Sunday, July 23, 2017

PRADHAN MANTRI VAYA VANDANA YOJANA - A REVIEW




PMVVY is a Government subsidised Pension Plan  Scheme for Senior Citizens which entatils them to get GUARANTEED 8% return in Monthly Mode and 8.3% return in Annual Mode.
Senior Citizens require a No-Risk, Non-fluctuating and reasonable rate of return product and to address this issue, the PMVVY has been launched.
Even with its soft launch, within 2 months, the scheme has collected Rs.2705 crores. 


Features : 
1. Implemented by LIC
2. Entry Age : 60 years.....(Maximum - No limit)
3. Polity Term : 10 years
4. Plan open from 4th May 2017  till 03/05/2018
5. On Death of subscriber,  Entire Deposited Amount will be refunded to Nominee/Legal Heirs
6. On Maturity at 10 years, Policy Holder will get the Last Due Pension along with the Intiail Deposited Amount
7. In rare cases like Critical Medical Emergency, the policy can be surrendered before maturity at a surrender value of 98% of Purchase price.
8. Minimum Amount is 1,50,000 for Monthly mode
9. Maximum Amount is 7,50,000
10. Minimum Pension / Maximum Pension 
Monthly - 1000 5000
Quarter - 3000 15000
Half Yearly - 6000 30000
Yearly - 12000 60000

For Rs.1000/- you will get 
Yearly :– Rs.83 every year.
Half-Yearly :– Rs.81.30 every year.
Quarterly :– Rs.80.50 every year.
Monthly :– Rs.80 every year.







Positives : 
1. GUARANTEED interet of 8% for 10 years that too options like Monthly, Quarterly, Half-yearly and Yearly.
2. GST will not be levied on this plan.
3. Surrender (redemption) before 10 years can be done in extra ordinary cases like critical illness of self or spouse.
4. Exempted from Service Tax or GST.
5. Loan can be availed upto 75% of Purchase price.
Loan interest will be recovered from pension instalments...whereas the Loan Principal will be recovered from Maturity proceeds.
6. Since the scheme is backed by Govt, it is absolutely SAFE.




Negatives : 
1. Pension will be added to other income for tax assessment.
2. Liquidity concerns as only Loan facility available that too after 3 years.
Especially, the fact that in Old age, there could be regular health related issues and in such a scenario, this scheme does not give you easy liquidity.
3. Taxes!!!!!
Pension paid will be added to your total income and tax will be calculated accordingly (if the total income comes under the tax bracket).
4. No cumulative Benefit.
5. The ceiling of Rs.7,50,000 covers entire family including pensioner, pensioner's spouse and dependants and hence may not be sufficient to many.
6. Not Inflation adjusted.
Assuming inflation at 7%, the purchasing power of Rs 5,000 would reduce to Rs 2,500 in 10 Years.




COMMENTS : 
With falling interest rates, the scheme is definitely attractive especially because the interest is GUARANTEED at 8% throughout the tenure of 10 years.
8% may appear attractive in the present circumstances but going forward may not be enough as Inflation pressure will extract higher expenses from you.



Entry age should have been 55 years as even those in that age bracket too would already be planning for their retirement.

Taxation is a HUGE negative. Govt could have given an exemption to at least to those who get Rs.3000 per month.




FINALLY, 
If you are looking for a SAFE, GUARANTEED long term product then PMVVY looks good otherwise you can consider SCSS (SENIOR CITIZEN SAVINGS SCHEME) as it provides better liquidity.
If you are just retired, you may outlive the policy term of 10 years and could get into REINVESTMENT RISK especially as you may need not just regular pension but INCREASING PENSION to meet RAISING EXPENSE.
Alternatively, Senior Citizens can look at Tax Free Bonds, Secured NCDs, SCSS, especially MIPs from Mutual Funds and even Balanced Funds, espeically if you are in Higher Tax Bracket and have just retired.



CAVEAT : 
Do consult your Financial Advisor before taking any Decision. 








Saturday, July 8, 2017

Soveriegn Gold Bond - July 2017.....THE BEST ONE BY FAR




I had written a lenghty article in April 2017 on the 8th Series of the issue of Sovereign Gold Bonds

Here is the link....
http://www.goodfundsadvisor.in/2017/04/sovereign-gold-bonds-good-one-but.html


I have already analysed these Bonds in depth in that article.
However what makes this particular issue of Bonds particularly interesting to me is that this Bonds are GST FREE!!!!!!!
Yes. Gold is taxed at rates even lower than the LOWEST slab of 5% of GST at just 3% and is definitely attractive Taxation wise but these SGB Bonds are exempt from even GST!!

Lets see the Features of this Sovereign Gold Bond Series II in 2017-18 in detail (Overall 9th issuance)


FEATURES  : 
1. Open for subscription on 10 July and closes on 14th July.

2) Bonds will have a denomination in multiples of 1 unit = 1gram of Gold
3) Tenor = 8 years (Exit option from 5th Year)
4) Price 2780 (mkt value 2830).............the Previous series was issued at 2901 (50 less than the then market value of 2951)
5)Interest 2.5% pa payable semi-annually.......The interest shall be paid in half-yearly rests and the last one shall be payable on maturity along with the principal.
6) Minimum 1 bond, Maximum 500 bonds
7) Each underlying unit will track and mirror the price of Gold
8) SGB available in Demat and physical format. (Here physical means Paper format).
9) Investments can be made in name of Minors
10) Indian Residents, HUFs, Trusts, Charitable Establishments, Universities are eligible
11) KYC required (same as when buying physical Gold) : Aadhar Card, PAN, Passport, et


POSITIVES : 
1. Gold is lower than the lowest slab of 5% and is taxed only on @3%.
But, this SGB does NOT have even this LOWEST tax.
Yes, SGB is TAX FREE.
2. And, of course, additional return of 2.5% per year (not compounded, but annual)
3. Tax Free if held till maturity (physical gold is taxed)
4. No making charges
5. Purity of 999
6. Can be used as Loan collateral
7. No "fund Management Charges" compared to Gold Funds or Gold ETFs



NEGATIVES : 
1. Interest is taxable
2. Lack of liquidity
3. If sold before maturity, Capital Gains will be taxed at 20% (though Indexation benefit is available)
4. Reduced Interest is at 2.5% (the first 6 tranches the interest was 2.75%)







THE BIGGEST ATTRACTION for me is that this SGB gives me Interest of 2.5% pa (on base value) and mirrors the prices of Market Value of Gold.
Neither Physical Gold, Gold Mutual Funds or Gold ETFs pay any Interest.
For a Gold lover, SGB is a GOD SENT WINDOW to invest in Gold (expecially as it is GST free!!)

SGB is definitely the BEST choice if you want to buy Gold but if you want to create Wealth and become rich.....no .....the asset class of Gold itself is not the right one...
Choose others like an Equity or a Real Estate
Please understand SGB is not a substitute for Equity/Fd/ppf/etc

BEFORE INVESTING IN SGB.....ask yourself WHY you are investing?
If it is for Returns = Please dont
If it is for Safety of Capital = Okay (Gold tends to give returns in line with Inflation)
If it is as an alternative to Gold = Yes....Please Go ahead
If it is to diversify = Yes. ...Please go ahead

But, do note....DO NOT....have more than 5-10% of exposure to Gold





GOLD OUTLOOK : 
Short term Gold looks good but long term....it does not look very attractive...Hence stick to Asset Allocation. 



Invest ONLY if you are sure to hold till Maturity. 
Invest ONLY if your Asset Allocation indicates you need to have more Gold exposure. 


Even if we assume just a 5% increase in Gold prices in 8 years.....the returns will be much higher due to the additional interest of 2.5% bign given by Govt. 
For example, if you invest Rs.50,000 in this bond and the same will appreciate to say...73872...you will actually get an extra Rs.10,000 which is 2.5 pa interest that the Govt is giving you. 
So you will end up with Rs.83872/- which is a return of 6.68% CAGR

Cost wise, SGB is really very effective even compared to Gold ETFs but cost is not everything. 
You need to look at Liquidity too. 
Even if you are lover of Gold and accept the benefits that SGB does offer....do not forge tthe dictum “DONT PUT ALL YOUR EGGS IN 1 BASKET”
While this refers to Different asset class...it could be referred to Gold too. 
Do not put everything into SGB....do have bit of exposure to Gold ETFs too
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