New year 2016 : Ten Best Money Moves ..!

10 Best Money Moves for 2016

These 10 decisions will ensure that your portfolio yields better returns, your transactions become savvier and your finances improve in the new year.

At the beginning of 2015, many stock market pundits had estimated that equities will deliver roughly 15% returns during the year. Instead, the Sensex has declined around 6%.

If you were investing for 1 to 2 years, these statistics would be truly worrisome. However, if your investment horizon is longer, say 5-6 years, 2015 would have been a great year during which you stocked up on quality stocks (or the funds that invested in them) at low prices.

The stock market graph is never a straight line. The Nifty's jagged trajectory has rewarded the patient and punished the jittery investor.

What should investors do in 2016?

Firstly, they should continue to save and invest for their goals and not be deterred by the noise about returns.More importantly, they should not lose sight of their asset allocation.

If the equity portion of their portfolio has shrunk due to the decline in equities, it is time for them to get rid of some fixed income instruments and increase the allocation to stocks.

However, this is generic advice that should be followed at all times. We have drawn up a list of smart things to do with your money in 2016. We didn't stop there.

ET Wealth reached out to 50 financial planners across the country to know what they thought of our suggestions. Some of the steps we suggested have been heartily endorsed by the planners. More than 95% believe that getting your staff to invest in the social security schemes launched by the government is a very good idea.

At the same time, some suggestions like buying an online Ulip or shifting from regular mutual fund schemes to direct plans have not received a good response.

Two out of three planners thought the Ulip was a bad idea, while one of every three planners gave direct plans a thumbs down. In the following pages, we will explain how direct plans can help you earn better returns and why you need to change your perspective about Ulips. We are sure that these two steps and eight other suggestions will prove rewarding in the new year.

1. OPEN AN NPS ACCOUNT..!

Avail of additional Rs. 50,000 tax deduction.

Opening an NPS account should be a priority for those wanting to save more tax this year. Up to Rs. 50,000 invested in the NPS under the new Section 80CCD (1b) gets additional tax deduction, over and above the Rs.1.5 lakh investment limit under Section 80C.

In the 30% tax bracket, an investor can shave off Rs. 15,000 from his / her tax liability.

This would bring down the effective investment to only Rs.35,000 and push up the returns for the investor.

If the NPS fund you invest in earns 8% compounded returns over the next 15 years, the effective return would be 10%.

Some financial planners say that investing in the NPS is not a good idea as equity mutual funds can give better returns than the NPS, where there's a 50% cap on equity exposure.

Even though investments in equity funds are not eligible for tax deduction, their potential to give superior returns more than makes up for it. The other problem with NPS is the rigid rules for investing the corpus on maturity.

After 60, at least 40% of the corpus has to be put in an annuity for monthly pension. Withdrawals are taxable and the pension from annuity is taxed at normal rate. The monthly pension from annuity will be a mix of principal and interest, but the entire amount will be taxed.

Experts admit that taxing annuity income means the principal will also be taxed, but point to the deduction the investor enjoys at the time of contribution.

“The investor only defers the tax till after retirement,“ says Mr. Amitabh Chaudhury, CEO & MD, HDFC Life.

2. START USING AN E-WALLET..!

You get cash back and it's safer than online usage.

This year, the RBI granted licences for payment banks to 11 entities. As e-wal lets are expected to play a key role, you can start using these for discounts, cashbacks and other incentives.

This, even as players like Paytm, PayU and Mobikwik are already offering significant cashbacks.

Some financial planners believe that ease of online transaction and heavy discounting have led to a rise in discretionary expenses.

“We have seen budgets for food and clothing increase two-fold in the past two years,“ says Ms. Priya Sunder, Director, PeakAlpha, a wealth management firm.

However, there are incentives even for essential household expenses like grocery, Internet, DTH and mobile bills (see table). Other categories include taxi rides, movie tickets, online shopping, food orders, hotel bookings, and flight, train and bus tickets. There are monetary rewards for referring others as well.

The wallets--in which you can put in Rs. 1010,000--also offer security, a concern in online transactions.

“They are safe, convenient and rewarding,“ says Mr. Abhijit Bhave, CEO, Karvy Private Wealth Management.

The sites maintain the same security level as that for any other banking transaction and you can limit your loss by putting less money in the account.

The only limitation is that they are semi-closed, which means you can transact only online on limited partner sites.

3. MOVE TO DIRECT MUTUAL FUNDS..!

Lower charges lead to higher returns.

Investors stand to gain from direct plans of mutual funds since lower charges translate to higher returns.

The difference in returns is more pronounced for equity funds. In debt funds, the expense ratio of regular plans is not too high, so the difference is lower.

In liquid funds, the expense ratio is very low, so the difference is wafer thin. In the three years since these were launched, the average large cap diversified fund has given 15.39% annualised returns, but the average direct plan has given 16.42%.

Even a 1% difference can grow to a big sum in the long term. Before you switch, however, check if you have crossed the minimum tenure set by the tax man. In equity and balanced funds, shift after completing a year or the 15% tax on gains will wipe out the gain.

In debt funds, debt-oriented hybrid funds and gold funds, wait for three years or the gains will be added to your income and taxed at marginal rate. Even after three years, gains will be taxed at 20% with indexation benefit.

4. REPLACE FIXED DEPOSITS WITH DEBT FUNDS..!

These are more tax-efficient and give higher post-tax returns.

Fixed deposits (FDs) are safe, but also tax-inefficient. Short-term debt funds, whose portfolio has a combined credit risk almost at par with FDs, can be a better alternative.

Though the returns generated from short-term debt funds are similar to the interest you earn on FDs, the tax benefits mean that the actual return from debt funds is higher if you hold them for more than three years.

This is why nearly eight out of 10 planners gave this move a thumbs up.

In a debt fund, the long-term capital gains are taxed at 20% after indexation, while short term capital gains are added to your income and taxed at the normal rate applicable to you.

This is a game changer for those in the 30% tax bracket (taxable income of over Rs. 10 lakh a year). Instead of shelling out 30% tax on the interest earned on a fixed deposit, the tax rate is 20%, which is further reduced by the indexation benefit.

“Besides this, there are ways that the capital gains can be set off if you invest in a debt fund. No such options are available for interest income from FDs,“ says Ms. Bhuvana Shreeram, Head, Financial Freedom Golden Practices, a Mumbai-based wealth management fund.

Debt funds also help in deferring the tax. In the case of FDs, you have to pay tax on the interest income every year, whereas in the case of debt mutual funds, tax is payable only when you generate an income, that is, when the units are sold during redemption.

5 MONETISE GOLD INVESTMENTS..!

Gold bonds offer 2.75% interest and don't levy any charge.

The government has given investors a good reason to not buy gold in 2016. Launched in November 2015, gold bonds are linked to the price of gold and offer 2.75% interest. If we assume that gold prices will rise by 5%, the bonds will yield an annualised return of 7.75%. This is higher than that of the gold deposit scheme.

“Gold bonds offer several advantages. One, you do not need to worry about the purity of gold.Two, the return is 2.75% over the price of gold at the time of investment, leading to compounding benefits. Finally, you don't have to worry about its safety,“ says Sunder of PeakAlpha Investments.

It's time to get rid of your gold ETFs as well. You pay 1% on the fund per year, but if you sell and put the proceeds in gold bonds, you earn 2.75%, and the net gain is 3.75%. However, take note of the tax implications and don't forget that gold bonds are less liquid than ETFs. They have a tenure of eight years with an exit option after the fifth year. Purchases have to be made within the stipulated time and there is also a 500 g buying restriction per financial year.

“Gold ETFs are attractive if you want to stagger investments and they offer liquidity on the exchange,“ says Mr. Lovaii Navlakhi, CFP and MD, International Money Matters.

However, if you already have bars and coins, put these in the gold monetisation scheme to earn an extra 2.25%. Investing via gold ornaments is the worst as making charges (15-30%) can even churn out negative returns.

6. INVEST IN THE SUKANYA SCHEME..!

If you have a daughter below 10 years, this is the best debt option for you.

Launched in January 2015, this government-managed scheme is definitely the best debt instrument in the market today. Do not get us wrong: we are not suggesting that the Sukanya Samriddhi Yojana (SSY) should be seen as an alternative to equity investments.

You should still invest in equity and balanced mutual funds through SIPs to get high returns.

However, the SSY is the best category to invest in if your daughter is below 10 years old. This is because it offers even a higher interest rate than the old-time favourite PPF.

Besdies, it is a far better alternative than the fixed deposits and recurring deposits you are investing in for your daughter's education and wedding.

While the PPF offers 0.25% points higher than the yield of 10 year government bonds, the SSY will offer 75 basis points higher than these bonds for the previous year.

This figure was 8.33% for the period between 1 April 2013 and 31 March 2014. For 2014-15, the interest for the PPF is 8.7%, while the SSY offers 9.1%.

Compared with the fixed deposit, the SSY not only provides higher rates (at present), but also has better tax benefits.

As in the PPF, you can avail of tax benefits under the Section 80C for SSY too. So, investments up to Rs. 1.5 lakh will be exempt from tax in a financial year.

However, the scheme lacks liquidity. While the fixed deposit has a lock-in period of five years and the PPF has a lock-in period of 15 years, you have to stay invested in the SSY till you child turns 21.

While this means a lock-in term of 11 years, if your child is 10 when you invest, it is over 16 years if she is below four. Premature withdrawals are only allowed after the girl turns 18 and you can withdraw 50% of the corpus. Under the PPF, 50% withdrawal is allowed from the seventh year.

7. PURCHASE A LOW-COST ULIP

Switch between debt and equity funds without tax implications.

Two out of three financial planners surveyed said that buying a Ulip was not a good idea. However, we feel that it's time investors shed the baggage of the past and look at Ulips from a fresh perspective.

Irdai clamped down on Ulip charges in 2010 by capping the annualised charges at 2.25% for the first 10 years of holding. The new online Ulips have sweetened the deal and brought down charges to such an extent that some are cheaper than the direct plans of mutual funds.

Some e-Ulips do not levy premium allocation charges or policy administration charges. Others compensate long-term investors with `loyalty additions', which helps bring down the overall costs.

HDFC Life declared a price war with its Click2Invest plan. The only charge it levies is an annual fund management fee of 1.35% of the corpus value. There is also a mortality charge, but that is for the life cover offered to the policyholder.

 The low charges make the Click2Invest plan cheaper than the direct plan of a diversified equity fund, which charges an expense ratio of 1.5% per year.

Another big advantage of choosing a Ulip is the tax-free switching between debt and equity. One can seamlessly transfer funds from debt to equity and, vice versa, without incurring any tax liability.

If you do the same with mutual funds, you will have to pay tax on the short-term and long-term capital gains. Since Ulips are insurance plans, the gains and maturity proceeds are tax-free under Section 10(10D).

However, only savvy investors may be able to take this advantage. “The switching facility of Ulips is hardly used by investors. Also, this advantage is overshadowed by the risk of being stuck with the one fund through a long period,“ says Navlakhi of International Money Matters.

8. START SAVING FOR A HOME..!

Depressed prices and supply glut mean you could get a good deal.

In the past 4 to 5 quarters, real estate prices have fallen or remained stagnant in some markets. This, coupled with interest rate cuts and passing of the Real Estate Bill, could make buying a home a sweeter deal in 2016. “End-users and investors can use the downturn to make a purchase with the objective of long-term gains, but some pain may still be left.So, consider buying in the second half of 2016,“ says Bhave.

Look for good bargains since builders have a pile-up of inventory and are facing a cash crunch. Besides, those who had invested for the short term and want to flip, are unable to sell as the sentiment has been low. Houses are being sold at discounted rates and 2016 may be the year to haggle hard.

This is the reason four out of 10 wealth managers surveyed agree.However, three don't and another three have taken a neutral stand.

“You will need a substantial amount for the down payment. It's not realistic to set the goal of buying a house in 2016 if you start saving now for the down payment. Begin scouting for property only after you accumulate a sizeable amount,“ says Pankaj Mathpal, MD, Optima Money Managers.

Buying a property is also a long term commitment if you are taking a loan.

“You need to ensure that not only do you have funds for down payment, but are also in a secure job to fund the EMIs for the next 20-odd years,“ says Sunder. Though there are tax advantages, they kick in only after you get the possession of the house. There are many frictional costs too. Take all these into consideration before making the purchase.

9. BUILD BUFFER OF CASH..!

Markets are jittery and you should be ready with cash to grab bargains.

The market is not looking very stable. A rate hike in the US and poor results by India Inc could result in a further market fall.

However, you might not be able to take advantage of the dip if you do not have surplus cash to invest with. So, it might be a good idea to start building a buffer of cash to use with when the markets go down further. It could be your opportunity to buy cheap and sell high.

Although every second financial planner agreed with this strategy, one in three also warned against the risks of doing so.

“The US rate hike is a much talked about event and the market might have effectively priced in a fair bit of the adverse movement that this could result in. Also, poor results have a lot to do with both micro (high leverage and interest burdens) and macro factors (weak economies globally and low domestic demand). Again, this is something that the market is aware of,“ says Navlakhi, International Money Matters.

The planners' argument against the strategy is that no one is an expert at timing the market. Investing regularly is the only good strategy for long-term investors looking to build wealth.

“There is no perfect time to buy and nobody can forecast the future accurately. A better strategy to take advantage of the downturn would be to start investing immediately and do so in tranches over the next 2-3 months,“ says Bhave.

10. SECURE A FAMILY'S FUTURE...!

Buy social security schemes for your maid, driver, watchman, sweeper, etc.

pread happiness and begin the new S year with a good deed. Help your household staff to open a Jan Dhan account and introduce them to social security schemes, such as the Atal Pension Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana (Life Insurance) and the Pradhan Mantri Suraksha Bima Yojana.

Financial planners have also given a resounding thumbs up for this move. “While it is the government's job to introduce such schemes, it is our responsibility to spread awareness among the uneducated household staff and insure them under these schemes,“ says Bhave.

However, it will require more than just convincing them to invest in these schemes.You might have to step in and make the first investment on their behalf. It will cost you less than below `2,000 per year (see table).Once they get in, it is easier to convince them to continue with it.

Src: CHANDRALEKHA MUKERJI AND BABAR ZAIDI, ET Wealth

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