You must be familiar with financial products that claim you just need to invest a sum for a certain period and then see it double at the end of the term. While it is easy to think you have earned a return of 50%, it is not so. This is because your money gets compounded each year at a certain percentage of return.

E.g. if you are investing 10,000 for 10 years and are getting back 30,000 at the end of the term, your effective rate is 11.61% compounded annually.

This concept is known as the time value of money.

It says that money available currently is more valuable than the equivalent sum later on because of its earning potential.

So the Rs 30,000 available with you presently is far more than Rs 30,000 available to you in the future.

Why is this important? Whenever you have money, you can either choose to spend it or invest it. If you opt to invest it, you should ensure you earn much more than its present value. This is why it is important to keep your investments for long-term. This will help you earn better returns.

Sometime back, international or global funds were a rage. Many investors were heavily seduced by these funds. This is because they could get international exposure at a nominal sum. They did not have to get RBI permission to invest abroad. They did not have to face the hassle of foreign currency conversion as the fund house took care of all these formalities.

However it was observed that these funds underperformed local mutual funds. In fact, in many instances, investors have seen the value of their investment eroding. Why is that? Why did these funds fail to deliver?

Well, here are some of the of the reasons while global funds failed to deliver.

• As global funds invest their corpus abroad, effect of economic crisis in the country in which they have invested, will end up eroding the value of the investment.
• Foreign currency exchange will affect the value of the investment. If the foreign currency is stronger than Indian rupee, the value of your investment will increase and vice versa.
• Taxation will differ from country to country. Taxes will affect the value of your investment. Besides you’ll end up paying taxes in India as well, since unlike normal mutual funds, these funds are taxable.

So what should you do? Well, as far as possible, avoid these funds. However if you choose to do so, just invest a small portion (not more than 5%) in such funds. But this should be done only after building up a robust portfolio of domestic funds. This will help you withstand the shocks in the international markets

Have your parents invested in Senior Citizen Savings Scheme (SCSS)? Are they planning to invest more in the scheme? Let us see how this scheme has fared and whether you should continue with it.

SCSS is a 5 year scheme, first introduced in 2004. It became very popular as it offered the highest assured return of 9%. You get paid interest each quarter, thus making it beneficial for senior citizens who have no other source of income.

Besides high returns and safety, you also enjoy tax benefit. Investments up to Rs 1 lakh are deductible under section 80C of the Income Tax Act.

But when it comes to renewal, you can only renew the scheme for maximum of 3 years. Also with the entry of direct tax code, there is no guarantee whether the tax benefit will continue.

Moreover these instruments are highly illiquid. It means you are stuck with the investment till the end of tenure. Now if you need cash on an urgent basis, you are stuck. Moreover SCSS is not transferable. So if you want to shift your investment from one bank or post office to another, you will not be able o do it.

Also for those senior citizens who have high investment corpus, SCSS will not offer high returns. In such instances, these investors are better off investing their funds in slightly riskier options like monthly income plans or balanced funds.

Recently ULIPs were in the news when SEBI had directed 14 insurance companies not to issue any new ULIPs. SEBI contended that despite being an insurance product, ULIP had a high proportion of investment and thus should be regulated by SEBI. However in reality IRDA regulates the insurance products including ULIPs.

The case went to the court and the government had to step in and hand over the jurisdiction of ULIPs to IRDA. But in this war, it is ultimately you the customer has lost. Wondering why? Here is why.

This is because mutual funds and ULIPs do not have level playing field. While mutual funds are not allowed o pay upfront commission to its agents, ULIP agents can pay commission as high as 40% to its agents. As a result, many financial advisors tend to push ULIPs on their unsuspecting clients. Now remember, this commission comes from your investment.

The drawback of ULIP is that you need to keep your investment for at least 10 years to recover this upfront commission. This despite what many insurance agents tell you that you can keep on investing only for 3 years. Also the insurance cover is very low than what you would get for half the investment had you opted for term plan.

Moreover returns from ULIPs are not guaranteed as it is a market-linked product. Thus looking at drawbacks of ULIPs it is advisable to stay away from ULIPs. But with IRDA winning the battle against SEBI, it is the customer who has lost.

Your company has just awarded you the Diwali bonus. You want to use the money to buy the latest mobile phone. But is it the right way to spend your bonus? Is there any other way to make the best use of this surplus cash?

Well, there are actually some things you can do with the money that will help your finances in the long run.

• Clear off any pending debts: Do you have any credit card debt? Have you taken any personal loan? If yes, then use this money to repay any such debts. It will save you a lot of money in terms of interest.
• Build a corpus for retirement: Retirement is one of the most stages in a person’s life. Many people don’t pay serious attention to building corpus for retirement. But when they retire they find out that they don’t have sufficient funds to meet their expenses. So it is very important for you to start building your retirement corpus from the time you start working. Use your bonus to build the retirement corpus.
• Buy additional insurance: Do you know insurance is very important for you and your family? You should have both medical as well as life insurance. Use the excess cash to buy both these insurance.

These are some of the best ways in which you can use your bonus money.

In the budget of 2009, government of India has introduced NPS or National Pension Scheme. This scheme is available in certain banks and post offices throughout the country. It lets you invest your money in equity, debt and government securities. You can invest your money in accordance with your risk appetite. The investment will be managed by fund managers, who will charge a nominal fee for the same.

You can withdraw your money in the form of pension once you reach the age of 60. You can claim tax benefits on the sum invested. The minimum amount you can invest is Rs. 500 per month. Once you reach the age of 60, you can withdraw 40% of the sum invested to buy annuity though a life insurance company to get your monthly income.

However there are 2 drawbacks to this scheme. For one, while investment helps you save tax, you will end up paying tax on the returns at the time of withdrawals. This will reduce your returns and is an important factor during your retirement when you don’t have any source of income. Also the charges for managing the fund are quite high. For opening an account you pay Rs. 50, Rs. 350 for annual maintenance charge, Rs 10 for each transaction and   0.0009% per year of the fund value as the fund management charges. So effectively you pay more than Rs 500 towards the charges. This is quite expensive.

Hence it would be advisable to avoid NPS. Instead stick to mutual funds that have managed to offer consistent returns. As you near retirement, withdraw your investment and invest it in a bank fd. You’ll save on taxes as well as charges.

Looking to save tax? Want secure yet tax-free returns? How about an investment option that is backed by government? Then PPF should be high on your priority. PPF a.k.a. Public Provident Fund is a savings account offered by Government of India. It can be opened at any public sector bank or post office. You can invest a maximum of Rs. 70,000 in a year. It carries an interest rate of 8%, which is tax-free.

Here are the main features of PPF:
• Absolute safety: As the amount deposited in PPF account is backed by Government of India, you can rest assured your money is in safe hands.
• Tax benefits: Investment in PPF attracts a tax rebate of 20%. You just have to show the proof of deposit and claim tax benefit.
• High interest: Though interest rate on PPF varies, it doesn’t change frequently. Present rate on PPF is 8%. Add to that the tax benefit you get, the interest earned is actually more than 8%.
• Low minimum investment amount: The smallest amount that you can deposit in PPF is Rs. 500.
• Loan facility: In case of emergency, you can take a loan against the balance in your PPF account. It is available from 3rd and 6th year. It can be up to 25% of the balance in your account and the interest rate charged on the loan is 2% more than the rate of interest earned on your PPF account. The tenure for the loan is 24 months.
• Extension available: Normally the tenure of PPF account is 15 years. After that you can extend it for further 5 years.
• Withdrawal facility: If in need of money, you can withdraw money from your PPF account. This facility is available to you from 7th year onwards. The withdrawn amount should be the lower of the 50% amount in your account at the end of 4th year and 50% of the amount in your account in the previous year.
• Eligibility criteria: Anybody can open the PPF account. However joint account is not possible. However if you think all is well with PPF, then you are wrong. It does have some drawbacks:
• Amounts over Rs 70,000 do not earn any interest.
• Interest rate may not catch up with inflation, thereby eroding the value of your money.
• If you are not to pay your yearly installment, then you are considered a defaulter. To regularize your account, you have to deposit Rs 500 as installment + Rs. 100 as penalty for each year of default.
• Government has plans to tax withdrawal from PPF in future. So you may end up paying tax ultimately.

Despite its drawbacks, PPF remains an excellent vehicle for long-term investment. So make the best use of it.