Mutual Fund Investment Basics: What is Mutual Fund?

To answer the question what is mutual fund should we break the term mutual fund into mutual + fund. Yes, may be that will help us derive the literal meaning of what is mutual fund. The word mutual means common or shared and the word fund means monetary investment.

So we arrive at an answer that provides us the literal meaning of our question what is mutual fund. A mutual fund is shared investments. In a mutual fund, the monetary investments made by different people is put into a fund comprising well-chosen financial instruments. Individually it may not be possible to buy enough units of each type of financial instrument stock for realizing worthy gains. So the monies invested by a large number of people is pooled and put into funds.

What is Mutual Fund Diversity?

A mutual fund comprises of select financial instruments and their units. The selection of financial instruments and the number of units of each selected financial instrument is made by the fund manager. The mutual fund manager aims to develop a fund portfolio that attains to the maximum the objectives of the fund and minimizes the risk. A mutual fund investment portfolio with minimized risk is called a diversified portfolio. For portfolio diversification, mutual fund managers apply advanced software models based on CAPM, alpha and beta risk calculation methods and other advanced risk calculation models. How do we know that a mutual fund has been well diversified? For this, we study the performance of the fund with respect to growth, returns, dividend yield, bonus and other benefits. A well-diversified mutual fund portfolio shows a steadily rising performance over time. Constructing a well-diversified portfolio also involves applying volatility tests to eliminate volatility as far as possible and ultimately arrive at the least volatile option.

What is Mutual Fund Type?

Mutual fund type is based on the investment objective of the mutual fund. A mutual fund can have several profiles based on investment objectives. Thus we have stable mutual funds, balanced mutual funds, growth and high growth mutual funds. Mutual fund type is also based on the type of financial instruments selected by the fund manager.

There are equity-based mutual funds, bond and debt based mutual funds, mixed mutual funds, large-cap mutual funds, mid-cap mutual funds and small-cap mutual funds. When the component of equity is more the fund aims for high growth and a high component of debt based instrument aims for stability whereas a mix of equity and debt instruments aims for a balanced mutual fund profile. Mutual funds can also be the tax saving mutual funds.

What is Mutual Fund Lump Sum Plan?

Under mutual fund lump sum plan, the investors make a lump sum investment in a mutual fund. These days mutual funds are providing greater flexibility and liquidity. The investor may choose to withdraw part or whole of the invested amount anytime from flexible mutual funds. If the withdrawal is made after three years, no charges or interests are deducted. Withdrawing prior to three years can be permissible after deduction of applicable charges.

What is Mutual Fund SIP?

SIP means a systematic investment plan. Many investors may choose to invest periodically rather than through lump sum mode. Mutual fund SIPs have been started to encourage more people to invest in mutual fund plans. A SIP can have yearly, semi-annually, quarterly, monthly or even weekly payment frequency. Nowadays SIP plans can start with as low as Rs 500 per month investment. SIP-based mutual funds are offering great flexibility. The investor may choose to withdraw his or her investments any time without the deduction of any charges.

What is Mutual fund Return?

Mutual fund return implies the total gain derived by an investor by investing in the mutual fund. Total mutual fund returns are based on the NAV or the Net Asset Value of the mutual fund portfolios comprising an n number of financial instruments. The NAV of a fund is calculated by dividing the fund’s total net assets by the fund’s total outstanding shares. The fund’s total net asset is calculated by subtracting from the fund’s total asset its total liability. The fund’s outstanding shares are calculated by subtracting the market value of stock holdings from the fund’s net asset.

The return percentage components of individual stock comprise of the percentage of price appreciation of the stock and the dividend percentage with the initial stock price as the base. For example, if the initial price of the stock is Rs 30 and it appreciates to Rs 33, then the percentage of price increase is 10 % [(33-30)/30*100]. Suppose the company declares a dividend of Rs 1 on the stock then dividend return is 3.3 % [(1/30)*100]. So by summing the two return percentages, we arrive at the total return of the stock which is 13.3 %.

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HRA Exemption – Maximize Tax Benefit in India

HRA or House Rent Allowance is the allowance that is given to an employee from the employer in order for them to pay for the rental accommodation charges for where they are living.

This is primarily meant for those people who work outside of their hometown and are in requirement of staying in a temporary accommodation situation. According to the new law for Income Tax, the house rent allowance that an employee is playing is exempted from paying tax. This is commonly known as HRA exemption.

There are a number of rules and regulations that need to be kept in mind for an individual who wants to be considered under the HRA exemption. Some of the necessary fields that need to be abided by the employer who is getting tax exemption from their employee are:

·       The House Rent Allowance needs to be given from the employer to the employee.

·    The actual rent for the accommodation is deducted from 10% of the basic salary of the  employee.

·    For those who are living in metropolitan cities like Mumbai, Kolkata, Delhi, and Chennai,  they are to be allotted 50% of their basic salary as House Rent Allowance.

·     For those who are working and living in non-metropolitan areas, their house rent allowance is usually 40% of the basic salary that they receive from the employer.

If the employee pays less for their rent and there is part of the house rent allowance remaining after he/she has paid for their accommodation, this remaining salary is added back to the basic salary of the employee which will now be taxable under the income tax.

Calculating and Understanding HRA Exemptions

The first thing that we need to understand before calculating the amount of exemption is the criteria for the exemption. For this, an example is an ideal way to understand the amount of money that is considered as non-taxable from the HRA exemption.

Rahul is an employee who works in a firm in Kolkata. The basic salary that he receives at the end of each month from this employer is Rs50, 000. The same employer pays him an amount of Rs15,000 as house rent allowance so that he can pay for the place that he has rented out and currently lives in. The amount of excess rent that is laid to the landlord over 10% of the basic salary of Rahul is Rs1,75,000. Between all the figures that are mentioned in the above example, the amount of money that is exempted from taxes is the minimum amount, i.e. 15,000 rupees. 15,000 rupees if Rahul’s HRA exemption amount.

Now, there are special cases that also need to be considered where Rahul is considered to be living with his parents in the same city and gets HRA allowance from his employer. Then for Rahul to make sure that HRA exemption is applied to him, he needs to submit the evidence that he pays rent to his parents for living there. The only condition for this to get through is if the house is in the name of Rahul’s parents and not in his own name. The HRA that the parents receive from Rahul should also be reflected in their income tax forms that they need to file at the end of each financial year.

HRA Exemption Benefits

Not all employees are allotted a separate House Rent Allowance from their employees and thus not all the employees can avail for the HRA exemption from their taxes. Only those individuals who have a separate allowance from their employer in the form of house rent are the ones that can ask for HRA claims and return benefits.

The best part about House Rent Allowance is that it is a separate salary allotted by the employer, so house rent is not deducted from the normal salary of an individual leaving them with very less amount of money for themselves and for purchasing their daily amenities and so on. The separate house rent allowance is a way of the employer or the company to ensure that the employers have a place to live and are able to afford it. The employee also checks if the place that they are living in is within the budget of the house rent salary that is provided to them.

Usually, the entire amount of money that is provided in the house rent allowance is exempted for tax completely or partially depending on the receipts for house rent that is provided by the employee. The house rent receipts are an important way of confirming that the house rent allowance that is provided to employees is being used by them. This serves as proof and can be added to one’s income tax form in order to avail the HRA return claims. The HRA exemption provides employees with more on their salary than what they already have.

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Income Tax Return Filing By Individuals: Who Should File and How to File

In every sphere of life, everyone has to shell out a percentage for everything that they buy, directly or indirectly. This shelling out of money is basically in layman terms called a tax. Tax exists everywhere, at the movies, at a restaurant, for services and even for your electricity. It is the duty of each and every citizen to pay the tax to the Government.

What Is Income Tax Return?

Income tax return is plainly the filing of the income tax form prescribed by the Government by a citizen. The tax return form contains information concerning the person’s income and tax paid to the Government. This tax return form is filed at the end of each financial year by people who come under the taxable slab. 

Who Fills An ITR?

Filing of income tax returns is necessary for people whose annual income exceeds Rs. 2.5 lakhs. You can also be an individual in the possession of valid credit. The criteria however for a senior citizen of 60 years of age is Rs. 3 lakhs per annum and for a super senior citizen of 80 years of age is Rs. 5 lakhs per annum. ITR’s also need to be filed by people who own immovable property as well as vehicles.

Why Should One File Income Tax Returns?

The Income Tax Act, 1961 of India, section 139(1) states that all individuals whose total income of the previous year extended the maximum amount not taxable, is mandatory to file Income Tax Returns (ITR). Taxable income is the gross income minus the deductions or exemptions permitted in that tax year.

What Is Individual Income Tax Return?

Every individual salaried or self-employed and who earns a certain amount of income needs to file an individual income tax return. An individual income tax return is a document to be filed with the Internal Revenue Service IRS or the state tax board specifying your income, profits and losses in business, other deductions and detailed description of taxability or tax refund. Taxation rates vary depending on the characteristics of a taxpayer. The filing of tax returns forms depends on various criteria as each taxpayer cannot submit the same form.

What Is The Deadline For Filing Individual Income Tax Return?

Each taxpayer has to file their individual income tax returns by the 31^st of July for each financial year.

What Are The Different Income Tax Returns Forms?

·         ITR-1: This is for persons who are salaried, pensioners, or who acquire income from a house property or lottery with no loss or foreign relief. However, a person who has an income above Rs. 50 Lakhs cannot file under this category.

·         ITR-2: This is for persons who do not have income under any proprietary firm.

·         ITR-3: For those persons who are business owners and professionals.

·         ITR-4: For those persons who are assessed on a presumptive basis.

·         ITR-5: For Association of Persons, Body of Individuals, LLPs, etc.

How Do You Compute Your Income For Tax?

Your individual income tax return has to be calculated after certain deductions are made. These deductions can be made under Section 80D for medical insurances, Section 80G for donations, Section 80C for investments/expenditure. Tax rates are also computed after all tax variables and deductions are done at the salary level. Balance tax rate after claim of prepaid tax needs to be paid after tax returns are filed.

How Do You File Your Individual Income Tax Returns?

Individual income tax returns can either be filed in the electronic or the digital paper format. Persons with incomes less than Rs. 5 Lakhs can file their individual income tax returns in the physical form. However, those wishing to claim tax refunds have to compulsorily file in the digital format.

Quoting and linking your Aadhar number with your PAN number is an important criterion before filing your tax.

Steps for Filing Your Individual Income Tax Returns

1.   Creation of your e-filing account on the Government’s income tax website under the Register Yourself tab is the first step in this process.

2.   You need to access the Form 26AS and download the same. Form 26AS is basically your computed tax statement paid by you against your PAN number.

3.    Download the ITR form that is suitable to your income category.

4.   Fill all your income details in the ITR form. These details will be your basic details, bank details and income details. Kindly re-verify your details before moving on to the next step.

5.    Calculate your liability in terms of deductions.

6.    Submit your filled income tax form.

7.   Send a print out of your ITR form to the Income tax department after which you will check the status of the receipt.

How to Choose the Best Pension Plan in India?

Retirement planning is one of the most sought after goals for most salaried individuals across the globe. After all, who doesn’t want to score a peaceful and prosperous retirement? Though everyone wants to live happy and content post retirement life, only a few are careful enough to plan well in advance for their retirements.

Given the existing inflation and the ever-increasing dearness, not planning your retirement well in advance may lead to a chaotic and full-of-pressure post retirement life. But you’ll be surprised to know that by simply choosing a good pension plan, you may easily score a great post retirement life.

Now, you may argue that there are virtually thousands of retirement plans and which plan should you opt for. Well, the secret is simple! You must choose a plan that’s most rewarding and offers you a lot of benefits post retirement.

To make things easier for you, here we bring to you some easy ways on how to choose the best pension plans in India. It only makes sense to keep these 7 important things in mind when planning to invest in a pension plan to ensure getting the best plan possible in the Indian Insurance sector.

7 Things to Keep in Mind When Fishing For Pension Plans in India

• Present Age-Age plays a very important role in pension planning. The earlier you will start, the more time you will get to accumulate a corpus for your pension. But in case, you’re starting late, you will need to choose a pension plan that allows you to build a huge pension corpus in a shorter span of time. 
• Intended Retirement Age– What age do you want to retire? Now, this is one question that is sure to influence your pension planning. In case, you’re planning to retire early, you will need to invest in a pension plan with great returns and huge accumulation. 
• Life Expectancy- This is yet another factor that determines the direction of your pension planning. If you and your family have high life expectancy, then you’ll need to start building a pension corpus early. And if you have a family medical history, it becomes even more important to build a pension corpus to use it for medical emergencies later. Don’t forget, due to the advancements in the world of medical sciences, the life expectancy ratio is dramatically increasing per year.
• Inflation-Okay, you probably already knows what inflation really is. But you’ll be surprised to know that inflation can quickly eat all your savings and leave you empty handed. Therefore you need to carefully consider the current and expected inflation rate when deciding on the accumulation and distribution period of your pension plans.
• Investment Portfolio – Yet another factor that you must carefully consider when planning your pensions or retirement is your investment portfolio. Carefully consider how much life insurance, health insurance and medical insurance do you have in hand and till what time are they going to support you and your loved ones. Basis this analysis, determine the right amount of corpus you need to build for your retirement and invest in a pension plan accordingly. 
• Present Lifestyle-If you have been living a really healthy lifestyle, then you will have less chances of contracting an age prone disease in your retirement years. Hence, you may choose to build a pension corpus at a slow and steady pace. However, if you are the one amongst thousands who are forced to lead an unhealthy lifestyle due to work pressure or otherwise, you will more chances to contract age prone diseases. Therefore, it makes sense to choose a pension plan that allows you to build a huge pension corpus in a shorter time frame.
• Spending Pattern- Last but certainly not the least, your spending pattern too influences your pension planning to a greater extent. If you have been living a financially frugal life, it makes sense to choose a pension plan that allows you to build a huge pension corpus quickly.

Conclusion

Remember, if you’re looking to retire in peace, you must have the assurance of a substantial pension amount in hand. That’s why it makes sense to be careful and heed to the above mentioned pointers while pension planning.

Refund of Service Tax in Varishtha Pension Bima Yojana

Varishtha Pension Bima Yojana is administered by LIC and is a single premium pension policy. Looking at the increasing demand in India for this policy for the enhancement of social security and welfare of senior citizens Vatishatha Pension Bima Yojana was revived by the Government. In this policy, the post-tax return is guaranteed to be 9%-9.8% p.a.

The Government has removed the Varishtha Pension Bima Yojana from the preview of Service Tax in Budget 2015 in order to make this policy more appealing. With effect from 1st April 2015, there is no service levied on the premium paid towards this scheme.

Let us learn more about the details of this scheme 

• Minimum Entry Age – LIC Varishtha Pension Bima Yojana is only available to the individuals who are 60yrs and above. However, there is no limit on the maximum age for a person to enter in this policy. This policy can be entered only by Indian citizens.

• Time limit – This scheme is open for subscription only for a small period of one year.

• Returns – Varishtha Pension Bima Yojana assures a rate of return on the policy of 9% which amounts to 9.38% return annually.

• Lock-in Period – under this policy the investments get locked in for a period of 15 years.

• The rate of Investment – In this policy, the minimum investment is fixed at Rs66, 665/- with a ceiling limit of Rs 6, 66,665/-.The ceiling limit of this policy applies to the dependents, whole family, and spouse.

• Payout Option –The policyholder can decide as to how he wants his dependents or a nominee to get paid. He can opt for monthly, quarterly or annual option depending on the need.

• The amount of Pension – In Varrishtha Pension Bima Yojana the amount of pension ranges from Rs 500/- to Rs 5000/- per month. This amount depends on the investment amount and also which pay-out option is chosen. This pension amount is paid during the lifetime of the pensioner.

• Withdrawal – In case of any unforeseen event like critical/serious illness of spouse or self or in the case of sudden death, the policy can be surrendered before 15years.The value of surrender would be given after deducting 2% as a penalty for premature withdrawal.

• Loan Facility – This policy give a benefit of a loan up to 75% of the value of the investment after 3 years of policy completion.

• Payment to the Nominee – In the case of death of the policyholder, the nominee gets the full investment amount.

• The option of Free-look period – Like any other insurance policy, this policy also offers for a Free-look period.

Service Tax Exemption in Varishta Pension Bima Yojana 

 According to the last year Budget 2015 there is a Service Tax exemption given to the policyholders on the investments made. However, people who have already invested in this plan prior to April 2015 will not enjoy this tax exemption would feel neglected as the returns which they get would be lowered because of the implication of service tax. Before service tax used to be at the rate of 3.09% on the invested amount because of which the implication is on the guaranteed rate of return gets reduced by almost 0.27%.

Drawbacks of Varishta Pension Bima Yojana 

1.   In this policy, the maximum pension amount is Rs 5000 which after the maturity of 15 years does not suffice the basic needs of the investor.

2.   The ceiling limit of this policy included the whole family because of which the maximum pension amount cannot be higher than Rs 5000.

3.   The tax-ability of the pension lowers the returns and gets the pension to 8.1% to 8.44%.

4.    Liquidity is also one of the drawbacks in this scheme as the money gets locked in for a period of 15 years with premature withdrawal charges of 2%.

In my opinion, it is wise to invest in this plan if a person who retires is not looking for higher returns and who falls in the low tax bracket of 10%.

LIC New Money Back Plan for 20 Years

A Life insurance policy provides dual benefits of security and savings. The below points explain why one must plan their finances and make an integral part of their investment tool.

•    Life is full of uncertainties, and in this scenario life, Insurance comes as a saving grace for your family.

•    It is not only a financial support in case of uncertainty but also an investment plan. It helps in meeting many future goals according to the stage in life and the priorities.

•    It protects against the rising health expenses. It offers protection against critical diseases and hospitalization costs.

•    It contract.

•    It is safe and highly recommended. The money that you invest is the primary responsibility of the stakeholders         

•    It offers protection as well as savings over a long term.

•    It also provides tax benefits for both at the time of entry and exit in most of the plans.

•    Money back policy also acts as a useful tool to cover mortgages and loans taken by the policyholders.

The NewMoney Back Plan is one such plan that provides periodical returns of survival benefits during the term of the policy. Under this scheme, 20% of the sum assured is payable by at the end of the fifth, tenth and fifteenth year of the policy term. The balance amount of 40% is due by the 20th year.

In the event of a death of the policyholder, the death claim covers the full sum assured without deducting any survival benefit amount, which was already paid. The bonus is also calculated on the full sum assured.

Features of the LIC Money Back Policy:

•    The survival benefits are paid periodically

•    There is a double tax benefit under section 80C and section 10D.

•    Death risk cover is 125 percent of the basic sum assured

•    Comes with an additional accidental sum assured

•    Loan can be availed against the plan

•    Premium payment term is 15 years only

Eligibility Criteria:

Minimum and Maximum age                                                 13 Years and 50 Years

Policy Term                                                                                 20 Years

Term of Premium Payment                                                     15 years

Maximum age of policyholder at maturity                          70 Years

Minimum sum assured                                                             100000

Maximum sum assured                                                            No maximum limit.

In Case of a possible event during the policy term:

On Survival:

5th Year       20% of the sum assured

10th Year     20% of the sum assured

15th Year     20% of the sum assured

20th Year     40% of the sum assured plus the accrued bonus.

On Death:

If the policyholder happens to die during the term of the policy her/his nominee will receive:

1.    Either 125% of the basic sum assured or 10 times of the annual premium whichever is higher

2.    Revisionary bonus

3.    Final Additional bonus if there is any.

4.    The benefits or amount that is already paid would not be deducted.

Let us understand the policy better with the help of an example:

Mrs. Basu was a 30-Year-old working woman. She invested in an LIC money back policy

20 Years of the sum assured- INR 100000

The Survival Benefits are as follows:

5th Year      INR 20000 (20% of 100000)

10th Year    INR 20000 (20% of 100000)

15th Year    INR 20000 (20% of 100000)

20th Year    INR 40000 (40% of 100000)

In case of death her nominee with receive 125% of the sum assured along with the accrued bonus. Additionally, any survival benefit that has already been paid would not be deducted.

In the case of an accidental death during the policy term the nominee with receive 125% of the sum assured+ accrued bonus+ accidental sum assured.