Many people find company deposits lucrative due to the higher rate they pay on the FDs as compared to bank FDs. However this high return also comes with high risk. The major risk in case of a company FD is that if the company is unable to repay your money, you end up losing it. But in case of banks, your money is safe as the bank FDs are insured up to Rs. 1 lakh. So in case the bank becomes insolvent, you are sure to get your money back.

So how do you protect yourself when investing in company FDs? For one, opt for bank FDs having a credit rating of at least A+. These ratings are given by rating agencies like ICRA and CRISIL. A+ ratings implies the FD is safe.

Find out the company’s record in making repayment on time. Check the company promoters’ record. E.g. it is always better to opt for FDs from companies like Tata and L&T. Stay away from companies with unknown promoters, even though they may be offering higher rate of interest.

Follow these tips to ensure your money in company FD is safe.

Today debt is becoming common place all over the world. Even in India that originally boasted about having the highest savings rate in the world, debt is slowly spreading its tentacles. Many people, especially youngsters fall prey to the easy availability of the credit. If you are in this position, then here are some tips to get out of your debt.

• Inform your spouse/parents: This is the biggest mistake many people make. They hide their debt situation from their near and dear ones. Don’t do that. Discussing your financial problem with them will help you solve your debt problem.
• Draw a repayment plan: Chalk out a plan to repay your debt. Cut down on unnecessary expenses like shopping for latest gizmos, eating out at a restaurant or going to movies at a multiplex. Use the amount saved to pay off your debt.
• Switch over to low-cost loans: Replace the loans with high interest like credit card debt and personal loan to low-cost loans like loans against securities, NSC, KVP and mutual funds. It will save you the money by reducing your interest costs.
• Opt for one time settlement: Many banks would prefer settling outstanding dues with their creditors. They will try to offer you a settlement as they would be happy recovering even a part of their dues, instead of letting the entire sum go down the drain. If you get such an offer, opt for it. But ensure the bank gives you a settlement letter and declare the account closed.
• Restructure the loan: Banks let you restructure the loan,  in such a way that you pay higher EMIs when your financial condition improves. Write a letter asking the bank to offer you this facility.
• Declare bankruptcy: This should be your last resort and should be used when everything else fails. Approach the bank and declare your inability to pay and also tell them you don’t have any assets. The bank will then take up the matter with the court, who will then attach your assets like property. Then it will commence the liquidation procedure to pay the bank. It is a complex process that can last for 3 years.

There are numerous mutual funds available in the Indian market. All this can be very confusing to an ordinary investor. So if you are looking to invest in a mutual fund but are confused as to how to go about selecting them, here are some tips that will help you in choosing a good mutual fund.

• Long-term consistent performance: Has the fund been a consistent performer over a long term? By long-term I mean we are looking at a time horizon of 10-15 years. Has it managed to deliver good returns during good and bad times consistently? If yes, then this fund should be considered. HDFC Top 200, Franklin Taxshield are some such funds.
• Fund management: Is the fund management headed by a reputed company? Has the company been in business for a long time? AMCs like Reliance, Franklin Templeton, HDFC and SBI have been in business for a long time. They have the necessary expertise to run the mutual fund business. So you know you are in safe hands.
• Portfolio allocation: Does the fund have a higher mid-cap and small-cap bias? If yes, then these funds have higher risk than the funds with large cap bias. Funds like Reliance Growth and Franklin Prima have mid-cap bias and so are riskier than funds like Reliance Vision and Franklin Prima Plus.
• Your risk profile: Can you withstand the risk associated with imid-cap and small-cap funds? If no, then stay away from such funds. If you cannot bear any type of risk then avoid equity fundgs completely.

The government wants to introduce changes in the existing tax regime. It is going to change the way you invest, save tax as well as your overall tax structure. Let us see how with this example.

Ravi earns an annual salary of Rs. 10 lakhs. He invests Rs. 50,000 in PPF, Rs. 30,000 in tax-saving mutual funds and Rs. 20,000 in insurance. He has a home loan of which he has already paid Rs. 2 lakhs in interest along with the principal outstanding of Rs. 1 lakh. Let us see how his tax liability will change.

Ravi’s present tax paid: Ravi invests in mutual funds, insurance PPF and home loan principal. The amounts invested in these options are tax exempted under section 80C up to Rs. 1 lakh. So Ravi’s taxable income goes down to Rs. 9 lakh. He has also paid Rs 2 lakhs towards the interest on his home loan. Hence his total taxable amount goes down to Rs. 7 lakhs. Now out of this, Rs. 1.5 lakhs don’t attract any tax, so his taxable income further reduces to Rs. 5.5 lakhs. Of this, he pays 10% tax on amounts up to Rs. 3 lakhs and 20% tax on amounts up to Rs. 5 lakhs. So the total tax, he pays is 10% of Rs. 3 lakhs and 20% on Rs. 2.5 lakhs  =  Rs. 80,000.

Now when the new tax code comes into effect, his total tax exempted income becomes Rs. 1 lakh (contributions towards PPF + insurance + mutual funds) + Rs. 1 lakh towards home loan principal repayment. Hence his total taxable income now becomes Rs. 7 lakhs. Of this, there is no tax on his income up to Rs. 1.6 lakhs. Hence his total taxable income now becomes Rs. 5.4 lakhs. On this he pays only 10% tax. Hence the total tax he will pay is Rs. 54,000.

Hence with the new tax code, he ends up saving Rs. 26,000.

In the last article on best tax-savings options, we saw the best the options available to you to save tax. Now let us see how to make the best use of them.

First make the best possible use of PPF. You can invest up to Rs. 70,000 in a PPF account in a year. So try to invest as much as possible in PPF.

Next calculate your insurance needs and find out if you are adequately covered or not. If not, then opt for a life insurance policy. Take a simple term plan as you can get high life cover at low cost.

Once you have done this, now is the time to take a look at your investments. Are you a risk taker? Then invest the balance portion of the investment amount in ELSS. If not, then you can opt for bank FDs and NSCs.

E.g. if your taxable amount is Rs 1,00,00,00, then invest Rs. 70,000 in PPF.

This leaves you with an amount of Rs. 30,000. If you have selected an insurance policy with a premium of Rs 10,000, then Rs. 10,000 will be deducted from Rs. 30,000. This leaves you with Rs. 20,000 that you can invest either in ELSS or NSC and bank FDs.

This will ensure you get the best possible returns from your investment.

We are already in the month of February and very soon March will be upon us. So it is time to think about taxes and how to save them. But which are the best tax savings options available? Here we give you a list of some of the best tax savings options open for you.

• ELSS: Are you ready to take risks in order to earn high returns? If your answer is yes, then this is the best option. ELSS or equity linked savings schemes are mutual funds with a lock-in period of 3 years and they invest in equities. Here you not only save tax but also get capital growth.
• PPF: It is one of the best debt products available in the market. It is backed by Government of India and has a lock-in period of 15 years. You get 8% interest on the amount deposited and both interest as well as capital withdrawal are tax-free. However you cannot invest more than Rs 70,000 in any one financial year.
• Medical insurance: You can get a deduction of Rs 15,000 if you are paying a medical insurance premium for you and your dependants. But if your dependents are your parents, you get further deduction of up to Rs 15,000. If you are senior citizen, your deduction amount goes up to Rs. 20,000.
• Home loan principal: The principal portion of your EMI will also help you save tax.
• Life insurance: This investment will not only save you tax but will also give you a peace of mind should you die or are unable to work. Opt for a simple term plan that will give you higher life cover at low premium.

In the article on Importance of asset allocation, we saw that determining your risk profile is the key to making successful asset allocation. We saw that proper asset allocation will protect you from losing your money and will help you become rich. Here we try to see how taking risk will help you achieve high rewards.

We all know that stocks are the riskiest investment option. This is because they have a risk of capital loss. If the company sinks or is mismanaged as in the case of Satyam, you can end up losing all your money. However if you have managed to select a company like Infosys, you will end up making money many times over.

But this is just one type of risk. The other type of risk is interest rate risk. This is common in debt investments like income funds and gilt funds. As the interest rates go up, the yields from these funds go down, thus making investors lose money. The vice versa is also true.

Then there is an inflation risk, where the inflation (the phenomenon of rising prices) erodes the value of your investment. This is also associated with debt investments, having fixed interest rate. So if you have an FD of Rs 10,000 offering 7% interest for 2 years, the value of your principal is less than what it was when you opened the FD account.

To become a successful investor, you need to be aware of the different types of risks involved. This will help you make uniformed decision. The key to achieving perfect allocation is to distribute your portfolio between equities and debt. While equities make ideal investment from long term perspective, debt should be used as a short term investment.

Ajit is a young executive working in a middle level management in an MNC. His financial advisor asked him to invest all his money in equities and equity mutual funds, since the market was touching new highs. Ajit did so, only to find that during the recent market crash, he ended up losing his money. Why did this happen? Where did Ajit err?

Ajit made the biggest mistake made by so many investors. They take fancy to a particular asset, either due to security it offers or high returns it generates. In the process, they ignore other asset classes, thus suffering financial loss.

In order to overcome this problem, it is essential to do proper asset allocation. In asset allocation, you diversify your portfolio amongst stocks, bonds, gold and realty. This is done after taking into account your age, income, investment objectives and investment time frames.  But the main factor that affects the asset allocation is your risk profile.

Those with a conservative profile should focus around 60-70% of their portfolio on bonds, FDs, realty, cash and gold and the rest in equities. For a balanced investor, the proportion of portfolio that can be divided between equity and other assets can be 50:50. An aggressive investor can have 80-85% exposure to equity.

As you become older and near your retirement age or your liabilities or number of dependents increase, you have to keep on rebalancing your asset allocation in order to take into account the new circumstances. This will help you meet the change in your circumstances very easily. Just don’t be swayed by greed or fear as it can cause financial loss in the long term.

Ajit didn’t go for asset allocation also called as diversification. Hence he suffered massive losses.

Credit card can be an expensive credit tool if not used properly. This is because it has many charges that can easily bog you down in financial crisis and destroy your credit rating. Here are some of the most important charges that accompany credit card.

• Late payment fee: When you get your credit card bill, you are given a due date by which you have to pay the outstanding amount. If you fail to pay the amount by this date, you end up paying late payment fee.
• Finance charges: When you use your credit card for making the payment, you are in effect taking an overdraft, which is a type of loan from the bank. You get an interest-free period during which you can pay off this amount. If you don’t pay the full amount by this date, the unpaid amount along with new purchases attracts finance charges. This rate can be as high as 45%, thereby leading you to debt trap.
• Cheque bouncing charge: If your payment cheque bounces, you end up paying this charge along with late payment fee.
• Cash withdrawal charges: Every credit card allows you to withdraw cash from ATMs in case of emergency. But remember, unlike the cash withdrawal using debit card, the cash withdrawal using credit card attracts cash withdrawal charges. So it is advisable to use credit card for cash withdrawal sparingly.
• Annual charges: While most entry-level cards don’t have any annual fees, the hi-end cards charge annual fees. These fees can be very high. So you need to watch out for these fees before deciding to take one.

Last time we understood what bonds are. Now let us see the different types of bonds available in India.

• Government Bonds: These bonds are the safest bonds as they do not carry any risk of default. These bonds are issued by RBI and have longer maturity period. These bonds have a fixed coupon rate and maturity period. The interest payments are made once in 6 months. Some common government bonds are NABARD bonds and 8% Taxable Bonds. But they do carry interest rate risk as they are highly liquid. They are also regarded as the benchmark as well as harbinger of the interest rate scenario.
• Corporate bonds: These bonds are issued by companies to finance their projects. They carry higher coupon rate, but are risky as the worth of the bond depends on the financial strength of the issuing company. Hence always choose those corporate bonds that have been highly rated by the credit rating agencies to ensure peace of mind and safety of your money.
• Zero coupon bonds: These bonds don’t have any coupon rate, hence the term zero coupon. Here the maturity value of the bond is higher than the face value. The difference between the two is your profit. E.g. if the face value of the bond is Rs 100 and its maturity value is Rs 150, then the difference of Rs 50 is your income.