Everyone wants to be safe and make the optimum utilization of their funds. However, not every financial instrument is made up of everyone. Financial Advisors always look at the following angles before advising the investment alternative.
- Short term Goal
Tax saving instrument, Interest earning, etc.
- Medium-term Goal
Wealth building instrument, Value Investing, Mutual Funds (dividend option), etc.
- Long Term Goal
Related Article: 5 Factors To Consider While Making Lump-Sum Mutual Fund Investment
Retirement Planning, Succession Planning, etc.
Each phase of human life needs a peculiar and appropriate investment instrument. Let’s understand how should you choose and opt for the appropriate option of ULIP or Mutual funds.
What are ULIP and Mutual Funds?
ULIP refers to Unit Linked Insurance Premium which is a unique insurance plan, which integrates benefits of both insurance and investment in a single instrument.
In all, it can be said that ULIP is a Hybrid instrument and not a pure insurance policy. ULIP will allow the flexibility to go for wealth building while being under insurance cover.
Mutual Funds refer to the investment pool which is managed by a professional portfolio manager. Any mutual fund would be divided into a number of small units. These units are calculated based on the basis of Mutual Fund’s Net Asset Value.
Difference between ULIP and Mutual Funds
|ULIPs include both the components of Investment Insurance||Mutual Funds are purely an Investment instrument.|
|ULIPs carry a Lock-In period of 5 years. ULIPs can not be fully or partially withdrawn during this Lock-in Period.||Mutual Funds are Liquid Financial Instrument since these can be redeemed or sold in the market at any time. (apart from ELSS which have Lock-in Period of 3 years)|
|ULIP do not display or present their structure of investment on public domains for the general public. This is because ULIPs have a very complex structure hence becomes a little less transparent as compared to Mutual Funds||Mutual Funds carry a simple investment structure which is determined at the inception of Mutual Fund only. Hence, Mutual Funds are much more transparent since the smallest detail about their investment structure are usually hosted on public domain.|
|ULIPS are good for tax management because Investment in ULIP is considered as a deduction from taxable income under section 80CMaturity amount is tax-free under section 10(10D)||Tax impact with respect to Mutual Funds can be summarised as below Investment in Mutual Funds is covered under section 80C only if the same is ELSS (Equity Linked Savings Scheme)Maturity amount / Redemption amount / Amount on sale is taxed as capital gains|
|ULIPs come with several charges like Fund Management Charges, Mortality Charges etc. This will result in a reduction of pure investment corpus which would actually be deployed for return earning purpose.||Mutual funds on the other hands are not burdened with the Mortality charges and also expense ratios are competitive. This results in better-earning prospect even with the impact of exit and entry load|
|ULIP are subject to discontinuance charges when they are redeemed prematurely. This would impact the return.||Mutual funds are subject to only exit load even if withdrawn before the expiry of Lock-in Period. This would not impact the returns already earned during the period of investments.|
Related Article: Postal Recurring Deposits Vs. Mutual fund SIPs
Case Study Analysis for ULIP Vs. Mutual Funds
Let’s take an example of Mr Mehta who is in aged 30 years. He wants to invest in credible and safe investment instrument which will put his funds to optimum utilization. His annual income is Rs.20 lakhs and he is ready to invest Rs.2 lakhs maximum in a year
Mr Mehta is contemplating 2 alternatives for investment; One is ULIP and another is Mutual Funds
A financial advisor has suggested Mr Mehta to invest in ULIP for 20 years which would earn him a decent rate of return and an additional insurance cover. This ULIP is estimated to earn a rate of return around 10-12% since it is market-linked.
In this case, if Mr Mehta thinks that he could allocate the whole of his excess towards the ULIPs. This would result in the following scenarios
- The insurance cover in ULIP is only proportional and usually on the lower side. This would only give him insufficient cover in the long run. Suppose Mr Mehta goes for Rs.50,000/- in a year, it would only give him Insurance cover of Rs. 5,00,000/- in the long run.
- The returns fetched would be first allocated towards charges and the commission so the effective rate of return earned on ULIP would not reach the target rate of return.
- If Mr Mehta wishes to switch or discontinue the ULIP, it would only wipe off the return earned so far and would result in a reduction of the corpus.
It would only make sense if Mr Mehta invests in ULIP at an early age and only a part of his targeted investment amount.
Suppose Mr Mehta wishes to invest in Mutua Funds it will Give him following results
- Mutual fund Investment is directly related to the market and hence the investment would always be subject to market risks.
- However, since the entire investment would be directed towards corpus, it would result in wealth building.
- It will not have any additional insurance cover
- ELSS will have tax benefit as well and would earn a decent rate of earnings
An ideal plan would be as below for Mr Mehta
- Opt for ULIP for 1/4th of his target investment amount which would give him leverage of diversified investment bucket. Suppose he opts for Rs.50,000/- ULIP annually, then it would give him an effective rate of earnings of 10% maximum and insurance cover of Rs.5 lakhs to 7 lakhs. However, this money will be locked in and would be able for withdrawal only after 6-7 years depending upon terms and conditions.
- Choose a mutual fund based on the risk appetite and financial goal. An equity-based mutual fund or Index funds have the lowest Expense ratios. Also, they have the safer potential of earnings since they are directly linked to markets. Mr Mehta in this case can go for the lumpsum investment of almost 50-60% of target investments or through SIP plan.
- Mr Mehta can consult with Insurance Advisor for additional insurance cover which would be sufficient for his age. Ideally, he should choose an insurance cover of almost 10 times of his annual income which would be Rs. 2 crores as his sum insured.
Investment is a vast topic, there are many things to consider before investing anywhere. People still prefer going the traditional way, of investing in fixed deposits and recurring deposits. For them, it is the best and safest option to invest in. What they don’t consider is the tax rate. In fact, if you go to see the returns are much less after considering the tax.
Recurring deposits are like fixed deposits, but you have to invest a certain amount regularly. It’s like regular savings for an individual. For example, a person is investing Rs. 1000/- monthly in a recurring deposit. The minimum period of recurring deposits is 6 months, and a maximum is 10 years. This gives a person the opportunity to save regularly and makes it a habit. An individual can give instructions to the bank, to transfer a certain sum of money every month into the Recurring Deposit account (RD).
Related Article : Equity Linked Saving Scheme For Saving Tax
In RDs if the installment is delayed or not paid, then the interest will be reduced as a penalty and this, in turn, will reduce the maturity value. The rate of penalty will be decided initially. You can avail loans and keep your RDs as collateral but only up to 80% or 90%. The rate of return of an RD is same to that of a fixed deposit.
Taxation of Recurring Deposits
Now let us look at the taxation part, Tax deducted at source is applicable in the case of RDs. Tax is deducted from the interest earned on the deposit. TDS at the rate of 10% is deducted by the bank. Income tax is to be paid as per the tax slab of the RD holder, on the RD. Those investors who do not have a taxable income, have to fill and submit a form 15G to avoid TDS on their RDs and for senior citizens is 15H.
Now lets talk about mutual funds, they are a collection funds from investors which are invested in different avenues in the market. Mutual funds are more riskier than RDs. Mutual funds are vast, there are so many schemes under Mutual Funds (MF). You have equity and debt funds, under this there are various schemes. Unlike RDs there’s no penalty if you discontinue your SIPs. For example: If a person has a monthly SIP of Rs. 1000/-, and after few years he stops his SIP, he will get returns on the existing amount in his fund. They will be no penalty for discontinuation of SIP.
We shall now take debt funds. Debt funds are mutual funds which are invested in fixed income securities, like bonds, treasury bills, Govt. securities, etc. They are less riskier as compared to equity funds. They are mostly used to fund short term goals. An added advantage is that there’s liquidity. Its returns are higher as compared to RDs. Debt funds are also invested in short, medium and long term bonds. These funds are meant for those investors who do not want to take a high risk. Debt funds are steady in nature compared to equity.
Equity funds are mutual funds invested in the equity market. These funds involve a lot of risks. There are many schemes under these funds as well. They are mostly used to fund long term goals. These equity funds are meant for those investors who are willing to take the risk and understand the market volatility.
We shall now see how are debt funds and equity funds taxed:
- In case of debt, if the fund is held for less than 36 months, then it is considered as short term gain and is taxed as per your slab rate. More than 36 months is considered as long term and is taxed at 20% with indexation.
- In case of Equity, if the fund is held for less than 12 months, then it is short term capital gain and it is taxed at 15%. More than 12 months, it is considered long term capital gain and is tax free upto a gain of 1,00,000. Any gain over a gain of 1,00,000 will be taxed at 10% without indexation.
Let us now compare the returns of an RD and an equity SIP
As you can see in the above table, the returns from the equity SIP is much more than the RD returns. If you are looking at short term investment, RD is good, but if long term, then Equity SIP is the right investment avenue. For short term, you may also look for Debt Mutual funds depending upon your risk profile.
Having said all this, it all depends on the investor’s risk appetite and what he’s comfortable in. It is always good to explore your options if you are at a younger age. If you are closer to your retirement age, then it’s better to be on the safer side.
Recently in last couple of months, SEBI has issued some circulars to bring in about some changes in the area of mutual funds. These are imposition of stamp duty on mutual fund, new rules for Multi cap funds, Change in margin system and modifying NAV rules for mutual fund schemes.
Let us discuss the first one in detail in today’s blog.
Stamp duty to be applicable on mutual fund – The first circular which was passed was regarding the imposition of stamp duty on mutual funds. From 1 July 2020, stamp duty is imposed on the purchase of mutual funds whether it is debt, Equity, Gold or hybrid mutual fund.
Important point to note here is that it is imposed only on purchase transactions. This means when you invest into a mutual fund, stamp duty will be levied.
In other words, we can say that stamp duty will be applied on the following transactions where investment is made:-
1. Lump sum investment
2. Systematic investment plans (SIPs) and
3. Systematic transfer plans (STPs),
4. Dividend reinvestment
So whether your investment is a lump sum investment or SIP, stamp duty will be applicable. Not only fresh investment from your pocket but also if there is an STP (Systematic Transfer plan), in the scheme in which the funds are switched to is considered to be a new investment in that particular scheme and thus stamp duty will be levied. Same logic is applied to dividend reinvestment, every dividend that is declared and reinvested in the same scheme will be open to stamp duty charges.
Like I said above it is imposed only on purchase transactions. This means it is not applicable on the redemption of units.
Now the next question can be “How much do we have to pay as stamp duty charges?”
Well, the rate applicable is 0.005% on the purchase or switch in amount and 0.015% for transfers between demat account i.e. ETF units. To understand it better, let us take an example.
If an investor made an investment of Rs. 1,00,000, stamp duty paid will be Rs.5. (0.005%*1,00,000)
As it is a one-time expense at the time of purchase, it is more like an entry load. SEBI had done away with the practice of charging entry load for mutual funds since 2009. However, with the introduction of this move of levying stamp duty on purchase transactions, it’s more like a return of entry load for an investor. But the impact will not be much for long term investments. This is because the returns may always be higher in long term as compared to short term.
Usually debt investments are made for short term specifically, liquid funds. So here the impact would be more. If you are doing investment for the long term then you will be least affected with this new stamp duty imposition.
It is further recommended to not switch your funds very frequently especially in a short term and also try to avoid dividend reinvestment option. You may opt for growth option instead to prevent stamp duty.
As the stamp duty will be auto deducted by the registrar and transfer agent (RTA) of the mutual fund when you buy units, you don’t have to pay it separately. You will get fewer units in the mutual fund due to the deduction. For example, instead of 50 units, you may end up with 49.98 units due to the stamp duty deduction.
Soon after this circular, there was a confusion regarding whether this will be applicable to AIFs or not.
SEBI immediately clarified that stamp duty tax is also applicable on units of AIFs.
In addition, SEBI has asked AIFs to appoint registrar and transfer agents (RTAs) to collect stamp duty tax. But, till they appoint RTAs, AIFs can keep the collected stamp duty tax in a designated bank account. With this circular, AIFs will be in line with mutual funds, ULIPs and NPS.
There is incidence of double stamp duty taxation on AIFs. How?
AIF investors will have bear the burden of stamp duty tax twice – first when he purchases mutual fund units as an investor and second at portfolio level when the fund manager executes transactions.
It is important to understand that the first taxation will be levied upfront whereas in the second incident it will be adjusted to scheme’s TER (Total Expense ratio).
Now let us see the applicable rate?
The government has imposed the same percentage of stamp duty tax of 0.005% on purchase of units of AIFs. This basically means that AIF players will allot units only after deducting stamp duty tax of 0.005% on invested amount.
At portfolio level, the government has imposed stamp duty of 0.0001% on transfer and re-issue of equity and equity related instruments. For debt instruments, stamp duty tax of 0.015% will be levied on delivery transactions and 0.003% on intraday and option transactions.
In case of equity IPOs and fresh issuance of debt papers, the government has imposed stamp duty tax of 0.005%.
The stamp duty tax on futures both equity & commodity and currency & interest rate derivatives would be 0.002% and 0.0001, respectively.
Please note that there will be no stamp duty tax on transactions of government securities. However, the government would levy stamp duty of 0.00001% on transaction of repo on corporate bonds.
With this I hope you have a better clarity on imposition of stamp duty on your investments.
Kanika is a 27-year-old, HR Manager in a bank, and is living with her husband Suresh, who is 31 years old, and her newborn baby girl Alia. Kanika wants to make sure that Alia’s future is not compromised on, as she has big plans for her. So she wants to start planning for it now. She approaches her adviser and gives him the relevant details of her plan. After much analysis, he tells Kanika, that she is still young and can have an aggressive investment approach, so why not invest through SIPs? and make use of Power Of Compounding.
Systematic Investment Plans are commonly known as SIPs. They are a fixed amount of regular savings, that go into mutual funds, which are nothing but a pool of funds collected from many investors for investing in stocks, bonds and other money market instruments.
SIP is an investing tool related to mutual funds. It inculcates a habit of disciplined saving. The magic of SIPs do not work overnight, but it works on the investments, collected over the years. This magic of SIPs can be understood if we understand the Power Of Compounding. Why do we water our plants regularly? So that they grow into a beautiful tree, right? It cannot happen overnight, it takes years for it to grow into a tree. Also, it needs to be taken care of every day, for it to grow properly. We can apply the same logic to SIPs. To create a huge corpus, you have to regularly water it with SIPs and over the years, it will grow into the corpus you wish for. This process of growth is called the Power of Compounding.
Power of compounding means earning interest on ‘interest’. Let’s take an example to make it clear, if I invest Rs. 8000/- in a fund, having an interest rate of 12% p.a. (i.e. 1% per month), look at the below table:
|Month||Opening Balance (Rs.)||SIP amount (Rs.)||Interest @ 12% p.a. (i.e. 1% per month)||Closing balance (Rs.)|
From the above table, we can see that the interest per month is not calculated on the SIP amount alone, but on the opening balance as well (which includes the SIP and interest of the previous month). This is how compounding works. So you can just imagine, 10 to 15 years down the line, what the corpus will be.
This table shows, the amounts after 5, 10, 15 and 20 years, with the same amount of the SIP being Rs. 8000/-, @12% p.a. for a term of 20 years:
|After 5 years||6,59,890.9324|
|After 10 years||18,58,712.611|
|After 15 years||40,36,607.996|
|After 20 years||79,93,183.352|
Shocked?? That’s the magic of a SIP of Rs. 8000/-.
To create wealth through SIPs, there is another advantage used, it is called ‘Rupee Cost Averaging.’ This concept is used when the markets are down and advantage can be taken of the situation.
Let us now take a common myth, all investors fear:
Myth: Do not invest when the markets are low, it will cause a loss.
Fact: Invest when markets are down and get more units at a discounted NAV.
Many people believe in this myth and it still prevails today. People fear the fluctuations in the market and keep a watch out, when the market is going to fall, because they do not want to invest at that time. But the fact is, when the markets are down, you get more units at a discounted value. These extra units, will be useful when the market goes up again. This is known as Rupee Cost Averaging.
An example will make the concept clear. If I invest a SIP of Rs 10000/- monthly, and the NAV (Net Asset Value) is Rs. 10, my number of units will be 1000 (10000/10). Now after few months, the NAV drops to Rs. 8/-, my unit will now be 1250 (10000/8). From this we understand, that when the market falls, an investor gets more units at a discounted NAV. So one can just imagine, over the years, how an investor can profit from these SIPs, because at the time of redemption, the market will be high and you will earn more profit on those extra units. This whole process is called Rupee Cost Averaging.
Having said that, this concept is effective only in the case of equity funds, as the rates in the equity market fluctuate from time to time. Whereas debt rates do not fluctuate that much. The Rupee Cost Averaging concept is based only on the constant fluctuations of the market. Hence, the benefit can be availed only if the market is volatile. So for all those investors, who think that they need to keep a close watch on the market, so as to find the right time to invest, can start investing now itself, without having to wait for ‘THE RIGHT TIME’.
These SIPs help in creating wealth to fund your future goals. If they are short term in nature, then it is good to invest in debt funds. But if it’s to fund long term goals, then equity is the right choice. Even if you stop your SIPs, your money will still grow on the amount in your fund. There is a lot of flexibility in investing through SIPs and one of the best investment options.
SIPs are a good option to start investing with, if you are a beginner. You can start with an amount as low as Rs. 500/-. SIPs reduce the burden of having to collect a lump sum first and then invest it. With SIPs, you can invest small amounts every month. You have the flexibility of even increasing your SIP amount. You just need to let your SIPs grow and let the magic of compounding work for you. There’s no right time to invest through SIPs. Now is always the right time.
Thinking of investing in hybrid funds? Have a complete knowledge of them before you do.
The mutual fund market is vast. There are thousands of scheme and also different categories of schemes. You can find equity funds, debt funds, hybrid funds, solution-oriented funds, etc. This wide variety of choice makes an amateur investor confused. Take the instance of a hybrid fund. Where equity and debt funds are easily understood, investors get confused when it comes to investing in a hybrid fund. They don’t understand whether they are investing in equity or debt or a mixture of both. Do you?
If you are looking to explore hybrid funds for your investments, understand what these funds are and what they promise. Interested? Let’s roll –
1. What are hybrid funds?
The Oxford Dictionary defines the word ‘hybrid’ as ‘a thing made by combining two different elements’. Thus, a hybrid fund is a fund which combines different assets in its portfolio. Hybrid fund represents a mix of equity, debt, money-market investments and also cash holdings. The risk, return and taxation of a hybrid fund depend on its asset class.
2. Types of hybrid funds
Based on the portfolio, hybrid funds are further classified into different categories. The primary categories are as follows –
- Equity oriented hybrid funds
Popularly known as balanced funds, equity oriented hybrid funds invest at least 65% of their portfolio in equity oriented securities. The remainder is invested in debt instruments and a little portion might also be held in money-market investments. Since equity exposure is high, the fund is volatile. However, since the portfolio also consists of debt, the volatility is reduced. Taxation is similar to equity mutual funds as the portfolio leans towards equity exposure. Thus, you get tax-free returns up to 1,00,000 if you redeem these funds after 12 months. In case your gain amount is more than 1 lac then you need to pay 10% on the excess amount. If the holding period is less than 12 months, then the gains are taxed at 15%. Balanced funds are suitable for investors just starting their mutual fund journey as they can enjoy low risk and good returns.
- Debt oriented hybrid funds
These funds are also called Monthly Income Plans (MIPs). At least 70% to 85% of the portfolio is invested in debt securities and fixed-income instruments. Equity exposure is limited to up to 30%. Being MIPs, these funds may provide regular returns in the form of dividends if you choose the dividend option. You can receive incomes monthly, quarterly, half-yearly or annually. There are growth option too wherein you don’t get returns. The returns remain invested and grow. These funds are taxed like debt mutual funds. If you redeem the fund within 3 years, you would earn short term capital gains and be taxed at your tax slab. If, however, the fund is redeemed after 3 years it qualifies for long term capital gain. You are taxed at 20% with the benefit of indexation. Returns of these funds could be higher than debt funds because of equity exposure in the fund.
- Arbitrage funds
These funds are specialized funds which try and generate return from the differential pricing of a stock in the derivatives market and the futures market. Arbitrage funds are considered to be equity-oriented funds and are taxed accordingly. However, they enjoy low volatility. Thus, arbitrage funds combine the benefit of both equity and debt funds.
3. Benefits of hybrid funds
Hybrid mutual funds provide good benefits and therefore they are chosen by many investors. Some popular benefits provided by these funds are as follows –
- Since these funds have both equity and debt investments, you can benefit from the high returns promised by equity while the volatility is cushioned out by debt. Thus, you get double benefits of equity and debt from hybrid funds.
- Hybrid funds are apt for new investors who want to test the waters. They have lower risk appetite and higher return expectations, a combination which is available only with a hybrid fund.
- Hybrid funds rebalance their portfolio automatically to attain the desired asset allocation of the scheme. This rebalancing frees you from timing the market, gives you risk-adjusted returns and also provides stability to the portfolio.
So, if you are looking to taste hybrid fund investments, know about the fund, its types, the risk associated, the return potential and the tax treatment. Invest only after you are clear on these parameters to avoid unpleasant surprises. Take assistance from Mutual Fund experts for guidance.
Mutual funds can be your pick if you wish to benefit from stock market and still want to stay away from actual share trading and instead would like to get the funds managed by a professional and experienced fund manager. Mutual funds can be aligned to your timeline and time horizon of financial goals. Instead of investing in fixed deposits or insurance unnecessarily for long term, mutual funds would be a best choice which gives out inflation adjusted returns and outperforming performance as compared to those conventional investment instruments.
Mutual funds have become a very popular source of investment for most investors. They come in different variants, allow affordable investments through Systematic Investment Plan (SIPs), help in saving taxes and provide great returns. The inherent risk is diversified as mutual fund schemes invest in a variety of stocks and shares. This is what makes mutual funds ideal. They provide attractive returns at lower risks compared to the share market.
When we talk about long term investments, Mutual funds are a good option. Whether you are planning to create an education fund for your child, buy a house, plan for your retirement or accumulate wealth, a mutual fund is your solution.
Do you know how many mutual fund schemes are available in the market? Too many to count! As such, it becomes difficult for investors to make a choice. To make your work easier, here are some essentials to look for to suit long term goals.
Essentially this is just general pointers list, however requirements may vary from one investor to another.
Considerations for Choosing A Mutual Fund
- Allocation Of Assets
As the very first step you need to understand the type of portfolio you want for your mutual fund investment. The portfolio of a fund is termed as asset allocation. An ideal and balanced asset allocation will strike a decent act by managing the risk components along with maintaining security with money market instruments.
The key consideration of asset allocation is that you need to have a proper mix of both high risk and low-risk components. As per experts, the allocation of secure components should match the age of the investor.
For instance, at an age of 40, you need 40% allocation in secure instruments. This shows that with age your investment should comprise more secure components. On the other hand younger, you are, you need to invest more in equity.
- Short Listing Fund Types
Now that you have an idea of portfolio or asset allocation, depending on your age and risk appetite you need to make a shortlist of funds that perfectly match your desired portfolio and return.
Now you need to compare among a lot of funds based on their performance, approach of investment and overall reputation. You can get the details about the year on year return of any fund through the prospectus of the fund and other industry publications.
More than just the last annualized return you need to target metrics like return achieved over the benchmark and consistency of performance.
As for choosing a fund, you need to consider your financial objectives first of all. Is it your retirement or old age planning for which you are investing in Mutual Funds or it is for luxury spendings? Whatever be the objective, to gain more monetary growth you need to have bigger risks.
But obviously, there is a limit of taking risks as mutual funds are addressed for population willing to ride growth while enjoying the security of their Money through diversification and few money market instruments.
- Making The Final Choice
Now that you have made a shortlist of funds as per the considerations mentioned here above, you finally need to pick a fund that suits your investment goal.
First of all, you need to check its past history starting from the date of inception. Check the holding pattern of the fund besides checking funds performance online.
You can also look for top funds in your preferred asset class on the basis of your financial objectives, and risk appetite.
As I mentioned earlier, when checking performance more than just considering its latest return focus on the return offered by them in comparison to the benchmark. Lastly, always study the fund manager profiles to gain confidence in the crucial expertise needed to manage such funds.
- Understanding How Diversification Helps
Wherever there is equity there is potential risk and chances of growth. So, Mutual Funds also have their share of risks and opportunities. But in spite of the risk involved majority of mutual funds offer good return year after year. How is this possible?
Well, Mutual Funds follow the aged principle of not keeping all eggs in one basket. So, by diversifying the assets across sectors it not only minimizes the risk but also ensures growth.
For instance, if your investment portion in telecom sector stocks face loses, the engineering or banking sector stocks within the same time frame can fetch you a good return. In between some stocks will not give any substantial gain or loss. Thus the diversification helps in managing risk and securing growth for the long term.
In addition to the above, you may also check Tax saving element and absence of exit load to finalize your decision. Equity linked saving scheme can also be selected which serve dual purpose of investing for long term and tax saving.
This is how you should be selecting mutual funds to provide the best-in-class returns and to become ideal for your long-term investments. So, analyse the funds based on criteria discussed above and take your pick. You would be amazed at the returns you earn.
SIP – Systematic Investment Plan, one of the most popular modes of investments in Mutual Funds. It is good to see how people are becoming aware of the investment options available to them. There was always this wrong idea people had with SIPs ‘That it’s meant for only the rich’. No one becomes rich overnight, unless you’ve won a lottery or a game show. What are the chances of that happening to you?
Becoming rich is when you start making your money work for you. It’s a long process, but you have to cut short your expenses or save what money you have left, in avenues that will generate income for you. So next time someone tells you investments are meant for the rich, then ask them ‘How did the rich become rich?
Investing is not easy, there are a lot of factors that need to be considered before investing. Some people are too lazy to do some research and find investments that would suit their needs, so they follow their friends blindly. For some it may turn out well, considering their friend or relative picked a good investment instrument, whereas for some, they may end up losing their money or their money just went down the drain.
I’ll tell you a real-life incident, Anushka a 21-year-old, from a finance background started investing at a very early stage in her life, she thought that since she had a long way to go before she needed the money, equity would be the best instrument for her and she could afford the risk as well. Her investments worked out quite well for her, since she planned very well. On the other hand, her Uncle Rohit, from a non-finance background, thought that he should invest in the same instrument for his retirement, which was just a few years away, but didn’t consult Anushka since it worked out so well for her, he thought it would work out well for him too. So what do you think happened at the time of retirement?
Well let’s just say, it didn’t really work out well for Uncle Rohit. Firstly because retirement is a goal that can’t be compromised, so putting all your money in equity, not a very wise move. Secondly, equity is meant to achieve long time goals and not short term. Thirdly, one of the major reasons is, it is very risky. If you are dicey about your investment options, take a second opinion. Now when I say a second opinion, I don’t mean friends or family (if they have no knowledge of investments.) or else it will be like ‘one blind man following another blind man’, go to a consultant and they will guide you with the right investments and how much to invest too.
‘How much should I invest and where?’ This is a question you always need to ask yourself. Diversification is a must with your investments. Choosing the wrong investment avenue can bring you loss, but investing all your money in one instrument can also cause you the same amount of loss or even more. So you need to make sure you diversify the amount you need to invest in risky as well as non-risky avenues. This is the main strategy to minimize loss.
For all the cricket lovers, let’s associate cricket with investing through SIPs. So all the cricket fans out there, here’s something you can associate your investments to. This will help you understand how many runs you need to win, i.e. is knowing how much you need to invest through a SIP, to achieve your target corpus.
Stay Fit – Awareness:
It is always important for an investor to be aware of the current market conditions. They should be aware of how the top funds are performing. Just how a cricketer needs to stay fit or exercise daily to increase their stamina, so do the investors, need to be aware, to increase their knowledge on the market scenarios. It is not possible to keep a track on all the funds in the market, so always pick the top 5 best funds and track their performance, and accordingly make your choice.
Pick your team – pick your investment options:
A cricket team is formed with diversified players. You can’t have all the best bowlers in one team or the best batsmen in one team. The team has to have a mix of all types of players, like fast bowler, spinners, batsmen, wicketkeeper, etc. If we apply this to investments, then you should always have a mixture of debt funds, equity, liquid, arbitrage, tax-saving funds, etc. Diversification is required to minimize your risk and each different fund will work differently towards your achievement.
Plan of action – Risk capacity:
Just as a batsman or bowler assesses his next strike, the same way an investor has to assess his risk appetite. A batsman’s strike will depend on the ball being bowled, he will assess whether he should go for a six or play it safe. Same goes for the investors, they should assess how the market is performing and then decide whether they are willing to take the risk with big investments or play safe and go with small ones.
Teammates Ranking – Fund Performance:
When you go to choose a fund, always look at how it has performed over the years. Just like how the top players are ranked on their consistent performance, so are the funds. Make sure the funds are performing consistently and choose accordingly.
Batting Second – Fund review:
You have to keep tracking your fund and see how it is performing and if not which fund to switch it to. It is just how the team who goes in for batting second has to analyze the performance of the team who had batted first.
Pressure – Stay invested:
Pressure can make an investor act foolishly. The same goes in a cricket match. When the whole team is counting on the batsmen to make those winning runs, it pressurizes them, which could cause them to make mistakes. So an investor under pressure should stay invested, even though the market may be volatile. Hold on till you reach your goal, because you are bound to profit in the long run.
Falling wickets – Review portfolio:
Sachin Tendulkar India’s no. 1 former cricketer, but even he has been bowled out on the first ball. So even the best performing funds may falter, so you have to be alert and check your investments on a timely basis.
These are the main pointers you need to keep in mind before you decide how and where to invest in Mutual Funds. Who would have thought that, knowing about cricket would one day help you decide how much you need to invest. Now plan your investments correctly and you can win your match. I meant you will reach your goal.
You may download the fintoo app to start investing in mutual funds.
Strategies of wealth management are some basic fundamentals that everyone should be aware of. The power of intelligent investment in the creation and multiplication of wealth is indisputable. However, many of us are not aware of some basic flaws that every investor might fall prey to. We often treat terms associated with investment strategies as financial jargons meant only for the erudite. But, working knowledge of investment is not hard to gather. Armed with this basic knowledge, we shall be equipped to make sure that we are not losing our hard-earned money.
In this article, we shall explore 8 common mistakes that investors have been making over the years and which should be avoided in order to facilitate long term wealth accumulation.
1. Ignoring Insurance
We cannot emphasize how important it is to have a well-suited insurance policy in place. Insurance policies make sure that the well-being of you and your loved ones are safe-guarded in case of any unforeseen circumstances. It provides you the knowledge that your family will be taken care of, your children will be provided for and all your financial commitments will be honoured even in your absence.
However, I have met many youngsters in their 20s who believe that they are invincible and thus above the purview of insurance policies. They forget that it is when you are young that the policies are cheapest and as you grow older, the policies keep getting more expensive. Hence, chances are that by the time you realise the indispensability of insurance policies, you will not be eligible for many of them.
Moreover, as the money in terms of periodic premiums keeps accumulating, you are privy to a bank of forced savings that have very low-risk factors associated with them. Moreover, insurance premiums are also eligible for tax benefits. Thus, when the insurance term matures, you have access to funds that will supplement your retirement plans.
2. Confusing Between Investing and Trading
Although these terms are often used interchangeably by young investors, there is a world of difference between investing and trading. If one is not completely aware of the ropes of the market, chances are they expose themselves to financial losses by trading with the wrong stocks. However, a diversified portfolio with equities that have a proven track record will help grow your savings in the long run at a moderate risk quotient.
3. Basing Investments On Ups and Downs Of Stock Market
If there is anything you should know about the stock market, then you should know that it is volatile. Stocks performing big on the first hour of the day might end up losing big as well as the day progresses. Thus, gambling your money away on the ups and downs of the Sensex arrow is never advisable. It is much more prudent to invest in healthy stocks with a proven 5-10 years track that will appreciate your wealth slowly but steadily.
4. Too Short Of Time Horizon
The golden rule of investment states that the longer your money stays invested, the greater are your returns. Such is the beauty of compounding interest. Thus, if you constantly keep taking out money from your investments, you will never be able to accumulate enough interest. It is due to this reason that most investment vehicles like fixed deposits, provident funds and ELSS mutual funds have a certain minimum lock-in period.
5. Not Starting Early Enough
The old proverb goes-“The early bird catches the worm”. Indeed, it is never too early to start investing. In fact, the earlier you start investing, the higher you end up gaining in terms of returns due to the magic of compound interest. Let us illustrate this phenomenon with an example.
Mr. A starts investing at the age of 20. He invests Rs X in a scheme that doubles his principal amount in 10 years. Thus at the age of 30, his investment grows to 2X, at the age of 40, it grows to 4X. At the age of 50, he has 8X and he has 16X when he is ready for retirement.
Now, let us consider B starts investing when he is 30. He invests Rs X in the same scheme as A. But when he turns 60, he ends up with only 8X amount. He has lost eight times his initial investment by starting 10 years later. You get the picture, right?
6. Not Having A Systematic Investment Plan
By investing small amounts regularly in a SIP, you gain the following advantages:
- Since you do not have to come up with a lump sum amount to invest, you don’t feel a financial burden or the inability to honour prior commitments
- You become a more disciplined investor
Trust us when we say that if you do not have a Systematic Investment Plan, you are losing out on your money.
7. Complicating Things
Many investors have the habit of dabbling in different equities every year. This makes it all the more difficult to stay top on your portfolio and make informed decisions. Instead, a well-chosen basket of consistent stocks in your portfolio serves the purpose of wealth multiplication quite well. And it keeps things simple.
8. Working With the Wrong Advisor
Of all the investment blunders that you might perform, this is perhaps the gravest. A wrong investment advisor will result in more than just financial losses. Thus it is very important to study the past performance of a financial advisor before choosing one. Moreover, keeping an eye on your portfolio is advised and with good reason.
Investment strategies might be a dime a dozen. The onus of choosing one that works for you lies with no one else. However, with a little amount of research and determination, carving out the path to glory is not that difficult as long as you are avoiding the pitfalls that we have outlined above. Start early, keep investing small amounts in regular intervals and watch your wealth grow. You may download the Fintoo app to start your investment now.
Mutual funds are an attractive avenue for investing your surplus cash. They are affordable and they also promise good returns in the long run. Moreover, there are various types of mutual fund schemes which you can choose as per your risk preference. The growth of a mutual fund scheme is measured by the change in its Net Asset Value (NAV). NAV is a very important concept in mutual fund investments that should be understood if you are investing in a scheme. Do you know all about mutual fund NAV?
No? Let’s understand.
What is NAV?
NAV is the short form of Net Asset Value. NAV represents the ‘per unit’ cost of a mutual fund scheme. It is calculated as follows –
NAV = (total value of the mutual fund portfolio – liabilities and expenses of the scheme) / total number of units
Understanding Mutual Fund NAV
When you invest money in a mutual fund scheme, it is pooled together with the money invested by other investors. From this pooled investment, the expenses and liabilities are deducted to arrive at the net investments. This investment is, then, used by the fund manager to buy stocks, shares, bonds or securities of various companies and institutions. The different investment made by a mutual fund manager represents the total portfolio of a mutual fund scheme. This value is then divided by the total number of units purchased to arrive at the Net Asset Value (NAV).
Let’s understand with the help of an example –
- 100 investors contribute Rs.1000 towards a mutual fund scheme of the unit value of Rs 10/-.
- The total investment in the scheme becomes Rs.1000*100 = Rs.1 lakh with total MF units of 10,000
- Rs.5000 is the expense incurred by the mutual fund scheme
- The available investment amount, therefore, is Rs.95, 000
- The fund manager uses this money to buy
- 500 shares of ABC Limited priced at Rs.100 spending a total of Rs.50,000/-
- 75 bonds of XYZ limited priced at Rs.200 spending a total of Rs.15,000/-
- 200 units of MNC Limited priced at Rs.150 spending a total of Rs.30,000/-
- Total invested value of the scheme is Rs.95,000 against 10,000 units
- If the share value of the ABC Limited increases to Rs 100,000/-; net asset value of the MF portfolio will increase by Rs. 50,000 to Rs. 145,000/- (ie. Rs. 95,000/- + Rs. 50,000/-)
- Thus NAV will increase to Rs. 14.5/- (ie. Rs. 145,000 /10,000 units)
Important facts about NAV
- The NAV of a scheme is dynamic. It changes every day and is calculated at the end of each market day.
- The growth in the NAV rate depends on the underlying assets of the mutual fund scheme. If the market value of the assets increases, NAV rises and vice versa.
NAV and Mutual Fund Returns
NAV has no relation with the return generating a potential of a mutual fund scheme. As such, you should not compare two mutual fund schemes based on their NAVs. A scheme’s performance should be measured by its historical returns. Though a higher NAV would give lower units, the growth of the scheme does not depend on the number of units but the value of the underlying assets. So, don’t judge a scheme by its NAV.
Now that you have understood the concept of NAV, you may start your first investment in mutual Funds through Fintoo.
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.