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Blog's FPA INDIA

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PPF or ELSS

Writer Name :- Alankar Saxena - Chartered Wealth Manager

Equity Linked Saving Schemes (ELSS) and Public Provident Fund (PPF) both instruments are used for tax saving and investment purposes in India. In both cases one can invest maximum Rs. 1.5Lac to save tax under section 80C  of the Income Tax Act, 1961.  Public Provident Fund (PPF) was introduced in 1968 by the government to encourage people to invest their small savings in a safe investment option.

PPF has always been a preferred investment tool for many of us due to its risk free guaranteed returns coupled with the option to save tax. But now a days ELSS investment tools have drawn the attention of people due to higher returns in the long term, including tax saving options. The investment patterns of PPF and ELSS are entirely different.

The basic oee factors for optimum results. This appropriate mix changes also according to change in our financial goals in life at different life stages. PPF and ELSS both are tax saving instruments. Maturity in PPF is tax free whereas in ELSS long term capital gain tax is applied i.e. 10% tax levied on returns above 1L at the time of withdrawal after 3 years of lockin period.

PPF is a government backed investment instrument and comes with a sovereign-backed guarantee on both the principal and interest portion, therefore it is risk free investment. ELSS is a fund based market linked investment tool. A large chunk of investment made in ELSS goes into equity shares, it always contains market fluctuation risk.  But this risk of ELSS can be minimised by increasing the term of the investment. ELSS is a category of mutual fund schemes and if we keep investing in mutual funds for a longer period of time, the market risk is minimised. The longer is the period of investment, the lower is the risk. One can also invest through systematic investment plan (SIP) mode to reduce the risk further in ELSS.

The investment duration or lock in period of PPF investment is 15 years. You can withdraw a full amount after 15 years or extend your duration for further 5 years, though partial withdrawals are allowed from 7th year onwards, once a year with limitations. Here ELSS investments take advantage over PPF by offering a lock in period of only 3 years. One can do full withdrawal or partial withdrawal (any amount) after 3 years of investments. so ELSS is more liquid compared to PPF. Though PPF accounts can also be closed after 6 years, but only in a very few special circumstances such as treatment of serious ailments or life threatening diseases of account holder, spouse, dependent children or parents. The amount can also be taken for higher education of account holder or change in residence status.

The PPF rates of interest are revised on a quarterly basis. The current rate of interest offered on PPF is 7.1% and has been fluctuating between 7 to 8% for the last few years. PPF interest rates are in decline mode over the last 20 years and there are chances of further decline with the fact when an economy grows in size, interest rates tend to decline.

Though ELSS returns are not guaranteed, an investor can expect an average return of 12-14% per year in the long term.Below are few top ELSS funds with actual compounded annual growth returns during 5 years investment horizon

Quant Tax Fund: 23%

Mirae Asset Tax Saver Fund: 21%

BOI Axa Tax Advantage Fund: 18% 

Canara Robeco Equty Tax Saver Fund : 17%

DSP Tax Saver Fund: 16%

If we calculate the actual returns, investment of 1L per year in PPF account can amount to 27,12,140/- after 15 years at prevailing interest rate. Whereas if the same Rs. 1L is invested into ELSS fund for 15 years, the amount may reach 41,75,000, calculated at 12%. So as far as returns are concerned ELSS looks lucrative investment option, on the contrary PPF comes under safe and secure category.

One should do investment keeping in mind the appropriate mix of Risk, Return and Liquidity linked with his financial goals and time horizon. Investing in PPF is better for a person who does not want to take any risk but aspires to keep his money in safe and secure investments, compromising with returns. ELSS investments are suitable for people who can take moderate risk to enhance their returns.  The ideal situation  is people should do risk-return analysis for their financial goals and  prepare a detailed Asset Allocation Pan before making investment. Through this plan it will be easier for them to understand and allocate their fund in PPF/ELSS and in other investment options as well in order to fulfil their long term and short term financial goals.

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INVESTMENT IN STOCK MARKET

Writer Name :- Alankar Saxena - Chartered Wealth Manager

 

 

 

 

 

 

 

 

 

We invest our efforts and time at the workplace in order to achieve the desired goals. If we are in the job, our business targets/ earning aspirations decide what kind of and how much effort are required to be invested in order to achieve our targets. In our life span, we have small and big financial goals at regular intervals for which we need a certain amount of money to achieve each goal like buying a house, car, higher education, marriage of children, vacations, retirement, etc. Our financial goals decide how much amount we should invest and which instruments we should invest in. Goal-driven investments are long-term investments and the probability of expected returns is high. 

A few days back my friend Rahul, who was very young, was earning around 25000 bucks per month in a private company. He had two big financial burdens for which he was worried. That was the personal loan whose installment was 5000 and a car loan of 7000. He did not have any savings and wanted to start a part-time business along with his job. But due to time constraints, he was unable to find work. Once he told me that one of his close relatives working in a private bank was making handsome money in the stock market along with continuing his job. I found that he was convinced and inclined towards doing stock market business. But he did not have any clue how to start. I was also a trader and investor in the stock market and use to make good money. So I decided to guide him to open a trading and Demat account with a stockbroker. There are 2 kinds of stock brokers available in the market ‘Discount brokers’ and ‘Service brokers. Discount brokers normally provide a trading platform and only execute the orders on behalf of their clients. They do not provide any advisory service or any other product except equity and derivatives. On the other hand, a full-service broker offers a wide range of services. They conduct research on behalf of their clients and provide professional stock advisory services to them. Apart from this brokers can also provide Financial planning services that include Tax Planning, Estate Planning, Retirement Planning, Insurance Planning, Portfolio management, wealth management services, and more. The difference between the two types of brokers lies in the variety of services offered and the brokerage (commission) amount they charge from their clients. The charges of a Full-Service Broker are more than that of a Discount broker due to the variety of services it provides. Investors who are comparatively new to the market and do not have much knowledge about stock market investments are advisable to open their demat/ trading account with Full-Service Brokers. 
The stock market can very well fulfill one primary motive of investment which is inflation. The returns in the stock market are usually higher than any other investment, but this investment is too risky and can deplete your money if invested randomly without any knowledge. A proper thought process with continuous study and research is required for this kind of investment. One should always remember that the stock market is not a money-making machine. Famous investor Warren Buffet says: Risk comes from not knowing what you’re doing.” So it is very important to know all rules before venturing into a new game.  Many times we are impressed by our friends or relatives because they have earned money in the stock market and start following them in choosing stocks. This is the wrong approach. Only since someone has made money in a couple of trades does not exhibit that he is an expert in stock market investments. You should start landing in the stock market after taking at least basic knowledge of the stock market nitty gritties. First of all you should start understanding the terms like Sensex/ Nifty/ Index/ Dematerialization/ Equity /stocks/ Portfolio/ Dividend/ Bull Market/ Bear Market / Delivery/ Future/ Option/ Margin trading/ Intraday, Long buy/ short selling/ stop loss/ Expiry etc. If you have no knowledge or do not have time to acquire knowledge about the stock market, you can start with a good Large cap Mutual Fund scheme where you can get your money invested in a collection of 20-25 good large-cap companies, that too professionally managed by qualified fund managers. 
The risk lies since stock prices change every time because of market forces. If more people want to buy a stock than sell, the stock price goes up, and vice versa if more people sell a stock than buy, the stock price goes down. More important is to understand why people start liking a stock more than others and why people start disliking a stock. This may depend on a number of factors. Like if there is any positive or negative news about the company it can affect the viewpoint of the investor towards that stock. Investors may have their own reasons for buying and selling a stock. We should keep in mind that the price movement of a stock indicates the worth of a company. The most important factor that tells the value of a company is its earnings. In India, listed companies declare their earnings at the end of every quarter in a year. Smart investors give weightage to these factors before investing in a company. If a company is generating loss year after year we must understand that something wrong is going on and its survival is difficult in long term. Analysts predict the future value of a company on the basis of its earning projection. Companies surprising with jumping profits attract investors’ attention. Those can provide us money in form of regular dividends, also the demand of that stock increases so is the price and profit for investors. Though earning is a very important factor in choosing a stock, there are several other internal and external factors that affect stock market movement. Macroeconomic factors like interest rates, inflation, unemployment, and economic growth often move stock markets. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything. Remember, it is investors’ sentiments, attitudes and expectations that ultimately affect stock prices. "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” ― Warren Buffett  

 

 

 

 

 

 

 

 

 

 

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