How risky are gold funds? How do they work and how is their value decided?
Gold funds invest in physical gold of a stated quality. The value of the units depends on the returns that gold generates less the fund management expenses (currently around 1%). Gold should be a part your portfolio (5-10%) as a hedge against inflation and a fall in other asset classes such as equity and debt. This is because the factors affecting gold prices are different from those that impact other assets. So, when other assets are losing value, gold helps prop up the value of your portfolio. The best way to invest in gold is through gold exchange-traded funds (ETFs). Benchmark Mutual Fund and UTI Mutual Fund, among others, offer gold funds.
I opened a Birla Advantage Fund (dividend reinvestment) SIP of Rs2,000 a month in 2001, for two years. I have more than 2,000 units now and the NAV is around Rs110.41. Should I continue to hold the units or switch to another fund? If I should switch, then should I transfer the entire sum or go through an STP route?
You should consider redeeming your units and investing in schemes that have been better performers. You may invest in schemes from the same stable, such as Birla Sun Life Frontline Equity and Birla Sun Life Equity Fund, or diversify to other fund houses. DSPML Equity and Kotak Opportunities Fund are good options. A systematic transfer plan (STP), using a liquid plus or a short-term debt fund, would be the ideal way to invest as it would give you the benefit of cost averaging in these volatile markets. Consider the effect of loads and taxes when you plan your investment.
What role does the frequency of an SIP investment have on an investor’s returns? Also, is it possible to buy units of mutual funds online?
A systematic investment plan (SIP) involves investing smaller sums periodically in the market. This strategy helps reduce the average cost of buying units in a volatile market. This benefit of rupee cost averaging is higher with a higher investment frequency. You should ideally look at a monthly SIP. You can buy units of some mutual funds through the fund’s official website. The process to be followed will be clearly mentioned there; what is important is that payments and receipts will be processed only through specified banks. Units bought directly from the fund (including its website) are exempt from entry load. There are online broking sites that are distributors of mutual funds and you can buy units after registering yourself as an investor. You will have to pay an entry load on any transactions done through such distributors.
In February 2008, I started an SIP of Rs1,000 per month in Reliance Diversified Power Sector Fund and Fidelity International Opportunities Fund. I want to remain invested for the next two years. Is my approach right?
Both these funds can be used to round off a portfolio that also has diversified equity funds and debt funds according to your requirements and risk profile. Reliance Diversified Power Fund has performed very well in the past and, with the focus on the infrastructure sector, is expected to do well despite the recent downturn in these stocks. The Fidelity International Opportunities Fund will lend geographical diversification benefits to a portfolio concentrated on the Indian economy. It draws from the expertise of its sponsor in international investment. Less than a year old, the fund is too new to be evaluated on its performance. However, these funds cannot form the mainstay of your portfolio. If you have not already done so, then you must build a portfolio of funds that meet your specific requirements. Your investment horizon is reasonable though a longer horizon of three years or more is more suitable for equity holdings.
My income tax refund cheque has the wrong bank account number. What should I do?
The bank account details in income-tax refunds are usually the same as those mentioned in the return of your income. If the income-tax office (ITO) has entered incorrect account details, you can resolve the matter by personally visiting your ITO with copies of the acknowledgement of your return and a bank statement carrying the account details. However, if you made an error in filling the account number, the ITO, in addition to the above documents, may also ask you to furnish a letter of indemnity before making the endorsement. In either case, the ITO will endorse the correct account detail on the cheque.
I want to invest either in Public Provident Fund (PPF) or National Savings Certificate (NSC) to save tax. What are the benefits of these schemes? What is the maximum amount one can invest in PPF and NSC?
Investments in NSC give an interest of 8% per annum, which is compounded half-yearly. The effective interest, thus, comes to 8.16% per annum. PPF, too, gives an interest of 8% per annum, but it is compounded annually. In the case of NSC, the rate of interest is locked at the time of investment. In PPF, however, interest rates can be changed and are applicable on the accumulated balance in the account. In both the schemes, interest accumulates and is not paid out every year. While the minimum investment required in NSC is Rs100, there is no upper limit. Certificates are in denominations of Rs100, Rs500, Rs1,000, Rs5,000 and Rs10,000. In PPF, a minimum of Rs500 needs to be invested every year to keep the account active. The maximum contribution that can be made is Rs70,000 per annum. The PPF account matures 15 years after the financial year in which the investor first invests.
Partial withdrawals are permitted from the PPF account six years after they are opened. NSC, unlike PPF, can be used as a security for mortgage and other purposes.
My employer gives me medical cover under a group insurance scheme. The insurer reimbursed a claim for an expense of Rs40,000 incurred by me for my mother’s surgery by depositing the amount in my salary account. Will this money be added to my total income? Is it taxable?
Claims under medical policies are of the nature of reimbursement of expenditure already incurred by the policyholder. Since medical insurance is a contract of indemnity and there is no profit element in the claim received by the insured, it is not taxable in his hands. Thus, the medical reimbursement credited in your salary account will not be included in your total income for tax purposes.
My son, who gets HRA from his employer, stays in my house and pays rent to me. Will the rent be included in my income? Can a son pay rent to his father if he resides in his house and claim tax exemption for it?
Yes, your son can pay you rent for staying in a house owned by you and can claim exemption for it from the HRA paid to him by his employer. The basic condition for claiming this exemption is that he should actually be paying the rent to you. The rent he pays you will be included in your income under the head income from house property and taxed as per the applicable rates.
I have taken a joint home loan with my wife. Both of us are working and jointly own the house. How should we claim tax deductions? Can we split the total loan repayment of Rs2.50 lakh between us?
As you and your wife are joint owners and have taken a joint loan, both of you are eligible for tax concessions in the ratio of ownership. If the house is a joint property and the percentage of ownership is not mentioned (which is normally the case when a couple jointly owns a property), it is presumed that the ownership is equal. Both of you can claim a deduction separately of up to Rs1 lakh from your respective gross total income for the return of principal amount under section 80C of the Income-tax Act, 1961. Each of you can also claim deduction for interest component paid under the head “Income from house property”. The maximum deduction both of you can claim separately is Rs1.5 lakh in case the property is self-occupied. There is no restriction on the amount that can be claimed as deduction for a rented property. You and your wife can divide the total interest paid equally and claim deduction for it in your return.
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