Gold ETFs are exchange traded funds that passively track the performance of Gold Bullion. These funds buy gold with investor's money (on the behalf of investors) and convert it into units. The units of Gold ETFs can be bought or sold on the stock exchange, just like shares.
For this the investor needs a demat account. The daily net asset value (NAV) of gold ETFs is decided by the price of gold. Retail investors can only exchange their units for cash and not physical gold. This provision is only available to large investors who can get the units of the Gold ETF redeemed directly from the AMC and get the equivalent amount of physical gold.
But the minimum number of units that the AMC would accept for this redemption has to be in multiples of the Creation Unit. This creation unit is different for different AMCs, varying from 100 units to 1000 units. However, such redemptions could involve complicated tax implications.
Tuesday, January 20, 2009
Thursday, January 15, 2009
Is gold as an Investment?
Gold has a lot of emotional value. But as an investment, it does not have much value. Let me make use of historical data to prove this to you,
In 1980 the cost of per gram of gold is 167.32 and in 2008 the cost of per gram gold is 1137.46. Annualised growth is 7.08%, which is very low and his could be erosioned by the inflation
So is it wrong to put money in Gold? Not exactly...
Gold has its uses, if kept as pure coins and bars:
It has high liquidity. It might take you a maximum of half hour to convert it to cash.
It is easy to procure (again half an hour) and protect (a bank locker will do) compared to other commodities.
Let investment grade (pure gold coins and bars) gold not be more than 5-10 per cent of your financial investment portfolio, as a cushion to manage inflation and emergencies. Count gold jewels as expenses, not as savings or investments.
Suppose the present value of 1000 invested in 1980 in gold (167 rupees per gram) and in sensex (110points). Now the value invested in gold would be 6811 (1137 rupees per gram) and in sensex would be 1,42,222 (15644 points)
Treat gold as a portfolio component to match inflation. It will serve you at its best that way. And if you truly love your children/friend/spouse, do not buy gold coins and jewellery; instead, buy them an index fund for the same value.
In 1980 the cost of per gram of gold is 167.32 and in 2008 the cost of per gram gold is 1137.46. Annualised growth is 7.08%, which is very low and his could be erosioned by the inflation
So is it wrong to put money in Gold? Not exactly...
Gold has its uses, if kept as pure coins and bars:
It has high liquidity. It might take you a maximum of half hour to convert it to cash.
It is easy to procure (again half an hour) and protect (a bank locker will do) compared to other commodities.
Let investment grade (pure gold coins and bars) gold not be more than 5-10 per cent of your financial investment portfolio, as a cushion to manage inflation and emergencies. Count gold jewels as expenses, not as savings or investments.
Suppose the present value of 1000 invested in 1980 in gold (167 rupees per gram) and in sensex (110points). Now the value invested in gold would be 6811 (1137 rupees per gram) and in sensex would be 1,42,222 (15644 points)
Treat gold as a portfolio component to match inflation. It will serve you at its best that way. And if you truly love your children/friend/spouse, do not buy gold coins and jewellery; instead, buy them an index fund for the same value.
Sunday, January 4, 2009
ELSS - An Overview
An ELSS is a diversified equity fund that comes with a 3-year lock-in period and offers tax benefits under Section 80C of the Income Tax Act.
Before selecting an ELSS, ensure that your investment takes into account your risk profile and the overall asset allocation of your portfolio. Remember that the higher returns from ELSS come with higher risk as they are market-linked.
CHOOSING THE FUND
The biggest advantage of an ELSS is that it allows investors to choose products according to their risk appetite. The suitability of a fund depends upon the compatibility of the fund’s strategy with the risk appetite of the investor.
The focus of the fund’s portfolio to different segments of the market, such as large-, mid- and small-cap, gives an indication of the volatility that an investor can expect in a fund. Moreover, the 3-year lock-in reduces the risk in equity investing to a great extent and allows the fund manager to choose stocks with long-term potential without liquidity concerns.
Less Aggressive Funds
SBI Magnum Taxgain
The top performing fund in the 3- and 5-year time frame, SBI Magnum Taxgain retains the flexibility to move into whichever market segment it sees opportunities in. Its mid- and small-cap focus in 2003, 2004 and 2005 reaped huge returns. The fund’s 3-year and 5-year returns of 59.93 per cent and 69.43 per cent, respectively, make it one of the top performers in this space. Since the mid-2006 market crash, it has slowly shifted focus to large-caps. At Rs 3,782 crore, it is one of the largest funds in the category and may make it difficult for the fund to take substantial exposure in the mid and small cap segments of the market. The past performance of the fund and its ability to move into various segments of the market makes it an attractive proposition for investors willing to put up with a degree of uncertainty for higher returns.
Sundaram BNP Paribas TaxSaver
A top performing fund in the category with returns of more than 45 per cent over a 3-year period, this fund again has the flexibility to invest across market segments and has done so successfully in the past.
The fund has always maintained a well-diversified portfolio with 55-60 stocks. So, even if one, or few stocks underperform, the overall performance won’t be much at risk. The fund has reduced its large-cap exposure in the last quarter of 2007 unlike most funds that increased holdings in large-cap stocks during the period. As a fund that can shift across segments, the ability of the fund manager to identify trends early enough would be crucial in the fund’s performance and is suitable for investors willing to take this risk.
HDFC Tax Saver
This is another fund for investors, who would prefer a large-cap orientation in their investment portfolio. Though the fund had benefitted by moving into the mid- and small-cap space in 2003 and 2004, it has focused on large-cap stocks in the last two years. The fund is among the top funds in the 3- and 5-year time frames though it fell in the 1-year stakes.
The 1-year rolling return of the fund at 40.55 per cent still keeps it among the top schemes with more than three years of performance track record.
Franklin India Tax Shield. This scheme is suitable for investors who like steady returns with no surprises. Its biggest advantage has been its ability to negotiate market downturns. The fund has given negative returns in only four of the 20 quarters. It finds a place on this list on the back of its consistent large-cap focus in its portfolio. The returns from the fund at 29.17 per cent, 38.65 per cent and 45.95 per cent over one, three and five years, respectively, have been steady rather than spectacular. Investors willing to trade return for the comfort and lower risk of a large-cap portfolio can consider this scheme.
AGGRESSIVE FUNDS
Principal Tax Savings Fund
This is another candidate for investors willing to take greater exposure to the mid- and small-cap segments. The fund has been among the top five schemes over one, three and five years and has consistently beaten the benchmark and the category average. The fund is suitable for investors who are willing to take a higher exposure to the more volatile small-cap segment since the fund has a substantial exposure to it. The 3-year lock-in gives the fund manager the leeway to take such calls. Nevertheless, the fund is not for the faint-hearted.
Birla Sun Life Tax Relief ‘96
This is another multi-cap fund that has been a steady performer. It has consistently outperformed both the benchmark and the category average. It took a large-cap tilt in its portfolio after the mid-2006 market crash. The fund has taken concentrated exposure to the financial services segment and has benefited from it as is evident from its 1-year return--41.66 per cent. The fund is suitable for investors willing to take greater risk associated with a higher degree of concentration both in sector and stocks.
Before selecting an ELSS, ensure that your investment takes into account your risk profile and the overall asset allocation of your portfolio. Remember that the higher returns from ELSS come with higher risk as they are market-linked.
CHOOSING THE FUND
The biggest advantage of an ELSS is that it allows investors to choose products according to their risk appetite. The suitability of a fund depends upon the compatibility of the fund’s strategy with the risk appetite of the investor.
The focus of the fund’s portfolio to different segments of the market, such as large-, mid- and small-cap, gives an indication of the volatility that an investor can expect in a fund. Moreover, the 3-year lock-in reduces the risk in equity investing to a great extent and allows the fund manager to choose stocks with long-term potential without liquidity concerns.
Less Aggressive Funds
SBI Magnum Taxgain
The top performing fund in the 3- and 5-year time frame, SBI Magnum Taxgain retains the flexibility to move into whichever market segment it sees opportunities in. Its mid- and small-cap focus in 2003, 2004 and 2005 reaped huge returns. The fund’s 3-year and 5-year returns of 59.93 per cent and 69.43 per cent, respectively, make it one of the top performers in this space. Since the mid-2006 market crash, it has slowly shifted focus to large-caps. At Rs 3,782 crore, it is one of the largest funds in the category and may make it difficult for the fund to take substantial exposure in the mid and small cap segments of the market. The past performance of the fund and its ability to move into various segments of the market makes it an attractive proposition for investors willing to put up with a degree of uncertainty for higher returns.
Sundaram BNP Paribas TaxSaver
A top performing fund in the category with returns of more than 45 per cent over a 3-year period, this fund again has the flexibility to invest across market segments and has done so successfully in the past.
The fund has always maintained a well-diversified portfolio with 55-60 stocks. So, even if one, or few stocks underperform, the overall performance won’t be much at risk. The fund has reduced its large-cap exposure in the last quarter of 2007 unlike most funds that increased holdings in large-cap stocks during the period. As a fund that can shift across segments, the ability of the fund manager to identify trends early enough would be crucial in the fund’s performance and is suitable for investors willing to take this risk.
HDFC Tax Saver
This is another fund for investors, who would prefer a large-cap orientation in their investment portfolio. Though the fund had benefitted by moving into the mid- and small-cap space in 2003 and 2004, it has focused on large-cap stocks in the last two years. The fund is among the top funds in the 3- and 5-year time frames though it fell in the 1-year stakes.
The 1-year rolling return of the fund at 40.55 per cent still keeps it among the top schemes with more than three years of performance track record.
Franklin India Tax Shield. This scheme is suitable for investors who like steady returns with no surprises. Its biggest advantage has been its ability to negotiate market downturns. The fund has given negative returns in only four of the 20 quarters. It finds a place on this list on the back of its consistent large-cap focus in its portfolio. The returns from the fund at 29.17 per cent, 38.65 per cent and 45.95 per cent over one, three and five years, respectively, have been steady rather than spectacular. Investors willing to trade return for the comfort and lower risk of a large-cap portfolio can consider this scheme.
AGGRESSIVE FUNDS
Principal Tax Savings Fund
This is another candidate for investors willing to take greater exposure to the mid- and small-cap segments. The fund has been among the top five schemes over one, three and five years and has consistently beaten the benchmark and the category average. The fund is suitable for investors who are willing to take a higher exposure to the more volatile small-cap segment since the fund has a substantial exposure to it. The 3-year lock-in gives the fund manager the leeway to take such calls. Nevertheless, the fund is not for the faint-hearted.
Birla Sun Life Tax Relief ‘96
This is another multi-cap fund that has been a steady performer. It has consistently outperformed both the benchmark and the category average. It took a large-cap tilt in its portfolio after the mid-2006 market crash. The fund has taken concentrated exposure to the financial services segment and has benefited from it as is evident from its 1-year return--41.66 per cent. The fund is suitable for investors willing to take greater risk associated with a higher degree of concentration both in sector and stocks.
PPF Account an Over view
The Public Provident Fund (PPF) is probably the most popular of all the tax-saving schemes. Under Section 88 of the Income Tax Act, you can invest up to Rs 70,000 of your income to claim a rebate of upto 30 per cent depending upon the rate of rebate applicable in your case. The PPF account may be opened at any branch of the State Bank of India (SBI) and its subsidiaries, a few branches of the other nationalised banks, and all head post offices. The minimum deposit is Rs 500.
You need a minimum investment of Rs 500 to keep a PPF account alive, and the maximum you could deposit in a financial year is Rs 70,000
Just about anyone can open a PPF account. You can open an account in your own name or in the name of a minor if you are the guardian. You can even open an account on behalf of a Hindu Undivided Family (HUF) using its income. The account can be opened even if you subscribe to a General Provident Fund or the Employees’ Provident Fund.
However, be warned: you can have only one PPF account in your name. If at any point it is detected that you have two accounts, the second account that you have opened will be closed, and you will be refunded only the principal, not the interest. Again, two adults cannot open a joint account. The account will have to be opened in only one person’s name; of course, the person who opens an account is free to appoint nominees.
A PPF account can be opened with a minimum deposit of Rs 500 at any branch of the State Bank of India or branches of its associated banks like the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of a few nationalised like the Bank of India, Central Bank of India and Bank of Baroda, and at any head post office or general post office. After opening an account you get a pass book, which will be used as a record for all your deposits, interest accruals, withdrawals and loans.
For how long can you maintain your PPF account?
On paper, your PPF account must be maintained for a 15-year period. However, the tenure actually works out to 16 years, since you are allowed to make your last contribution in the 16th financial year. Even if you make a deposit on the last day of your account (that is, the day it is due to mature), you get a tax rebate, even though no interest accrues on the deposit.
Can you continue your account after the 15-year period?
Sure, but only in a block of five years at a time with no upper limit.
Will you have to continue investing after extending your account?
No. If you merely retain your balance, it will earn 8 per cent interest per annum till withdrawal.
What if you want to withdraw money during the extension period?
After the initial 15-year period, if you choose to extend the account and just maintain the balance, you can withdraw the entire sum in a lumpsum or in instalments. If you withdraw the money in instalments, you cannot make more than one withdrawal a year.
If you continue to deposit money in your account, you can withdraw up to 60 per cent of the balance to your credit at the beginning of each extended period (block of five years). The money can be withdrawn in a lumpsum. If you choose to withdraw it in instalments, you cannot make more than one withdrawal a year.
Do you have to notify the bank about the extension?
Yes. The Central Board of Direct Taxes (CBDT) has stipulated that after 15 years, the tax benefits under Section 88 will not accrue unless you choose to continue the account and deposit money in it.
How much money do you have to put into your PPF account?
Any amount not less than Rs 500 and not exceeding Rs 70,000 in a financial year payable in lumpsum or instalments in multiples of Rs 5. Not more than 12 instalments can be deposited in a year. However, unlike in a bank recurring deposit, you don’t need to deposit the same amount every month.
How much interest do you earn?
The interest rate is fixed periodically by the government. For now, it is 8 per cent compounded annually. The interest for a month is calculated on the lowest balance between the close of the fifth day and the end of the month, and is credited to the account at the end of each year. So, to get the maximum returns, make deposits in the first few days of the month.
How do you withdraw money from your account?
The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account. Of course, you can choose to continue the account beyond 15 years, but you will have to do so in blocks of five years.
Before maturity, you can make withdrawals within limits: from the seventh financial year, you can make one withdrawal every year of an amount not exceeding 50 per cent of the balance at the end of the fourth year or the year immediately preceding the withdrawal, whichever is lower. If, however, you have taken a loan, the amount you are eligible to withdraw will be reduced by the amount of loan you have taken.
If you choose to continue the account after 15 years and make deposits, you can withdraw up to 60 per cent of the balance to your credit at the beginning of each extended period (block of five years). The money can be withdrawn in a lumpsum. If you choose to withdraw it in instalments, you cannot make more than one withdrawal a year.
You can even retain the balance after 15 years without depositing any more money and without intimating the bank. The balance to your credit continues to earn interest till such time as you withdraw it. Of course, you can continue to make one withdrawal a year till you withdraw the entire amount.
Can you take a loan?
Yes, even before becoming eligible for a withdrawal in the seventh year, you can take a loan from the third year onwards. However, you cannot take a loan after you become eligible for the withdrawal facility. The loan amount should not exceed 25 per cent of the amount to your credit at the end of the financial year immediately proceeding the year in which you apply for the loan.
The loan is repayable in a maximum of 36 instalments at an interest rate of 1 per cent per annum. If you are unable to repay the entire loan in 36 months, you will have to pay interest on the deficit. Of course, you will not be eligible for a fresh loan until you repay the first one with interest.
Tax benefits, nominations, minors...
Benefits. Deposits (even those in the name of your spouse or minor children) are eligible for a tax rebate of upto 30 per cent under Section 88 of the Income Tax Act. What’s more, interest accruals and withdrawals are exempt from income tax, and the balance in your account is exempt from wealth tax. Further, the balance in your PPF account cannot be attached by the courts in the event of any debt liability.
Nomination. You can appoint one or more nominees to receive the money in your account in the event of your death. If you were to die before your account matures, your nominees get the money in your account after the initial lock-in period of 15 years. If you are in a transferable job, your can transfer your account to any scheduled bank or post office in the country.
Retirement planning. A PPF account is the most effective tax-saving vehicle for those sunset years which could give you amazing returns, particularly when you consider that there's at no risk at all! When used as an instrument for retirement planning, a PPF account can provide a really big corpus at the time of retirement.
You need a minimum investment of Rs 500 to keep a PPF account alive, and the maximum you could deposit in a financial year is Rs 70,000
Just about anyone can open a PPF account. You can open an account in your own name or in the name of a minor if you are the guardian. You can even open an account on behalf of a Hindu Undivided Family (HUF) using its income. The account can be opened even if you subscribe to a General Provident Fund or the Employees’ Provident Fund.
However, be warned: you can have only one PPF account in your name. If at any point it is detected that you have two accounts, the second account that you have opened will be closed, and you will be refunded only the principal, not the interest. Again, two adults cannot open a joint account. The account will have to be opened in only one person’s name; of course, the person who opens an account is free to appoint nominees.
A PPF account can be opened with a minimum deposit of Rs 500 at any branch of the State Bank of India or branches of its associated banks like the State Bank of Mysore or Hyderabad. The account can also be opened at the branches of a few nationalised like the Bank of India, Central Bank of India and Bank of Baroda, and at any head post office or general post office. After opening an account you get a pass book, which will be used as a record for all your deposits, interest accruals, withdrawals and loans.
For how long can you maintain your PPF account?
On paper, your PPF account must be maintained for a 15-year period. However, the tenure actually works out to 16 years, since you are allowed to make your last contribution in the 16th financial year. Even if you make a deposit on the last day of your account (that is, the day it is due to mature), you get a tax rebate, even though no interest accrues on the deposit.
Can you continue your account after the 15-year period?
Sure, but only in a block of five years at a time with no upper limit.
Will you have to continue investing after extending your account?
No. If you merely retain your balance, it will earn 8 per cent interest per annum till withdrawal.
What if you want to withdraw money during the extension period?
After the initial 15-year period, if you choose to extend the account and just maintain the balance, you can withdraw the entire sum in a lumpsum or in instalments. If you withdraw the money in instalments, you cannot make more than one withdrawal a year.
If you continue to deposit money in your account, you can withdraw up to 60 per cent of the balance to your credit at the beginning of each extended period (block of five years). The money can be withdrawn in a lumpsum. If you choose to withdraw it in instalments, you cannot make more than one withdrawal a year.
Do you have to notify the bank about the extension?
Yes. The Central Board of Direct Taxes (CBDT) has stipulated that after 15 years, the tax benefits under Section 88 will not accrue unless you choose to continue the account and deposit money in it.
How much money do you have to put into your PPF account?
Any amount not less than Rs 500 and not exceeding Rs 70,000 in a financial year payable in lumpsum or instalments in multiples of Rs 5. Not more than 12 instalments can be deposited in a year. However, unlike in a bank recurring deposit, you don’t need to deposit the same amount every month.
How much interest do you earn?
The interest rate is fixed periodically by the government. For now, it is 8 per cent compounded annually. The interest for a month is calculated on the lowest balance between the close of the fifth day and the end of the month, and is credited to the account at the end of each year. So, to get the maximum returns, make deposits in the first few days of the month.
How do you withdraw money from your account?
The entire balance can be withdrawn on maturity, that is, after 15 years of the close of the financial year in which you opened the account. Of course, you can choose to continue the account beyond 15 years, but you will have to do so in blocks of five years.
Before maturity, you can make withdrawals within limits: from the seventh financial year, you can make one withdrawal every year of an amount not exceeding 50 per cent of the balance at the end of the fourth year or the year immediately preceding the withdrawal, whichever is lower. If, however, you have taken a loan, the amount you are eligible to withdraw will be reduced by the amount of loan you have taken.
If you choose to continue the account after 15 years and make deposits, you can withdraw up to 60 per cent of the balance to your credit at the beginning of each extended period (block of five years). The money can be withdrawn in a lumpsum. If you choose to withdraw it in instalments, you cannot make more than one withdrawal a year.
You can even retain the balance after 15 years without depositing any more money and without intimating the bank. The balance to your credit continues to earn interest till such time as you withdraw it. Of course, you can continue to make one withdrawal a year till you withdraw the entire amount.
Can you take a loan?
Yes, even before becoming eligible for a withdrawal in the seventh year, you can take a loan from the third year onwards. However, you cannot take a loan after you become eligible for the withdrawal facility. The loan amount should not exceed 25 per cent of the amount to your credit at the end of the financial year immediately proceeding the year in which you apply for the loan.
The loan is repayable in a maximum of 36 instalments at an interest rate of 1 per cent per annum. If you are unable to repay the entire loan in 36 months, you will have to pay interest on the deficit. Of course, you will not be eligible for a fresh loan until you repay the first one with interest.
Tax benefits, nominations, minors...
Benefits. Deposits (even those in the name of your spouse or minor children) are eligible for a tax rebate of upto 30 per cent under Section 88 of the Income Tax Act. What’s more, interest accruals and withdrawals are exempt from income tax, and the balance in your account is exempt from wealth tax. Further, the balance in your PPF account cannot be attached by the courts in the event of any debt liability.
Nomination. You can appoint one or more nominees to receive the money in your account in the event of your death. If you were to die before your account matures, your nominees get the money in your account after the initial lock-in period of 15 years. If you are in a transferable job, your can transfer your account to any scheduled bank or post office in the country.
Retirement planning. A PPF account is the most effective tax-saving vehicle for those sunset years which could give you amazing returns, particularly when you consider that there's at no risk at all! When used as an instrument for retirement planning, a PPF account can provide a really big corpus at the time of retirement.
Saturday, January 3, 2009
Debt Fund Investments
Debt funds are nothing but investing in fixed income papers. The debt markets includes corporate banks and it comes in both short term as well as long term. Even government securities are also part of this debt funds
All companies need money to run their operations. They will get this money in two ways one is through listing the company and the other one is borrowing the money from some individual or coporate lenders at specific interest rates. The borrower (i.e. the company) promising the lender that he would pay back interest at certain intervals and the principal at the end of the term
RBI the government's bank also borrow money from the market. They will borrow money on behalf of central government, such securities which matures after a year what called as Government Securities and those that mature within a year called as treasury bills.
All companies need money to run their operations. They will get this money in two ways one is through listing the company and the other one is borrowing the money from some individual or coporate lenders at specific interest rates. The borrower (i.e. the company) promising the lender that he would pay back interest at certain intervals and the principal at the end of the term
RBI the government's bank also borrow money from the market. They will borrow money on behalf of central government, such securities which matures after a year what called as Government Securities and those that mature within a year called as treasury bills.
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