Query Corner

Money Today experts answer your personal finance queries
     Print Edition: November 2013
Query Corner

Money Today experts answer your personal finance queries

INVESTING

Q I'm new to invest- A ing in mutual funds. I have fixed deposits and life and health insurance. What is the best investment option among mutual funds to get a regular monthly income? This would be for my retirement years. I have at least 25 years before I retire. - -Sunil Pandit, Bhopal

A.
Considering you have a long time to retire, use more aggressive strategies while you are contributing to the corpus and a tempered strategy once you need a monthly income. It is common knowledge that you must decrease equity exposure as you near retirement. Based on your risk profile, try large-cap, mid-cap, balanced, debt or gold exchange-traded funds via the SIP route. Balance and diversify to reduce risk. Only consider heavy investments in debt funds or monthly income plans after you've retired.

Q. I am an Indian citizen and have been living in Singapore for over five years. Considering the depreciation of the rupee, I would like to buy a house in India. I would be using my earnings here for the purchase. Is this a better option as compared with investing in equities or funds in India? What is the outlook for realty in India? -Dipender Bawa, email

A.
All investment avenues have pros and cons unique to each. Equity mutual funds are relatively volatile when compared with real estate but, at the same time, these are highly liquid and you can exit a fund to meet an emergency need. On the other hand, real estate investments are highly illiquid, but far less volatile when compared with equity. It is a capital-intensive sector and will be affected by the interest rate scenario. In India, the real estate sector has delivered good returns. However, the outlook for the sector in the short term is not easy to predict. Sales in cities such as Delhi and Mumbai have slowed down, while the demand is upbeat in Bangalore, Hyderabad, Chennai and Pune. Further, two crucial bills, the Real Estate (Regulation and Development) Bill and the Land Acquisition Bill, are under review this year. You will have to assess the impact of regulatory changes as well. Of course, in the long term, real estate is likely to do well. So, we would suggest a combination of real estate and equity investments.

Q. I have been using fixed deposits and long-term bonds to invest my surplus savings. About a year ago, I started investing in mutual funds (through systematic investment plans) to include equity in my portfolio. Now, I plan to leave my job for a couple of years. I want to invest in some steady growth products. I don't need the money immediately and can stay invested for between three to five years. -Niti Kiran, Agra

A.
Investing in equity is a good option, but it does not offer steady growth as it is volatile owing to the associated market risk. If you are looking for the element of safety, consider investing in debt mutual funds, which are tax efficient, or fixed deposits, if you do not need tax savings. However, avenues such as fixed deposits only aid in capital preservation and not wealth creation. If you do not need liquidity, you can use balance funds, such as the Templeton Dynamic PE fund.

Q. I want to invest in a tax-saving fund. This would be the first time that I'm investing in any mutual fund. What are the benefits of investing in taxsaving funds? -Ujjwal Rawat, Noida

A.
Tax saving funds or equity-linked savings schemes (ELSS) are efficient in saving tax and offers capital appreciation. The benefit of investing in a taxsaving fund is that the lock-in period is much lower as compared with say, PPF, fixed deposits or NSC. The returns are also tax free. However, an ELSS fund is a high-risk, high-return instrument as it invests only in equities. Since you take on higher risk with an ELSS fund, there is no need to invest in a non-tax saving fund at the same time.

INSURANCE

Q. I have two family floater plans, one with a sum insured of Rs 4 lakh, which is about to be renewed, and another plan of Rs 5 lakh. Now, I want a higher sum insured. Should I keep both plans or discontinue one and buy a top-up plan instead? - Prabhjot Singh Oberoi, Patiala

A.
It is best to continue the existing policies to enjoy continuity benefits such as waiver of waiting period, accumulation of cumulative bonus and utilise health check-up benefits. If both policies are indemnity based, you will be able to claim from either one or both (in the ratio of the sum insured). The above coverage seems to be sufficient for normal situations. So, consider a top-up plan as an add-on to cover a high-value claim, say in case of a critical surgery or lengthy hospitalisation.

Q. I want my wife and children to have control over my assets after I die. However, I would also like to donate some part of my wealth to a few charitable organisations, but only after the death of my wife. Is it possible to write a will to cover this? My assets are my own and not inherited from my parents. What are the relevant rules? -Bijoy Roy, Asansol

A.
It is possible for an individual to donate a part of his wealth (that was not inherited) to charitable organisations in a will. The will can be worded such that the donation or gift would come into effect only on the demise of the spouse. Futher, the family would have 'life interest' on the donated wealth during the surviving spouse's lifetime. This means that your successors would have control over all your wealth, including the gift, as long as your wife is alive. It would be a good idea to get a professional to draft the will to avoid any misinterpretation.

Q. I'm 69 years old and a widower. I want to sell my house (owned for over 20 years) and move to a retirement home. What will happen to the capital gains? I'm doing this because my retirement corpus is inadequate. What are my best investment options for the money from the sale? -Ballabh Kumar Jha, Delhi

A.
Since the property is a long-term holding (held for over three years) tax of 20% (post indexation) will be applicable on the sale proceeds. You can consider investing the money from the sale to the following asset classes:
- Post Office Monthly Income Scheme
- Senior Citizens Saving Scheme
- Immediate annuity option
- MIPs of equity mutual funds with systematic withdrawal or monthly dividend payments.

On the other hand, you could opt for reverse mortgage. You can pledge your property with a bank and you will be given an amount every month for a certain
period.

Q. I am told I've to declare all pre-existing conditions when applying for a health plan. I had a minor thyroid condition a couple of years back. Should I include this as well? Do such conditions increase the premium much higher? -Suresh Manchandani, Gaziabad

A.
It is better to be transparent and disclose your complete medical history to ensure that there are no complications with claim settlement. An adverse medical condition does carry the risk of a higher premium. However, the increase in premium should not be a deterrent to disclosure. Of course, premium loading will vary among insurers and minor conditions might not have a huge impact.

Q. I'm 32 years old and want to buy a health plan. The premium at my age is manageable but I understand it increases with age. I do not want to pay exorbitant premiums at a later stage. Is there a way to compare the price escalation by health insurance providers? -Joy Dash, Kolkata

A.
Health Insurance premiums will probably increase with age, subject to your health and the policy's claim status. Insurers generally disclose the premium rates in the prospectus or respective websites. You will have do the comparison by yourself.

TAXATION

Q. In March 2013, the department in which I was working was shut down. Is it true that if an employee loses his job, withdrawal of provident fund (PF) becomes tax-free even if the account hasn't completed five years? What are the main rules regarding PF withdrawal? -P K Garg, Bengaluru

A.
Yes, withdrawal from provident fund (PF) is exempt from tax if an employee has lost his job, even if the PF account has not been serviced continuously for five years. Generally, you are not required to pay tax on withdrawal from a PF account, maintained with all previous employers as well as your current employer, if the account has been serviced for five years. Ensure that the balance accumulated in your account is transferred when you change jobs to keep the account in service.

Q. I have been living in the US on a H1B work visa for the past two years and had lived there on a student visa for three years before that. Prior to that I worked in India and had a Public Provident Fund (PPF) account. Can I continue contributing to PPF now? What will be the tax implications? -Vaibhav Gupta, email

A.
If your residential status for 2013-14 is 'non resident', you can still continue contributing to your PPF through an NRO account in India. Assuming that you have a taxable income (over Rs 2 lakh) in India in 2013-14, you can claim the tax benefit of PPF investment (up to Rs 1 lakh).

Q. I took an education loan of Rs 7 lakh to pursue a specialised diploma. Now that I am employed, I'm repaying the loan. Am I eligible for tax benefits? -Dilip Karnik, Nagpur

A.
You can claim tax benefit for interest paid on any education loan. It is available for up to eight assessment years from when the loan was taken or until the interest is paid in full, whichever is earlier.

Q. Could you tell me the tax implications of putting one's house on reverse mortgage? -Mihir Kundoo, Hyderabad

A.
There is no tax liability on availing a reverse mortgage scheme. You're not earning an income on the monthly installments received. Further, there is no capital gain on using the property as security since there is no transfer of asset. In fact, reverse mortgage is a great tax-efficient option for senior citizens to get a regular income.

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