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Save tax and Plan retirement with Mutual Funds

September 12th, 2022 Growreal


For most Indians, retirement is the most ignored financial goal. From the beginning of our career, we start chasing short-term goals which give us short-term gratification like buying a car, buying a New smartphone, vacation, etc. Most of our savings are channelized into achieving our Retirement goals.

However, we all have a desire to save tax. We can channelize this desire to achieve two goals,

  1. Saving Tax
  2. Creating Retirement Corpus

Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. This deduction is allowed to an Individual or a HUF.

To save tax, we normally invest in PPF and other instruments which has a long lock-in period. When you are ready to invest for such a long period, investing in equity is a better idea, as equity is less risky and more rewarding in long term. You may choose to invest in Equity Linked Savings Schemes (ELSS) of mutual funds to save tax under section 80 ( C ).

What is ELSS?

An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn't just help you save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act.

Along with the tax deductions, an ELSS offers you the opportunity to grow your money by investing in the equity market. ELSS carries a lock-in period of 3 years. Furthermore, you can also choose to invest through a Systematic Investment Plan and bring discipline to your tax planning.

Here's how it will work. Say, one invests Rs 12,500 monthly in ELSS (Rs 1.5 lakh annually) for 25 years of one's working life towards retirement. Assuming a growth rate of 12 percent a year, the corpus could be nearly Rs 2.12 crores, which could be part of one's retirement portfolio in addition to other investments earmarked for retirement. 

SCHEME NAME 1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 12 Year 15 Year
Capital Invested
Rs 1 Lac Rs 2 Lacs Rs 3 Lacs Rs 5 Lacs Rs 7 Lacs Rs 10 Lacs Rs 12 Lacs Rs 15 Lacs
Returns Generated from Various Schemes
Maximum ELSS Return ₹ 1,21,559 ₹ 2,75,071 ₹ 4,41,203 ₹ 8,98,110 ₹ 16,13,266 ₹ 26,14,434 ₹ 35,18,416 ₹ 82,92,953
Minimum ELSS Return ₹ 1,00,030 ₹ 2,29,534 ₹ 3,50,048 ₹ 7,25,657 ₹ 12,12,686 ₹ 19,86,361 ₹ 25,83,101 ₹ 48,77,739
Average ELSS Return ₹ 1,10,884 ₹ 2,51,585 ₹ 3,89,498 ₹ 8,08,623 ₹ 13,58,294 ₹ 23,01,979 ₹ 30,64,690 ₹ 69,33,800
S & P BSE Sensex ₹ 1,13,410 ₹ 2,45,862 ₹ 3,72,791 ₹ 6,97,401 ₹ 11,06,090 ₹ 17,71,240 ₹ 23,53,781 ₹ 47,32,426
PPF Calculated @ Actual Rates ₹ 1,07,829 ₹ 2,24,307 ₹ 3,50,839 ₹ 6,37,886 ₹ 9,76,743 ₹ 15,94,563 ₹ 20,93,314 ₹ 30,01,347


Past Performance may or may not sustain in the future. The above table shows the value of Rs. 1 Lac invested in PPF, Sensex and various ELSS Schemes as on 31ˢᵗ May of every year. (Valuation Date: 31ˢᵗ May 2018) Note: Amount assumed Rs. 1 Lac in PPF & ELSS. However, deduction u/s 80C has been increased from Rs. 1 Lac to Rs. 1.5 Lacs w.e.f 22ⁿᵈ August 2014.

Disclaimer: The information contained in this report has been obtained from various sources. While utmost care has been taken for the preparation of this report, we do not guarantee its validity or completeness. Neither any information nor any opinions expressed constitute an offer, or an invitation to make an offer to buy or sell any fund. Investors should take financial advice with respect to the suitability of investing their monies in any fund discussed in this report. Mutual fund investments are subject to market risk. Please read the Scheme Information Document and Statement of Additional Information carefully before investing. 

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Power of Compounding

If you want to go around the earth and start with 100 metres on first day and double the distance every day, How long do you think it will take?

1 year?

10 Year?

Let’s find out, within 19 days you would have covered 39,321  Kilometers, while the equatorial circumference of Earth is about 40,075 km. you would have travelled around the world in less than 20 Days.

But, What if you stop after 10 days? You would have hardly covered a little less than 77 km.

This is the power of compounding. Power of compounding can help you to create a great wealth as well.

How to leverage the power of compounding for maximum benefit to create a wealth!

Start Early & Invest Regularly

Key ingredient to avail the benefit of power of compounding is TIME. You need to keep investing regularly for long term. The sooner you start investing in your life, more wealth you will be able to create.

For Example,

Nisha invests 5000 rupees every month since the age of 25, while Nilesh invest 7000 rupees every month since the age of 35. Both of them kept investing till the age of 60 years with the objective of creating a corpus of retirement.

By the age of 60 both would have invested 21 Lac rupees. Assuming a return of 12%, How much wealth both of them would have created for their retirement?

Nisha will accumulate 2.75 Crore rupees, while Nilesh will get only 1.19 Cr rupees, which is 59% lesser than Nisha’s corpus.

This is why starting early is important.

Challenge:

"I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” Bruce Lee

One requires a lot of discipline in doing the same things again and again for long term, though it is the most proven method to create a great result in any area.

To avail the benefit of power of compounding the biggest challenge is to keep investing every month with discipline. And as a human being, most of us lack discipline, when it comes to follow the same routine in the absence of instant gratification. For creating wealth in long term, one needs a lot of discipline to start early and keep investing regularly.

Solution:

Start a SIP (systematic investment plan) in Equity Mutual Fund for the long term to automate the process of investing. You need to exercise your willpower just once to decide the amount and tenure to start your SIP. The biggest benefit of investing in mutual funds through SIP is that it helps you in investing with discipline regularly. You need not do paperwork or pay every month manually. This automation makes this long-term powerful process of wealth creation easier for you.

So remember, to avail of the power of compounding starting early and remaining invested for the long term is the Key.

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Understanding Asset Allocation

As the classic proverb says, ’Don’t put all eggs in one basket, Investors also must diversify his/her portfolio into different asset classes. Why? The reason is very obvious – to reduce the risk.

There are mainly 5 asset classes, namely; Equity, Debt, commodity, real estate, and cash. One must allocate his/her savings into different asset classes based on the various parameters and their own risk appetite. Dividing your investment into different asset classes based on different parameters is called asset allocation.

Considering the ease of investing and liquidating, we shall focus on two asset classes – Equity & Debt, to understand the process of asset allocation.

Deciding the right Asset Allocation Mix:

One of the most important criteria while selecting the asset class is the time horizon.

  • Short Term - If you are looking to invest for less than 3 years, your portfolio should consist of mainly Debt investment as equity is very volatile and market risk is higher in short term.
  • Medium Term - If you are looking to invest for a  period of 3 to 5 years, your portfolio should be a mix of equity and debt both.
  • Long Term - In case of investment for longer than 5 years, you can invest more into equity. Equity as an asset class is lesser volatile in long term.

Rebalancing Asset Allocation:

The investment horizon keeps on changing over a period of time. So as the years passed by, asset allocation needs to be re-adjusted based on the remaining number of years till you need to withdraw. So for example, if you are going to need money in the year 2027, you must start shifting money gradually from equity to debt by the year 2024.

Other important Parameters:

Risk appetite, the required rate of return to achieve your financial goals, tax implications, etc. are other parameters that are also crucial while deciding the right asset allocation mix.

One must be able to control GREED in a bull market and FEAR in a bear market to ensure the right asset allocation mix in the portfolio. One must be focused and disciplined to save from the emotional decisions which might deviate himself/herself from the asset allocation.

“Most important key to successful Investing can be summed up in just two words Asset-Allocation.” Michael LeBoeuf

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Understanding Return


 

Understanding Return

Calculating return would have been easier if we had been investing exactly for one year. But that doesn’t happen in the practical world. Investment is normally done in a staggered manner and each investment is not kept for the same period of time. Withdrawal also might happen over a period of time.

To compare the return from various investment plans, it is necessary to have a common parameter that can be used for all types of investments with different investment amounts and different holding periods. That common parameter is to assume that all investment returns get compounded annually.

If the investment is held for lesser than one year, then we need to calculate the return in percentage terms by assuming that the investment is held for one year.

CAGR – Compounded Annual Growth Rate

If you want to calculate the return for one time investment then CAGR (Compounded Annual Growth Rate) is used. But when the investment is done periodically or staggered over a period of time, CAGR is not useful to calculate the return.

In the case of staggered investment, either IRR or XIRR can be used.

IRR – Internal Rate of Return

If the investment is done in a strict periodic manner, you may use IRR to find out the rate of return. For example, if an investment is done at a fixed interval (Monthly/quarterly/yearly) and withdrawal only at the end of the entire tenure, IRR can be used to find out the return.

XIRR

If cashflow includes frequent inflow as well as outflow over a period of time, we need to use XIRR for calculating the rate of return. XIRR gives you the flexibility to assign specific dates for each cash flow, making it a much more accurate calculation.

Though Return is one of the most important criteria but we should also look at other parameters like consistency, portfolio quality, risk, risk-adjusted returns, etc.

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Save tax and Plan retirement with Mutual Funds


For most Indians, retirement is the most ignored financial goal. From the beginning of our career, we start chasing short-term goals which give us short-term gratification like buying a car, buying a New smartphone, vacation, etc. Most of our savings are channelized into achieving our Retirement goals.

However, we all have a desire to save tax. We can channelize this desire to achieve two goals,

  1. Saving Tax
  2. Creating Retirement Corpus

Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. This deduction is allowed to an Individual or a HUF.

To save tax, we normally invest in PPF and other instruments which has a long lock-in period. When you are ready to invest for such a long period, investing in equity is a better idea, as equity is less risky and more rewarding in long term. You may choose to invest in Equity Linked Savings Schemes (ELSS) of mutual funds to save tax under section 80 ( C ).

What is ELSS?

An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn't just help you save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act.

Along with the tax deductions, an ELSS offers you the opportunity to grow your money by investing in the equity market. ELSS carries a lock-in period of 3 years. Furthermore, you can also choose to invest through a Systematic Investment Plan and bring discipline to your tax planning.

Here's how it will work. Say, one invests Rs 12,500 monthly in ELSS (Rs 1.5 lakh annually) for 25 years of one's working life towards retirement. Assuming a growth rate of 12 percent a year, the corpus could be nearly Rs 2.12 crores, which could be part of one's retirement portfolio in addition to other investments earmarked for retirement. 

SCHEME NAME 1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 12 Year 15 Year
Capital Invested
Rs 1 Lac Rs 2 Lacs Rs 3 Lacs Rs 5 Lacs Rs 7 Lacs Rs 10 Lacs Rs 12 Lacs Rs 15 Lacs
Returns Generated from Various Schemes
Maximum ELSS Return ₹ 1,21,559 ₹ 2,75,071 ₹ 4,41,203 ₹ 8,98,110 ₹ 16,13,266 ₹ 26,14,434 ₹ 35,18,416 ₹ 82,92,953
Minimum ELSS Return ₹ 1,00,030 ₹ 2,29,534 ₹ 3,50,048 ₹ 7,25,657 ₹ 12,12,686 ₹ 19,86,361 ₹ 25,83,101 ₹ 48,77,739
Average ELSS Return ₹ 1,10,884 ₹ 2,51,585 ₹ 3,89,498 ₹ 8,08,623 ₹ 13,58,294 ₹ 23,01,979 ₹ 30,64,690 ₹ 69,33,800
S & P BSE Sensex ₹ 1,13,410 ₹ 2,45,862 ₹ 3,72,791 ₹ 6,97,401 ₹ 11,06,090 ₹ 17,71,240 ₹ 23,53,781 ₹ 47,32,426
PPF Calculated @ Actual Rates ₹ 1,07,829 ₹ 2,24,307 ₹ 3,50,839 ₹ 6,37,886 ₹ 9,76,743 ₹ 15,94,563 ₹ 20,93,314 ₹ 30,01,347


Past Performance may or may not sustain in the future. The above table shows the value of Rs. 1 Lac invested in PPF, Sensex and various ELSS Schemes as on 31ˢᵗ May of every year. (Valuation Date: 31ˢᵗ May 2018) Note: Amount assumed Rs. 1 Lac in PPF & ELSS. However, deduction u/s 80C has been increased from Rs. 1 Lac to Rs. 1.5 Lacs w.e.f 22ⁿᵈ August 2014.

Disclaimer: The information contained in this report has been obtained from various sources. While utmost care has been taken for the preparation of this report, we do not guarantee its validity or completeness. Neither any information nor any opinions expressed constitute an offer, or an invitation to make an offer to buy or sell any fund. Investors should take financial advice with respect to the suitability of investing their monies in any fund discussed in this report. Mutual fund investments are subject to market risk. Please read the Scheme Information Document and Statement of Additional Information carefully before investing. 

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HOME LOAN EMI VS SIP

 

Combination of EMI and SIP can save you lot of money

What if your Home loan tenure is reduced without increasing EMI, even if the interest rate remains the same? Sounds interesting? Read it.

In the year 2010, I bought a flat in Ahmedabad for which I took a home loan of Rs 48 Lacs from one bank. At that time the interest rates were around 10.5%. So I decided to take the loan for the maximum tenure available, i.e. 20 years as I could afford the EMI of Rs. 47922/-.

The bank RM came to my office for completing the paperwork. While filling out the forms he asked me about the tenure which I would like to go for. I told him to go for maximum tenure i.e. 20 years. Bank’s RM told me, “Sir maximum limit is not 20 years it is 25 years”. According to my calculation, I was ready for paying  Rs 47992/, an EMI amount for 20 years of tenure considering 10.5% interest, and a Loan of Rs 48 Lacs.

So if I chose to go for 25 years, EMI would be lesser. I tried to do the exact calculation and ended up with some unique Ideas which I am sharing through this article. The EMI for the 25 years tenure was worked out to be Rs 45302/, resulting in the saving of Rs 2600/ per month in the EMI. So I decided to go for the longer tenure i.e. 25 years.

Now financially and mentally, I was ready to pay for Rs 47992/ of EMI per month. So I decided to start a SIP of this Rs 2600/- (saving in EMI due to increased term) and to use the amount accumulated through this particular SIP to repay the Loan in the future.  I did some calculations in excel to check with the help of this combination of reduced EMI and SIP, how would it affect my loan repayment schedule.

My older SIPs were giving me some 18% kind of a CAGR, while doing the calculation I assumed that my future SIP would generate a 15% CAGR. I found out that with this combination and an assumed return of 15% CAGR from SIP, I can repay the loan in just 18 years and 2 months.

Sounds interesting?

Let me explain,

Case 1: 20 years loan – Outflow (EMI – 47992)

Case 2: 25 years loan + SIP of saving into the EMI (EMI 45302 + SIP 2600 = Total 47992)

In both the above cases my monthly outflow is the same, the only difference is into the methodology. In the first case, I am only paying EMI in the second case by increasing tenure I am making saving into the EMI and doing the SIP of that saving, making my monthly outflow the same as that in case 1.

After 18 years and 2 months, the value of my SIP of Rs 2600/- per month assuming the 15% CAGR* would be approximately Rs 26.29 Lacs, which I can use to fully repay the Home Loan outstanding. In other words, the outstanding loan principle amount would equal to the Fund Value of SIP after 18 years and 2 months.

In the whole process, I would pay 22 EMIs less compared to Case one, making an absolute saving into the EMI worth Rs 10.54 Lacs. Though Bank charged me 10.5% interest for me the effective interest worked out to be only 10.03%.

If you are planning to buy a Home loan and if you have decided to take the loan for a shorter period then you can use the above idea to save some EMIs. So if you have decided to go for 15 years of tenure and your bank is ready to provide you maximum tenure of 25 years, I suggest you go for the higher tenure and utilize the monthly saving into EMI due to increased tenure to start a SIP into some good diversified equity mutual fund.

If you have already taken the loan you can still utilize the above idea by asking the bank to increase the tenure or you can also transfer your loan from one bank to another and while doing so, go for the maximum tenure.

I transferred the above-said loan to some nationalized bank at the time 22 years of tenure were pending in the earlier bank. I opted for 30 years of tenure in my second bank where I transferred my loan, further reducing my EMI. I added that saving also into the SIP and that would again save a few more EMIs.

Thus, selecting the maximum tenure and doing the SIP can help you repay your loan earlier. The return assumed in the above calculation is not the guaranteed return but I can safely assume that kind of return from SIP into my portfolio. My current portfolio has a CAGR of around 18%, while in the calculation I have assumed a 15% CAGR only.

*The return showcased is the assumed return and is not to be treated as any assurance or guarantee.

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Tax on Digital Assets

                                                    

Tax on Digital Assets


 

All That You Need to Know About Tax on Cryptocurrency & NFT

Taxes on digital assets were pretty vague up to Budget 2022. The finance minister didn't notify the tax structure on corporate or individual levels. But, under new norms, all profits from cryptocurrencies are to be taxed at 30%. It is quite a steep rate and one that might lead you to think twice about investing in digital assets. To understand this move from the government, we have broken down the entire subject of taxes on digital assets into three main sections: tax on income, tax on gifts and the 1% TDS.

People who make money from digital assets must pay tax on that money

In Budget 2022, the finance minister said it would tax digital asset profits at 30%. That doesn't mean that digital assets are legal just because they are taxed. The legality of cryptocurrency as an asset class is still not clear.

Government officials say digital assets include cryptocurrency and NFTs. 

At 30% tax, the people who make different amounts of money will pay the same tax rate.

They would calculate this tax on income after subtracting the cost of acquisition, which could be the price of the cryptocurrency and the fees for transactions.

Moreover, crypto investors can’t set off their losses against any capital gains of other asset classes. However, it's not clear if the profits from one type of digital asset can pay for the losses of another digital asset.

If you use the foreign exchange, a peer-to-peer marketplace like LocalBitcoins or mine your own, you'll have to pay 30% of your profits. On the other hand, miners may be able to write off the cost of things like electricity, the depreciation on their mining computers, and so on.

Moreover, it is crucial to note that you still have to pay tax on your cryptocurrency gains made before April 2022.

Tax on digital assets as gifts

The budget also said that digital assets that were given as gifts would also be taxed. Concerned authorities may include digital assets as ‘property’.

Free digital assets that you receive, such as airdrops, learn-to-earn schemes, and games where you can earn money by playing games, are also included as gifts.

However, under the Income-tax Act of 1961, gifts made to specific relatives or as a wedding gift are not taxed, no matter how big the gift is. Parents, siblings, and other relatives who give money to you don't have to pay tax on it. Gifts that are given at weddings, through a will or inheritance, or in anticipation of the donor's death are also not taxed, no matter how much they are worth.

But, if your friend gets you a gift that costs more than Rs. 50,000 on your birthday, you will have to pay tax on it.

So now, the question is whether the same gift taxation rules that apply to real things would also apply to virtual digital things.

As part of their pay package, people who got digital assets like cryptocurrencies or NFTs will have to pay a 30% tax because, as per the new tax law, it will be considered a gift.

They will have to pay the tax even though they have sold none of the coins yet. Not only that, but in many cases, employees may have to pay tax on more money even though the value of the coins they got has gone down since they got them.

Impact of the 1% TDS

Taxes on income and gifts aren't the only things the government announced in this budget. They also announced a charge of 1% tax on all crypto transactions.

The new section 194S of the Income Tax Act says that crypto exchanges will have to withhold 1% TDS for most transactions starting July 1, 2022. People who use crypto will have to tell the government about all of their transactions to track them.

This TDS may be applicable only if the total amount of cryptocurrency transactions in a year reaches Rs. 50,000 for the following individuals:

  • Each person, as well as Hindu Undivided Families (HUF), who have annual sales, gross receipts, or turnover above Rs. 1 crore.
  • People who make more than Rs.50 lakh a year.
  • People or HUFs who don't have a job or business to make money.

For the other individuals, this TDS may apply if the total amount of crypto transactions in a year is more than Rs. 10,000.

Moreover, as crypto trading takes place all over the world, the foreign cryptocurrency exchange will not deduct 1% TDS, but it is still not clear if and how TDS would be deducted if the transaction took place between an Indian buyer and a seller from another country.

What is your opinion on the taxation of digital assets? If you have any doubts, it will be best to consult us.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme related documents carefully.

 


 

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