Kavitha Menon's Blog

Tax Laws related to Gifts Gifts can mean taxes for the receiver as well as the giver .Iif you know laws related to gifts given or received you can avoid taxes or minimize their impact. I. Some gifts do not attract any taxes for the receiver. These gifts include Gifts from a relative. Relatives include Spouse of the individual; Brother or sister of the individual; Brother or sister of the spouse of the individual; Brother or sister of either of the parents of the individual; Any lineal ascendant or descendant of an individual; Any lineal ascendant/descendant of spouse of the individual Gifts received the occasion of the marriage of the individual, or Gifts received under a will or by way of inheritance, Gifts received in contemplation of death of the payer.   The Problem of Clubbing of Income Although the gift itself is tax free, in some cases it could attract clubbing of income. Income and wealth from gifts given to minor children, the spouse

Property investments have to be carefully considered and evaluated. There are many online sites that help you make preliminary inquiries about location, prices and deals in property markets. Here are a few such websites that you must go through for preliminary investigations about the property that interests you. 1. Property Search Portals There are several websites dedicated to listing properties directly from builders, property owners as well as from agents/brokers. These sites help you scan through hundreds of properties from the comfort of your home. Mainly the features they offer are Facilitating search amongst several properties by sorting them on the basis of price, location, covered area etc. Providing information about amenities, local infrastructure like schools or hospitals, connectivity and price history. Sites like magicbricks.com, a leading real estate portal, help you not only search but also register your requirements, which is in turn relayed to l

My client complained that he was being offered a ridiculously high rate of interest on his car loan. It was surprising because he was a 'Privileged' customer of his bank and had no other liabilities. On enquiry, he was told that he was offered a higher rate due to bad CIBIL score. What is a CIBIL score and how did it impact my client's rate of interest on his car loan? CIBIL stands for Credit Information Bureau (India) Ltd. It collects information about borrowers like my client from all Banks and lending Institutions operating in India, collates such data and creates, maintains and distributes a report on credit history of commercial and consumer borrowers like credit card users, home loan or personal loan borrowers. Their report called Credit Information Report (CIR) is a factual record of a borrower's credit payment history compiled from information received from different credit grantors. Its purpose is to help credit grantors m

Peer groups include family, work colleagues, friends etc who influence our decisions with respect to several aspects of our lives. It is natural behavior to conform to general norms followed by these groups. Unfortunately pressure to conform to peer group norms can cause severe damage to financial wealth. Common money mistakes that one makes due to peer pressure can be avoided if you can recognize them and taken corrective and preventive action. I have enumerated such mistakes that investors make due to peer pressure. 1) Making money decisions to maintain status in society: Here's an example of a client who was born into a rich business family, lived in South Mumbai and had a roaring family business. In his mid forties a family dispute broke up the entire business and he found himself left with no assets and no business. He had no means of starting afresh and had taken heavy private loans at ridiculously high rates of interest to fund high living expe

As parents retire and age, adult children have the additional responsibility of looking after their physical, emotional and financial well-being. Care for parents, whether independent or dependant, includes three important areas Medical Care Investment and Income Management and Estate Planning I have expanded briefly on these areas. Medical Care  Everyone goes through a stage which requires long term medical care of parents. One needs to plan on financial aspects of such care. In the good old days of joint families, at least physical care was never an issue as miscellaneous aunts and siblings could take care of the elderly. In the absence of such a support structure, it is necessary to plan in advance for a scenario where one of your parents would require long term medical care. The cost of care includes not only actual medical expenses but also the cost of lost hours of work and the cost of arranging external arrangements like appointing full time nurse, infrastructure for

While making financial plans, young couples are eager to start saving for their children's future and this is often on their top priority list. They want to be ready when their child will need financial assistance to purse expensive higher study courses. With a little bit of planning they can secure their child's future with the following three step process. Investment Planning: Step one of the process involves knowing firstly how much you will need to save and secondly which instruments are right. How much to save  - Lets say an engineering degree will cost approx Rs.10 lakhs (including cost of tuition, books etc) while an Masters abroad can cost another 20-25 lakhs today. A similar course, 15 years from now, at a 10 % rate of inflation will cost Rs.41 lakhs and Rs. 83 lakhs respectively. Use this calculator given below to find out how much you will need to save for your child's future. Download Calculator [xls]. Choice of investment vehicle  - It is a known f

K We all love the idea of home away from home. Away from the pollution and fast life of the city, a vacation home seems to be a perfectly romantic way to spend a weekend every now and then. But are they really good investments? To evaluate a vacation home as an investment option, consider the following Liquidity  - Vacation homes are tough to sell. The developer from whom you may be planning to or already purchased the apartment can use several marketing tools like advertising in national dailies, attractive brochures and events to market his homes. You on the other hand have no such resources except utilizing the services of a broker. Think in terms of future demand or rental demand and the investment prospect looks less rosy. Transportation  - A back breaking, nerve wreaking joyride is not something you would look forward to after a hard week at work .Your location needs to have good roads or other means of transportation like railways that will take you there without stress and

First time property buyers face the dilemma of whether it would be more prudent for them to buy property or continue living on rent. Indeed it is cheaper to rent a house for a lesser amount than the EMI. You could invest this difference between the rent you pay and the EMI, let it grow and later on buy a house. On the link below is a calculator that allows you to compare the two options and see which one is beneficial for you. https://www.ppfas.com/research/ereports/week/110711/rent-vs-buy-calculator.xls . For most young couples buying a house will always be the better of the two options even if it means paying EMIs over long periods of time. The benefits of owning your home are -You are investing in a growing asset -Your income will eventually increase and accommodate the EMIs far more easily than they appear to in the beginning of the loan period -Finding new apartments to rent every two to three years is time consuming .The inconvenience caused to family specially when there

My client was concerned. After five years of systematically investing in equity funds his IRR or annualized return was a mere 7%. He isn't sure if investments in equity mutual funds are right for him anymore. Many investors started off with SIPs in equity under the notion that they are entitled to a 20-25% return on a compounded basis and anything below this is too poor. Despite years of market experience behind us , investors seem to have very unreal expectations from equity investments . Unfortunately many also tend to shy away from equity investments when  such expectations are not met . Equities are the best long term assets to invest in provided you are clear about the time frame of investments, expected returns , portfolio quality and lastly whether your financial situation allows for such long term investments. Being Realistic about the Time frame -  Every analyst or fund manager would tell us that we need to give a minimum 3 to 5 years while investing in equities. Fi

Financial do's and don'ts before you turn entrepreneur Planning to turn entrepreneur? You have got to be prepared for a period of sporadic to zero income - a world apart from the comfortable space of monthly pay cheques. Financial planning will take care of the crucial transition period in which monthly credits to your bank account will stop. Here are some important dos before taking that long break. 1. Maintain a fund equivalent to the period for which you believe your business will not bring in positive cash flows.  To do this you will have to make a budget and plan expenses on both the personal front as well as for your business. Only then can you define a time frame in which the business will start making enough to meet expenses. Add a margin of a few months' expenses to make it safer. If you are planning a break of say two years, you need to maintain at least two years worth of basic expenses in a liquid fund. A Systematic Withdrawal from this fund that will tak

Last week, we received a call from a lady who wanted to get financial planning done for her family. She was a smart and educated woman working as a top executive in a well known company, while her husband was running a successful business. One look at their joint income gives one an impression of an upper class well off couple. However our client wanted to meet us because they were in the middle of a financial crisis. The couple spent a very large part of their income paying off debt in the form of personal loans, EMIs and funding of a very expensive lifestyle. There were no savings while loans and EMIs were related to purchase of gadgets and cars and some land that was turning into a white elephant. When in a debt crisis, following suggestions could help. They need to be however implemented with a time bound plan. Restructuring - You can speak to your bank or creditor to restructure the debt such that they can be paid off over a longer duration or at a reduced rate. Banks /credit

This article is an attempt to simplify the process of retirement planning in three basic steps Step One: Knowing what you will need at retirement and how much to save. The link given below takes you to a retirement calculator and will help calculate your retirement corpus as well as the amount required to be saved by you to achieve this goal. But before going to the calculator you need to be ready with the following. 1. Retirement Age 2. Your current expenses: Remember to remove expenses related to children's education, EMIs and insurance premiums that you may not pay after retirement. 3. Life Expectancy: Generally financial planners take life expectancy upto 85 years. This is an important input from the point of view of calculating the corpus required at retirement. 4. Pre retirement returns - Based on your past experience with investments or with the help of a financial advisor you could arrive at the returns that you will be able to get from investments during y

When young couples make financial plans, their goals revolve around buying a home, vacations, a car, their child's education and lastly retirement. Almost always retirement is the least prior goal in their plan while the reverse is true for those in their forties. Irrespective of how old you are, retirement is the most important goal to plan for. One of the discretions we make as financial planners is to always put, first emergency fund and then the retirement fund as the most prior goals irrespective of clients own preferences. I am listing a few reasons for doing that - Our life expectancy is rising:  This means that with increased life you need money to last you for that increased lifespan. Our life span has risen from 44 years in the 1940s to 74 years in 2011.That is the average age. Most individuals have a working life of around 30 odd years would have an equivalent number of retirement years. Of course one can work till one dies, but that should happen out of choice, and n

"Your charges are way too high!" Said my client, when I recommended he get himself a plan made. Every month he would call me to ask about appropriate instruments to put his savings into. As a financial planner I know such advise based on limited information about his financial situation was not only inappropriate but could also be detrimental to his long term wealth. He however was happy that he was earning well, saving regularly and was well versed with investments and hence was ok with the current set up. I would like to compare investor's relationship with their advisors with that of a patient with a chemist and a family doctor. You go to a doctor for advice, take a prescription to the chemist and buy a product. But hey! You need to pay your doctor a fee and plus pay your chemist a margin on the product purchased. Would it not be really smart to simply ask the chemist for a prescription? He is earning a profit from the product isn't he! When it comes to mone

It is a well known fact that expensive products like ULIPs and endowment products can considerably reduce your wealth pool over long durations of time. Let me explain with an example. Take two equity funds with 1 lakh each invested in the same portfolios, one being a regular diversified equity fund having a 2 % expense structure while the other being a ULIP product having a 4 % expense structure. Let's assume that equities deliver a 17 % compounded annual return over a 20 year period. The end value of the regular equity fund will be approx Rs.16 lakhs at the end on term while the ULIP product with the same portfolio will notch a mere Rs.11 lakhs at the end of term. The difference in returns is approximately Rs.5 lakhs. With Annuities or SIPs this difference in wealth will only accentuate disproportionately over time. Typically any product that creates a package for you will be expensive. A ULIP is an investment plus insurance package, a MIP is a debt plus equity package, a capit

What's your opinion on silver? Since equities don't seem to be doing much why don't we switch to gold and silver?" asked my client of several years. This was coming from a client, who had earned rock solid returns from his investments under our PMS, had an asset allocation plan and had benefited tremendously from regular rebalancing of his portfolio. I didn't have an opinion on silver prices. My only fear was that it was moving up too fast for comfort and as an advisor I am averse to suggesting commodities specially ones that have had a speculative run. It is mandatory for every investment scheme that publishes returns to declare that past returns are no guarantee for future returns. Then why do investors seem to chase those assets that have already had a superb run. Despite years of historical evidence that the best returns are earned when a particular asset class has been badly trashed and at rock bottom, investors seem to care less. There is an enigma about inv

Kavitha Menon |  kavitha@ppfas.com Like equity, property purchased for investment purposes needs to be evaluated both quantitatively and qualitatively. Of the most common and simple ways of quantitatively evaluating value of a property is by rental yield. Both potential buyers as well sellers can use this tool to decide on the true price of a property.  Here is how you calculate rental yields Net Rental Income = Monthly Rental X12        Less: 1) Rent for the Period Unoccupied        Less: 2) Brokerage Expenses        Less: 3) Maintenance Expenses        Less: 4) Tax payable on rental income        Less: 5) Repairs and Maintenance expenses amortized        Net Rental Yield = Net Rental Income/Current Property Value Needless to say a high rental yield indicates an undervalued property while very low rental yields could mean that the property is overvalued. If you intend to fund the purchase of property with a mortgage loan you could look at how much positive cash flows

Asset bubbles have been around for centuries. Although we humans have grown in leaps and bounds in areas of science and technology, when it comes to stock market behavior our instincts are as primitive as ever. As always the ongoing correction and volatility have started sending blood pressures soaring. Investors want to know, to what level will the market correct? How long will the trend last? , will FII dump stocks like they did in the 2008 meltdown? Unfortunately I don’t have the answers .Neither do the gaggle of fundamental and technical analysts offering you their expert views on various market channels . Corrections are only a mechanism to purge the market of all imperfections and excesses. It is a friend of the value picker and long term investor. Then why do we fear market corrections? 1 ) We are not sure of the real ‘value ‘of the equity we hold . Let take a little example here. Let’s say you and your friend found two beautiful teak wood tables at 'Chor Bazaar' for

Asset bubbles have been around for centuries. Although we humans have grown in leaps and bounds in areas of science and technology, when it comes to stock market behavior our instincts are as primitive as ever. As always the ongoing correction and volatility have started sending blood pressures soaring. Investors want to know, to what level will the market correct? How long will the trend last? , will FII dump stocks like they did in the 2008 meltdown? Unfortunately I don’t have the answers .Neither do the gaggle of fundamental and technical analysts offering you their expert views on various market channels . Corrections are only a mechanism to purge the market of all imperfections and excesses. It is a friend of the value picker and long term investor. Then why do we fear market corrections? 1 ) We are not sure of the real ‘value ‘of the equity we hold . Let take a little example here. Let’s say you and your friend found two beautiful teak wood tables at 'Chor Bazaar' for

“9.75% interest rates ” screamed the hoarding outside a prominent bank near the stock exchange . Bank interest rates are now looking attractive and it may be a good time to lock in debt allocations at high rates of interest . However before locking in your hard earned money in 'safe' bank Fds you must consider some facts. Taxes - Bank interest in fully taxable in your hands . Depending on the highest income bracket in which you fall , you may pay upto 30 % taxes on interest income . Effectively this means that a person falling in the 30% tax bracket will earn only 6.8% (9.75% less 30% taxes ) returns after paying taxes Inflation adjusted returns – Let me explain this with a simple example .Say you are able to buy your days requirement of vegetables for Rs.20 today . Assume prices of vegetable go up next year by 10 % while you have invested Rs.20 in a FD earning 8% . We also assume that you fall in the lowest tax bracket of 10 %. In a years time your Rs.20 would