LIC Jeevan Anand Policy is one of the most popular LIC Endowment Policy (cum Wholelife). The fact that makes it so popular is the triple benefits the policyholder enjoys under this scheme – death, maturity and post maturity benefits.

Due to its popularity, many advisors recommend Jeevan Anand LIC Policy as a one-stop financial solution to investors. However, an investor should always be informed about the difference between a pure insurance product, a pure investment product and insurance cum investment product (such as LIC Jeevan Anand Policy). Other LIC plans include LIC Jeevan Arogya and LIC Jeevan Nidhi Policy

How LIC Highest NAV Plan Works

So, here’s a quick analytical comparison between LIC Jeevan Anand Policy and a pure investment product – a current top performing Equity mutual fund scheme. For our comparison, we have chosen HDFC Top 200 Fund which is one of the best mutual fund in India – as equally popular as Jeevan Anand LIC Policy

Read: How LIC Money Plus Plan was sold to Layman

Also Read: Have You Ever Read Terms & Conditions of Life Insurance Policy

Conclusion: Therefore, as seen from the above comparison between LIC Jeevan Anand and top performing mutual funds like HDFC Top 200, Jeevan Anand provides more benefits as a life insurance product than an investment product.

Also, the average return of past years and the huge difference in monthly investible amount makes the best mutual funds like HDFC Top 200 superior to Jeevan Anand Plan although Jeevan Anand is attractive considering the triple insurance covers and non-guaranteed bonus available.

LIC Jeevan Anand Policy is not a one-stop financial solution and therefore, needs to be teamed-up with other pure life covers and equity investments to provide maximum advantage to one’s dependents while simultaneously setting aside money for future dreams.

This topic is suggested by one of my blogging friends, Mr. Suresh. from myinvestmentideas.com Generally, people select or choose mutual funds on the basis of past performance, but past performance can’t be taken as a sole indication for future fund performance. Now there are always two things you must keep in mind while you take any investment decision. One is risk and the other one is return. Normally all investors look at the return side of the mutual fund. But you also need to see the “risk” side of the mutual fund also to choose mutual fund portfolio in India. For studying various risk factors, you are required to study these ratios in mutual funds:

Beta in Mutual Funds

To put it in simple and lucid language, a beta of 1 would indicate that the mutual fund would move in line with the benchmark returns that could be Sensex performance. If Sensex gave 15% returns last year and the mutual fund also gave 15% returns, the beta of such mutual fund portfolio would be 1. If the beta of the portfolio is 1.1, this means the portfolio is 10% more volatile than the benchmark index i.e Sensex in this case

• How to select mutual funds

Standard Deviation in Mutual Funds

One of the other risk factors in mutual fund is standard deviation. Standard deviation simply measures the volatility of returns of mutual funds. It measures if the mutual funds are delivering consistent returns or not. To give you a simple example, this year SBI Magnum Emerging Business Fund and Reliance Equity Opportunities performed well, but did they performed well in the past. Are they consistent enough? Debt Funds should have low standard deviation. There are various types of mutual funds – one of them is short term debt funds. Short term funds have lower standard deviation against high risk mutual funds like Media and entertainment mutual funds or infrastructure mutual funds which are highly volatile. To support it with another example, a bluechip stock like Reliance Industries will have low standard deviation as it is less volatile and the price of such stocks doesn’t make 5% ups and downs so frequently. On the other hand, small cap stocks like DCB, 3i Infotech and Lanco Infrastructure would have higher standard deviation because they are more volatile and more prone to big ups and downs as the trading volumes are low. You must also look into mutual fund taxation part while choosing mutual funds

• Best Mutual Funds to invest

Sharpe Ratio in Mutual Funds

If we talk about the sharpe ratio definition, it tells how much more return you can expect against per unit of risk taken. In other words, it signifies how much excess return you can expect per extra unit of volatility. Sharpe Ratio in mutual funds is represented by a single number and tells the risk and return associated with the mutual fund scheme. If you ask me, my main aim of investing is to generate returns in excess of risk free returns i.e 8.5% returns from PPF or from fixed deposits. So if I am looking for returns in excess of risk free returns, it is certain that I have to take certain risk. The more risk you take, the more returns you can expect. It tells whether the mutual fund you want to select is good and the excess returns which you are expecting are coming by taking comparatively less units of risk or not

Read: Other Risk Factors in Mutual Fund

Sharpe ratio can better be used while making comparison with other funds. Otherwise just reading the sharpe ratio of a particular fund might not be that useful to you. But sometimes, you may get biased results from sharpe ratio. If the particular mutual fund is full of banking stocks and they are performing well because of credit policy easing and that mutual fund sharpe ratio would always show better results

Read: I Love FMCG Sector Funds

Treynor Ratio in Mutual Funds

Treynor Ratio definition can be described in a way which tells you the returns per unit of market risk. It is a reward to volatility ratio. It is somewhat similar to sharpe ratio. This measures returns in excess of that which you should have earned without taking any risk like fixed deposit. The higher the treynor ratio value, the better is the fund risk adjusted returns. The only difference between sharpe and treynor ratio is that sharpe ratio uses standard deviation in its denominator where as Treynor ratio uses beta value of the mutual fund scheme.

I hope my readers would take into account the possible risk factors like sharpe ratio, treynor ratio and others also along with looking only at the past return side of the mutual fund

A mutual fund investor earns by two ways by investing in mutual funds. One is the net increase in the NAV of the fund which is called capital gain. Second way is when he opts for a dividend option and earns dividend from the mutual fund scheme. A lot of investors have a query of how these dividends are taxed under the current taxation rules and under DTC i.e Direct Tax Code.

At the current stage, mutual fund taxation goes like this. Dividend from a mutual fund scheme doesn’t attract any tax. Though dividend distribution tax is collected from the fund house which is tax free in the hands of investor and it gets adjusted in the NAV of the mutual fund

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Tax on Equity Funds

Now, as per new mutual fund taxation rules under Direct Tax Code (DTC), dividend income earned from mutual funds may be taxed @ 5% which will be taxable in the hands of investor to be deductible by the fund house before the amount gets credited to your bank account. This 5% deduction can be considered as dividend distribution tax.  Earlier there was no tax on dividend income earned either in the hands of investor or as dividend distribution tax. As far as the long term capital gains are concerned (LTCG), there is no change in DTC and LTCG are not taxed. Short Term Capital Gain (STCG) would be applicable at half the rates which are applicable as per the current income tax slab of 15%

Best Mutual Funds for SIP

Tax on Debt Mutual Funds

There is a slight change in income tax rules on debt mutual funds also. Earlier, there use to be a 14.1625% tax on dividend income on debt oriented mutual fund schemes which includes service tax and education cess and 27.03% on liquid funds as dividend distribution tax. Though, the dividend income was tax free in the hands of investor. But under DTC rules, the income earned as dividend would be added into the income of the investor and would be taxed as per the normal tax rate slabs. It means the tax rate applicable for an investor who comes under 30% slab would be 30% which eats up your returns from debt oriented funds which are already low. The tax rate for LTCG and STCG would remain the same. Short term capital gains would be added in the current income of the investor and taxed accordingly. Looking at the income tax rules on debt funds, a lot of people have question: Debt Funds or Fixed Deposits. I would prefer to go with debt funds especially when interest rates are at its peak.

Tax on Equity Linked Saving Schemes

Furthermore, ELSS schemes will no longer come under 80C deduction and there will be no longer tax exemption under DTC. Under the previous ruling, an individual was able to save tax on Rs 100000 by investing in best equity linked savings schemes.

Then, what can I do?

As the mutual fund tax under dividend option has been raised to 5%, one is recommended to shift his/her investments to growth option where there is no tax as there is no tax on LTCG i.e long term capital gains tax. Moreover, it will also help you in taking a compounding effect on your investments. For a investor, who is looking to invest in debt funds, one must check if he is coming under 10% tax bracket or 30% tax bracket which may eat up his returns.

Today, I got a SMS on my mobile from a LIC agent and I got the following text written in the SMS

“Invest Rs 5000 per month and get

• 12 Lakhs of insurance cover
• 12 Lakhs as bonus
• Rs 66000 as annuity every year till the time you are alive on earth”

Well, like every person, the said offer from this LIC agent looks very lucrative and appealing and the first thought comes to every person’s mind is “Wow, let’s call up the LIC agent and avail this lucrative deal as it is also offered from one of the biggest government organisation LIC

Please Read: How did My Uncle Lost 10 Lakhs in Investing

But in reality, this is nothing but hard core mathematics which you need to understand by doing it on a piece of paper before you buy this offer from LIC. Let’s burst this myth:

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LIC Jeevan Tarang Policy

The said offer in the SMS is actually LIC Jeevan Tarang Policy details. Let’s make some calculations from the above offer that how much you are paying out and what are you getting at the end of the day. We would compare it with vanilla Fixed deposits (not high return mutual funds) in the end and would see, who is making a fool of us, the SMS guy or the FD guys, I mean which is giving us more benefits and money in the end J

Read: Why LIC Agents Pay You Back First Year Premium

I called up the LIC guy (SMS guy) and I told him my uncle want to purchase this LIC Jeevan Tarang plan who is aged 40 and he asked me how much do my uncle need a insurance cover.

I replied around 10-15 Lakhs. He said, your premium amount would depend upon the actual insurance cover you opt for. So for an insurance cover of Rs 12 Lakhs, you need to invest Rs 5000 per month. I got some more details about the plan. They were as under

• Your Input – Invest Rs 5000 as premium per month for 20 years
•  Your First Output – You would get Insurance Cover of the same Amount You actually Invested in Complete 20 Year Tenure

You would get close to 12 Lakhs of insurance cover from Day 1 till your death or 100 years whichever is earlier (The above premium in point No.1 as input is calculated as 5-5.5% of life insurance cover, 5% of Rs 12 Lakhs is Rs 60000 per year or Rs 5000 per month) So in short, you are investing 5% of your insurance cover per year. And you are getting an equal amount of life cover of Rs 12 Lakhs of what you are going to invest in complete 20 years i.e Rs 5000 * 20 years * 12 months equals Rs 12 Lakhs

Read: How much Insurance Do I need

• Your Second Output – You would Keep on Getting Bonus of the same Amount every year of what you are investing each year

Every Year, you would get a bonus of around Rs 50 per Rs 1000 of sum assured or it is rather 5% of the sum assured, that is again Rs 60000 per year and that’s the same amount you invested each year under LIC Jeevan Tarang Policy. This means you are able to accumulate the same amount as bonus, the amount you are actually investing. This amount would keep on accumulating; you can’t withdraw it before the complete tenure. At the end of the tenure of 20 years, you would get Rs 12 Lakhs (a rough estimate) as accumulated bonus and this is the same amount which you have invested in complete 20 years. Means you actually lost nothing as per the LIC guy J

• Your Third Output: You would get annuity of Rs around 5500 per month throughout your life after you stop paying premium after 20 years

You would keep on getting annuities per year @ 5.5% of the sum assured i.e Rs 66000 per year or Rs 5500 till the time you are alive on the earth or 100 years whichever is earlier

After reading the above material, you might be feeling this is the best insurance cum investment offer which the SMS guy might have offered you.

Let’s burst this myth:

To burst this myth, I don’t need to use high return paying products like equity mutual funds or direct stocks. I would use simple and vanilla products

• Bank Fixed Deposits offering around 8.5% returns
• Vanilla Term Insurance Plans which is the cheapest insurance

 Alternate to LIC Jeevan Tarang Policy

• Your Input – Investing Rs 5000 per month for 20 years

How to Plan Rs 5000 Per Month Investments

Now we would divide our Rs 5000 investments per month into three parts so that we can have all three outputs (infact better than that) which we discussed above as per the SMS guy offer

• Rs 450 per month would be utilised to buy online term insurance plan from Kotak to provide same amount of insurance cover which we got in the first case of Rs 12 Lakhs. For this purpose, I have found out the Kotak online term insurance quotes for a 40 year non smoker male, 12 Lakh insurance cover (same amount of cover as per case 1, is quoting Rs 443 including tax per month, Rs 5214 per year)
• Rs 3300 per month would be invested in vanilla fixed deposits to provide a accumulated amount as bonus at the end of the tenure of 20 years
• Rs 1250 per month would be invested in vanilla fixed deposits to provide annuity each year of Rs 5500 each month (the amount which we got in the first case) buying term insurance and investing the remaining amount in buying vanilla fixed deposits

How to choose best Mutual Funds

Note: I am not using high return mutual funds to make it look more lucrative, but I am using risk free instrument i.e fixed deposits

• Your First Output – You would get Insurance Cover of the same Amount You actually Invested in Complete 20 Year Tenure (same amount as Case 1)

Now as we calculated above, we are able to able 12 Lakh term insurance cover from Kotak and that is exactly the same insurance cover which the SMS guy offered us.

• Your Second Output: You would get annuity of Rs around 5500 per month throughout your life after you stop paying premium after 20 years

Now Rs 1250 per month would be invested in vanilla fixed deposits which would accumulate to Rs 7.83 Lakhs after 20 years of tenure. Now this Rs 7.83 Lakhs if again invested in fixed deposits would give you Rs 5500 as annuity each year till the time you are alive on the earth based on 8.5% returns from fixed deposits. Now this annuity is same amount which the SMS guy offered tom us each year after the tenure completion

• Your Third Output – You would get 8 Lakhs More to what You Invested i.e Rs 20.76 Lakhs after 20 Years after Tenure Completion (In first case, we got same amount what we invested i.e 12 Lakhs)

Now here is the big catch

Now Rs 3300 per month if invested in fixed deposits would give you a sum of 20.69 Lakhs after the tenure completion which is Rs 8.69 Lakhs more than what you have got as an offer from SMS guy which was only 12 Lakhs under LIC Jeevan Tarang. So you are able to earn Rs 8.69 Lakhs more than what LIC Jeevan Tarang would have given you

How to become Crorepati in 10 Years

Had I used equity mutual funds to make calculations, you would have been able to accumulate Rs 68 Lakhs (more than half Crorepati) after 20 years along with same Kotak term insurance as compared to Rs 12 Lakhs being offered by LIC  Jeevan Tarang Policy assuming 15% returns

Learning from the SMS

• Apply Your Brain
• Make Calculations OR
• Consult a professional financial planner to assist you before you jump into waters

Happy investing

So you think all this talk of SIP investment plan in equity through mutual fund is all eye-wash? Because market has hardly moved anywhere in the last 3-4 years (Hovering around 18000 to 20000 level, as same as 3-4 years ago), there is no one who has made significant gains in his SIP investment plan. Also because in the same time period, I would have earned handsome returns even if I would have put my investment in safest options such as bank FD or PPF??

Are you one of those people who are surrounded by these irritant facts and had stopped your SIP plans a while ago or planning to discontinue your SIP because you see no sense in continuing with them? It is the right time to burst these mutual fund myths

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Stopping SIP Investment Plan- Example

Firstly, let me tell you some of my assumptions for this article. I have taken an example of Mr Ravi who is investing Rs 5,000 regularly in equity SIP investment plan on monthly basis (SIP hitting on 1^st of every month). To see how he has fared since 01 Jan, 2009; I have assumed his returns in following equity funds (with growth option

Now let’s see how he would have fared and what would have been his returns over different time periods

TOTAL AMOUNT INVESTED with ACTUAL FUND AS OF 14^th OCT, 2012

So we can see a few myths busted right here. In most of the cases, a regular SIP by Mr Ravi in any particular category would have given him better return than PPF or FD or any LIC policy . A better option would have been that instead of investing Rs 5,000 in one category of fund, Mr Ravi have divided those investible Rs 5,000 into Rs 1,000 each in all those 5 funds mentioned above and he would most certainly have beaten all investment options handsomely, without taking any extra risk. Most important thing to be kept in mind is that we are comparing these returns over a period of 3-1/2 years only and not with the time period required for other “supposedly safe” options. As you must be knowing that PPF has locking period of 15 years; any LIC endowment policy is not less than 10 to 15 years; and most of the FDs for higher interest rate require time period of 5 to 10 years

 Finally Stopping SIP Investment Plan- Yes OR No

Do you think that he would have benefited if he would have stopped his SIP just by listening to sundry news? Certainly not! Just to give you an idea, what would have happened to Mr Ravi’s investment if he would have not started them at all at the beginning of the year (01^st JAN, 2012 to 14^th OCT, 2012)

When it comes to analysis of stock market, it is based on two parameters i.e Fundamental Analysis and Technical Analysis of stocks. Fundamental Analysis is an answer to the question of which stock to buy? Fundamental analysis is a study of company financials including balance sheet, profit and loss account for past 5 years future projections, stock price valuations and thus arriving at a decision whether or not to buy a stock or not

What is Technical Analysis

Technical Analysis gives you an answer to the question “When to buy – At what price should I buy a stock” Technical Analysis helps you to trade or invest in stocks in the direction of the trend. This analysis is rather based on the demand and supply factors in the stock market. If the demand of certain stock is high in the market, the stock price would go up and vice versa. The same is the case with technical analysis of Nifty

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I want to share some of my learnings from the Technical Analysis course which I did from Bombay Stock Exchange Training Institute, Mumbai back in 2009. Along with it I also did Fundamental Analysis Training and Mutual Funds Training from Bombay Stock Exchange, Mumbai

Why do Share Tips Don’t Work

Technical Analysis Course Learnings

Some of the learnings from this technical analysis training course are as follows:

Technicals Do Work on Long Term Charts

There are a lot of traders who analyze markets studying short term charts i.e hourly charts, 5 min chart and try to trading intraday trading studying short term charts. If you ask me, technicals work better if you study long term charts i.e you study daily charts for one year or two year rather than studying short term charts and drawing conclusions from last 5 days price movement. I have seen many stock prices stopping at the same highest point where it stopped a year back and thus forming long term resistance level and same is the case with stock support levels where stock price stops at the same low point where it stopped a year back. The same rule apply for commodity markets also

Why can’t I become successful stock market trader

Buying All Time High Breakouts is the Best Trading Strategy

If you are a trader, the best strategy for day trading to be followed to make money is buying stocks crossing all time high levels with significant volumes on long term daily charts. You also need to look at the general trend of the stock market as a whole while using this strategy. The most important thing to notice over here is that the stock price must close above the previous high rather than stock price trading just for hours above the previous high

Technical Analysis also Helps Investors along with Traders

Yes, you can also take your investment decisions based on technical anslysis. But I would always advise to look at candlestick price patterns only on the long term charts using a daily chart. If you want to buy a particular stock for investment, you may look at the price if it is stopping at the previous low point and can look to buy it from that support point. Technical analysis also helps investors not to buy long term down trending stocks looking at the technical charts

Become Crorepati in 10 Years

Moving Average Crossovers Can Give Good Trading Signals

From this session delivered by Vishal Malkan, one more learning was- moving average crossovers can give good trading signals. 5 and 35 day moving average crossover can help you initiate buy positions and sell positions. When a 5 day moving average line crosses 35 day moving average line from below, this gives a buy signal and vice versa. I know this is quite difficult to understand for those who have never heard of these terms.

You can study technical analysis price charts at icharts owned by Mr. Sridhar. You can also buy paid technical analysis software like Metastock & Spider software

I always support this notion “Stock Trading is more of a mind game” And 90% of the actions which you take in stock trading is based on your psychology which is not towards the right direction for most of the times.

A simple example to quote over here is as a stock trading tip: If I bet on Rs 10 and I bet on Rs 100 on Rs 1000 of trading capital. In first case, I have the opportunity to lose 100 times in a row to make my trading capital nil. In second case, I need 10 losing trades to make my trading capital zero. Naturally, a series of 10 losing trades is likely to come sooner than 100 losing trades. Stock Trading industry works hard to reinforce this delusion that winners in stock markets get money lost from the losers of the stock market. Cocky amateur stock traders take wild positions (means having Re. 1 in pocket and taking a position of Rs 100 in stock market) and thus creating commissions for stock brokers and profits for other successful traders. When they blow themselves out, a new set of amateurs come in and gift their share trading capital to professional traders. They want to work on stock trading tips

Image Source: Flickr

Read: Why Do Share Tips Don’t Work

Stock Trading Tips to Learn

• You can’t have 10/10 successful trades
• You can’t become a successful trader working part time. This is my personal experience too

Also Read: Why Can’t You Become a Successful Stock Market Trader

Money Management Rules

Survival First

The very first rule of money management is survival first. Avoid those risks which can put you out of your business. The second goal of yours while learning stock markets should be steady returns. Take small positions. Don’t take positions of the value of 5 times your trading capital which generally happens with futures contact. Normally online, intraday stock traders tend to lose because they put their entire capital in a single trade

Read: How Did My Uncle Lost 10 Lakhs in Stock Markets

Reason:

• If you lose 10%, you need to gain 11% to get your lost money back
• If you lose 50% in a single trade which generally happens in a futures contract (if you lose 5% on a trade and the futures contact is 10 times your trading capital or margin money, you ultimately loses 50% (10*5% = 50%), you need to gain 100% to get your lost money back

The second bullet point stated above happens a lot with amateur traders or the traders who are trading for the first time who normally are lala businessman. You must know in advance what is your maximum risk or loss from the trade and at what point you would prefer to cut your losing position

Note: Professional Traders tend to run as soon as they smell that their trading position has broken some important support level where as layman traders just hope, hope and keep hoping for their stock prices to go up.

Get Rich Slowly

Normally institutional traders who trade for their foreign clients prove to be much more successful than an individual trader because an individual trader always treats stock market as a casino and take wild positions as he is not owing to any boss who would enforce discipline on their trading style. An amateur intraday trader wants to make his trading capital from 10 Lakhs to 50 Lakhs in one year which means a profit of 400% in a year. Personally, I have not seen any such good investment avenue or any such business which can offer such exceptional returns. He is just like a teenager who runs into Bollywood to become Pop Singer overnight.

Amateurs often ask people “How much return annually can I expect from trading” But I have never seen any amateur trader asking this question “How much will I lose before I stop share trading” If you take care of controlling loses by applying stop losses, profits would take care of themselves. If you earn 30-35% annual returns, your friends and relatives would run after you to handle their portfolio

Stock Trading Tips: Set realistic goals and become a successful stock trader!

With the recent boom in the stock markets, retail investors look like coming back to the financial markets by investing in equity mutual funds in 2013 either in lumpsum fashion or by SIP in mutual funds. Now a lot of working professionals and lala businessman generally buy mutual funds by calling up some nearby mutual fund agent. Now there are two sides of the coin. On one side, there is your hard earned money and on the other side of the coin, there is your mutual fund agent who has just cleared simple & basic mutual fund course AMFI module. Now can you dare to take decisions on your hard earned money based on his advice or can he suggest you top mutual funds to invest in India in accordance to your financial needs

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Read these three points and take your independent decision to see if he can manage your mutual fund portfolio or not:

He would sell you Top Mutual Funds Based only on Past Performance

When you call up your mutual fund broker and he would generally ask you to buy certain mutual funds on the basis of past performance. He would show you the mutual funds sheet which would be headed by “Top 10 Mutual Funds in India” based on 1-3 year return and ask you to invest in these top mutual funds in India only on the basis of past performance. Well, past performance of a mutual fund is never is a guarantee for future performance. There are a lot of other things to be considered while buying or selecting mutual funds:

• Studying the objective of the mutual fund
• Size and age of the fund, the greater the size and age of the fund, it gives better chances for the fund to perform better
• Fund Manager who is managing the fund is most important because it would be his decisions on which the mutual fund portfolio decisions would be taken. I personally favour funds managed by fund managers like Mr. Madhu Kela (now he is at a much senior designation at Reliance MF), Mr. Sunil Singhania from Reliance Mutual Fund and Prashant Jain and Chirag from HDFC Mutual fund
• Percentage of equity and debt in the portfolio and diversification across various sectors
• Sharpe Ratio and Standard Deviation tells you the volatility of the mutual fund portfolio against the benchmark index

If Equity Mutual Funds give 15% in Long Term – He would commit 15% in Short Term

Normally as per advice by various fund managers, one should expect around 15% annualised returns in the long run i.e if invested for a period of more than 5 years. But your mutual fund agent would commit you 15% annualised returns even in shorter time frame i.e less than 1 year which may or may not be possible so that he is finally able to sell you mutual fund and he get his commission

If equity markets have performed well in the recent past i.e 1 year after the downtrend got over and equity funds gave 30% returns in past one year but the past 5 year performance of the same fund shows 14% annualised returns. In such a scenario, your advisor would show you last one year return of 30% and sell you mutual fund based on past one year return of 30% and commit you 30% return in long run which is quite impossible

He won’t ask you about your Financial Goals

If you are investing in best mutual funds, this doesn’t mean you are fully planned for your retirement and other financial goals. Your mutual fund agent would never invest keeping in view your personal financial goals like buying a house and retirement planning. He would just ask you to fill application form of best mutual fund based on past performance. If you are investing in top mutual funds without considering your financial goals won’t help in long run in creating wealth or fulfilling long term financial goals

A lot of investors have learnt the importance of staying long term invested in financial products. They have also learnt about the power of compounding which takes effect in the later part of your investment, may be after 5 years of investment. In the process, they tend to forget about their investment and get busy in their personal family life, their child education, their job or business.

But this “buy and forget” strategy can backfire, sometimes. Let’s take the example of Mr. Anil Seth from Pune who is a businessman dealing in iron rods. He invested Rs 50000 in a 5 year fixed deposits from HDFC Bank 7 years ago after considering fixed deposit interest rate. As per advice by his friends, he invested in fixed deposits and had forgotten about it. Now all of a sudden when he thought of his investment in fixed deposits after 7 years (earlier he invested for a period of 5 years), he approached his bank and got his principal plus fixed deposit interest back. But an important point to note over here is that he lost his fixed deposit interest payments of two years as his FD had matured two years back and HDFC bank refused to pay him interest for last two years

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Auto Renewal or Auto Termination Facility in Fixed Deposits

Whenever you invest in fixed deposits, there are two options in front of you, one is termination of fixed deposit account on completion of tenure and the second is auto renewal facility. Now opting for auto renewal or termination can both be tricky at times. If you opt for termination after the fixed deposit term, you may lose out on interest after the term completion if you forget to approach your bank on time as in the case of Mr. Anil Seth. On the flip side, opting for auto renewal facility can land you in a situation, where you did not get any time to rethink and opt for some other financial products like Fixed maturity plans (FMP) or balanced mutual funds and thus have had to stick to FDs for additional five years.  This means you have your money parked in fixed deposit investments for 10 years, as in the case of Mr. Anil Seth.

However, auto renewal facility in fixed deposit investment may not score well as after 5 years the fixed deposit interest rates might have gone up with the increase in the Repo and reserve repo rate by RBI. This difference between fixed deposit interest rates can be anywhere between 1-3%. In this case, he might lose out on the opportunity to enjoy better rate of interest. A difference of 2% will take one and half years lesser to double his money. At 10% fixed deposit return, your money gets doubled in 7.3 years and at 8% fixed deposit return, your money gets double in 9 years.

Another point to note over here is premature withdrawal of fixed deposit attracts a penalty which can hamper your fixed deposit returns which are already low and doesn’t beat inflation in the current inflationary environment.

Conclusion

Though fixed deposit investment is one of the most simplest and traditional mode of investment but making money is never easy. One has to track his fixed deposit investment after every year. One must remember or take a note of the maturity dates of his fixed deposit investments. Second thing to take care of is the interest rate cycle in the economy and the changes in the RBI credit policy every now and then. An investor must shift his fixed deposit investment in some other scheme if the fixed deposit interest rate has gone up during the end of the tenure of his investment 

Income Tax is a combined tax on the total income of a person earned during a period of one year. There might be cases where a person has different sources of income under the same head of income. Similarly, he may have income under dissimilar heads of income. It might also happen that the net result from a particular source/head may be a loss. There can be set off and carry forward of losses against other sources/head in a particular manner. This is all needed when you are going to file Income Tax Returns

Set Off and Carry Forward of Losses in Business

Example - Where a person carries on two businesses and one business gives him a loss and the other a profit, then the income under the head ‘Profits and gains of business or profession’ will be the net income i.e. after the adjustment of the loss. Similarly, if there is a loss under one head of income, it should normally be adjusted against the income from another head of income while computing the Gross Total Income, of course subject to certain restrictions. These provisions for set off  and carry forward and set off of loss are contained in sections 70 to 80 of Income tax Act

Clubbing of Income Rules

There are whole lot of combinations when it comes to adjusting profits and losses intra and inter heads, I shall bring to you some very important ones which are practically very significant

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Steps in Set Off and Carry Forward of Losses

Before we get any further, let’s understand the steps that need to be followed for carrying out this calculation. Briefly, it’s about three simple steps –

1. The profit/losses arising from different sources but same head, should be adjusted
2. If you have any loss remaining to be set-off under step 1, you can now adjust with profit under other heads in the same assessment year.
3. If you have any loss remaining to be set-off after step 2, you will have to carry forward that to next year.

Below listed are important set-off and carry forwards combinations you must keep in mind before claiming set-off and carrying forward losses –

1. Long term capital loss can be set off only against long term capital gain. However, short term capital loss can be set off from any capital gain (long-term or short-term)

Situation I                                                       Situation II

Short-term capital gain   (-) 2, 00,000    (+) 5, 00,000

Long-term capital gain   (+) 5, 20,000    (-) 1, 80,000

Save Long Term Capital Gain Tax

Solution:

In situation I, short-term capital loss of Rs. 2, 00,000 will have to be set off from long term capital gain. Hence, the net long-term capital gain in this case shall be Rs 3,20,000.

In situation II, it is not possible to set off long term capital loss from short-term capital gain. Hence, short-term capital gain of Rs. 5, 00,000 shall be taxable and Rs. 1, 80,000 of long-term capital loss shall have to be carried forward

How to calculate Long Term Capital Gain

2. In case of Inter-Head adjustment, any capital loss, whether short-term or long-term, shall not be allowed to be set off against income under any other head. It shall however be allowed to be carried forward.

3. From the Assessment Year 2005-06, any loss under the head ‘Business and Profession’ cannot be set off against income from ‘Salaries’. However, it can be set off against the Income from any other head.

Income from salary                                     2, 00,000            2,00,000

Income from Bus/Prof                               (-) 50 ,000          (-) 50 ,000

Income from House Property                            -                    80,000

Solution 

In situation I his GTI would be 2, 00,000 and his loss from business and profession will be carried forward ( any loss under the head Business & Profession cannot be set off against any income from Salary).

In situation II business loss can be set off against income from House Property and his Gross Total Income would be Rs. 2, 30,000.

4. All losses are not allowed to be carried forward. Another very important aspect is that in case of carry forward, losses can be only set off under the same head of income only. Inter head adjustment is not allowed.

Only the following losses are allowed to be carried forward and set off in the subsequent years.

a) House property loss

b) Business loss

c) Speculation loss

d) Capital loss

e) Loss on account of owning and maintaining race horses

Hence any loss under the head income from other sources is not allowed to be carried forward (except race horses).

5. A loss under the head house property will be allowed to be carried forward for 8 assessment years to claim it as a set off in the subsequent years under the head Income from house property

6. Business losses can be adjusted only against business income:  Business income may be from the same business in which the loss was incurred, or may be any other business.

Duration of Set off Losses

Now the question that arises is how long i.e for what period can we set off and carry forward of losses can be done. Lets understand –

Each year’s loss is a separate loss and no loss shall be carried forward for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Therefore, a loss of previous year 2002-2003, i.e. assessment year 2003-2004 can be carried forward till assessment year 2011-12. Besides the above, the following can also be carried forward indefinitely, as per income tax law:

i) Unabsorbed depreciation

ii) Unabsorbed capital expenditure on scientific research;

iii) Unabsorbed expenditure on family planning