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My Money – what to do with it? - Views on News from Equitymaster
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  • Mar 11, 2002

    My Money – what to do with it?

    Now that we have digested the bad news in the budget where every tax payer has literally had his shirt taken off, the big question staring everyone in the face is simply what to do with any investible surplus?

    Have cash and no place to go?
    Take a single premium whole life policy from a well known insurance company. This is an investment policy disguised as a life insurance policy and requires no medical tests etc. Simply because its not your life that they are insuring. You fill up a simple form and invest say Rs 25,000 for 10 years. At the end of 10 years you get back the principal and bonuses declared every year. The total proceeds are tax free in you hands at the end of 10 years. HDFC Standard Life declared a bonus of 9.25% for the financial year ending March 2002. That will be compounded next year. Ofcourse the rate of bonus is not guaranteed but given that the total returns are tax free at the end of 10 years it looks very attractive. You can invest upto Rs 5 lakhs per year.

    Top up your PPF account to Rs 60,000, that’s 9.0% tax free compounded annually (expect that rate to go down soon). If you are a smart investor who has had a PPF account for long and your PPF account is about to mature then do not close it and then open a new account with another 15 years lock in. Simply extend your existing account for another 5 years. That way you have the flexibility to opt out totally in case the returns get very low.

    Even though RBI tax free relief bonds are now limited to only Rs 2 lakhs per investor you should invest yourself fully in this instrument. It rarely gets better for Indian tax payers. The RBI relief bond may move to a floating rate instrument in which case even the 8% yield would have been attractive. The maximum amount investible may also be reduced further from the existing ceiling of Rs 2 lakhs .

    Mutual Funds:
    If you are already invested in funds then do not make any hasty moves and switch from dividend plans to growth or switch from debt to equity. Wait till after 31st March since almost all debt and equity funds will declare a dividend before 31st March which will be tax free in the hands of the recipients. All mutual funds want to be investor friendly and ease the burden on the investor. A lot of funds have already declared dividends and others will follow suit.

    If you are planning to make fresh investments in mutual funds then it makes sense to invest in the growth option rather than the dividend option. Growth option will mean that you may end up paying long term capital gains of 10% or 20%. Dividend option would imply your paying short term capital gains.

    If you can wait then
    temporarily park your money in gilt funds. If nothing else Mr Sinha’s taxation policy has certainly made Mutual Fund managers go back to the drawing board and do some homework. There is some serious product innovation going on. In the next month you will see a lot of new schemes where the dividend declared could be credited to another folio or account. This will enable the investor to withdraw his principal, avail of liquidity, reduce his tax liability and optimise his investment. Simply put if you invest Rs 10,000 in a mutual fund and it declares a dividend of 10% then the Rs 100 dividend would be credited to another account. You can thus withdraw your original Rs 10,000 at any time without paying any tax. This provides liquidity and tax efficiency. Whenever you choose to withdraw the Rs 100 then you will have to pay either long term or short term capital gains on it. Wait for schemes like these to come out. In the meantime gilt funds should still post some good returns in the short term since interest rates are only headed southward and bond portfolio’s will see capital appreciation.

    None of these attract you
    or have you exhausted all these investment avenues? Well then millions of investors like you are facing the same dilemma about what to do with their money. There is only one place left and that’s equities. Huge surpluses will gradually find their way into the stock market and one can hopefully expect a fairly good run from here on. India as a destination remains a great growth story for FII’s. The rest of the world is not faring too well and after Mexico, Thailand, Argentina and several other countries that have gone bust India has a lot to offer. Even Alan Greenspan, Chairman of the US Federal Reserve has finally made the first tentative public statements that the US economy is recovering and is out of the recession. So re-look at your asset allocation and invest in equities if there is any room to do so. Remember, choose your mutual funds carefully after seeing their track record. Invest wisely. Don’t throw money at stocks.

    And if you are disheartened with this budget you have every right be so. You are a tax paying minority in this country and will remain so for a long time to come. There is no recognition and certainly no incentive to be honest , to save or to earn more.



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