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Saturday, November 23, 2013

Method of Accounting on FD interest : On accrual or on receipt ?

Every penny earned as interest on your Fixed or Recurring Deposit is taxable. Most banks will pay quarterly interest on your Fixed Deposits. This interest will keep compounding. An interesting situation arises when you get into a multi year Fixed Deposit. In such cases, you really should understand what are the options to pay taxes - should you pay the interest accrued in every financial year OR should you wait for the FD to mature. The choice is yours. This post tries to explain the two methods of accounting – mercantile(accrual) and cash.

Saturday, November 16, 2013

Fixed Deposits Vs Recurring Deposits


Fixed Deposits and Recurring Deposits are two most commonly leveraged debt based investments used by 90% of the investors in India and abroad. Off late, many of my followers have asked me various questions pertaining to the benefits of investing in either of them and what they should choose and why. So, this post is for all of them.

Sunday, November 10, 2013

Welcome to online EPFO : Balance, Transfer, Claim, e-Passbook

I have experienced, as many of you would have, the painful months / years it used to take to move our EPF (Employee Provident Fund) account balance from one company to other, while keeping our fingers crossed during this long journey of money transfer. The complex forms, unsure claim settlement, a balance statement which was delayed by at least 2 years - all these are things of the past !! 
Welcome to the all new, fast, reliable, dynamic online EPFO.


What is EPFO?
The Employees' Provident Fund Organisation, abbreviated to EPFO, is a statutory body of the Government of India under the Ministry of Labour and Employment. It administers a compulsory contributory Provident Fund Scheme, Pension Scheme and an Insurance Scheme. It is one of the largest social security organisations in the India in terms of the number of covered beneficiaries and the volume of financial transactions undertaken

Website

Online Transfer
If you are worried about transferring your Employee Provident Fund (EPF) account after a job change, the implementation of online transfer of EPF accounts has come as a relief. Earlier, it used to take one to two years for the EPF account transfer to take place (filling and submitting Form 13). But with the start of the online transfer system, the entire process should happen within three days time.
In the online transfer system, PF subscribers need to visit the website www.epfindia.com and click on ‘Online Transfer Claim Portal’ (OTCP) and follow the process. For this, it is important that the digital signatures of these employers are registered with EPFO to verify claim papers online. The EPFO had started registering digital signatures of companies from July this year.

Check your account balance
Gone are the days when we used to wait for the annual account statement slip from EPFO to find out the current balance in our own PF account.
For this, click on "Know Your EPF Balance" on the website www.epfindia.com and follow the steps (enter the PF Office, and your PF Account Number) and get the latest balance details on your mobile number.

Check your Claim Status
If you have applied for a PF claim, gone are the hassles of visiting the PF Office to find out the status of your refund. Everything is now available online. For this, click on "Know Your Claim Status" on the website www.epfindia.com and follow the steps as listed on the portal (select State, PF Office, PF Account Number) and get to know the real time status of your EPF claim.

Download your ePassbook
E-Passbook is the employee Provident Fund status book (PDF). Employee can check own PF status. For this, you need to register as a member of the Member Portal. 

Who can register?
Any member of the EPFO (if you have a EPFO Account through your company) can register for the member portal. Details of PF Account are not required at the time of registration.
Other important aspects of an online EPFO registration:

  • Only a registered member can download his / her passbook
  • Any chosen document such as PAN, Passport No. etc will be considered the username and the mobile number will be the password.
  • Facility to edit the mobile number is provided on the portal
Cheers


Manoj Arora
Lead a Financially Free Life !!

Thursday, November 07, 2013

Meet our 2nd Freedom Seeker : Ms. Rita Cooper, Dubai, UAE

Last time, we met a CA from Bangalore, India who is on the journey towards financial freedom now - Mr. Sailesh Damani, The response to that post was overwhelming.

In continuation with our effort to interlock you with some common men and women who have been seeking financial freedom, today, it is a chance to meet a Marketing Director from Dubai, UAE : Ms Rita Cooper.


I have tried to mentor her to build a financial freedom plan of her life. This monthly track-able plan, once executed, has the potential to bring her out of the rat race and allow her to chase the true dreams of her lives. This plan can make her experience "freedom" in life.
And as we all know " Freedom can buy you, what money cannot !!"

So, lets meet her to know who she is, what her dreams and goals are, why is she chasing financial freedom, and above all, how has been her experience since she has set herself on this journey to financial freedom. So, here we go, lets meet with the 2nd freedom seeker : Ms. Rita Cooper.


Rita is passionate about spending time with her loved ones, helping the less fortunate, and quit her corporate rat race.
She wants to focus on living a healthy and happy life.
With Rita already following some of the best practices on personal finance already in her life, it just took a series of one-one calls to identify her assets, liabilities and cash flow.
She has now started on her journey towards financial freedom with a target of Feb 2015 to be free from rat race and start living the life of her dreams.

We will be together monitoring her journey and tuning her plan during the course of this journey, so that we stay on track and maximize the returns from her existing investments.

I wish her all the best for her life and wish that she can go on to chase her dreams.

Rita is just one among all of you. She is no different, except the fact that she took a step to connect with me, was open to accept advise, and then worked on that advise. She took the first step. She came out of her comfort zone.

Do you think it is wise to have a financial plan in place for your life, instead of randomly doing investments with no target in mind? 
How much money you need to get financially free? 
How much time you need to accumulate that kind of corpus which can fund you for the rest of your life? 
How can you maximise your returns on your net worth?

If you have any of the above questions pondering in your mind, or you have any genuine financial query, or you have strong dreams on which you are yet to start working, do write to me at help@ratrace2freedom.com and i will be happy to share my experience with you, so that we can work together and plan your future better.


Cheers


Manoj Arora
Lead a Financially Free Life !!

Saturday, November 02, 2013

What are REIT (Real Estate Investment Trusts)

REITs (Real Estate investment Trusts) first originated in the United States. REITs were created in order to give all investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities. See whats happening in India on the REIT front now a days, and this can potentially change the way we manage our wealth portfolios today.

Securities and Exchange Board of India (Sebi) issued a consultation paper on draft Real Estate Investment Trusts (REITs) Regulations, 2013. Once it has received feedback from the public, the regulator will come out with the final regulations on REITs. Thus, it appears that after a long wait REITs may finally start operating in India soon.

What is a REIT?
A REIT is a pooled investment entity, just like a mutual fund. After registering with Sebi, REITs will launch initial offers that investors will subscribe to. While mutual funds invest their corpus in equity, debt and money markets, REITs will invest primarily in real estate, and that too mostly in completed, revenue-generating real estate. The rental received from these properties will be distributed among investors as dividend.

Advantages of REITs
  • Lower entry barrier: Real estate is a big ticket investment. With the advent of REITs, investors will be able to gain exposure to real estate with a smaller amount. Minimum unit size is expected to be Rs 1 lakh and minimum subscription size of Rs 2 lakh. Thus, deep-pocketed investors will be able to take exposure to real estate via REITs, thereby diversifying their portfolios beyond the asset classes available currently (equity, debt, money market, and commodities). In the future, the investment limit could be lowered further to include all kinds of retail investors. 
  • Lower risk: Since REITs will invest primarily in built-up property, the investor will not have to bear development risk, as happens when you invest in under-construction properties.
  • Greater transparency: REITs will provide an above-board source of funding to the realty sector, which currently depends heavily on black money. Limiting the use of black money will go a long way towards making the sector more transparent and consumer friendly.
  • Easy liquidity: As envisaged by Sebi, the units issued by REITs will be listed on stock exchanges. Whenever an investor wants to exit, he will be able to sell his units on the exchange. Today, liquidity is one of the biggest inhibitors to real estate investment.
  • Diversification: The minimum asset size that a REIT will be required to have is Rs 1,000 crore. Having such a large corpus will allow REITs to diversify across locations and types of real estate, such as offices, warehouses, and shopping malls. Such diversification will reduce risk. It is impossible for an individual investor to achieve diversification in his small portfolio.
  • Professional management: As with most mutual funds, REITs too will have managers who will manage the realty portfolio and try to earn higher returns for investors.
  • Asset allocation strategy: At present, it is impossible for retail investors to apply the asset allocation strategy to real estate. The essence of asset allocation is that you invest in a variety of asset classes. Such diversification lowers risk and ensures that some part of your portfolio does well under all market conditions.

The risks
As with any other investments, investing in real estate entails a few risks too. 
  • Real Estate is a cyclical asset. Just like equities, real estate markets also see bull and bear phases. These cycles tend to be longer and deeper than in the case of equities. Another risk is that real estate is an illiquid asset. Since the ticket size is large, it is not easy to sell and exit your investments even in good times.
  • During a slowdown, when you are more likely to need money, buyers become even more scarce. Both these risks will exist even when you invest via a REIT. To some extent, by listing on the exchanges, REITs may lessen the liquidity risk associated with real estate but they will not fully eliminate it. In difficult times, you may have to sell your units at a steep discount.

Who should invest?
REITs are well suited for investors with the following characterstics:
  • Investors seeking a regular income from their portfolio. 
  • The investor should not be already overweight on real estate. 
  • According to Sebi's consultation paper, REITs will declare NAV twice a year. Investors will have to take into account their liquidity needs before investing in them. Those who already have high exposure to illiquid assets (PPF, insurance policies, physical real estate) should not take a heavy exposure to REITs as well.

The right allocation
Once REITs become a reality, how much should you allocate to it? Depending on yourrisk appetite, 30-50% of your total allocation must go to growth assets, which include both equities and real estate, could be to REITs. 
Thus, if you are, say, 30 years old, it is expected that you should have 70% of your portfolio allocated to growth assets. In that case, REITs could occupy around 20-35% of your portfolio (or roughly half of your growth assets)

Cheers


Manoj Arora
Lead a Financially Free Life !!