Many people believe that investing in a new fund would be more profitable than investing in old funds. The reason, as they say, is that the new fund would be issued at a price lesser than old funds in similar category and therefore the percentage increase one could expect in the fund growth would be more. This is one of the biggest myth in mutual fund investments.
The point to note is, NAV is not an indicator of the potential of fund. In fact a fund with good track history is more likely to yield better returns with adjusted risk-return, than the tumultuous new fund in the market.
Read our article on diversifying your investments in mutual funds -
Are you satisfied by the returns that your investments are getting you today? If not, think, is your money invested in the right avenue.. One needs to plan one's finances according to his/her needs and choose the investment avenues accordingly.
The concept of Value averaging Investment is picking up these days. One of our earlier blog on 'Value average Investment Plan (VIP), a new approach towards Investing...', explained the concepts behind VIP.
Last week Rediff covered the comparison between such two investment methods. Have a look at it...
Gold is a good hedge against equities and is often used as an insurance to equity holdings. In past, even in extremely negative scenarios, gold has performed well.It is therefore advised that one should always hold some gold in his/her portfolio.
Gold is a very popular metal; mostly it is accumulated in the form of Jewellery. However, this is not an ideal mode for an investment considering the transaction costs. A retail investor should consider investing in Gold via virtual ways i.e. Exchange Traded Funds and Mutual Funds that invest into gold mining companies through an overseas fund. One should bear in mind that Gold Mining Funds can be volatile due to exchange rate risk. Therefore it is suggested that they invest in the companies which deal in Gold rather than directly investing in the base metal; Companies are subject to market risk that is much larger than that of a commodity like gold.
Asset Management companies (AMCs) often come up with new ideas to attract investors. The quest for an investment tool that helps investors achieve the dream of good returns on their investments with efficient management of risk has given birth to the concept of Value Averaging.
What is Value Averaging?
The idea of value averaging was first developed by a former HarvardUniversity professor. Value averaging is a strategy that allows an investor to incrementally increase the value of the portfolio through the addition of a set amount of assets rather than relying on the existing components of the portfolio to achieve growth. This approach follows a particular formula for this and helps to shield the investors from the possible decline in the total value of the portfolio due to fluctuations in the market. Unlike the more common practice of rupee cost averaging, value averaging also includes the projected rate of return as part of the formula and projections.
Since value averaging is involved with making informed decisions based on certain criteria, this investment method is more structured than any other random investing style. This method helps the investor to be fully aware of the volatility for mutual funds and other securities that are under consideration and thus act accordingly. From this perspective, the systematic approach that is pertinent to value averaging helps to limit the amount of risk that the investor may incur as a result of the transaction.
The method of value averaging includes projecting the expected rate of return on a given investment and determining when the investor will want the maturity or would like to sell the security. We have then to consider periods when the security will perform above expectations and periods when it will underperform. During the fluctuations, the investor will adjust buying and selling accordingly, so that the anticipated return can remain more or less constant. In this way the investor will be able to project when the final average return will be achieved; and thus can plan when to sell off the security.
Value averaging Investment Plan (VIP)
Under the VIP, investors contribute to their portfolios in such a way that the portfolio balance increases by an amount calculated by a formula-based technique, regardless of the market fluctuations. As a result, when the market declines, the investors contribute more and when the market goes up, the investor contributes less. This is in contrast to Systematic Investment Plans (SIPs) which are based on Rupee Cost Averaging, requiring a fixed investment at each period. The VIP takes into consideration the expected rate of return of your investment.
Why Value averaging the investments?
The age-old formula - ‘to buy cheap and sell dear’ still inspires many investors. The crux of value averaging is simple: It is difficult to identify the top and bottom of market. Varying the amount of investment with time can help investors.
Let us understand this concept with an example. Suppose you want Rs 2,000 added to your equity mutual fund every month and you start with investing Rs 2,000.
Let us assume that at the end of first month you find that the value of this investment has fallen to Rs 1800 due to a correction in the market. In that case, in the next month you will invest Rs 2,200 to ensure that you have Rs 4,000 in your fund. By the end of the second month, let us say, you find that the value of these units have gone up to Rs 4,200, then in the third month you will invest Rs 1800 only, taking the value of the units to Rs 6,000 (Value Averaged). Here you invest more when the prices fall and invest less when they rise. In other words, you buy more (units) when the prices are low and you end up investing less (buying less units) when the markets peak.
Because the risk is often minimized and the return is more or less reliable, value averaging is a great way for investors to methodically increase the value of their investments. In the above example, it’s recommended that one should invest Rs 200, which is not being invested in the third month due to a rising market, in a safe instrument or keep it in a savings bank account. The thing to keep in mind is that this money will be utilized when markets fall. After all, to get the best out of VIP one should have sufficient funds during a bear market.
My nephew, Adi, aged 23 Yrs was all excited when he approached me, for he was filing taxes for the first time! I was only intrigued to figure out what the hoopla was all about, he quickly came up with some interesting inundates. “know what”, the young man said, “I feel responsible for the country, I am paying taxes and contributing to the country’s development!”. “I don’t want to get a thing wrong, don’t want to run hither and thither in the last moment.”
I was indeed proud that at such a young age, he was more organized than most of older brethren, infact Adi’s father always did the eleventh hour preparation, like most of the other individuals we come across. I was more than willing to fill him with the nuances of tax filing.
Know the last minute to avoid it!
For any project in life, it is best to be prepared early on – this holds good for tax filing as well, infact tax planning is another arena where individuals await the last call for proofs and then consider saving taxes. Now, to avoid the last minute rush, it becomes pertinent to know the last dates applicable.
The last date for filing return of income for the year ended March 31, 2009 is July 31, 2009 (Salaried and non-tax audit cases) and for individuals who are required to get their books of accounts audited under the Income Tax Act, 30 September 2009.
File your documents, before filing your returns
Apart from the form 16 issued by the company, there are couple of other documents which would be pertinent. Here’s a brief list of what would be required to conduct your tax filing –
·Form 16 (received from employer/s)
·PAN Copy
·Form 16A (Where TDS has happened incase of Term Deposits, Consultant Income)
·Summary of all bank statements
·Details of Capital Gains, Rental Income
If you have business / consultant income and claiming certain expenses, then the vouchers / bills should be in place.
Missed your proof submission deadline – Not late as yet
Being painfully lazy, some people tend to miss their deadline for submission of tax proofs and others could have genuine reason, don’t get panicky just yet – one can still claim the benefit and refund thereof. Re-compute your tax liability while filing return of income and attach the relevant proofs thereof. This is applicable for both Exemptions and Deductions.
Don’t lose your mind over lost Form 16
It is always a herculean task to get duplicates issued, it’s no different for Form 16. Form 16 is an important document, handle it carefully, but if someone were to lose the same, simply request the HR / Finance team to issue a duplicate – the written request should be on an indemnity bond.
Applicable ITR
With the advent of new income tax return forms based on nature of income earned during the year, one needs to know relevance of each return form and select the right ITR as applicable. For an individual, four forms are applicable based on the sources of income, the details of which are as under:
Form No.
Applicability
ITR 1
Meant for Individuals, who have
- Income from salary
- Interest income (taxable / exempt)
- Family pension
- Income from agricultural activities
ITR 2
Individuals / HUF not having any income on account of carrying out business / profession or on account of being a partner in a partnership firm.
ITR 3
Individuals / HUF who are partner in a partnership firm and does not carry out any other separate business / profession.
ITR 4
Individuals / HUF who is carrying out business / profession under a proprietary concern.
During the current budget, the Finance Minister hinted that Tax filing would be made simpler by re-introducing Saral, this would be a welcome move.
Preserve the filed documents
The acknowledgement that you receive from the IT department after stamping is an important document – these are the documents which are to be preserved –
·Detailed calculation of taxable income and amount of tax payable / refundable
·Advance Tax / Self Assessment Tax Challan
·Copy of documents concerning sale of investments & properties, bank statements etc.,
·Income Tax Returns Acknowledgment
My nephew was a happy lad, for he had devoured ample information, as he prepared to leave, he glanced back to ask, “Is it a legal obligation to file for taxes?”. I had indeed forgotten to mention that it was a legal obligation to file your taxes, however, only if your taxable income exceeds the basic exemption limit- For FY 2008 – 09 - Male Assessee – Rs. 1.5 Lakh; Female – Rs. 1.80 Lakh; Senior Citizen (above 65 Yrs) – Rs. 2.25 Lakh. If your income has been lower than the stipulated amount then you can lay back and relax!
As an afterthought, Adi added, “Oh! In that case, I don’t have to worry this year!”
