Only caveat is that SUBBU needs to take some financial literacy lessons from Financial Planners like me so that he becomes wiser… let me explain…

Now advertising on TV and other print media is not cheap....

A one minute clip on TV and half page advertisement in leading biz dailies like The Economic Times and Business Standard by Kotak Bank to advertise the simplest of all products, the Savings Bank Account seems a bit tricky…

Somewhere, the top management at that bank believes that 6%pa is an attractive rate of return good enough to lure the depositors to park their idle cash with them rather then your existing bank, which in all probabilities is still giving you a mere 4% per annum on your Savings Bank account ....

Now, if Kotak and some other banks believe that offering a 5 or a 6 % on it's savings bank a/c is good enough to attract depositors money, so much so that it worth spending lacs on TV & Print media…then there might be some truth behind it…and why not, if I am getting 2% extra, I will go there…after all, as SUBBU says, look at it as 50% more…

Now, let us visit the BASICS first…

What is a “Savings bank a/c” and why do we keep money there...

Well, you and I keep that portion of our money in the saving bank a/c that we have as a surplus, that we have not spent but which we think we might need in a foreseeable future...but we are not sure when we might need that money…

So we keep our idle money in a savings bank account pending further use... Why do we not invest this money...

Because we might need it any time...therefore it's better to keep it idle in a savings bank account then to invest it somewhere where it might become difficult to withdraw it when the need arises...

So , as far as our savings bank money is considered, we give preference to LIQUIDITY over RETURNS...

And by the grace of God, the returns on Savings bank account have also become attractive now... Alas, one good news that 2011 had to throw us...

The Reserve Bank of India (RBI) announced a deregulation of the savings bank deposit interest rate in its second quarter monetary policy review some time back. This means banks are now free to determine the interest rates on their savings accounts. Before the deregulation, banks were supposed to give a flat 4% per annum on savings accounts.

I expect savings accounts interest rates to go up in short term due to competition among banks to acquire these low-cost deposits. The interest rates are expected to be higher for deposits of more than Rs 1 lakh. But this will hold true as long as the interest rates in the economy are high…Once RBI starts reducing the interest rates, this golden period might also come to an end…

So since last few months of 2011, you would have come across advertisement by some banks highlighting the increased savings bank account interest that they would have begun offering to their customers compared to  the 4% per annum that other banks are offering...

After the recent deregulation of savings bank account interest rates by RBI, at least three banks have hiked their interest rates till date.

Yes Bank was the first one to raise the interest rates on savings account with all balances to 6%, and this was followed by Indusind and Kotak bank announcing interest rates hikes on their savings accounts too. Others might follow too…

To start with, these are the three/four banks that have announced a hike in their interest rates.

S.No.	Name	Under Rs. 1 lakh	Over Rs. 1 lakh
1	Yes Bank*	6.0%	6.0%
2	Indusind Bank	5.5%	6.0%
3	Kotak Mahindra Bank	5.5%	6.0%
4	Karnataka Bank	5.0%	5.0%

Source: Internet; data as on Oct 31^st, 2011

Now why are these banks offering more to it's savings bank customers and also spending lacs of rupees advertising the same... Is it not a loose- lose situation for them...

First increasing their cost of fund by offering 50% more and then heavy spending on advertisement,

And the answer is No... Because money that we keep in our savings bank account is the cheapest source of funds for any bank... Even at 6% it is by far one of the cheapest ...

So they are not doing a favour to you and me by offering 2 % more but they are actually getting a very cheap source of money from us...But there is nothing wrong on their part either....this is how a bank is run..

And SUBBU s right when he says that do not look at it as 2% extra but look at it as 50% more...(6% is 50% more than 4% that was earlier being offered by all banks to its savings bank customers)

But there is one thing that SUBBU is either not aware of or that he is hiding from us...

(in fact, since I have developed a liking for Subbu, I would like to believe that SUBBU is plain ignorant but he is honest)

Ever thought where do banks park their surplus funds... banks, as per banking regulations are not allowed to lend all their money to us… So if banks are not allowed to lend all their money and as a rule if banks are supposed to have LIQUIDITY at all times, where do banks PARK (as against INVEST) their surplus or idle funds....

·         Because like you and me, LIQUIDITY is of primary importance for a bank too...

·         And a Bank does not have access to a savings bank type product like you and me...

·         So a  bank would like to PARK it's money in a product where it can withdraw money at will at very short notice and yet earn more than the 5 or 6 odd percentage that it is offering to it's savings bank customers...

Among the 2 to 3 options available to a bank to park it's short term money,Liquid funds offered by Mutual Funds is one…

Now, just think for 2 minutes....

A bank needs to fulfil 3 criteria before it can park it's short term money:

1.      The investment avenue should b safe, very safe, as a bank cannot afford to take risks with its short term money

2.      The liquidity should be good ie; a bank can withdraw money at a day or 2 days notice

3.      The bank should earn returns good enough to compensate for the interest rate it is offering its customers on its savings bank or Equivalent products...how will it make money otherwise…

So, if banks are using Liquid funds to park their money, rest assured it fulfils all of the above mentioned criteria of SAFETY, LIQUIDITY and attractive RETURNs as far as short term funds are concerned...

Now, can YOU & I invest in LIQUID funds, banks favourite products for parking it's short term money....

The answer is YES....

Do we get the similar returns as to what a bank earns from liquid funds?

The answer is YES...

Then why are we, the lay people,  not using LIQUID FUNDs as a safe, sound instrument to PARK (and not INVEST) our short term funds and leaving it idle in a savings bank account for months together earning a meagre 6% per annum, 5% per annum or in most cases 4% per annum? (and mind you this was 3.50% pa earlier)…

The only answer that comes to my mind is sheer IGNORANCE...

Either you have not heard about this wonderful savings product or you have heard about it but not considered the proposition seriously...

I do not blame you for the same… Since time immemorial we have been using a SAVINGS BANK A/C as the only and only place to keep our idle, temporary , short term money… so what if it was earning 3.5% per annum earlier and is now earning 4 to 6% per annum…

At least our money is safe and you might need the money any time…

After all, we are not supposed to invest all our surpluses…we need to have spare cash with us for emergencies or unforeseen events…

But if banks (where we so comfortably park our excess cash) think LIQUID Funds are safe and liquid and remunerative enough then it would be sheer ignorance on our part not to consider this wonderful instrument that offers avenues for parking our short-term, temporary funds…

Just imagine, an instrument where you can park your money for short term (for a time period as short as a couple of days), that offers liquidity so that we can withdraw money at will (at 2 working days notice ) and yet it earns an annualized return in the range of 7 to 8% per annum...practically risk-free…(remember, banks will not park their money where they are not safe)

Yes, well chosen liquid plus funds are currently offering anywhere between 7 .50% to 8.00% per annum, risk-free &

 YES again, you can withdraw this money on 2 working days notice…&

YES again, your money is as safe as it was in a bank account provided you choose your fund carefully or take professional advice…&

YES again, you can withdraw your money, that you had parked in Liquid Funds,

 either at one go or in multiple instalments, as you please…

What a wonderful proposition indeed…

Why keep even small amount of money idle in a savings bank account earning a 4%, 5% or in a few rare cases 6 % per annum return when today, we are getting upward of 8% per annum annualised returns on LIQUID FUNDS offered by Mutual Funds...virtually risk-free

Now SUBBU will agree and if he is honest enough, which I believe he is, he will admit that if a “Liquid fund” is offering 7.50% per annum to 8 % per annum currently, and at the same time not compromising either on the SAFETY of your funds or on LIQUIDITY, it is a very very attractive avenue for parking our idle funds that we might need anytime…

After all, a good LIQUID Fund is offering a COOL 25% more than the best savings bank rate being offered by any major bank in India (7.50% of liquid fund is 25% more than 6%, the highest  interest rate being offered by any bank on savings a/c) and a cooler 100% more than what most banks are currently offering (8.00% of liquid fund is 100% more than 4%, the  interest rate being offered by most banks on savings a/c)

Now have a look at the graphic below...

 Last 1 year actual returns from some Liquid+ Funds

No.	1 year return (% pa)*	Expense Ratio (%)	Returns post expenses  (% pa)
1	9.62%	0.37%	9.25%
2	9.40%	0.25%	9.15%
3	9.34%	0.35%	8.99%
4	9.14%	0.35%	8.79%
5	9.29%	0.63%	8.66%

Now, the above table shows post expenses actual returns realised from some of the Liquid Plus Funds over the past year….

As you can see, the actual returns earned by some liquid plus fund over the past year are well above 8.50% per annum…but the reason I am saying that one can expect 7.50% to 8.0% pa going forward is because RBI is expected to decrease the interest rates going forward…but even in that scenario, it is a very attractive proposition…

And mind you, it's the likes of kotak, Indusind & Yes bank that are offering 5 to 6% per annum on savings account and that too now when the interest rates are at their peak...these banks are bound to decrease the interest rates on savings bank a couple of months later when RBI starts decreasing them…

Also, Most of the banks have not yet increased the interest that they are offering on Savings bank account...they continue to offer4% per annum on Savings bank accounts…

So SUBBU, an 8% per annum on Liquid Funds, where your very bank is parking our money, is a COOL 100% more than 4% being offered by most banks & a cool 33.33% more than what your bank is offering us on our money…

Why don’t you consider shifting your money from your bank a/c to Liquid Funds…

I shall await your reply SUBBU…and shall also look forward to your next pitch…

What did you say, you do not have access to a Financial Planners services…

Oh dear, do not worry, I am always there for you SUBBU… call me any time in case of any query that you might have regarding Savings & Investments or for that matter any financial product…

No, do not worry; my Advisory Fees are very nominal, they will be very light on your pocket…

No SUBBU, I will not tell anyone that you take advice from me before giving it to others…

…after all, I am your fan too…

Have a nice day SUBBU….

                     

Thought for the day

Don’t SAVE what is left after spending,

SPEND what is left after saving…