A variety of ingredients come together to make a complete
meal. In personal finance too, it's about getting the mix right.
Here are seven product combinations for different financial needs for you to consider.
1. Tax Planning
ELSS + PPF + NPS
Here are seven product combinations for different financial needs for you to consider.
1. Tax Planning
ELSS + PPF + NPS
When choosing products under Section 80C, opt for a mix that
will not only help you preserve capital and save tax, but also make your wealth
grow. ELSS gives the benefit of superior wealth accretion coupled with tax
saving, with a low 3 year lock-in period. PPF offers guaranteed interest income,
with a 15 year lock-in.
Based on your risk appetite and time horizon, decide whether to put more in ELSS or PPF. This can be supplemented with Rs 50,000 in NPS under Sec 80CCD (2), which is entirely tax deductible. This scheme is a good vehicle for building a retirement kitty.
Total tax saving: Up to Rs 61,800 for a person in highest tax bracket
Based on your risk appetite and time horizon, decide whether to put more in ELSS or PPF. This can be supplemented with Rs 50,000 in NPS under Sec 80CCD (2), which is entirely tax deductible. This scheme is a good vehicle for building a retirement kitty.
Total tax saving: Up to Rs 61,800 for a person in highest tax bracket
2. Post-Retirement Income
SCSS + Bank FD
For those about to retire without the benefit of NPS or government pension, there are several options for generating income. The Senior Citizen Savings Scheme is the ideal fit with an assured return of 9.2% (currently) for 5 years, coupled with a tax break of up to Rs 1.5 lakh under Section 80C. You can invest a maximum of Rs 15 lakh a year in this scheme.
Any surplus should be parked in a 5-year tax-saving fixed deposit offered by banks at interest rates similar to traditional bank FDs. These investments are also eligible for tax deduction under 80C. However, interest earned on both instruments is not tax exempt. The two instruments combined offer retirees a steady stream of income.
The interest on SCSS investments are paid on a quarterly basis, i.e. on the first working days of January, April, July and October.
3. Capital Preservation
Tax-free bonds + Arbitrage funds
Safety of capital is very important yet safe instruments like FDs are not tax-efficient. Investors can instead put their money in a mix of tax-free bonds and arbitrage funds. The former are fixed income instruments issued by government-backed companies that guarantee safety of capital.
The interest rate of 7.3-7.6% is completely tax-free, making them more tax-efficient than FDs. While these come with a tenure of 10-20 years, investors can sell them on exchanges before maturity.
For enhanced liquidity, consider arbitrage funds. They yield returns comparable to debt instruments and are very safe. They are-tax efficient as they are treated as equity funds for taxation.
Tax-free bonds issued in 2013-14 have yielded returns of around 20%, apart from a near double-digit rate of interest for the investor.
4. Wealth Accumulation
Diversified equity funds + Dynamic asset allocation/Balanced funds
To build a corpus for long-term goals like buying a house, building a retirement kitty or funding a child's education, investors must choose products that provide enhanced earning power. This can come in the form of diversified equity funds. Those with a steady cash flow should ideally set up SIPs in 3-4 funds with a proven track record.
Additionally, investors can invest in a balanced fund or dynamic asset allocation fund to ride out the volatility inherent in equity markets. These will automatically shift the investor's money between equity and debt instruments depending on market conditions and introduce stability to the portfolio.
SCSS + Bank FD
For those about to retire without the benefit of NPS or government pension, there are several options for generating income. The Senior Citizen Savings Scheme is the ideal fit with an assured return of 9.2% (currently) for 5 years, coupled with a tax break of up to Rs 1.5 lakh under Section 80C. You can invest a maximum of Rs 15 lakh a year in this scheme.
Any surplus should be parked in a 5-year tax-saving fixed deposit offered by banks at interest rates similar to traditional bank FDs. These investments are also eligible for tax deduction under 80C. However, interest earned on both instruments is not tax exempt. The two instruments combined offer retirees a steady stream of income.
The interest on SCSS investments are paid on a quarterly basis, i.e. on the first working days of January, April, July and October.
3. Capital Preservation
Tax-free bonds + Arbitrage funds
Safety of capital is very important yet safe instruments like FDs are not tax-efficient. Investors can instead put their money in a mix of tax-free bonds and arbitrage funds. The former are fixed income instruments issued by government-backed companies that guarantee safety of capital.
The interest rate of 7.3-7.6% is completely tax-free, making them more tax-efficient than FDs. While these come with a tenure of 10-20 years, investors can sell them on exchanges before maturity.
For enhanced liquidity, consider arbitrage funds. They yield returns comparable to debt instruments and are very safe. They are-tax efficient as they are treated as equity funds for taxation.
Tax-free bonds issued in 2013-14 have yielded returns of around 20%, apart from a near double-digit rate of interest for the investor.
4. Wealth Accumulation
Diversified equity funds + Dynamic asset allocation/Balanced funds
To build a corpus for long-term goals like buying a house, building a retirement kitty or funding a child's education, investors must choose products that provide enhanced earning power. This can come in the form of diversified equity funds. Those with a steady cash flow should ideally set up SIPs in 3-4 funds with a proven track record.
Additionally, investors can invest in a balanced fund or dynamic asset allocation fund to ride out the volatility inherent in equity markets. These will automatically shift the investor's money between equity and debt instruments depending on market conditions and introduce stability to the portfolio.
A Rs 10,000 monthly SIP in a
multi-cap diversified equity fund starting January 2006 would have generated a corpus
of Rs 23.5 lakh today.
5. Emergency Fund
FD sweep-in + Liquid fund
Put in place an emergency fund (ideally amounting to 6 months' expenses) to act as a buffer against unforeseen events. This fund is best created with a combination of a sweep-in account and a liquid or ultra-short term debt fund. Put 3 months' worth of expense in a fixed deposit with a sweep-in facility.
Under the sweep-in, any amount beyond a threshold is automatically moved into a fixed deposit, earning a higher rate of interest. In case of an emergency, the deficit in savings can be met by pulling from the FD. The remaining funds can be put in a liquid fund that not only offers high liquidity but also yields better return on idle savings.
Some funds like Reliance Money Manager Fund provide an ATM card which can be used to withdraw money instantly from the fund any time.
6. Insurance
Pure term plan + Family floater health plan + Accident insurance + Critical illness protection
5. Emergency Fund
FD sweep-in + Liquid fund
Put in place an emergency fund (ideally amounting to 6 months' expenses) to act as a buffer against unforeseen events. This fund is best created with a combination of a sweep-in account and a liquid or ultra-short term debt fund. Put 3 months' worth of expense in a fixed deposit with a sweep-in facility.
Under the sweep-in, any amount beyond a threshold is automatically moved into a fixed deposit, earning a higher rate of interest. In case of an emergency, the deficit in savings can be met by pulling from the FD. The remaining funds can be put in a liquid fund that not only offers high liquidity but also yields better return on idle savings.
Some funds like Reliance Money Manager Fund provide an ATM card which can be used to withdraw money instantly from the fund any time.
6. Insurance
Pure term plan + Family floater health plan + Accident insurance + Critical illness protection
For complete protection of yourself and your family, it is
necessary to look beyond life insurance. A pure term plan will provide
financial cover to your family in the event of your death. But this would be of
no help if the policyholder meets with an accident and loses a limb. Supplement
the term plan with an accident disability cover.
To prevent any medical exigency wiping out your savings, opt for a family floater health plan that can reimburse such expenses. Also consider a critical illness rider to go with a term or health policy to protect against costs associated with diseases like cancer.
A life insurance policy should ideally provide a cover of at least 8-10 times your annual income; health cover is best enhanced through a top-up plan to reduce costs.
7. Payments
Credit cards + Internet banking + e-wallets
To prevent any medical exigency wiping out your savings, opt for a family floater health plan that can reimburse such expenses. Also consider a critical illness rider to go with a term or health policy to protect against costs associated with diseases like cancer.
A life insurance policy should ideally provide a cover of at least 8-10 times your annual income; health cover is best enhanced through a top-up plan to reduce costs.
7. Payments
Credit cards + Internet banking + e-wallets
Paying with cash is so last decade. Internet banking now
allows you to carry out most transactions from home. Pay bills, transfer funds
or create a fixed deposit at the click of a mouse. While shopping online or in
the mall, make the experience more rewarding by using credit cards or e-wallets
smartly. Credit cards allow you to enjoy interest-free credit for up to 50 days
provided you pay the card bills on time.
They also offer rewards on every
purchase. E-wallets being prepaid accounts help you buy merchandise and
transact online without using your debit or credit card. The discounts and
cash-back offers on various products make them a rewarding payments solution.
E-wallets allow you to store Rs 10 to Rs 10,000 in your online account at any time.
E-wallets allow you to store Rs 10 to Rs 10,000 in your online account at any time.
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