The Insurance Regulatory and Development Authority has warned insurers not to issue policies without receiving the requisite proposal forms from customers as stipulated under Section 4 of the Irda Act 9 (Proposal for Insurance).
"Any violation of this provision by an insurer shall be viewed seriously by the authority and action as deemed fit, (will be) taken," said the regulator in a communication received by insurance company CEOs on Monday.
Irda said it has received several complaints that policies were being issued without collecting proposal forms from customers. The regulator further pointed out that "the number of complaints of policies being issued without the consent of policyholders, either through telemarketing or banking channels, especially through credit cards, is on the rise."
Credit card companies are now being watched closely since co-branded credit cards offered by leading banks come with either life, accident or health insurance schemes to lure in first-time card holders. Premiums towards these policies are deducted directly from the customer's credit card.
In this process, there is no verification or proposal form filled in by the insured person; the only form which the customer fills out is a credit card application. Customers feel that in the absence of relevant documentation they are exposed to exploitation by the insurers.
It may be recalled that couple of years ago, the regulator pulled up Citibank and two general insurers -- Tata AIG and Royal Sundaram -- for foisting accident insurance covers on credit card-holders.
Irda has summoned insurers to explain why and how their personal insurance schemes are being tied up with credit card companies.
It is alleged that credit card companies have been charging the card-holders the premium for insurance cover without their consent, and automatically debiting card-holder accounts against the insurance premia.
How card firms milk customers
S Srikanth, a Chennai-based software engineer, bought a credit card from a major bank, which came with personal accident insurance, which he didn't opt for.
What irked Srikanth was that the bank was debiting the premium and administrative charges from his account automatically.
"Just because they give a customer a credit card does not mean that they own the customer and resort to such tactics. It is a dangerous notion for financial institutions to harbour," Srikanth says.
"Irrespective of the merits of the insurance cover, I feel that the scheme is unethical as I have not given debiting authority in writing to the bank."
An industry expert gives an example of a credit card company offering 5 lakh (500,000) cards with accident cover. At a conservative estimate of average collection per card-holder being Rs 300 per annum, the credit card company would mop up around Rs 12.37 crore (Rs 123.7 million) per annum. On this, an insurance commission of 15 per cent works out to Rs 1.8 crore (Rs 18 million).
If you own a credit card, chances are that you were probably asked by the company if you would like to slap on some credit insurance. In most cases, gullible customers are unfamiliar with this type of insurance and accept it, especially if tax benefits under sections 80 C or 10(D) are offered.
Actuarial sources note that credit insurance is beneficial to the credit card company since it can be used to pay off debt when a credit card holder dies.
Thus, the final beneficiary of the customer's insurance policy is the credit card company itself, they add.
Tuesday, February 19, 2008
Wednesday, February 6, 2008
Tax? 10 things to do before March 31 - Investment Guide
The Income Tax department does not want too many papers as proof of investments made or expenses incurred. But it is always better to file them now.
So please rush! Here are ten things to do before March 31, 2008 or before the financial ends:
1. If you are claiming deduction for house rent allowance on account of actual rent paid, collect the rent receipts from the owner and keep them in your possession.
2. If you received any gifts during the year, please collect the gift deeds. The deeds should clearly state that you received the gift without any consideration.
3. In case you have changed employment during the financial year, you have to go back to your previous employer and collect the Form 16.
4. If you have donated to charitable trusts, obtain a receipt and also a certificate saying the trust is an approved one under Section 80G of the Income Tax Act, 1961.
5.Collect all your bank statements and TDS certificates, if any. This will help you calculate your earning from bank interest and deposit advance tax if required.
6. If you have a running home loan, you must collect the certificate of repayment of principal amount and the interest paid during the financial year from the bank.
7. If you are claiming an interest-paid deduction on an educational loan, get a certificate of repayment made in the financial year where the interest is stated separately.
8. Keep all receipts for contributions made to schemes listed under Section 80C, such as insurance payment, PPF, ELSS, and children's tuition fees.
9. In case you are claiming a deduction for any medical disability under Section 80U, do not forget to collect a certificate of disability from an authorised doctor.
10. If you are claiming deduction for payment of health insurance premium, you need to keep the premium receipt indicating that the premium was paid in cheque.
So please rush! Here are ten things to do before March 31, 2008 or before the financial ends:
1. If you are claiming deduction for house rent allowance on account of actual rent paid, collect the rent receipts from the owner and keep them in your possession.
2. If you received any gifts during the year, please collect the gift deeds. The deeds should clearly state that you received the gift without any consideration.
3. In case you have changed employment during the financial year, you have to go back to your previous employer and collect the Form 16.
4. If you have donated to charitable trusts, obtain a receipt and also a certificate saying the trust is an approved one under Section 80G of the Income Tax Act, 1961.
5.Collect all your bank statements and TDS certificates, if any. This will help you calculate your earning from bank interest and deposit advance tax if required.
6. If you have a running home loan, you must collect the certificate of repayment of principal amount and the interest paid during the financial year from the bank.
7. If you are claiming an interest-paid deduction on an educational loan, get a certificate of repayment made in the financial year where the interest is stated separately.
8. Keep all receipts for contributions made to schemes listed under Section 80C, such as insurance payment, PPF, ELSS, and children's tuition fees.
9. In case you are claiming a deduction for any medical disability under Section 80U, do not forget to collect a certificate of disability from an authorised doctor.
10. If you are claiming deduction for payment of health insurance premium, you need to keep the premium receipt indicating that the premium was paid in cheque.
Tuesday, February 5, 2008
How to optimize your tax using mutual funds?
Mutual Funds by their very nature are not tax saving instruments but investment products that may offer tax concessions. But the question is whether these should be looked at as tax saving instruments?
Moneycontrol tells you how to kill two birds with one stone - how to optimize tax while getting the best from mutual funds.
Equity Linked Savings Schemes (ELSS) are Strong Favorites:
ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax. (Also read - How does an MF investor stand to gain now?)
These are special equity funds, which have to invest at least 80% of their corpus in equity, and investments are locked in for a period of 3 years. Investments can get you benefits under Section 80C i.e. investments of upto Rs 1 lakh in such schemes can be reduced from your gross income.
Hemant Rustagi, CEO, Wiseinvest Advisors believes that ELSS is the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. “Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under section 80C. Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable”, he adds.
But should an investor go the whole nine yards and put in the entire permissible amount of 1 lakh in ELSS? Probably not!
Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80 C covers your principal on housing loan, PF, pension plan, life premiums, so only what is left after that can give you a benefit if invested in ELSS.
All Smiles From Equity Funds:
Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best excercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital. (Also read - Mutual Funds: Your best personal Portfolio Manager)
Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price.
So what strategy will help to reduce the burden of STT to the minimum possible extent?
Investment expert Krishnamurthy Vijayan advises to choose the dividend option, while it remains tax-free. “Though both decisions are by and large tax-neutral, your STT will go down if your profits have already been taken out by you in the form of dividend”, he adds.
Debt Funds Can Benefit From Indexation:
Debt funds have lost their sheen thanks to falling interest rates and paling tax sops when compared with equity schemes.
Any fund wherein the average holding in equity is 65% (as per Budget 2006) or below is treated as a debt fund. If you invest for less than 1 year in the growth option of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at which you pay income tax on your income. But, if you stay invested for over a year, you can either pay 10% tax on the profits or pay 20% after reducing the rate of inflation (indexation benefit). So if you are invested for three or four years, your tax may become much, much lower than 10%.
Nevertheless for the risk averse, there are ways to reduce the tax burden on returns.
Investors can also benefit from double indexation benefit (when you invest late in one financial year say on March 28, 2005, and redeem early in the next financial year say on April 2, 2006, you use the index of both Financial Year ending March 2006 and March 2007 to get this benefit for as little as 366 days) provided the two financial years' index adds up to more than 10%. (Also read - How to ride the rising interest rate tide?)
In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option.
Vijayan advises most debt fund investors who have a reasonable horizon to invest for at least one year or more, in any case and choose the growth option, since by and large this would prove most tax efficient for retail investors in the lower tax brackets.
Moneycontrol tells you how to kill two birds with one stone - how to optimize tax while getting the best from mutual funds.
Equity Linked Savings Schemes (ELSS) are Strong Favorites:
ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax. (Also read - How does an MF investor stand to gain now?)
These are special equity funds, which have to invest at least 80% of their corpus in equity, and investments are locked in for a period of 3 years. Investments can get you benefits under Section 80C i.e. investments of upto Rs 1 lakh in such schemes can be reduced from your gross income.
Hemant Rustagi, CEO, Wiseinvest Advisors believes that ELSS is the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. “Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under section 80C. Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable”, he adds.
But should an investor go the whole nine yards and put in the entire permissible amount of 1 lakh in ELSS? Probably not!
Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80 C covers your principal on housing loan, PF, pension plan, life premiums, so only what is left after that can give you a benefit if invested in ELSS.
All Smiles From Equity Funds:
Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best excercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital. (Also read - Mutual Funds: Your best personal Portfolio Manager)
Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price.
So what strategy will help to reduce the burden of STT to the minimum possible extent?
Investment expert Krishnamurthy Vijayan advises to choose the dividend option, while it remains tax-free. “Though both decisions are by and large tax-neutral, your STT will go down if your profits have already been taken out by you in the form of dividend”, he adds.
Debt Funds Can Benefit From Indexation:
Debt funds have lost their sheen thanks to falling interest rates and paling tax sops when compared with equity schemes.
Any fund wherein the average holding in equity is 65% (as per Budget 2006) or below is treated as a debt fund. If you invest for less than 1 year in the growth option of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at which you pay income tax on your income. But, if you stay invested for over a year, you can either pay 10% tax on the profits or pay 20% after reducing the rate of inflation (indexation benefit). So if you are invested for three or four years, your tax may become much, much lower than 10%.
Nevertheless for the risk averse, there are ways to reduce the tax burden on returns.
Investors can also benefit from double indexation benefit (when you invest late in one financial year say on March 28, 2005, and redeem early in the next financial year say on April 2, 2006, you use the index of both Financial Year ending March 2006 and March 2007 to get this benefit for as little as 366 days) provided the two financial years' index adds up to more than 10%. (Also read - How to ride the rising interest rate tide?)
In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option.
Vijayan advises most debt fund investors who have a reasonable horizon to invest for at least one year or more, in any case and choose the growth option, since by and large this would prove most tax efficient for retail investors in the lower tax brackets.
Friday, February 1, 2008
Comparing Mutual Fund portfolios?
Investors who do a bit of research on their own are often stumped by how mutual funds with relatively similar portfolios have sharp variance in their performances. They expect such funds to post similar results by virtue of similar portfolios.
We believe this can be explained easily if investors factor in some points in their analysis.
At Personalfn, clients taking a keen interest in their investments are a common sight. They often evaluate their investments critically and do their homework, like comparing portfolios of various mutual funds looking for patterns, reasons for outperformance/underperformance and why similar portfolios have wide disparities in performance.
It's always a good sign for investors to take more than a casual interest in their investments. Although the financial planner is there to guide them, investors must never lose sight of the fact that it is after all their money.
While comparing portfolios of various mutual fund schemes, investors must keep the following points in mind:
1) If you wish to compare portfolios of two mutual funds, first ensure that they belong to the same category. For instance, comparing the portfolios of two diversified equity funds that invest across the market (large caps, mid caps) is rational but comparing a thematic fund's portfolio with that of a diversified equity fund isn't.
While comparing mutual funds across categories is flawed right from the start, there may be some instances when a diversified equity fund's portfolio might coincide with that of a thematic fund. But such a scenario is likely to be rare and short-lived. Short of these instances, such a comparison would give very misleading results.
2) Investors often evaluate portfolios to get into the fund manager's mind so to speak. At least that is the case with some popular names like Warren Buffett.
However, some investors go a step further and compare portfolios of two mutual funds to understand why there is a disparity in their performance despite the presence of similar stocks and sectors across the two portfolios.
For instance, they will compare the latest portfolios of two mutual funds and try to figure out why their returns over 3-year are so disparate? There is a fundamental flaw in this evaluation. The latest portfolios cannot unravel what happened 3 years ago.
To understand that, investors will have to go back 3 years and evaluate the portfolios of both the mutual funds over this time frame i.e. from then until now. The disparity in the two portfolios over this period (3 years in this case) should explain the disparities in their performance.
3) Another point that investors ignore while studying portfolios is that simply being invested in similar stocks and sectors is not reason enough for mutual funds to deliver the same performance.
Even when two portfolios have the same stocks and sectors, they could have invested in these stocks/sectors in varying allocations/proportions and over varying time frames, which could explain the disparities in their performance.
4) Let's assume there are two mutual fund portfolios with fairly similar stocks and sectors in roughly similar allocations, but yet have varying performance.
To unravel the disparity in their performances, it's necessary to examine the performance of each stock and sector in their respective portfolios in detail. When investors get down to doing that, they will find that there is at least one stock/sector that has appreciated very sharply which eventually proves to be the difference between the two funds.
That is what one smart investment decision can do to a mutual fund's performance. There have been many instances of just a couple of investment decisions changing the fortunes of a mutual fund dramatically. However, for investors to determine which particular investment decision made all the difference, they will have to evaluate each investment made by the mutual fund (in terms of stocks and sectors).
5) To continue the previous point, at times investors may not be able to trace a particular stock/sector that made a huge difference to the mutual fund's fortunes. In such a scenario, it could well be that it was not an investment in a particular stock/sector that did the trick; it could simply be a higher cash allocation in a particular month which coincided with a stock market crash.
We have seen this happen in the past, when a mutual fund's performance jumped not so much due to its stock/sector investments as much as its cash allocation during a market downturn. While evaluating mutual fund portfolios, investors must also keep this point in mind.
So while it is an encouraging sign to see investors take an avid interest in their investments, they must adopt the right approach so as to make an accurate evaluation. This way, they can have a fairly good idea about why certain mutual funds are doing well or have done well in the past.
We believe this can be explained easily if investors factor in some points in their analysis.
At Personalfn, clients taking a keen interest in their investments are a common sight. They often evaluate their investments critically and do their homework, like comparing portfolios of various mutual funds looking for patterns, reasons for outperformance/underperformance and why similar portfolios have wide disparities in performance.
It's always a good sign for investors to take more than a casual interest in their investments. Although the financial planner is there to guide them, investors must never lose sight of the fact that it is after all their money.
While comparing portfolios of various mutual fund schemes, investors must keep the following points in mind:
1) If you wish to compare portfolios of two mutual funds, first ensure that they belong to the same category. For instance, comparing the portfolios of two diversified equity funds that invest across the market (large caps, mid caps) is rational but comparing a thematic fund's portfolio with that of a diversified equity fund isn't.
While comparing mutual funds across categories is flawed right from the start, there may be some instances when a diversified equity fund's portfolio might coincide with that of a thematic fund. But such a scenario is likely to be rare and short-lived. Short of these instances, such a comparison would give very misleading results.
2) Investors often evaluate portfolios to get into the fund manager's mind so to speak. At least that is the case with some popular names like Warren Buffett.
However, some investors go a step further and compare portfolios of two mutual funds to understand why there is a disparity in their performance despite the presence of similar stocks and sectors across the two portfolios.
For instance, they will compare the latest portfolios of two mutual funds and try to figure out why their returns over 3-year are so disparate? There is a fundamental flaw in this evaluation. The latest portfolios cannot unravel what happened 3 years ago.
To understand that, investors will have to go back 3 years and evaluate the portfolios of both the mutual funds over this time frame i.e. from then until now. The disparity in the two portfolios over this period (3 years in this case) should explain the disparities in their performance.
3) Another point that investors ignore while studying portfolios is that simply being invested in similar stocks and sectors is not reason enough for mutual funds to deliver the same performance.
Even when two portfolios have the same stocks and sectors, they could have invested in these stocks/sectors in varying allocations/proportions and over varying time frames, which could explain the disparities in their performance.
4) Let's assume there are two mutual fund portfolios with fairly similar stocks and sectors in roughly similar allocations, but yet have varying performance.
To unravel the disparity in their performances, it's necessary to examine the performance of each stock and sector in their respective portfolios in detail. When investors get down to doing that, they will find that there is at least one stock/sector that has appreciated very sharply which eventually proves to be the difference between the two funds.
That is what one smart investment decision can do to a mutual fund's performance. There have been many instances of just a couple of investment decisions changing the fortunes of a mutual fund dramatically. However, for investors to determine which particular investment decision made all the difference, they will have to evaluate each investment made by the mutual fund (in terms of stocks and sectors).
5) To continue the previous point, at times investors may not be able to trace a particular stock/sector that made a huge difference to the mutual fund's fortunes. In such a scenario, it could well be that it was not an investment in a particular stock/sector that did the trick; it could simply be a higher cash allocation in a particular month which coincided with a stock market crash.
We have seen this happen in the past, when a mutual fund's performance jumped not so much due to its stock/sector investments as much as its cash allocation during a market downturn. While evaluating mutual fund portfolios, investors must also keep this point in mind.
So while it is an encouraging sign to see investors take an avid interest in their investments, they must adopt the right approach so as to make an accurate evaluation. This way, they can have a fairly good idea about why certain mutual funds are doing well or have done well in the past.
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