FINANCE SPECIAL .............Best money moves for 2016

Best money moves for 2016





Financial planners agree that these seven decisions can prove profitable in the new year

At the beginning of 2015, many pundits had estimated that equities will deliver roughly 15% returns during the year.

Instead, the Sensex declined around 6%. If you were investing for 1-2 around 6%. If you were investing for 1-2 years, these statistics would be worrisome. However, if your investment horizon is longer, say 5-6 years, 2015 would have been a great year during which you stocked up on quality stocks (or funds that invested in them) at low prices.

What should investors do in 2016?
Firstly , they should continue to save and invest for their goals and not be deterred by the noise about returns. More importantly , they should not lose sight of their asset allocation. However, this is generic advice for all times. We have drawn up a list of smart things to do with your money in 2016. We also reached out to 50 financial planners to know what they thought of our suggestions. We are sure that our suggestions will prove rewarding in the new year. Up to `50,000 invested in the NPS under the new Section 80CCD (1b) gets additional tax deduction, over and above the `1.5 lakh investment limit under Section 80C. In the 30% tax bracket, an investor can shave off `15,000 from his tax liability. This would bring down the effective investment to only `35,000 and push up the returns for the investor. If the NPS fund you invest in earns 8% compounded returns over the next 15 years, the effective return would be 10%.

Some financial planners say investing in the NPS is not a good idea as equity funds can give better returns than NPS, where there's a 50% cap on equity exposure. Even though investments in equity funds are not eligible for tax deduction, their potential to give superior returns more than makes up for it. The other problem with NPS is the rules for investing the corpus on maturity . After 60, at least 40% of the corpus has to be put in an annuity for monthly pension. Withdrawals are taxable and the pension from annuity is taxed at normal rate. The pension will be a mix of principal and interest, but the entire amount will be taxed. With e-wallets expected to play a key role, you can start using these for discounts, cashbacks and other incentives. Players like Paytm, PayU and Mobikwik are already offering significant cashbacks. Some financial planners believe that ease of online transaction and heavy discounting have led to a rise in discretionary expenses. “We have seen budgets for food and clothing increase two-fold in two years,“ says Priya Sunder, Director, PeakAlpha. However, there are incentives even for essential household expenses like grocery, Internet, DTH and mobile bills. Other categories include taxi rides, movie tickets, online shopping, food orders, hotel bookings, and flight, train and bus tickets. There are rewards for referring others as well.

The wallets--in which you can put in `10-10,000--also offer security. The sites maintain the same security level as that for any other banking transaction and you can limit your loss by putting less money in the account. The limitation is that they are semi-closed--you can transact only online on limited sites. Investors stand to gain from direct plans of mutual funds since lower charges translate to higher returns. The difference in returns is more pronounced for equity funds. In debt funds, the expense ratio of regular plans is not too high, so the difference is lower. In liquid funds, the expense ratio is very low, so the difference is wafer thin. In the three years since these were launched, the average large-cap diversified fund has given 15.39% annualised returns, but the average direct plan has given 16.42%. Before you switch, however, check if you have crossed the minimum tenure set by the taxman. In equity and balanced funds, shift after completing a year or the 15% tax on gains will wipe out the gain. In debt funds, debt-oriented hybrid funds and gold funds, wait for 3 years or gains will be added to your income and taxed at marginal rate. Even after 3 years, gains will be taxed at 20% with indexation benefit. Fixed deposits (FDs) are safe, but also tax-inefficient. Short-term debt funds can be a better alternative. Though the returns generated from short-term debt funds are similar to interest you earn on FDs, the tax benefits mean that the actual return from debt funds is higher if you hold them for more than 3 years.

In a debt fund, the long-term capital gains are taxed at 20% after indexation, while short-term capital gains are added to your income and taxed at the rate applicable to you. This is a game changer for those in the 30% tax bracket. Instead of shelling out 30% tax on interest earned on a fixed deposit, the tax rate is 20%, which is further reduced by indexation. Debt funds also help in deferring the tax. In case of FDs, you are taxed on the interest every year, whereas in debt MFs, tax is payable only when you sell. Launched in November 2015, gold bonds are linked to the price of gold and offer 2.75% interest. If we assume that gold prices will rise by 5%, the bonds will yield an annualised return of 7.75%. It's time to get rid of your gold ETFs as well. You pay 1% on the fund per year, but if you sell and put the proceeds in gold bonds, you earn 2.75%, and the net gain is 3.75%. However, take note of the tax implications and don't forget that gold bonds are less liquid than ETFs. They have a tenure of 8 years with an exit option after the fifth. Purchases have to be made within the stipulated time and there is also a 500 g buying restriction per fiscal. Launched in January 2015, the Sukanya Samriddhi Yojana (SSY) is the best category to invest in if your daughter is below 10 years old. It offers a higher interest rate than PPF.

While the PPF offers 25 basis points higher than the yield of 10-year government bonds, the SSY will offer 75 basis points higher than these bonds for the previous year. Compared with FDs, the SSY not only provides higher rates (at present), but also has better tax benefits. As in the PPF, you can avail of tax benefits under the Section 80C for SSY too. So, investments up to `1.5 lakh will be exempt from tax in a financial year.

However, the scheme lacks liquidity. While the fixed deposit has a lockin period of five years and the PPF has a lock-in period of 15 years, you have to stay invested in the SSY till you child turns 21. Premature withdrawals are only allowed after the girl turns 18. Spread some happiness and begin the new year with a good deed. Help your household staff to open a Jan Dhan account and introduce them to social security schemes such as the Atal Pension Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana and the Pra-dhan Mantri Suraksha Bima Yojana. They can get `2 lakh accidental insurance for as little as `12 a year, and a term cover of `2 lakh for `330 a year.

However, it will require more than just convincing them to invest in these schemes. You might have to step in and make the first investment. It will cost you less than `2,000. Then it becomes easier to convince them to continue.

Chandralekha Mukerji & Babar Zaidi

TOI4JAN16