The Tribune, Chandigarh, India

The perks of staying invested
Mahesh Patil

We often hear — "Time in the market is more important than timing the market." Be it experts or the common man, it is extremely difficult for anyone to predict the swings in the equity market given its intensely dynamic nature. Every time someone who is unfamiliar with market dynamics tries to time the market, he takes an uninformed and uncalculated risk.

Simply put - every time the stock market hits a high level, some investors enter the market thinking that since the market is up, returns will be good. Similarly, when the markets are down, some investors exit the market, thinking - What's the point, I've lost money anyway!

So how can investors still make the most of the equity markets, despite its volatility? The answer is - through Systematic Investment Plan (SIP). It is the best way, especially for new investors to approach the equity markets for long-term wealth creation and attaining financial goals.

In a SIP, the investor regularly invests a sum of money every month into buying units of a mutual fund. Because investment is made in small parts or instalments, an SIP helps investors avoid the risk of timing the markets and creates wealth in a disciplined manner by averaging the cost of investments.

Here's how investing through Systematic Investment Plans would benefit an investor.

Regular investing makes a difference: A SIP encourages a habit of regular saving and enables disciplined participation in the market despite its ups and downs. For example, let us cover a complete market cycle and assume that an investor was investing Rs 5,000 per month in an SIP from July 2008 to June 2013. This means an investment of about Rs 3 lakh, which a period of 5 years would have grown to Rs 3.67 lakh. This is a tax-free return of 8% p.a, and that too when the markets are going through some difficult times.

Cuts the risk of lump sum purchases: Since a small fixed amount is invested across time, SIPs can also help in reducing average cost in volatile or falling markets. For example, if one invests Rs 1,000 per month at the price of Rs 10 per unit in the first month, he gets 100 units. If the price falls to Rs 9 per unit next month, he gets allotted 111 units. If the price drops further to Rs 8, the investor gets 125 units. Therefore, by investing Rs 3,000 over three months, the investor gets 336 units at an average unit cost of Rs 8.9. Now if the investor had invested the entire amount in the first month itself, he would have garnered only 300 units. Thus, SIPs help lower the average cost so investors can buy more units, leading to potentially better returns.

Power of compounding: The benefit of compounding becomes more significant when one starts investing early. For example, Ram is 20 years old and starts investing Rs 5,000 per month till he is 25.

The total investment made by him over 5 years is Rs 3 lakh (5000 x 60). His friend Shyam doesn't start investing monthly, but invests the entire amount of Rs 3 lakh at the age of 25. Both of them decide not to withdraw these investments till they turn 50.

Assuming a growth rate of 10% p.a, Ram's investment of Rs 3 lakh has grown to Rs 46.7 lakh whereas Shyam's investment of Rs 3 lakh has grown to Rs 36.2 lakh. Ram's decision to start investing earlier than Shyam with small contributions through SIP has made him wealthier by over Rs 10 lakh.

Have your cake and eat it too: Equity SIP investments over a year attract 0% long-term capital gains tax. The short-term capital gains tax for investments less than a year stand at 15% for equity funds. Hence the investor gets the benefit of taxation and capital appreciation by participating in the equity market if he remains invested for over a year.

Small sums, big gains: With per month SIP contribution of as low as Rs 500, investors can easily start investing in SIP without impacting their monthly budgets. They can continue maintaining current lifestyle, while contributing towards securing their financial future at the same time. What's more, they also get tax benefit u/s 80C by investing in ELSS schemes.

Clearly, there is long-term money to be made in good mutual fund schemes. But to get there, investors need to invest regularly and stay invested. The key to successful investing is therefore to invest regularly, and with a dependable investment partner having a good long-term track record.

The author is co-chief investment officer, Birla Sun Life AMC. The views expressed in this article are his own

Are you sub-standard or a Superman?
Harsh Roongta

LIC has at long last shed its inhibitions about annoying its powerful agents and has launched their online term plans labelled LIC e-term plan. This is a welcome step as the much needed online term plans were being aggressively de-marketed by LIC agents citing the low premiums and implying that they were low simply because private sector life insurance companies settled a lower percentage of the death claims as compared to LIC. With LIC itself now coming up with online term plan which is at least 40-50% cheaper than its own offline counterpart, this de-marketing tool has been deactivated.

That brings us to the true reason why premiums for online term insurance policies are so much cheaper than their offline counterparts even from the same life insurance companies. First are the more obvious reasons - there is no agent's commission in those products and the administrative costs for the insurance companies are also lower.

Another reason is that insurance companies have discovered that since consumers fill in the form themselves they are far more truthful about existing issues about their health or financial situation and hence the chances of having early death claims are reduced as compared to offline term plans. In fact, there has been a virtual war to reduce premiums for online term plans over the past 2-3 years.

This dramatic reduction in premiums for online term plans has one significant hidden aspect. The displayed low premiums are meant for people in perfect health who do not use tobacco. If any person, even if he is in perfect health, uses tobacco, then the premium rates applicable to him are only marginally cheaper than what he will get on

offline plan from the same life insurance company. More importantly, the definition of what constitutes "perfect health" varies from company to company. In some companies, I suspect only a superman who does not use tobacco would qualify for normal premium rates with most other people (referred to in the insurance industry as "sub-standard" lives) being asked to pay higher premiums or even being denied insurance policy. Consumers who seek large insurance policies tend to be from the relatively higher income bracket who definitely are not "superman" health wise. Although no data exists, market sources indicate that a very large number of consumers who seek online term policies have to pay higher premiums than those displayed.

With at least one notable exception, the definition of "superman" is stricter if the premium is at the lower end of the scale and hence in most cases the cheaper rate may just be illusory.

Since the difference in premiums for online term plans (adjusted for the above things) is not very high it poses a question on how to choose your online term policy. As a consumer you should not really be worried about death claim settlement ratio as long as you disclose all facts fully and completely. You can bet that if the claim happens in the first 2-3 years it will be investigated thoroughly and be disputed if the insurance company finds any misstatement or suppression of facts - irrespective of the high death claim settlement ratio of that company.

It is here that LIC may have an advantage since they have the ability and expertise to write large insurance policies for "sub-standard" lives (yes it was a shock when I first heard myself being described as such) albeit at much higher premiums. It is not known however whether that ability or expertise that is available in the offline world will also be available for its online consumers.

Whichever way that goes, the introduction of LIC's e-term plan will provide an additional fillip to the entire online term insurance market that is already growing rapidly. Finally, a new generation of Indians will begin to buy adequate insurance, whether from LIC or some other insurer, it doesn't really matter.

The author is CEO, Apnapaisa.com. The views expressed in this article are his own

Tax Advice
CCA taxable
SC Vasudeva

I am employed with a company which is giving me various allowances such as City Compensatory Allowance (CCA) and HRA. Are these amounts taxable or any type of exemption is allowable under the Act? — Rajinder Kumar

The CCA, even if it is paid to meet additional expenditure, is an additional salary and therefore taxable. This issue stands settled by a Supreme Court decision. The HRA is exempt to a certain extent. The exemption is based upon the following criteria:

An amount equal to 50% of salary, where residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40% of salary where residential house is situated at any other place.

HRA received in respect of the period during which rental accommodation is occupied during the previous year.

The excess of rent paid over 10% of salary.

The least of the above three will be exempt from tax.

My income for the year 2013-14 is Rs 6 lakh. My savings are to the tune of Rs 1,38,000 and home loan interest is Rs 28,400. Please calculate my tax liability. — Kuldip Kaler

Total income in your case would work out at Rs 5,00,000 as you would be entitled to a maximum deduction of Rs 1,00,000 in respect of savings. This is in accordance with the provisions of Section 80C of the Income-tax Act, 1961 (The Act) as in view of the absence of any details in the query, it is presumed that amount of Rs 1,38,000 was invested by you in respect of saving instruments covered by Section 80C of the Act. After allowing deduction of home loan interest, the total taxable income would work out at Rs 4,71,600. Tax thereon would work out at Rs 25,915 after allowing a special rebate of Rs 2,000 as your total income does not exceed Rs 5,00,000. It is presumed that you are not a senior citizen as above tax has been computed on that basis.

My father held shares in various blue chip companies which he had acquired at least 10 years prior to his death with his own resources. On the basis of will, such shares have devolved upon me. My father died in January 2008. I am interested in selling these shares as share prices have improved considerably as compared to the cost which my father had paid at the time of their acquisition. These shares are of listed companies. I have been advised that the sale of such shares will entail short-term capital gain as my holding in respect of such shares is less than one year. Is such presumption correct? — Krishan Kumar

According to the provisions of Section 2(42A) of the Act, a capital asset in the nature of shares in a company is deemed to be a short-term capital gain if the same is held by an assessee for not more than one year immediately preceding the date of its transfer. The said section also provides that in case the shares so held have become the property of the assessee on account of succession, inheritance or devolution, the period for which the shares were held by the previous owner will be included in the period for which the asset has been held by the assessee. In view of the above legal position, the shares received by you by inheritance from your father would be deemed to be a long-term capital asset as these have been held for a period of more than one year. In case the shares so held are sold through stock exchange and securities transaction tax is paid on such a sale, the long-term capital gain earned on such shares would be exempt from tax under Section 10(38) of the Act.