Beat Escalating Education Costs Through Mutual Fund Children Plans

Children education cost is skyrocketing with each passing year, making the effectiveness of traditional products like fixed deposits highly questionable in the current scenario. Equities stand out of all options as a means to achieve children education goal.

Getting to reality

Before jumping to any ad-hoc number, it is imperative to note down three key numbers that are vital to your child’s education goal. 

1. Corpus needed
2. Number of years left until your child’s education begins
3. Expected rate of return

As said earlier, it is highly critical that you set the above three numbers right or else the whole process of education planning will turn futile. 

Let’s assume that the current cost of education in India at 18 years of age is Rs 20,00,000. The same is expected to grow to Rs 70 Lakh (rounded) after factoring in inflation at 7%. The following table illustrates the monthly SIP amount required to attain the required sum at varying rate of return and number of years.  

	Number of Years Until The Education Begins
Expected Rate of Return	10	15	20
10%	₹ 34,961.98	₹ 17,518.71	₹ 9,706.97
12%	₹ 31,516.76	₹ 14,828.81	₹ 7,668.33
15%	₹ 17,862.50	₹ 5,863.18	₹ 2,043.68

As apparent, the amount of SIP per month reduces vastly when there are enough number of years in your hand and the returns generated are higher. Thus, it is important to start investing earlier to lessen the burden of monthly outflows. 

How to move ahead with your plan?

The next obvious question is how to select a viable route to invest in equities. In the given condition, mutual fund plans offer themselves as the best investment alternative. Investment in mutual funds can be done in two ways.

Equity-oriented schemes- You can start a SIP into one or two equity-oriented schemes and earmark it towards your child’s education. However, you will have to periodically evaluate the performance of these schemes to know whether SIP should be continued or not in the said scheme. A scheme underperforming for more than three years should be immediately discarded and replaced with a well-performing scheme. 

Mutual fund children plans - Many fund houses offer child plans that are basically hybrid schemes with a mix of debt and equity instruments. These schemes allow parents to invest on behalf of their minor child. These schemes stipulate a condition that the redemption proceeds are credited only in beneficiary kid’s bank account.

Here is a snapshot of some of the child plans offered by various mutual fund houses along with their performance so far. 

Scheme Name	Inception Date	1-Year Return	3-Year Return	5-Year Return	10- Year Return
HDFC Childrens Gift Fund - Investment Plan	March 02, 2001	15.59	13.37	18.10	14.13
HDFC Childrens Gift Fund - Savings Plan	Jan 01, 2013	7.70	10.93	NA	NA
SBI Magnum Children’s Benefit Plan	Jan 25, 2002	15.90	15.11	14.42	10.98
ICICI Prudential Child Care Plan - Study Plan	Aug 31, 2001	10.07	12.39	15.38	12.28

Exit load under these schemes is as high as 3% within the first year of redemption. This discourages parents to withdraw from corpus prematurely and help it stay intact till the intended goal nears.

Another benefit associated with these plans is that they connect emotionally with parents than a regular equity-oriented scheme. It is more likely for parents to continue investments in these schemes even during rough financial phases just because of emotional quotient. Hence, there are higher chances of disciplined investing in these schemes. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging. 

Should You Always Invest In Five-Star Rated Funds?

The craze for five-star rated mutual fund schemes is growing rapidly among investors. Many believe that choosing only five-star rated schemes will ensure outperformance of their portfolio. But, there is more to this than meets the eye. 

Fact # 1 - Ratings are not permanent - Don’t be misled by the belief that five-star ratings are permanent. Ratings can change within no matter of time if schemes fail to hold on to their exemplary performance. This means that a five-star rating can easily be downgraded to three-star or four-star in an event of declining performance and thus, relying just on this parameter is counterproductive. 

Fact # 2 - Category-specific ratings - Ratings are assigned as per the category of the mutual fund scheme. For example, there will be a separate set of ratings for equity-diversified schemes and another set for tax-savings schemes and so forth. A scheme is rated five-star among its category even it that category as a whole is not putting a good show. For example, an infrastructure based (sectoral specific) scheme might be assigned five-star even if its performance is lagging behind an equivalent rated equity-diversified scheme. So, it's equally important to know what category you are investing in rather than rushing to pick up just five-star rated funds. 

Fact # 3 - Past performance - Five-star rated status is highly dependent on a scheme’s past performance. As Mutual fund disclaimer points out “Past performance is not indicative of future returns”, therefore, it is not wise to invest mainly on the rating criteria. Also, five-star rated funds have less scope to maintain their rankings compared to three or four-star rated funds, which have the scope to improve and rise. 

Look for methodology

Not all rating agencies assign the same rating to a scheme due to the difference of methodology adopted to rate it. Hence, it is wise to look for the rating parameters used by rating agencies to circle a scheme. In general, consistency of returns and degree of risk should be compared to filter the relevant schemes. 

Is rating useful at all?

Given the several hidden factors associated with rated funds, it is essential to understand if an investor should pay heed to rating statuses at all. The answer is not explicitly ‘No’ as it will not be fair to throw this parameter out while evaluating schemes. 

Ratings do matter in decision making but not entirely. It is recommended to choose between three to five-star rated schemes while keeping an eye on important factors like expense ratio, fund-size, category etc. Also, it is important to analyze a scheme’s performance over a period of time like 1, 3, 5, 10 years to understand the consistency of returns over both short and long-term horizons.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging. 

Obsessed With Fixed Deposits? Here’s A Better Alternative

Are you constantly inclined towards parking your surplus funds in safe instruments like fixed deposits? What if a better option exists that gives you best of both worlds i.e. safety like FDs and better returns too. 

Mutual funds have introduced ‘Equity Savings Fund’ that distribute its investment between debt, arbitrage, and equity asset classes. Usually, 30%-40% of the total corpus is allocated towards equity, consisting mainly of large cap stocks that helps keep the portfolio stable. Another 30%-40% is invested in arbitrage and remaining goes into debt. 

Alternatively, you can opt for ‘Equity income fund’ to further reduce your equity exposure to 20%, focussed on large-cap stocks. The fund allocates 45% into arbitrage and the balance in debt. 

Equity savings fund vs fixed deposits

Apart from better returns, equity savings fund scores over fixed deposits on other fronts as well. 

Taxation - It is common knowledge that the interest earned on fixed deposits is taxable, hence, post-tax returns can drop substantially if an individual falls into a higher tax bracket. On the flip side, equity savings fund enjoy tax-status of equity funds. This implies that investment in these funds for over a year will be accounted as long-term capital gains that are not taxable. Investments for less than a year are taxed as short-term capital gain at 15%. 

Inflation - An investment makes sense only if it is successful in fetching returns over and above inflation. The real gain occurs when the returns beat inflation. Currently, the inflation rate is hovering around 6% p.a. that makes returns from fixed deposits in the range of 7%-8% unattractive. Moreover, the tax impact further ruins the return potential of deposits. Conversely, equity savings fund has been able to deliver double-digit returns over one year period that smartly beats inflation. 

Equity savings fund vs other asset classes

It is important to understand how equity savings fund fare against not just fixed deposits but also other asset classes. The same is put together in a table below for a better understanding. 

Asset Class	Pros	Cons
Debt Funds	A higher debt portion makes it relatively safe.	Equity return compromised Tax applicable as per slab rate for holding period of less than 3 Years
Hybrid Funds (Debt Oriented)	Safer option alongside some exposure to equity.	Tax applicable as per slab rate for holding period of less than 3 Years
Equity Funds	Promising returns in long-term.	High risk involved for short-term investments
Equity Savings Fund	Enjoy equity tax status Portfolio stability while seizing return potential from equity	Diminishing returns from arbitrage portfolio during market down phase.

Ideal investment period

Investment in certain funds works best if they are made for the right investment horizon. From this perspective, equity savings fund qualify to be a part of a portfolio if the investment tenure is more than one year. Anything below the said time horizon will attract tax and will be counterproductive.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Why Should Balanced Funds Be Part Of Your Portfolio?

There are several types of mutual funds available in the market today that offer different exposure to various types of equities. These funds range from large-cap, mid-cap, small-cap to multi-cap, depending on the investment objective of the fund. On the other hand, there are various debt oriented funds that are structured to align with varying investment horizons of investors.

*Image Courtsey - Creative Commons

The bouquet of these funds do provide freedom to investors to customize their investment portfolio as per their goals but they fail to provide active management or dynamic allocation. In simpler words, an individual will have to manually adjust his/her portfolio to keep the asset allocation intact. A bull or bear rally in equities or debt can directly alter the asset ratio, which needs constant asset balancing. 

Balanced mutual funds offer a simple way to achieve desired asset allocation without compromising on returns potential. Balanced mutual fund schemes stand apart from plain vanilla equity schemes in terms of their exposure to equities. These funds invest at least 65% of their assets in equities and the remaining portion is invested in fixed income securities. The primary objective of these funds is to earn higher returns while limiting risks, hence providing a superior risk-return trade off over diversified equity offerings. 

Let’s look at other associated benefits of these funds that make them suitable to be a part of any type of investment portfolio.

1) Dynamic asset allocation - These funds can increase the equity exposure in their portfolio up to 75-80% when the equity markets appear to be undervalued and can similarly cut it to the lower range as and when the market becomes overvalued. This characteristic of balanced schemes gives them an upper hand over diversified funds that come with limited flexibility.

2) At par risk-adjusted returns - Balanced funds not only shield investors from market volatilities to a larger extent but also strive to match the performance yielded by large-cap or mid-cap equity funds. Here’s a snapshot of how balanced funds have fared against equity-oriented schemes over different time horizons.

	1-year	3-year	5-year
Balanced Funds	12.09%	12.19%	15.65%
Equity - Large Cap	14.15%	10.33%	14.76%
Equity - Mid Cap	17.27%	17.88%	23.29%

*Source- www.valueresearchonline.com

3) Tax advantage - Despite having exposure to debt instruments, balanced funds enjoy tax status of equity funds. Redemptions within one year of investment attract short term capital gain tax of 15% and those over one-year time frame are tax exempted. Similarly, dividends received from an equity-oriented balanced fund scheme is tax-free in the hands of investors.

Should you invest in a balanced fund?

Balanced funds should definitely be a part of your portfolio if you are a conservative investor or simply want to earn decent returns without taking too much of risk. Also, it is appropriate for investors who have little time to spare towards reviewing their asset allocation. Moreover, adding a balanced scheme to any portfolio will not hurt but only add stability.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Why You Must Invest In Tax Saver Funds Through SIP?

Come March and we all rush to make last-minute investments to save tax. These investments are mostly guided by the urge to save tax than to make the best use of the invested sum. We hardly take our tax investments as anything worthwhile than solving the basic purpose of claiming tax exemption. It is not surprising that those investments remain neglected thereafter and see some attention only when they are due to be redeemed or reused. 

But do you know that a little planning can make your investments do wonders. The key is not to wait till the last moment but to act as soon as the financial year begins - i.e. April. Again, you need not to invest everything at one go. Equity Linked Savings Schemes (ELSS), an eligible investment product under Section 80C, does away with the need to invest at one-go. These funds offer Systematic investment plan (SIP) option to let investors invest monthly in small portions. 

Let’s see what are all the benefits associated with SIP in a tax saver plan. 

1) Rupee-cost averaging - Investing through SIP comes with the benefit of rupee-cost averaging, meaning, you accumulate more units when the prices are low and vice-versa. This way of investing certainly favours your acquisition cost compared to one-time investments. 

2) Meeting your goals - It is worthy to reiterate that your tax investments can do more than just meeting your tax saving goals. You might be aware that the investments under tax saver funds are locked-in for a period of three years. Hence, these investments can be earmarked towards meeting your mid-term financial goals like buying a car or a foreign vacation. 

3) Added benefit of life insurance - Do you know that your monthly investments or sip can get you insurance benefit as well. Mutual funds have launched SIP schemes that give dual  advantage of tax saving as well as life insurance coverage. For instance, Birla mutual fund has introduced ‘Century SIP’, applicable on all of its tax plans, that combines tax saving with life insurance benefit at no extra cost. The minimum amount of SIP to qualify under this scheme is Rs 1,000 with no upper band applicable. Here are finer details of the scheme. 

	Insurance Cover	Example SIP Amount	Applicable Insurance Cover
Year 1	10 times the monthly SIP	5000	50000
Year 2	50 times the monthly SIP	5000	250000
Year 3	100 times the monthly SIP	5000	500000

Max Cover* 20 Lac

Max Age* Upto 55 Yrs

The insurance benefit comes along with the potential for your investments to earn higher returns. This factor alone makes SIP investments stand out from term plans or other conventional insurance plans. Also, the plan has an upper hand over unit-linked insurance plans (ULIPS), which have higher costs associated with them. 

4) Tax free returns - Another key advantage of investing in tax saver funds is that being equity-oriented, these funds enjoy tax-free returns. Let’s look at the average returns delivered by tax saver funds over the last few years. 

Tax Saver Funds	1-Year	3-Year	5-Year
	18% -24%	18%-20%	19%-22%

*Source - www.valueresearchonline.com

The stellar returns generated by these funds are unparalleled and cannot be compared with other tax saving options with scanty returns.

These points should be good enough for anyone to kick-start their tax planning right away rather than waiting for the financial year to end. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

Income Tax Return Filing - Check Out These Changes

Final countdown to income tax return filing for AY 2018-19 has begun. Here are few of the critical changes introduced this year that you should take care before filing your returns. 

1) Aadhar-Pan link - It is now mandatory to link your Pan No with Aadhaar for filing income tax returns. You can visit the income tax website to check or link your Aadhaar with Pan no. If you have applied for Aadhaar then the 28 long Aadhaar Enrolment number needs to be input while linking the Pan. 

2) Benefit for investing LTCG in Startups - Tax exemption under section 54GB has been handed out to those who have invested their Long Term Capital Gains (LTCG) arising from the sale of land or property into the equity shares of a start-up venture. Investment should be made before the filing of income tax return on the due date as per the condition set for this exemption. 

Also, the startup company is required to use the received investment towards purchasing plant and machinery within one year from the date of investment. Apart from this,         taxpayers will also have to obtain proofs from the startup company to establish that their investment has been used for the said purpose. Bank payment, purchase invoice or agreement will qualify as valid proofs in this regard. 

3) Rebate u/s 87A - Now individuals whose taxable income is below Rs 5,00,000 are allowed a rebate of up to Rs 5,000 under section Section 87A. The rebate will be restricted to the tax liability if the same is less than Rs 5,000. 

4) Cash deposits during demonetization - Aggregate cash deposits exceeding Rs 2,00,000 (new and old currency notes) between 9th November 2016 to 30th December 2016 needs to be reported during income tax return filing. 

5) Mandatory filing if LTCG exists - The income tax return filing is mandatory even if your taxable income is below the exempted limit of Rs 2,50,000 but has surpassed the limit after considering the LTCG. For example - If your taxable income is Rs 2,00,000 and the LTCG is 1,50,000 then the total amount is Rs 3,50,000, which is above the exemption limit, hence making the necessity of filing returns mandatory. 

Lastly, make sure to cross check TDS certificate with the Form 26AS available on the income tax website to ensure that no mismatch arises later. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.