PUBLIC PROVIDENT FUND

When Budget 2014 raised the deduction under Section 80C from `1 lakh to `1.5 lakh, it also hiked the annual investment limit in the Public Provident Fund (PPF). Risk-averse investors can now sock away more in this ultra-safe scheme.

The PPF scores high on safety, taxability and costs, but the returns are not so attractive and liquidity is not very high. The scheme will give 8.7% this year, but don't count on it in the following years. The interest rate on small savings schemes like the PPF is linked to the government bond yield and it is likely to come down in the coming years.

Though it is a 15-year scheme, the money isn't locked for this period. You can make partial withdrawals from the sixth year or take a loan. The interest rate on a loan is 2 percentage points higher than the prevailing PPF interest rate. For 2014-15, the rate will be 10.7%. Besides, the lock-in period depends on how long ago you opened the account. For those who started investing in the PPF 10-12 years ago, the effective lock-in period will be only 3-5 years.

You can extend your PPF account for blocks of five years even after the scheme matures. An account can be opened in a post office or at designated bank branches. Some banks even give online access to the PPF account. It's a useful feature that will reduce the effort to invest in the scheme.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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ULIPs

 

For a lot of people, Ulip is still a four-letter word. However, investors need to wake up to the new reality. After Irda capped the charges and introduced new rules for Ulips in 2010, these plans have become more customer-friendly. An ordinary Ulip is still a costly proposition, but the online avatar of these market-linked insurance plans is a low-cost version far removed from the one mis-sold to investors a few years ago. The Click2Invest plan from HDFC Life, for instance, charges only 1.35% a year for fund management. The only other deduction is mortality charge for the life cover, while the rest of the premium is invested. The iGrowth plan from Aviva Life Insurance charges 1.21% a year for a 20-year policy with an annual premium of over `1 lakh.

While the low charges are a big advantage in the long run, experts say one should not go by cost alone. Don't buy a Ulip only because it has low charges. The performance of funds should also be taken into consideration. That's true. If you save 2-3% on cost by investing in an online plan, but the funds underperform by 4-5%, you will be a net loser.

Ulips have not done too badly in recent years. Ulip funds with an aggressive allocation (50-75% of the portfolio in stocks) have risen 28% in the past year (see graphic). However, these returns reflect only the rise in the fund's NAV. The returns for the investor may be lower because some of the monthly charges levied by Ulips are by deduction of units. So, if you started the year with 5,000 units of a fund with an NAV of `20, your corpus would be `1 lakh. If the NAV rises to `25 by the end of the year, your returns may not be 25% because some units may have been deducted. If 100 units have been deducted, your returns will be lower at 22.5%. Keep this math in mind when looking at the returns from Ulips.

Even so, these can be used as a rebalancing tool by the savvy investor. The switching facility in a Ulip allows the policyholder to switch from equity to debt, and vice versa, based on his reading of the market.

There is no tax implication on such switches and the process is fairly simple.

Online access has made it even easier.

Though financial planners frown on this combination of insurance and investment, they feel that Ulips are a better option for those who are reckless with money. If a spendthrift invests in an ELSS fund, he is likely to withdraw after the lock-in period and blow it away. Ulips have a lock-in period of five years and one is forced to invest every year.

Buy a Ulip only if you can pay the premiums for the full term and take one for at least 15 years. A short-term plan may not help recover the high charges in the initial years.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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NPS

More than five years after it was thrown open to the public, the New Pension Scheme (NPS) is yet to become a popular choice. Despite very low charges, the scheme has not attracted investors in droves because of the complex procedure involved in the opening of an account. You have to literally beg the post office staff to get the paperwork done. In bank branches, the investor himself has to guide the staff on the basics of the NPS.

However, the investors who have managed to cross these barriers have found it rewarding. The NPS funds have not done badly in the past five years. The returns from the E class funds are in line with those from the Nifty, the benchmark index they are supposed to follow. It is the corporate bond funds that have been the best performers in the past five years. Even the gilt funds have given reasonably attractive returns (see graphic).

Some financial planners believe that the NPS puts the investor in a strait jacket. The exposure to E class (equity) funds cannot be more than 50%. That is too conservative, especially for the young people who want to stay invested for longer periods and prefer a higher exposure to equity. While this is a major drawback, the NPS is flexible in other ways. It allows investors to rejig their asset allocation and even change the pension fund manager once a year. In a pension plan or Ulip, you cannot change from one company to another without terminating the plan. The other sore point is the lack of liquidity and taxability of income. The investment is locked up till the investor turns 60 years old. Before this age, a subscriber can withdraw only 20% of the corpus and use the balance 80% to buy an annuity. If he waits till he turns 60, up to 60% of the corpus can be withdrawn and the balance 40% would be annuitised. However, un like pension plans from insurance companies, the amount withdrawn will not be tax-free. The annuity income will also be fully taxable.

The NPS also offers a feature of life cycle fund. It is meant for those who are not financially savvy and can't manage their asset allocation themselves. It is taken as the default option for someone who has not indicated the desired asset allocation. Here, the asset allocation is driven by the investor's age. The 50% equity allocation reduces by 2% every year once the investor turns 35, till it touches 10%.

The NPS also offers tax benefits, besides the deduction under Section 80C. Contributions of up to `1 lakh in a year made by an employer on behalf of an employee are eligible for additional deduction under a new Section 80CCD. The contribution under this section is limited to 10% of the salary (basic plus dearness pay).

However, not all NPS investments are locked up till you retire. The investments in Tier II accounts can be withdrawn anytime. Some investors look at Tier II accounts as low-cost mutual funds. However, the low cost alone should not be the reason to invest in these funds. 

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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ELSS MUTUAL FUNDS

 

ELSS funds are the showstopper this year, scoring 28 out of 30 points. Being equity schemes, they are low on safety, but score full points on all other parameters. The returns are high, the income is tax-free, the investor is free to alter the time and amount of investment, the lock in period of three years is the shortest among tax-saving investments and the cost is only 2-2.5% a year. The liquidity is even higher if you opt for the dividend option, and cost is even lower if you go for the direct plans of these funds.

Don't look at ELSS funds as one broad category. Within these, there are schemes with a large-cap orientation, making them more stable than others. Some have a midcap skew, which can be riskier than large cap funds but also have greater potential. The funds that have lined their portfolios with small and mid-cap stocks will be riskier, but can outperform by miles if the small-caps turn out to be multi baggers. The Reliance Tax Saver fund has almost 70% of its portfolio in small and mid-cap stocks. It has outperformed the category in the past three years, churning out 41% returns when the category average is 27.7%. Most of these returns have been generated in the past 16 months. Between December 2011 and August 2013, Reliance Tax Saver was just another tax-saving fund with an annualised return of 9%. Since then, it has shot up 93%, compared to the 55% rise in the average ELSS fund. Invest in such turbo-charged schemes if you want high returns but beware of the gut wrenching volatility.

Investors seeking stability can opt for large-cap funds, such as Franklin In dia Taxshield, ICICI Prudential Tax Plan and Axis Long Term Equity Fund. These move in line with the broader market and can be part of the core equity portfolio.

A few caveats here. While ELSS funds have generated spectacular returns in the past few years, tone down your expectations in the coming years. Equity schemes do well when the market rallies, but suffer when the bears return. These can carry a slightly higher risk because the exit route is blocked. Once you invest, you cannot withdraw your money before the lock-in period of three years. This is why you should have an investment horizon that is longer than this. Equities can be slightly risky over a three-year term as one business cycle takes 2-3 years to play out. So, in three years, one can get caught on the wrong side of the cycle.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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SCSS

 

The Senior Citizens' Saving Scheme (SCSS) is an ideal tax-saving option for senior citizens above 60. The money is safe, while the returns and liquidity are reasonably good. There is an investment limit of `15 lakh but it is sufficiently high. However, the interest income from the scheme is fully taxable.

The other problem is that even if you have a large amount to invest, the maximum deduction will be `1.5 lakh a year. You can stagger your investments across 2-3 financial years to make full use of the deduction under Section 80C. You can open an SCSS account in a post office or designated branches of public-sector banks. The interest is linked to the government bond yield. It is 1 percentage point higher than the 5-year government bond yield. Unlike the PPF, the rate remains unchanged till maturity.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

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For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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VOLUNTARY PF

 

Investors love the PPF because they get a tax deduction on the amount they invest. There is no tax on the interest earned and withdrawals are also tax-free. The only glitch is the annual investment limit, which has now been hiked. However, another instrument gives almost the same returns and tax benefits without imposing any investment limit. Salaried taxpayers who are covered by the Employees' Provident Fund can put more than the mandatory 12% of this basic in the Voluntary Provident Fund (VPF). The VPF is an ideal saving instrument for high-income earners looking to build a tax free corpus. Unlike the PPF, there is no limit on how much you can invest.

The contributions to the VPF are eligible for tax benefits that the Provident Fund enjoys. They also earn the same interest (8.75% for 2014-15). Unlike the PPF, its returns are not linked to the market but decided by the Central Board of Trustees of the Employee Provident Fund Organisation in consultation with the government.

However, the VPF scores low on liquidity. You can't access money till you retire.

A one-time withdrawal is allowed in special circumstances--medical emergency, purchase or construction of a house, or a child's marriage. As with EPF, money withdrawn within five years of joining service at tracts tax at the applicable marginal rate.

For some taxpayers, this may not be an option now.

Typically, employees have to inform their employers about deducting VPF at the beginning of the financial year. If you have opted for the deduction, you can't discontinue till the end of the financial year.

Experts advise this option to those nearing retirement and face a shortfall.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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Bonds over Bank FDs

Bonds over FDs

If you are a debt investor content with putting money into fixed deposits ( FDs), this might be a good time to consider duration funds. The Reserve Bank of India ( RBI) surprised the market last week by cutting the repo rate by 25 basis points (bps) to 7.75 per cent. If interest rates fall further by about 50 to 75 bps, as is widely expected, long duration bond funds will rally. That's because bond prices rise when interest rates fall, meaning bond investors will benefit from capital gains in addition to interest income. The longer the average portfolio maturity of a bond fund, the higher the capital appreciation when rates fall.

Bond funds score over fixed deposits in two ways: tax treatment and superior returns. If the holding period is three or more years, bond investors are taxed at 20 per cent with indexation, whereas interest for FD investors is added to their income and taxed in line with their individual slab rates of 10, 20 or 30 per cent. Investors in the 30 per cent tax bracket especially stand to benefit by choosing bonds over FDs.

Two to three- year FDs will fetch you around 8.5 per cent pre- tax. On the other hand, assuming a rate cut of 50 bps over the next one to one- and- a half years, duration funds of six- seven years will give effective returns to 11- 12 per cent over the next one to two years. This includes capital gains of three- four per cent plus accrual income of around 7.7- 8 per cent.

Investors can look at three different categories of long- term bond funds. Gilts, income funds and dynamic bond funds. Of the three, experts believe dynamic bond funds can be more suited to investors' needs, as fund managers have the flexibility to change duration depending on the interest rate outlook. Income funds and gilts don't have this luxury.

Income funds are better than gilts, as they are less volatile and invest in corporate bonds, apart from government securities. Gilts are ideally suited to savvy investors or traders who are more interested in taking short- term calls.  Income funds can also gain if the spreads between corporate bonds and government securities reduce.

Investors should aim to hold these funds for at least three years, to ride out the inherent volatility. With duration, there could always be short- term volatility and therefore there is a need to hold for a longer period to ensure returns are captured, especially when one is looking at capital appreciation opportunities when rates fall.

Long duration bond funds have emerged the top performers among debt funds this year. According to data collated, gilt medium & long term funds and income funds have given one- year average category returns of 16.5 per cent and 13.4 per cent, respectively. The yield of 10- year government papers has fallen to 7.69 per cent from 8.5 per cent last year.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

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For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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