RailTel IPO grey market premium plunges
RailTel Corporation of India’s Rs 820 crore initial public offer (IPO), which has been seeing strong retail participation at bids totaling 11 times the issue size so far, closes for subscription on Thursday. Till the end of Day 2 of the IPO, the issue was subscribed 6.55 times with the retail quota getting bids for 10.55 times the limit. The qualified institutional buyers’ quota was subscribed 2.97 times and the non-institutional investor category 2.63 times the limit. The portion reserved for employees was subscribed 1.85 times. The grey market premium still suggests a 13-15 percent upside over the upper limit of the IPO price band.
SIPs back in limelight even as MF outflow continues
With the equity market scaling record highs, new SIP account registration has risen to a record of 16.4 lakh in January 2021, the data from the Association of the mutual fund of India (AMFI) show. This is the second month in a row when SIP registrations hit a record level. The previous peak was in January 2018 at 12.9 lakh accounts. The two-month rolling average of new SIP registration reached 30.7 lakh accounts compared with an average of 18 lakh in the past four and half years.
What’s in Joe Biden’s sweeping immigration bill being rolled out in Congress?
An eight-year path to citizenship would be provided for millions of people who were living in the United States unlawfully on Jan 1, 2021. They would receive a permanent residency card, commonly referred to as a “green card,” after five years if they pass certain requirements including background checks and could then apply for citizenship after three years. President Joe Biden’s proposed legislative overhaul of the U.S. immigration system, due to be formally introduced in Congress on Thursday, would be the largest in decades, but it faces steep odds.
Vodafone Idea lost 2.7 million users in October
Vodafone Idea Ltd slipped further behind its main rivals in terms of subscriber base as it net lost 2.7 million mobile subscribers in October. Data from the Telecom Regulatory Authority of India showed. In contrast, its rivals Reliance Jio Infocomm Ltd and Bharti Airtel Ltd saw an increase in their subscriber base by 2.2 million and 3.7 million respectively, which helped them further consolidate their position as the largest and second-largest operators in the country. Reliance Jio had 406 million subscribers as of October end, while Bharti Airtel had 330 million. Vodafone Idea, which was once the largest operator in India, slipped further behind its rivals at 293 million.
Should depositors worry about co-operative banks?
It is a financial entity engaged in the business of collecting deposits and lending – like any other commercial bank. But they function on the principle of cooperation and sharing profits with members. They offer services essentially to members who are shareholders of the bank. A co-operative bank also offers many high-tech products and services like any commercial bank. But their business jurisdiction in most cases is localized.
Petrol prices all time high
Petrol and Diesel prices have been on the rise once again. The price of a litre of Petrol breached the Rs.100 mark yesterday in Rajasthan. Elsewhere in the country, it’s the same story, albeit not as drastic and it’s upsetting a lot of people. Including the Prime Minister, who recently lamented about India’s dependency on foreign oil. India is most certainly dependent on foreign oil. Back in 2015, the government had outlined plans to reduce India’s import dependency – from 77% in 2013–2014 to 67% by 2022. Because the central government saw an opportunity to make some money here. After all, tax collections were abysmal. They were already borrowing too much. And they were desperately looking to fund their expenditure through any means necessary. So the central government increased excise by a record ₹10 per litre on petrol and ₹13 per litre on diesel, planning to raise a ₹1.6 lakh crores. States meanwhile got in on the act as well. They bumped up taxes in tandem and together these extra charges alone make up 55–60% of the final retail price today.
We all want to make that extra money on the side, and if you really put your mind to it, you can make your ends meet. Do you think, the beggars on the road have no choice to make a living for themselves? They do have a choice. We gave them money, when they come to beg, is only encouraging them more, to continue begging. Even the roadside vendors, may not have their shops registered or may not even pay income tax. Two main reasons could be literacy and corruption. Literacy because, they wouldn’t know the importance of declaring their income and getting themselves registered and corruption because, if they get caught, they pay bribes to be let off the hooks. One way you can’t really blame them, because that is their only source of income and that is how they make their ends meet, they don’t have much of a choice. So basically everyone has needs, but what we are willing to do, to fulfill those needs, is what separates us from the beggars. Salary is not enough to make ends meet, as our demands keep on increasing. So what other choices do they have?
Well, there are many more ways to earn that extra income, it can be done through investments. You invest a certain sum of money in any investment instrument and give it time to grow through the interest earned, in other words, your invested capital is being appreciated, this capital appreciation is also known as capital gains. We all know, where there is income, there is tax, some investments have more advantages over the other investments. Also, the duration is one more important factor that decides,’ how much tax you pay’ and also if you have incurred a long term or short term capital gain. The longer the investment kept, the better it is for you, since you save more tax. Let us now look at how a short and long term investment is categorized:
- Short term investment in case of Equity, debt, and real estate: For equity, if the investment asset is held for less than 12 months and attracts gain, then it is considered as short term capital gain and will be taxed at a flat rate of 15% + educational cess at 4%. For debt, real estate, and physical gold, gold ETF, the short-term capital gain will arise, only if the asset is held for less than 36 months and will be taxed according to their slab rates + educational cess at 4%.
- Long term capital gain in case of Equity, debt, and real estate: For equity, if the investment is held for more than 12 months, the amount withdrawn will be tax-free in the hands of the investor up to a realized gain of 1lac and 10% tax will be levied on any gains above this threshold of 1 lac. For debt, real estate, and gold, the long term capital gain will arise, only if the asset is held for more than 36 months and will be taxed at 20% with indexation benefit + educational cess at 4%.
One more term that we need to understand before we move ahead is ‘Indexation Benefit’. What is the indexation benefit? Say Mr. Paul bought a house 5 years back for Rs. 60 lakhs, he wants to sell his house now for Rs. 1 Crore, what will be the capital gain he earns? Now, I’m sure many of you will say Rs. 40 lakhs. But that’s wrong because, in those 5 years, the value of the house has also appreciated saying Rs. 80 lakhs, so Mr. Paul has made a capital gain of only Rs. 20 Lakhs. So indexation is a technique to adjust the income payments, through a price index and the benefit is given, just to maintain the purchasing power of the people, after taking inflation into consideration.
As you can see for yourself, investing for a longer term is better than investing for a shorter term. Now let us look at the 5 categories, where you can incur long term capital gain and as we have already seen you can save maximum tax when your capital assets are long term in nature:
This is a very risky type of investment, as it has direct exposure in the market. Under equity, there are again numerous instruments in which you can invest, namely shares, mutual funds, etc. Since the risk is very high, the tax implication on equity investments is also very lenient. In fact, a person can save more tax, if they invest in equity and it could be tax-free if these investments are held for more than 12 months and the gain amount is less than 1 lac. However, there is only one equity mutual fund, which is known as Equity Linked Saving Scheme, which is available for deduction under section 80C. This fund’s lock-in period is for 3 years, as it is the only fund available for deduction.
For example, If a person has invested in 100 shares for Rs. 50000/-, he now wants to sell off those shares for Rs. 80000/-, within 6 months from the date of purchase, he has attracted short term capital gain, so now he has to pay 15% + 4% on that profit of Rs. 30000/-. Let us say he has kept it for 12 months and wants to sell it now at Rs. 100000/-, the whole amount of Rs. 50000/- will be tax-free in the investor’s hands.
This is a safer option as compared to equity funds in terms of risk, so the tax levied on debt instruments is also more as compared to equity investments. But the same logic of the holding period of the investments is applied here as well, the longer the investment held, more of your tax gets saved. Unlike equity investments, after 36 months of holding the investment, the amount withdrawn will not be tax-free, but the person will get the indexation benefit. So once the indexation benefit is deducted from the sale consideration, 20% + 4% will be levied on the remaining amount.
This is another asset, held by an individual, which can attract capital gains. If a person sells his house, the profit that he makes on the sale of his property will be taxed on, for how long he has held that property. Again if it is a short-term capital gain, it will be taxed as per the individual’s slab rate. On the other hand, if it is a long term capital gain, then tax will be charged at 20% with indexation benefit + 4% educational cess. Now, an exemption on the long term capital gains is available under section 54. But to claim this deduction, the following has to be fulfilled:
- To claim this exemption, a residential property must be bought, it could be either old or new or to be constructed.
- To claim this deduction, only two house property can be bought and it should be in the name of the seller too.
- This property has to be situated in India, this deduction available cannot be claimed for properties bought or constructed out of India.
- The seller should purchase a residential house either 1 year before the date of sale or 2 years after the date of sale. In case the seller is planning to construct a house, he will have to construct the residential house within 3 years from the date of sale.
Please keep in mind that, in the long term capital gains are not invested in a new house property, before the date of tax filing or 1 year from the date of sale, then the same amount can be deposited in a Capital Gains Account, as per the Capital Gains Account Scheme, 1988. Also note that, if the property bought is sold before the completion of 3 years, then the exemption will be reversed and now the gains acquired from the sale will be taxed as short-term capital gains. So like equity, in real estate also, there is a chance for your long-term capital gains to be tax-exempt.
This is a completely different category and the long-term gains taxed, is also different from the rest. So if these bonds or debentures are sold before the completion of 12 months, then it falls under short term capital gains and will be charged as per the individual’s slab rate. However, if it’s sold after the completion of 12 months, then it is taxed at a flat rate of 10%. So again here, you have long term gains having the upper hand.
There are different ways in which people can invest through gold. Buying gold is a common way of investing in it. It is, however, more of an asset than an investment. For gold, only after the completion of 36 months, will it be considered long term and will be taxed at 20% + 4% with indexation benefit. If it doesn’t complete 36 months, then it will be charged according to the individual’s slab rate. It is better not to hold gold physically, it is a safer option to buy paper gold. The Government has proposed that Sovereign Gold Bonds, issued by the Reserve Bank of India, will be exempt from capital gains tax which makes it one of the best ways to invest in Gold. Another exemption that has already come into force, since April 2016 is, under Gold Monetisation Scheme, the deposit certificates issued, will also be exempt from capital gains tax.
Related Article : Sovereign Gold Bonds – Should you invest?
Note: In the case of SIPs, in mutual funds, each of your SIP has to complete, the relevant months to fall into the long term capital gain category. For example, SIPs in equity mutual funds, have to complete 12 months individually to be tax-free. So if I invest Rs. 1000/- every month, starting from January 2020, then the SIP of January 2020 ONLY will complete 12 months in Jan 2021 and that amount plus the interest earned on it will be tax-free (i.e. Rs. 1000 + interest amount ). So February’s 2020 SIP will be tax-free only in February 2021 and so on. In the case of the Equity Linked Savings Scheme, each SIP will have to complete 3 years.
So it’s very clear now, that the longer you stay invested, the better it is for you. It is very easy to dream, but the hard part is putting that dream into action, you have the above options to guide you also, what are you waiting for? We all crib about how we have to pay tax for all the incomes we earn; well now we have a choice to reduce that tax payment.
Mutual Funds are one of the best investment avenues when it comes to creating wealth in the long term. In order to grow your wealth, your portfolio needs to beat inflation and mutual fund is an investment avenue which ensures that you beat inflation in the long term.
It seems quite convenient for those who do not want to jump into the market directly. Since mutual funds are professionally managed and fetch reasonable returns adjusted to risk appetite (as per the investment strategy of the fund), they have become investor’s favorite, be it conservative or be it, aggressive investor.
If you have made up your mind to invest in mutual funds, it is important that you know the tax implications of the same. You cannot ignore taxes while investing in mutual funds.
“How much tax I need to pay on mutual funds?”
You must have this question in mind. But the answer is not direct. The amount of tax that you need to pay depends on various factors. These are:-
- Type of Income
- Type of Mutual Fund
- Holding period of investment
- Type of transaction
Let us take this one by one
Type of Income
When do we pay income tax?
As simple as it may sound, we pay tax only when we earn income, right?
So what kind of income is generated when we invest in mutual funds?
There are two types of incomes generated through Mutual funds –
- Dividend Income
- Gain on selling mutual funds
These are the two instances where we gain out of mutual funds. Tax treatment is different in both instances.
Let us first focus on dividend income
- Dividend Income
Regarding dividend income, there have been recent changes in Budget 2020 on how dividend income needs to be taxed. The finance minister has proposed the abolition of DDT and made the dividend income taxable in the hands of the investor.
Now the question comes, how much tax you need to pay on dividend income.
The answer is simple. Dividend income from mutual funds is taxed as per slab rates.
- Gain on selling Mutual Funds
Apart from dividends, you can earn through capital Gains from mutual funds. Let me clear one point here, capital gain here refers to the gain you get when you sell your mutual funds and not on notional gains.
Thus, we can say
Capital Gain = Redeemed Value – Cost of investment.
Now the main question, how much tax needs to be paid on capital gains?
It does not have a one-word answer. It depends on what kind of mutual fund it is. This brings us to the next factor i.e. “Type of Mutual Fund”
Type of Mutual Fund
The amount of tax to be paid on capital gains depends on which type of mutual funds you had invested in.
As per Mutual fund scheme rationalization and categorizations, SEBI has provided the following classification of mutual funds namely-
- Equity Mutual Funds
- Debt Mutual Funds
- Hybrid Mutual Funds
- Solution oriented Funds
Each of the above categories has subtypes as well. For example, there are 11 different types of equity funds and 16 different types of debt mutual funds.
But don’t worry! From a tax perspective, all these funds are divided only into 2 categories. This means there are only two types of mutual funds that you need to consider to find out how much tax you need to pay. These are:
1.Equity Oriented Mutual Funds
All the types of equity mutual funds come under this category. Not only this, any mutual fund which has an equity exposure of 65% or above will become under this category. This implies that balanced funds where equity holdings are 65% or more will come under this classification.
All the funds which do not fall in the above category come in the “Other Category”. This includes all debt funds, Gold funds, real estate funds, any balanced fund where equity exposure is less than 65%.
Now once we know these two categories, it is simple to know the tax implication on these mutual funds. This is because the tax rate on Equity oriented mutual funds is different from all other funds.
However, there is one more step. This next step is to find out what is the holding period of these investments.
What does holding period mean? That is our next factor – Holding period of investment.
Holding Period of Investment
Holding period means that for how many months you hold on to that particular mutual fund before you sell. Based on this we have two types of gain i.e.
- Short term Capital Gain
- Long term Capital Gain
Short-term capital gain is when an investor receives gain by selling an investment in a short duration and long-term capital gain is when an investor receives gain by selling an investment in a long duration.
Now the question comes, how do we define short term and long term.
Short term and long term holding period differ for equity-oriented mutual funds and other funds. That is the reason we covered that part first.
The below chart explains the short term and long term holding periods along with the applicable tax rate.
Type of Transaction
Now that we are clear with all tax rules, I would now like to specify a few common transactions to make it clearer. In mutual funds we have the following transactions:-
- Lumpsum purchase
Related Article : Understanding SIP, SWP and STP
No income tax you need to pay when you are making an investment whether Lumpsum or SIP. However, if you are making this investment in an ELSS fund (Equity Linked Saving Scheme) then, you are eligible for an 80c deduction up to Rs. 1,50,000.
Transactions like SWP (Systematic Withdrawal plan), STP (Systematic Transfer Plan), Switch, Redemption are considered as selling units i.e. redemption only. So the treatment will be the same as described above. That is, first you need to check which type of fund and then holding period.
Securities Transaction Tax (STT)
Apart from income tax, you also need to pay STT. STT is to be paid on transaction value and not on gain amount.
How much STT needs to be paid?
An STT of 0.001% is levied by the government (Ministry of Finance) when you decide to sell your units of an equity fund or an equity-oriented fund. There is no STT on the sale of debt fund units.
To summarise, an investor first needs to check whether the income is through a dividend or capital gains. If it is capital gain, check the type of fund – Equity or other. Next check the holding period and tax rate applicable. This was a 360-degree view on tax implications on mutual fund investments. I hope it has given you a better understanding.
So the other day, I had a word with my friend Shaila over the phone, as she needed my help to make a financial decision and since I come from a finance background, she thought I would be the right person to ask. She wanted to know, where she should invest for her child Namrata’s further studies after graduation. She was going to start with a monthly SIP, in a mutual fund scheme, but later heard of the Sukanya Samriddhi Yojana scheme, introduced by PM Narendra Modi, as a ‘Beti Bachao Beti Padhao‘ campaign. So she was confused about what would be the right option to invest in.
I asked her to give me the following information
- What amount is required for her child’s education? She gave me an approximate lump sum amount of Rs. 50 lakhs, since she was going to send her abroad.
- After how many years you need it? Her daughter Namrata is currently 6 years old and she needs it when Namrata turns 21 years.
- Are you willing to take the risk? She said since it’s for her daughter’s education and she doesn’t want to make a compromise on the amount, she would prefer a more secure fund, to invest in, but if the risky fund is performing better and she reaches her goal, she doesn’t mind taking the risk.
- Monthly amount to invest: She said that she has Rs. 12500/- per month available with her to invest.
- Will you make a premature withdrawal? She doesn’t want to withdraw it as it is specifically for her daughter’s education.
So I did some analysis based on the information she provided. I also asked her to do a virtual meeting again after 2 days, to discuss on the same. I made 1 table which shows the returns of her monthly SIP and the returns of the Sukanya Samriddhi Yojana after 15 years. But I also thought that it would be helpful for her to make a decision, if I at least explained to her the basics, she would know the best investment options and accordingly make her choice.
Related Article :-Creating Wealth By Doing SIP – Power Of Compounding
We connected after 2 days, and I started explaining to her that, the Sukanya Samriddhi Yojana was introduced specifically to cater to the needs of a girl child. This scheme was made to collect funds for a girl’s higher education and marriage
- Eligibility: Any girl of age 10 years or less can open an account and she should be an Indian citizen.
- Who can open an account: The account can be opened in the girl’s name by her parents. If the girl is taken care of by a legal guardian, then the account can be opened by them too.
- Maturity: The account can be held for 21 years from the date of opening the account. If the girl gets married before the completion of 21 years, the account automatically closes. If the girl doesn’t get married even after the completion of 21 years of the account, the balance will continue to earn interest as specified in the scheme.
- Rate of Return: The current interest rate is 7.6% and is subject to change every year by the Government of India.
- Premature withdrawal: It is allowed at the age of 18 years for either her marriage or higher education. But only up to 50% of the deposit amount.
- Deposit amount: A minimum of Rs.250/- and a maximum of Rs.150,000/- in a year.
- How many accounts can be opened: Only one account per girl child. The parents or guardians can open maximum 2 accounts for 2 of their daughters, even though they have 3 daughters. If twins are born and both are girls, and if you have a girl child already, then all 3 are eligible to open an account.
- Penalty: If you do not invest the minimum amount in a year, the account will be deactivated. To reactivate it, you need to pay Rs. 250/- along with Rs.50 for each defaulted year.
- Tax implications: The interest earned as well as the maturity amount is tax free. Deposit made under this scheme is also eligible for deduction under section 80C, to a maximum amount of Rs.150,000/-.
I told Shaila this was all she needed to know about the scheme. She was quite impressed with this scheme. But I reminded her that there is still one more option left. So her second option was SIP, I told her that SIP is best effective only when invested in equity, one is because of it’s power of compounding and the second is because of it’s Rupee Cost Averaging.
Power of Compounding:
This is simple, it means earning interest on interest. So I showed her a small table of how the compounding works:
|Month||Opening Balance (Rs.)||SIP amount (Rs.)||Interest @ 12% p.a. (i.e. 1% per month) (Rs.)||Closing balance (Rs.)|
|2||6060||6000||120.6 ((6060 + 6000) * 1%)||12180.6/-|
This table was just to make her understand how interest is calculated on interest. It shows how the interest is calculated on the interest and principal received from the previous month as well as the fresh SIP.
Rupee Cost Averaging:
This is when investors take the advantage from the market downfall. When the market is down, you can buy more units at a discounted value, which will in turn give you more profit, when the market rises.
For example You started an SIP of Rs 12000/- per month in an equity scheme. The Net Asset Value (NAV) at that time was Rs. 10/-, so your no. of units will be 1200 (i.e. 12000/10). Now after few months, the NAV drops to Rs. 8/-, your no. of units now increase to 1500 (i.e. 12000/8). This possible only in the case of equity funds as the equity market fluctuates more. The rate of debt funds fluctuate but not much as in the case of equity.
I also informed Shaila that equity investments are risky as compared to the Sukanya Samriddhi Yojana. Finally, I showed her the table and the comparison of which investment gives a higher return to reach her goal of 50 lakhs in 15 years for Namrata’s education.
|INVESTMENT OPTIONS||MONTHLY INVESTMENT/ SIP (RS.)||RATE OF RETURN||VALUE AT THE END OF 15 YEARS (RS.)|
|SUKANYA SAMRIDDHI YOJANA (SSY)||12500/-||7.6%||42,48,290/-|
|SIP IN EQUITY FUNDS||12500/-||12%||63,07,200/-|
She was shocked when she saw the above table, I also reminded her that, the interest rates in the SSY scheme are subject to change every year. In equity, the rates keep fluctuating as well, the 12% rate I’ve taken here is the minimum earned on an average basis. She was quite clear after this where she wanted to invest, it was obvious that SIP won this battle. She thanked me for my help.
So now your concept is also clear on which is the better option to go for. One good thing about SSY is that it is for a specific purpose and not utilized to fund just any goal. Well there are so many options out there to invest, but nothing can beat the power of compounding of a SIP. So choose wisely and happy investing! Start investing in SIP mutual fund Online via Fintoo.
Owning your house, is a great feeling. You work hard and finally purchase your own home. However, most of the times, this great feeling of having your own house comes with a burden of a huge loan. This of course you plan to pay through EMIs. While it is a big goal achieved, it is also true that a home loan tenure of nearly 2-3 decades is intimidating.
The fluctuations in the market make it cumbersome to allow home purchase for many, leaving no other option than to go for a loan. In almost all the cases, the buyer has paid almost double the amount of house cost during the tenure of loan.
Being under huge liability, you wish you had a way to get rid of this loan as early as possible. You think of making pre-payments on your loan and pay off your loan faster, but with a hefty EMI being deducted from your take home salary, that does not seem feasible to you. Right?
There is no doubt that people are working hard to buy a house, but as compared to huge real estate cost, people are still lagging behind in purchasing a new home. So, most of the people choose to give only about 20% cost of the home as down payment and the remaining as EMI.
However, when you calculate the EMI paid by you every month, it adds up to 10 – 30 Lakh or more than the cost of the house, depending on its actual cost. Some people, however, are smart enough to choose different methods which can help them repay their loan or debt.
This smart way is SIP. Let us understand this in detail.
What are SIPs?
A systematic investment plan is an investment vehicle offered by mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums. The frequency of investment is usually monthly.
The amount accumulated at the end is a large sum of money which can be used in paying off a loan, debt, going for a vacation or can even be used for your business use. More and more people are nowadays opting for SIP as it’s easy to invest in mutual funds through Systematic investment plan and enjoy good returns in the long term.
Re-Paying off Your Debt?
Investments when started early in life can help you achieve good returns. A great way to easily repay off your debt is through SIP i.e. Systematic Investment Plan.
SIPs can help you achieve a different variety of financial goals. But were you aware that SIPs can also help you recover the interest you pay on your home loan?
Related Article : 8 Real Facts Why People Love To Invest In SIP
The monthly pattern might give you a similar feel as you are paying `EMI for your home loan. But wait, the EMI on home loan incurs a higher rate of interest from you, however, the SIP gives a higher rate of interest to you.
Although you are paying for the SIP in monthly instalments, the benefits of the returns remain the same.
How Is It Beneficial?
If you are unaware of the benefits of SIP, let us explain how you can become a good investor by investing in a SIP.
- Making investments in SIP is easy on your budget, by investing as low as INR 500 per month.
- Enjoying higher returns on investment, equal to 12 – 15% per annum.
- A disciplined way to make an investment.
- Easy to pay off your loan for the car, home etc in a smaller time period instead of continuing the loan for a longer time period.
Let us explain you with an example:
A SIP is called a “Good EMI” simply because of the reason it helps to provide good returns in the end to the investor.
Say there are two people, Mr. Rakesh and Mr. Mukesh, both are going to buy a house worth INR 20 lakh. There are two kinds of home plan you can go for, 10 year and 20 years. Calculating the EMI based on a 10-year plan, comes to INR 25200, however for 20 years comes to INR 17800.
Now Mr. Rakesh, goes for a home loan of 20 years, paying INR 17800 EMI per month. However, Mr. Mukesh wants to go for a 10-year plan but doesn’t have the excess INR 7500 to pay every month.
So let’s suppose he starts a SIP of 5000 every month for a period of 10 years. After a period of 10 years, his SIP will give him a total return of INR 14 lakh based on an approximate return of 12 – 15% per annum. After 10 years, his remaining home loan amount is also around INR 14 lakh, which he can easily repay with his SIP return. This is how the SIP can help you in repaying off your home loan with ease. Hence, Mr. Mukesh can easily repay off his home loan within a period of 10 years.
So it is a wise decision to start a SIP along with your home loan, or preferably to start before it, which is even better.
This way, starting an SIP will be able to give more returns and even help you in repaying off a large debt like a home loan in a shorter time period. You may start investing in SIP Online via Fintoo.
Over the years, we have been hearing about the stories of people turning out to be the billionaires overnight, but is it really so? Who doesn’t want to be? Even I want to be one. Well! But the fact is that tycoons like Warren Buffett, have actually built their own empires with investments on buying right and sitting tight.
Having said that; let me ask you, what are your financial goals and what are you doing to achieve them? You keep a hold of a secured job with good salary package, commercial independence, but still more is needed. Sure! You must be doing savings on the earnings. So, what do you do more to grow the assets? If you have ever thought over investments, you must have surely heard about investing in SIP, i.e., Systematic Investment Plan.
“What is SIP?” It’s is the simplest, organised and a convenient way to fulfil your dreams.
The core behind this is that you invest a fixed amount every month or quarterly over a period of time in the mutual funds. However, the NAV (Net Asset Value) of the fund might vary each month; whereas, on the other hand, you can also increase with the committed amount along with the rise in your source of income to avail more benefits of when you invest in SIP.
Is your mind wondering whirls of questions about investing in SIP? Hold your thoughts! Here are the facts that will give you clear idea about it. Let’s have a look at that:
- Easy investment
“But I don’t know about mutual funds, so what do I do now?” you had this question in your mind. Didn’t you? Relax! If you are amongst those who cannot give full time attention to the stock market or the early investors who just have a vague knowledge about the finance and budgeting, you can undoubtedly invest in SIP. It is reliable. SIP doesn’t ask necessarily for big-time investment, you can start with a fairly small amount too.
- Better returns
Turning back the pages of market, when we look into the past decade, the average inflation rate has been about 7% p.a. and a couple of years back; which has gradually paced down. If we consider the capital market return, a person who is willing to invest in SIP can have CAGR (Compounded Annual Growth Rate) of around 15% p.a. in the long term i.e 5 years or more. It clearly shows that comparative to the other options to put the money in, investing in SIP has beaten the other asset classes. This is a good value for money.
- Investment in small chunks
Investing in lump sum is not what everyone can afford to do so. Also, when you are not sure about the market, where you never know if the market is running at its peak or trough. Thereby, when you invest in SIP, it turns out to be a life saver for you. As you cannot do large investment, devoting in small chunks overtime leads to good monetary benefits in long run. Of-course, it feels a bit stress free when you know that you will not lose the valuable amount if the market goes down.
- Don’t worry about the market
Even if you invest the regular amount that you had committed for the investment when the market is low, you are not adversely affected by it. Instead, many of the sources suggest doing more here – yes, invest in SIP. With this investment, you can also benefit from rupee-cost averaging. No worries about the inflation in market as the average investment shall balance out with the funds.
- Long term savings
If you have the habit of savings, and you invest in SIP, it will ultimately lead to good long term returns. It is like when you take a decision to make yourself fit and fabulous, you start the daily work out because you trust that you will undoubtedly see the good results in some time. Similarly, you shall definitely experience the power of compounding when you regularly invest over a period of time.
- Tax Benefits
Just like there are tax saving government securities, FDs, there are also tax saver mutual funds to cut down your tax bill, one of which is ELSS SIP’, i.e., Equity Linked Saving Scheme. However, the according to section 80C, the maximum limit of investment is up to Rs. 1.5 lakhs.
- Achieve your financial goals
We are living in a generation where our needs are increasing day by day. And to fulfil those, savings in bank will just not do. On the contrary, if you invest in SIP starting with a small amount, you take the advantage of the investment along with the dividends and capital gains too. Isn’t it a win-win situation for your short-term and long-term goals!
- Minimize risks
It is because you regularly supply a deliberate amount over a period time, the gross investment is averaged. And hence, reduces the risk factor of being unfavorable by the fluctuations happening in the market. If you still aren’t sure about long-term financial goals, do talk to your financial advisor about a proper plan. When you invest in SIP, it acts as a stepping stone for to reach your goals.
The below quotation of Warren Buffet fits rightly, when you have made a decision to invest in SIP.
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Indeed, I am investing in SIP. What about you?
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.
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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.
Just the other day, I had a word with one of my friends, Nikita over the phone. Talking on the phone was the only feasible option as I could not meet her because of the country wide lockdown owing to COVID-19. She was going on about, how her life is set and how she’s managing her money well to fund all her goals. So I asked her if she has insurance, her reply was a common one that anyone would give, “I don’t need insurance, I’m investing every month, which is enough to collect funds for my goals. On top of that I am just staying home and taking all precautions to avoid coronavirus”
Then I just asked her one question, which changed her whole perspective of thinking. That question was “What if you are no more tomorrow?” We usually live in a bubble that all bad things can only happen to others but not us. Even when we encounter someone’s family suffering because of no insurance, we still ignore it thinking that it can not happen to us.
It is obvious that we all should take precautions of social distancing, washing hands regularly, using sanitizer frequently, but the risk of getting coronavirus still remains as you will have to step out of your home as the unlock happens to resume your life as before. Not only for this deadly virus, but insurance is for long term protection from any major disease or accident which is uncertain.
Harsh isn’t it?
But it is a bitter fact. We all know, we are going to go sometime or the other, but no one knows ‘WHEN’. When it comes to finance, you have to think of all aspects before planning your finances. You may have the perfect plan, to use your current resources to reach your goals, but you still have to consider the fact that, what if you’re not around tomorrow?
Read More :- 7 Reason Why You Should Buy Insurance
How will your investments continue to reach your goal? Didn’t think of that, right?
Now here comes Insurance + SIP, to complete your investment package. When we say insurance + SIP, we are talking about term insurance and SIP in equity, since this is the perfect combination.
Let me explain why.
Term insurance has a cheap premium with a reasonable cover, whereas SIPs in equity is profitable in the long run. So on one hand you’re covering your life and on the other, you’re funding a long term goal.
Now the question here is how does this become a good combo?
Say an insured (Nikita, for example) has taken this combo, and is paying a SIP of Rs.15,000/- per month. After 5 years, the insured dies, so what happens to the investments? Of course the death claim will be given, but the SIP will stop.
Now think, what if I said, the SIPs don’t have to stop.
Well, the family can use the claim amount to continue the SIP along with the expenses. That way, the goal is not compromised, and the family is happy financially!
Let us take an example to make it more clear, Mr. Ronak, aged 30 years, working for a leading oil and gas company, has a wife Sarita, 28 years, and a son Rohit, 1 year old. He heard about the new combo of SIP + insurance, and loved it. So he decided to go ahead with taking a term plan for 30 years and started investing through a SIP, for creating a corpus of 1 crore at retirement.
He also explained to his wife how this new product works. At the age of 45, Ronak met with an accident, and did not survive it. Sarita is now responsible for all the decisions in the house. She gets the insurance claim but is not sure how to manage it.
Suddenly she remembers Ronak’s explanation of why he took the insurance policy. So she continues the SIP investment with the claim amount and at the end of the next 15 years, Sarita successfully creates a corpus of Rs. 1 crore.
Note: The above example is given to make the concept of Insurance + SIP clear. The corpus can be either less or even more than the desired corpus. This is because investments are subject to market risks.
Now since the basic concept is clear, let’s go one step higher.
Taking the same example, what if Ronak wants his family to get Rs.20,00,000/- at the time of his death, that will suffice their basic expenses at that time. Well the solution is very simple, just add this amount to the death claim amount, that Ronak’s family will get.
For example, if Ronak has taken an insurance policy cover of Rs.1 crore, he should add Rs. 20 lakhs to that amount. So his family will get a total claim of Rs 1.2 crores. So 20 lakhs can go towards the family’s expenses and the 1 crore can be used to continue the investments and monthly expenses.
Okay one more question that may pop up, where will you invest the entire claim amount? and how will you continue the SIPs.
There is a solution for that too, let’s see the different ways of investing the amounts:
- Bank – SIP – Equity fund: This is the normal way of investing, the amount is deducted from the insured’s savings account every month and it goes to the equity fund.
- Debt – STP – Equity: STP is Systematic Transfer Plan, i.e. money transferred from one fund to another. Here the nominee , on death of the insured, can invest the whole claim amount in a liquid fund (also a debt fund) and through STP, transfer a fixed amount from that liquid fund to the equity fund. This will help in continuing the SIP. This option is recommended as you may earn more in liquid mutual funds than in saving bank accounts.
- Equity fund – SWP – Bank: SWP is Systematic Withdrawal Plan. It is used to withdraw a fixed sum from the fund into the bank account for monthly use. So here, Once the corpus has been achieved, the nominee can make monthly withdrawals from that same fund, for their daily use.
Please note that above options are given in respect to the concept of insurance + SIP.
This is a very good combo, for those who find insurance very boring or those looking to benefit from insurance. We all think of what is in front of us, but this is a concept which makes you think of possibilities that can occur. It may not strike us at the time of planning. But when the incident does occur, it will be too late.