Spend, Save and Invest Smartly

Creating Wealth by Investment Planning

From a financial point of view there are four kinds of people in this world

  • The first kind are the ones who are only concerned about fulfilling their basic needs. The ones which we will call "with limited means" or in simple terms "poor"
  • The second kind are the hard working / earning ones who are busy buying stuff sometimes even beyond their pay cheque. They are the ones who are busy paying bills of all kinds: medical, electricity, house rent, house EMI, credit card etc. which seem never ending in nature. At the end of the month virtually nothing is left when it comes to savings.
  • The third kind are those who become super rich all of a sudden but don’t know how to utilize their wealth find themselves in a mess financially. Michael Jackson and Mike Tyson are examples of such "Rags to Riches and Back to Rags" stories
  • The fourth kind are what we would say, "Wealth creators", "Smart investors" or the ones who do not have to worry about money being not enough. They might be born poor, born rich, born in a hard working family or might someday become rich over night. But what differentiates them is that they know how to "GROW" their money.

The only way to multiply your money is by proper Investment or Financial Planning. As Warren Buffett says - "Never get dependent on one source of income, make Investment to create second source". The need of financial planning is in preserving ones money and converting it into wealth. Financial planning basically means determining ones current financial situation, setting goals and targets and devising methods in order to achieve these set goals and targets.Posted below are some tips which would help in planning your Financial Planning.

Investment Planning:
Invest in a Term Plan

One should invest in a term plan as this covers the risk of a loss of potential income on the death of the breadwinner of the family. This is a pure protection or a mortality cover with no investment benefits but after investing in a term policy one can be financially secure and can invest the rest of the corpus in a good investment scheme.

Stay Invested in SIP’s (Systematic Investment Plans) for the long term

An SIP forces an investor to stay invested at all points of time accumulating units during periods of fall in the market and the prices of these units rise when markets spike. Stay invested at all times. Many investors in India panic when the market tanks and discontinue the SIP, they tend to follow the buy high sell low philosophy due to the panic syndrome. This should be avoided at all costs.



Balance Your Portfolio

One need to ring fence ones portfolio against volatility by diversifying ones investments. Never put all your eggs in one basket. Always invest in a combination of debt and equity.In periods of high volatility debt instruments tend to be safe as well as yield good returns. Liquid funds invest in a wide variety of money market instruments such as treasury bills, commercial paper, call money as well as certificates of deposit. Income funds invest in money market instruments as well as government and corporate debt. These investments are open ended and investors can exit these funds at any time.An investor must go in for a wide variety of investments in debt instruments such as money market instruments as well as bank fixed deposits and an investment in the public provident fund which also entail tax benefits. Debt funds lead to a lower tax liability. These debt funds have long term capital gains taxed at 10% without indexation and 20% with indexation leading to huge savings among those investors who fall in the upper tax brackets.

Fixed Maturity Plans are better bet than Fixed Deposits

Investments are made in fixed income securities which mature in a year. These are close ended funds and once the new fund offer closes no further investment is allowed. These funds are open typically for a couple of days and no new offers are accepted once the new fund offer closes.The prevalent yield of the underlying security minus the expense ratio mainly cost of running these funds gives the indicative yield. Expense ratio may be in the range of 0.5-1.0% in a typical fixed maturity plan. A bank fixed deposit actually prints the amount thereby indicating the actual return .In a fixed maturity plan the returns are indicative albeit higher than a fixed deposit.
Let us consider Mr X invests INR 5 Lakh in a fixed maturity plan (Dividend) for a period of 3 Months. Mr X’s friend Mr. Y also invests INR 5 Lakh in a fixed deposit of a similar tenure.The rate of return obtained from the fixed deposit is 8.5% which is same as the indicative yield on a fixed maturity plan. Both of them fall in the highest tax slab earning more than INR 15 Lakhs per annum. We now study the benefits of a fixed maturity plan as a tax saving instrument. Dividend in the hands of the investor is tax free but the mutual fund has to deduct a dividend distribution tax of 16.61%.

Comparison Between Fixed Deposit And Fixed Maturity Plan Dividend Option Showing Savings On Income Taxes For A 90 Day Period

Bank Fixed Deposit FMP Dvidend
Net Yield 8.5% 8.5%
Tax 33.66% 0
Dividend Distribution Tax 0 16.61%
Net Yield 5.64 % 7.09%

The Fixed Maturity Plan Dividend Option gives a higher post tax return than a fixed deposit of a similar tenure. Over a short tenure such as 90 days fixed maturity plans are a good tax saving option. Short term capital gains are added to the income of the investor and taxed as per the slab the individual falls under. In a fixed deposit the interest portion is added to the income and taxed as per the slab the individual falls under. Mr X saves heavily on his income taxes by investing in a fixed maturity plan.If one is still not confident of how and where to invest, one can always take the help of a Investment Planner or an expert in finance, who would be able to understand when a financial plan is off track and set in corrective measures in order to bring ones financial plan back on track.

Financial Planning
Tax Planning
Investment Planning