Bonds

Bond is an instrument of indebtedness of the bond issuer to the holders. These are a kind of fixed income securities. Depending on the terms and conditions of the bond, interest is paid to the holder. The principal is repaid on a date that’s called the maturity date. The ownership can be transferred in the secondary market. These are more secure because here we have guaranty of repayment of principal.

Types of bonds              

Fixed income securities are generally classified on the basis of the time frame/ maturity period.

Bills: fixed income securities that have a maturity period of one year.

Notes: fixed income securities that have a maturity period between one to ten years.

Bonds: fixed income securities that have a maturity period of more than ten years.

Government bonds: These are issued by the government authorities and are as safe as the debt of a stable country. They are free from state and local taxes on the interest payments.

Municipal bonds: these are the next in matters of risk after government bonds. They are also called as “munis”. The main advantage of such bonds Is that the returns are free from federal taxes. These are very good tax saving instruments. Local governments may sometimes make their debts tax free for the residents leading to tax free municipal bonds.

Corporate bonds: these are bonds that are issued by the company to raise capital. There is no limit as such. These give higher yields than a government bond because they have a higher risk of defaulting than a government. The driving factor in case of these bonds is the credit quality. The higher the credit quality the lower is the interest rate. Corporate bonds can also be convertible is nature. The holder can get them converted into stocks or callable bonds.

Zero Coupon Bonds: This is bond that does not have coupon payment but I issued at a discount to par value.

Trading

Retail Debt Market: NSE has introduced a new and simpler way of investing in bonds and fixed income securities. The retail investors can buy and sell government securities from different locations through NSE brokers and sub brokers in the same manner as trading of equities is done. This market is known as “Retail Debt Market”.

Wholesale Debt Market:  It provides a trading platform for a wide range of debt products.

It is a market where corporate bonds, government bonds, municipal bonds, negotiable certificates of deposit, and various money market investments are traded.

Bond duration

A bond’s duration represents the weighted average time to full recovery of Interest and principal payments.

There are four main types of bond duration calculations which are as follows:

1)Macaulay duration: Macaulay duration is calculated by adding the results of multiplying the present value of each cash flow by the time it is received and dividing by the total price of the security. The formula for Macaulay duration is as follows: 

n = number of cash flows t = time to maturity C = cash flow i = required yield M = maturity (par) value P = bond price

2)modified duration: Modified duration is a modified version of the Macaulay model that accounts for changing interest rates. Because they affect yield, fluctuating interest rates will affect duration, so this modified formula shows how much the duration changes for each percentage change in yield.

3) Effective duration: The modified duration formula discussed above assumes that the expected cash flows will remain constant, even if prevailing interest rates change; this is also the case for option-free fixed-income securities. On the other hand, cash flows from securities with embedded options or redemption features will change when interest rates change. For calculating the duration of these types of bonds, effective duration is the most appropriate. 

Mutual Funds

We all know how a mutual fund works, what are its advantages and disadvantages, all spoken and heard about a lot. From an investor point of view, when it comes to investing and choosing the right type of mutual fund it gets worse than a maze. The main aim here is to explain what the different types of mutual funds are, how are they sub-divided and what are the characteristic of each.

                       

Based on Structure

Open ended Mutual Funds are not listed on the stock exchanges. They are open for subscription throughout the year. The investor can purchase funds directly from the fund and not the existing unit holders. The unit holders can buy and sell their units at the prevailing NAV.

Close ended Mutual Funds are funds that raise capital trough initial public offering (IPO). It is listed and traded on the stock exchange. They have a lock in period. Once invested, amount can be withdrawn or switched only after the completion of the lock in period. The stock prices of such funds fluctuate according to the changing market forces of demand and supply.

Based on Objective

Equity Funds: These funds typically invest into stocks. They need to be aggressively managed due to the quick changes in the markets. They are also known as Stock Funds. Depending upon the objectives of the fund they may be further categorized as abroad market, regional and single country funds (region of investment being the main criteria). They can also be categorized depending upon the sectors concentrated in the fund.

Equity funds can be further classified as follows:

                    Classification on the basis of Capitalization

                   

Ø  Large Cap Funds: It includes companies whose market capitalization is more the $10 billion.

Ø  Mid Cap Funds: It includes companies whose market capitalization ranging between $2 billion and $10 billion.

Ø  Small Cap Funds: It includes companies whose market capitalization is more the $10 billion.

NOTE: Market capitalization is calculated by multiplying the outstanding shares and the stock price per share.

                            Classification on the basis of Sector

                       

Ø  Depending on Sector: Such funds concentrate on investing in a particular sector. For example infra, pharmaceutical, banking etc.  The risk in case of these funds would be high because these funds are less diversified.

Ø  Thematic: Thematic fund is the opposite of a sectoral fund. As the name suggest, the investing of the fund follows a particular theme, for example multi sector, international exposure, commodity exposure etc.

             Classification on the basis of Index funds

                           

Ø  NIFTY Index: As the name suggests the fund invests in NIFTY. For this purpose we need to understand what we mean by NIFTY. NIFTY consists of top 50 stocks belonging to 21 different sectors of the economy. It is used for benchmarking fund portfolios, index based derivatives and index funds.

Ø  Junior Index: It represents 100 most liquid stocks traded on the NSE. A company cannot be listed on both NIFTY and NIFTY junior at the same time.

Balanced Funds:In this fund, the returns is generally a combination of  capital appreciation and current income. This is possible when the fund invests in Bonds, preferred stocks and common stocks. Depending upon the ration of debt and equity in the portfolio, the fund may be further classified as debt oriented balanced fund or equity oriented balanced fund. This is mainly preferable for investors who are looking for a mixture of safety, income and modest capital appreciation.

Debt Funds: As the name suggest the Fund mainly invests in debentures, bonds, treasury bills, Etc. Suitable for investors who are risk adverse. The incomes of these funds may not be high enough as that of a Equity oriented mutual fund. The returns are regular.

                  

Ø  Liquid Funds: Liquid funds are those funds that invest in “liquid assets”. Liquid assets are those assets that are easily convertible into cash or cash equivalents, the reason being that they have a market where people are ready to by the asset. The price fluctuations in this case is also relatively stable. These are mainly short term in nature ranging from 3 months to 1 year maturity period.

Ø   Gilt Funds: This fund mainly invests in medium and long term government securities and top corporate debt instruments. Since it invests mainly in government securities they are said to be low risk.

Ø  Income Funds: The main aim of such funds is to have regular income. It may be on monthly, quarterly or yearly basis. They invests in a variety of government bonds, municipal bonds, corporate debt instruments, preferred stocks, money market instruments and regular dividend paying instruments.

Ø  FMP: FMP stands for fixed maturity plan.  This has been introduced in the market in the recent years. These are basically debt funds with fixed duration.  Typical debt funds are open-ended. Since the duration is fixed in advance the investors cannot enter and exit as their wish.

Ø  Floating Rate Funds: In such funds the rate of interest is not fixed and changes  with change in market conditions.

Ø Arbitrage Funds: these are funds that try to take advantage of the price discrepancies of same commodities in different markets.

9 questions you must ask your financial planner. By P.V.Subramanyam. A must read

http://in.finance.yahoo.com/news/9-questions-you-must-ask-your-financial-planner-063533327.html

Service tax and Sales tax.

Of late the topic that's been spoken about most often once your bill arrives the dinner table at a restaurant  is service tax and sales tax. Two words that seem similar to a person who has no idea of it. Let us first understand what both mean exactly. 

According to wikipedia service tax is defined as "Service tax is a part of Central Excise in India. It is a tax levied on services provided in India, except the State of Jammu and Kashmir. The responsibility of collecting the tax lies with the Central Board of Excise and Customs(CBEC)."

According to investopedia service charge is defined as A type of fee charged to cover services related to the primary product or service being purchased. For example, a concert venue may charge a service fee in addition to the initial price of a ticket in order to cover the cost of security or for allowing electronic purchases. Another example would be a fee for using the ATM of a competing bank.

From calculation point of view the "service tax" amount is charged on the service charge @4.94% and not the items consumed. Most of the hotels tend to misguide their customers on this point.They calculate service tax on the items consumed. The difference here is huge. This thereafter becomes an income to the owners.

Here is an example to illustrate this.

Food and beverages			Rs. 2,000
Service charge			Rs. 200
Service tax 4.94%			Rs. 9.88
Total			Rs. 2,210

This is how the charges are actually suppose to be. But what most of the hotels do is given below.

Food and beverages			Rs. 2,000
Service charge			Rs. 200
Service tax 4.94%			Rs.108.68
Total			Rs. 2,309

There is Difference of Rs.99 this becomes a income for them. So now the next time you at a hotel with a bill in your hand you know exactly what to do.

Financial planning???

The first question that pops up in most people's mind.

Investopedia definition "A comprehensive evaluation of an investor's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans."

Let me just take a situation into consideration: God forbid an emergency pops up in your house and one among your family member needs to under go a operation or a treatment, what would you do in such a situation? There are so many things to be taken care at the moment.

For example understand whether the problem is genuine (thanks to the doctors who now a days magnify and probably even add up things), take second opinion, look after the finance and, in case existence of health insurance run around for the claim. Lets look at the same situation from another aspect. What if you just have to go the hospital get treated and come back? Doesn't it sound a little more comfortable? 

Let me share a case. There was this person(Mr. A) who had severe stomach pain. After a few tests the doctor practicing at one of the biggest hospitals declared it as Cancer. Mr. A was shattered. Fortunately he had a medical cover. Just to accelerate his claim settlement he got in contact with Certified Financial Planner(CFP) with some medical knowledge and a good network.  On checking the reports the CFP did not find any traces of cancer but felt it was a case of Kidney stones. On getting a second opinion the doctor agreed with the CFP. All this matter was then handled and settled by a CFP. The doctor was made aware that he cant get away by fooling innocent people and a claim for Kidney stones was raised and instantly settled by the insurance company. That's the reality of the world.

CFP is a person who looks after all aspects of a personal finance. They first Secure your present by checking your insurance covers. Help you in understanding and putting down your goals. Invest in such a way that all your dreams are fulfilled. They offer you services like Insurance Planning, Investment Planning, Tax Planning, Child education planning, Child marriage planning, Retirement planning and Comprehensive Financial Planning.

Once a Financial Planner takes over all these aspects then an individual's problems are reduced to a great extent. During times of market crises a CFP doesn't promise growth but would definitely design and implement a value based strategy to minimize the possible loss.

For people who are interested in knowing there current financial position and want to over come their shortcomings by seeking the assistance of a professional financial planner (CFP) please fill in the form in the link below.

https://docs.google.com/spreadsheet/viewform?pli=1&formkey=dGxTOENXejVKdUVUWXJyalBXa29rb3c6MQ#gid=0 

We would be glad to assist you and help you in achieving your financial goals   

Find cfp certification services in Hyderabad on Freeads.in

Find cfp certification services in Hyderabad on Freeads.in

Pre retirement counselling

Pre-retirement counseling is primarily concerned with developing an adequate corpus for retirement.

Key areas to be focused -
1. What is the inflation rate expected to prevail during post retirement
2. What could be required medical expenses / emergency requirement post retirement
3. Selection of investment as well as annutiy vehicles post retirement
4. Activities desired to be performed or executed post retirement.

Areas of concern -
1. Increase in life spans
2. Quantum of money that can be spent for piligrim and other tour during retirement.
3. Individual fear including loss of identity, loss of social contacts, boredom, and loss of income.

The right mix of enjoyable and interesting leisure activities will help people maintain a strong sense of identity and an active social network.

Senior Citizen Savings Schemes

Interest payable, Rates, Periodicity etc.

• 9.30% per annum, payable from the date of deposit of 31st March/30th Sept/31st December in the first instance & thereafter,
• Interest shall be payable on 31st March, 30th June, 30th Sept and 31st December. 

Investment limits and Denominations

• There shall be only one deposit in the account in multiple of INR.1000/-
• Maximum 15,00,000.
• Account in multiple of INR.1000/- maximum not exceeding rupees fifteen lakh.

Salient features including Tax Rebate

1. Maturity period is 5 years.
2. A depositor may operate more than a account in individual capacity or jointly with spouse. 
3. Age should be 60 years or more, and 55 years or more but less than 60 years who has retired on superannuation or otherwise on the date of opening of account subject to the condition that the account is opened within one month of receipt of retirement benefits.
4. Premature closure is allowed after one year on deduction of 1.5% interest & after 2 years 1% interest.
5. TDS is deducted at source on interest if the interest amount is more than INR 10,000/- p.a. 
6. The investment under this scheme qualify for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007.

Post Office Monthly Income Account Scheme

Interest payable, Rates, Periodicity etc.

• 8.50% per annum   w.e.f. 01.04.2012
   

Investment limits and Denominations

• In multiples of INR 1500/-
• Maximum INR 4.5 lakhs in single account and INR 9 lakhs in joint account.

Salient features including Tax Rebate

1. Maturity period is 5 years.
2. Can be prematurely encashed after one year with some conditions. 
3. No Bonus is admissible on maturity in respect of MIS accounts opened on or after 01.12.2011.

National Savings Certificate (IX Issue)

Interest payable, Rates, Periodicity etc.

• Rate of interest 8.90%.
• Maturity value of a certificate of INR.100/- purchased on or after 1.4.2012 shall be INR. 238.87 after 10 years. 

Investment limits and Denominations

• Minimum INR. 100/-
• No maximum limit.

  • Denominations available - INR. 100/-, 500/-, 1000/-, 5000/- & INR. 10,000/-.

Salient features including Tax Rebate

1. A single holder type certificate can be purchased by an adult for himself or on behalf of a minor or to a minor.
2. Interest on these certificates shall be liable to tax under the Income-Tax Act, 1961 (43 of 1961, on the basis of annual accrual specified in rule15, but no tax shall be deducted at the time of payment of discharge value.

National Savings Certificate (VIII Issue)

Interest payable, Rates, Periodicity etc.

• Rate of interest 8.60%.
• Maturity value of a certificate of INR.100/- purchased on or after 1.4.2012 shall be INR. 152.35 after 5 years.  

Investment limits and Denominations

• Minimum INR. 100/-
• No maximum limit.
• Denominations available - INR. 100/-, 500/-, 1000/-, 5000/- & INR. 10,000/-.

Salient features including Tax Rebate

1. A single holder type certificate can be purchased by an adult for himself or on behalf of a minor or to a minor.
2. Deposits qualify for tax rebate under Sec. 80C of IT Act.

   
   
3. The interest accruing annually but deemed to be reinvested will also qualify for deduction under Section 80C of IT Act.

Post Office Time Depost Account

Interest payable, Rates, Periodicity etc.

Interest payable annually but calculated quarterly.

Period          Rate
1 yr. A/c      8.20%
2 yr. A/c      8.30%
3 yr. A/c      8.40%
5 yr. A/c      8.50%
w.e.f. 01.04.2012 


Investment limits and Denominations

• Minimum INR 200/- and in multiples thereof.
• No maximum limit.

 

Salient features including Tax Rebate

1. Account may be opened by individual.  
2. The investment in the case of  5 years TD qualify for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007.

5 Year Post Office Recurring Deposit

Interest payable, Rates, Periodicity etc.

 

• Rate of interest 8.40%.
• Maturity value of a 5 Years RD account opened on or after 1.4.2012 with monthly deposit of INR.10/- shall be INR.746.51.
• Can be continued for another 5 years on year to year basis.

 

Investment limits and Denominations

 

• Minimum INR 10/- per month or any amount in multiples of INR 5/-.
• No maximum limit.

Salient features including Tax Rebate

 

1. One withdrawal upto 50% of the balance allowed after one year.
2. Full maturity value allowed on R.D.
3. Accounts restricted to that of INR. 50/- denomination in case of death of depositor subject to fulfillment of certain conditions. 6 & 12 months advance deposits earn rebate.

Post Office Savings Account

Interest payable, Rates, Periodicity etc.

4.0% per annum on individual/ joint accounts.

Investment limits and Denominations

Minimum INR 50/-.

Salient features including Tax Rebate

1. Cheque facility available.  
2. Interest Tax Free.

15 year Public Provident Fund Account

Interest payable, Rates, Periodicity etc.

• 8.80% per annum   w.e.f. 01.04.2012
   

Investment limits and Denominations

• Minimum INR. 500/-
• Maximum INR. 1,00,000/- in a financial year.
• Deposits can be made in lumpsum or in 12 installments.

Salient features including Tax Rebate

1. Deposits qualify for deduction from income under Sec. 80C of IT Act.
2. Interest is completely tax-free.
3. Withdrawal is permissible every year from 7th financial year.
4. Loan facility available from 3rd Financial year.
5. No attachment under court decree order.

Tax Planning - Deduction with respect to House Rents

House Rent is a major component of expenditure in personal financial planning.

In case of individuals working in a company, house rent is evaluated under House Rent Allowance (as per Section 10(13A) read with rule 2BA).

In case of individuals with business or profession, the following rule applies:

Rent paid (furnished/unfurnished) by the individual must be in excess of 10% of the total income.

Allowable deduction:

1. Excess of rent paid over 10% of total income
2. TWO thousand rupees per month
3. 25% of total income

Least of the above is allowed

Example - A sole proprietor trader's annual business turnover is 14,50,000. He pays annual rent of 2,40,000 and an additional maintainance of 18,000/-. His claim of deduction under section 80 GG.

 

Excess of rent paid over 10% of total income = 95000

TWO thousand rupees per month                  = 24000

25% of total income                                      = 362,500

Least of the above = 24000

Deductable under section 80 GG for Sole Propietor = 24000

Net Taxable income = 14,50,000 - 24,000 = 14,26,000

Revenue leakage in personal finance

Revenue Leakage

Financial Planning depends totally on financial decision making, done carefully in a stipulated timeline. Individual should remember that expenditures are outflows of cash/reserves; once the cash flows out, it is gone forever. A cash outflow can sometimes lead to repentence. This type of cash outflow is referred to as "Leakage". Refining further,
Revenue leakage in financial planning is generally referred to as an expenditure made in haste. This is a phenomenon that eventually happens when -

1. a comprehensive financial plan is not built
2. a comprehensive financial plan has defects
3. a comprehensive financial plan is not reviewed in the light of change in key assumptions
4. the client has preferred for a limited financial planning services