Six tips to make the most of your PPF

The stock market, despite the probability of giddy returns, can give you the heebie-jeebies due to the wild swings in share prices. Fixed deposits can be a turnoff because the interest earned is taxable. For investors seeking the best of both worlds, there is the Public Provident Fund (PPF). Wrapped in safety and free of tax, the PPF is almost a godsend for risk-averse investors. 

PPF is an excellent tool for long-term investment. It is risk-free as it is backed by the government. It is especially suitable for self-employed professionals and small businessmen who are not covered by the Employees' Provident Fund. Those who don't have access to an organised setup can realise long-term goals through the PPF.

Don’t think of your PPF account as a stodgy investment option where you put away something once in a year. With a little planning, it can be an important part of your financial portfolio. Here are a few tips that will help you make the most of this option: 

Maximize limit:

The 8% compounding interest you earn on the balance can work wonders for you, especially because a PPF account is a long-term investment. There is an annual limit of Rs 70,000 that one can invest in the PPF.

You may feel it is a waste to be investing Rs 70,000 in this option when your Rs 1 lakh tax saving limit under Section 80C has already got exhausted. But don't let the tax savings alone guide your decision. Invest as much in PPF as you can afford to.

If you contribute Rs 70,000 a year to your PPF for 15 years, your investment would grow to a gargantuan Rs 22.92 lakh on maturity. 

And remember, this is tax-free money. In the 30% tax bracket, this is equivalent to receiving almost 11.5% interest on a bank fixed deposit. The PPF offers the highest post-tax returns among all fixed income options since no tax is levied on the investment, income and withdrawals

Distribute income:

There are benefits in store if you open a PPF account in the name of your spouse or child. Tax laws say that if any money gifted to a spouse is invested, the income from that investment is clubbed with the income of the giver.

However, since PPF income is tax free, it will not push up his tax liability. This way, you can invest more than Rs 70,000 a year in this tax-free haven and benefit from its various advantages.

This strategy does not work in case of minor children though. You can open a PPF account in the name of a minor child but the combined contribution to you and your child's account cannot exceed Rs 70,000 a year.

Invest for children: 

However, if the child is over 18 years, up to Rs 70,000 a year can be invested in his name separately. The taxman insists on clubbing the income of minor children with that of the parent. But once they turn 18, they can have a separate income.

A PPF is an ideal way of building a fund for your child's educational needs instead of falling for all the ‘high-commission-paying’ child plans of insurers. In a child plan, you are not sure of the final returns.

Invest before cut-off:

It’s important to keep an eye on the calendar when you make your contribution to the PPF. The interest on your investment is compounded annually but the calculation is monthly.

The interest is calculated on the lowest balance between the 5th and last day of every month. So, if you invest before the 5th, the contribution will earn interest for that month too. Otherwise, it's like an interest-free loan to the government for a month.

Withdraw for emergencies:

The PPF can also be your emergency fund. Although it is not a good idea to dip into long-term savings for consumption, if you are faced with a terrible cash crunch, you can withdraw from your PPF account. It will be far cheaper than going in for a personal loan at 17-18%.

Withdrawals are allowed after the sixth year. But you can withdraw only once in a year and only up to a specified limit.

Also, be sure to put back the amount you have withdrawn at the earliest. As we said earlier, this is not a good strategy if you do it frequently. Some investors use this tack to claim tax deduction.

They withdraw from the PPF and then reinvest the money after sometime. This is a flawed investment strategy. They only look at their gross savings but their net savings do not grow.

Other helpful tips: 

A PPF account matures in 15 years. Though you are allowed to open only one PPF account, you can extend it after it matures. Accounts can be extended in blocks of five years indefinitely. Even if you don't have a large sum to invest in the PPF, don't forget to invest the minimum Rs 500 in a financial year.

There's a small but troublesome penalty of Rs 50 levied if you fail to do so. Don't invest more than the Rs 70,000 a year. The excess amount, even if credited to your account by mistake, will not earn any interest.

Plan your Retirement properly

Every one dreams about a comfortable retired life but how many actually Plan.

Why not turn this dream into reality?

There was a time when people gave little thought to planning for their retirement. They were somehow able to manage with their PF Receipts and other savings or they had their children to look after them.

Now, the scenario has changed radically. We do not want to compromise on our lifestyles even post retirement, competition is immense and joint family has become a rare phenomenon. Many people postpone their wishes to retirement. For e.g., going for a foreign tour or for a pilgrimage, buying a vacation home and so on.

In the light of these factors, Retirement Planning has emerged as one of the most important goals for one and all. Irrespective of the age bracket or work area we may belong to, Retirement Planning is certainly relevant for each one of us. While some of us may be self employed professionals aiming to work till we live, but it is important that we understand that as we age, our stamina goes down and so does our work capacity and there is no exception to this law of nature.

 I have missed the bus, or There are many years before I retire, both these schools of thought are inadmissible and just another way to procrastinate. By thinking this way, you will never be able to make your retirement years, the golden years of your life, where you do not retire from work but also from worries, tensions and any form of anxiety. 

So, what are you waiting for?

To start with, you can earmark a part of your monthly income towards funding your retirement. If there are over 10-15 years to your retirement, invest this amount in a growth portfolio with equity as the dominant asset class.

If there are less than 10 years for you to retire, increase the monthly savings amount and invest it in a moderate portfolio so that you do not bear high risk on your investments.

The retirement plan would differ case by case depending upon client specific situation in terms of portfolio size, intermediate goals, risk appetite, years to retirement, retirement contributions, etc.

So go ahead and start now. It will surely be worthwhile.

Set Realistic Goals: 

Decide how much money you will require to live the retirement lifestyle you want. With good health and increasing life expectancy, you could even live for more than 30 years after retirement.

Earmark a Part of the Monthly Inflow to Retirement: 

Make sure that a part of your monthly income is earmarked to retirement. For the exact amount that you should be saving towards your retirement, you just have to log on the Just Plan Section on this website. 

Informed & intelligent Investing:

 Following a well devised investment strategy can work wonders towards timely and efficient realization of your goals. Make sure that your investments are not concentrated in one asset class and are indeed diversified towards optimizing the overall return. 

So, if you are all geared up to invest towards your retirement, go to the Just Plan Section and Plan Now. 

Personal loan trap: Flat rate no better than reducing one

Placed at the entrance of the office, the big banner proclaimed the USP of the non-banking finance company (NBFC)—“No disclosure of the purpose of the loan.” I was grateful. Despite racking my brains for hours, I hadn’t come up with an urgent reason for a Rs 3-lakh personal loan. 

All the options seemed clichéd—illness in family, debtors threatening to sue or capitation fee for a sibling’s education. Weekend doses of potboiler movies were taking their toll. The relationship manger (RM) lived up to the NBFC—not once did he ask why I wanted Rs 3 lakh. The questions were basic. 

“Do you own a credit card or have you taken any other loan?” he began. “No,” I replied. My credit record was clean. In fact, I had no record at all. Most investors think this is a good thing. Would the RM let on the truth? He did: “We need to examine your credit record with Credit Information Bureau India Limited for the past one year. If you have no loan or credit card, there is no record. We can’t give you a loan.” I was stumped. 

My application had been turned down within five minutes. Where were the false promises to ensure I took a loan? They were coming. The first one was a lame attempt. “Take a credit card. Don't use it if you are uncomfortable. After one year, we will give the loan,” said the RM. What about the emergency for which I needed the money? Would it wait for one year? Of course, I had forgotten.

The NBFC didn’t ask for the purpose of the loan, so they couldn’t be bothered. I murmured something about an emergency and started to get up. “Wait,” ordered the RM. I sat down again. “Does anyone in your family have a credit card? Or has anyone taken a loan?” he asked His second attempt hit pay dirt. I told him that my husband had a credit card and was servicing a home loan. Would that do? “Of course. Take the loan in his name.

What is his annual income?” he asked. I gave a random figure. He tinkered with a calculator and said my husband was eligible for a personal loan up to Rs 6 lakh. It wasn’t his business that my husband’s cash flow could not accommodate another EMI. It was time to ask the most important question: “What is the interest rate on my loan?” The RM excused himself to discuss it with his senior. 

Within five minutes he had the answer: "Your EMI will be Rs 10,696." Alarm bells ought to have started clanging. Instead of revealing the loan rate, the RM was talking about the EMI. Why? I pushed him to tell me the loan rate. He hemmed and hawed but seeing no way out, gave me the figure: 9.45% It wasn't shocking. As expected, the NBFC was charging 7-15% lower interest than banks. This is why people go to them: lesser paperwork and cheaper rates. Also, most don't know the difference between a flat rate and a reducing balance rate.

I wasn't supposed to know either. Continuing to play a naïve investor, I asked: "What will be the rate in the way banks calculate interest?" The RM was not ready for the poser. He stared at me, his computer screen and again at me. Finally, he said reluctantly: 17%. The cat was out of the bag. Banks advertise loan rates calculated on reducing balance, while NBFC's rate was applicable on the entire loan. 

In absolute terms, the EMIs would not be very different. I asked the RM to explain why the second figure was higher. "It has been calculated on a reducing balance whereas ours is a flat loan rate. Double the flat rate and you get the reducing rate," he said. In that case, twice 9.45 should be 17, right? Even ordinary investors would have seen through his sham. The RM knew he had messed up. Quickly, he moved to plan B. If you can't convince, confuse. "In a flat rate loan, you have to pay the entire amount if you pre-pay within six months.

In a reducing balance loan rate, you don't have to pay anything except the principle." Did the RM realise he was favouring banks and not the NBFC? Trying to rush, the RM explained the sanctioning of loan. I had to give photocopies of some documents. EMIs would start from 3 February. "So I won't pay anything for the month of January, right?" I asked. The RM's smile slipped a notch. "You will be charged a pre-EMI interest of Rs 10,000 up to 3 February 2011.

I can't set up the direct debit from 3 January as it is only two working days from sanction date (30 December). But don't worry. The amount will be deducted from the loan cheque," he said. What about the processing fee? It was 2% of the loan and would be deducted from the loan cheque as well. I insisted on paying pre-EMI interest and processing fee—totaling Rs 25,000 in cash. But the RM didn't budge.

"We are doing this for you. How does it matter whether you pay now or through the loan?" he asked. It didn't matter to him. I would be the one paying 17% interest on Rs 3.25 lakh instead of Rs 3 lakh. 

When I confronted him with this, the RM offered another deal: "If you take this loan from me, I will reduce the interest to 16% and the processing fee to 1.5%." I had to give him credit: He was a lousy RM but a relentless salesman. It is a pity that most people can't make out the difference.

Courtesy- By Khyati Dharamsi,ET Bureau 

Mobile Number Portability: Frequently Asked Questions

The long-awaited mobile number portability finally became reality in India, empowering consumers to change providers conveniently. Here is some FAQ.

What is mobile number portability?

Allows subscriber to opt for service provider of his choice but retain his mobile number. The number gets ported to the new provider.

Mobile Number Portability: Does it allow a technology switch?

Subscriber can stay with same technology, GSM/CDMA. Also change to CDMA or vice versa. Both post-paid & prepaid subscribers can use it.

How long will it take to port a number?

Seven working days. Fifteen days in J&K, North-east

How expensive?

Will cost Rs 19, to be collected by new service provider.

Can you retain your number in another city?

No. You can’t change circles.

How frequently can you switch service providers?

A subscriber must be with a provider for at least three months.

Step 1

To switch, send the following text PORT mobile number to 1900.

You’ll get an eight-digit alphanumeric code and expiry date for it. This is the unique porting code.

Step 2

Approach service provider you have opted for with unique code. Carry address & ID proof/ photograph/ application form with unique code & mobile number. Complete this process within the expiry date that came with unique code

Operator will take request to mobile portability clearing house. Clearing house will get your number deactivated from existing provider and activate new one.

Step 3

You’ll then get text from new provider mentioning date & time when phone will go through a no-service period.

This is when switching of service providers will happen. Phone will be out of use for couple of hours — between 12 pm and 5 am.