In an interview to CNBC-TV18, Gaurav Mashruwala, Certified Financial Planner gave strategies on how one can plan finances at the beginning of the financial year.
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Below is the verbatim transcript of Mashruwala's interview with CNBC-TV18.
Q: It is the beginning of the financial year and our only hope is that people will use this opportunity to plan their finances as well as their taxes much in advance and not in March 2014, when the year ending comes. What would your strategy be in terms of people planning their finances; a lot of people get their increments around this time. Do you think it is good idea for employees to voluntarily opt for higher Employees Provident Fund (EPF) deductions?
A: It makes lot of sense because what happens is usually, whenever one has an increment or bonus or anything, retirement takes the backseat in the sense that people look at either splurging because of nearing summer vacations or people get into funding for their other goals. So, it makes sense to focus on retirement when one gets an increment and ensure that the additional amount that he will be getting gets deducted and added to the retirement corpus.
Voluntary contribution voluntarily to provident fund, usually companies prefer that the request is made at the beginning of financial year. So, if one has got an increment now then inform the HR department that he wants to make additional contribution to his provident fund.
One can do up to 100 percent of basic. Obviously that may or may not make sense but one may want to do it, put it on autopilot so that throughout the year, every month from the basic pay, there will be contribution happening to his voluntary provident fund.
Q: What is the rate of interest on this? Is there something like lock in period and if someone wants to withdraw then will you take a haircut on it?
A: Interest rates hover every year. The employees' provident fund organisation (EPFO) meets and the interest rates normally vary between 8-8.5 percent - that's number one. One can take out his corpus at the time of retirement however there are certain situations where he can withdraw interim. So, if there are situations like marriage in the family or home buying or there are some special situations where one is allowed to withdraw.
In terms of tax implications, contribution to provident fund is tax free, the growth is tax free and when one takes that money out, there is also a tax benefit. In fact, public provident fund is one more option where one can contribute. There has been some reduction in rate of interest there by 0.1 percentages. There is another option one can consider but here, generally, people tend to keep money till end and they only take it out towards the retirement. So, only when one retires, he should take out money and that is a prudent strategy.
Caller Q: I have Rs 4 lakh to invest. I want your guidance on where to invest so that I can get 50 percent return on yearly basis?
A: Difficult to comment on the exact return but since you are talking about a financial goal, which is more than a decade away, equity is an asset class and what you want to do is put into an equity mutual fund. If you have skills and time then you may want to get into largecap equity fund or even midcap and smallcap because you are young and you have time horizon. However, if you do not have either skills or if you do not have time I would suggest picking up an index fund, which replicates a largecap index so you may take Nifty based fund or a Sensex based fund and just park in that.
Since you are talking about lump sum, one more option you may want to consider is park in a debt fund, do a systematic transfer. So, you are not taking call at one single point, just transfer the entire money into equity fund over a year and leave it at that. Twelve-fifteen percent, ideally it should happen though it is not guaranteed. Therefore, you live with that volatility and uncertainty.
Q: Even if you map the last five years, equities have given no returns at all and at a juncture like this when there is so much by way of headwinds for our market, the investor apathy is something that everyone can understand on the street. If I want to not put my money in equity and lump sum that he was suggesting has to be invested elsewhere. What other ideas would you give him?
A: For me equity has always been for seven-nine years or longer and that is what any financial planner would maintain. That is one. Second, do it over a period of time. Therefore, if pickup any decade and he is talking about 1 year horizon -- pickup any decade in India or across the world and you would have one or two complete business cycles. So, five years yes, it could be bad from 2007 till date but if you look at a decade, India has given 12-15 percent. Therefore, I would still stick to equity as an asset class and in his case mutual fund.
Gold could be another asset class because there is no way debt based instruments is what he wants to pickup because over a longer tenure he loses to inflation. So, 13 years, I would still stick to equity as an asset class and maybe gold as an asset class.