Wednesday, April 4, 2012

3 Personal Finance Tips for the New Financial Year :

It's April 03rd, 2012. The new financial year has officially begun.
Rung in with the Budget that has put money back in our pockets through a reduction in direct tax but taken it right out again through an increase in indirect taxes  followed by a slash in the EPF rate for this year to 8.25%, followed quickly by an increase in the tax free rate of interest on the PPF account to 8.8% (up 20 bps from 8.6% as per the earlier announcement), the implications for the coming year have been fast and furious. 
Here are 3 things you need to do to ensure your personal finance knowledge remains strong and you benefit from any changes in the coming year:

  1. Keep up to date on important announcements 

    Any changes in the national personal finance space can and will affect you directly as an investor. They will have an impact on your savings, your returns on investments and your taxes saved. 
    Here are a few you should know: 

    1. Interest rate on PPF has been increased from 8.6% by 20 bps to 8.8% effective from April 01, 2012. 
    2. MIS interest rate has been increased to 8.50%, higher than the earlier 8.20%
    3. Post office term deposits will earn 8.20% and 8.309% for the one year and two year deposits respectively, that’s an increase of 50bps 
    4. Interest on the 5 year deposit is up 20 basis points, from 8.30% to 8.50%
    5. Senior citizens can now earn 9.30% as against the earlier 9%. Keep in mind, this is taxable interest, it is not tax free. You will be taxed as per your tax slab. 
    Also, keep in mind that you should invest in the PPF immediately (before the 5th of the month in fact) to get the maximum interest benefit for this financial year, and that the maximum investment limit is now Rs. 1 lakh. 
  2. Know the difference between FDs and FMPs

    We’re currently in a very good interest rate scenario for fixed income investors. This is not a situation that will last long, so you must make the most of it right now. 
    The first thing to do is know the difference between an FMP (a Fixed Maturity Plan) and an FD. 

    An FMP is a close-ended fund that invests in debt and money market instruments of similar maturity as the stated maturity of the plan. That means a 90 day FMP will invests in debt and money market instruments which mature in 90 days like 3-month Certificate of Deposits (CDs), 3-month Commercial Papers (CPs) etc. So a 90-day FMP will cease to exist on maturity. Here your maturity amount is not fixed, but your maturity date is fixed. 

    With an FD, your rate of interest and hence maturity amount are fixed, date is fixed, and you know exactly what post tax return you will get as you will be taxed as per your own tax slab. In an FMP, you have the benefit of indexation, and hence can achieve higher post tax returns than an FD. For more information, read our article titled FMPs or FDs - Which One to Choose? 

    Take advantage of the current interest rate scenario and invest in FMPs - keeping in mind the potential impact of the Direct Tax Code (as regards indexation), and of course keeping in mind your goal time horizon, liquidity requirements and risk appetite. Also keep in mind that if you are in the 10% tax bracket, then the hike in FD interest rates will benefit you the most. For example, HDFC Bank offers 9.25% for the 1 year 16 day FD. SBIoffers 9.25% for a more than 1 year FD. Rates at your bank are probably revised with effect from end March as well, so do be sure to check them out to see if the post tax returns are worth investing for. 
  3. Don’t Neglect Your Contingency Fund

    Considering that personal expenses are likely to go up, you need to first track your expenses this year. Track your spending for the months of April and May. Take the average and multiply it by anything between 6 and 24 to keep aside 6 months to 2 years worth of expenses in a contingency fund. This can be held across cash at home and in the bank, and a liquid or liquid plus fund. 

    With an increase in expenses, your contingency fund should increase accordingly. This is something people often forget to do. 

    For more information on how to plan your contingency fund and other debt investments, read our article titled How to Position Your Debt Portfolio for Smart Gains.


So remember the 3 simple things given above. In the current interest rate scenario that we are facing at the beginning of this new financial year, these 3 things will help you have healthy cash flows and investments through the new financial year.
Source : personalfn

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