PROVIDENT FUND

A fund into which the employer and the employee both pay money regularly, so that when the employee retires or leaves the company, he or she receives a sum of money.

Different kinds of Provident Funds

At present there are 4 types of provident funds:  Recognized Provident Fund (RPF): This scheme is applicable to an organization which employs 20 or more employees. An organization can also voluntarily opt for this scheme. All RPF schemes must be approved by The Commissioner of Income Tax. Here the company can either opt for government approved scheme or the employer and employees can together start a PF scheme by forming a Trust. The Trust so created shall invest funds in specified manner. The income of the trust shall also be exempt from income taxes.  Unrecognized Provident Fund (URPF): Such schemes are those that are started by employer and employees in an establishment, but are not approved by The Commissioner of Income Tax. Since they are not recognized, URPF schemes have a different tax treatment as compared to RPFs.  Statutory Provident Fund (SPF): This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.  Public Provident Fund (PPF): This is a scheme under Public Provident Fund Act 1968. In this scheme even self-employed persons can make a contribution. The minimum contribution is Rs.500 per annum and the maximum contribution is Rs.70,000 per annum. The contribution made along with interest earned is repayable after 15 years, unless extended. The rate of interest is statutorily set at 8% per annum.

Tax treatment of Provident Fund

As mentioned above, both the employer and employee contribute towards Provident Fund. The contribution made by employees is out of their own income and therefore no question of taxation arises as the entire amount has already been taxed. The contribution by the employer is over and above salary of employee and therefore is seen as income of employee and taxed. The interest earned on the Provident Fund balance is on both employer as well as employee contributions, and this interest is also an income of employee and therefore taxed. The detailed tax treatment of different kinds of provident funds is little technical. There are rules that govern whether a certain fund will be taxable or not, the technical details of which are shown here. Tax treatment of Provident Fund can be discussed under two scenarios: y One during continuity of job, and y Upon receipt of accumulated balance of provident fund at the time of retirement or resignation

The table below shows the tax treatment of different kinds of provident funds: http://www.itrust.in/content/tax-planning/What-is-the-Tax-treatment-ofProvident-Fund

401(K)
A 401(k) is a type of retirement savings account in the United States, which takes its name from subsection 401(k) of the Internal Revenue Code. A contributor can begin to withdraw funds after reaching the age of 59 years. 401(k) was first widely adopted as retirement plans for American workers, beginning in the 1980s. The 401(k) emerged as an alternative to the traditional retirement pension, which was paid by employers. Employer contributions with the 401(k) can vary, but in general the 401(k) had the effect of shifting the burden for retirement savings to workers themselves. In 2011, about 60% of American households nearing retirement age had 401(k)-type accounts. Anyone familiar with the time value of money knows that even small amounts, when compounded over long periods, can result in thousands, or even millions, of dollars in additional wealth. This simple truth is one of the reasons many financial planners recommend tax-advantaged accounts and investments such as traditional / Roth IRA s and municipal bonds. In the past, these decisions were not as crucial because of the prevalence of defined-benefit pension plans. Today, those old-world pensions are going by the wayside at many U.S. firms; instead, most of today s workforce is likely to find their retirement years funded by the proceeds of their 401k retirement plan.

What is a 401k retirement plan?

A 401k retirement plan is a special type of account funded through pre-tax payroll deductions. The funds in the account can be invested in a number of different stocks, bonds, mutual funds or other assets, and are not taxed on any capital gains, dividends, or interest until they are withdrawn. The retirement savings vehicle was created by Congress in 1981 and gets its name from the section of the Internal Revenue Code that describes it; you guess it - section 401k.

What are the benefits of a 401k retirement plan?

There are five key benefits that make investing through a 401k retirement plan particularly attractive. They are: y y y y y Tax advantage Employer match programs Investment customization and flexibility Portability Loan and hardship withdrawals

Tax advantage of 401k retirement plans

As touched on in the introduction, the primary benefit of a 401k retirement plan is the favorable tax treatment it receives from Uncle Sam. Dividend, interest, and capital gains are not taxed until they are disbursed; in the mean time, they can compound tax-deferred inside the account. In the case of a young worker with three or four decades ahead of them, this can mean can mean the difference between living at the Plaza Hotel or the Budget 8.

Investment customization and flexibility

401k retirement plans give employees a range of choices as to how their assets are invested. An individual that knows he or she does not have a high tolerance for risk could opt for a higher asset allocation in low-risk investments such as short-term bonds; likewise, a young professional interested in building long-term wealth could place a heavier emphasis on equities. Many businesses allow employees to acquire company stock for their 401k retirement plan at a discount although many financial advisors recommend against holding a substantial portion of your 401k in the shares of your employer in light of the Enron and Worldcom scandals. You can get more information by reading Investing in Your Employer's Stock - Good Idea or Disaster Waiting to Happen?

ETF(exchange trading fund)

Exchange Traded Funds (ETFs) represent a basket of securities that is traded on an exchange, similar to a stock. Hence, unlike conventional mutual funds, ETFs are listed on a recognized stock exchange and their units are directly traded on stock exchange during the trading hours. In ETFs, since the trading is largely done over stock exchange, there is minimal interaction between investors and the fund house. ETFs can be categorized into close-ended ETFs or open-ended ETFs.

In the stock exchange many types of exchange traded funds exist. The following are the various types :-

1 COMMODITY ETFs :- Commodity ETFs invest in commodities such as precious

metals and futures. In India, we only have GOLD ETFs. Gold ETFs enables the investors to take active part in the gold bullion market while there is no requirement of taking physical delivery of gold and thus giving the investors right to buy/sell through the trading of the security on the stock exchange. Gold ETF s prices rise with the rise in gold prices, and it loses its value when gold price reduces.

2 BOND ETFs:- In the case of bond ETFs there is currently only one such ETF
available in India, i.e. Liquid Bees.

3 INDEX ETFs:- Index ETFs are actually index funds that hold and keep certain
securities and attempt to duplicate the performance of a stock market index. An index funds main objective is to track the performance of an index by holding in its portfolio either a sample of the securities in the index or the contents of the index.

4 EXOTIC ETFs:- The following are the various forms of EXOTIC :

a) Leveraged and Inverse ETFs: These ETFs enables the investors to gain or lose 23 times the direction of a particular type of index. These funds reset on a daily basis so they are useful only to seasoned traders who understand their risks rather than long-term buy and hold investors. b) Futures-Based Commodity ETFs: These ETFs have the primary aim to track commodities by investing in baskets of futures or swaps. These ETFs may get investors near to a pure play on commodities swap prices, they are prevented by problems such as contango from fully performing at all times. c) Exchange Traded Notes (ETNs): It is a notes track baskets of debt, secured by the provider, rather than a basket of stocks. An ETN can also be sold short, trade like a single stocks and offer special exposure to currencies or commodities. d) ETFs of ETFs : These funds are seen to layer on top of other funds, giving investors more bang for their buck. But they can also compound fees and contain products some investors may not want, so look under the hood first before you buy.

MUTUAL FUNDS
Mutual fund is a company that pools the money of many investors, its shareholders, to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio, entitled to any profits when the securities are sold, but subject to any losses in value as well. Today, minimum investment requirements on many funds are low enough that even the smallest investor can get started in mutual funds. A mutual fund, by its very nature, is diversified, its assets are invested in many different securities. The list of top 5 performing mutual fund companies is as follow: 1. HDFC Mutual Fund Inception Date June 30th 2000 Trustee HDFC Trustee Company Ltd. Top Performing Schemes AUM as on 30th April 09 + HDFC Top 200 (2338 cr) + HDFC Equity (2759.30 cr) + HDFC MIP Long-term (887.90 cr) 2. Tata Mutual Fund Inception Date June 30th 1995 Trustee Tata Trustee Company Pvt. Ltd. Top Performing Schemes AUM as on 30th April 09 + Tata Pure Equity (269.95 cr) + Tata Index Nifty (6.77 cr) + Tata Short-term Bond (292.08 cr)

3. SBI Mutual Fund Inception Date June 29th 1987 Trustee SBI Mutual Fund Trustee Company Pvt. Ltd. Top Performing Schemes AUM as on 30th April 09 + Magnum Contra (1,958.50 cr) + Magnum Balanced (333.11 cr) + Magnum Multiplier Plus (687.15 cr) 4. Reliance Mutual Fund Inception Date - June 30th 1995 Trustee Reliance Capital Trustee Company Ltd. Top Performing Schemes AUM as on 30th April 09 + Reliance MIP (168.52 cr) + Reliance Banking Retail (681.25 cr) + Reliance Diversified Power Sector Fund (3809.57 cr) 5. DSP BlackRock Mutual Fund Inception Date December 16th 1996 Trustee DSP Merrill Lynch Trustee Company Pvt. Ltd. Top Performing Schemes AUM as on 30th April 09 + DSPBR top 100 Equity (1167.08 cr) + DSPBR Equity (919.77 cr) + DSPBR GSF Longer Duration (425.67 cr)