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Category: Personal Finance

Income Tax Planning for salaried employees

80% of the returns for salaried individuals filed by us end up with a refund.

A refund arises due to excess deduction of taxes by the employer.

No, it is not the employer’s fault. It is usually inadequate tax planning by the employee.

Either the investments or deductions are not declared or the wrong tax regime is chosen for TDS, but lack of proper tax planning means withholding of excess TDS.

Which also means a lower in-hand salary every month!

Let’s be real – employees are taxed on their gross income i.e. they do not get any significant deductions for their expenses.

So every tax saving becomes precious.

Here a few practical tips and tricks to ensure proper tax planning to avoid needless refunds:

1. Declare all income and investments to the employer

– Nothing invites trouble more than not declaring expected incomes to the employer. This can result in a payable situation as well and you end up shelling taxes at 1% p.m.

– While investments like employees contribution to PF and NPS contributions are considered by the employer upfront, there are other investments like LIC premium, medical premium which should not be considered for the purpose of working.

– It is important to declare everything to the employer such that it gets considered at the time of TDS itself.

2. Choose the new or old tax regime during the financial year itself and intimate the employer

– This has become common recently that employees get their tax deducted under old regime while after coming to us, they realise that the new regime suits their case better.

– This can be easily avoided by doing a draft calculation at the beginning of the FY and asking the employer to deduct tax in the respective tax regime.

– Suppose, you are an employee who does not claim much tax deductions under section 80C or 80D, then it is likely that the new regime will result in significant tax savings.

– It is vital to do a calculation to ensure that there are no surprises at the time of filing refunds!

3. Make full use of available tax deductions for housing (owned/ rented)

– While everyone knows about the HRA deductions, there are various lesser-known deductions like under section 80C, interest on home loan etc. which are not declared to the employer upfront.

It is always advisable to have this factored into the monthly in-hand.

Why?

If there is any deduction which has not been declared to the employer (i.e. appearing in Form 16) and the same is claimed only during the return of income, then it increases the chances of inquiries by the Income Tax Department.

Caution points to remember in tax planning:

– Make sure your immediate and mid-term financial needs are covered as most of these investments have a minimum lock-in period of 3/ 5 years.

– It’s important to consider several investment opportunities before making a final decision. Ensure that your need of tax saving is not getting fulfilled at the cost of poor returns from that investment.

– Be fully aware of the objective of an investment, it’s gestation period and maturity terms and conditions.

Thank you for reading. Should you require any clarification or information, please write to us at contact@vprpca.com

July 5, 2022
The HUF Magic – Legally save lakhs of rupees in taxes

Going old school works.

Clients approach their Chartered Accountants (like us) to save taxes. And CAs like us advise clients to form an HUF and save lakhs in taxes over the years.

This form of tax planning is completely unique to India!

So what is the hype all about?

HUF stands for Hindu Undivided Family. There are three conditions to fulfill:

1. You are either a Hindu, Sikh or Jain

2. You must be married (not necessary to have kids)

3. The family must be undivided i.e. husband, wife and children (if any) must live together

If you fulfill all the three conditions above, congratulations! You are eligible to save a lot of taxes legally!

How does HUF help in saving taxes?

Let’s get down to the details. Here is all you need to know.

Features of HUF

1. HUF is treated as a separate person for the purpose of tax law. It has its own Permanent Account Number, bank account and files its own tax returns.

2. For income taxes, it is taxed at slab rates similar to an individual. Thus, first Rs 2.5 lakhs are exempt.

3. HUF is awarded almost all the same deductions as an individual. Example, if HUF takes out a life insurance for its members, a deduction under section 80C of the Income-tax Act, 1961 is available.

4. HUF has a separate bank account, PAN and own balance sheet.

5. HUF is created in many ways like through wills, gifts, inheritance. However, creation of HUF through gifts from the members is the most common way.

6. The head of the HUF is called as ‘Karta’ and the other members are called co-parceners.

7. HUF can make investments in its own name. It can be a shareholder of companies too. Thus, a separate demat account can be opened in the name of the HUF.

Who is ‘Karta’?

The ‘Karta’ is the senior-most male member of the family who is responsible for management of the affairs of the family.

In simple terms, ‘Karta’ is the head of the family.

Only a family member with coparcenary rights can become ‘Karta’. However, after Hindu Succession (Amendment) Act, 2005, a daughter has also been given coparcenary rights in the HUF property.

Tax planning must be done properly so as to avoid the income of HUF getting clubbed with the income of the Karta.

How does HUF help in saving taxes – an illustration.

Let us take family of Mr. Chandumal who earns a salary Rs 25 lakhs. He gets married this year to Mrs. Chandumal who earns a similar salary too. They pay taxes of roughly Rs 5,85,000 each.

The parents now want to gift ancestral property to their son and newly wed daughter-in-law.

Scenario 1: Mr Chandumal does not create an HUF

Mr. and Mrs. Chandumal receive ancestral property from his parents giving income of Rs 10 lakhs per year.

The income would get split evenly between the husband and wife i.e. Rs 5 lakhs is added to each of their total incomes.

The tax outgo for both Mr and Mrs Chandumal will rise to Rs 7,41,000 each for the entire year in their individual names.

To put it in perspective, an additional income of Rs 5,00,000 has increased their tax outgo by Rs 1,56,000. This is because of the higher tax slab of 30%.

Total tax outgo = Rs 14,82,000 (7,41,000 + 7,41,000)

Scenario 2: Mr Chandumal creates an HUF

The ancestral property is in the name of the HUF. The income of Rs 10 lakhs is taxed in the hands of the HUF and the return is filed separately too.

The HUF has to pay a tax of Rs 1,17,000 only.

Total tax outgo = Rs 12,87,000 (5,85,000 + 5,85,000 + 1,17,000)

Difference between Scenario 1 and 2 = Saving of Rs 1,95,000 every single year!

Using HUF for tax planning makes a lot of difference in creating the family wealth of Mr and Mrs Chandumal. It will help them achieve their financial goals faster.

Steps for creating an HUF

Step 1: Prepare a HUF deed

Though it is not mandatory, it is highly advisable (based on our practical experience) to have a deed. It helps the HUF sail smoothly in documentation requirements, especially while liaising with regulators and authorities.

The deed must create the name of the HUF. If Mr. Raj Mehra is creating an HUF, the name should be ‘Raj Mehra HUF’. Using any other iterations is not advisable.

It is advisable to seek professional assistance (e.g. CAs, lawyers) for creating the HUF deed to ensure it is bullet-proof and in compliance with laws.

Step 2: Create a rubber stamp

The Karta is the person who runs the HUF. A rubber stamp must be created (available at local stationery shops and online as well) in the name of the HUF. It is required for PAN and bank accounts.

It should read as under:

For Raj Mehra HUF

Karta

Step 3: Application for PAN

An Income Tax identification number is to be obtained for the HUF. A separate PAN application must be filed along with the HUF deed as proof of creation of HUF.

It takes nearly a week for the PAN to be allotted.

Step 4: Opening of bank account

After PAN has been allotted by the Income tax department, the Karta can proceed to open a regular bank account. The HUF deed, PAN card along with other details of the Karta should suffice as proof required by banks.

Step 5: Deposit money into bank account

Based on how the HUF is created (e.g. wills, gifts), the money can be transferred into the bank account of the HUF.

Remember, HUF is a separate entity in the eyes of the law.

Separate accounts are required to be maintained for an HUF. The tax return would be filed separately too.

It is always advisable to seek professional assistance in the creation and administering of HUF.

Thank you for reading.

In case of any clarification or information, please reach out to us at contact@vprpca.com. We shall be happy to assist you.

May 5, 2022
E-Dispute Resolution Scheme – Income Tax – All you need to know
On 5 April 2022, the Central Board Of Direct Taxes (CBDT) issued the e-Dispute Resolution Scheme, 2022 by the Dispute Resolution Committee on applications made for dispute resolution under Chapter XIX-AA of the Act in respect of dispute arising from any variation in the specified order by such persons or class of persons, as may be specified by the Board.

Key features
- Assessee who fulfils the specified conditions may, in respect of any specified order, file an application electronically for dispute resolution to the Dispute Resolution Committee designated for the region of Principal Chief Commissioner of Income-tax having jurisdiction over the assessee.
- Application shall be filed in the Form No. 34BC referred to in rule 44DAB within such time from the date of constitution of the Dispute Resolution Committee, as may be specified by the Board, for cases where appeal has already been filed and is pending before the Commissioner (Appeals); or within one month from the date of receipt of specified order, in any other case;
- Application shall be submitted by email to the official email of the Dispute Resolution Committee alongwith proof of payment of tax on the returned income, if available and accompany a fee of one thousand rupees.
- The Dispute Resolution Committee shall examine the application with respect to the specified conditions and criteria for specified order;
- Upon such examination the Dispute Resolution Committee, where it considers that the application for dispute resolution should be rejected, shall serve a notice calling upon the assessee to show cause as to why his application should not be rejected, specifying a date and time for filing a response;
- The decision of the Dispute Resolution Committee that the application for dispute resolution should be allowed to be proceeded with or rejected, shall be communicated to the assessee on his registered e-mail address;
- the assessee shall, within thirty days of receipt of the communication that the application is admitted be required to submit a proof of withdrawal of appeal filed under section 246A of the Act or withdrawal of application before the Dispute Resolution panel, if any, to the Dispute Resolution Committee or convey that there is no aforesaid proceeding pending in his case, failing which the Dispute Resolution Committee may reject the application.
Conclusion

A good move aligned with the intention to create ease of doing business for taxpayers. The challenge lies in the implementation. Communicating with tax department over email has proven to be a constant challenge under the faceless assessment regime. It remains to be seen how well this E-dispute resolution scheme can be implemented.

We would love to hear from you. Please get in touch at contact@vprpca.com
April 7, 2022
How to pay using UPI123Pay – Everything to know

The Reserve Bank of India (RBI) has launched Unified Payments Interface (UPI) service for feature phones called UPI123Pay.

At present, efficient access to UPI is available on smart phones. Considering that there are more than 40 crore feature phone (e.g. Nokia dabba phone) mobile subscribers in the country, UPI123pay will materially improve the options for such users to access UPI.

With this launch of new UPI for feature phones, Das added that it would help the National Payments Corporation of India (NPCI), an umbrella organization serving retail payments and settlement systems in India, reach its goal of processing a billion transactions a day.

UPI123Pay will also assist RBI to achieve its objective of a less-cash economy and financial inclusion.

Features:

Feature phone users will now undertake a host of transactions based on four technology choices. These include calling an IVR (interactive voice response) number, app functionality in feature phones, missed call-based approach, and also immediacy sound-based payments, the RBI stated.

Such users can make payments to friends and family, pay utility bills, recharge the FAST Tags of their vehicles, pay mobile bills, and allow users to check account balances. Adding customers will also link bank accounts and set or change UPI PINs.

Further, the 24×7 helpline ‘Digisaathi’ will assist the callers/users with their digital payments queries via the website and Chabot.

Users can visit www.digisaathi.info or call 14431 and 1800 891 3333 from their phones for their digital payments and grievances queries.

Distinct options:

App-based Functionality: App could be installed on the feature phones, allowing several UPI functions open on smartphones to be functional on feature phones.

Missed Call: By dialing a missed call on the number displayed at the merchant outlet, feature phone users will be capable of accessing their bank account and performing routine transactions such as receiving, transferring funds, regular purchases, bill payments, and so on. The customer will accept an incoming call asking them to verify the transaction by entering their UPI PIN.

Interactive Voice Response: UPI payment via pre-defined IVR numbers would necessitate users making a secure call from their feature phones to a pre-determined number and completing UPI on-boarding formalities before they could begin making financial transactions without the internet.

Proximity Sound-based Payments: This technology utilizes sound waves to permit contactless, offline, and proximity data communication on any device.

How to use UPI123Pay?

A shared server site library permits feature phone holders to use digital processes to transact.

The UPI123Pay feature does not require internet connectivity to transact online. Additionally, this service is available in various Indian languages.

The smartphone and feature phone users can now effortlessly transact digitally with the new facility.

UPI for feature phones is a three-step process call, choose and pay.

Before initiating to make the payment, it is required that the user links their bank account with the feature phone.

Further, using his/her debit card, they will be required to set a UPI PIN.

Once the UPI PIN is created, the user can use their feature phone for transactions just like a smartphone user.

The feature phone user needed to call on the IVR number and choose the phone relying on the service mandated such as money transfer, LPG gas refill, FasTag recharge, mobile recharge, balance check, etc.

To transfer the money, one will have to choose the phone number to whom money is to be transferred, add the amount, and enter UPI PIN.

To pay to a merchant, they can use an app-based payment method or missed call payment method.

They can also use the voice-based method to make digital payments.

Actual steps/ process for using UPI123Pay

#Dial the IVR number 08045163666 on your phone.

#On the IVR menu, select your preferred language.

#Now, choose the bank linked with UPI

#Press ‘1’ to confirm the details.

#Press ‘1’ to send money by using your mobile number.

#Enter the mobile number of the recipient.

#Confirm the details.

#Now, enter the amount that you want to transfer.

#Enter your UPI PIN and authorise the money transfer.

That’s it. That is how you use UPI123Pay!

Welcome to the new India.

March 17, 2022
All about Advance taxes under Indian Income Tax law

Every citizen of India is liable to pay tax if their income comes under the Income Tax bracket. The government depends mainly on its tax collection to finance its spending throughout the year. This funding is utilized in the development of nation, reforming infrastructure, and the betterment of society, which helps in shaping the economy of the country. There is a tax structure in India that is followed and as per the tax slabs; individuals are required to pay their taxes.

Let us understand about advance tax and how advance tax is calculated in India.

What is Advance Tax?

Advance tax is the amount of income tax that should be paid much in advance instead of lump-sum payment at the year-end in instalments as per the due dates given by income tax department. Advance tax is also known as ‘pay as you earn’ tax and is supposed to be paid in the same year the income is received.

Who Needs to Pay Advance Tax?

As per section 208 of Income-tax Act, 1961, a taxpayer needs to pay advance tax if their tax liability is 10,000 or more in a financial year.

Advance tax is for those who earn money from sources other than salary. It is applicable for self-employed individuals, professionals, and business men if their income exceeds a certain limit This includes money that comes from shares, interest earned on fixed deposits, rent or income received from house tenants. Senior citizens who are more than 60 years of age are exempt to advance tax.

How to Calculate Advance Tax?

Listed below are the 4 steps that will help you calculate advance tax:

1. Make an estimate of the total income earned by you.

2. Subtract all expenses from your income, including medical insurance premiums, phone costs, travel expenses, etc.

3. Now, add other income that you received apart from your salary. This includes interest from FDs, house rent, lottery earnings, etc.

4. If the amount of tax calculated is more than 10,000, then you are liable to pay advance tax.

How to Pay Advance Tax?

Just like regular tax payment, advance tax payment is also done using challan. There are many banks that allows you to pay advance tax through challans. You can also pay advance tax online from the comfort of your home. Here’s a step-by-step guide that will help you pay advance tax online without any hassles –

1. To pay advance tax online, you need to click on the government’s official website – http://www.tin-nsdl.com

2. Choose the correct challan that is ITNS 280, ITNS 281, ITNS 282 or ITNS 284 as relevant to pay your advance tax.

3. Fill in your PAN card details along with other important information such as your address, phone number, e-mail address, bank name, etc.

4. Once you have entered all the details, you will be redirected to the net-banking page of the website.

5. Now, you will receive all the information regarding your payment. Enter all payment details and pay your advance tax online successfully.

What are the Benefits of Advance Tax?

Here’s a list of benefits you get when you pay tax in advance –

1. It reduces the burden of paying tax at the last moment.

2. It helps in mitigating stress that a taxpayer may undergo while making tax payment at the end of fiscal year.

3. It saves people from failing to make their tax payments.

4. It helps in raising government funds as the government receives interest on the tax collected.

What are Due Dates for Payment of Advance Tax?

Here’s a schedule of advance tax payment for individual taxpayers –

15 June – 15% of advance tax liability

15 September – 45% of advance tax liability

15 December – 75% of advance tax liability

15 March – 100% of advance tax liability

1. What if I pay advance tax* less or more than required for a financial year?

The IT Act has provided four dates and the percentage of advance tax to be paid on each of these dates. If by chance you have paid the excess advance tax you would receive a refund subject to section 237 of the Income Tax Act with 6% interest per annum on the excess amount subject to Section 244A of the Act if the excess is more than 10% of the tax liability.

If on March 15, you find that you have a shortfall of advance tax to be paid you can still pay the advance tax before 31st March and the same would be treated as advance tax.

2. What is the penalty for missing the dates of payment of Advance Tax?

If you miss the dates for payment of advance tax you will be levied interest under section 234B and 234C of the Income tax Act.

3. Can I claim deduction under 80C while estimating income for determining my advance tax?

Yes, you can claim deduction under Section 80C while estimating income for determining your advance tax.

4. Is an NRI liable for payment of advance tax?

Yes, an NRI is liable for payment of advance tax on the income earned in India as per provisions of the Income tax Act in force for the relevant assessment year.

In case of any confusion or queries, please seek professional guidance.

You can reach us at contact@vprpca.com

March 9, 2022
Loan against PPF account balance – Key features, pros and cons
Public Provident Fund (PPF) is one of the most popular investment options in India, largely due to higher interest rates and complete Income tax exemption.

However, a lesser known feature is that one can obtain a collateral-free personal loan against PPF balance available at 1% interest rate.

We gain an insight on the key features, pros and cons of this product.

Key features
- The significant features of taking a loan against your PPF account are as follows:
- Account holders can avail this loan facility between the 3rd and 6th financial year from when PPF account was opened. The loan ends in the 6th FY since starting from the 7th financial year, the PPF account can be partially withdrawn.
- The loan amount is capped at 25% of the balance at the end of the second financial year preceding the year in which the loan was applied for.
- Interest is charged at 1% more than the interest earned on the balance in the PPF account. Once the interest rate is set for a loan, this rate will be applicable till the end of the tenure.
- In case the loan against the PPF account is not paid off within 36 months, the applicable interest rate will be hiked to 6% more than the interest earned on the PPF balance.
- The principal amount needs to be paid off first, followed by the interest accumulated. The interest amount should also be repaid in two monthly installments or lesser.
- If the principal is repaid within the loan tenure, but there is a portion of the interest amount that remains to be paid, then the outstanding amount will be deducted from the PPF account balance of the individual.
- It is not possible to avail a second loan on the PPF account until the first one has been paid-off completely.
Pros
- No collateral or mortgage required – You will not be required to pledge any asset in the form of a collateral when taking a loan against your PPF account.
- Repayment tenure of 36 months – The loan can be repaid within 36 months. This timeline is calculated from the first day of the month following the month in which the loan is sanctioned.
- Low interest rates – This is one of the most significant benefits of availing a loan against your PPF account. Interest rates are far lower than those of traditional personal loans from banks.
- Flexibility in repayment – The repayment of the principal amount of the loan can be done either in two or more installments (on a monthly basis) or as a lump sum.
Cons
- PPF loan is available at 1% interest rate but you will forego the interest accumulation on the loan amount. So the actual cost of a PPF loan is PPF interest rate plus 1%. At the current interest rate, a PPF loan would effectively cost you 8.1%.
- The time period is very limited. It may not be practical for some investors to require funds at such an early stage, except in case of emergencies
- You lose the compounding effect on the interest amount foregone due to the loan. WAs PPF loan is available in the earlier part (between 3rd and 6th FY), the compounding effect of the interest foregone will be much high at the time of maturity.
- Cumbersome compliances: PPF is largely a Government instrument and availing this loan carries considerable paperwork and compliances, as compared to a personal loan which is available in 3 seconds nowadays!
Conclusion

All in all, the loan against PPF balance has numerous restrictions while giving an attractive interest rate.

PPF should be seen as a retirement fund and withdrawals/ loan should be avoided, unless in case of emergencies.

However, it can prove to be better than a personal loan where interest rates sore as high as 20% p.a.

The information is purely general in nature and not intended to be an investment or financial advice. Please consult a professional for any advice before taking any action.

We would love to hear from you. Write to us at contact@vprpca.com
January 23, 2022
Card Tokenisation – A simple guide

There is a lot of buzz around “tokenisation” nowadays.

The word sounds complex but let us decode it in simple terms. A final verdict awaits you at the end.

The way we pay money through credit or debit cards on Amazon, Flipkart, Uber, Zomato etc, will not be the same anymore.

Current scenario

When we enter the card details for the first time, the website gives us an option to save the card details (Card number, name, expiry) for ease of future use.

Let’s face it, we all check that box for convenience. No one wants to enter the 16 digit card number and details again.

What is the need for change?

The card details are stored with the merchants and this leads to an issue – in case hackers steal your data (and data leaks are alarmingly increasing nowadays), your data is at risk.

Your money is not really at risk – the hackers cannot directly steal money from your cards since your CVV (Card Verification Value) pin is not stored in the data.

But even the details of your cards pose as a privacy threat and can be misused in combination with other data.

Welcome to tokenization!

The Reserve Bank of India brought in CoF (card on file) tokenization guidelines that mandate replacing actual card data with encrypted digital tokens to facilitate and authenticate transactions.

Tokenisation is nothing but replacement of actual card details with an alternate code called the “token”, which shall be unique for a combination of card and token requestor.

A tokenised card transaction is considered safer as the actual card details are not shared with the merchant during transaction processing.

Now what?

You would no longer need to (or allowed to) save the 16-digit card number and the card expiry date on the merchant website.

On the backend, the card’s CVV number will no longer be required for digital payments making the entire system safe and secure.

If you choose not to opt for tokenisation, you will have to manually enter your card details every time you transact.

How does card tokenization work?

On the end-user front, nothing changes. Users need to enter their card details and opt for tokenization while making online transactions at the check-out window of the shopping portal.

However, merchants will now need to forward the token to respective banks or the card networks. A token is produced and sent back to your merchant, which then, at that point, saves it for the end-customer. As customers, we don’t have to recall the token as the experience is not going to change for you while making digital payments.

Is the tokenization service free?

Tokenization is absolutely free for users, who can tokenize any number of cards. However, only domestic cards fall under the current guidelines.

Tokenization is not applicable to international cards as of now.

How will it benefit users?

Customers need safety and security at any place they shop. In this time where digital fraud presents dangers all through the economy, building trust and connection with clients starts with keeping their payment and other individual information safe.

Tokenization shields businesses from the negative financial impact of data theft as even if there is a breach, the merchant would not have important data that can be stolen.

Tokenization can’t shield your business from an information and data breach—yet it can diminish the bad outcomes of any possible breach.

When will it come into effect?

This was initially slated to come into effect from 1 January 2022. However, the payment systems are not yet geared to accept tokens. Hence, the Reserve Bank of India has extended the date to 1 July 2022.

Final verdict

Whenever a new compliance is mandated, we fear a new headache.

But this is an exception to the rule.

The tokenization will only make it easier for end-users to transact online. No need to remember those CVVs.

There is no effort from end users for tokenization except that we need to do it for the first time. Thereafter, the token will transact automatically.

As with any new rule, the effectiveness lies in its implementation.

We can hope that tokenization will be a smooth ride and make online transactions safer, faster and reliable.

Thank you for reading!

We would love to hear your views! Get in touch.

December 26, 2021
Diversification – Why you should use it now

The word of ‘Diversification’ seems long but it is not really complicated.

It just builds on the famous saying – “Do not put all your eggs in one basket”

In simple terms, diversification means spreading your investments so that your exposure to any one type of asset is limited.

But why do investors fear diversifying?

For starters – because they do not know anything about it.

But before we dive into it, we must first accept the fact that the market is unpredictable. No one can predict what will happen in the market tomorrow, and if anyone claims to predict that – they are either lying or are God.

So, the next best thing is to work with probabilities.

And here is where diversification helps. It reduces the volatility of your portfolio over time.

Why diversify?

One of the keys to successful investing is learning how much risk you can tolerate in comparison to the returns you want.

Invest your retirement nest egg too conservatively at a young age, and you run the risk that the growth rate of your investments won’t keep pace with inflation. On the other hand, if you invest too aggressively when you’re older, you could leave your savings exposed to market volatility, and run the risk of eroding your assets at an age when you have fewer opportunities to recoup your losses.

The primary goal of diversification is not to maximize returns. Its primary goal is to limit the impact of volatility on a portfolio and help you sleep better.

I would definitely not trade my good night’s sleep for any amount of returns. Would you?

How to diversify?

Financial advisors can make it complicated but at its root, it is the simple idea of spreading your portfolio across several asset classes like equity, mutual funds, debt etc.

Even within those asset classes, you should diversify within sub-classes.

Talking about equity, you can diversify by purchasing assets of companies in different industries.

For debt, you can diversify between bank deposits, corporate bonds, government securities etc.

How diversification can help reduce the impact of market volatility

A study in the USA is a good example on the benefits of diversification. Look at the charts below, which depict hypothetical portfolios with different asset allocations.

The average annual return for each portfolio from 1926 through 2015, including reinvested dividends and other earnings, is noted, as are the best and worst 20-year returns.

The most aggressive portfolio shown comprises 60% domestic stocks, 25% international stocks, and 15% bonds: it had an average annual return of 9.65%. Its best 12-month return was 136%, while its worst 12-month return would have lost nearly 61%. That’s probably too much volatility for most investors to endure.

Changing the asset allocation slightly, however, tightened the range of those swings without giving up too much in the way of long-term performance. For instance, a portfolio with an allocation of 49% domestic stocks, 21% international stocks, 25% bonds, and 5% short-term investments would have generated average annual returns of almost 9% over the same period, albeit with a narrower range of extremes on the high and low end.

As you can see when looking at the other asset allocations, adding more fixed income investments to a portfolio will slightly reduce one’s expectations for long-term returns, but may significantly reduce the impact of market volatility. This is a trade-off many investors feel is worthwhile, particularly as they get older and more risk-averse.

Regardless of your goal, your time horizon, or your risk tolerance, a diversified portfolio is the foundation of any smart investment strategy.

History is witness to this fact.

Thank you for reading.

Feel free to reach out in case of any questions.

December 23, 2021