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Over the last year or so, there has been a sense of disquiet relating to the mis selling of financial products. Much of the complaints have been directed at distributors of insurance products, who are ever so keen on pushing unit linked insurance plans (Ulips) rather than plain vanilla life insurance plans. In the past, such charges had been hurled at mutual funds and issuers of credit cards as well.
While some of the charges may stick, it is striking that apart from the sophistication of new financial products and the growth in disposable income, there has been very little effort at boosting financial literacy levels.
Financial literacy, going by the definitions adopted in some of the major economies, would mean the ability or understanding to make informed judgments about money or financial services that is suited for one’s needs. Recently, IIMS Dataworks, which had carried out an income and savings survey, said in its report that unwillingness on the part of individuals to save was the most adverse of financial literacy markers. Its data showed that of the over 320 million paid workforce in India, close to 60% do not set aside any money to save in financial instruments, including gold and property.
The data provider and analyzer also said that there is a major misconception on the primary nature of an insurance product with most people viewing insurance products as an investment (read Ulips). Many investment advisers have indeed attempted to dissuade investors from this but the success of Ulips demonstrates that such isolated efforts have not worked.
India’s pensions regulator PFRDA had said a while ago that mounting a campaign across the country to inform and educate the vast number of citizens on the need to save for retirement incomes would be a priority. That may well kick off sometime. It may be facile to suggest that regulators in the financial sector that also have the mandate to develop markets besides oversight ought to do this. Some have gone one step further to say that these regulators should be tasked with this job considering that their corpus built through fees levied from intermediaries is substantial enough to run financial literacy campaigns.
Some regulators have done a bit of that but not sustained enough or across the country to leave any deep impact yet. Several years ago, when dematerlisation of securities, especially shares, was being encouraged, India’s leading depository, National Securities Depository (NSDL), did a lot of road shows to push the concept. It was also helped in this effort by a few depository participants.
A point that IIMS made, and rightly too, is that it cannot be left to the government or the regulator alone to carry out such literacy campaigns. Rather, in the short term, it is the financial services industry which should take on the burden of this responsibility. Players in the financial services segment, be it insurance, pensions or mutual funds, have a stake, selfish as it may sound, in this endeavour considering that a better informed citizenry can help them grow their business.
According to RBI data, as a percentage of financial savings, mutual funds constituted 7.7% of the financial savings of the household sector while insurance accounted for 17.5% and provident funds and pensions funds made up for 8.2% of the total financial savings during 2007-08. The predominant share fo savings was still parked in banks (55%). This goes to show how much ground providers of financial products have to cover.
One way out, IIMS said, would be to revisit agent training and the certification process of agents in retail finance sales by individual firms and the financial sector and by financial regulators. The aim would be to thus promote greater financial literacy among the agents themselves and ultimately firms would reap the benefit of higher sales.
Financial regulators could also perhaps nudge the players whose activities they police to start investing in this endeavour. The benefits to be had are enormous for the industry.
Losses on various financial transactions can be set off against gains, which leads to reduction in tax liability.
Gains and losses are a part of the investment game. But while gains always bring a smile to the face, losses make one cringe. But then, losses are not too bad, especially if you know how to take advantage of them. Avoid the blues by proper tax planning.
As far as the capital market goes, if you are holding loss-making shares for over a year, it won’t be possible to set them off against any income. However, a slew of other financial transactions can used to reduce the tax outgo when losses are incurred.
For instance, loss on sale of property, dwindling salaries or falling profits – a simple rule for the taxpayer is to play off losses against gains. You can carry forward losses for eight long years. And even a fall in share prices or net asset values (NAVs) of mutual funds can be carried forward for four years.
In the income tax returns forms, there are schedules for showing carry forward of losses. The income tax (IT) department studies them, allows carry forward and adjusts the income tax to be paid in the current financial year. Besides this, here’s how you can book losses and bask in profits:
DWELL, ON THIS:
First, in case you have sold a house in distress, the loss incurred can be set off against the capital gains in the future. Also, a self-occupied property can also fall in value because the notional income is nil or zero and the interest payout on a home loan results in negative income. Further, one house’s income loss can be set against another’s income (profit), if there are two dwellings. However, remember to pay the municipal taxes without fail, or claims would be rejected. Where one property is rented out, you can set off the interest portion of the equated monthly instalment (EMI) against rent earned.
BUSINESS LOSSES:
If you have two businesses or more, it’s easy to neutralise losses from one against the other’s profits. In fact, the tax rules allow carrying forward of losses, with intention of setting them off against a new business too. The business income of spouse, clubbed together can be also used to offset business losses. If there are bad debts, like forfeiture of advance for raw material supply, you can classify them under losses.
OTHER INCOME:
It is essential that any losses under income form other sources is adjusted in this financial year. Otherwise, they would lapse. For example, an insurance agent can offset commission loss against rent from plot from land. Letting out machines or furniture, interest on bank deposit and examination papers checking are examples of income from other sources.
MAKE CAPITAL FROM FALLS:
If the value of shares, worth Rs 5 lakh fall to Rs 2 lakh after a sharp market fall, selling them at a loss of Rs 3 lakh would lead to short-term capital loss. This amount can be set off against any other short-term capital gains.
A word of caution – do not set off short-term capital losses against long-term capital gains. It would be bad tax planning. For instance, a short-term capital loss, say in shares, should not be set against long-term gains from mutual fund units or profitable listed shares. This is because there is no tax on them. However, if unavoidable, try to adjust them against long-term gains on gold, estate or debt mutual funds because they are taxed, but at a lower rate.
Don’t sell listed shares and equity mutual fund units, if you have held them for more than one year. Long-term capital losses in either category can’t be set off or carried forward, at all. However, long-term losses on debt funds and exchange-traded funds, if required can be set off against long-term gains from gold.
In case of fall in mutual funds after it has been held over a year:
Book losses and cut tax outgo by selling it to a relative, friend or spouse, at market rate at a loss. This can be shown and claimed as losses.
Debt funds, if sold after a year, attract 10 per cent capital gains tax (without indexation) or 20 per cent (with indexation). Holding them for five years and choosing the 10 per cent option would that reduces the tax outgo. (see table: Benefits of long term)
CUT LOSS THROUGH DEPRECIATION:
Make sure to claim depreciation, as they can be easily set off against your business profits. They would effectively reduce income from business. During the current financial year, if business earnings/profits are not sufficient, remember to carry depreciation forward for next assessment year. The advantage is that unabsorbed depreciation can be set off in subsequent years against any head, like house or income from other sources, and not just business alone.
Apparatus, fixtures or machinery – all suffer erosion in value and are covered. Computers (including software), cars and furniture also show depreciation. Mobile phones too can be placed under the depreciation head. The most important advantage is that any unabsorbed dip in depreciation can be filed, for years, and years. In fact, they can be carried forward, indefinitely. All other miscellaneous expenses like stamp duty, registration charges in house property transactions and legal and travel fees in share deals can be claimed when losses are set off or carried forward. Indexation is a great tool when selling property. It must be diligently calculated and availed to keep pace with inflation. It reduces the tax liability as well.
Always remember that there are tax laws that allow you to reduce the burden when you are in financial distress.The lesson here is simple – don’t get scared when losses are staring at you. Instead, work your way out of it.
Source: Business Standard
Ideasmoney shares an interesting story about a friend on Saving/Investing Regularly
It’s a story about a guy who got a car ( worth almost 7 Lakhs) out of just 70,000 which he invested a decade ago and left with some good money too!!On the contrary lets look at a person who buys a car on EMI. he pays almost 15% as interest. By making money work for you ..you tend to gain in the long run. But this requires tremendous patience and a systematic approach.
Check out the full story
The area under consideration today is availability of insurance along with mutual funds; and this is likely to remain in the spotlight because of huge attention focused on the area. An investor needs to distinguish the position with respect to other mutual funds that he has experienced. In this entire issue, the question of collection of insurance premium is important and a small distinction can make all the difference.
Regulation In the existing position, the mutual funds cannot collect insurance premium. This, according to many people, puts mutual funds at a disadvantage because unit linked insurance plans (ULIP) offer insurance as well as investment like mutual funds together.
There are schemes that still offer an insurance cover but comply with the main guideline. To understand this one has to look at the fine print of the entire issue.
Offering insurance Presently when a mutual fund offers insurance along with the investment in their specific schemes, the entire situation works in a different way Mutual funds that offer such insurance do not ask the investor to pay the premium.
This means that the funds are offering insurance but are not collecting premium and the later condition is the one that has to be complied with. Currently the funds enter into a tie up with the insurance companies to provide insurance and they pay the cost. This is not collected from the customer. This thus becomes affordable only for those funds that have a strong financial position and this is also the reason why such insurance is offered for specific types of investment.
Collecting premium This can be distinguished from the situation where a mutual fund house collects insurance premium from an individual. This is what has been demanded from several quarters to get the mutual funds back on a level playing field with other instruments in the market.
Once the fund houses start collecting premium, they are effectively giving both the benefits of insurance and investment at a single place and the character of the investment changes. Investors need to look at the fine print because it is this kind of small change that can lead to a different outcome. They need to understand what is happening and how they are getting affected in terms of the benefits received.
PREMIUM DIFFERENCE ¦ Insurance and investments are very popular offer ings in the market ¦ There is a demand for mutual funds to provide insur ance ¦ Currently mutual funds cannot col lect insurance pre mium ¦ So mutual funds offer free insurance to some investors ¦ This is different from a state where they offer insurance too and collect premium for the insurance
What is the fundamental reason why people avoid personal finance?
We can think of three reasons.
One, there is an information asymmetry in this industry. That means that the seller of financial products knows more than the buyer and he uses it to his advantage and not the buyers advantage. The lack of transparency puts off people.
Two, the sellers use a lot of jargons and number crunching which makes people uncomfortable. Probably that’s another reason why people avoid personal finance.
The third reason that comes to mind is of a psychological nature. In Mahabharata, the great Indian epic, there’s a story of a Yaksha who challenges Yudishthira to answer his questions.
What is the most surprising thing in the world was one of the questions. Yudishthira answers that the most amazing thing is that even though every day one sees countless living beings that are old and dying but no one can imagine him/herself as old or taking that last journey!
That’s why people have a natural tendency to avoid financial planning.
Here are the popular posts on India’s first online weekly on personal finance.
Which one is your favorite? Or do you have a question to ask?
Simpla Dollar is an amazing blog on Personal Finance and this post can help all of us deal with our financial fears
I think this is actually a pretty normal thing for most people. We all have areas where we’re less than confident and we all have areas that concern us about the future.
It’s very easy to push these fears aside and just not worry about them, especially if they’re not vital to our day to day life. We’ll tell ourselves, “I’ll think about that later,” and then when it comes up again, tell ourselves the same thing again, until it’s sat around for years, untouched.
This can really be dangerous. Take, for example, my fear of taxes. I’m making myself face this fear this year and that means I’m digging into an uncomfortable subject, saving for the taxes, and paying them when they’re due. If I had taken the “typical” route and worried about it later, I would be suffering dearly when tax time came around.
Here are six alternate tactics to try.
If the India long-term growth story is intact and the Indian market so attractive, why is the penetra- tion of financial products so low? As a case in point, life insurance penetration was at an abysmal 4.1 per cent in 2006-07, while non-life penetration was even lower at 0.6 per cent. Only around 6 per cent of household say- ings are invested in mutual funds while a meagre 3.9 per cent of household savings head towards equities.
The approach towards the spread of financial products has to be like any other large scale social change which essentially entails increasing predisposition towards financial planning, creating enablers to improve affordability and accessibility, share the success with people at large to give a positive thrust towards the cycle of social change.
Thus, governmental agencies, regulators and service providers will have a large role to make this change.
But more important than all those, improved financial literacy will be key Until now, consumers did not have sufficient enough surplus to start thinking seriously about financial planning. In addition, many consumers are still not comfortable investing in equities and prefer traditional forms of investments like gold, property and fixed deposits. By and large, people in our country are encouraged to have a better-safe-thansorry approach in money matters.
On the part of service providers which includes producers and distributors of financial products, we need to engage better with our consumers and help them articulate their long term financial goals. The need to tailormake the approach from a community and neighbourhood perspective will make it easier for customers to see success stories and experiences in their own social setting making the whole movement more believable.
The next step is to provide credible product and solution offerings across loan products, investment products and protection products of life insurance and general insurance. Consumer confidence will be enhanced with the help of hands-on training and guidance. His convenience will be enhanced by easy access to physical branches, user-friendly online access and better use of technology to reach out to a larger base.
To improve affordability it is critical that customers understand their need across various life stages childhood, education, career, marriage, parenthood, homeownership and retirement planning. An improved financial literacy will help them negotiate these needs, and use financial products efficiently and move towards financial independence.
Sundar is a Google Software Engineer and has been selected to IIM, Bangalore’s PGP this year. He had some very interesting questions on personal finance. He wanted to know why people do a shoddy job when it comes to financial planning among other things.
Read my interview at компютриCoffee with Sundar
I enjoyed answering those interesting questions. 
Thanks Sundar
Ranjan's Blog Personal Finance 2.01