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Resolving Financial Dilemmas

Print Edition: January 2012

INVESTING

Q: I am new to investment in mutual funds and the equity market. I usually buy when the net asset value of a fund is low and exit when it's value is relatively high, just as with the stock market. Is that a prudent strategy for investing in mutual funds? - Ratan, Mumbai

Mutual Funds
A: The NAV of a fund is calculated based on net value of the securities held and is not related to it's valuation. Generally, older funds have a higher NAV compared with new ones. For example, a fund A has a NAV of Rs 10 and a fund B has a NAV of Rs 20 as on 30 June. On 31 July, the NAV has changed to Rs 11 for fund A and Rs 21 for fund B. So, fund A has given returns of 10% and fund B 5% in this period. This means that fund A has given better returns because the value of its holding securities has gone up by 10%.

Q: I am 21. I have selected some funds in which I want to start SIPs. Please advice. ICICI Prudential Focused Bluechip Equity- Rs 4,000, HDFC Top 200 Fund-Rs 3,000, Birla Sun Life Dividend Yield Plus-Growth-Rs 1,000, IDFC PREMIER Equity Rs 2,000, HDFC Prudence Rs 2,000, ICICI Prudential FMCG Fund Rs 1,000, Reliance Banking Fund Rs 1,000. Am I on the right track? I hope to make about Rs 20 lakh in about seven years. -Lawrence Fernandes, Bengaluru


Mutual Funds
A: Yes, you are on right track. You have a well-diversified portfolio of seven funds. The core of your portfolio is diversified with two sectoral funds and one balanced fund. Continue investing in these funds as your long term goal can be achieved with this. A monthly investment of Rs 14,000, earning an annualised 12% return, will accumulate Rs 18 lakh in seven years while if returns are at 14%, then it will grow to Rs 20 lakh. Hence, even considering average returns of 12%, you can achieve your long-term goals.

Q: I want to invest in gold. I thought of going for a Quantum Gold fund for (Rs 1,000 SIP) and in e-gold. Which brokerages allow buying of e-gold? -Uma Krishnan, Mumbai

A: You should consider investing in gold through SIPs and restrict allocation to it to 5-10% of the overall portfolio. There is little to choose between gold funds. When trying to pick one, the main criterion should be the expense ratio because the investment mandate for all gold funds is the same and what distinguishes their performance is the expense. So, you can go ahead with the Quantum Gold Savings Fund, but do review the performance of your portfolio at least once in a year.

Q: I have my father's surplus money to invest in mutual funds. I thought of putting that in liquid or debt funds and then opt for STP. But, I don't know much about liquid funds. Could you suggest some such funds for a systematic transfer plan? -Rohan Patel, Pune

A: Investing in liquid plans through SIP or STP is a good option to get exposure to the stock markets, diversify and spread the risk of investments. You will benefit from the various market cycles and the power of compounding.

It will be better if you initiate an STP from liquid funds to diversified equity funds for long-term growth: ICICI Prudential Liquid Plan to ICICI Prudential Focused Bluechip Equity Fund (from large-cap category), HDFC Cash Management Fund Savings Plan to HDFC Mid-Cap Opportunities Fund (from mid- and small-cap category), and Fidelity Cash Fund to Fidelity Equity Fund (from multi-cap category). Do check with an advisor so that the fund you choose is suited to your financial goals.

REAL ESTATE

Q: Builders now guarantee returns on investments in real estate of up to 10% on apartments they build and take on lease. How safe are such investments and what would a good tenure for the same? Is the 10% return a stretch or achievable? -Mohan Bharadwaj, Pune

Real Estate
A: The transaction that you have outlined consists of two parts-purchase of property from the builder and then a lease to him or another party. Exercise the usual care while purchasing the property. Additionally, ensure that the terms of the lease, especially in terms of lockin, maintenance of property and escalation of rent are acceptable to you. Residential property typically earns between 2.5% and 6% per annum, 10% seems high. Please read the fine print of the agreement before you decide to go ahead with the investment.

Q: I have a floating-rate home loan with SBI. I have completed five years of the 20-year repayment period. Now that prepayment charges have been removed, do you think it is advisable for me to close my loan? - Ravi Jadeja, e-mail

A: Prepaying your existing home loan should take into account more than just the charges that you would have had to pay to the bank. Your decision should also consider your current financial situation, meaning your liquidity, cash inflows and projected expenses over the next few years so that you do not fall short of cash when required. After earmarking the amount that you would need, you can use the remaining to partially or fully prepay your home loan.

Q: I have shortlisted a property of Rs 50 lakh for purchase in the outskirts of Bengaluru. However, based on the salary I earn, my eligibility works out only Rs 35-40 lakh. I am a bachelor and have no dependents currently. Can I take a joint home loan with my brother? He is willing to invest in the same property for now. If his salary is clubbed with mine, I will be eligible for a loan that would enable me to purchase the house. -Madhusudan Reddy, Bengaluru


A: The property of Rs 50 lakh would entail a contribution of at least 20% (Rs 10 lakh) from you. You will then get a loan of up to Rs 40 lakh. If your income does not support such a loan amount, your brother could be the co-applicant or guarantor on your home loan to make up the shortfall.

INSURANCE
Q: I already have a family health floater plan of Rs 10 lakh, which covers me, my spouse and our two children. My in-laws (father-in-law, 62, and mother-in-law, 60) are not insured. Is it possible and advisable to include them in my current family floater plan or should I go for separate health insurance plan for them? -Ali Sahiwala, Gujarat

Insurance
A: The premium amount of any floater policy is determined on the basis of the age of the eldest member. Therefore, if you wish to get your in-laws covered under the existing policy, the premium amount may rise accordingly. You should ideally opt for a separate plan for your in-laws that provide transparent benefits. Read the policy terms and conditions thoroughly. To avoid hassles at the time of claim, it is always advisable to choose a health insurance plan that requires a medical check before issuance and has no disease-specific or expenditure-specific sub-limits. This may be marginally more expensive in some cases, but you will hedge a larger financial risk and have the freedom to opt for efficient treatment at the best healthcare provider possible. Check for various health plans available on insurance company websites or speak to your insurance advisor before you decide which policy suits you the best under the circumstance.

Q: I have a group health policy from my employer but I feel it is insufficient. Is taking a top-up plan to enhance the coverage a good idea? Also, is it possible to port my group health cover and take an individual health policy? -Ravi Joshi, Chandigarh

A: You may certainly choose to supplement your current group health insurance policy with an additional health insurance plan. Depending on your age, a top-up is a good idea. If you are nearing 50, consider a top up policy. But if you are in your 30s or 40s, and have a family, you could consider a family floater plan, which would cover you and your family against medical emergencies. According to the Irda, you may port your group health cover to an individual policy with the same insurance provider. But, you would be bound to continue the individual policy with your incumbent insurer for one year before porting your policy to any other another insurer of your choice. If there are strong reasons to port your policy, we advise that you place your porting request at least 45 days before your policy lapses, to ensure that you are not left without cover at any point.

TAXATION
Q: A residential home I build in Kolkata thirty years ago had cost me a total of Rs 65 lakh (construction costs and value of land together). Currently, the sale price of the same property is Rs 3 crore. How are the taxes determined on the profit made on the sale of the house? Do I deduct the old price of Rs 65 lakh and pay taxes on the profit of Rs 2.35 crore or is the property to be indexed to a present day market valuation (cost of building a similar structure and buying the land at current price) and then deducted to determine the profit to pay taxes. Will the tax implications change if I had inherited the property and I incurred no expenses? Do I have to pay taxes on Rs 3 crore if I sell the house right now? -Lena Saha, New Delhi

Tax
A: You would not be required to pay tax as there will be long term capital loss of Rs 2.10 crore. The indexed cost (calculated as Rs 65 lakh times 785/100) is Rs 5.10 crore, which is much lower than the current price. The long-term capital loss can be carried forwarded for 8 years to be adjusted against longterm capital gain. In case you have inherited the property, the cost incurred by the previous owner will be taken as cost of acquisition and capital gain will be computed accordingly.

Q: My son has A worked for three companies in this financial year. The first two companies have not given him his Form 16 yet. The third company will issue Form 16 at the end of this financial year. No company has deducted his income tax so far. What should he do? -Manu Joseph, Kochi

A: Tax deduction details can be obtained from the income tax website incometaxindia.gov.in. You need to register and check Form 26AS for all income and TDS details. A company is obligated to deduct tax on salaries if the amount to be paid is above basic exemption limits (Rs 1.8 lakh). Your son will have to pay tax on the total salaries received from the three companies. If tax deducted by all three companies is less than the total tax due then he should pay self assessment tax before filing return.

Nelson D'souza, General Manager, Fundsupermart.com, has tackled financial planning issues; Antony Jacob, CEO, Apollo Munich has advised
on health insurance; Anil Kothuri, CEO, Edelweiss Housing Finance, has responded to real estate related queries and Taxspanner.com has
answered tax queries.


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