DV-Mint – Page 31

March 1, 2021

Endowment vs ULIP Plan

ULIP or Unit Linked Insurance Plan is a financial instrument that is a combination of insurance and investment. Under a ULIP, the premium paid is divided into two parts.

One part is to provide for your life insurance cover while the other part is put in investment products such as bonds, stocks, or mutual funds.

The life insurance cover depends on the sum insured, the higher the sum insured, the more the premium.

The investment fund comprises units in equities, debts, or hybrid funds. The value of such funds/assets depends on the prevailing market conditions.

The sum insured is usually the original sum insured or net asset value of all units (whichever is higher) or both.

An endowment plan is a traditional life insurance plan which guarantees a lump sum amount/payout post the survival period or on the death of the policyholder.

Apart from providing life cover, an endowment plan helps in creating savings over the investment tenure.

The savings amount is released on the maturity of the policy or to the mentioned beneficiary/nominee.

There are two types of endowment plans, one with profit and the other without profit.

Also, there are multiple variants of endowment plans which are a mixture of life cover, savings, retirement, pension, education, money-back, etc.

Which is Better? ULIP or Endowment Plan?

Criteria	ENDOWMENT PLAN	ULIPS
Type	Insurance cum savings	Insurance cum investment
Lock-in	Depends on the plan and premium payment term, usually 2-3 years	5 years
Investment Decision	Does not have investment decision power for policyholder	Comes with investment options which can be chosen by policyholder
Transparency	Lacks transparency as there is no investment portfolio	Can easily track your entire investment portfolio
Maturity	The policyholder will receive sum assured plus bonuses, if any	Redemption of units at the prevailing unit prices
Fund Switching	You cannot make any changes to the policy	You have the option to make fund switches to the entire investment policy
Withdrawal	There are restrictions and penalties upon withdrawal	You can withdraw from the policy post the mandatory 5 year lock-in period
Returns	Guaranteed fixed amount	Depends on market performance

Why Invest in an Endowment Policy?

Guaranteed Returns

Endowment policies offer guaranteed returns upon maturity/survival/death. The returns offered are independent of market performance and help you create savings.

Bonus

In a participating policy, the insurance company distributes a part of its profit in the form of bonuses to the policyholder. Simple Reversionary Bonus and Terminal Bonus are added to the policy over the investment tenure.

Long Term Financial Goals

An endowment plan offers high returns when invested for the long term. This will help you achieve your long-term goals effectively.

Why Invest in ULIP Plan?

Flexibility: Under a ULIP, you have the flexibility to:
- Switch the investment funds
- Make partial withdrawals
- Make lump sum additions in the form of top-ups

High Returns: Since ULIPs offer different types of investment funds, some of these investment funds are equity-based which offer high returns over the investment period.

Rider Options: You can enhance your ULIP scheme with rider add-ons such as accidental death rider, term rider, and critical illness rider by paying an additional premium.

Transparency: ULIPs offer complete transparency. You can keep track of your investment portfolio. The policy provider keeps you informed of all the charges levied, the number of units issued, etc.

Financial Security: Over the entire investment tenure, ULIPs allow an investor to accumulate a huge corpus which can be utilized for retirement planning, child education, marriage, etc.

Funds Switching: You can easily switch between the investment funds and revise your entire investment portfolio if needed.

February 25, 2021

Secure your Child’s Future – Invest in Mutual Fund

Raising one’s child to become the best version of himself/herself is the biggest responsibility of the parents. From nutrition, healthcare to education – you want to provide the best in everything to your child.

Apart from that you also have to make sure that their future is secured.

And the only way to achieve this mammoth task without hurting your own financial future is by investing through mutual funds.

1. Goals for your Child’s Future

The first step towards investing is to know what you are investing for, i.e. what is your investment goal. Now, as parents, you need to have financial goals set for your child.

For example, you have to save for your child’s school admissions, his or her college/higher education, maybe for a degree from a foreign university, his/her marriage, etc. Try to figure out what kind of money you would need to achieve each of the goals.

Say, for your child’s school admission you need to save Rs 2 lakh; or Rs 80 lakh for your child’s higher education, etc. This way you can turn your dreams for your child into financial goals.

2. Choose the right fund and start saving towards the goal

Since you know your goals, you should start saving towards them. Now, it is extremely important to choose the right mutual fund as per your goals.

For example, let’s suppose you would need Rs 2 lakh for your child’s school admission in two years. This is a short term goal, for which the main focus is capital preservation. Ideally, you should invest in Short Duration Debt Funds or FDs to achieve the goal on time.

Meanwhile, you might also want to save for his/her higher education. This is a goal that is at least 17 or 18 years away. And also, due to inflation, the amount that you would need would be much higher than it is today.

For example, an MBA course at a top-rated university costs around Rs 20 lakh today. And at the 10% annual inflation rate the same course would cost Rs 80 lakh in 15 years.

So to achieve this goal, you need to invest in equity mutual funds as they are your best bet to get inflation-beating returns consistently over the long run.

3. Start investing through SIPs to save towards your goal

The easiest way to get into the habit of disciplined investing in mutual funds is by starting a SIP.

Through a SIP, you put a fixed amount of money every month towards your mutual fund investment, which over the years helps you achieve the target amount in time.

For example, say you want your child to attend a top-rated B-school and for that, you need to save Rs 80 lakh in 15 years. If you choose to invest in a mutual fund through a SIP, then your monthly SIP amount would be Rs 16,000 every month to reach the goal on time (assuming 12% average annual returns)

4. Increase your SIP investments periodically

As every year your income and salary increases, you should also increase your SIP investments every year. This can be a fixed 10% every year or as per the percentage of increment in your salary each year.

Now, this timely boost every month can make a huge difference in the final amount that you will receive. Let’s explain this with a two case scenario.

Say you want to save Rs 80 lakh in 15 years to be prepared to send your kid to B-school. In the first case, you keep investing Rs 16,000 per month all through to reach the goal in time.

Meanwhile, if you keep increasing the investment amount by 10% every year, you can save Rs 80 lakh in 12 years. (In both the cases the return amount assumed is 12% p.a., though there are no guaranteed returns.)

And if you reach the goal early, you will be much well prepared when it’s finally time for your kid to go to B-school.

5. Do not stop/skip your SIP investments

To achieve a financial goal on time, this is the most important thing to follow. That is, never stop or skip your SIP investment. Remember, one wrong step can completely jeopardize your child’s future.

The most important future goals of your children are time-bound, like your child’s school, college education, or higher education.

So if you skip, miss, or stop your investments midway meant for such goals, it would mean you might not have enough funds when it’s time to go for college/university. So be regular with your investments.

However, if you had to stop investing for some reason, make sure to fill that gap later by adding money later.

Conclusion:

Ensuring that your child’s future is well secured is one of your biggest responsibilities. There are several milestones that they need to achieve at different ages. And you need to be financially prepared to help them achieve each of the goals.

So set the goals, determine the timeframe, and start investing in the right mutual funds.

February 22, 2021

4 Reasons You Need a Travel Protection Plan

1. You’ve invested a significant expense in your trip. If you have to cancel, you’ll lose that money.

Canceling a trip is a bummer enough. You don’t want to lose your entire trip investment on top of it. The Trip Cancellation benefit covers you in case you or a family member becomes ill or seriously injured before your trip, or if there’s a death in the family.

You can also be covered in the event of natural disaster or bad weather impacting your home or destination, or if your travel supplier (such as an airline) goes bankrupt or on strike. There are more reasons too – read them all in the policy.

Don’t want to be bound by the reasons outlined in the policy? Upgrade your plan with the Cancel For Any Reason option and you can cancel your trip for any reason at all!

2. Once you’ve departed on your trip, plans can still go wrong.
Unfortunately, baggage loss or damage is not uncommon. Neither are travel delays. Our plans offer coverage for these scenarios. And if your trip is interrupted and you have to leave early? Our plans cover that too.

So you can feel more at ease packing up to leave your loved ones and your home behind, knowing that if something happens, you have coverage and help to get you back home. You need coverage in case you get sick or injured while away from home.

And within the many plans provide limited coverage out of your region. If you get sick or injured on your trip, access to medical coverage is important.

This is not the case, particularly for visitors to other countries. Many travelers have been shocked at the cost of care abroad. And let’s go one step further…what if you become sick or injured on vacation and don’t heal immediately.

How will you get home? All our plans provide coverage for Emergency Medical Evacuation, enabling you to get to an adequate facility for treatment, then transported home if needed.

3. A travel protection plan gives you access to 24/7 assistance no matter where you are in the world.

Let’s say your passport was lost or stolen in Europe. Or your prescription medications were left behind in a hotel in Buenos Aires.

Or you twisted your ankle on a hike in New Zealand and need to find a doctor. Who do you call or where do you go for help? With our plans, it’s easy.

Your plan comes with access to 24/7 Travel Assistance services, available at any time, from anywhere in the world.

If at any point you have any question during your trip or need assistance with ANYTHING, you can call the numbers provided and get assistance from someone in your native language. Wouldn’t it feel nice to know that someone always has your back?

4. It’s a small price to pay to gain peace of mind.

We hope your trip goes completely smoothly. But think of the investment you made on your trip. Would you be comfortable losing it all in the event of a cancellation?

And perhaps more importantly, think of the huge expense you could face if you become sick or injured while traveling and need medical care or an evacuation.

Covering yourself for the risks will make your trip all the more enjoyable and relaxing. And that’s the whole point, right?

February 22, 2021

4 Misconception’s About Car Insurance

It is quite a well-known fact that according to Indian law, while purchasing a new car, purchasing a car insurance policy is mandatory.

A car insurance policy would help in the protection of not only the car but also the person driving the car in case of any accidents or damages.

But there is a lot of misinformation floating around related to car insurance plans, which leads to misconceptions among vehicle owners.

1. You are a safe driver and do not need car insurance

You might think that you are an experienced and safe driver, so there is no need to purchase car insurance.

This is a wrong perception. You might be sure that you are one of the safe drivers but you cannot be sure about the conduct of other drivers and road conditions.

In case your car meets with an accident and your car is not insured, then you would have to pay all the expenses incurred in damage of a third party car and also your car out of your pocket.

Moreover, the Motor Vehicles Act, 1988 makes it compulsory to have a third party car insurance policy while driving cars on the Indian roads.

2. Your insurance premium would be low if your car is older

Usually, it is said that the older the car, the lower would be the premium. It is believed that the IDV (Insured Declared Value) of your car is the main factor determining your car insurance premium.

So, if your car is older, then the IDV would be also less, and hence, you would obtain cheaper insurance.

However, this is not true always. In addition to the IDV of your car, there are several other factors as well, which determine the insurance premium of your car.

These factors can be your previous driving history, the distance you have traveled, your claim history, the category of coverage you have purchased, your NCB, etc.

In case you have made numerous claims in the previous year, then your premium for the current year would be high.

3. Purchasing a car insurance policy is a slow process

The fact is no, it’s not a slow process anymore. Technological advancements have made the entire process easy and quick.

You can purchase and renew car insurance policies online conveniently and with minimum documentation.

You just need to fill in the basic details associated with your car, compare car insurance plans online, and make an informed decision.

Your car insurance would be in your mailbox within some time. This process is cheaper and very efficient.

4. Claim settlement is a very painful process

This is one of the most common car insurance myths. You might believe that in case of an incident involving your car, you might have to take a lot of pain to get a CLAIM.

However, this is not a fact anymore. Claim settlement procedures are quite easy and can be done online conveniently.

You will have to log in to the insurance company’s website and fill up the claim form. In case of successful claim registration, you would be asked for submitting your documents.

You can obtain assistance anytime during the claim procedure by connecting with the customer care representatives or by referring to the FAQs present on the company website.

Conclusion

So, these are some of the most common and widespread car insurance myths among vehicle owners.

You must understand the differences between myths and the realities associated with them to fully appreciate the car insurance cover that you own.

Make sure to compare car insurance policies online and buy the ones which suit your requirements by providing maximum coverage with a nominal premium.

January 4, 2021

Markets at all-time highs: Should you exit & re-enter at lower levels?

The markets are high and they look overvalued. Many are worried about the expensive markets. But the bigger questions that investors must ask, are the following.

1. If it falls, then by how much?

2. What if it does not fall much; i.e., what if it is a time-bound correction and not a price-bound one?

3. ‘When’ will it fall?

Now, let’s apply this logic to the stock market. A lot of investors are in a dilemma: ‘should we book profits for now and enter again when the market falls?’

Let’s say you execute this thought and sell all your investments today with the plan of entering the market again when it falls.

And let’s assume your decision is proved right and the market falls drastically in the next few days or weeks.

If that happens, it is not good news. This is because if you are proven right in this decision, you will do it again in the future.

That is, you will ‘time the market’ again and again. And this is a bad habit. If you time the market 10 times in the next few years and you are wrong just 3-4 times out of 10, you may still lose money overall, forget about making great returns.

Check the records of successful investors. Do they follow this practice? If not, why? If they cannot or do not predict the market, what are the chances of you being right?

We have to be careful about the kind of actions we take, as they will become a habit. If this habit is a bad one, it will be very tough to leave it.

Now, let’s see if we can answer the three questions asked earlier.

1. What if there is only a time-bound correction?

Correction can be price-bound, the way we had in 2008 and March 2020. And it can be time-bound as well. That is, the markets remain in a certain range for a very long time.

Examples:

1) From July 2009 till December 2011, again, the Sensex was range-bound.
After moving in a range, the market started moving up again in both cases. If that happens again in the next few months or years, your plan to enter at low values may never fructify.

2) From December 1993 till February 1999 (for more than five years), the Sensex was range-bound between 3000 and 4000 levels.

2. If it falls, then by how much?

Did you invest a huge amount in March 2020? No? Maybe because you were waiting for the markets to fall more. We, as humans, have this deep desire to buy at the lowest level.

And who tells you where the bottom is? TV experts, your advisor, neighbors, colleagues, or friends?

Investing at the lowest point and exiting at the top is a matter of luck, not research. Therefore, the best strategy is to invest at every level. Even at today’s level in January 2021.

In a nutshell, make sure you are conscious of the habits you develop while investing in the stock market. This is what differentiates a successful and not-so-successful investor.

3. ‘When’ will markets fall?

I know investors who sold their portfolios in July 2020. The market had recovered significantly from its March lows and economic activity had hardly started.

Logically speaking, it was the right call. Many investors and experts were expecting the market to fall again.

We are in December 2020 now and we all know what has happened from July onwards. It is not about being ‘logically right,’ but about developing the right habit.

I also know a few of these investors who entered the market again in September-October 2020.

It was not easy for them to watch the markets grow continuously when they had sold their investments in anticipation of a fall.

December 29, 2020

5 Things to know before investing in ELSS Mutual Fund

Your insurance agent may be pushing life insurance as the best option, while your friend extols the benefits of a plain vanilla PPF account or even a tax saving FD with a bank.

And yet, there’s an 80(C) instrument that not just has a relatively short lock-in period of just 3 years – but has delivered a 5-year category average return exceeding 15% per annum and a 10-year annualized return of more than 17% per annum.

These are tax saving mutual funds or ELSS (Equity Linked Savings Schemes. These numbers may seem tempting, but make sure you’ve understood a few things about ELSS funds before you say “Tax Saving Mutual Funds Sahi Hai” and jump in with both feet!

1. They Have no Premature Exit Option

Tax saving mutual funds have a hard lock-in period of 3 years, and there are no options for partial or complete withdrawal. If you’ve invested in more than once tranche over the course of a year, each tranche will be treated as a separate purchase and will have to complete three years before you can access them.

2. They are High Risk in Nature

Being equity-oriented in nature, ELSS funds tend to be quite volatile. In a sense, that’s the price to pay for a significantly higher long-term return compared to low-risk products.

However, if you’re not willing to withstand ups and downs in your fund value, give ELSS funds a pass.

3. Their Returns Are Non-Linear

Many investors who are used to the linear returns associated with traditional products tend to get quite disconcerted by ELSS funds.

Understand that ELSS funds may go through phases of flat or even negative returns, but things tend to average out over the long term as cycles reverse. It’s vital to set your expectations right while investing.

4. The Dividend Option isn’t a Very Smart Idea

You may be tempted to go for the dividend pay-out option in an ELSS, but know that this isn’t a good idea.

First, you’ll take a hit of 15% in terms of dividend distribution tax. Second, dividends from ELSS funds are non-predictable in both timing and quantum, so you can’t really base any plans around them.

5. SIP’s are a Better Idea Than Lump Sums

For the next fiscal year, start a SIP in an ELSS fund instead of investing your money as a lump sum at the end of the fiscal year.

Your unit costs will get averaged out neatly, and it’ll be a lot easier on your pocket too!

December 22, 2020

Sovereign Gold Bond (SGB) Scheme 2020-2021

In India, gold has traditionally been used as an instrument of saving along with its use in jewelry for marriages and festive occasions.

Over the last few decades, gold coins and bricks are being used as a saving medium. In general most of the gold that is imported into the country was rarely put to use regularly.

To take advantage of this habit, the government came out with a novel scheme that would incentivize gold saving as well as prevent the
import of gold.

The government decided to launch a Sovereign Gold Bond scheme where instead of purchasing gold in physical form one can do so in electronic form, just like shares.

Date of Issue

The date of issuances shall be as per the details given in the calendar below:

Sr. No Tranche Date of Subscription Date of Issuance

2020-21 Series IX Dec-28-2020 – Jan 01-2021 January 05, 2021
2020-21 Series X Jan-11-15-2021 January 19, 2021
2020-21 Series XI Feb-01- 05-2021 February 09, 2021
2020-21 Series XII Mar-01- 05-2021 March 09, 2021

What is the Gold Bond Scheme?

Sovereign Gold Bonds, hereafter referred to as SGB, are government securities denominated in grams of gold. The Bond is issued by the Reserve Bank of India on behalf of the Government of India.

Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. These bonds act as a proxy for holding physical gold.

Why are SGB called Bonds?

SGB’s are just like any other bonds as the bearer of the
the instrument is entitled to interest payment.

The Bonds bear interest at the rate of 2.50 percent per annum on the amount of initial investment.

This interest will be credited semi-annually to the bank account of the investor and the last final interest will be payable on maturity along with the principal. The tenure of each SGB is for eight years.

At what price is the SGBs sold?

The nominal value of SGB will be fixed based on a simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Ltd, for the last 3 business days of the week preceding the subscription period.

The price of gold for the relevant tranche will be published on the RBI website two days before the issue opens.

What are the advantages of SGB over physical gold?

The risks and costs of storage are eliminated.
The SGB offers a superior alternative to holding gold in physical form.
The bonds are held in the books of the RBI or Demat form eliminating the risk of loss of scrip, etc.
SGB is free from issues like making charges and purity in the case of gold in jewelry form.
These bonds carry a sovereign guarantee since they are issued by the government.
The SGB can be used as collateral.
The buyer gets paid interest on the money invested, which is not possible when holding physical gold.

Who all are eligible to invest in SGB?

A resident Indian as defined under the Foreign Exchange Management Act (FEMA), 1999 is eligible to invest in SGB.

The set of eligible investors include individuals, HUFs, Trusts, Universities, and charitable institutions.

Joint holding and minors are also eligible to invest in SGB. If an individual investor changes his residential status from resident Indian to non-resident he may continue to hold SGB till early redemption/maturity.

What are the tax implications of investing in SGBs on both – interest and capital gains?

Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961.

The capital gains tax arising on redemption of SGB to an individual has been exempted.

The indexation benefits will be provided to long terms capital gains arising to any person on transfer of SGB.

Is there a minimum and maximum limit of investment for SGB?

Yes, the SGB are issued in denominations of one gram of gold and multiples thereof.

The minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the government.

Each member of the family can buy 4 kg of SGB in her or her name. In the case of joint holding, the limit applies to the first applicant.

Is premature redemption allowed?

While the tenor of the bond is 8 years, early redemption or encashment is allowed after the fifth year from the date of issue on coupon payment dates.

The proceeds will be credited to the customer’s bank account provided at the time of applying for the SGB. The SGB investor also has the option of selling the bonds prematurely anytime on stock exchanges.

Such sales would attract capital gains tax at the same rate as for physical gold.

December 19, 2020

4 Tips for the smooth Health Insurance Claim.

So in this blog, I will talk about what you should do to extract the maximum value from your policy during claims and come out of the process truly satisfied

One of the biggest reasons for dissatisfaction with claims is a lack of awareness of the policy terms and conditions.

It can’t be stressed enough that every policyholder should read one’s policy document as soon as you receive it and if any terms and conditions are not clear, you should call us up at your insurer to understand more about it.

1. Limits on certain procedures

Your policy will have limits of certain procedures like the maximum price of the room that you can avail of.

Now you might want to go for a higher-priced room and you’ll assume that you can simply pay the difference between the actual rent of the room and the allowable limit. Please don’t do that.

Contact your insurance company before you do something like this. Insurers often treat room up-gradation as a partially payable claim.
In other words, never decide to alter the terms of your insurance contract unilaterally.

2. The minimum hospitalization required is 24 hours

Most health insurance policies require the patient to be admitted for a minimum of 24 hours or more to avail of the policy benefits.

This is a firm rule but excludes a few day-care procedures which will be clearly mentioned in your policy document. So if you were to go to your hospital for a tetanus shot, for example – you won’t be able to file a claim on that basis.

3. Waiting period on certain diseases

The third area you need to pay attention to is your waiting period for certain diseases. A waiting period is a sort of a hibernation period during which any claims made will not be admissible

A good number of consumers are not aware that claims for certain conditions are inadmissible for up to two years.

While these are a handful of conditions but it includes popular ones like tonsils, hernia, cataract, etc. A list of these medical conditions will be available in your policy wordings.

And finally, there is a waiting period on pre-existing conditions where there is a wait of 3 -4 years.

This is another clause that several policyholders are not aware of because they did not read the policy document and leads to dissatisfaction when they apply for claims within the waiting period for pre-existing ailments.

A common problem related to this is that consumers don’t state their pre-existing condition while taking the policy. This generally happens under two circumstances.

One, when consumers allow agents to fill the proposal form on their behalf. Two, when they make the application process very lightly and leave these details accidentally or on purpose.

This is a very difficult situation for the policyholder and the insurer. But because every insurance contract was agreed upon based on good faith, there is every probability a claim will not be admissible in case the declaration made by the policyholder is false or partial.

4. Examine the plan’s co-payments, sub-limits, and exclusions

The fourth area and the last of the key clauses that have a major impact on the claims are limiting conditions like co-payments, sub-limits, and exclusions.

Co-payments:

Co-payments are where you will have to pay part of the claim and the insurer will pay part of the claim.

If you have ever made a car insurance claim without having zero depreciation on your car insurance policy, you would have noticed that you had to pay like 30-35 percent of the total bill to the workshop and the insurance company paid the rest.

Similarly, co-payment may be triggered in your health insurance contract in some situations which is why you should read the policy document carefully once you receive it.

Sub-limits:

The same is true for sub-limits which by definition mean that the insurance contract has a capping on how much is payable for a particular illness.

Sub-limits are used for procedures like cataract, total knee cap replacement, and kidney dialysis. These too will be in your policy document and will go something like Rs 20,000 per eye for cataract removal.

Exclusions:

And finally, the exclusions, which becomes the cause of a lot of hardship. Most health insurance policies don’t cover maternity and childbirth, yet a huge number of claims are lodged toward these due to a lack of awareness of policy exclusions.

Other exclusions in the policy include participation in adventurous activities, abuse of intoxicants like alcohol, mental disorder-related ailments, etc.

Some smaller payments are generally not included. Again, most policyholders assume that these expenses are claimable but that is not the case.

Some expenses which are not payable by health insurance include registration and discharge charges, cost of hearing aid, any toiletries, donor screening charges, etc.

Understanding co-payments, sub-limits, and exclusions are a must to ensure you are claiming for the right procedures as contracted under your health insurance contract.

The secret to a happy claims experience is to have a clear understanding of what is claimable and what is not under the terms of your policy – most of which are available in the policy wordings. This includes inclusions, exclusion, waiting period, sub-limits, etc.

Conclusion

If you are thorough in your research, you wouldn’t have to worry about claim rejection. And when you know what is in your policy, then it also gives you the necessary knowledge to fight for any unjust calls made by the insurer’s claims team.

December 16, 2020

Have you been knowing wrong about Liquid Fund ?

Liquid Funds are debt mutual funds that invest in debt securities with very short maturities. The residual maturities if bonds held by liquid funds cannot exceed 90 days, as per the rules defined by the regulator. In fact, most liquid mutual funds hold securities that are due to mature in the next 30 days or so.

Bonds maturing within two months need not be ‘marked to market’ – only their interest component needs to be factored in while calculating NAV’s (net asset values). Hence, the NAVs of Liquid Funds remain relatively steady compared to other debt funds.

Why are Liquid Funds used in STP’s (Systematic Transfer Plans)?

Their low volatility, steady returns, and zero exit costs make liquid funds an ideal choice as a deployment vehicle for STP’s (Systematic Transfer Plans) into equity funds.

Instead of investing a lump sum into an equity mutual fund, you could choose to park your money into a liquid fund and initiate an STP into an equity fund from it.

Over time, your liquid fund balance would be transferred to the equity fund. In this way, you’ll be protected from the risk of investing your entire money at an interim market peak.

You’ll benefit from corrections as you’ll be making a staggered entry into the equity fund. At the same time, your idle balance will earn better returns than your savings bank account.

How are Liquid Fund Returns Taxed?

Profits earned on your liquid fund units (at the time of redeeming or switching them) are taxed per your income tax bracket if the units are redeemed within three years – a highly likely scenario, given that liquid funds are meant for short term investments).

In the unlikely scenario that you hold on to your liquid fund units for more than 3 years, the profits will be indexed for inflation and taxed at a flat rate of 20%.

Do Liquid Funds Provide Guaranteed Returns?

Contrary to popular belief, Liquid Funds do not provide guaranteed returns. However, they do provide relatively steady returns compared to all other classes of Mutual Funds, owing to the nature of their portfolios.

Liquid funds typically provide returns that are similar to ‘call money’ rates, meaning that they can be expected to provide annualized returns in the range of 5% to 6% in the immediately foreseeable future.

Are Liquid Funds Risk-Free?

Liquid funds are very low risk, but not risk-free. There’s a chance that bonds held by liquid funds can default if the companies that issue them are in severe financial distress.

Owing to the very short maturities of the bonds held by liquid funds, his remains a remote possibility – but the risk still exists on paper.

When a bond held by liquid fund defaults and is subsequently downgraded to a “D” rating by any leading rating agency, the fund needs to write off its value entirely.

This results in a hit on the fund’s NAV. A case in point was the relatively recent Taurus Mutual Fund fiasco, wherein the fund had to write off close to 10% of its holdings in BILT after the latter defaulted and was downgraded.

So, liquid funds are very low risk, but not risk-free. It’s best to stick with liquid funds of large and renowned AMC’s, which employ more robust research teams.

How Liquid is Liquid Fund?

As their name would suggest, liquid funds are highly liquid in nature. If you place your request for redemption before 3 pm today, you’ll get your money in your account the next morning.

However, SEBI has recently mandated that AMC’s should allow instant redemptions of up to Rs. 50,000 from Liquid Funds.

Many AMC’s have already implemented this. Your Financial Advisor can help you clarify which funds currently offer this facility, and which ones do not.

December 14, 2020

Does SIP in an ELSS Makes Sense?

With the growing awareness about Mutual Funds more than doubling the industry’s assets in the past three years, more and more people are catching on to the fact that for tax saving, Mutual Funds Sahi Hai! ELSS (Equity Linked Savings Schemes) funds have shot up in popularity in the past year or two. Here are a few reasons why you should consider starting a SIP in an ELSS.

No Year-end rush

So many of us get caught up in the struggle of putting together enough funds to invest in tax saving schemes at the very end of each fiscal year. Not only is this stressful; it also puts you at risk of taking ill-thought-out decisions that you could potentially end up regretting later.

By running a SIP in an ELSS throughout the year, you’ll have completed the lion’s share of your tax-saving investments well in time – so while your friends and colleagues are fretting, you can sit back and relax!

Long Term Compounding

It’s a well-known fact that investments that are linked to the stock markets need the magic element of time to compound and grow.

By continuing your SIP in an ELSS over the long term, you’ll ensure that your money compounds – that is, earns ‘returns on returns’, and therefore outpaces inflation over the long run.

Compare this with tax saving FD’s or PPF accounts, which do not compound your money, and you’ll see the difference that a SIP in an ELSS Mutual Fund can make.

Rupee Cost Averaging

Since ELSS funds are linked to the equity markets, they can potentially be volatile. For this reason, you may find yourself in the unlucky position of having invested in an ELSS just before markets begin to correct, as many investors who deployed lump sums in ELSS Mutual Funds on or before 31st January this year realized.

By running a SIP in an ELSS, you’ll ensure that the average cost of your ELSS units gets averaged out neatly through the ups and downs of the markets.

Author: DV-Mint

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