Debunking myths about life insurance
Life insurance is an invaluable financial safeguard that ensures your and your family’s financial well-being. Despite its critical role, several misconceptions about life insurance often stand in people’s way, which hinders them from making well-informed financial decisions.
In this blog post, we’re going to address some of the most common myths that surround life insurance and debunk those. By debunking these myths, we aim to empower you with a deeper understanding and the genuine value and benefits life insurance offers.
Myth Number 1: I don't need life insurance! I'm single, young, and healthy.
Whenever we hear the term “Life Insurance,” we often think of it as a product we will need in the future, and we plan to invest in it someday—but not today.
But you know what? Life is uncertain. Even those in the prime of their youth and health are not immune to fatal accidents. When you’re just starting your career, building a large pool of funds is not easy. In such cases, life insurance acts as a financial safety net for your family, ensuring they aren’t left in a financial bind.
Investing in life insurance early on, as soon as you begin earning, allows you to secure extensive coverage at a more affordable rate.
Myth Number 2: Your employer's insurance is all you need
Coverage through your employer lasts only as long as your employment does. Once you depart or retire from the company, your insurance ends. If the company faces financial difficulties, there’s a risk it might cancel or diminish your policy, leaving you vulnerable when you most require coverage.
While the insurance provided by your employer might seem adequate during your younger, healthier years, especially if you’re currently free of major responsibilities. Often, such employer-sponsored insurance only offers a death benefit, leaving you without financial support in retirement unless you have other savings or financial strategies in place.
To ensure you and your family’s financial security, it’s wise to obtain a customised insurance that’s tailored to your long-term requirements. Opt for a policy that provides financial stability throughout your life and ensures your family is taken care of financially should anything happen to you.
Myth number 3: Life Insurance is valuable only after the policyholder dies
Life insurance is much more than a death benefit. Depending on the chosen plan and its features, it can offer various other benefits to your family. For instance, retirement plans from life insurance can support your financial independence in old age.
Term insurance plans include critical illness riders which cover costly medical treatments. Endowment plans can be an effective way to accumulate assets. Thus, investing in life insurance is not just beneficial for your nominees but can also enhance your financial well-being during your lifetime.
Myth number 4: Holding health insurance is enough and you don’t need a life insurance
Life insurance and health insurance cater to distinct needs. Life insurance guarantees a death benefit to the nominees after the policyholder’s demise, providing financial security for loved ones left behind. Health insurance, in contrast, offers financial relief to the policyholders themselves in case of sickness, accidents, or particular health challenges, through direct financial assistance.
Both types of insurance play critical roles in a comprehensive financial plan and should be acquired promptly to ensure full coverage and peace of mind.
Myth number 5: Life Insurance policies are complicated and get rejected
Today, the internet has revolutionised every aspect of our lives. Gone are the days when you had to rely solely on agents. Before choosing an insurance policy, examine the claim settlement ratio and solvency ratio of the insurer.
Higher ratios indicate a stronger likelihood of the insurer fulfilling its claim obligations. Aim for an insurer with a consistent CSR above 95%. The CSR for any insurer can be verified on the IRDAI’s website.
Once you’ve compared insurance providers online, simply navigate to your chosen insurer’s website. Complete your KYC and purchase the policy. You can also complete this process on Floatr’s mobile app as well.
Conclusion
Financial planning involves setting several goals. One such goal is to secure your family’s future even when you’re no more. Hence, it’s important to grasp the reality behind myths about life insurance.
It’s important not to let false beliefs deter you from exploring the benefits of life insurance. You must dedicate time to research your options, seek advice from experts, and select a policy that best suits your individual needs and situation.
Frequently Asked Questions
Why should I consider life insurance if I’m young?
Even if you’re young, life insurance is crucial due to life’s unpredictability. It can provide a safety net for any future dependents, cover potential debts, and secure a lower premium rate early on.
How do I choose the right amount of life insurance coverage?
The ideal coverage amount varies per individual, but a common recommendation is to have a policy worth at least ten times your annual income.
What happens to my life insurance if I change jobs or retire?
Personal life insurance policies are not tied to your employment status, so they remain in effect regardless of job changes or retirement, as long as premiums are paid. However, life insurance through your employer ends when you leave the company.
Can older adults still buy life insurance?
Yes, many insurance companies offer life insurance products designed for older adults, including whole-life policies and immediate annuity plans for retirement.
How can I ensure my life insurance claim will not be denied?
To minimise the risk of a claim being denied, be truthful and thorough when applying for a policy. Disclose all relevant health information and lifestyle habits. Choosing a reputable insurer with a high claim settlement ratio also helps ensure that your policy will be honoured.
Consequences of not owning a life insurance
Living life with optimism is a good way to lead life, and preparing for any unforeseen circumstances beforehand makes life even more stress-free. However, the spectrum of unforeseen events can be wide, and we may not always know the nature of these events.
The least we can do is to be prepared for such events financially. One product that helps you prepare in advance is life insurance. In this blog, let us explore a few consequences that can arise if you don’t invest in a good life insurance policy.
Scenario 1: Leaving your Family under huge Debts
It is possible that you took a few loans in your lifetime to provide for your family. It’s justified to take a few loans but what’s not justified is leaving behind those debts for your family.
Without you, these obligations continue, piling up debt. Without the right life insurance, your family could face not only the grief of loss but also the relentless pursuit by debt collectors. Many Indian generations have faced the problem of a debt trap as their families owe huge sums of money to lenders. It is advisable to opt for a comprehensive life insurance plan that covers death and total and permanent disability so that you can leave a legacy of love, not debt.
Scenario 2: Not Protecting Your Loved Ones After You're Gone
If you are the sole provider for your family, you need to have a plan for them after you’re gone. Imagine the sad setting that already exists which is further exaggerated by lack of funds.
The solution is for you to invest in life insurance. It isn’t for you alone; it’s a wise step to ensure your family’s well-being even in your absence. With life insurance, you can safeguard your family’s future, ensuring continuous support for your child’s education and providing your spouse with financial stability during tough times.
Scenario 3: Overwhelmed by Taxes? Having a Life Insurance Policy could be a Relief!
Purchasing life insurance presents a strategic advantage as it grants you a tax deduction under Section 80C of the Income Tax Act of 1961. The payout you receive upon the policy’s maturity is also tax-free under Section 10(10D).
Nobody wants to pay taxes on their income. By saving your money through the right channels you can save on your taxes today and prepare for your family’s future tomorrow.
Scenario 4: Being Financially Dependent on Your Family in Your Retirement Years
Retirement is often seen as the golden phase of life, and you should enjoy it thoroughly. However, for many people above the age of 60, this period is marked by heavy dependence on their children and other family members, signifying a total loss of financial independence.
To avoid becoming financially reliant on your family in your later years, it’s crucial to plan for your retirement early. This includes investing in a robust life insurance policy that will support you in your golden years.
Consistently investing over time is a wise strategy for retirement savings, allowing your funds to accumulate and grow through compounding interest.
Scenario 5: Delaying Life Insurance Can Cost You
Delaying the purchase of life insurance only leads to higher costs. The best time to buy is when you’re young, healthy, and have a clean family health history, as premiums are more affordable. If you wait until the age of 50 to buy life insurance, the premiums become very expensive and can pinch your pocket.
The benefits of an insurance policy are innumerable and only time can help you understand its importance. But we do hope it’s not too late before you can understand the importance of having a life insurance policy in place.
Concluding thoughts
In summary, India offers a diverse range of life insurance options, including term, unit-linked, and endowment plans. The essential step is choosing a policy that matches your financial situation and goals.
Evaluate your finances, considering debts, expenses, and future needs. Aim for coverage that is 10 to 15 times your annual income and compare quotes from different insurers to find the best rates. This approach will help you secure favourable life insurance terms and ensure that your family is financially protected.
New NPS Partial Withdrawal Rules 2024: Details, Eligibility, and Application Process
Starting your journey towards retirement planning with the National Pension Scheme (NPS) can be a wise move for securing your financial future. NPS comes with considerable perks, like a monthly pension post-retirement, which is eligible for tax deductions. As you navigate how NPS works, understanding its intricacies becomes pivotal.
Recently, the Pension Fund Regulatory and Development Authority (PFRDA) introduced new guidelines for partial withdrawals, effective from February 1, 2024. These rules, aiming to streamline NPS partial withdrawals, bring changes to how you can access your investments.
So, what are the new changes in NPS partial withdrawals, and how can you access them? Let us find out.
How does the National Pension Scheme (NPS) work?
The National Pension Scheme, or NPS, is a long-term retirement savings plan that increases your pension wealth through effective investment over your tenure in the scheme. With NPS, you access an affordable, tax-efficient retirement savings account that is adaptable and easy to manage. You contribute to your retirement fund, and your employer may also contribute to your social security, which gains returns over time.
NPS operates on a defined contribution basis, meaning there is no guaranteed benefit upon exiting the system. So, the more you invest, the more your investments grow, and the longer they accumulate, the greater your eventual pension wealth is expected to be. The age of superannuation, or maturity, ranges from 60 to a maximum of 75.
Upon turning 60, you have to use a minimum of 40% of your pension savings to buy an annuity for a monthly pension, with the rest as a lump sum. However, if your total savings are less than or equal to Rs. 5 lakh, you can withdraw the entire amount. If you exit before 60, 80% goes to the annuity, with the remainder as a lump sum, and you can exit the NPS after 5 years. If your savings are less than or equal to Rs. 2.5 lakh, you can withdraw 100% of the amount. In the event of the account holder’s death, the entire savings go to the nominee or the legal heir. However, if you do not wish to withdraw any amount at 60, you can opt for continuation until 75 years of age.
What are the new NPS rules for partial withdrawal in 2024?
On January 12, 2024, the Pension Fund Regulatory and Development Authority (PFRDA) released a master circular stating the new NPS partial withdrawal rules. According to the new rules, effective February 1, 2024, you can only withdraw a maximum of 25% of your investments, excluding your employer’s contributions and any investment returns.
This partial withdrawal is only permissible after your account has aged 3 years, and you are limited to three withdrawals during the entire tenure. Following your initial withdrawal, subsequent withdrawals can only occur after 5 years and are limited to your additional contributions. However, this 5-year gap does not apply in cases where a withdrawal is made for the treatment of specified illnesses.
Let us understand with an example.
If you invested Rs 300,000 in the initial 3 years of your NPS investment, you qualify for a loan of 25% of that amount, which equals Rs 75,000.
A second withdrawal depends on the corpus invested between withdrawals. So, if you have already withdrawn Rs 75,000 initially and subsequently invested another Rs 400,000 over the following 5 years, you can only withdraw 25% of that new amount, not the entire sum. This means you can withdraw Rs 100,000 during your second withdrawal.
What are the eligibility criteria for NPS partial withdrawals?
Although you can withdraw up to 25% of your NPS investment, there are limitations to the purpose of these withdrawals. You can only withdraw an amount for the following purposes:
- You can fund your child’s future education or cover their wedding expenses. This includes legally adopted children.
- If you are buying your first independent or joint house, you can use your NPS funds. However, this is not applicable if you already own a house under your name.
- You can finance medical conditions such as cancer, kidney failure, pulmonary arterial hypertension, surgeries, strokes, coma, life-threatening accidents, and COVID-19, to name a few. This also includes hospitalisation and treatment expenses related to these illnesses.
- This coverage extends to disabilities or incapacitation, covering your medical and incidental expenses.
- You can use the funds for your skill development, re-skilling, or other self-development activities.
- You can also establish ventures or startups by using your NPS for financial aid.
How to apply for a partial withdrawal from NPS?
To apply for a partial withdrawal from your NPS, you need to submit a withdrawal request accompanied by a self-declaration stating the purpose of the withdrawal. This request should be submitted to the central recordkeeping agency (CRA) through your Government Nodal Office or Point of Presence. If you are suffering from any illness specified in section 6(d) of this master circular, a family member can submit the withdrawal request on your behalf.
Upon receiving your withdrawal request, the Point of Presence or Government Nodal Office will identify the beneficiary. The CRA will process partial withdrawal requests only after successfully verifying your bank.
Conclusion
While you might be eligible to enjoy the benefits of partial withdrawals from an NPS, remember that the primary objective of an NPS is to financially secure you during your retirement. Every withdrawal you make reduces the corpus you receive after maturity. So, it is advisable to be mindful of your withdrawals and only turn to your NPS when they are extremely urgent.
You can secure yourself financially with other options like health insurance and life insurance, which provide financial aid when necessary. The NPS has significant long-term benefits, considering the tax exemptions and returns, so make sure you manage it wisely.
Need help planning a financially secure retirement? FloatR is here for you! We offer a wide range of investment solutions and expert guidance right at your fingertips. Download our app or give us a call to contact our experts, and let FloatR guide you to a secure and fulfilled retirement!
Dividend vs. Systematic Withdrawal Plan (SWP) in Mutual Funds. Which One is Better For You?
Mutual funds are a great investment option when you want to see compounding growth and steady cash flow for your retirement. A steady income is crucial in old-age and dividend plans, and SWP can provide you with the financial support you need.
However, what is perfect for you depends on your required financial support, investment choices, and market conditions. It is important to go for low-risk options during retirement so your existing finances stay safe while you still enjoy gains.
So, out of dividends and SWP, which one is the right choice for you? Let us answer your questions.
A brief idea of dividend plans
A Dividend Plan (referred to as IDCW now) is a mutual fund option that provides investors with regular dividend payouts from the fund’s earnings. These dividends are disbursed from the profits generated by the mutual fund itself. Dividend plans depend on capital appreciation and payouts for regular income. The AMC decides the frequency of dividend payouts, which can be weekly, monthly, or even annually.
There are no fixed dividends since they depend on market performance and profits incurred. However, the company may also choose not to pay dividends, depending on the profit generated.
A brief idea of systematic withdrawal plans
Systematic withdrawal plans allow you to withdraw a fixed amount of money from your mutual fund investments. You can decide the frequency from weekly, monthly, and quarterly to annual withdrawals according to your financial needs.
The amount on these withdrawals is fixed, so the market volatility does not affect your income. SWP provides you with more control over your finances and is a less risky option.
Differences between dividends and systematic withdrawal plans
Portfolio impact
If you opt for a dividend option for income, the net asset value(NAV) gets affected. However, the number of units you hold stays the same.
SWP does not affect the NAV, but the regular withdrawals reduce the fund units eventually.
Cash flow
Cash flow from dividends depends on the market and the asset management company. Hence, you have no control over the amount of money you receive, when you can receive it, or stopping the inflow when you do not require an income.
SWP offers you the flexibility to choose the time and amount of cash withdrawal, with complete controls to stop it whenever needed.
Taxable income
When you invest in mutual funds, dividend funds are taxed based on income tax slab rates. If you receive dividends totaling more than Rs 5,000, 10% TDS will be deducted as tax before you get the money.
However, when you withdraw money using SWP, you will be taxed based on the capital gains, which vary depending on how long you have held the investment and the type of mutual fund you have chosen. The amount of tax you pay is also determined by the number of units you redeem.
Reasons why a systematic withdrawal plan is better than a dividend plan
Control over cash flow
Since SWP provides you with a fixed amount, you have complete control over your withdrawals according to your financial requirements at the time. The fixed payout also ensures complete repayment of your investments with returns in the long run. This security makes it ideal for your retirement plans.
Avoids risk
SWP is low-risk compared to dividend plans, which are entirely dependent on market performance and company profits. SWP allows you to withdraw a predetermined amount irrespective of what the current market conditions are, providing a secure platform for your finances.
Lower taxes
Amount received as dividend is fully taxable as per your personal tax slab. If you qualify for a higher tax slab, dividend income could be more expensive for you since it is taxed based on slab rates. However, SWP from an investment is taxable only to the extent of the actual gains and not on the full amount. If the SWP is from equity funds, long term gains will be taxed at a lower rate of 10% and short-term gains are taxed at 15%.
If you sell stocks at a loss, you can also use those losses to reduce taxes on any profits from selling assets for the next eight years. This makes SWP a better option for short- and long-term gains. However, it is important to remember that these tax exemptions only apply to equity funds, and debt funds are taxed as per the slab rate.
Conclusion
Whether you are planning for retirement or looking for options to earn an extra regular income, systematic withdrawal plans are the clear winner for you. They offer security, providing you with steady financial support to help you manage your monthly expenses better. However, remember to be aware of all your financial decisions and act according to your risk appetite to leverage your options the best.
Need help understanding what plan is suitable for you? Reach out to the experts at Floatr and get the financial investment assistance you need. Download our app or give us a call to start your investment journey today.
Including Women in Financial Planning for a Future-Ready Society
Women in India have made strides, proving their capabilities and claiming an equal stance in society. However, when it comes to finance and investment, the situation still favours males. Women are more likely to save money than men, but when it comes to investments, women aren’t involved enough. It should come as no surprise that if the goal is to make India a $5 trillion economy by 2025, the women and men of India need to work together. But after all the progress women are making today, what is holding us back from being a financially inclusive society? Let us find out.
The current state of women in the workforce
The participation of women in the workforce in India is 22.3%, which is lower compared to the global average of 47% in 2022. Women also face higher rates of part-time employment and are more likely to take career breaks for personal responsibilities like caring for their children or parents. These factors contribute to a significant wealth gap between men and women, who eventually have lower savings, investments, and retirement funds compared to their male counterparts.
Challenges women face in financial planning
Social inequality
Many families in India have a male as the head of the family who makes all the decisions for the women in the family. According to the National Family Health Survey (NFHS 2019-21), 85% of working married women aged 15-49 participate in deciding how to utilise their earnings, but only 18% of them have the last say.
Financial planning has always been considered men’s expertise, and even women with accomplished careers rely on the males in their families to make investment decisions. Women are often discouraged from voicing their opinions on the family’s future financial plans and sometimes even restricted from working. This deprives women of the authority to plan their financial future.
Gender wage gap
According to a report by the ADP Research Institute, 82% of workers aged 18-24 believe that there is a gender wage gap in the Indian workplace. Women are often paid less and, hence, can spend less and invest less, not having a chance to grow their finances.
Apart from the wage gap, women also face a lack of opportunity where they are diverted from leadership roles simply based on their gender. The belief that men are better leaders persists in many workplaces despite women constantly projecting competitive results.
Lack of financial literacy
Financial literacy is not yet part of the Indian education system, which affects both men and women, but it affects women more than men. A study by LXME’s Women and Money Power Report 20222 suggested that 49% of women in India don’t invest at all, either because of a lack of awareness or fear of risks.
Women end up choosing investment options like fixed deposits or just keeping their money confined to their savings accounts. This diverts them from the benefits of better investment options like stocks, mutual funds, and other compounding options that might be much more beneficial for future financial security.
Higher life expectancy
Women live longer compared to men, and that often forces them to manage inherited finances after their spouse passes away. Since they have little to no awareness of these responsibilities, they get overwhelmed and miss out on opportunities meant to help them.
For example, many women might not be aware of how to claim their husband’s life insurance, or pension funds, or claim ownership of other assets. In some cases, they also fall prey to others seeking advantage of their lack of financial knowledge.
Bias in financial services
Not seeking enough professional guidance is a problem, but there is another side to it. Many women feel like they get looked down upon when seeking financial advice from professionals. Their lack of knowledge and confidence leaves them feeling intimidated, leading to decisions that are not beneficial for their financial growth.
Solutions to overcome these challenges
Financial education
Financial literacy is a key aspect that needs to be focussed upon to empower women. Financial advisors can be considerate and educate their clients about their current financial situation, their best investment options, and how these decisions will benefit them in the future. Financial literacy also boosts confidence, encouraging women to further take charge of their financial plans.
Equal pay and opportunities
According to the International Monetary Fund (IMF), if we can achieve gender equality and equal participation of both men and women in our workforce, India’s GDP could grow by 27%. Women have consistently proven their potential by handling C-suite positions in global companies, but that is just a small percentage.
Separate financial plans
Life is uncertain, but your finances don’t have to be. Families can focus on having a joint account where both the partners contribute towards monthly expenses along with having separate accounts for themselves.
This helps both equal control over how they choose to spend or invest the money that they earn.
Social Mindset
External changes do not matter until there is a change in the mindset of individuals. Most women lack the confidence to own their finances because they are assumed incapable of making wise financial decisions. Families need to involve the women in the house to manage family finances without understating their opinions and helping them be more financially capable.
Results of women being aware of financial planning
Economic growth
As individuals grow financially, so does the country’s economy due to an increased buying capacity, taxes, etc. Similarly, when women are treated equally and are aware of the benefits of financial planning, they are encouraged to participate more in the workforce, elevating their financial strength.
A bigger workforce means more taxpayers, which directly affects the GDP growth of the country. Hence, women involved in financial planning not only uplift personal finances but the economy as a whole.
Improved security
Financial awareness secures long-term finances while also ensuring the social security and dignity of a woman. According to an article published by Rights of Equality, women who are financially aware find it easier to leave abusive households due to their financial backup. It also gives them the confidence to build a life for themselves and their family with a secure financial future.
Role modelling and leadership
The majority of women in India have their children’s education as their top priority. Women’s inclusion in financial planning not only helps this motive but also makes them a role model for the children who grow up with the same ideals. Taking charge of their finances also affects their leadership skills since they become more responsible and informed through the process.
Conclusion
Women make up nearly half of the population of the country, making their contribution extremely crucial for national growth. Although the inclusion of women in finance is a step towards financial independence, it is also the start of a social change in our journey towards ending gender discrimination.
In current times, financial security should be non-negotiable for any individual. If you are a woman who hasn’t taken that step yet, start reaching for your financial security and freedom today.
Understanding the Equity Savings Scheme in Mutual Funds
Understanding the Equity Savings Scheme in Mutual Funds
Equity savings schemes are mutual fund plans that allocate their funds to equity funds, debt funds, and arbitrage. By diversifying across different segments, ESS aims to optimise returns while managing risk effectively, making it appealing to traditional investors seeking high returns while maintaining a level of risk mitigation.
This investment approach distinguishes ESS from conventional schemes, with around 30%-35% of the investment dedicated to equities and the remaining split between debt income funds and arbitrage.
The equity portion safeguards investors against purchasing power erosion, while the debt and arbitrage segments act as buffers against market fluctuations. If the equity market experiences a 10% decline, the returns from the debt and arbitrage segments could help minimise the overall loss, ensuring a relatively stable return compared to traditional equity schemes.
Understanding the Taxability of Equity Saving Scheme
An investment could provide a 100% return but if you do not consider the applicable tax rates, it’s not a wholesome rate of measure. Here are the tax treatment pointers you must take into account before you invest in the Equity savings scheme:
- In terms of taxation, equity savings schemes are classified as equity assets for tax purposes.
- Any gains from holding ESS for more than 12 months are subject to a 10% tax rate. However, if the gains are less than Rs 1 lakh, the gains are not subject to any taxes.
- Investments held for less than one year incur a tax rate of 15%.
Advantages of Investing in an Equity Savings Scheme
Stability in Returns
- Equity savings schemes allocate over 50% of funds into debt and arbitrage holdings which ensures more stable returns compared to pure equity investments.Fund managers employ derivative strategies to reduce volatility, while the arbitrage component capitalises on price inconsistencies across markets.
This stability makes ESS an attractive option for investors seeking consistent returns.
Arbitrage Opportunities
- The arbitrage segment of these funds provides significant advantages in terms of stable returns.
- Fund houses are proficient in arbitrage techniques, which offer low-risk returns by prioritising stability in their investment portfolios.
Diversified Portfolio
- Leading equity savings funds offer diversification through a single investment vehicle.
- Investors are relieved from the task of analysing and selecting individual funds, as ESS provides exposure to a range of assets managed by professionals.
- This diversification enhances risk management and simplifies investment decisions for investors.
Comparison between top 3 Equity Savings Scheme Funds
India has witnessed a rise in Equity Savings Scheme Funds in the last 2 decades. Here is the return the 3 funds have achieved in the last 3 years. From the data, we can see that the SBI Equity savings scheme has achieved the best returns with a slight margin of 0.2% above HDFC and Kotak Equity savings schemes.
Investors need to note that holding these funds for more than 12 months is advisable, as early redemption may incur an exit load charge of 1%.
Returns earned over the years | |||
Since Inception | 1 year | 5 year | |
HDFC Equity Savings Fund | 9.57 | 16.77 | 10.76 |
Kotak Equity Savings Fund | 9.43 | 18.05 | 10.76 |
SBI Equity Savings Fund | 8.96 | 19.78 | 10.96 |
Understanding Arbitrage funds and who should invest in them
Understanding Arbitrage funds and who should invest in them
To understand how an arbitrage fund operates, let us first understand what is the meaning of Arbitrage.
Arbitrage is the practice of simultaneously buying and selling the same asset across different markets to capitalise on slight discrepancies in prices. The aim is to generate profit without taking on any significant risks. This strategy involves purchasing the asset where it’s priced lower and selling it where it’s priced higher.
Now let us understand what arbitrage funds do.
Arbitrage funds are hybrid mutual fund strategies that leverage price differentials among the same underlying assets across various capital market segments to yield arbitrage returns. These funds also invest in debt and money market products.
When the price of a particular security varies between the cash and derivatives markets within the same exchange, arbitrage opportunities arise.
Suppose that an arbitrage fund purchases 5,000 shares of company A at Rs 500 per share for Rs 25,00,000. It also simultaneously sells 5,000 shares in the futures market at Rs 505. This move effectively locks in a profit of Rs 25,000 (5 x 5,000 shares) for the fund. The fund stands to gain Rs 25,000 when the futures contract matures.
However, if market sentiment takes a downturn and prices decline, with spot market shares trading at Rs. 485 and futures market shares at Rs. 480.
In this scenario, while the fund incurs a loss of Rs. 15 per share (Rs. 500 – Rs. 485) in the spot market, it simultaneously gains Rs. 25 per share in the futures market (Rs. 505 – Rs. 480). As a result, the fund’s overall profit from the transaction increases to Rs. 10 per share (₹25 – ₹15) or Rs. 50,000 (₹10 x 5,000 shares).
At times, identical securities are priced differently across two distinct exchanges, creating arbitrage prospects for fund managers. For instance, consider ABC shares trading at Rs 1,000 on the Bombay Stock Exchange and Rs 1,025 on the National Stock Exchange.
An arbitrage fund manager can exploit this situation by purchasing ABC shares on the BSE at a lower price and selling them on the NSE at a higher price, thereby securing a risk-free profit of Rs. 25 per share.
Arbitrage opportunities can also manifest at the index level rather than individual stocks. For example, if the Nifty 50 Futures are priced at Rs 21550, while the equivalent basket of Nifty stocks trades at Rs 21500 in the cash market, an arbitrage fund manager can capitalise on the price difference.
By shorting the Nifty Futures at the higher level and simultaneously buying the basket of Nifty shares from the cash market at a lower price, the manager can lock in a risk-free profit of 50 points on the Nifty trade.
If you’re considering investing in an arbitrage fund, you should know that it is a low-risk option. Arbitrage opportunities are limited and short-lived and provide very modest returns. Therefore, if you’re comfortable with the prospect of low risks with lower returns, arbitrage funds could be a viable option for your investment portfolio.
However, the good part is that arbitrage funds delivered consistent returns across different market phases like the bull markets, bear markets, and even during periods of high volatility.
Taxation of Arbitrage funds
Arbitrage funds are classified under the equity schemes for taxation purposes. If you make an investment in arbitrage funds for less than a year, any gains are classified as STCG (Short Term Capital Gains) and taxed at a 15% rate. If you keep your investment for over a year, the gains are considered as LTCG (Long-Term Capital Gains) and taxed at a rate of 10%.
Comparison between the top 3 Arbitrage Funds
Here is a comparison of the returns that HDFC, SBI and Tata Arbitrage funds have generated over the years. SBI arbitrage funds have outperformed the other two funds by 0.2%.
|
Returns earned over the years |
|||
|
Since Inception |
1 year |
5 year |
|
|
HDFC Arbitrage Fund |
6.47 |
7.51 |
5.01 |
|
SBI Arbitrage Opportunities Fund |
6.71 |
7.71 |
5.17 |
|
Tata Arbitrage Fund |
5.31 |
7.41 |
5.28 |
Financial Planning Tips for Women
Financial Planning Tips for Women
Do you know the difference between a woman born in the 1960s and a woman born in the 1990s?
A woman born in the 1960s dreamt of running a business or having a full-time career. Women born in the 1990s had similar dreams. The difference is that women born in the 1990s knew they could achieve all their dreams.
The era when marriage was the sole means for a woman to secure her financial stability has faded into the past. In the present times, many women are shattering stereotypes daily.
They are assuming influential roles within their homes and in the corporate sphere. They have the freedom to make decisions as they have achieved financial independence or are on the path of it.
However, with freedom comes responsibility. Hence, women must refine their financial literacy and master money management. Financial literacy has the power to empower women. It can provide women with a profound sense of security and help with savings and investments for the future.
Let us understand why financial planning is important for women.
Well, the answer lies within the question itself.
Why shouldn’t financial planning be important? It’s a life skill. Just like communication and decision making, etc., financial planning is a life skill that everyone should have.
Financial planning 101
Here is a list of things you can pursue to ensure you are managing your finances well:
Step 1: Start by assessing your financial situation
Financial planning aims to achieve financial independence, which comes from financial literacy. Before you do or plan anything, take a thorough inventory of your existing assets, liabilities, expenses, and cash flow.
Start by checking your household, living & lifestyle expenses. You can further evaluate your current tax situation and have a good understanding of your savings, investment & debt.
You must also take into account if you have any big financial expenses that you are planning to undertake in the next 5 years. This can include planning a wedding or buying a property.
Step 2: Set your Financial Goals
Once you have a report card of your expenses you can set your financial goals. Define how much money you are going to set aside to save and invest, and how much you are going to spend.
Financial goals could include:
- Getting married
- Family planning
- Purchasing a property
- A good education for your children
- Staying compliant with tax rules
- Retire with good savings
Additionally, add an approximate amount that you will need to fulfil these goals.
Step 3: Develop the plan & implement it
Based on your current liabilities, cash flow, and your financial goals, create an investment and debt-clearing plan that works for you. Make sure you take your risk tolerance and values in mind. Planning is easy, but the implementation of those plans can be hard.
Under each goal, you can write how you plan to contribute funds towards it. You can also invest in mutual funds to achieve specific goals as they help to grow your money over time.
Step 4: Monitor and Review
Many people forget about this step or overlook it. Regular monitoring and making the right adjustments are essential to ensure that your financial plans align with your needs and goals. Review your plan at least once a year.
Tips for planning your finances better
Planning your finances is not that difficult. You can start with small tips like starting an SIP in a mutual fund. Once you gain more awareness towards financial topics you can move to buying individual stocks or even investing in alternate asset classes.
Here are a few tips that will make you more comfortable once you start your financial journey:
Allocate a Budget
Your financial planning should include a well-defined budget. Based on your monthly or annual income, plan your expenses, investments, and leisure activities. A good starting point is the 50-30-20 rule: allocate 50% to living expenses, 30% to wants, and 20% to savings.
Create a ‘Rainy Day’ Savings Account
Start saving early and consistently. While you invest and spend according to your financial plans, maintain a dedicated savings account. Set aside a specific amount every month, and refrain from using these funds unless it’s an emergency. This account serves as your emergency fund.
Eliminate any High-Interest Credit Cards
Identify and eliminate high-interest credit card debts promptly, as they can severely impact your financial health. Delinquent credit card payments can harm your credit score and future loan eligibility.
Plan your finances with your family
Take an active role in your family’s financial discussions and planning. Familiarise yourself with your family’s finances, review bills and accounts regularly, and take charge of responsibilities.
Plan your motherhood
Many times, women have to take a step back in their growing careers as they plan their families. You and your partner must plan out maternity expenses in advance.
Plan for Retirement
Take control of your future by planning for retirement early in your career. Invest in mutual funds, PPF, and NPS to ensure a comfortable retirement. Every penny saved today will be invaluable in your golden years.
Use Special Policies for Women
Special policies and schemes exist for women, including lower interest rates on loans, special rewards, and tailored loans for women entrepreneurs.
Explore schemes like the MUDRA Loan, Mahila Udyam Nidhi Scheme, Annapurna Scheme, and Stree Shakti Scheme. Women applicants benefit from reduced stamp duty on home loans and low-interest rates, with special premium rates on health and term life insurance.
If you’ve read this far, you have a checklist of major financial goals you want to take care of. But, getting a tick mark on all the check boxes can be challenging and may seem like a difficult task to meet.
But don’t worry! We are here for you. Floatr is a revolutionary app that helps you plan your budget, map your money goals and invest in smart mutual fund baskets.
You can visit our website today or download our application and get started on your financial journey.
Understanding the Pension Landscape in India
Understanding the Pension Landscape in India
Pension plans provide financial security and stability during old age when people do not have a regular source of income. Retirement plans ensure that people live with pride and without compromising their standard of living during their old age.
Pension schemes are more than just an employee benefit scheme in India. Pension payment accounts for a substantial portion of the government’s spending that they collect from taxes. For years, India has witnessed a debate around the OPS and the NPS. However, the technicalities are not that simple.
In this blog let us try to decode what OPS(Old Pension Scheme) and NPS( National Pension Scheme) mean exactly, which is a better plan to have in the country and how it can benefit you as an investor to know about the details of these plans. With this, we will be able to look at the current retirement landscape of India.
A timeline of pension schemes in India
Like many of the first things that the British introduced to India, the pension system was one of them. The tradition of providing pensions to retired employees dates back to Colonial India, with its roots tracing back to 1881.
OPS (Old Pension Scheme) has its historical origins in the British colonial era when the Royal Commission, known as the Lee Commission, in 1924, recommended that half of an employee’s salary during their active service should be granted as a pension after their retirement for individuals serving in India.
On January 1, 2004, India’s then PM, Shri Atal Bihari Vajpayee announced the National Pension Scheme (NPS). Since May 2009, the NPS has also covered many individuals who are self-employed or work in the “unorganised sector”.
What is the Old Pension Scheme?
The Old Pension Scheme guarantees a stable income after retirement. In this scheme, employees receive a pension equivalent to 50% of their final salary. They also benefit from a biannual dearness allowance. The pension payout remains consistent, with no deductions
from the salary.
Let us understand the old pension scheme with an example:
Mr A’s salary at the time of his retirement was Rs 50,000. As per the OPS, he is assured a pension of Rs 25,000, which amounts to 50% of his last drawn salary. Mr A is also eligible to receive a dearness allowance, which is a percentage of his fixed pension. In this case, with a dearness allowance of 2%, he receives an additional Rs 500 on top of his pension.
The government is obligated to pay this pension to government employees as promised, regardless of the state of the economy.
The economic challenge with OPS is that a substantial portion of the government’s income, which comprises tax revenue collected from ordinary citizens, is allocated to meet these pension obligations.
What is the NPS scheme?
Due to the heavy economic burden on state and central governments, the old pension scheme was abolished and a new scheme, known as the National Pension Scheme or NPS was introduced.
The NPS was launched on January 1, 2004, with the primary objective of providing retirement income security to all citizens. Initially, NPS was exclusively available to new government recruits, excluding the armed forces. However, starting on May 1, 2009, the
NPS was extended to encompass all citizens of the country.
The scheme encourages individuals to invest systematically in a pension account throughout their employment tenure. Upon retirement, subscribers can withdraw a portion of the accumulated corpus, while the remaining amount is disbursed as a monthly pension, offering financial security in their retirement years.
Let us understand how NPS is different from the OPS with an example:
Consider Mr. A, whose monthly salary is Rs 25,000. In the NPS scheme, the employee and the employer can contribute 10% of Mr A’s salary to a pension fund. These contributions are subsequently invested in various financial instruments like corporate bonds, government bonds, and equities. Professional pension fund managers, such as SBI, LIC, Axis, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, and Max Life, oversee and manage these pension funds.
NPS operates as a government-monitored portfolio management service. Mr. A’s retirement corpus grows alongside his salary increments. Upon retirement, he has the option to withdraw 60% of this accumulated amount. The remaining portion of the corpus can be utilised as annuities, providing a steady income stream during his retirement years.
Here are the top 3 reasons why NPS benefits the Indian landscape:
- NPS allows employers and employees to invest a percentage of their salary in the scheme. Investing in NPS incentivises employers and employees by providing tax savings and enabling them to plan for a more secure retirement in the future.
- The increase in pension funds has led to an infusion of capital into various new businesses, ultimately contributing to economic growth.
- Unlike OPS, NPS does not burden the government with the responsibility of paying a fixed pension amount. Investors receive pensions based on the market performance of the economy.
The current landscape of retired individuals in India
The percentage of people aged above 60 years is only 8.6%, but in absolute terms, they constitute more than 10.4 crore individuals. Crossing 60 years does not mean that Indians retire from work. Census 2011 data shows that for every five persons aged above 60 years, more than two are still working.
Traditionally, Indians were dependent on their children for retirement support. However, this trend is slowly evolving with the growth of retirement communities across India. These are residential communities designed for elderly couples, featuring modern and spacious facilities with safety features such as anti-skid floor tiles, call buttons, and doctors on standby in case of emergencies.
With the increasing popularity of financial influencers and fintech companies, many Indians are becoming aware of money management practices, and retirement planning has gained more prominence over the last 5-10 years. Given this awareness, we can expect the current generation to lead a very fulfilling and happy retirement.
Conclusion
There are multiple approaches to strategies and navigate your life after retirement. Saving your funds in the NPS can prove to be a goldmine during retirement years.
If you feel intimidated by words like retirement or saving and if you feel that you are too late, it’s alright to feel this way. It is better late than never. Give us a call today to help you get started on your financial planning journey. You can even download our app that will assist you in navigating your financial journey step by step, starting from planning an emergency fund to building a retirement corpus.
Many retirees find themselves pondering over how to make the most of their retirement years. Ensuring you have saved enough funds to support the duration of your retirement is of key importance when it comes to retirement planning.
Focusing on maintaining good health and actively socializing can significantly reduce stress, leading to a more relaxed and enjoyable retirement experience.
Navigating the Path to Financial Growth: A Beginner’s Guide to Starting Your Mutual Fund Journey
Most people dream of becoming successful in their lives. This directly translates into becoming rich and being someone popular & respected in their social circles. Many of us who are born and blessed with a financially sound family are looking to expand our horizons further by generating more wealth than our parents.
Many of us who did not have it all are also looking for ways to earn higher and break out of the shackles of money problems. The common thing that both these groups are trying to create is “Wealth”.
“Wealth” is defined as having a surplus of valuable material assets or resources, and for many, this equates to having a substantial amount of money and freedom to make your own decisions.
From a financial perspective, our wealth can be described as the combined value of our savings and investments, subtracting any outstanding liabilities such as loans.
Savings and investments don’t grow automatically, they require a well-thought-out wealth creation plan to help us reach our financial goals and lead a secure life. So, what exactly does wealth creation entail, and why is it significant? Let’s delve into these questions for a better understanding.
What Does Wealth Creation Entail?
Building wealth means more than just relying on our regular earnings. While our income from employment or business may increase with age, so do our responsibilities and expenses. As a result, it is important to establish alternative income streams to accumulate wealth.
One effective method to achieve this is by investing your savings strategically to generate returns. 2 decades back, information wasn’t as freely available and one had to work hard and find means to grow their wealth. Investing in a mutual fund wasn’t as easy as it is today, thanks to the arrival of the internet which has enabled digitised the entire banking sector. If you are 25 and looking to start your investment journey this is how much you can create by age 60 just by investing in mutual funds.
Investment Duration | Expected Annual Returns | Monthly SIP Amount | Investment Value at 60 |
35 years or 420 months | 16.86% | ₹5000 | ₹2,33,61,814 |
This means by saving just ₹5000 and investing in an asset that provides about 15-16% return for 35 years, you can amass an investment value of more than ₹2 crore rupees.
Float’s SmartStart Wealth is a mutual fund basket that has provided a similar return over ten years. Smart Start is a good place to start their investment journey with mutual funds.
This scheme consists of stable and consistent performing schemes. Let us look at the schemes this mutual fund comprises of:
HDFC Balanced Advantage Fund – Regular Plan-Growth
This fund offers a balanced approach, combining equity and debt investments to provide stability and growth potential. 25% of your investments are allocated here. This scheme has earned a return of 13.17% over 10 years.
ICICI Prudential Small Cap Fund – Growth
Small-cap stocks have the potential for high growth. 25% of your investments are allocated to this fund and it has earned a return of 18.75% over the past 10 years.
SBI Equity Savings Fund – Regular – Growth
This fund offers a unique blend of equity, arbitrage, and debt investments, providing stability and potential for higher returns. It constitutes 25% of your portfolio, adding diversification and risk management and has earned a return of 8.85% since its inception in 2015.
Nippon India Large Cap Fund Growth
Large-cap stocks provide stability and steady growth. It comprises the remaining 25% of the portfolio and has returned 16.98% returns over 10 years.
Features of Floatr’s SmartStart Wealth Basket
The basket comprises a selection of stable and consistently performing mutual fund schemes, making it an attractive choice for both novice and experienced investors.
Let’s delve into the distinctive features of SmartStart Wealth:
Preferred Tenure – 10 Years: SmartStart Wealth encourages a long-term investment horizon of 10 years. This extended tenure is well-suited for those who seek to harness the potential of compounding and wish to attain substantial financial goals over time.
Risk Category – Aggressive: This portfolio falls into the aggressive risk category, signifying a higher potential for returns. While this comes with increased risk, it also offers the opportunity for greater rewards, making it suitable for investors with a higher risk tolerance.
Minimum One-Time Investment – INR 5,000: To initiate your investment in Smart Start Wealth, a minimum one-time investment of INR 5,000 is required.
Minimum SIP (Systematic Investment Plan) – INR 2,000: For added flexibility, Smart Start Wealth permits investors to make regular contributions through SIPs, with a minimum monthly commitment of INR 2,000. SIPs enable gradual, disciplined investing, making it convenient for individuals to build a substantial corpus over time.
No Lock-In Period: Investors can access their funds as needed without penalties or restrictions, providing liquidity and freedom to adapt to changing financial circumstances.
The Significance of Wealth Creation
The importance of wealth creation in our lives cannot be overstated for the following reasons:
Achievement of financial goals
Wealth creation helps you realise your financial aspirations, helping you reach your desired milestones and objectives.
Additional income source
It is an additional income source, supplementing your earnings throughout your working years and increasing your financial stability.
Post-retirement financial security
A well-structured wealth creation plan ensures a consistent income stream during retirement, ensuring financial security for you and your loved ones.
Financial independence in retirement
With wealth creation, you can embrace a financially independent lifestyle during your retirement, enabling you to savour the activities and pursuits you cherish the most.
Conclusion
Building wealth plays an important role in a financially stable and contented life. It empowers you to lead with confidence and actively chase your aspirations. If you have a good understanding of wealth management and creation, it is time to leverage this knowledge to your benefit. Start your journey towards your financial objectives with Floatr today.
