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Yogi Zone

Useful articles for your finance management by our team of experts

Financial Planning for the Year 2014

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Personal finance has always been an interesting subject to talk about but very difficult thing to implement. Like anything else, we would have also taken financial resolutions such as cutting down on unnecessary expenditure, making a budget, etc. You know that skipping a movie would save you around Rs.500 and also that this amount would appreciate if invested in proper financial instruments. However, did you ever try this? Not many would make this sacrifice!!!

Few such sacrifices could actually take you closer to your cherished goal which is a few years away. Goal setting and implementation are two sides of the same coin.

A Goal is a Dream with a Deadline

Financial discipline is also an important aspect of the goal implementation process. However, most of us do not have the financial discipline required. We end up blaming the markets or the products (mis)sold to us by some of the agents for the failure to reach our goals.

new year 2014Past mistakes should be used as guidelines to learn from our mistakes and then take steps to correct them in the future. Here is an attempt to help you correct the mistakes which you might have committed in the year 2013. Let’s also see how financial planning can be done for the year 2014 so that you would reach your goals.

Budgeting

There isn’t a better time to start preparing a budget than now. You do not have to be a finance expert to be able to do this. Make a list all your expenses and incomes on a sheet. You then need to create two different bank accounts, one of which will be used for all your expenses and the other for investments. We will talk more about investments later on. The following points can help you prepare and follow your budget:

  • Prioritize your spending
  • Set a limit for monthly expenditure and make sure you don’t miss out on it
  • Pack your lunch box, buy in bulk, search for deals online, go out less frequently and do whatever you can to stick to your budget.
  • Finally, review your budget every 3 months to know if you are on track. You can also seek the help of online tools for tracking income and expenses.

Investments for 2014

Goal Setting

goals for 2014No investment should be done randomly. There should be a purpose for investing in a particular product. Hence, before making any investments, clearly define your short, medium and long term goals. A Goal can be a vacation, purchasing a car/home, children’s education or marriage, etc. Once you define your goals, you would get a fair idea of which investment suits which goal. Three important parameters to consider before making an investment are risk, returns and duration of investment.

Check out our goal based financial plan for free

Let us now compare various investment products that you can choose based on these 3 parameters.

Fixed return products

Fixed deposit

Since long, FD’s have been the most favourite saving/investment option in our country. You can deposit a lump sum amount in a bank or company FD. Interest is compounded quarterly. These days FD’s have also become flexible. Not many banks today impose a penalty on breaking an fd. You can use this investment to make your idle money earn decent returns. However, beware of the taxation if you are in the higher tax bracket since it might bring down your net returns.

Risk – Low

Avg Returns in 2013 – 9-9.5%

Duration of Investment – 7 days to 10 years

Expected Returns in 2014 – 9.25-9.75%

Recurring deposit

Recurring deposit (RD) is a simple monthly investment option provided by banks. You can invest a fixed amount in it regularly such as every month. You would receive a lump sum amount at the end of the tenure. It suits beginners who do not want to take much risk by investing in unknown financial instruments.

Risk – Low

Avg Returns in 2013 – 8.5-9%

Duration of Investment – 12 months to 10 years

Expected Returns in 2014 – 8.75-9.25%

PPF

Public provident fund (PPF) is a post office scheme with great features. It is a long term investment option. Interest rate on PPF keeps changing as per the rate set by the government. Interest is compounded per annum. Tax benefit offered by the product is an added advantage. You can also open PPF account online.

Risk – Low

Avg Returns in 2013 – 8.7%

Duration of Investment – 15 years (with option to extend for blocks of 5 years unlimited times)

Expected Returns in 2014 – 8.6-8.8%

NSC

National Savings Certificate (NSC) is another post office scheme similar to PPF, offering very good returns. However, tax benefits of this product are not as good as PPF.

Risk – Low

Avg Returns in 2013 – 8.5-8.8%

Duration of Investment – 5 & 10 years

Expected Returns in 2014 – 8.6-8.9%

Inflation bonds

Inflation bonds have been introduced for the benefit of investors who are suffering from rising inflation. They could have been more attractive had there been a few tax incentives on them.

Risk – Low

Avg Returns in 2013 – NA

Duration of Investment – 10 years

Expected Returns in 2014 – As per inflation

Stocks

Investment in stock market is the best way to beat inflation in the long term. Sensex and Nifty have been sensitive and volatile to news. However, they have made tax free money for a lot of investors in the past few years. Be careful while picking stocks. Prefer companies with long term value in business rather than short term movements.

Risk – High

Avg Returns in 2013 – 9%

Duration of Investment – NA

Expected Returns in 2014 – 9-10%

Mutual Funds

Mutual funds are a brilliant way of mitigating risk of investing in one particular instrument. There are various categories of mutual funds such as debt funds, balanced funds, equity funds and so on. In these categories, there are various other sub categories like short term debt, liquid, gilt, large cap, mid cap, small cap, diversified equity, etc. A lot of these funds offer you the option to redeem your investments whenever you need it. Analyze the fund thoroughly before investing.

(Get your lifetime free Mutual Fund account from FundsIndia)

Equity funds

They invest in stocks of various companies based on the objective of the funds. There could be funds which offer extra ordinary returns in one year but fail to sustain later. You should be investing in these funds for a longer tenure to reap the benefits of equity investing.

Risk – Medium to High

Avg Returns of top 10 equity funds in 2013 – 5%

Duration of Investment – NA

Expected Returns in 2014 – 8-10%

Debt funds

These funds invest in debt instruments such as treasury bills, government bonds, commercial paper, etc. Liquid funds provide the flexibility to invest through SIP or lump sum amount and can be an alternative to savings bank account. Other debt funds also protect you from market volatilities.

Risk – Low to Medium

Avg Returns of top 10 debt funds in 2013 – 7-8%

Duration of Investment – NA

Expected Returns in 2014 – 6-7%

Gold

Gold, which has been the darling of a lot of investors for the past few years, is slowing losing its sheen. There have been some curbs on the import of Gold. Gold is set for an annual decline for the 1st time in 13 years of history. Physical gold, ETF and E-gold, all are likely to take a beating in 2014. You can invest 5-10% in the metal for minimizing the risk in other securities.

Risk – Low to Medium

Avg Returns of top 10 ETF’s in 2013 –11% down

Duration of Investment – NA

Expected Returns in 2014 – 5-10% decline

Tax Planning for 2014

income taxInvestment deadline for tax saving is March 31, 2013. You would have started thinking about the investments to make for saving as much tax as possible. If you have not yet started, do it now. Further delay may make you buy products which may save tax but don’t suit your financial profile. Common mistake made by people in the rush to save tax is putting a lump sum amount in an insurance product without knowing whether they require that product or not. Here is a list of tax saving options available to you for the year 2014:

Section 80C

A very popular section among the employed section, which gives a tax deduction of up to Rs. 1 lakh p.a. You can claim insurance premiums, home loan principal amount, investments in 5 year FD’s, ELSS mutual funds, EPF and so on subject to the limit of 1 lakh p.a.

Know more about Tax Saving Investments

Section 80D

You can claim deduction of up to Rs. 15,000 paid as health insurance premium under section 80D. Senior citizens can claim up to Rs. 20,000. You can also claim this benefit by taking mediclaim policy for your parents.

RGESS

Rajiv Gandhi Equity Savings Scheme (RGESS) provides you option to invest up to Rs. 50,000 in the specified list of stocks or stated mutual funds. Tax deduction will be 50% of the invested amount. The scheme has been made available for new equity investors with income of up to Rs. 12 lakh (previously it was Rs.10 lakh). There is a lock in of 3 years on this investment.

Additional deduction of Rs. 1 lakh

Finance Minister has proposed an additional tax deduction benefit of up to Rs. 1 lakh on takers of home loans for the 1st time. This will be over and above the 1.5 lakh limit available on the interest paid on home loans. This benefit is only for FY 2013-14.

Try our one minute financial planner for free

Insurance

Life Insurance

There are a few changes in the life insurance space from 2014. Following is a glimpse of these changes:

  • Service tax on LIC policies – LIC will be charging service tax on its policies from Jan 1, 2014.
  • Higher Sum Assured – Insurance cover would be at least 7 – 10 times the premium.
  • Greater Surrender Value – Surrender value will be at least 30% of premiums paid, including first year premium.

Irrespective of these changes, we advise you segregate insurance and investment. Insurance should be pure protection cover and investments can be mix of various instruments stated above in this document. Online term cover is the cheapest and best form of insurance. Few companies have also started to offer variations in term insurance such as giving out death benefit in regular intervals rather than a lump sum.

Read our comprehensive comparison of Policybazaar versus other Insurance Portals

Health Insurance

Health insurance sector will also undergo some changes as specified below:

  • Portability – Health insurance can now be ported across insurers and also be converted from a group insurance cover to an individual policy.
  • Guaranteed Renewability – Insurers now cannot reject renewals of policies based on silly reasons. They are bound to give customers guaranteed renewals for life long.
  • Entry age for Senior Citizens – Entry age for senior citizens has been made as 65.

Health insurance will be more and more important in the coming year with medical inflation growing at a rapid pace. A small surgery can ruin your financial life. Make sure you have adequate health insurance in place to cover your entire family. You can opt for a family floater plan or an individual policy depending on your need.

Motor Insurance

Third party motor insurance will be expensive by 20%. It is mandatory to have this cover for any vehicle at the time of purchase. So, get ready to pay more if you are planning for a vehicle in 2014.

Loans

Home Loan

Not many changes will be seen in the home loan space. You would have to fund at least 20% of the value of the property yourself and the rest 80% can be provided by the bank. Interest rates of home loans were in the range of 9.75-10.25% in the year 2013. There could be an increase of up to 0.25% on the rates based on the policies of RBI.

Gold Loan

Loan to value ratio of gold loans has already been made 60%. Hence, you would be getting lesser value for the gold deposited with the gold loan providing companies.

All other loans such as education loans, personal loans, etc remain same. We advise you to avoid opting for personal loans and lessen the usage of credit cards.

Some Smart Financial Tips

  • Have an Emergency Fund – Start saving for an emergency fund worth at least 5-6 months of expenses. A liquid fund can be used such purpose.
  • Start Saving for Retirement – Retirement might be long time away for you but starting early will give you the power of compounding.
  • Increase your EPF contribution – You can increase your contribution to EPF by some percentage. Do not dip into the EPF savings till retirement.
  • Pay off high interest debts – Prioritize your debts according to the interest rate being charged and pay off the expensive ones such as credit card or personal loans.

Finally

2014 will not be very different from 2013 unless you want it to be and take some effective action. In case you do not have time and knowledge to follow the above said points, you can approach a financial planner who would advise you comprehensively.

InvestmentYogi wishes you a very happy and prosperous year 2014.

  • rajiv ahuja

    I am not receiving your e-mails in my account. I am looking forward to your e-mails. My e-mail is rajivahuja06@gmail.com

  • Kapil Tiwari

    I am not receiving your articles in my e-mail id kapil,tiwari@rediffmail.com though I registered for it. Kindly ensure I do henceforth :)

    • Yogi Cfp

      We will make sure you get the emails from now on. Keep visiting us for latest news, tips and updates on personal finance.

  • ayush

    What are other conditions for Additional deduction of Rs. 1 lakh on home loan ?

    • Av Suresh

      It should be a first time home loan up to Rs. 25 lakh. The loan should be for the first home as well.

      • ayush

        Only interest paid for the 25 lakh loan can be claimed in additional 1 lakh (above 1.5 lac interest) , if that is the case , how would some one can get so much interest paid for an year with 25 lac loan

        • Av Suresh

          You are right. But, the tenure of the loan is not specified in the conditions. A lesser tenure loan would attract more interest, especially in the initial years.

  • Uday dange

    I have invested in RGESS an amount of Rs 50000/- Now in 2014 if i invest 50000/- in RGESS CAN i GET INCOME TAX REBATE?

  • Uday dange

    I have invested rs 50000 in RGESS in 2013 and got I.T rebate. Now in 2014 if I invest Rs. 50000 in RGESS can I get the rebate again.

    • Av Suresh

      Uday, this benefit is only for the first year. You cannot get the rebate again.

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