Thursday, March 22, 2018

When I Have A Demat Account, Why Should I Use A Mutual Fund?

Making investments on your own or hiring fund managers? What makes more sense for you?
What it takes to beat a mutual fund manager?
Investing well, without losing money, is not just some random activity. There are over 5,000 listed companies in India, and the top 250 companies represent over 80% of the market value. The remaining 4,500+ are all small companies whose business prospects fluctuate a lot. This extreme up and down fluctuation in the share prices of small companies is what generates excitement and greed in an emotional roller-coaster. Daily spam SMS text messages from unknown brokers do not help.
So what should you do?
If you have a job from Monday to Friday, stop wasting time dabbling in investing directly. Go through a professional fund manager – usually, he or she works at a mutual fund. You trust trained professionals in other spheres of your life, do that with your money too.
Exercise / do yoga/ run marathons to build the mental resilience and fortitude that is absolutely needed to stay steady through up and down market cycles. Share prices do not go up in a straight line and there will be many periods where your conviction will be tested. You need to stay healthy to stay invested for the long-haul and benefit from compounding.
Ultimately you need to clearly understand what you’re good at, and what you’re not (your “circle of competence”). Focus on what you’re good at and outsource the rest to trained professionals – be it a doctor, a lawyer, a gym instructor or mutual fund manager. Focus your time on making more and saving more, both of which are under your control. Just because you can, doesn’t mean you should.

Tuesday, March 20, 2018

Saving Taxes Is Not A Cashback Deal, It’s An Opportunity To Create Wealth

Tax saving investments are an opportunity to start your journey of creating wealth. Evaluate your tax saving options carefully, before investing.
This is the season for saving taxes. Half of all Insurance policies sold and tax saving investments made are in January, February and March – the last 3 months of the financial year.
This frenzy is driven by our deep-rooted aversion to paying taxes. The first investment most people will make is for tax saving. Most of them will invest approximately one month of their salary (a significant amount) to save taxes, without really evaluating their options. Or even stopping to consider what it is that they are really doing.
Tax breaks offered on your investments are not in the nature of a discount or cashback – even though it feels like that. You invest 10,000 and you immediately get a benefit in your salary slip. Instead, they are an incentive for you to prepare for the long term. Just consider the range of investment options that qualify for a tax break: your employee provident fund contribution (meant for retirement) qualifies for it, so does your Public Provident Fund; Life Insurance is supposed to replace your earning capacity for your loved ones, it too qualifies for a tax break; equity funds help you beat inflation over the long term, they figure in the list too.
All of these are long-term investments – preparing you financially for a distant future.
Tax saving investments are an opportunity to start your journey of creating wealth. So please take time to carefully evaluate your options and don’t just save tax – take your first step to create wealth for a secure future.

Thursday, March 8, 2018

Investing in balanced funds? Look beyond tax gains

The objective of these funds is to provide capital growth via a mix of equity and debt: blend of growth and safety. Balanced funds invest around 70% of the money in equities and rest in bonds.In the recent past, mutual fund assets have grown significantly. The highest percentage growth has been in Balanced Funds.
The reasons for this growth are as follows: (a) equity valuations being stretched, the exposure to the market is defensive as compared to 100% equity exposure (b) tax efficiency is same as that of equity funds and (c) regular dividends.
The correct perspective
Let us look at the three reasons mentioned above. The first rationale is, asset allocation done by the fund manager without the investor doing it himself , which has the advantage of discipline, i.e., the fund manager does the portfolio rebalancing from time to time. The second rationale is what we will discuss now, on tax treatment after the Union Budget and revised taxation of equity funds. The third reason, regular dividends, goes against the grain of long-term growth-oriented investing. A market growth-based investment, meant for the long term, should be differentiated from a Post Office Monthly Income Scheme; it is not meant to give regular dividends. If you require regular cash flows, you should do your financial planning accordingly.
Taxation rules
The current tax treatment, valid till March 31, 2018, is that dividends from Balanced Funds are tax-free, i.e., there is no dividend distribution tax (DDT). The Union Budget has changed it effective April 1, 2018; there is a DDT of 10% plus surcharge and cess, i.e., 11.65%. As against this, the DDT rate on debt funds, with marginally increased cess from April 1, is 29.1% for individuals and 34.94% for corporates. Let us now compare the current tax efficiency of Balanced Funds with the revised one applicable from April 1, 2018. Let us say, there is a dividend of Rs 100 paid out by a Balanced Fund, and the allocation of the fund is 70% in equity and 30% in debt. Currently, DDT is nil. As against this, if the allocation is made as 70% in an equity fund and 30% in a debt fund, the DDT would be (70 x 0) plus (30 x 28.84% for individuals) = Rs 8.65 for individuals. That is, the tax efficiency in Balanced Fund over focused allocation is 8.65%. Now we will see how it looks in the revised scenario. The DDT in the Balanced Fund will be Rs 100 x 11.65% = Rs 11.65. The DDT in the focused allocation will be (70 x 11.65%) plus (30 x 29.1% for individuals) = Rs 16.86. Hence, the tax efficiency in the Balanced Fund over focused allocation is (Rs 16.86 – Rs 11.65) = 5.23%. There will be a tax efficiency, but to a lower extent, i.e., 5.23% vis-à-vis 8.65%, under the assumptions.
The crux of the matter is, investments should be decided on fundamental parameters, i.e., what the investment is worth. Tax efficiency is relevant as an additional parameter, not as the sole decision criterion.
Finally, find out where the fund manager invests both in the equity and the debt portfolio. As an investor you need to decide which style suits your portfolio. Also find out where the fund manager puts the money in the debt portion.

Thursday, March 1, 2018


The majority of the investors buy when the market has already run up and is valued expensively. This often leads to disappointment when the market either goes down or sideways for years. If you avoid doing what others do and invest regularly in top fund schemes, you can easily make money from your mutual fund investments
Naturally, when we burn our fingers, our first reaction is to shut the doors on that option. In investments too, we seldom look back to know why we lost money. Were we wrong, or were the markets? But in equity markets, or specifically, in a product like mutual funds, if the market was wrong, then why does it continue to have people investing and making money? Why is it that internationally, they are known to be proven vehicles to build long-term wealth?
Most of the times when a loss is incurred, the fault lies with investors and no one else. Here are a few obvious reasons  on why we lose money when we could have avoided it.
Not having a time frame to invest
How long you would like to keep the money invested is a very personal decision. It would depend on a host of factors like your saving goals, income, expenses and other investments. But, when investing for the long-term, it is always a good idea to invest systematically.
Not having a time frame compounds your errors. One, it makes you set wrong return expectations (like expecting double-digit returns in a short period); two, it pushes you to choose unsuitable products (choosing an equity fund for a one-year time frame) and three, it prompts you to exit at wrong times (panicking and exiting when markets are down soon after you invest).Having a goal naturally puts a time frame for your investments and helps you choose the right product in line with your time frame and return expectations.
Not knowing that trading and investing are different
Many investors start by saying they will stay ‘invested’ for the long term but they buy a fund hoping it will zoom right away; if it does not – they sell it. Then there are others who stop their SIPs when the market moves a bit one month, thinking that they should not be averaging at higher costs.
These are certainly not investing strategies and will also not fetch you money. They only delay the process of building wealth and often times harm your portfolio. Besides, products such as mutual funds are simply not built for ‘trading’.
If you are an investor, the only reason why you exit should be when you near your goal or your fund is really an underperformer vis-a-vis the market.
Not having a perspective on return expectations
“I got only 15 per cent on my mutual fund. I expected at least 25 per cent returns. I don’t want to invest more” is not an uncommon statement. So what are your other options for getting that 25 per cent return? Because there is no guarantee. But it is precisely for the risk that you take that you are rewarded far higher returns than the other options. Hence, you will do well to see how much you get over your other options or simply over inflation, rather than setting a number that perhaps has no basis.
Now, can you think of a stronger reason for losing money than not knowing the product you are investing in.

Tuesday, February 27, 2018


So you’ve decided to invest your money, but where to invest is still a question? Mutual Funds, where you give your money to someone more informed about the markets for high returns, is the best choice for beginners. However, there are many myths associated with investing and picking the best mutual funds. Gaining knowledge is never-ending exercise. The various misconceptions which many investors hold while buying mutual funds.
  • Lower the NAV, cheaper is my fund – The Commonly believed that when the NAV is lower, the fund is cheaper and hence will provide higher returns. NAV is nothing but the current market value of the portfolio today. Older the fund, higher is the NAV as the market value grows over a period of time.
  • The investment has to be for very long-term – When someone suggests a mutual fund, the first question asked is whether it is “long-term ” investment. The fact is its good if you invest for a very long term, as you the benefits of compounding.
  • The investment sum has to be big – A common myth among investors is everyone feels one must have a large number of funds to invest in a mutual fund. But the reality is that you can start investing in a fund with as small as Rs 500 only.
  • Mutual fund equals to no risk – It’s important to note that no single mutual fund in this class is clearly superior to any other. Rather, the quality of a given mutual fund can be judged by the risk-return ratio that it offers. There are several funds that offer approximately equal rates of return at approximately equal levels of risk.. This acknowledgement is always made to you, when you sign the document of an agreement while investing, which is often missed by investors.
  • History will always repeat – Everyone who tends to invest in mutual funds first looks at the historic performance of the fund and then decides to make the investment. Therefore we can clearly say everyone feels the future performance will be linked to the previous performance and will fall in line. Always expect returns only as high as you are willing to risk. Unrealistic profits require unrealistic investment and risk appetite.
  • Investing in higher rated funds will fetch higher returns – People believe that the fund which has the highest ratings are safe and will give the best returns. The truth is mutual fund ratings are dynamic and are based on the performance of the fund at that given point. So, a fund that is rated highly today, may not necessarily maintain its high rating tomorrow and it also doesn’t guarantee a better performance going forward.
Investing involves risk and the sooner you accept the fact, the easier it would be for you. So figure out how much risk you can afford to minimize your loss in mutual funds. Have a goal in mind and invest to achieve that. The goal will motivate you to stay invested and meet the target.

Wednesday, February 21, 2018


We Indians have inherited the habit of savings since generations. Earlier, people used to save their hard-earned money to meet planned expenses. They would squirrel away a part of their income by keeping it in some safe location and for getting it only to look for it when there was a need for funds to meet shortfalls. Wonder whether this will work in today’s time as well?  Again, this money was lying idle and not earning anything. Gone are the days when savings were just sufficient enough to meet our future needs. With the changing social structure, increased life expectancy, changing lifestyles and needs etc., one needs something more than just savings.
Another inevitable reason why just savings are not enough is inflation. Price of goods today will not be same tomorrow; money gets dearer with each passing moment. To accumulate wealth, at the same time beat inflation, one needs to invest and not just save.
An investor can invest in various instruments such as gold, equity, debt etc. Each instrument has its unique risk and return profile and an investor must carefully analyse all parameters before investing. From a long-term perspective, equity as an asset class scores over other asset classes in terms of performance. Here are a few reasons why investing in equity as an asset class is important:
Higher inflation-adjusted returns – Since investing in equities is akin to investing in the company itself; equity investments generally have the potential to generate higher returns (albeit with higher risks involved). These returns, generally, beat inflation and give the investor real returns on their investment amount over long term. This coherent nature of equities makes it a preferred investment option for investors who have moderate to high-risk appetite.
Meet financial goals – Different investors have different financial goals such as marriage, buying house, going on a vacation, children’s education etc. These goals are generally long term in nature and the quantum required to meet these is high. The income generated from traditional savings schemes helps to meet financial goals to some extent but they are not enough when inflation comes into play. Equity provides the much-needed push to returns and facilitates a long-term wealth creation opportunity to help achieve one’s goal.
Easy liquidity option – Most of the traditional saving instruments come with a lock-in period. Early liquidation is not possible in some cases and even if it is possible, it comes with a penalty. An investor tends to lose if he/she withdraws before the said period. Equity, on the other hand, as an investment provides easy liquidity. There is the complete transparency as regards the exit price and charges, if any.
While investing in equities acts as a good portfolio diversifier and a catalyst to returns, it requires thorough research and expertise to pick the right stock.  Even after investing in a stock, investor needs to constantly track not only company’s financials but also related non-financial events and macro-economic events. Rather than undertaking such tedious tasks on their own, investors can invest in equities through the mutual fund route. There are various benefits of investing in equities via mutual fund:
Facilitates professional management of funds at a relatively low cost. The fund managers are better equipped to take call on investment, given the experience to handle the volatility
Enables investor to diversify the portfolio by investing across various companies and sectors
Mutual fund provides a facility called as “systematic investment plan, which helps an investor to invest fix amount at fixed time interval. As equity markets are generally volatile and one cannot time the market, it is beneficial for investors to take the SIP route and stay invested during different market conditions.
When it comes to equity investing, an investor should keep in mind that “equity investing requires time in the market rather than timing the market.”
An easier way to benefit from volatility is to invest in mutual funds that are designed with intent to do this for you or simply invest through systematic investment plans.

Thursday, February 8, 2018

Elss Sip A Winning Combination For Tax Saving For Retail Investors

At the start of a fiscal year, financial planners usually advise investors to opt for systematic investment plans (SIPs) in equity linked savings scheme (ELSS) mutual funds. This not only obviates the last-minute rush where investors park a lump sum in tax-saving funds, but also helps them spread their investments through the year.
Even though it is an ELSS, play it smart through the SIP route.
A systematic investment plan (SIP) is a phased approach to investing. That means, each month when you get your salary, you invest a small amount in an ELSS. There are three distinct advantages in this SIP- approach to ELSS buying:
  • Tax planning becomes more of a planned affair for you rather than trying to bunch all your tax-related investments in the last quarter. This not only inculcates saving discipline but also saves you the funding blushes in the last quarter.
  • You obviously get the added benefit of rupee-cost averaging by opting for a SIP. That means when the NAV goes down you buy more units and when the NAV goes up you get a better yield. Over the longer term, this approach tends to be more productive for you.
  • SIP on ELSS helps you create liquidity on your ELSS on a rolling basis. For example, if you start your ELSS SIP in April 2017, then that installment matures in April 2020. However, if you bunch all your ELSS investments in March 2018, then you have to wait till March 2021 to liquidate your ELSS investment.
Remember, ELSS investing is not just about saving your taxes via Section 80C. While the tax break is critical, it is the lock-in period that enforces discipline on the investor and the fund-manager. Of course, do not forget to adopt the SIP approach while investing in ELSS. That gives you a combination of stable returns, tax efficiency and rupee cost averaging. Surely, a winning combination!
Invest through SIP to make Tax Planning Quick & Effortless!
Information on tax benefits are based on prevailing taxation laws. Kindly consult your tax advisor for actual tax implication before investment.