Since equity plans not doing very well over the last years people are seeking alternative avenues for investment now. Most people are investing their money in Fixed deposits of Banks and in Fixed Maturity Plans. In investment horizon there are many plans to invest our money in the market.. There are equity fund, index funds, debt fund, ELSS and fixed maturity funds beside fixed deposit of Banks. Among all the funds fixed maturity funds are less risky. One thing must be kept in mind that fixed maturity funds are not risk proof as generally made out to be.. It however is next best to the fixed deposit in bank, PPF, SCSS etc as far as security of money is concerned. Fixed Maturity Plan protects capital but is open to interest rate risk. It provides better return most of the time than fixed deposit. This fund is popularly known as “FMP”
The reason investors choose FMPs is for their high returns which are also indicated but not guaranteed. In order to give assured returns, FMPs opt for very secure investment options like AAA rated corporate bonds whose maturity tenure matches the maturity tenure of FMP. However in the recent times, some of these FMPs started investing in commercial paper from real estate and finance companies, in order to give higher returns on their investors. The long term FMPs become more tax efficient as it does not attract income tax due to double indexation.
The investing in FMPs allows an investor to earn higher returns while minimizing their exposure to the risk. As a result, many fund houses have introduced their FMPs to entice investors to invest with them. But what are FMPs? Are they safe as they seem to be? If not, what are their pitfalls? We explained in the beginning of the article about the myth surrounding the FMPS. It is not always safe like Bank FDAs the name implies; these plans have a certain maturity period. They are closed-ended funds, meaning you can invest in them only when they are open for purchase. This is only during NFO period. To redeem your investment, you need to wait for the pan to mature or pay a stiff 2% exit load. Generally FMPS are for around 13 to 18th month’s period. Incase you can survive the period a handsome gain could be expected. If you take out during midstream you loose money as there is high exit load.
How FMPS could provide better return than bank F. D.? In order to give assured returns, FMPs opt for very secure investment options like AAA rated corporate bonds whose maturity tenure matches the maturity tenure of FMP It is however a myth that there is no risk in FMP. Despite their claims of being one of the safest investment options around, FMPs do have their own share of risks. A few of them are as under:
Those FMPs offering higher yield can afford to do so by investing in risky investment options. This has been evident in 2008, when these funds faced liquidity crisis due to their exposure to real estate and finance companies. . In the recent times, some of the FMPs started investing in commercial paper from real estate and finance companies, in order to give higher returns to their investors. When the finance and realty companies landed in trouble during the recent economic downturn, their offerings also lost value Investors pulled out in panic. With the investors pulling out their investments from these FMPS, the funds were forced to offload their investments in the illiquid markets, thereby causing liquidity crisis. But ultimately investors who stayed invested did not loose at the end of the period and go almost assured returns. The actual yield will depend on the yield on the debt instruments at the time of actually investing your money. In reality the FMPs offer safety of their capital, but they do not offer protection against interest rate risk. As the interest rate rises, the value of the bonds goes down. This sometime can affect the returns of the fund.
What precaution investors should take while opting for FMPS. To get the best out of FMP certain precaution should be taken. Always check the indicative portfolio of the funds. In case you find any non AAA security avoid the particular FMPs. The assured yields are on the indicative yield as the actual return indicative and suggestive and should not confuse with guarantee. Sometime there are wide gap between yield shown while launching and actual yield at the time maturity. Sometime it is more but sometime it can lower.
The golden rule is to stick to the maturity period of the plan. Don’t withdraw half way through as it will force the fund manager to redeem investments at any available price, thereby causing losses to you as well as other investors. The FMPs are good investment for risk adverse people of middle age group. But do not put all the eggs in one basket. You can invest 10% of the total investment in fixed maturity plan and earn better returning compared with the Fixed Deposit of Bank. But for persons who don't come under income tax ambit fixed deposit of bank at the rate of 10.5% are more paying than FMP now. It would be for individual persons to choose what suits them best.
---------------------------------------------
Monday, June 6, 2011
ALL WAGE EARNERS SHOULD PLAN FOR PENSION
I am not aware of any country, except perhaps Arab world, where pension received by a retiree is free of income tax. Enormous tax benefit are available while contributing to a fund. But all senior citizens of western countries pay Income tax when they receive their pension amount monthly or weekly. Of course citizens of those countries receive social security which our citizens do not receive. Perhaps to mitigate this shortcoming the union Government is planning to make pension free of income tax when Tax code is going to be introduced next year for Indian citizen.
The annuity and PPF are two great schemes which would usher in a great time for retired and senior citizen and tax paying rich single women. At present there are a few guaranteed fixed income schemes like bank FD, post office monthly saving schemes and senior citizen scheme in our country .The return on the capital is 7.75% to 9% in those entire schemes with applicable income tax provision. Incase revised Tax code is implemented both deferred and immediate annuity would not be taxed and hence investors would be more inclined now on ward to invest in pension schemes. The great thing it would not only cheers older citizen but motivate greatly young and mid aged person too to save more and more for their future...
Till now school teachers to senior bureaucrats, who have been receiving pension, had to pay income tax. Now since no income tax would be required to pay naturally they would feel happy. Young people opting for deferred payment option would also be greatly benefited. Widows and older citizen who were not willing to save money in pension scheme would be interested since immediate annuity benefit like “Jeevan Akshay” scheme of LIC would get a boost. Now an older person of 65 years and above can invest Rs.10 Lakh during 2010 year and started getting pension from 2011 at the rate of 7.5% return with out tax. . This means a retiree would be able to get Rs 75,000/- annually without tax..
Any persons of above 40 years would be able to save and get the similar return and start a systematic investment plan of Mutual fund from the money received as interest. If they keep this investment system till he/she retires at 60 years of age she would be able to gather at least Rs 49 lakh even if a moderate return of 10% is considered for the period of twenty years. This amount would be free of income tax as on date. But may attract capital gains tax at the applicable rate after twenty years.
The immediate annuities have been around for last few years in our country. But most of the people were not interested due to heavy income tax rate and lower annuity value. The LIC has a very decent immediate annuity policy in Jeevan Akshay. It was one of the most successful policy till 1992. The growth of this policy along with Jeevan Dhara (deferred policy) was phenomenal. Both the policy went by way side since 1993 till date as no tax benefit was available. With the intended tax benefit from 2012 the Jeevan Akshya policy could be a marvelous policy for senior citizen. If senior citizen has lump sum money to spare, after investing in SCSS and PPF, I would rather recommend our readers to invest in this product provided they are already tax payers. The amount received from immediate annuity would be tax free in the hands of Senior citizen. The rate of return annually would be 7.60% till his/her demise with return of capital to her / his nominee. This is a fantastic return after taking advantage of SCSS , Post office monthly income scheme and PPF..
I am also sure with such great benefit the new Pension scheme would be a great product for younger generation. Senior citizen would not be so benefited from NPS for it has no immediate annuity facilities. It would be wise for senior citizen and tax paying rich widows or single women to concentrate on single annuity based product like Jeevan Akshya for their decent livelihood without tax burden.
What is immediate annuity? When a person buys an immediate annuity, he pays the life insurance company a lumpsum amount up front and the insurer gives a guarantee of paying him a fixed amount at regular intervals(depending on payment option chosen by him) as long as he lives. On his demise the principal amount is returned back to his spouse or children .The spouse may also continue to get same amount till her life time. The present rate of annuity is around 7.60%.per annum. Once upon a time during twentieth century it was much higher. Before 2001 LIC was the sole company who issued immediate annuity policy. Now also there are very few companies who provide these facilities. With new tax provision surely more and more companies may start single premium immediate annuity plans as it is going to be a hot product for middle aged persons, senior citizen and tax paying rich single women. The great news is though immediate annuity plans are insurance products it does not require any medical check ups. The return is not market related yet the rate of annuity is higher than regular insurance product and fully assured like bank product. What is better than bank FD it has no tax tag to oblige. So get prepared and start investing in a great product of your life time. Do it soon because tax benefit can be withdrawn as it was done in 1992. But once you invest during the currency of the scheme you would continue to get the benefit for the life time.
-------------------------------------------
The annuity and PPF are two great schemes which would usher in a great time for retired and senior citizen and tax paying rich single women. At present there are a few guaranteed fixed income schemes like bank FD, post office monthly saving schemes and senior citizen scheme in our country .The return on the capital is 7.75% to 9% in those entire schemes with applicable income tax provision. Incase revised Tax code is implemented both deferred and immediate annuity would not be taxed and hence investors would be more inclined now on ward to invest in pension schemes. The great thing it would not only cheers older citizen but motivate greatly young and mid aged person too to save more and more for their future...
Till now school teachers to senior bureaucrats, who have been receiving pension, had to pay income tax. Now since no income tax would be required to pay naturally they would feel happy. Young people opting for deferred payment option would also be greatly benefited. Widows and older citizen who were not willing to save money in pension scheme would be interested since immediate annuity benefit like “Jeevan Akshay” scheme of LIC would get a boost. Now an older person of 65 years and above can invest Rs.10 Lakh during 2010 year and started getting pension from 2011 at the rate of 7.5% return with out tax. . This means a retiree would be able to get Rs 75,000/- annually without tax..
Any persons of above 40 years would be able to save and get the similar return and start a systematic investment plan of Mutual fund from the money received as interest. If they keep this investment system till he/she retires at 60 years of age she would be able to gather at least Rs 49 lakh even if a moderate return of 10% is considered for the period of twenty years. This amount would be free of income tax as on date. But may attract capital gains tax at the applicable rate after twenty years.
The immediate annuities have been around for last few years in our country. But most of the people were not interested due to heavy income tax rate and lower annuity value. The LIC has a very decent immediate annuity policy in Jeevan Akshay. It was one of the most successful policy till 1992. The growth of this policy along with Jeevan Dhara (deferred policy) was phenomenal. Both the policy went by way side since 1993 till date as no tax benefit was available. With the intended tax benefit from 2012 the Jeevan Akshya policy could be a marvelous policy for senior citizen. If senior citizen has lump sum money to spare, after investing in SCSS and PPF, I would rather recommend our readers to invest in this product provided they are already tax payers. The amount received from immediate annuity would be tax free in the hands of Senior citizen. The rate of return annually would be 7.60% till his/her demise with return of capital to her / his nominee. This is a fantastic return after taking advantage of SCSS , Post office monthly income scheme and PPF..
I am also sure with such great benefit the new Pension scheme would be a great product for younger generation. Senior citizen would not be so benefited from NPS for it has no immediate annuity facilities. It would be wise for senior citizen and tax paying rich widows or single women to concentrate on single annuity based product like Jeevan Akshya for their decent livelihood without tax burden.
What is immediate annuity? When a person buys an immediate annuity, he pays the life insurance company a lumpsum amount up front and the insurer gives a guarantee of paying him a fixed amount at regular intervals(depending on payment option chosen by him) as long as he lives. On his demise the principal amount is returned back to his spouse or children .The spouse may also continue to get same amount till her life time. The present rate of annuity is around 7.60%.per annum. Once upon a time during twentieth century it was much higher. Before 2001 LIC was the sole company who issued immediate annuity policy. Now also there are very few companies who provide these facilities. With new tax provision surely more and more companies may start single premium immediate annuity plans as it is going to be a hot product for middle aged persons, senior citizen and tax paying rich single women. The great news is though immediate annuity plans are insurance products it does not require any medical check ups. The return is not market related yet the rate of annuity is higher than regular insurance product and fully assured like bank product. What is better than bank FD it has no tax tag to oblige. So get prepared and start investing in a great product of your life time. Do it soon because tax benefit can be withdrawn as it was done in 1992. But once you invest during the currency of the scheme you would continue to get the benefit for the life time.
-------------------------------------------
Subscribe to:
Posts (Atom)
Subscribe To
Posts
All Comments
