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Have your eyes open at the bank!

No, I don’t mean keeping a look out for gun toting bandits or lesser thieves who will nick your bag… just the bank staff and systems themselves.

People promise you big things when they take your money and fall short when they return it. With mutual funds, shares and other investments, one can expect this to happen. But one doesn’t expect it to happen in the case of banks.

I had a sum of money put in a Fixed deposit with State Bank. When the term was over, the officer at the bank duly transferred the money to my SB account. Only when I came home did I realise that a sum much less than the interest noted on the FD certificate had been transferred to my account. Was it tax deduction at source? The shortfall was much more.

I went back to the bank and they told me to give them a letter asking for the shortfall amount. I did, and then they transfered the balance to my account. Explanation was some kind of computer glitch in interest rates.. (not their fault then of course!)

So, when you turn in your FD, carefully note the amounts written on it before submitting it.

Kisan Vikas Patra

Kisan Vikas Patra is a certificate issued by the Department of post, Government of India so it is an absolutely safe investment. And It doubles your money!  It is generally not very popular because there is no income tax benefit and most savings are done with the IT in view.

But you could buy it as a gift for children or anyone else.

Period: Eight years and seven months.

Amount: Any amount upward of Rs.100. Certificates are available in denominations of 100, 500, 1000, 5000, 10000 and Rs.50000.

Procedure : Walk into a Head Post Office and buy at the counter. There are also many agents who will help you. They will be paid a commission by the post office so you don’t have to pay them.

Encashment: Can be encashed after 2.5 years and at any post office with proof of identity.

TIP: In case you are buying a KV in the name of your child make it a joint certificate so you can sign on maturity.

NSC

National Savings Certificate is a certificate issued by the Department of post, Government of India so it is an absolutely safe investment. And can be used to reduce your tax.

Period: The certificate can be cashed after 6 years by which time it would have grown at a rate of 8%

Rs.1000 invested now would be 1600 after 6 years. Comparatively, Rs.1000 invested in a bank Fixed Deposit would fetch Rs. 1500 at 7%. Banks do not encourage you to deposit money for long periods because their interest rate keeps fluctuating.

So if you have money which you can put away for 6 years, use this option.

Amount: Any amount upward of Rs.100. Certificates are available in denominations of 100, 500, 1000, 5000 and Rs.10000.

Procedure : Walk into a Head Post Office and buy at the counter. There are also many agents who will help you. They will be paid a commission by the post office so you don’t have to pay them.

Transfer: If you move to another city, then the Certificate can be transferred there for a small fee.

Loan: One can pledge this certificate as security at a bank for a loan

Premature encashment: It is also possible to encash this certificate after three years. Of course you will receive a smaller amount. For more  details see here.

Employee Provident Fund

The EPF is a  scheme that is mainly meant to create a pension after retirement. Part of the amount can be withdrawn for major expenses like a daughter’s marriage or education.

  • Both the employees and employer contribute to the fund at the rate of 12% of the basic wages, dearness allowance and retaining allowance, if any, payable to employees per month.
  • The rate of interest is fixed by the Central Government and is credited to the members account on monthly running balance at 8.5%.
  • Annual statements of accounts are sent to each member through the employer showing  the opening balance, contribution amount,  interest credited, any withdrawal and the closing balance at the end of the period.
  • When changing jobs, if the person joins another company within two months, then the EPF account can be transferred to the new employer. However, if  the new company is not covered under PF, then you can withdraw.
  • A member of the provident fund can withdraw the full amount on retirement from service after attaining the age of 55.
  • Or   at the time of termination of service.
  • Or if he or she is retired on account of permanent and total disablement due to bodily or mental infirmity.
  • Or on migration from India for permanent settlement abroad or for taking employment abroad.
  • In the case of mass or individual retrenchment.

    TIP: Since the EPF right now pays more interest than PPF (8.5% vs 8%) , it seems better to increase your investment in your  EPF account if you have one. However, the employer will only match your contribution upto 12% and less if its a sick company

    Public Provident Fund

    For long term savings of 15 years, consider a PPF account.

    Public Provident Fund Account can be opened by any adult in his/her name or as guardian of a minor.

    • It can be opened in any Head Post-Office or some select Post Office, any branch of the State Bank of India and selected branches of other Nationalised Banks.
    • Minimum amount is Rs.500/- and maximum Rs. 70,000 /- in a financial year.
    • Deposits can be made in lump sum or in 12 monthly instalments.
    • Deposits are payable on maturity after 15 years along with interest at the rates declared by the Government from time to time. Right now the rate of interest is 8% per annum compounded annually.
    • Part of the amount (less than 25%) may be availed from the 3rd financial year excluding the year of deposit as a loan.
    • Tax benefit under Sec 80C, no tax on maturity and no tax on interest earned.
    • Safe fund run by Govt.

    With a PPF account, you can vary the amounts paid in. You can even put in as little as Rs.500 in a bad year  to keep it going.

    To know how to open an account, read the steps here at taxguru.com

    TIP: From Manish at jagoinvestor.com

    Lets say after 11 or 12 yrs , you need to invest some money for short term , at that time , you can put money in your PPF account and it will get matured in next 3-4 yrs and whole maturity amount would be Tax-free and earn you interest of 8% . And it costs just Rs 500 per year for account to be active .

    So open a PPF account.

    Investing For Your Kids

    Most parents now start saving for their children as soon as they are born or even before. With the rising cost of education, it is prudent to plan ahead. Some ideas:

    Savings Bank Account:

    Open a small saving account in the child’s name and put in all the small amounts that are gifted to the child over the years. This suggestion came in from reader Urmila. One parent will have to be the operator as the child is a minor.

    When the child is old enough, it is good to help the child operate the account by himself or herself so that he or she learns about banking. And the pride of possession will encourage the child to save even more.

    So much so, that it becomes rather tricky when the child grows up. I recently closed the accounts of both my daughters, now that they are both majors and don’t even operate these accounts any more. But still they are miffed.

    Which brings me to another point. When children grow up and go away and there are still investments in their names, the whole process becomes complicated with them having to sign each time and declare that they are now majors and so on. It is easier if there is a joint account in the names of both parents and children so that any cheques coming in  can be paid in here and the parent can use the amount as she wishes.  Upto 4 people can be joint holders of an account.

    Fees:

    It is a good to have a Recurring deposit that matures in June so that all those costs besides tuition fees- uniforms, special fees, books etc can be met easily. Reader Radha says this made her life much easier.

    Capitation Fees:

    Many parents get bogged down when they meet this bogey. But huge fees have become a way of life and it is good to plan ahead.

    One parent I know  invested in a small piece of land in a small town several years ago and now he is ready to sell it and meet whatever demand is made of him.

    Education is the biggest investment we make for our children so it seems better to sell the land and pay the college fees.

    But my personal feeling is staying with simple RDs and FDs will give assured returns. And you know when you can withdraw the money. Investing in equity or mutual funds doesn’t seem a good idea when it’s a question of your child’ future. Do that with a portion of your funds which you feel you can risk losing.

    Insurance Plans For children:

    There are several schemes which tell you to save with them for your child’s future. The best advice on these schemes is found in Shyam’s column Fiscally Fit.

    “Children’s Plans are insurance-cum-investment plans offered by insurance companies. In other words, they are similar to ULIPs (Unit Linked Insurance Plans). A part of the premium is used to provide life cover for the parent and the remaining portion is invested in debt and/or equity instruments. The term period normally ranges between 10 yrs to 25 years, so that you can time your policy’s maturity around the time your child reaches adulthood.

    To begin with, the insurance companies tend to deduct premium allocation charges upfront. These charges are meant to pay the distributor commissions. As a result, very small portion of the premium gets invested during the initial years, which by the way are the most precious years from a compounding perspective.

    He sums it up so:

    In summary, term insurance and mutual fund or index fund combination beats the so called Children’s Plans in terms of costs and returns.

    Plan, save and then invest in your child’s future.

    Of Maids and Money

    Keeping track of your money has one unremarked but important consequence. It improves your relationship with your maid.

    Im sure everyone has had this experience which I’m going to recount.

    A few days ago, someone gave me Rs.2000 and I hastily put it into a draw and thought I’d deal with it later which  I didn’t do. Yday, I suddenly remembered the money and spent some time looking for it unsuccessfully. Then thoughts about my maid began to creep in. She’s been with me many years..but who else is there in the house?  And then I started looking at her with a bit of suspicion.

    This morning, I found the money stuffed into a passbook. I was so relieved and happy. And a bit ashamed too.

    Then I resolved to DO IT NOW. When it comes to money; putting it away in the right place, counting , writing down amounts, getting receipts and bills makes a difference. And all these things take about a minute. If you do it Right Away, then it saves a lot of hassle later.

    So Im just back from the market, I’ve put the handbag away in the cupboard and locked it and have written down the amounts I spent.

    TIP : If you have a maid, you are probably giving her an advance now and then from her salary. When you make a deduction from her salary, keep this amount in a separate labeled envelope. (Do not think , ‘ yay, more spending money this month ‘ as I used to) . Add to it each month.

    This way, you will know how much you have deducted from her salary and when the amount  has been collected in full, the money is there for you to advance it to her again.

    Start Early

    That’s the message that all finance people give. Start young. The earlier the better. Just a simple recurring deposit or fixed deposit can put you on the road to wealth.

    If you are 24, have just started on a salary of Rs. 25000 – Rs.30000  or you can  save Rs.10,000 a month  of your salary, then using the power of compound interest  with steady savings, within 6 years or by the time you are 30, you will have Rs. 10.38 lakhs at the current interest rate of  7% . If the interest rate rises up within this period, you will have more!  You could then turn entrepreneur !

    If you save a little less, or Rs.1,00,000 annually or Rs. 8333 per month, in 6 years you would have 8.65 lakhs.

    Use this calculator on moneychimp.com to try your own permutations.

    FD s for Retirement Planning

    Here is another interesting exercise in the power of using recurring deposits with fixed deposits as a steady means to save. From Deepak Shenoy of the blog Capital Minds.

    Let us put  Rs.2,000 per month in a bank fixed deposit (FD) at a nominal 8% interest compounded annually. That makes Rs.24,000 annual investment in FD. For the next 30 years, let us assume that the interest rate remains constant at 8%. The Rs.24,000 per annum investment at 8% will accumulate to Rs.29.36 lakhs.

    This amount (Rs.29.36 lakhs) if reinvested again in FD at 8% interest will give annual interest of Rs.2.35 lakhs or a monthly interest of Rs.19,575 for life. Now compare with this with  the Rs.15,315 per month ICICI’s Retirement Plan. The FD comprehensively beats the returns of ICICI by a massive Rs.4,260 per month (21.8% more). And don’t forget that the FD return is more or less guaranteed where as ICICI’s 10% return in risky and market dependent (it could be less, or more). Also, the accumulated Rs.29.36 lakhs is preserved for passing on to the next generation

    Deepak Shenoy  argues that going with FDs or government Bonds beats any Retirement plan or annuity. A view I agree with totally. Read more here.

    Note:  Reader Urmila has brought up this valid point. Is the Rs.2000 to be invested in a FD or and RD every month? While it is possible to invest in a FD every month, it is much more practical to invest in an RD for a year and then convert the Rs.24000 saved to a FD every year. You get the Rs. 29.6 lakhs at the end of 30 years at an interest rate of 8% .

    An Introduction to Life Insurance

    Why should you take life insurance?

    Life insurance is to safe guard your family in case of death or a major accident. If you are a salary earner, then your family will suffer if they lose you and that salary.  Insurance is a safeguard against that incident, however unlikely it may seem or however little you may want to think about it.

    There is a wonderful calculator which helps you calculate how much insurance you need. It is in dollars but you can use it anyway. It helps you to think about these questions:

    1.      How much will be needed at death to meet immediate obligations?

    2.      How much future income is needed to sustain the household?

    It could end up with a frightening number but gets you thinking anyway. How important you are!

    1. Term plans are real insurance policies. The premiums will be really low, especially if you are young.  These give your family a substantial amount in case of your death or disability.  But the money you put into this plan, is not returned to you. If you are a young person earning a good salary and with dependents , this is the type of insurance you should go for.

    As a form of Investment

    It is always best to separate life insurance from saving for the future. But most people invest in life insurance as savings so that the money they put in is returned eventually.

    2. Endowment plans are for a fixed period so you get back your money plus a bonus based on the fund performance. This is a kind of savings/investment plan with a little bit of insurance thrown in.

    3. ULIP: In Unit Linked  Insurance Plans, a part of your premium is invested in the stock market and some in  non-equity funds. You can change the fund plan to take advantage of market rises… but very few people will actually do this. But some of your money is kept aside as insurance premium, so only a part of your money is invested in the market. This kind of plan speculates on high returns from the market.

    It seems better to separate investing in the market and life insurance.

    Simple ideas for Saving Towards a Goal

    Dami , a  student in America tells how saved towards an engagement ring from his limited scholarship money  planning for a period of one year :

    1)      he saved 100$  in a Recurring Deposit every month for one year at 8%

    2)      he invested a small amount in a Index fund when the markets were low which gave him a return of 11%

    3)      he got a lumpsum from his Tax Returns

    You can watch him on Youtube to get the story right from him or read more about  financial plans for student on his blog.

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