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Investment planning needs to be done at the beginning of the year.

Yes, you just might be feeling relieved now that all your tax-saving investments have been made. In fact, you might
have even filed your income-tax returns. And after all this hard work, you want to take it easy for sometime.

But hold on, there is something more to be done - planning your finances for the coming year. And as they say, "A job
well begun is half done".
The beginning of the financial year is an extremely important period. And doing proper financial planning in this period
will

ensure

two

things.

One, you do not end up scrambling once again to complete all those tax-saving investments at the end of the year,
while putting undue stress on your finances. Two, the returns on investment earned will be maximum.
Here are some of the important things that have to be tackled at the start of the year.
A financial plan: The first thing that is required is a tangible financial plan. This is essential for individual investors to
ensure

that

all

financial

activities

proceed

along

smoothly

during

the

year.

The plan should consist of the details regarding all the investments, tax savings, insurance and even retirement
planning. So it includes everything from insurance to investment.
At first sight, this financial plan might seem like an additional cost because a professional can charge anywhere
between Rs 5,000-25,000 for drawing one up. However, you can make your own plan without taking any outsider's
help. The simplest way to construct such a plan would be to list out all your requirements and activities throughout the
year, complete with specific dates when the investments or payments have to be made.
The benefits of this can be manifold. For example, paying insurance premium on time will ensure no late charges.
More importantly, it will ensure that the cover does not expire.
Then you will be able to pay even your credit card bills on time, which will avoid all those obscene amounts of interest
charges. Always keep in mind that missing out on credit card payments can set you back by Rs 300-500 for not
paying just the minimum amount.
Also, if the outstanding is say, Rs 20,000, there would be an interest at the rate of 3.41 per cent. Of course, this figure
will vary for each individual, but the cost can be heavy.
MAKE YOUR PPF INVESTMENT: One thing that has to be done at the very beginning of a financial year is to make
an investment in the public provident fund (PPF) account before the fifth of the month. This is because the interest is
paid on the invested amount only if the money is invested by the fifth.

As far as the amount goes, if you can afford to, then invest the entire Rs 70,000 (the maximum that can be invested
in PPF in a year) before that date. Investing a day later would cost the investor a sum of Rs 467 per month. This
amount may look small, but remember that it's these small amounts that ensure great returns when added up over
time.
Start an SIP: The beginning of a financial year is a good time to start a systematic investment plan (SIP) in mutual
funds. It can either be a new investment or it can be the continuation of an existing SIP that has just ended. Executing
this at the beginning of a month is essential because it will ensure that the SIP payment comes earlier in the month
rather than at the end of it.
Even if you are investing in a debt fund, it makes sense to invest the amount at the start of a month as this will lead to
a larger accumulation. For example, a monthly investment of Rs 5,000 invested towards the end of each month and
earning a return of 8 per cent per annum will result in an accumulation of Rs 1,82,945 after 10 years.
In this example, if the payment is made at the start of the month, then the accumulated sum will be higher at Rs
1,84,165. Clearly, an investor can gain much more by investing at the start of the month.
START THE TAX PROCESS: This is the most important task. Start the entire tax planning now. In the beginning of a
financial year itself, human resource departments (for the employed) start making queries regarding tax-saving
investments proposed for the entire year.
Accordingly, the employer deducts taxes from the monthly salary. And you do not want to fill up this form without
having any idea about the investments that you will make during the year. That's because there could be serious
consequences for your finances.
In case the numbers are too little, the employer will cut higher taxes, thereby reducing your salary. For instance, if
investments of Rs 40,000-50,000 have to be made after the provident fund deduction, the employers will cut Rs
1,000-1,250 till they get the exact details.
Worse, if you declare a particular amount of tax investment and do not stick to it, there could be heavy cuts during
the last few months of the financial year. This would stress your finances for a long period of time.

Investment planning for the middle-aged

Financial Planning/Rajiv Bajaj, Apr 1, 2002, 03.03pm IST

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last week we suggested a financial plan for the 20 to 30-year-old. this week we discuss financial
planning for those between 30 and 45 years of age it is amazing how our thinking process,
financial preferences and goals change with events like marriage and the arrival of a child. this is
why the age group 30-45 years is the most important phase in ones life cycle. three distinct
stages are evident during this phase. young, married up to 35 years: a person at this stage is
young and newly married. he has to take care of himself and his spouse. a young couple becomes
interdependent with shared responsibility for day-to-day expenses as well as achievement of
future goals. this increases the requirement of life insurance. if both husband and wife are

working, then both should get life cover. however, if only one member is earning, the importance
of life cover for him/her is tremendous. life insurance acts as financial protection for the family
and would help it maintain a comfortable lifestyle in case of the unexpected demise of the bread
earner. the ideal policy would be that providing a higher coverage at lower premium, like lics
bima kiran. endowment policies like jeevan mitra, etc also are good from the returns point of
view for their additional bonus amount along with the sum-assured and having triple life-cover
benefits. the risk profile of an individual also undergoes tremendous change. the risk a married
individual can take on his investment is considerably less than what a young, unmarried can take
on his investments. future objectives also start taking concrete shape during this stage. couples
start planning for their children, a house, etc. it is advised that compulsory saving and investment
should start now. a systematic investment plan (sip, discussed in earlier issues) of a debt fund or
equity fund, depending upon the risk profile of the individual, is the ideal saving vehicle in such
a situation. the gift of lump sum money received on the occasion of marriage should not be
wasted but should be invested for future gains in schemes like company fixed deposits for
assured returns, and in the growth options of income funds for market-related, realistic returns.
young, married with children, upto 40 years: the arrival of children very quickly changes the
financial situation of a young couple. each extra mouth to feed increases the family expenditure.
the need for life insurance of the bread earner increases. health and personal accident cover are
also essential. the familys investment needs increase. planning for childrens education and
marriage comes to the fore. almost all parents would like to give their children a privileged
education, and therefore, will have to accumulate money to pay school fees and higher education
costs. a person needs to do now what his parents had done for him, i.e., create a fund for his
future expenses. these investment needs catering to the betterment of childrens lot are in
addition to parents needs for themselves: better house, better car, holiday plans, and above all,
adequate provision for retirement. there is rarely sufficient money to pay for all. difficult choices
have to be made. as people grow older, they become better off and their ability to contribute to
the financial planning programme increases. bonds from financial institutions like icicis deep
discount bond, bonds for children, fixed deposit in hudco or hdfc etc. could be taken at this stage.
sip of the earlier stage should be continued with. child care plans from mutual funds as well as
from lic and icici pru life insurance could be considered. married with older children (up to 45
years): during this stage, financial objectives change. due to available protection in terms of
insurance taken earlier, the planning needs change to investment needs. due to improving
finances, the family lifestyle would also change. parents would now have more money for
discretionary spending, including spending on financial planning. income protection is still
needed and endowment plans like jeevan mitra and jeevan griha could be considered. for
investment needs, majority of investments could be made in debt funds or equity funds for their
long-term growth potential, depending upon the risk profile of the individual. the need to provide
income for retirement in the form of pension becomes more urgent. the time left for retirement is
growing shorter. the annual investment required to fund good pension increases with each year of
delay. if adequate contributions do not start now, it may become impossible to build sufficient
fund to buy a pension that would allow you to maintain the same standard of living after
retirement as during your work life. lics jeevan suraksha plan, icici pru forever life pension plan
and hdfc lifes personal pension plans are some of the best pension plans available in the country.
(the author is md, bajaj capital ltd)

Where can you put your money now

Your Money/Rajiv Bajaj, Mar 12, 2002, 09.09pm IST

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the verdict is out. this budget aims to bring a further reduction in interest rates. so, where does
that leave the retired person whose only source of income is the interest income he gets from his
investments? we have found that the scenario is actually much brighter than appears to be the
case at first glance. firstly, the reduction in interest rates on small savings has been only
marginal. also there has been only a small increase in tax liability by way of increase of
surcharge. now let us see the investment options that still hold out hope for investors. post office
monthly income scheme it is one of the safest monthly interest payment avenues. it provides an
alternative monthly income in the form of regular interest payment on the investment. it is

currently offering interest at the rate of 9 percent per annum payable monthly (rs 90 will be paid
every month on a deposit of rs 12, 000). this is another high yielding scheme from post office
where maturity period is six years. the minimum amount invested is rs 6,000 and there is a limit
on the maximum investment - rs. 3 lakh in single account and rs 6 lakh in joint account. another
big attraction of pomis is that a 10 per cent bonus is paid on the investment at the time of
maturity. government of india relief bonds the goi relief bonds offer a high of 8 per cent p.a.,
compounded half yearly or cumulatively. this return is completely tax free as it is exempted from
income tax under the income tax act, 1961 as well as wealth tax under the wealth tax act, 1961.
the current budget has imposed a limit on this investment at rs 2,00,000 per person per annum.
this ceiling is effective from 1st march, 02 till 28th february, 03. meaning if someone had made
investment in these bonds before 1st of march 2002, he/she can still make further investment into
these bonds subject to ceiling as aforesaid. further, these bonds can be held in demat form,
making the investment in the bonds hassle free, in case of sale or transfer. the interest/proceeds
are credited directly to the investors account. these bonds earn interest half yearly, or on a
cumulative basis. the tenure of the bond is five years. the issue price is rs 1,000 per bond. further
investments can be made in multiples of rs 1,000. company fixed deposits company fixed
deposits (cfd) of top companies have been the most sought after instruments for investors who
are looking for assured returns over short to medium term period. they provide assured return on
the investment. cfds have always given higher interest rates than a bank deposit. while
comparing interest rates of a company and bank fd, or of two cfds, one can see that even a
difference of a mere 1 per cent can give you as much as 25 per cent increase in your assets over a
long period of 20-25 years. many good companies are offering interest ranging between 12 per
cent to 10 per cent on a one-year deposit. these are india glycols offering 11 per cent, morepan
labs offering 11 per cent, ballarpur industries offering 10 per cent, and ashok leyland finance
offering 10 per cent. income funds the tax-free status of dividend from mutual funds has been
abolished. but that does not rule this investment option out from an investors portfolio because
now the investor will have to pay tax on the dividend according to his/her tax slab. earlier there
was a uniform tax on dividends @ 10 per cent which the mutual fund was liable to deduct. now,
no such deduction will be made by the mutual fund. the result could be higher dividend in the
hands of the investors. and if the investor does not have taxable income then the dividend could
be completely tax-free for him/her. growth option provides option to long term investors to pay
capital gains tax @ 10 per cent or 20 per cent with indexation benefit, whichever is less. deposit
scheme for retiring govt. employees this is a scheme providing regular income, exclusively
meant for retired government and psu employees. it offers interest @ 8 per cent per annum. this
interest is totally tax-free for investors. interest is payable half yearly. the account can be closed
after 3 years. it is ideal for retired having high tax-free income. bima nivesh an ever-popular
investment plan from lic. the plan offers high tax-free return of 7.47 per cent for 5 years deposit
and 8.30 per cent for 10 years deposit. as compared to goi relief bond, bima nivesh provides easy
liquidity option and the maximum investment limit ( which is rs 50 lakhs) is also high.

You can still bet your savings on PPF

SAVINGS WATCH/Rishi Chopra, Mar 12, 2002, 08.28pm IST

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interest rates may be dropping, yashwant sinha may have issued a fatwa against
the middle-class, and section 88 benefits may have been snatched away, but hang
in there. there is still some hope left. the public provident fund (ppf) scheme
remains the best investment option with a 9 per cent tax-free return which no other
instrument today provides in the market. so, even if you are in the highest income
bracket, dont miss out on putting that rs 60,000 in ppf every year. while the posttax returns on income funds would currently range between 7-8 per cent, rbi bonds
would provide you with 8 per cent. on the other hand, bank fixed deposits would
fetch you just 5-6 per cent post-tax. this makes ppf the favourite by a long shot. the
only compromise an investor has to make while investing in ppf is liquidity. but then,
you have to pay some price for getting better returns. although the budget has
partially taken away benefits under section 88 from ppf investments, interest
income on ppf continues to remain tax-free. on the other hand, it has brought
dividend income from companies and mutual funds under the tax purview. also,
according to the new norms, the administered interest rates on small savings like
ppf will now be benchmarked to the average yields of government securities of
equivalent maturity. the average yield of 10-15 year government paper during
2001-02 is in the range of 8.5 per cent. as the interest rates on small savings need
to be fixed at half a percentage point above the yield on securities of equivalent
maturity, the returns on ppf are now fixed at 9 per cent. this would be reset
annually. even without taking into consideration the section 88 rebate, the current 9
per cent tax-free return works out the highest among all categories of instruments.
this is applicable not only for the person earning less than rs 1.5 lakh (getting the
maximum section 88 benefit) but also an individual who falls in the highest income
bracket of above rs 5 lakh who gets no benefits at all. the reason is that every extra
rupee of interest earned by him would be subject to a 31.5 per cent tax which would
bring down the post-tax return substantially. so, while the person in the highest
income bracket has every reason to think that he should not invest in ppf as there is
no section 88 benefit, the stark reality is that there is no instrument in the market
that can match the 9 per cent tax-free rate of ppf. the returns on bank deposits for a
five-year term currently stand at around 8 per cent. for the individual in the 31.5 per
cent tax bracket (including surchage of 5 per cent), the effective yield on the
deposit works out to 5.5 per cent while for a person in the 21 per cent tax bracket,
the yield works out to 6.32 per cent. likewise, the post-tax rates on the post office
monthly income scheme for an individual in the 31.5 per cent slab works out to 6.2
per cent. if one goes for income funds, the dividends received would be taxed as per
the income slab of the investor. even if one opts for the growth option, one still
cannot escape the 10 per cent capital gains tax. assuming income funds are able to
generate a return of around 8-9 per cent, looking at the current interest rate

scenario, the post-tax return would work out to a lower 7-8 per cent. single premium
policies, the nearest competitors to ppf, are also not that attractive post-budget,
largely because of a 5 per cent service tax imposition. the returns on these policies
have gone down substantially after imposition of the tax. in the case of bima nivesh,
the premium on a 10-year policy for say rs 1 lakh would work out to rs 89,781
against rs 85,506 earlier. this has bought down the return from 7.93 earlier to 7.4
per cent now. but its still nowhere close to ppf returns.

Go for Dynamic Asset Allocation

FINANCIAL PLANNING/Vivek Reddy, TNN, Mar 12, 2002, 08.07pm IST

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as an investor, your asset allocation should be responsive to factors like the state of
the markets. here are some key concepts that investors should be aware of when
investing in mutual funds: when to invest, and when to cash out clients should
invest when they have the money because that gives their money more time to
grow, whether in equity or fixed income markets. if their inflows are of a monthly
nature, such as salary or rental income, then they should enroll in a systematic
investment plan. the question of when to cash out needs considerably more thought
and skill. some pointers are provided below: if the client has invested directly in
shares or fixed income securities, he has to learn to be very active and sell out as
soon as the price rises beyond reason, or when that companys fundamentals begin
to deteriorate. a buy and hold strategy rarely works in the case of individual
securities. and it is questionable whether individuals have the time or resources to
take appropriate action with their direct investments. however, with a good mutual
fund, clients can adopt a buy and hold strategy. active management and
monitoring by fund managers ensures that a good fund will remain a sound
investment and continue to deliver results over long periods of time, because fund
managers have diversified portfolios and are actively weeding out underperforming
companies. in the case of mutual funds, clients could consider redeeming in the
following circumstances: when their goals have arrived and clients need the
money for the purpose for which they had been investing. if the market overall
appears overvalued in terms of fundamentals and historic valuations. in this
regard, it should be kept in mind that it is the financial planners job to advise
clients when to exit or enter an asset class; the fund manager will stick to the asset
class defined in the investment objective of the offer document. start planning and
investing early people who save or invest small amounts of money early and often
tend to do better than those who wait until later in life. similarly, by developing
good financial planning habits early in life, such as saving, budgeting, regular
investing and periodic review of finances, a person will be in greater control
financially, and can handle changes and emergencies better. have realistic
expectations financial planning is a common sense approach to managing ones
finances to reach ones life goals. it cannot change a persons situation overnight.
building wealth and finances takes time and planning. also, clients need to realize
that macroeconomic factors will affect returns from investments. for example, up to

the 1980s, indian investors could expect bank and corporate deposit interest rates
of 14 per cent and above. now in the first years of the new millennium, depositors
can expect a maximum interest rate of around 8 to 9 per cent. with regard to equity
investments, a return premium of 5 to 6 per cent over the yield of fixed income
securities can be expected over time. therefore, while markets will have their surges
and crashes, the average return over the next few years for the stock markets and
for a well-managed equity fund is likely to revert over time to a level of around 13 to
15 per cent compounded growth per annum. therefore, if the clients financial goals
are to be achieved, the return expectations from their investments should be
realistic and should take into account these macro factors. invest regularly even if
you do not have a lump sum readily available, you can use future surpluses to
invest on a regular basis through systematic investment plans offered by many
mutual funds. static and dynamic asset allocation the typical approach to asset
allocation is to first articulate goals, resources and risk tolerance, and identify the
one correct asset allocation that best meets these goals. thereafter, the asset
allocation remains more or less static, remaining steadfast through all types of
market conditions, changing only infrequently when the individuals situation or
goals have altered dramatically. this is called static asset allocation, which means
that the asset allocation stays more or less constant. this is a more passive
approach to financial planning and asset allocation, and focuses on sticking to a
plan and not deviating regardless of market conditions. but for certain types of
investors, for whom investing is not just about meeting specific goals but more
about wealth maximisation, there is an innovative and interesting strategy called
dynamic asset allocation. in dynamic asset allocation, the allocation to asset classes
keeps varying based upon market movements. when stock markets are high, the
idea is to reduce exposure to equities and vice versa. therefore, this is a more
aggressive and contrarian approach compared to a static asset allocation which
seeks to stay riveted to a predetermined mix. if investors can identify a clear
buy/sell discipline and evolve a systematic way to vary their exposures to different
asset classes based on market movements, then they could earn superior riskadjusted returns over time and build wealth while avoiding the trauma of huge
swings in value of their portfolio. the author is ceo, pioneer iti amc