5 Things To Do At The Start Of The Financial Year

The new financial year 2022-2023 is here. If you want to become disciplined with your finances, doing certain things at the start of a new financial year can simplify your financial planning needs.

Here are five things that you need to do at the start of the financial year:

Analyse your asset allocation: It is essential to review your portfolio’s asset allocation before making any financial decisions in the new financial year. You can rebalance your portfolio’s asset allocation if there is any significant change in your asset allocation because of recent market movements.

Let us assume that your ideal asset allocation among equity and debt asset class is 80% and 20%, respectively. During a market rally, the equity allocation in your portfolio may increase to 90%. If you are not happy with the current asset allocation pattern, you can rebalance your portfolio to the original asset allocation. To do that, you can redeem your equity investment, or you can increase your debt investment. The rebalancing exercise helps you to keep risk and reward at a level that is optimal for you.

Review financial goals:Financial goal give a sense of purpose to your investment. So if you have financial goals, this can be the right time to review your journey towards achieving your financial goals. It can help you understand if you are struggling to achieve a financial goal or if the cost of your financial goal has increased. You need to evaluate your target investment amount and draw an alternative plan with your financial advisor in such cases.

Review your investment:While it may not be a good idea to check your portfolio daily, a timely review of your investments can help you understand your investments’ performance. A review of your investment at the start of the financial year will help you figure out funds that have performed exceedingly well and funds that have underperformed its peers. You might want to reconsider further investment in funds that have consistently underperformed its peers throughout the past few quarters.

Tax planning:Do you want to have a stress-free financial year-end? If yes, then you need to start Tax Planning at the beginning of the financial year. Tax Planning in April gives you enough time to calculate the amount of money you need to invest and start investing smaller amounts regularly instead of investing lump sum at one go.  Equity Linked Savings Scheme (ELSS) is a type of equity Mutual Fund that offers tax benefits the maximum investment amount of rupees 1.5 Lakhs under section 80C of the Indian Income Tax Act. It is one of the best tax saving investment options as it provides wealth creation with tax benefits.

Increase your investments:You can fulfil your financial goals earlier by increasing our Systematic Investment Plan (SIP) by a certain percentage every year. The start of the financial year is the best time to increase your SIP. Typically, increasing your SIP investment with an increase in salary can help to reach your financial goal easily. Moreover, by increasing your SIP with your salary, you are less likely to spend more on splurges. You can aim for at least an annual 10% increase in SIP investment. 

Asset allocation analysis, review of financial goals, review of your investments, tax planning, increasing your SIP amount are the five things you can carry out at the beginning of the financial year.  

This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.

Why Should You Plan for Your Child’s Education?

Saving and planning for your child’s education can be a daunting task for many parents. The level of responsibility and the amount of money that one has to save and invest requires a lot of wisdom and knowledge. This blog will look at the need to have a financial plan for your child’s education and some easy steps.

If you think that there is enough time to plan for your children’s education, think again. The best and first step you need to follow if you want your child’s dreams to become a reality is to invest in their education ASAP.

Don’t trust us? Let us look at the figures.

Let us assume you would like it if your daughter does an MBA from a prestigious college in the US. She is too young to understand, but you want to be prepared.

To help you understand the importance of early investing, let us consider two scenarios. In the first scenario, you invest when she is three years old, and on the other hand, you invest when she is ten years old. If we assume that she might want to pursue an MBA at the age of 21, then considering an inflation rate of 5%, you will need to accumulate Rs.2.41 crore and Rs. 1.71 crore respectively.

However, you will require a monthly SIP of around Rs.31,000 when she is three and almost the double SIP amount if you invest when she is 10 years. This is the power of compounding. The sooner you invest, the better.

Daughter’s age	3	10
Years left to pursue MBA	18	11
Current MBA in USA fees	1 crore	1  crore
Inflation Rate	5%	5%
Amount required	2.41 crore	1.71 crore
Expected return from investments	12%	12%
Total Investment	68.59  lakhs	83.03 lakhs
Monthly SIP	31,755.43	62,904.21

Now that you understand the necessity of child education planning, let us go over some basics that will assist you in deciding about your child’s education.

Know how much time you have

Calculate your child’s graduation year and post-graduate years. You can determine the time horizon by estimating the number of years.

Figure out the total education cost

The first step is to determine the overall cost of your child’s education. This depends on several things, such as whether your child wants to have a global education or prefers to study somewhere closer to home and the discipline that your child likes.

Know where you financially stand

To get a sense of where you are today and how to plan for the future, make a note of all of your assets and liabilities. This can assist you in making better plans. While preparing for your child’s education, keep in mind that you should avoid dipping into your investments for other financial goals, particularly your retirement fund.

You should also avoid using funds set aside for your child’s education for non-educational purposes, such as house renovations.

Decide how much you need to save/invest

Once you know how much college will cost, you can plan accordingly. Decide how much you need to save right now or how much of a monthly contribution you’ll need to meet this goal by the required time.

One simple way is to start a Systematic Investment Plan in a mutual fund and make regular contributions for your child’s education plans.

To make a more significant contribution, you can eliminate unnecessary items from the budget or look for an additional source of income.

Asset allocation and rebalancing

Asset allocation is the breakup of the different assets, such as equities and debt in a portfolio. Proper asset allocation and investing are the smartest way to invest as per the time horizon and risk profile.

You need to make sure that the asset allocation will help to achieve your child’s dreams.

If your investment horizon exceeds five years, consider investing in equity funds, which have the potential to deliver higher long-term returns.

Rebalance your investment portfolio gradually towards fixed income or debt as you get closer to your goal.

A well-thought-out asset allocation boosts your portfolio’s returns. It can also operate as a shield, protecting your invested amount during times of market volatility.

Conclusion:

If you are a parent or plan to raise a child, you shouldn’t delay investing in their education. With the rising education costs and volatility in the job market, quality education has become imperative. So, start planning for your kid’s future today and make their dreams a reality.    

Sources:

• https://collegedunia.com/usa/article/mba-in-usa-fees-for-indian-students            
• https://www.businessbecause.com/news/mba-cost/7705/mba-cost-increases-covid

This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.

Investment Lessons to Learn From Holi

Holi is a festival that we all eagerly wait for, and it is almost here. It is one of the best times of the year to meet and enjoy the day with friends and family. Holi is incomplete without colours and sweets and it celebrates the win over evil. If we compare Holi with our financial life, we see that there are many investments lessons that we can learn from Holi.

Here are some four key investment lessons that we can learn from the festival of colours.

Importance of a diversified portfolio

Holi won’t be Holi without colours. The colours make this spring festival vibrant. Similar to Holi, our investment portfolio also needs colours. The different investment assets such as equities, debt and gold are the main asset classes that colour our portfolio. It helps us to give optimised returns as it reduces the risk associated with a single asset class. Different asset classes play different roles and give different returns at the same time, which helps to minimise the risks.

So, try to maintain a diversified portfolio with different assets as per your investment objectives and risk-taking capacity.

Safety comes first  

Most of us love to play with varied colours. But sometimes some colours may be harmful for our body and hair. In such circumstances, it becomes important to take safety measures.

Investment is no different. Before you invest in riskier assets like equities to achieve your financial goals, it is important to build an emergency fund to take care of unexpected expenses. An adequate emergency fund with at least three to six months of expenses can help you navigate situations such as job loss, car and house repairs among others. Liquid fund which is a type of debt mutual fund invests in low-risk debt securities is one of the best options to build an emergency fund.     

Get rid of the evil

Holi signifies the triumph of good over evil. Holi gets the name from Holika Dehan where Holika was killed in a fire whereas Prahlad, a devotee of Lord Vishnu came out unscathed.

During your investment journey, you may have invested in products that do not suit you and damage your finances. Mixing insurance with investment, investing in schemes that haven’t performed in a while or investing in a high-risk product beyond your risk tolerance are some evils that you may have accumulated throughout the course of your investment journey.

Portfolio evaluation can help you figure out the laggards and evils in your portfolio and weed it out. It will help your investment portfolio to be better aligned with your financial goals.

Be Patient

Desserts such as Gujiya and Thandai are Holi staples. Gujiya is not Maggi and it requires a lot of effort, planning and most importantly, patience.

Patience is also important in the world of investments. Staying patient and disciplined over a long period of time builds wealth as time is a crucial component in the compounding process.

Focus on your financial goals and don’t let short-term movements in the market wreck your goals. If you are getting cold feet because of market volatility, talk to us to help you figure out the best course of action for you. 

Portfolio diversification, being prepared for the unexpected, deleting the harmful aspects and being patient are some of the investment lessons that one can learn from Holi.

This blog is purely for educational purpose and not to be treated as a personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.

How Mutual Fund Investment Can Help You During Emergencies

Preparing for emergencies is the first step in any financial plan. Having a certain amount of money parked in a savings account or liquid fund can help to tide over difficult scenarios. However, sometimes, the emergency fund may not be enough. And, you might have to borrow money. And loan against collaterals can be helpful to tide over such a situation.

You must know you can take a loan against gold or property. But did you know you can take a loan against your mutual fund investment? In this blog, we will look at loans against mutual funds.

What is a loan against a mutual fund?

A loan against a mutual fund is just like the other loans backed by collateral. In this case, the collateral is your mutual fund investment. A financial institution such as bank marks a lien against your mutual fund units and disburses the loan amount. Once they mark the lien, the bank will have ownership of your fund units. One should remember that the bank keeps a lien against your mutual fund units and not your investment amount or the current value of your investment. So, once the lien is marked, you don’t have access to your units. This means that you can’t redeem those units until you repay the loan.     

And just like other loans, banks will decide the amount of loan based on your number of units, type of mutual fund and loan tenure.

The lien gets removed as you repay the loan.

How can I apply for a loan against mutual funds?

Nowadays, most banks offer instant loans against mutual funds, similar to their overdraft facility.

You can also apply for a loan against mutual funds offline as well. Here, you will have a loan agreement with the bank. The lender instructs a mutual fund registrar, such as CAMS or Karvy to place a lien on the quantity of pledged units. The registrar then stamps the lien and sends a letter to the lender, with a copy to the borrower, confirming the claim.

Things to keep in before borrowing against your mutual fund units

You can borrow against different types of mutual funds such as equity funds, debt funds and hybrid funds. However, the loan that you can get depends on the type of mutual fund. Different banks will have different criteria. For example, we can borrow up to 50% of your mutual fund value with equity funds and 80% with debt mutual funds. 

There will be a minimum and maximum amount that you can borrow against your fund units. This amount will differ among banks.

Banks may not offer loans against every mutual fund. Each bank has an approved list of mutual funds. E.g., ICICI Bank offers loans against mutual funds registered with CAMS.

Advantages of borrowing against mutual fund

Instead of selling your mutual fund units, taking a loan against a mutual fund can be a better option. Here are some advantages of taking a loan against mutual funds.

Tide over an emergency:  This is especially useful during a crisis because you can pledge your mutual fund units and instantly get the money into your bank account.

Fulfil short-term financial needs: Loans against mutual fund can be a unique way to raise funds for short-term financial needs. You can borrow money against your MF units for a short period and repay it over time without jeopardising your mutual fund unit ownership.

Low interest rate: Interest rates on loans secured by mutual funds may be cheaper than those on unsecured loans, such as personal loans.   

Your units stay invested: You won’t have to sell your mutual fund units if you take out a loan against them. The mutual fund units that have been pledged will remain invested and generate returns. This ensures that your financial plan and investment ownership remain intact.

Only pay interest on the utilised amount: When you take loans against mutual funds, you only pay interest on the amount credited to your account and not the total loan amount guaranteed from your mutual funds.

Conclusion:

Even if you have money in your bank account, you may need to take out loans for several reasons. It’s because of certain unexpected expenses that may require a loan. You can borrow money against mutual funds if you invest in them. This will help you meet your financial obligations while also ensuring that your investments continue to generate returns.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

Want inflation-beating predictable returns? Check out Target Maturity Funds   

Are you looking for a mutual fund that gives you predictable returns without stock market investments? You may look at target maturity funds.

Target maturity fund is a type of debt mutual fund that invests in high-quality bonds that mature within four to seven years.

What are target maturity funds?

Target maturity funds are debt mutual funds where fund manager invest in high credit quality bonds that mature within a specific period. Currently, it ranges from four to seven years. These funds are passively managed funds as it invests in similar bonds as per their benchmark index.

As the maturity period of these funds is fixed, the fund’s average portfolio maturity decreases as it inches closer to the maturity date. This is roll down strategy.

What are the advantages of target maturity funds?

Here are some of the advantages of target maturity funds:

Low expense ratio: As the structure of target maturity funds is like passive funds, they have a comparatively low expense ratio.

High creditworthiness: Target maturity fund mainly invest in government bonds, state development bonds, and PSU bonds. The credit risk in these funds is negligible as these securities have high creditworthiness.  

Predictability of returns: One of the major selling points of these funds is their return predictability. Investors can expect to earn indicative yields if they stay invested in the fund till maturity. Please note that no mutual fund can guarantee returns.

In the current scenario, the indicative yields of these funds hover around 6%. We see that the newly launched target maturity funds are aiming at a five to seven-year time horizon. In the current economic scenario, fund managers and market experts believe the timeframe will help investors get reasonable returns.

Different from Fixed Maturity Plans (FMP): It may seem that FMPs and target maturity funds are similar. However, there are a few differences between them. FMPs are close-ended and have an investment horizon of three to five years. Moreover, you can only invest in FMPs during the New Fund Offer (NFO) period.

On the other hand, target maturity funds are open-ended funds, and most funds mature within five to seven years. So, unlike FMPs, target maturity funds are highly liquid as you can invest and redeem units of target maturity funds at any time.  

Indexation benefits: Investors who stay invested for more than three years get indexation benefits. Indexation aims to reduce the impact of inflation on your investment gains. So, you can get more benefit if you cross a higher number of year-ends.

What are the limitations of target maturity funds?

Interest rate volatility  is one limitation of target maturity fund. These funds invest in longer duration bonds. Funds with longer duration carry higher interest rate risk than short term funds as it is difficult to predict the movement of future interest rate. So, when the interest rate moves up, and the price of bonds fall, the returns from the fund may inch lower.

Who should invest in target maturity funds?

So, now that you know about the advantages and disadvantage of target maturity funds, let us see who should invest in target maturity funds. 

· You may invest in target maturity funds if you are looking to stay invested the entire duration.

· You may also invest if you have a financial goal that matches the fund’s time horizon.

· Target maturity funds may also be a good option for long-term investors who want to invest in a debt fund.

· Individuals in the higher income tax brackets can invest in target maturity funds as an alternative to fixed deposits. 

Conclusion: Target maturity funds is a new concept in the Indian mutual fund sector. It is a debt fund and may give predictable returns. You may invest in target maturity funds if you have a financial goal that fits the fund’s timeframe. Contact us to know more.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

Everything that You Need to Know About Quant Mutual Funds

Artificial intelligence (AI) and Machine Learning (ML) have become a part of our daily lives. From navigation through Google Maps and social media feed, we can find the presence of AI and ML almost everywhere.

The world of investment is not far behind. The financial world has also opted for artificial intelligence to take care of the shortcomings of a human fund manager. It also helps to keep up with the upcoming changes.

Quant fund is a category of mutual fund not managed by a human fund manager. In that way, it shares its characteristics with passive funds. However, humans design the underlying selection process of these quant mutual funds.

So, different mutual fund houses can add a unique set of variables that serve their purpose best.

What is Quant Mutual Fund?

Quant fund is the short form of quantitative fund. The goal of this fund category is to decrease the impact of human mistakes on investing.

Quant funds create their portfolios by employing mathematical algorithms with basic investment principles with little human intervention. Short listing and building an investment portfolio are easier with rule-based investing. Fund managers can assess the model and, if required, make changes whenever needed.

Pros and Cons of Quant Mutual Funds

Just like every innovation, Quant Mutual Funds have pros and cons  

Pros of Quant Mutual Fund:

Cost Efficiency:Quant mutual funds are cost effective than other actively managed mutual funds.

Every mutual fund carries an expense ratio that includes various costs, including fund management fees. The price of an actively managed fund is higher as a professional fund manager looks after the fund actively. But this also adds up as costs. 

And, over a long time, the costs compound over time. So, higher the costs, better performance is required to surpass the benchmark to justify the fees.

Analyse large amounts of data:The capacity to derive insights by evaluating vast quantities of data in real-time is another benefit of quant funds.

No active involvement of fund manager:

You won’t have to worry about the fund management quitting, making mistakes, or straying from the fund’s goal.

Faster and effective to implement trading strategies:

Quantitative funds can also make investment choices more quickly than human managers. As a result, they may place orders more rapidly and take advantage of the narrow pricing differentials

Fund houses can use Artificial intelligence (AI) in the investing process to provide consistent, high-speed information processing and organised decision-making that the human brain may not be capable of handling.

So, AI can be far more effective in implementing trading strategies than human managers.

Cons of Quant Mutual Funds:

Increased volatility: As the triggers activate at pre-determined levels, quant funds can increase volatility during unfavourable market scenarios.

Take the same financial decision: Various quant funds may take the same decision after a particular market event. This poses a risk for the financial markets.

Should you Invest in Quant Mutual Funds?

Quant funds can perform effectively in the large cap category with deep markets and long trading history. On the other hand, these funds may not be suitable for mid-and small-cap stocks, as bottom-up stock selection still works.

Conclusion

Quant mutual fund is a new category of funds. Please note that these funds can also give poor results, as they are primarily reliant on previous occurrences. And, we know that past events may not necessarily repeat themselves in the future.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

How to Rebalance Your Mutual Fund Portfolio

A mutual fund is a popular investment option through which one can invest in a portfolio of securities such as stocks and debt investments. There are multiple types of mutual funds to cater to your different financial goals and needs. You build a mutual fund portfolio when you invest in different mutual funds such as equity funds, debt funds to achieve your long term and short-term financial goals.

The asset allocation of your mutual fund portfolio is the mix of different assets such as equities and debt. The ideal asset allocation in your mutual fund portfolio will depend on your various parameters such as financial goals, investment horizon and risk tolerance. For instance, your ideal asset allocation of mutual fund portfolio between equity and debt may be 60:40. This means that out of our total investments in mutual funds, 60% of your investment should be invested in equity investments and the rest in debt instruments. 

Rebalancing refers to selling equity investments or buying debt investments, or vice versa, ensuring that the portfolio’s asset allocation matches the ideal asset allocation.

Often, rebalancing is considered a part of a long-term investment strategy. In other words, it is an exercise that needs to be undertaken regularly to fulfil long-term financial goals.

How to Rebalance Your Mutual Fund Portfolio?

Here is how you can start with portfolio rebalancing for your mutual funds:

• Set Goals for Asset Allocations:

The initial step in the portfolio rebalancing is to set goals for asset allocation. If your stock or bond ratio seems better to you in the current market scenario and you think it will still have better performance in upturn or downturn, go for the same. However, if you do not have any asset allocation strategy, you must focus on having one. You can seek help from an experienced financial planner to help you figure out your ideal asset allocation.

• Find out About your Current Asset Allocation:

Once you have finalised a strategy for asset allocation, you must find your current asset allocation. Gather all the investment statements you have, and you can calculate to understand the current asset allocation. There are multiple free and paid online tools other than mobile applications that can show the asset allocation breakup of your investments.

• Create a Portfolio Rebalancing Plan:

If your asset allocation goals and the current portfolio are in line, the task is almost done. However, you might have to make some changes. When you decide upon the funds to be added to your portfolio and the units to be sold or bought, you will find that the process is more about trial and error. You might require revaluating the impact of buying or selling some holdings before making the actual trade. Even though your portfolio doesn’t need to be a replica of the market, you must find out if it is heavily skewed towards some sector or style.

• Paying Heed to Tax Angle:

Before you rebalance your mutual funds’ portfolio, you must consider the tax impact of your investments. Therefore, if you invest in the equity funds, ensure not selling off the units before a year to avoid paying the short-term capital gains taxes. For non-equity mutual funds, any holdings sold within three years from the purchase are subject to the short-term capital gains tax. The capital gains are added to the income and taxed as per the income slab. In contrast, the holdings sold after three years are subject to long-term capital gains tax of 20% after indexation benefits.

How often should you rebalance the portfolio?

There is no right or wrong answer to this question. A significant life event such as marriage, the birth of a child or death may call for portfolio rebalancing in addition to a regular portfolio check-up.

Ideally, you should review your portfolio every year. You can decide on a fixed date that is easily memorable.  You can look at rebalancing your portfolio if there has been an extreme change in the asset allocation mix.  Moreover, consider the expenses before rebalancing your portfolio.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, Read all scheme-related documents carefully.

Budget 2022 Highlights: Key Takeaways for Investors

On Tuesday, Union Finance Minister Nirmala Sitharaman presented the Union Budget for the financial year 2022-23.

Let us look at some of the important announcements made by the finance minister in the budget with special emphasis on updates for investors.

Cryptocurrency and Digital Rupee

• The government intends to develop a digital rupee based on blockchain and other technologies in the fiscal year 2022-23. It will be issued by the Reserve Bank of India.
• Profits from digital assets will be taxed at the highest rate of 30%.
• Only the acquisition cost would be considered while computing the income from digital assets.
• The losses from digital assets can’t be set off.
• TDS of 1% will be deducted on transferring digital assets.
• The individual who receives the digital assets as a gift will also have to pay taxes.

Increase in the tax benefit for state government contribution in the NPS

• For state government employees, the tax deduction against employer contributions in NPS will be increased to 14% from the current 10%.

Possibility of correcting a tax mistake

• Taxpayers have two years to file an updated return within two years of the relevant assessment year if they fail to disclose income when completing their first forms.

Other important updates:

Here are some of the other essential announcements mentioned in the budget that may boost the companies associated with these sectors. 

Infrastructure sector

The government wants to expand highways across the country by 25,000 kilometres and spend more money on the Nal se Jal scheme, five river link projects in different states, and more money for the PM housing scheme.

 The government would develop the PM Gati Shakti master plan for expressways in 2022-23 to promote the speedier movement of people and products. In 2022-23, the national highway network will be increased by 25,000 kilometres. Besides public investment, Rs 20,000 crore will be allocated through other sources.

Drone industry

The announcement of Drone Shakti by the Union government is a major boost to the drone sector. Drone Shakti and the Rs. 120 crore PLI scheme for drones and drone components will assist boost domestic manufacturing and job creation. According to the government, start-ups would be encouraged to help with ‘Drone Shakti’ through various use cases and applications.

Blended petrol

According to the budget, unblended petrol will be subject to an additional differential excise fee of Rs.2/ litre from October 1, 2022. The finance minister has announced this move to lower the percentage of unblended petrol in the country and reduce dangerous particle emissions.

MSME & Travel Industry

In her Budget 2022 speech, Union Finance Minister Nirmala Sitharaman announced the continuation of the Emergency Credit Line Guarantee Scheme (ECLGS) until March 2023.

The government will set aside a separate corpus for hospitality and allied industries, and the government will take initiatives to strengthen the MSME (Micro, Small and Medium Enterprises) sector.

The finance minister stated that the scheme’s coverage would increase from Rs.50,000 crores to Rs.5 lakh crores.

5G

The Indian government plans to hold a spectrum auction by the end of the year to help private telecom companies put out 5G services.

As part of the production-linked incentive plan, a design-led manufacturing scheme will be developed to help build a robust ecosystem for 5G.

Form expert panel for PE/VC investments 

The government is going to set up an expert panel to help people invest in venture capital and private equity. The government, through this panel, will look at more policies that could help investors who put money into Indian businesses from outside the country.

Conclusion

While the budget didn’t have any significant updates for mutual fund investors, it made major announcements for the crypto industry. This article has summarised some of the major pointers announced in the budget.    

Difference Between Tax Free and Tax Saving Investment

Death and taxes are the two certain things in life. Taxpayers keep looking for investment options that may provide them with satisfactory tax benefits. There are various options to help you out in this aspect.

However, if you explore this domain a bit more, the two major things you will come acrossi.e.tax free investment options and tax saving investment options.

In this article, let’s find out the difference between these two investment options and who should invest in them.

What are Tax Saving Investments?

As you can already comprehend with the name, tax saving investments are the ones that help you to decrease your tax liability to a great extent. For instance, suppose you made Rs. 5,00,000 in a year.

By investing in specific tax-saving instruments, you get to save and claim a deduction by investing up up to Rs. 1,50,000 in a year under Section 80C of the Income Tax Act.

These instruments comprise subscriptions to specific NABARD bonds, contributions to Public Provident Fund, deposits in Sukanya Samriddhi Account, or a five-year long-term deposit with the post office or any of the banks.

However, keep in mind that the income from any of the tax-saving instruments might or might not get exempted from the tax.

What are Tax Free Investments?

On the other hand, if you wish to save taxes on your interest income or any other income coming from investments, a tax-free instrument should be chosen.

These tax-free bonds include REC, HUDCO, NHAI and PFC. They are issued by state companies and generally have a maturity period of 10-years or more.

These bonds can be purchased either during the primary issue or once they get listed in the secondary market.

Differences between Tax Saving and Tax-Free Investments

There are only two major aspects that distinguish tax saving and tax-free investments. Here are the differences:

·         Tax free options offer interest that is not taxable; whereas capital gains may be applicable on tax saving investments.

·         For tax saving investments, investors can claim deductions under the section 80C; on the other hand, this option is not available in tax free bonds.

To understand this detail in a comprehensive manner, jotted down below is a breakthrough of differences between tax saving and tax free investments.

·         Suitability Factor:

Considering that tax saving investments such as ELSS are suitable for mid to long-term investments, they are more suitable for those investors who are looking for long-term returns. On the contrary, tax free bonds are appropriate for senior citizens and retirees as they provide regular income.

·         The Risk Factor and Returns:

Talking about the return, tax saving options like ELSS can generate higher returns with higher risks than tax free investments. As tax-free bonds are issued by the state government; it carries less risk.

·         The Benefit:

As far as tax saving investments are concerned, they provide a benefit under the 80C section of the Income Tax Act on the principal amounts. Thus, by investing in these schemes, you can get a deduction of up to Rs. 1.5 lakhs.

Contrary to it, tax free bonds offer an annual coupon, which makes interest accumulated tax free according to section 10 of the Income Tax Act.

Conclusion:

Now that you have understood the difference between tax free and tax saving investment, make sure you choose the right option. In case you need any further information on this topic, we are just a call away.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

Should You Invest in Covered Bonds?

Everyone seems to be talking about covered bonds. The increase in the demand for these instruments is clear. As per the ICRA’s report, Indian issuers have sold covered bonds worth Rs. 2,218 crores in FY2021,up from Rs. 25 crores in FY2019.

In this article, we will talk about covered bonds and the hype surrounding this investment option. 

What are Covered Bonds?

The NBFC creates a pool of loans against which the firm issues bonds. These bonds are called covered bonds. The asset, i.e., the pool of loans,are secured loans. This means that gold or any physical property backs the loan. E.g. a covered bond asset can comprise a pool of gold loans backed by physical gold. This is the reason behind its name.

Another safety feature of the bond is that covered bondholders are the first nominees if the NBFC goes bankrupt. This feature distinguishes covered bonds from other types of bonds.

How it benefits NBFCs?

Many NBFCs find it hard or expensive to raise money from the market. The debt instruments issued by these NBFC are not AAA-rated. AAA is the highest credit rating and depicts the high creditworthiness of the NBFC. So, in this current scenario, not many investors would be willing to take the risk and invest in the company.

So, NBFC can now raise funds at a cheaper rate through covered bonds. This may increase the company’s credit rating, making it easier for them to raise funds in the future.

How do investors benefit?

The demand for covered bonds is strong among investors seeking interest income and capital safety. In this low interest scenario, many investors are looking for fixed income assets that give them a reasonable rate of return.

Covered bonds are claimed to be less risky than equity assets and generate high returns than bank fixed deposits.

In India, covered bonds were an investment option for High Net worth Individuals(HNI). The minimum investment amount was Rs. 10 lakhs or more. But investors can make a minimum initial investment of Rs. 10,000 and invest in covered bonds. 

Taxation

It is also a tax-efficient product,and you need to pay 10% tax if you stay invested for over 12 months.

Things to keep in mind before investing in covered bonds

• The high return comes with high risk. It carries higher risks than debt mutual funds.
• Online Platforms selling such bonds are not responsible if the NBFC goes bankrupt. They are a platform and receive a commission for offering covered loans on their platform.
• It is not an alternative to Fixed Deposit (FD).
• If you want to invest in covered bonds, you can start by allocating small % of your portfolio based on your risk appetite.

Covered bonds have caught investors’ interest. Investors need to remember that high interest comes with credit risk, liquidity risks and fraud risks.

It would be a better idea to talk to your financial advisor before investing in covered bonds.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.