Query Corner

Resolving financial dilemmas
     Print Edition: December 2013
Query Corner

Money Today experts answer your personal finance queries -

INVESTING

Q. I would like to invest Rs 3,000 monthly for five years. I expect annual returns of 8-10%. I can take risk and handle the loss if my investments don't pan out as expected. Under these circumstances, should I choose mutual funds or stocks? Which funds are my best options? -Puneet Panda, Ranchi

A. Consider investing in a large-cap fund such as ICICI Prudential Focused BlueChip Equity and a mid-cap fund such as IDFC Premier Equity. The former has given returns of 11.9% in the past one year (as on 8 November), while the latter gave returns of 4.7%. Large-cap funds invest in blue-chip firms whose stock prices are stable, while mid-cap funds are more volatile but also deliver superior returns. Mutual funds also offer diversity in sectors compared with picking out individual stocks, which in itself is a risky proposition for retail investors.

Q. FMCG stocks have started falling from peak prices. I have a stock portfolio heavy on FMCG and pharmaceutical (50-60%) companies. Is this a good time to sell some of these holdings and invest in other sectors? Which sectors can offer good investments? -Sheetal Patil, Nagpur

A. Both FMCG and pharmaceutical stocks are trading at high PE (price-to-earnings) valuations. However, the high valuation of the pharmaceutical sector can be justified by expected growth in future earnings. Even so, we suggest you avoid pharma stocks that are facing US FDArelated issues. We recommend partial booking of profit in the FMCG sector and that you gradually shift the earnings to higher beta sectors such as private banking and automotive.

Q. I want to save for retirement by investing in equity products. What are the best possible options available right now? -Bimal K, Panaji

A. You can buy stocks directly, invest in equity-linked mutual funds or use a portfolio management service (PMS). Ensure that you invest systematically over a period to average your costs and adjust risk and return. A Systematic Investment Plan, or SIP, in equity mutual funds is great for long-term investments. You can also diversify across categories such as large-cap funds, mid-cap funds, small-cap funds, gold funds or balanced funds. If you wish to buy stocks directly, do your research or try to get professional advice. You must have diversified stock holdings across sectors to reduce the impact of market volatility.

Q. What are the factors to consider before buying bonds from secondary markets? What sort of returns can I expect from these? -Sukrit Oberoi, Chandigarh

A. Consider the following factors when buying bonds from secondary markets:

>> Yield-to-maturity: This has an inverse relationship with the price of bonds
>> Coupon rate in comparison with the prevailing interest rates
>> The credit rating of the bond, and
>> The remaining tenure of the bond Returns will depend on yield-to-maturity, which is related to the trading price of the bond. However, you can expect returns close to prevailing interest rates.

Q. I'm 28 years old and wish to make mutual fund investments. I have no investments of any sort right now and can invest Rs 6,000 a month. I'm also looking to save some tax. What are my top four options (funds)? -Basu B, Mumbai

A. Equity-linked savings schemes (ELSS) will help you save tax and provide capital appreciation from investing in the market. The only drawback is that if you withdraw investments in an ELSS before a three-year period from date of investment, you will lose all tax benefits earned. Alternatively, consider investing in two large-cap funds, such as ICICI Prudential Focused BlueChip Equity and Birla Sunlife Frontline Equity, and one mid-cap fund, say IDFC Premier Equity. All these funds have an excellent track record and are expected to do well.

INSURANCE

Q. I came across health plans from PSU banks with competitive premiums provided to account holders. Do you recommend such policies? The cost is much lower than for retail plans available in the market. What are the disadvantages of such plans? -Meenal Sharma, via email

A. Health plans offered by PSU banks are group plans offered to account holders. There are several advantages, including competitive premiums. These products are designed by insurers with the bank's customer demographics and their needs in mind. So, read the documentation thoroughly for all inclusions, exclusions, waiting periods and benefits. For example, in group policies, ensure that you can continue the policy even if the bank and the insurance company have terminated their business relationship.

Q. I have a family floater health insurance scheme. I want my newborn to be included in the plan. What is the procedure? Will the premium go up if I include my daughter in the scheme? -Rahul Sadana, New Delhi

A. Health cover for a newborn is usually available as part of maternity benefits of most health insurance schemes. An insurer covers a newborn as an insured person from birth as part of coverage for pregnancy and delivery on payment of the applicable additional premium.

If your policy does not cover expenses related to maternity, opt for a newborn cover as part of your existing floater policy by paying an additional premium (charged pro rata).

We would suggest you contact your current provider to determine the next premium. At the same time, submit your daughter's birth certificate to your insurance provider, along with a request for inclusion of a new family member in your family floater policy.

Q. My wife had a complicated pregnancy that required surgery. During the operation, it was decided that one of her fallopian tubes would have to be removed. This was done the very next day as doctors said it was a medical emergency. Will my health plan cover the second surgery? What would be the procedure to make a claim? -Joy D'Souza, via email

A. As part of maternity benefits of a health insurance scheme, complications related to pregnancy are also covered by the insurer. So you can file a claim for your wife's second surgery as well. To file a claim, submit the necessary claim forms, medical files, discharge papers, original bills, receipts, and any other documents required by your insurance company to process the claims. Even though this is the usual procedure, do consult your insurer or an advisor to ensure that your policy extends cover for such complications.

Q. I'm a British citizen and am living in Delhi right now and will be here for at least two years. Is there a health plan for foreigners that I can use? -Prateek Ranjan, Delhi

A. Insurance companies in India do offer health insurance policies to foreigners living in the country. However, the scope of coverage is restricted to treatment undergone in hospitals within India, during the policy period, and you cannot avail of any benefits once you leave the country.

TAXATION

Q. What are the tax benefits of forming an HUF (Hindu Undivided Family)? My brothers and I were considering it after the recent death of our father. He left a substantial inheritance. We do not wish to divide it right now, but want a tax-efficient way to manage it. -Aditya Kishore, Bengaluru

A. The Income Tax Act and Wealth Tax Act recognises the HUF as a taxable entity with a PAN number. You cannot transfer individual assets or income to that of the HUF (clubbing provisions are applicable if you do). It helps those who receive money or property from parents. Such assets can belong to an HUF and it's income will not be taxable for an individual. If the income is less than Rs 3 lakh, no tax need be paid (after tax saving of Rs 1 lakh under 80C). Tax savings on home loan and wealth tax exemption are also applicable.

Q. My wife and I have decided to buy a house, for which the loan application is being processed. We would be renting the property as we are staying with my ailing parents in the same city where we are buying the property. Can I claim interest rate exemption on the home loan interest? How will the rent be taxed? -Ajay Midda, Noida

A. The rental income will be taxable along with your personal income on the basis of your ownership share of the property. Further, both of you can claim deduction on interest paid on the home loan, assuming that your wife has contributed towards purchase of the property.

Q. I own two houses. One will be let out for tax year 2013-14. I live in the other one. Do I have to pay wealth tax on any of the two properties? -Rijul Mehta, Ahmedabad

A. Assuming that both properties are residential, the following is your tax obligation:

>> Rented property-You do not have to pay tax on such property if it is let out for a minimum period of 300 days during financial year 2013-14.

>> Self-occupied property: You can claim exemption as per Section 5(VI) and, hence, you are not required to pay tax on such property. There is no limit on value or size of self-occupied property.

Q. I get a consolidated salary of Rs 60,000 per month and it does not include HRA. I pay Rs 4,500 as rent monthly. How do I calculate tax deduction on rent paid? I do not own a house or property anywhere. -Bony Mukkuzhiyil, Kochi

A. As per Section 80GG of the Income Tax Act, you can claim Rs 24,000 as deduction on rent paid, which is the least of the following: Rs 2,000 per month, 25% of total income or excess of rent paid over 10% of total income.

Q. My wife was gifted a house by her father, which has been rented out. The income is not high enough to be taxable for her. Will the rent be added to my income? -Manoj K, Patna

A. No, as the rent is taxable only as your wife's income. If the house was gifted by you, then the income is taxable along with your income.


Anil Rego, CEO, Right Horizons, has tackled financial planning; Antony Jacob, CEO, Apollo Munich Health Insurance, has answered insurance queries; and Sudhir Kaushik, Co-founder and CFO, Taxspanner.com, has provided tax solutions.


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