In order to bring uniformity in mutual fund investments, the Securities and Exchange Board of India (SEBI) prescribed a uniform classification of mutual fund schemes a few years ago in October 2017. But most of the investors are still not aware of this classification. Mutual fund houses were required to align their existing and potential schemes under the prescribed categorisation. Equity mutual funds got 10 distinct categories while debt funds ended up with 16 new ones.
Are you a conservative investor? Are you not willing to take high risk?
If, yes then you should invest in Debt Mutual Funds. Debt Mutual funds are the best bet for you if you prefer small but stable returns over possibility of high returns with high risk involved. These funds will provide you with better returns than your saving bank account. So if you have surplus funds to park for a while then you should definitely check out debt mutual funds.
But Do you know the different categories of debt mutual funds?
If you are thinking of investing in debt mutual funds, you should know the different categories to understand the underlying assets of the fund. Categorization of debt mutual funds is mostly done on the maturity date of the underlying assets and the type of assets selected for investment. The underlying risk of each category, therefore, varies depending on the investment horizon of each fund.
Here are the 16 different fund categories of a debt mutual fund scheme –
Different types of Debt Mutual Funds
- Overnight funds – These funds invest in assets which mature overnight. The scheme is an open-ended scheme where the underlying assets have a maturity period of 1 day.
- Liquid funds – Under this category, the maturity period increases. The underlying assets of the fund have a maturity period of up to 91 days and include money market securities and other short-term debt instruments.
- Ultra-short duration funds – The portfolio of this debt mutual fund scheme has assets which have a maturity period of more than 91 days but less than 6 months.
- Low duration funds – These schemes invest in debt securities which have a maturity tenure ranging from six months to 12 months
- Money market funds – These debt funds invest in money market instruments which have a maturity tenure of up to one year
- Short duration funds – Assets which have a maturity duration of one to three years are selected for investment under this mutual fund scheme
- Medium duration funds – These funds invest in assets which have a maturity duration of three years to four years
- Medium to long duration funds – These funds invest in securities with a maturity period of four years to seven years
- Long duration funds – As the name suggests, long duration funds invest in long-term debt assets. The maturity of such underlying assets is greater than seven years
- Dynamic bonds – Dynamic funds do not have a particular affinity to the maturity duration of the underlying assets. These funds invest in multiple assets having different maturity tenures
- Corporate bond fund – These funds primarily select corporate bonds as their underlying assets. High rated bonds of reputed corporates are chosen for investment under these funds. At least 80% of the portfolio should be invested in corporate bonds
- Credit risk funds – These funds also invest at least 65% of their AUM in corporate bonds. However, the bonds selected for investment are rated lower than the bonds selected for corporate bond funds. So, if a corporate bond fund selects A+++ corporate bonds, credit risk funds would select corporate bonds which are below this rating.
- Banking and PSU funds – At least 80% of the assets of this fund scheme is invested in debt securities of banking institutions, public sector undertakings (PSUs) and public finance institutions.
- Gilt funds – The assets of a gilt fund are predominantly invested in Government securities. At least 85% of the fund is invested in government securities which might have varying maturity tenures
- Gilt funds with 10-year constant duration – The name of these funds denote their characteristics. The fund invests in government securities which have a maturity period of 10 years.
- Floater funds – Floater funds are named so because the assets they invest in have a floating rate of interest. At least 65% of the fund’s assets are directed towards such instruments with floating interest rates.
Tax Implication of Debt Funds
Debt Mutual funds are taxed as short term Capital Gain and Long term Capital Gain. Short term Capital Gain is the gain which you get if you redeem your fund within 3 years of investment and it is taxed as per your income tax slab rates. On the other hand, long term capital gain (LTCG) is the gain that you get if you sell your investment after completion of 3 years. LTCG is taxed at 20% with indexation benefit.
So now that you know all the 16 different types of debt mutual funds and its tax implication, you can make an informed decision. Ideally, one must select these funds based on tenure of the investment. Understand these funds before you choose to invest in any of them. You may download the Fintoo app to start investing or sign up on our website FIntoo to start investing.
Looking at the current market situation, you might feel this is not the right time to invest as the markets are volatile due to slow economic conditions owing to global spread of deadly coronavirus. The impact has aggravated in most sectors due to extended lockdown in the country which is now at a stage of phased unlock.However, to create wealth for the long term, this would be the best time to invest in equity markets. Wise people say, “little drops of water make up the mighty ocean.” And it is amazingly accurate and perfectly fits the wealth appreciation through mutual funds SIP.
SIP is just a modest way to start a mutual fund portfolio and it can prove to be the most powerful tool for wealth building.
What Is SIP?
SIP refers to Systematic Investment Plan, which is similar to recurring deposit in a way that a specific sum of money is required to be invested periodically. Generally, a bank account is required to be assigned for direct debit or ECS facility for such SIP investment. Every mutual fund house offers investment in mutual funds through the SIP route.
Advantages of SIP
SIP can be started with any minimum sum prescribed (minimum Rs.500 per month), but afterwards can be topped up with additional sum of money as and when excess funds are available. This means that additional units can be purchased through SIP route as and when excess money is available. Such flexibility increases the attractiveness of the SIP route.
- Compounding effect
SIP leads to wealth appreciation as the amount contributed periodically is invested over and over again along with the return earned on the principal. This yields better when the investment tenure is longer and the investor has entered into the investment at much early age. Compounding effects can provide for a good swell in your mutual fund portfolio.
Even a small investor can enter the mutual fund investments through the SIP route. This is because, only a specific sum committed at the beginning of mutual fund SIP is required to be invested periodically.
Even conventional and conservative investors can easily opt for SIP route, because money at stake is much lower (even if we accumulate lowest contributions for a longer term), but return on such investment and wealth appreciation is very lucrative, especially in case of equity mutual funds. So those who do not wish to enter the stock market directly, but wish to enjoy stock market ups and downs, SIP is an ideal way to go in.
- Professional management
Even though you are sparing for management fees while you purchase a mutual fund through SIP, it is worth every penny spent, because your funds are managed by experienced and academically well off fund managers. This gives you an extra edge over common equity shareholders, who trade in the markets on the basis of individual experience and study.
- Inflation effect
Inflation is the real enemy of your future income earning capacity. Inflation reduces the returns in real terms. For e.g. if Rs.100 is what is needed to buy 10 bottles of juice, then considering 10% inflation rate, next year, you will only be able to buy 9 bottles of juice.
This means that inflation reduces the purchasing power, thereby creating a need for inflation adjusted returns in the long run. Mutual fund returns are usually inflation adjusted, as there they provide returns more than the inflation rate in the long run.
- Rupee cost averaging
SIPs give us an added advantage of rupee cost averaging which refers to lower average costs than different individual purchase costs (which at times may be higher in case the markets are bullish) of various lots of mutual fund units, purchased at different point of times.
Rupee cost averaging yields better results especially when markets are bearish and end up in down trending stock prices. This results in lower NAV, meaning that a fixed sum of SIP amount will be able to purchase more number of units as compared to a bullish market scenario.
SIP in mutual funds is not restricted only to equity markets, but also to debt funds or hybrid funds or even gold funds etc. There could be any type of underlying asset for the mutual fund, so if you invest in different types of mutual funds (equity, debt, hybrid, gold, emerging equity, GILTs etc.) with a minimum sum allocated to each of those, you may enjoy a balanced bouquet of returns as well as decent wealth appreciation as compared to conventional modes of investment like bank fixed deposits etc.
How to build a mutual fund portfolio through SIP?
- Diversification is the key
As discussed herein before, mutual fund SIPs are the cheapest way to diversification within the investment portfolio. Hence, it is important that you should invest in SIPs of various mutual funds with different underlying assets like equity, debt, gold etc. This would offer you superior returns, when markets are spurting growth and at the same time, will ensure minimum risk to the principal invested, when markets are falling down.
- Align your mutual fund to your financial goals
Every individual has different financial needs and hence has different financial goals at each age group. Hence, it is better to align the mutual fund SIPs according to your investment strategy based on long term and short term financial goals. For e.g. it is better to invest in equity mutual funds SIP, if you are investing for your retirement corpus which is a long term investment.
- Don’t hustle
The markets are usually much heated and are very volatile, so it is very common that NAV will keep fluctuating every now and then. However, there is no need to panic and get out of mutual funds, when markets fall down. If you stay put for 1-3 years for short and mid-term goals and 5 or more years for long term goals, then you may very well be richer than you already are, giving you benefit of rupee cost averaging.
- Age appropriate investment
For e.g. if you belong to the age group of 25-35, then equity exposure in your mutual fund SIP portfolio should be almost around 60-70%, which would earn superior returns and will offer tax benefits also (for equity), thereby increasing the effective rate of return.
Reverse is the case when your age progresses, which means you should concentrate more on balanced funds which provide reasonable returns with moderate or low risk.
- Focus on long term
If you are investing in SIP for mid-term or long term goals like kid’s education or retirement planning, then it would be better if you are invested for at least 3 years in any particular mutual fund. For e.g. compare the returns generated by any mutual funds for 1 year, 3 year and 5 years. You could observe that funds have generated higher returns in 3rd year or 5th year. This is because of the compounding effect.
Now that you are aware of all the features and benefits of investing through SIP, do not waste any more time and start investing. You can download the Fintoo App to start your SIP today.
Financial experts say that – Disciplined equity investing can change your life in a disciplined way! This means that the one who masters in equity investing can have a sound and safe financial future. Isn’t that great? With strong wealth creation strategies and practices, one can create their own strong financial base that could further prove to be a strong financial support for the family.
If you are getting worried looking at the current market situation where the market fell by approx 30% initially majorly because of the Covid-19 pandemic, then please be informed that this is not something which has happened for the first time. Even in 2008, when the markets fell drastically, soon after it recovered in 12 months time giving double digit approx 75% return the next year. So no need to worry looking at the short term volatility. Wealth creation is a long term process.
Now let us see how we can invest in equity.
Depending on your savings you can choose your investment options. In this, there are two cases-
- If your income is regular, you can invest through SIP mode
- If there is no defined pattern of your income, you can save and invest lumpsum.
It is suggested that you invest through the asset allocation process by matching your personal goals, investment objectives, risk profile as well as time horizon.
You must be thinking which option is better for investing among the above available two options, right? You can clear your doubts and queries in the below segment –
In any of the approaches that you choose, the main point of consideration is to align your asset allocation to your personal circumstances and objectives.
The SIP mode can be preferred for a regular saving that would further help in building the discipline to investing. This provides the benefit of rupee cost averaging as well as compounding in the long term. The lumpsum investment must be in line with the asset allocation that is necessary to compute the investment objective, risk profile and even time management.
This was about general investment plans of how to plan your investments and which factors to keep in mind before investing. With these investments, we can have our own wealth creation that is obviously everyone’s dream. In spite of this being a wish of everyone, not all are able to successfully do it. Apart from following the strategies of investment gurus, there are some of the really helpful practical tips that can help you with better investments.
Before we dive into these practical tips, let’s be clear that there is no full-fledged working strategy of wealth creation in equity. You need to implement ideas, develop strategies for your finances that could help you a lot in future. So, let us now have a peek at the top 5 insiders rather say key ideas for having good wealth creation in equity:
The prerequisite- Set your financial goals:
This is the primary requirement for your wealth creation plan. Depending on undertaking the risk, you can set up your financial goals. You need to understand your needs and wants clearly and accordingly approach it. Your hard earned money needs to be properly invested and so you must decide how and till which period you need to invest. This is called goal based investing. It is important to have a goal in place before starting the investment to achieve it. This is necessary because the investment decision should be based on the nature of the goal and tenure of the goal.
The most important thing- Research:
Research is another prime factor to consider for your investments. Generally, people say that investment in equities is nothing less than gambling. There is a term called “tip” that decides about your investment in equities which is just a mouth of victory without any backing. With strong and thorough research, equity can be a more of a knowledge based wealth creating medium. As a result, it is advisable to invest your time too in learning the basics of equity investments. You can also get in touch with investment experts online platforms like Fintoo to guide on the same and help you with the investment process.
The must-have thing: Focused Portfolio:
After thorough research, you need to have your focused portfolio for carrying out investments. Focus on a few good names that can help you out with wealth creation rather than running behind 100 present in the market. Instead of managing big portfolios, focus on the small but good ones. Investing in few quality stocks or mutual funds can help you in managing your portfolio in simplest ways.
Consider investment period- Long Term:
If you are planning to invest in equity, it is advisable to invest for a longer time. The best thing you can do is buy the right funds/stock and hold them across the market cycle. The investments that you make in equities are not just about picking up quality stocks, but it’s also about how much patience you have to see your money grow. Keep in mind that – Big money is not in buying or selling, but instead it is in waiting patiently.
The last one- Reconstruction:
In the investment process, there are chances that your risk appetite may change or you may even come across any unwanted or unexpected circumstance while you are still investing. In such time, you need to effectively revise and reconstruct your portfolio. This is necessary in order to benefit you from the risk reward equation. Churning and updating your portfolio at regular intervals is not advisable as you may miss something big at some time. So, a better option is to reconstruct the portfolio according to the risk appetite only when it is needed.
Thus, these were some of the best tips that one should keep in their mind before making investments. Just be updated with the market trends, update your knowledge and keep a strong focus on your strategies that can help you with better investment plans and of course return on investments too.
For any further guidance and to initiate your investments, download Fintoo App and get started.
While investing in mutual funds, it is important that you look at past returns, compare the returns with the benchmark, category average and it’s peers. But returns should not be the only criteria while selecting a mutual fund.
One should also look at how much risk is associated with the particular scheme. Risk and return are two sides of the same coin and thus we should not ignore the other side i.e. RISK.
As a rational investor, everyone should look how to obtain maximum return with comparatively lesser risk.
“Mutual funds are subject to Market risk please read the scheme related documents carefully before investing.” Most of us have heard this line many times. So, in this blog we will understand what are the different measures to check risk components in a mutual fund.
Equity vs Debt
Equity investment is considered to be more risky compared to any of the investments because of it’s volatile nature. At the same time, it is also important to understand that if you want to grow your wealth in the long term, this is the only investment avenue which beats inflation and is tax efficient. So one should definitely have some exposure to equity in their portfolio. The safest way to do this is by way of Mutual Funds.
Debt investment on the other hand is for conservative investors but it is also exposed to some risk like interest rate risk, credit risk etc. So it is better to have some knowledge to understand how to measure risk.
Now let’s see how to gauge the riskiness of mutual fund scheme:-
Standard Deviation (SD)
Standard deviation measures the deviation of a fund’s return from it’s average return. Return on a Mutual fund can be predicted based on it’s past returns. Therefore, an average is calculated called as Mean. For example, Fund A has an average return of 12% and it’s Standard deviation is 6%. What does this mean? We should be able to understand and interpret this information. This means that the returns from this fund varies 6% from it’s average. That is this fund returns will vary from 6% to 18%.
Minimum return = 12%-6%=6%
Maximum return =12%+6%=18%
So most of the time, this mutual fund gives return in this range i.e. 6%-18%. Broader this range, higher the volatility which means more risk. Therefore, SD is used to measure a fund’s volatility in comparison to it’s average. High standard deviation means a high volatility. You should choose a fund with a lower standard deviation.
Eg, Fund A – Return – 12%, SD =6%
Fund B = 12%, SD= 2%
Then you should be selecting Fund B because you are expected to get 12% return by taking much less risk.
In the above point, we are finding out the fund’s volatility in comparison to its own average. But it is also important to compare it with the market. Therefore, beta comes into picture. Beta measures the volatility of the fund compared to it’s benchmark.
When you are looking at the beta of a mutual fund, you are finding out the tendency of your investment’s return to respond to the ups and downs in the market. Here, the market usually refers to the benchmark index the fund follows.
Beta measures the systematic risk in a fund. The beta of the market or the benchmark is always considered to be 1. Now we need to compare the beta of our mutual fund with the beta of this benchmark. How will we do that?
A beta of 1.0 indicates that the fund is as volatile as the market. A beta of less than 1.0 indicates that the fund will be less volatile than the market. Correspondingly, a beta of more than 1.0 indicates that the fund will be more volatile than the market. For example, if a fund’s beta is 1.1, it is 10% more volatile than the market.
So you should be selecting a mutual fund according to your risk profile. If you do not want to take much risk then go for a lower beta fund which has a beta of less than 1. If you compare two funds in the same category that are giving similar returns, then you should be selecting one with lower beta.
Risk Adjusted Ratios
We will discuss the few risk adjusted ratios which will help us to understand the risk component in a fund. These are:
Sharpe Ratio: The Sharpe’s ratio uses standard deviation to measure a fund’s risk adjusted returns. This will help you to understand how well your mutual fund has performed in excess of the risk-free return.
If you would have invested in government securities i.e. risk free investment, you will be earning some return without any market risk involved. So it is called risk free return. But as you have decided to invest in a mutual fund, you will be exposed to market risk. Nobody would want to earn a return equal to risk free return after investing in the market. So you would expect a higher return.
This ratio essentially gives you an idea if your returns are due to smart investment decisions or excessive risk.
Higher the Sharpe’s ratio, better the risk adjusted return of your mutual fund portfolio. So when comparing two mutual funds, go for the one with a higher sharpe ratio.
Treynor Ratio : This is exactly similar to sharpe ratio. The only difference is that this ratio considers beta to measure risk adjusted returns. So with the same logic, higher the treynor ratio, better it is.
Alpha : Alpha will give you an idea of the excess returns that your mutual fund may generate, compared to its benchmark. For instance, if a mutual fund scheme has an alpha of 4.0, it usually means that the fund has outperformed its benchmark index by 4%. It can be seen as the additional value the mutual fund manager adds or takes away from the return on your portfolio.
Alpha can be negative or positive. A positive alpha of +2 means the fund has outperformed its benchmark index by 2%. Correspondingly, a similar negative alpha of -2 would indicate an underperformance by 2%. For investors, the more positive an alpha is, the better it is.
The Bottom Line
Many investors usually focus exclusively on returns with little or no concern for investment risk. These risk measures can provide an insight to the risk-return equation. You can find these indicators in a fact sheet of a mutual fund and many financial websites.
You can combine the inferences from the above methods of measuring risk with other factors like the fund history, past performance and expense ratio to identify the best-suited mutual fund schemes for your portfolio and your risk profile.
Investing in the mutual funds is one of the best options to gain the maximum returns for the capital invested in the market. It is a better way to make money. Mutual fund are for long term investment goals. In order to gain the benefits, the mutual funds investments have to be reviewed and tracked regularly. The performance of the mutual fund has to be seen in the right way.
Considering the current situation, where the market is down owing to COVID-19 pandemic, many of you must be thinking how to check whether you should continue to stay invested or redeem your investments. Although if you have invested for long term goals, short term volatility should not bother you. But still we can track the performance of our portfolio and take the informed decision based on the outcome.
Though the future of the mutual fund are not dependent upon the past performance, the performance of the mutual funds are mathematically calculated based upon the performance in history. The mutual relationship between the potential risk factors and the potential returns are the determiners of the performance of the mutual funds.
Here are some of the key points to consider while evaluating the performance of the mutual funds –
- Risk adjusted returns: In general terms, the risk adjusted returns are the calculated returns that take into consideration the risk involved in the funds. For instance, we are comparing two mutual fund with similar returns. The one with the lesser risk will be a better option.
- Benchmark: It is a way of standardizing the quality of the funds. It is considered as a point of reference. Any mutual fund that has outperformed the benchmark is considered superior than ones which have underperformed compared to benchmark.
- Relative performance evaluation: The comparison of the performance of the mutual fund with that of the peer mutual fund is one of the options to track the mutual fund’ performance. It is just a measure of the effectiveness of the mutual funds.
- Evaluate the quality of the stocks: The portfolio of the mutual funds deals in various stocks. It is a point of consideration, whether the stocks are of good quality or not. The stocks will be performing in the market and the returns gained on your investment in the mutual funds are dependent upon the stocks. So it is necessary to track the quality of the stocks in the fund.
- Track the competence of the fund manager: The fund manager of the mutual fund company is the person that chooses how and where your invested capital will be placed to work. The fund manager is responsible for taking all the major investment decisions. One can track the past performance and records of the fund manager to determine the competence and experience in his decisions.
These key factors are used for tracking the performance of schemes offered by the mutual funds. The tracking and evaluation procedures can be done by following the proper guidelines. There are various mathematical models and calculations that can help the individuals to efficiently track the performance.
Various methods by which one can track the performance of the mutual funds –
- Use the various mutual funds trackers that are available in the market. One such platform is “Fintoo”. It is simple to track. You just have to go to your Dashboard, click on the transactions. Next click on the small “i” icon against the name of the scheme. It not only provides you the details about the past performance of the mutual funds but also evaluates how much rate of returns has been provided by the funds in a particular time frame. It helps to understand whether the returns that have been availed over the investment capital are good enough or not.
- Factsheets Fact Sheets are considered as a score card of a Mutual Fund. While referring to the factsheets for the performance of the mutual funds, one must take the help of the financial advisor. The factsheets are generated after the completion of the particular time period and as per the guidelines of the capital market regulator, the mutual funds have to give returns every month.
- Rolling Returns The factsheets do not mention anything about the rolling returns that are provided after a particular time. It is used to maintain the consistency of the mutual funds. So check the average of rolling returns, if the average is higher than the benchmark then the funds are good.
To sum up, you can begin the procedure of tracking the performance by comparing the scheme with the benchmark and if it has outperformed the benchmark, the next step would be to compare the performance with the mutual fund category. Additionally, you can check the portfolio of the scheme and compare it with the peers.
If your fund is not performing based on these factors, then you should switch it to better performing funds. But while doing so, it is suggested that you take help of a finance expert to guide you and optimise your portfolio performance keeping in mind exit loads and taxation.
After our last blog on Importance of continuing SIPs amid Covid 19, we have received some queries on SIPs and most of the concerns were actually turned out to be myths. So we have decided to debunk those myths in today’s post.
After our last blog on Importance of continuing SIPs amid Covid 19, we have received some queries on SIPs and most of the concerns were actually turned out to be myths. So we have decided to debunk those myths in today’s post.
For the ones who have not read our last blog, we are starting with a little introduction about what exactly are SIPs.
SIP or Systematic Investment Plan is an effective means of investing funds in the mutual fund territory in accordance with the convenience and discretion of the investor. The periodicity of payments in this case gets determined by the chosen plan. Instances are not rare when retail investors shy away from the usual mutual fund investments due to inadequacy of funds.
A SIP can come to their rescue in such a scenario by helping them in proceeding with small investment amounts on a regular basis. Now, let’s discuss in brief about eight of the biggest SIP myths and examine their validity in its true sense.
Only small investors can benefit out of SIPs
There is a common misconception amongst investors that those having large funds cannot benefit adequately out of SIPs. However, just as its name suggest, SIP creates a systematic investment environment to instil the saving habit amongst its investors who can start with as low as 500 INR per month. Correspondingly, high net worth individuals can invest lacs of rupees in the SIP schemes according to their preferred tenure.
Missing SIP instalments attract heavy penalty
Investors are often worried about being penalised with hefty amounts if they miss out one or more of their SIP instalments. But in reality, no penalty, fine or similar charge is imposed by the Asset Management Companies if investors default on paying their instalments in time.
Let us take the example of Mr A who invests 2000 INR in SIP schemes per month having a NAV of 100 INR. Thus 20 units are added to his portfolio. If the investor defaults on paying a particular month’s instalment, then he will not be able to avail the units belonging to that particular month.
If you want guaranteed returns, SIP can serve as your perfect choice
SIP should never be thought of as a guaranteed return scheme. Investors often think that opting for the SIP method completely eliminates all the associated risks and capital loss. But in reality, the ultimate profits or gains of an investor depends upon the market scenario. In the event of a market crash, an investors capital might totally erode even if he proceeds with SIP investment.
However, the extent of loss in this case shall be significantly lower in comparison to lump-sum investment. SIP is the ideal choice for benefitting out of rupee cost averaging through investment in both high and low prices although it cannot completely eliminate the risk of loss.
You should start with your SIP only during the bear phase
Contrary to this popular misconception, you can also start with SIP investments when the market is undergoing a bullish phase. The main reason behind the same is that an investor can collate more units pertaining to a particular fund on the event of a market correction.
The total number of units held by an investor will keep on increasing coupled with a downfall in NAV of the fund. This brings down the investor’s average purchase cost. His gains will also be higher when the market is correctly valued as he collects greater number of units at a lower average cost.
The entire money invested in a tax-saver ELSS can be withdrawn after 3 years
Under ELSS, a majority of the investor’s corpus stays parked in equity and related products. There is a common misconception related to investing in ELSS funds as investors feel that they can withdraw their entire investment amount after the completion of the 3-years lock-in period. However, this 3 year is calculated starting from the date of investing a particular SIP instalment and not the entire fund itself.
You can take the example of Mr A who is planning to invest 1000 INR every month starting from 1st April 2019 in an ELSS fund. The units purchased on 1st April 2019 can only be sold on 1st May 2022 whereas the ones purchased on 1st May 2019 can be sold only after 1st June 2022. In simple terms, each single SIP instalment is treated as an individual investment having a separate lock-in of 3 years.
You cannot invest a lump sum amount in an ongoing SIP scheme
SIP is merely a mutual fund investment vehicle and it does not impose any restriction on lump sum investment even while proceeding with a monthly payment scheme. Suppose Mr B is investing 1000 INR monthly in a particular SIP scheme with a reputed fund house. If he gets a bonus worth 50000 INR from office and wishes to invest the same, then he can proceed with it readily without hampering his normal SIP investment.
Lump Sum and SIP mutual funds are different from each other
Lump-sum and SIP are simply two different modes of mutual fund investment. While one encourages periodic investment, the other is perfect for bulk investment at one-go. Both these two methods carry their individual investment philosophy and are meant for two completely different sets of investors.
It is better to invest in stock periodically
Mutual fund investments bring down the level of risk when compared to individual equity stock. However, if the investor parks all his money in a particular stock and its value crashes, then he might have to suffer heavy-duty losses. Mutual fund investment however tries to address this common problem by diversifying your investment to an array of stocks each having a separate set of risk and returns.
This distributes and brings down the overall risk by increasing chances of benefitting out of higher returns. This is why fund houses advise investors to proceed with balanced investment in mid-cap, large-cap and small-cap sectors. Alternatively, they can also proceed with multi-cap funds to enjoy the best of both worlds.
SIP has been accredited with inculcation of discipline amongst the investing folk while safeguarding them from the wrath of inflation. It also leads to holistic participation by a bigger chunk of investors coupled with relatively less risk.
When it comes to saving taxes, there are myriad options available but nothing works like Equity Linked Saving Scheme. ELSS or Equity Linked Saving Schemes comes with a lock-in period of 3 years, which is the shortest holding compared to all other tax savings. By Investing in ELSS, one can attain deductions up to INR 1,50,000 from their taxable income as per the Section 80C of Income Tax Act. As ELSS funds are equity diversified with a major portion of the fund being invested in equity & related products, they provide equity returns too. This means that investors can also earn equity returns on their investments.
Owing to the popularity of the funds, there is an option to invest through both the dividend and growth options. Investors get a lump sum on the expiry of 3 years in growth schemes while in a dividend scheme, investors get a regular dividend income, whenever declared by the fund, even during the lock-in period.
Who should invest in ELSS?
The ELSS is the best option for individuals who are looking for investment avenues which will yield decent returns in the long run, and provide tax-saving benefits also. It is ideal for investors who are looking to invest money for at least 3 years and are vouching for additional benefits of income tax saving coupled with higher returns expectations. All in all these investors should also be prepared for the possibility of moderate losses since the funds invest in equity stocks.
The top ELSS schemes to invest in the year 2020
1) Axis Long Term Equity Fund:
- An open-ended equity scheme generating long term capital appreciation
- Statutory lock-in of 3 years and tax exemption on investment
- The highest value of total assets under management
- Whopping returns of 20.25% in the 7 – year time frame.
- Fund Allocation: 98.52% investment in Indian stocks of which 67.01% is in large-cap stocks, 17.01% is in mid-cap stocks, 6.72% in small-cap stocks
2) Kotak Tax Saving Scheme
- Fund Allocation: 97.64% investment in Indian stocks of which 47% is in large-cap stocks, 29.68% is in mid-cap stocks, 11.73% in small-cap stocks.
- additional benefits of income tax saving apart
- higher returns expectations
3)DSP Tax Saving Fund:
- An open-ended equity mutual fund scheme,
- invests in equity and equity-related securities of high growth corporates
- more than ₹6,000 crore fund size
4) Mirae Asset Tax Saver
- invests in equity stocks of flourishing companies
- the fund is relatively new compared to other top ELSS funds
- since its inception, it has delivered whopping returns of 19.39%.
5) Aditya Birla Sun Life Tax Relief 96
- asset allocation in equity securities to foster significant capital appreciation in the long run.
- it has allocated around 44% of assets to large-cap stocks.
- provides substantial stability against market volatility.
What are the advantages of investing in ELSS?
Even with the risk involved, ELSS is capable of delivering significantly higher returns as compared to traditional tax-saving instruments.
ELSS has the lowest lock-in period amongst all other tax-saving avenues. The lock-in also develops a disciplined approach in the investor.
The ease of transacting in an ELSS scheme is available with the Systematic Investments Plan approach.
Any investor has the option of investing either online i.e through investment platforms (Fintoo) or by visiting the AMC’s websites. One can also fill out the form and submit it at a nearby branch of the fund house, or invest through a broker (offline mode)
What are the drawbacks of investing in ELSS scheme?
ELSS is not available for those who are risk-averse and want safer options since ELSS invests in equity stocks. So it is advisable to steer clear from ELSS if you are not willing to take a risk. Also, due to the lock-in period, you can not withdraw the money before the maturity date. Park your funds in any other option if you need liquidity.
Invest in the ELSS scheme now for better returns and tax benefits