One of the key aspects of creating a successful financial plan for a year is to establish a workable home budget that deals with your expenses, manages your debt and also builds your savings at the same time! A home budget can be defined as a plan that pre-determines your spending goals, spread over a certain period of time (in this instance, 1 year).

your income and cash flow

To chalk out a workable home budget, your income is the first thing that you need to consider. It must include all forms of income that is being received by you, like your pay cheque; interests and dividends that you earn from investments; tax refunds and gifts too. When you are calculating the “Cash Flow”, you however need to consider your expenses too – both anticipated expenses like food, conveyance, loan payments, taxes, supplies etc. as well as the unanticipated ones like medical bills and car repair costs. The incoming and outgoing money in your household is your cash flow. Good home budgeting can better your cash flow, i.e. will help you ensure more inflow and fewer outflows while reckless spending can do just the opposite! The bottom-line therefore should be to successfully manage and tackle the cash flow.

Home budgeting tips

Manage your home budget by tracking all the income/expenses that have occurred in your household month on month to figure out the bigger picture for a whole year! This will help you understand your weekly, monthly and annual cash flow and provide you with a good understanding of how your money is spent and saved! You will notice an improvement in savings with the progress of each month, as the stringent tracking of expenses will help you take a disciplined approach to excessive spending!

Once you understand the patterns of your income and savings graph you will be able to forecast your expenditure for the upcoming year, set new goals with regard to repaying your debts, planning your investments and improving your savings! To secure your finances for the future it is important that you save a minimum of 5-10% of your income every year!

Your sample home budget checklist

Mortgage/Loan repayments

Groceries and supplies

Utilities

Children’s education

Insurance premiums

Car/ Gas maintenance bills

Communication expenses like phone bills, cell phone bills, internet and cable TV charges

Subscription charges

Medical expenses

Entertainment costs

The reason why ‘Entertainment’ finds a place right at the end is primarily because this needs to the first to be sacrificed in a month where an unplanned or emergency expense crops up!

Paying the bills (even if you are not working and everything is being paid for from your spouse’s money), must be a prerogative for both the partners. Remember that you can chalk out a workable home budget and better the prospects of your family’s financial planning only if you have a clear-cut idea of the financial dealings that you need to make every month.

Emergency fund

The most successful of budgets always includes a contingency fund or an emergency account, to meet the unexpected costs that may arise in a household due to unforeseen events like a job loss for instance! Anywhere between 2 and 6 months of average income must always stay intact in this account.

The Akshaya Tritiya is supposed to be one of the most auspicious days to buy gold. According to Indian belief, this day is blessed by the goddess of wealth and investment on this day would grow throughout the year.  The jewelers and gold traders wait for this occasion to push up the sales.

In order to attract more buyers, the jewelers and banking institutions have come up with various schemes this year. One of the leading jewelers has come up with an offer of a free silver coin equal to half the weight of gold purchased i.e. if someone buys 100 grams gold, then he will get 50 grams of silver free. Another renowned jeweler is offering up to 50% discount on the making charge of jewelry. Similarly, banks are also offering attractive discounts on the gold coins if booked on or before Akshaya Tritiya.

There are many options available in the market, and it’s natural for the buyers to get confused. The buyers have a wide range of options to buy Gold on this Akshaya Tritiya. Before buying, it is necessary to understand whether one is purchasing for investment or as jewellery. Following are some of the most attractive gold investment options available in the Indian market:

a. Gold Jewelry
b. Gold Bar/coins
c. E-Gold investment
d. Exchange Traded Fund (ETF)

The details of all the four options are shown in the table below:

Finally

Now after analyzing all the data under the four options to invest in gold, it would be a better choice for a buyer to first analyse his/her need. If the buyer wants to invest for long term with less carrying cost and doesn’t want many tax obligations, then Gold ETF is the best choice. Even when the buyer wants to make jewelry in the future with the invested gold, it is best to invest in the electronic form of gold because later on when needed it can be easily liquidated, and proceedings can be used to make gold jewelry at the prevailing market price. If, however, the buyer immediately wants to use gold as jewelry, then obviously there is no point in buying gold in an electronic form. Usually during Akshaya Tritiya people try to invest in gold as a long term asset, so perhaps the best way to do this is to invest in the electronic form of gold.

Gold is one of the most influential financial instruments in the India. Banks, NBFCs and unorganized lenders are actively engaged in providing loans against gold value. The loan against value of gold has played a great role by providing liquidity for an idle asset kept in the lockers.

However, in its latest move, RBI has come up with a norm for NBFCs that does not allow them to offer a loan above 60% of the value of gold.

RBI grew uncomfortable with the high growth rate of gold loans for NBFCs. It has increased its inquiry of the gold loan portfolios, even for the banks. RBI wants interest rates and growth rates on gold loans to come down, especially for NBFCs considering concentration risk and the risk of a fall in gold prices.

Furthermore, RBI’s directive that a bank credit to NBFCs for giving loans against gold jewelry will not be treated as exposure to the agricultural sector would hinder companies to raise easy funds for gold financing.

Some of the key points from the RBI’s latest guidelines for NBFCs include transparency in interest rates, due diligence in understanding the repayment capacity of the borrower, awareness of his existing debts, explicit loan agreement etc. Also, NBFCs that have gold loans of more than 50% of total financial assets have to maintain Tier -1 capital ratio of 12% from April 2014.

Why it is a setback for NBFCs?

RBI’s guideline is a setback for NBFCs because the new rules require greater capital adequacy for the financing companies and the thresh hold for the value of loan against gold is proposed to be at a lower value. This would mean that ornaments of the same value are expected to result in a lesser loan amount and that too at a slightly higher cost.

Let’s check out other aspects where NBFCs could be adversely affected. Earlier NBFCs used to provide up to 80% loan against the gold now it would be reduced to a mere 60% of the gold value. Gold loans from banks would now become more attractive than NBFCs until they are allowed to lend more on the value of pledged gold. The cost of funding for NBFCs would go up due to the RBI’s restriction to allow the NBFCs to finance its gold loan from the banks as an exposure to agricultural loan. NBFCs might have to reduce the interest rate to sustain hold in the gold loan market. Hence the current profit margin would come down significantly.

What’s in favor of NBFCs?

Though this regulation would hit hard on the revenue as well as bottom-line of the NBFCs there still some positive aspects to this move:

NBFCs would continue to enjoy the niche segment advantage due to its deep presence in the gold loan market. At present, NBFCs have a 32% share of the total gold loan market. The gold loan would still be cheaper than the personal loan, so the size of market is set to grow bigger in coming days. There are many untapped areas where NBFCs could have a better reach than the banks. The advantage of trouble free and quick loan processing by NBFCs would give them the edge over the banks. NBFCs can raise funds through market borrowings, i.e. commercial papers to lower the cost of the fund.

On gold loans

The RBI move would create a gap between bank and NBFC gold loan operations.  The banks are expected to make an aggressive take over on the gold loan segment in the absence of a strong NBFC presence. In the current scenario, RBI’s recent regulations have hit the top as well as bottom-line of the NBFCs. In India, gold buying is a regular process, and people are expected to continue its inclination towards gold in the future. The regulations may negatively affect the gold loan business in the short term for NBFCs but in the long term, the overall gold loan market is set to grow as long as the demand for gold is growing in the country, and NBFCs just need lay the foundation to pick up the pace again and devise ways to cater to their customer base in an innovative manner.

Empirically, the percentage of investments just before 3-6 months of tax filing climbs up while it becomes a bit subdued post the tax filing season. Why such a scenario? What is the relationship between tax filing and investment?

Many investors confuse investment with a tool to save tax and do not see them as a tool to build wealth! Investment certainly helps you save taxes but by making tax saving as the primary goal of investment, you are mismanaging investments that can help you retire early in style!  Take some pointers from the article that unfolds below to make a fresh start this year!

Tax saving versus investment

Tax saving is an integral part of financial planning no doubt. There are several schemes introduced by the Government to encourage individual savings. It is meant to inspire people to see the larger picture and not just to try to save taxes for a particular year. It is true that tax savings is equivalent to earning a return and is supported by the philosophy that a penny saved is a penny earned! The problem arises when you do not see tax as a piece of the saving puzzle and consider it as the puzzle itself! Most individuals just opt for a random investment instrument to save tax without weighing its pros and cons and without understanding why it deserves to be a part of a healthy financial portfolio.

Every investment needs to have an objective. A person starting out on his first job could start investing with a goal to start his own business; a new parent might want to get started early to invest for his child’s education; a senior executive may invest for his retirement savings corpus; an employee with the highest income bracket might want an additional tax benefit and invest in infra bonds solely for tax saving etc. Investment can also be of short term and long term. Investment to save tax will fall into short term investment as the sole purpose is to save tax.

Why should you think beyond tax?

A host of tax saving instruments might be introduced during the tax season for the masses but you must keep in mind that you need to carefully sift through them to suit an instrument that will suit your individual needs. Here  individual needs refers to aspects that will drive investment keeping the larger objective of  building wealth for the future in mind rather than a  last minute rush to save tax! Investors should decide their investment plan based on two aspects: objective and investment horizon.

Investment Objective: The objective of any investment is to get specific returns or an approximate sum of money at the end of the investment horizon. The objective should be realistic and must take into account the risk appetite of the investor. For example, if you are an investor with a low risk appetite you should not invest in stocks and should not expect 20% returns over the period. At the same time, a risk taking investor can build immense wealth by investing in equity and equity oriented mutual funds over a longer term.

Investment Horizon: As an investor you should consider your investment horizon while choosing investment assets. Risky assets such as equity and equity oriented mutual funds are not a good choice for short term investment. Their returns fluctuate drastically in the short term but tend to provide good returns over a longer time frame to the tune of 10-12 years. Those who are interested in short term investments should look at debt assets such as company deposits, Government bonds, bank fixed deposit etc. Similarly, if you wish to stay invested for a longer term, you should consider investing in equities and equity oriented mutual funds. Investing in debt will incur opportunity cost.

Things to remember

Investment planning should be done in advance and you should not wait for the tax filing season to arrive. Investors often make the wrong choices in the last minute rush to save tax. Remember that you do not save much in taxes anyway. Most of the investments fall under article 80C which provides a maximum tax deduction of 1 lakh. This amount is so small that your PPF alone can cover the entire 1L now, as the investment limit on it has been recently increased from 70,000 to 1 L.  Even otherwise your EPF and insurance will anyway cover most of it. Nevertheless, if you still need to invest, you should do it as the saving itself is equivalent to 30% of returns immediately. Infrastructure bond under 80CCF was re- introduced last year to help increase the tax savings and is useful solely for this purpose for most individuals who are intent on saving tax.

Secondly, if you have not taken up any investment for tax savings, do not panic and buy anything that is recommended. Do your own research and take your time. If you find nothing, don’t buy. It is better to pay taxes than lose out more than your tax liability in a bad investment. Some investors invest in properties just to save taxes. This is fine if you have enough disposable income to pay the EMIs. However, if your disposable income is not enough to afford the EMI, avoid investing in properties. Do remember that properties are not easily converted to cash because it takes time, due diligence, and enormous amount of paperwork to sell the property.

Additionally, investment planning requires expertise. The good news is that this expertise can be learnt provided you spend some effort and time in this direction. Asking simple questions such as what is the past returns over last 10 years; what is the rating assigned to this bond; what is PE ratio etc., can go a long way in building wealth and mapping out a wise investment schedule. A healthy financial portfolio is an ideal mix of short and long term investments or the right ratio of debt and equity instruments.

Finally, investment planning is a necessity to secure the future for yourself and your loved ones. Ensure you do not make it solely the function of tax saving alone!

Gold is said to be the most-favored investment instrument in India. In year, 2011, India imported 969 tons of gold, which was much higher than the previous year. In every Indian wedding gold shares a major part of total bill and it is regarded as women’s most secured treasure. India’s main gold suppliers are Australia and South Africa.

What changes the budget proposes?

Considering the fact that one of the prime reasons of India’s current account deficit was around 50 per cent increase in the imports of gold and precious metals, in the Budget 2012-13, the honorable finance minister, Mr. Pranab Mukherjee proposed to increase the basic customs duty on standard gold bars, gold coins of purity exceeding 99.5 per cent and platinum from 2 per cent to 4 per cent. Furthermore, the duty on non-standard gold has been proposed to increase from 5 per cent to 10 per cent. Added to that, the finance minister proposed to enhance basic duty on gold ore, concentrate and dore bars for refining, from 1 per cent to 2 per cent. In addition, duty on refined gold is proposed to increase from 1.5 per cent to 3 per cent. In short, FM has proposed to double the duties on all forms of gold.

What is the impact of the same on prevailing gold prices and demand of it?

The increased customs duty on gold is expected to result in 1.96 per cent increase in the cost of imported gold. This hike, based on the current market price of gold in India, is expected to lift the cost of gold by additional INR 550. As the precious yellow metal was already a far end of the common man’s reach, the current hike in customs duty has further extended the distance. With this, there may be a slight decline in demand of gold from lower middle class. However, this decline is expected to be more than offset by the demand from affluent class. With this, the enhanced customs duty is unlikely to have a significant impact upon the growth in demand of gold.

What would be the impact on gold trade?

On the prima facie the hike in duty is expected to hold a mild negative impact on the Indian gold trade, it is definitely going to result in a shift of trade with the countries where India, as a country, has entered into free trade agreements and who have a low duty on gold. Currently, India has entered into free trade agreements with the following countries / blocks:

• South Asian Free Trade Agreement (SAFTA) – Members include Bangladesh, Bhutan, Nepal, The Maldives, Pakistan, Sri Lanka and Afghanistan.
• Association of Southeast Asian Nations (ASEAN) – Members include Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Myanmar, Cambodia, Laos and Vietnam
• Sri Lanka
• Thailand
• Malaysia
• Japan, and
• South Korea

Furthermore, the country may finalize these agreements with European Union, European Free Trade Area, and Canada in near term. Added to that, the free-trade agreements are separately made with Thailand and Malaysia other than the agreement under ASEAN. Under these agreements, the trade between these countries attracts either no duty or duty at concessional rates. For example – If the gold is to be bought from a country such as Thailand, with whom India has a free-trade agreement, will attract concessional custom duty of 2 per cent compared with the newly proposed 4 per cent. As a result, a gold trader, jewellery manufacturer, by just shifting his trade to the countries, with whom India has free trade agreements, can avoid paying additional duty on gold, which he has to pay if he sources the gold from India. With this the gold source from these countries is expected to remain cheaper for him than the gold purchased in India. Consequently, such purchase could yield a healthy return for him depending on the quantity imported.

What does this mean?

The exercise and example provided above clearly indicate that the gold sourced from the countries, with whom India has free trade agreements coupled with concessional duty arrangements on gold, is likely to remain cheaper than the gold procured in India. As a result, it is beneficial for a jewellery manufacturer, gold trader, gold dealer situated in India to Import gold from the countries such as Thailand and Malaysia rather than procuring the same in our own country. The reason for the same remains that in such case, the cost of gold is likely to remain insulated from the current hike in customs duty on the precious metal. With this, it can be easily presumed that the glitter of the gold is likely to remain and shine further the way it excelled in the past.

Exercising discipline is extremely important in every aspect of life. This cannot be more stressed in the case of managing your money. The manner in which you manage your expenses is the key to reduce liabilities and save more. According to a famous trading and investing legend- One must not spend time looking for the Holy Grail of investments or trading systems. It doesn’t exist. The Holy Grail is within you. It’s not the investment that’s going to determine success or failure rather it’s the discipline of the investor.

There are 2 friends Mr. X and Mr. Y both in their late 20s. Mr. X has a monthly income of Rs. 60,000, while Mr. Y has a salary of Rs 40,000 per month.  However, Mr. X’s job is more stressful and demanding; while Mr. Y has a comfortable job with low stress levels and better work life balance.

Mr. X lives a lavish life. He spends most of his salary; saves inconsistently. On the other hand Mr. Y is very regular in savings. From his monthly income, he saves Rs 15,000 a month in the following investment options.

Pension - Rs 3,000; Child plans -  Rs 2,000; Mutual Funds -  Rs 4,000; Emergency fund -  Rs 1,000; Vacation fund -  Rs 1,000; PPF – Rs 2,000; Mediclaim-   Rs 2,000

Suppose at the age of 44 years, both have a medical emergency. Due to lack of savings Mr. X would be stumped. However, in case of Mr. Y, his saving patterns, as visible below, would be able to save the day and give him the ability to meet the sudden expense.

One can never predict life. It’s difficult to anticipate bad times. Hence, it is essential to save for such rainy days. One should make it a habit to save, even if it’s a small amount.

Here are some steps which one can follow.

Track expenses: This is the foremost step. You should keep a check on monthly expenses. Unnecessary expenses should be avoided. One way to know how much one spent for a month is by having a monthly budget. This will show where the money is spent and also regulate the cash flows. This done over a period of time will help you identify areas where there is room to cut back on spending and save money. This will free up cash, which can be used to pay up existing debts or help save for the rainy day. Reducing spending, as opposed to earning more money, is the real key to gaining control of finances. Also, you must ensure that some money is set aside to cover monthly expenses for at least three months. These funds should be set aside such that can be readily accessed in case in times of emergency or as a contingency fund.

Pay off debts/ credit card debts: Paying off your debts early is one of the best investments you can make, specially paying off debts which have a high rate of interest.  This includes the credit card payments which generally have higher interest costs.

Create discipline: You need to have discipline in the way you spend and control your expenditure. It is the key to save. A consistent plan of saving and investing helps attain one’s goal. With discipline and time one can reach goals.

Importance of saving: Here is a simple example. There are 2 friends, Mr. A and Mr. B. Mr. B saves Rs 500 per month. Mr. A saves nothing. Over the years, here’s what happens.

The discipline of saving regularly has helped Mr. B be richer by Rs 19, 931. Also what you earn is not as important as what you save. If you spend everything you earn in futile pursuits and wasteful expenditure, then there is no point to the amount earned.

Invest: Start the wealth building exercise by investing in low risk investments. Once the base is strong, then increase the risk exposure by investing in higher return investments. Also, do not put all the eggs in the same basket. Your risk tolerance level goes a long way in defining your investment approach. However, do remember your investment objectives before you subscribe to an investment plan.

Follow a systematic investment plan: Invest at regular times. By doing a SIP, you can SIP (sleep in peace). This will help you reduce the cost and earn higher returns in the long term.

As seen in the case of Mr. Y, by saving regularly helped him meet the medical emergency with ease. By following these simples steps, you can make your money last longer!

Leave Travel Allowance (LTA) is granted by the employers to the employees as part of the remuneration to provide for travel expenses incurred during the year. Leave Travel Allowance also covers such expenses of the spouse, children as well as dependent parents and siblings. However, there is a restriction. The allowance is restricted to two children born on or after October 1, 1998. There is no restriction on the number of children born before this date.

Expenses that Leave Travel Allowance covers
Leave Travel Allowance (LTA) only covers travel expenses incurred on travelling with your family within the country; i.e. exemption can only be claimed if it is within the country under Section 10(5) of the Income Tax Act. Some other expenses which cannot be included are expenses on hotel rooms, sightseeing, food, etc. Another condition is that you must make sure to opt for the shortest possible route, only then can you claim expenses. There is also a restriction on the fare component. Tax exemption can only be claimed for economy class air fare, first class AC rail fare or first/deluxe class bus fare. However in the absence of public transport, you can hire a taxi or rent a car and claim for expenses equivalent to first class AC rail fare.

Can the entire amount be claimed as an exemption?
Yes, provided that the entire amount has been spent according to the tax rules specified under LTA laws.

Can you claim Leave Travel Allowance every year?
While you can claim LTA every year for which you will be taxed, LTA exemption can only be claimed twice in a block of four calendar years.

Does claiming LTA in alternate years mean that the two year entitlement gets added together?

It does. If you are entitled to an LTA of Rs.10,000 per year and do not utilize it for the the first year it is carried forward to the next year. In the second year you can claim the entire amount (Rs.20,000) as tax exempt provided you spend it according to the specification in LTA tax laws as detailed above.

Carry over concession for Leave Travel Allowance
Leave Travel Allowance (LTA) comes with a carry forward feature. You can carry forward your Leave Travel Allowance in the situation that it has not been used. It can be brought forward and claimed in the first year of the next block.

No travel proof required for Leave Travel Allowance (LTA)
Supreme Court announces that there is no need to submit proof of travel in order to claim Leave Travel Allowance. Employers while assessing the travel allowance claims, do not need to collect proof of travel to submit to the tax authorities. Though it is not mandatory for employers to demand proof, they still have the right to demand documentary proof depending on its policy. The announcement by the Supreme Court has only moved the responsibility from the employer to the employee, the assessing officer can still ask for the employee to provide details of travel.

Can both spouses claim Leave Travel Allowance?
If the husband and wife are benefiting from Leave Travel Allowance benefit in their respective offices, then they both have the option of claiming Leave Travel Allowance exemption from their employers. They can also get the benefit of four journeys in just one block. There is no need to make sure that they do not travel twice in the same year. Also, as long as they adhere to the definition of family members, it does not matter whether they choose to take the same family members or different ones. Family in this case consists of spouse, children, siblings and parents who are dependent on you. In the case of kids who are born on or after October 1, 1998, the exemption will be restricted to only two surviving children. The only exception for this is if after the birth of the first child, the second conception results in multiple births (twins or triplets).

If both spouses travel together, can they both claim Leave Travel Allowance simultaneously?
No, both spouses cannot claim Leave Travel Allowance simultaneously. Leave Travel Allowance cannot be claimed twice for the same journey.

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.

While searching for different investment options, you might have come across the term ‘Liquid Funds’. There are many of us who might have wondered what these funds are and more so after the news articles popped up telling everyone that investing in these funds is not a smart choice. However, before we make a decision, let’s discuss what Liquid Funds are.

What are Liquid Funds?

When we try and understand the term ‘liquid’ in financial terms, it means an asset which is as good as hard cash. Real estate is the least ‘liquid’ of all assets and a savings deposit is the most ‘liquid’ of all. Similarly, Liquid Funds are a kind of mutual fund or debt fund which can be redeemed in as less as 24 hours.

What are Liquid Funds invested in?

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.

What is the ‘lock in’ period for Liquid Funds?

Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. However, some funds may even have a lock in period of a week or a month or more. However, the tenure is always far less than a normal mutual fund.

What are its features?

Here are some of the features of Liquid funds:

• No Entry and Exit load (sometimes exit load is charged if redeemed before the lock in period)
• Low annual fee 0.30 to 0.70%
• Variable Minimum investment amount according to scheme
• Great tax benefit
• Easy liquidation, hence the name
• An average 8% p.a return on liquid funds
• Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk.

What are the tax benefits?

If you invest in a short-term fixed deposit, the returns are taxable as per the investor’s tax bracket. Therefore, if you are in the highest tax bracket most of your returns from the fixed deposit would be wiped out.

On the other hand with liquid funds, as mentioned before, if the dividend option is taken, the returns are tax-free in the investor’s hand!

Has the past performance been good?

In the last one year, liquid funds have returned between 7.7 per cent and 8.85 per cent. Recent data shows that banks are taking fresh exposures in liquid funds which indicates a high degree of safety and confidence in liquid funds. This shows that liquid funds are a good product to invest in if you are looking to fulfill some short-term goals.

How does it compare to a short-term fixed deposit?

Not taking a very conservative stand doesn’t mean you should play aggressive in the markets. An investor is bound to lose money even if he chooses to take a very aggressive stand by investing his money in high risk avenues such as equities without even taking enough care to understand how they work. The middle path is always better so that you can always make changes to your investment basket according to market conditions.

We all make mistakes, don’t we? Some mistakes are minor that you get a second chance to make amends. But there are some mistakes that will prove to be very, very costly and cannot be easily amended! Investment is one such tricky area where you just cannot afford to go wrong! So, what should you do before making an investment? Or do you know what are the most common mistakes that you should avoid when making an investment? Well, here’s a list of the seven common investing mistakes that you should avoid at any cost! Remember investing in the right manner can help you reach your goals like owning a home or car that much faster as the down payment for a home loan or car loan, can be saved up in quick time with the right choices!

Confusing between trading and investing

This is perhaps the most basic confusion that you should get cleared of lest you will make big losses and lose confidence to try again: the confusion between trading and investing. Trading involves a higher element of risk that requires expertise and experience and is not for a amateur investor who goes by the rule book. Frankly speaking, trading might not help you build long-term wealth but could bring good money to your broker! So it is important to understand the basic differences between trading and investing before taking the plunge.

Investing takes a lot more research and well-thought planning in the different avenues of the investment. Your investment amount, your investment goal, your risk appetite, the present market conditions and some basic studies about the future of the markets and many other factors go into making the best investment strategy for you.

Taking a very conservative stand

Most people prefer to take a very conservative stand and invest in traditional products like bank deposits, public provident fund (PPF) and so on. Their argument is that the traditional products ensure guaranteed returns though they are comparatively lower than returns from stocks or mutual funds or equities. However, a good investment is not only about guaranteed returns but about real returns. Real returns are returns post inflation. And it is always better to calculate these real returns with an expert’s help considering the complexities involved in today’s economic scenario especially inflation.

Taking a very aggressive stand

Not taking a very conservative stand doesn’t mean you should play aggressive in the markets. An investor is bound to lose money even if he chooses to take a very aggressive stand by investing his money in high risk avenues such as equities without even taking enough care to understand how they work. The middle path is always better so that you can always make changes to your investment basket according to market conditions.

Holding on to the dud stocks

This is one of the most common mistakes some investors make, holding on to the dud stocks! A dud stocks need not necessarily mean only non-performing stocks; it could also mean purchasing stocks of unheard companies. Never buy stocks of unheard companies even if they are doing well while you are planning to buy them. It could well be just a short term stint because these unheard companies never have in them the thing to perform well on a long term and their stocks might soon turn to be duds. There are many instances of such companies and their stocks turning dud over a period of time.

Hence, it is important to invest in performing stocks, and at the same time have a backing from a good fund manager. For example, you could invest regularly in small amounts through Systematic Investment Plans (SIP) and make money by holding on to them for a long term.

Asset allocation holds the key

Your investment basket should be filled with the right type of assets for good long term returns. And remember to fine tune the basket at regular intervals depending on how the market behaves and in line with your risk appetite and financial goals. Improper asset allocation like investing in too much of debt for the long term or irregular investments in equity for the coming quarters could put you in an awkward position and leave you with no or little returns.

Timing the market

This is one area where even the experts fumble. Markets are highly unpredictable even in the short to medium terms. Though there are some parameters to predict the market like the changes to the country’s socio, economic, political and business spectrums, there is no fixed rule to say how markets would react to these turn of events. Hence, it is advisable to stay away from reading too much into such parameters while timing the markets. Instead, you could go in for a closely controlled investment strategy that could help you make money in the long term.

Overconfidence

Ask the long term players in the markets and they will perhaps warn you against being overconfident with recent successes. There is nothing wrong in hoping for the best times but overconfidence is something an investor should do away with. It is important to understand that your recent successes in the markets could have been due to many ‘hidden’ factors that might have escaped your attention. Overconfidence in your so called ‘perfect management of portfolio’ might spell trouble and you might end up losing money!

Avoid these common mistakes at any cost. After all, a good beginning is half the battle.

Government of India has outlined a plan to spend $1 trillion in next 10 years on infrastructure development. This development is needed because infrastructure needs to support and sustain the projected growth rate of Indian economy for next few decades. To fund this initiative, the Government is trying to tap the various sources at its disposal. Infrastructure bond is just one source where Government has given tax breaks for up to Rs 20,000 for individuals. This is to attract retail investment.

Infrastructure bond vis-à-vis other debt instruments

Infrastructure bond is widely welcomed by salaried individuals who have been demanding to increase the tax break from 1 lakh. It has given them another avenue to invest for tax saving purpose. Let’s take a look at other investments that are available and provide a fixed income.

Debt oriented mutual funds

The other debt instruments available for investment are debt oriented mutual funds. These funds allocate major part of the fund in Government securities, corporate bonds and debentures, and sometimes in fixed deposit. They can be a good alternative. However, even though they are debt oriented funds, a small part (up to 30%) goes towards equity. Hence investors do see fluctuation in returns. The average returns from debt oriented funds over a period of time can be about 12% depending upon the market condition and proportion of fund invested in equity.

Bank fixed deposit

The other option is banks where the rates of interest have gone up. Few banks are giving good returns on fixed deposits. For example, bank of Baroda is giving 10% returns on fixed deposit. This is certainly better returns in absolute term. The post-tax returns will be about 7%. There are other banks which are offering similar rates on fixed deposits.

Corporate fixed deposit

Then there are fixed deposits offered by blue chip companies. These are highly rated debt instruments. For example, Mahindra Finance or Tata Motors deposits are two prominent offers that offer 10.25% returns. Mahindra fixed deposit scheme is rated FAAA, the highest rating. The payment is done quarterly. There are other firms which offer even better returns but those firms rated lower. Investors should consider these alternatives too.

Fixed maturity plan

There are mutual funds, also known as, fixed maturity plans (FMP). They are as good as fixed deposits and offer an “expected” return of 9% to 10% . We use “expected” because there is always the risk of corporate default (though it rarely happens).

Hence all the options look better till you consider the tax advantage that the infrastructure fund provides you. Tax advantage is the biggest advantage that infra bonds provide. The interest received on infra bond is taxable though.

Investors’ response

Infrastructure bond has seen tremendous response from retail investors for tax saving purpose. The demand goes up before the end of the financial year. Even though it is a big hit among salaried individuals and retail investors, it did not impress big ticket investors in India and abroad much because they are more focused on getting better returns than saving tax.

To encourage response from FII, Government is planning to reduce the lock in period of infra bonds. The lock in period currently is 5 years. In all probability, this may come down to 1 year. The reduced lock in period may be able to bring foreign capital for infrastructure projects which are delayed because of lack of funds.

Ideally, reducing the lock in period should bring more investors, both domestic and multinational. This seems to be a good way to increase participation and transaction. However, the downside of this is that it will increase speculative investment.

Retail investors anyway invest in infra bonds to save taxes and hence there isn’t much scope left in retail segment.

Important points to keep in mind

First, you must invest in infra bonds because you will save taxes. There is no other way you can save taxes on Rs 20,000 extra. Do not invest more than Rs 20,000 as the tax benefit is limited to just Rs 20,000. Any investment beyond this will be taxed as usual. The disadvantage of infra bonds is the lock in period and the taxable interest.

Second, look at the rating assigned by rating agencies before investing in infra bonds. All bond issuers have to go through rating process before they can raise debt. A high rating such as AAA or even AA is good and implies the capability of the company to pay the interest and principal.

Finally, understand the risk associated with bond investment. While the nature of fixed return looks risk free, it exposes the investors to interest rate risk and inflation risk. Inflation at the rate of 10% will essentially give you negative returns on a bond that offers 9% returns.