Sunday, 17 June 2012

Retirement Benefit- Who Am I?
You can get me, if you stay with your company for atleast 5 years. Only employees on payroll are entitled to claim me, meaning contractors are not eligible.I am completely Tax free upto 10 Lakh. Guess Who Am I?

You guessed it Right!!!, if your answer is "Gratuity". In this article let us peep into some of basics of Gratuity.

  • Who is Eligible: You are eligible for Gratuity benefit, only if you complete 5 years of continuous service with the company. You need to be on the company payroll as permanent employee and not working as a contractor. In case of death of an employee Gratuity would be paid even if the employee had not completed 5 years.
  • Who Gets the Gratuity amount: Gratuity amount is paid to the emoployee. In case of death, the gratuity amount is paid to the nominee. Amount would be paid to Heirs in case of absence of Nominee.
  • Gratuity Calculation: (Last Drawn Salary/26) * 15 * Number of years of service.
  • Taxation for Gratuity Amount:
    Fully Exempted if you are government employee.
    - Exempted up to 10 Lakh, if you are private employee.
Let us look into a scenario: Below table shows the Gratuity amount for an employee who joins the organization with Basic Salary of 25K and Gets an increment of 12% year. His gratuity amount at the end of 20 Years will be 24.84 Lakh.

Years of Service
Basic Salary
Gratuity Amount

Note : Values shown have been rounded off and are approximate value   

Smart Tips:
  • Looking for company Change: If you are nearing completion of 5 years in your current organization, it makes sense to complete 5 years then look out for change.  Click Here to read "Should you change your job for Monetary Benefits?"
  • Exemption limit of 10 Lakh: If you have already received a gratuity 6 Lakh from previous employer (this is completely tax free as you are with in the exemption limit). Now later if you get another 6 Lakh as gratuity amount, in this case only 4 Lakh is exempted from tax and 2 Lakh is taxable income.
  • Negotiate you salary structure:In case there is an opportunity to negotiate your salary or design your salary/CTC , it makes sense to go for higher Basic salary as Gratuity is directly dependent on your basic salary.
  • 6 months or more is considered as one year.  For example in the gratuity formula (Last Drawn Salary/26) * 15 * Number of years of service),   5 years 6 months and above is considered as 6 years.  Anything below 5 years 6 months is considered as 5 years.
Addtional Reading for Retirement schemes:
The intend of article is to cover the basics of Gratuity. In case you have any query please post it in comment section.Have you calculated your Gratuity amount?

Wednesday, 13 June 2012

All About Debentures - Debenture Details.
Debt Instruments have always been the darling of conservative investors. They are always on hunt for investment opportunities that offer them either guaranteed or assured returns. Investments like Bank Fixed Deposits, Fixed Maturity Plan, Bonds, Company Fixed Deposits, Debentures, etc.

In this article let’s limit our scope to Debentures.
  • Get started with Basics of Debentures: It is fixed income instrument where in the issuer agrees to pay assured interest or returns at the time of maturity. 

  • Debenture Types:Broadly there are two types of debentures – Secured and Unsecured. Secured Debentures offer lower interest in comparison to Unsecured Debentures.  The primary reason for this is, in case company defaults, the Secured Denture holders are paid off by selling the assets of the company. This is not the case with Un-Secured Debentures.

  •  Attractive Features of Secured Debentures:
    -TDS : There is no tax deducted at source.
    -Safety: On a relative basis, they are safer than company   deposits. For more details of company Fixed deposit, click here.
    Attractive interest rates. Interest rates are in range of 11%  to 12.5%
    -Flexible Tenure: Usually come with lock-in period of 3 years, 5 Years and 10 Years.
    -Liquidity: NCD are listed on National Stock Exchange, In case of premature exit one can exit by selling in secondary Market. 

    All the above points indeed reflect that Secured Debentures a good Debt Option. Off-late especially when the stock market is in Jittery mode, investors are flocking towards relatively safer options like Secured Debentures.

    Are Secured Debentures are really safe: In this Finance World, there is nothing called 100% Safe. Every investment comes with some element of risk.  Yes on relative basis, one can say Secured Debentures are Safe when compared to Equity or Company Fixed Deposits. If company defaults, the secured debenture holders are paid by selling the assets of the company against which the charge was created. This does not happen in case of company fixed deposits or unsecured Debentures.  There is possibility that a reputed company with good credit rating might fail to redeem the secured debentures. 
        Any Smart Tips:
    • First Come First Serve:  Early Bird Gets The Fish. Shiram Transport NCD and Tata Capital NCD were heavily oversubscribed.  In case you have decided to invest, apply it on Day One. You never know when the subscription will get closed.
    • Plan to Hold Till Maturity:  Watch out!!!  if you plan to trade or make quick bucks. NCD prices are impacted due to change in interest rates.  NCD Prices will move up if the interest rates decrease and vice versa.  You need to hold the Debentures till maturity if you don’t want expose yourself to price fluctuations.
    • Right Pick: Never ignore the reputation and ratings provided by the credit rating agency.  Don’t risk your investment for extra % or two.
    • Right Option: It is always advisable to opt for cumulative option. This option will provide you highest yield as the interest earned is re-invested. Choose the interest payout option only if you need money periodically or regularly. Remember Time is Money. Money grows with Time. :) Give your investments maximum time, only then you can appreciate the power of compounding.
    • Any Pre-Requirements: PAN(Permanent Account Number ) is Must to have. In case NCD are going to be dematerialized form, you are expected to have  Demat Account.
      Do you bet on Debentures?

Sunday, 27 May 2012

Switching Job – For Monetary Benefits?
Each one of you at some point of time would have thought of changing your job. The reason for your decision could be different. Here are some of the common quoted reasons.
  • I have Bad Boss. I just want to get out of his clutches.
  • I want to join a bigger company, with onsite opportunities.
  • You were expecting a promotion and you colleague got it.
  • Your appraisal was very good, the merit number are not matching or reflecting the same.
The list can be endless… 
It is often said “People leave their bosses and not the company”. Historically statistics have shown this as the primary reason for people looking out for change.  Past or Historical data need not guarantee that the present and future will remain the same. Yes the trend has started changing.
The Gen Y or Gen Z generation is smart enough to handle their Bosses.  Current Trend is that people are switching Jobs not because of their bosses but because, they want better salaries.   Its Era of T-20 Cricket, everything should happen at lightning speed. You look for expensive watch that is out of your budget, you tend to think that you are underpaid. Next instantaneous reaction is to update your resume.
Is this approach Right? Is hopping job is the solution to earning more salary? Probably yes, but let me warn you, it is just temporary solution and not permanent one.
Let us take a scenario: Geetha who has 7 years of experience in Java Development is earning a salary of 8 Lakh. Frustrated!!!, as she could not afford the expensive watch, decided to quit the company and join any company that would offer  her 25% hike. With a month’s time she did manage to grab an offer of 10 Lakh Salary. The company offered this premium price as they were in urgent need of resource for high priority project.
Here comes the reality:  Every year companies get a report that details average salaries - categorized by role or years of experience. 3rd Party HR consulting companies provide this report by taking data from different companies.  Let us not dwell into further details..
For the sake of an-example let us assume as per the HR Consulting report - Market Median for a Java developer with 8 year of experience is 10 Lakh.  Do you think Geetha would get any hike in the upcoming? The answer is – She might end up getting very little hike. It would not be surprising if she does not get any hike. 
Now one might argue that “This is not fair”. We need to understand, the company needs to have some guidelines for salaries, only then it can operate rationally.  As Geetha is already on par with market, there is little chances that she would be given hefty hike.
Let us look into some commonly quoted reasons during salary Negotiation:
  • I need 10+ Lakh salaries because my friends are getting the same.
  • I need 40% hike to fulfill my persona dreams( buying home, luxury car)
  • Offer me good package as I don’t believe in hopping jobs frequently.
  • Inflation is high; House rents are high, give suitable offer.
  •  Most Common – I already have an offer of 8 Lakh. Give me better than this.
You may end up getting a job offer in spite of quoting one of the silliest reasons, simply because the company is need of resources.

Take away: - Though the change or switch in job boosted your salary with immediate effect, however down the line, you will be again on par with market standards.
My two Cents:
  • Choose a company that promises your better career over a company that offers highest salary.
  • You have new offer in hand, never ask your existing employer to match it.  This is just another form of blackmailing.
  • Change the job when you think you are no longer valued. Don’t jump to immediate conclusion. You need to give yourself enough time before you take any decision.
  • Finally, If you are switching Job- Just for sole reason “The salary” then thinks twice.
Would you change your company for better salary? What could drive you to look out for new job?

Tuesday, 22 May 2012

Financial Plan - Emergency Fund and Insurance

Do you love your Dad or your Mom? Ask this question to a baby or kid, i bet the answer is not always consistent. Dad could be the answer in morning and Mom in afternoon. The question seems to be simple but the answer is not. It’s a tough call; baby would or may love both parents equally.
I was in similar situation when my friend Sanjeev asked me a query- Here goes the query:
Now that I understand Financial Plan is very important, what should be my first step? Should I build Emergency Funds or Buy a Term Plan? 
Honestly During my conversation with him, I did flip my answers. It was indeed a tough call to make. Logically speaking both should have same priority. Both should have the same beginning. Sanjeev was adamant, wanted me to pick one of the two. The answer should be objective.
A bit of background:
Sanjeev who recently got married, his life partner “Neeta” is house wife. After all the monthly expenses he would be left with 25k per month. The little savings he had was all spent for his own marriage.
Considering that Neeta is dependent on Sanjeev, my objective answer was to start off with buying a Term Plan. In case of Sanjeev’s untimely death, Neeta will end up in deep financial crisis. For Sanjeev it is not important but critical to buy Term Plan for himself.
Click Here to know more about Term Plan/amount of cover, etc.
His next question was "When I have term Plan, why do I need emergency fund”? I responded back saying; this cannot be answered in objective way. I need to be subjective. He was kind of OK with it.
  • Let’s understand what Emergency Fund is:Emergency Fund is something that should be used to meet your emergency needs that might otherwise adversely impact your physical or financial wellbeing. This fund is NOT for meant for buying anniversary gifts or celebrating your angel/prince’s first birthday. In case of unforeseen situation this fund will protect you from getting into high interest debts like Credit Card or Personal Loans.
  • What is the right amount?There is no perfect answer for this. This depends on various factors. If you are the sole earner in your family, your emergency fund should at-least be 6 to 8 times your monthly expense. In case of Job Loss, these funds will help you sail through till you get another job. If you have a working spouse you have an emergency fund that is 3 times your monthly expense. 
  • Word of Caution:Once you succeed in building the necessary funds, don’t be tempted to utilize this fund for vacations or down payment for your flat. Don’t dilute the purpose of this fund. Let us re-iterate that Emergency funds should be utilized only in case of emergency situation. The idea is to have this money in liquid form. It is Ok if this money earns lesser interest than your fixed Deposits.
  • Best Way To Build This Fund:Start off with smaller target/goals. Aim to build the funds gradually. Have a realistic target. Every month divert few thousands towards Emergency funds. In case you get additional money in form of bonus or hike, divert your money towards emergency funds. The process of building emergency funds should be just like baby steps, One step at a time. Make sure you keep moving.
  • Where should I park these funds?Remember - Equity is NOT always the answer for parking or building your funds.  Recurring Deposit is one of the safest and best ways to build money. Savings Bank Account is one more option. Off late there are quite a lot of banks that are offering attractive interest rates. More over the interest earned up to 10k is exempted from tax. Mutual Fund Savvy people can tap into Liquid Funds to build Emergency funds.
    Click Here to know more about Recurring Deposits.
    Click Here to know more about Liquid Funds.
Any Important Tips:
  • Separate Account for Emergency funds:Open a separate account exclusively meant for emergency funds. The day you get your salary, divert specific amount to this account. Good if you can automate this. Don’t opt for ATM card. Check book is good enough. With ATM you have easy access to this money and we might end up spending this money in some non emergency situations. Let’s understand this is only for emergency.
  • Realistic Milestone: If you’re Goal is to build 5 Lakh. Break this journey into smaller milestones of 50k each. Initially Plan off for 50K. Once you achieve this, aim for next target. Setting Up a big goal and not achieving it, for sure will demoralize you. Let’s have SMART GOALS.
Note: This is cooked up story, the article intends to highlight Emergency Funds and Term Plan as two important aspects of financial plan.
Do you have emergeny funds? Do you agree emergency funds and Term Plan as vital for sound financial Plan?

Tuesday, 15 May 2012

Test Your Financial Skills- Basic Finance Questions
Lets have a quick Basic Financial IQ Test-? Here we Go. Some questions may have multiple answers. Do not use Google or Calculators :)

  1. Is it possible to invest in PPF for 25 Years?a) Yes Possible b) Not Possible
  2. Bank Deposit with 5 years tenure by default (automatically) entails an investor for tax deduction under Section 80C.a) Yes  b) No
  3. One Lakh Invested in HDFC Top 200 in Aug 1996 would have approximately grown to (as of today-16th May)a) 12.5 Lakh  b) 18.5 Lakh c) 8 Lakh  d) 22 Lakh
  4. SIP of 1 Lakh per year for 25 years @ 10% and compounded quarterly will mature approximately toa)50 Lakh   b)1.2 crore  c)  35 Lakh  d) 1.8 crore
  5. TDS for Bank Recurring Deposit of 30 Thousand Per month for 1 year Tenure isa) 10%  b) 20% c) TDS is not applicable for Recurring Deposits.
  6. 30 Years old Software Engineer earning 6 Lakh per year earns an interest of 15K pers year in XYZ Bank. He can save/avoid TDB by:a) Submitting 15G Form b) submitting 15H Form c) Not Possible to avoid TDS
  7.  What is the tax exemption limit for the interest repayment (home loan) for 2nd house?a) Maximum of 1.5 Lakh 2) No Limit 3) No Tax exemption for 2nd house. d) 3 Lakh
  8. Profits Earned from ELSS Mutual Funds are taxed as pera) Your tax bracket b) Returns are tax free c) flat 10% tax  d) 20.3%
  9. Here are few LIC Insurance Schemes. Pick the Term Plan.a) Amulya Jeevan b) Jeevan Ananad c)Jeevan Chaya d) Jeevan Rekha d) Anmol Jeevan
  10. Pick the Odd Man Outa)SBI b)Canara Bank c)HDFC Bank d)Corporation Bank d)Indian Bank
  11. Pick the Odd Man Out
    a) NSC b)ELSS c)PPF c)Tax Saving Fixed Deposits
  12. Tax exemption Limit for Gratuity(Act 1972)  amount isa)3.5 Lakh b) 5 Lakh c)10 Lakh d)Gratuity amount is completely taxable.
    Feel Free to Pass this test to your friends and loved ones. Use the comment section to try out your score. Personally feel a score of 10+ is pretty good.
Here are the answers :

  1. A
  2. B
  3. B
  4. B
  5. C
  6. C
  7. B-No Limit
  8. B
  9. A & D
  10. C - HDFC bank is private bank all other are Govt/PSU
  11. B -ELSS is market linked, others are not.
  12. C

How did you perform ?

Saturday, 12 May 2012

IDBI India Top 100 Equity Fund-Did You Invest?

Danilo Rizzuti

Do Not Compare Apple with Potato. This was my comment for one my friends Naveen. Now you might be thinking that wealth U Create (wUc) is being harsh. I will let you all decide if i was being mean by saying this. Here is little brief about Naveen.
Naveen has the real art of making money in Real Estate. All that he does is, invest in flats that are almost ready for possession. The trick here is, he would invest only in those flats that are built by builders who are trying to create an image or band name. In other words Good Builders who are yet to establish themselves in this competitive R.E world. Hold the flats for few years and sell it out for profits. This is something similar to investing in small caps that have the potential be ”Leaders Of Tomorrow”. So far Naveen has had a great success with this strategy.
Recently he decided to venture his luck or strategy in stock world. Naveen started off his journey by investing lump sum in recently launched NFO "IDBI India Top 100 Equity Fund".   I asked him, why did he choose to invest in this particular fund? This is what Naveen Explained:
"IDBI India Top 100 Equity Fund" is IDBI's is the first actively managed fund from IDBI. IDBI is trusted name and have proven track record, hence there is no way they would let this fund to underperform. If they have to prove themselves, they need to ensure that this Fund Outperforms. More over by investing in this fund, he would be exposed to Large Cap stocks that have the potential to give good returns in long term.He also added the Good Old Myth of NAV available at 10 Rs. Click Here to read Mutual Fund Myths
Take Away : In short Naveen applied his real estate strategy. Let us explore this fund a bit more.
  • The Man Behind the Fund - V. Balasubramaniam- For IDBI he is been handling MIP Fund and Three Index Funds. In case of index Funds I don think he would have major role to play.
  • Minimum Investment: Rs 5,000 for Lump sum and Rs 500 for SIP (Period of SIP 12 Months).  Rs 1000 would SIP amount if you want SIP tenure for 6 months.
  • Asset Allocation: Exposure to Equity -(Minimum 70% to Maximum 100% )  :  Exposure to Debt-(Minimum 0% to Maximum 30%).
Pros of the Fund:
  • CNX 100 - In all CNX 100 will provide fund manager 100 stocks to build his portfolio. Fund manager would have enough options to choose his best picks.
  • Timing- Sensex is hovering at around 16K. Fundamentally Good stocks are trading at cheap price. The fund manager can make investments in blue chip that are trading at fair value.
  • Fund Focus- The Fund is focused to invest in large caps or big companies. This means that fund would be relatively less volatile.
Cons of the Fund:
  • This Fund is NFO- Financial Guru's recommend to stay away from NFO's.
  • New Fund House- The Fund is from a New Fund House. There is no past experience or track record of handling equity funds.
  • Nothing New To Offer- The Fund has nothing new to offer (In terms of investing style, Theme), There are quite a few good funds with good track record.
  • Fund Expense- For first 100 crore, the expense ratio is 2.5%. This is on higher side.
Conclusion:  Naveen always had his share for luck. Even this time he may end up with smile. Current Market Conditions will give the fund manager enough opportunity for value buying. The valuations are attractive. A pull back or recovery from here, will give attractive returns for investors.
Click Here for additional reading on Mutual Funds.
My Take Away: Weather NFO or existing fund, current valuations are attractive, investing now will and holding it for long term might be rewarding. I would bet my money on existing funds. What about you?

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