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ULIP vs mutual funds cover

ULIP vs Mutual Fund -Which one should you opt for?

ULIP or Unit Linked Insurance Plan is a financial instrument which is a fusion of insurance and investment. Therefore, if you are a ULIP holder, you are going to enjoy the benefits of both insurance and investment at the same time.

Being a ULIP holder, you are required to pay a regular premium for the insurance part. A part of such premium paid by you would get invested in financial instruments (combination of debt and equity) as per your choice of weightage. It is solely your discretion what your investment is going to be consisted of. Your choice is should match with your risk appetite, liquidity requirement, and financial goal.

On the other hand, a Mutual Fund is purely an investment product. The AMC or Asset Management Company pools the money from the investors (also called unit holders) for investing in financial instruments like shares, derivatives, and bonds. Such investments are professionally managed by the AMC through its experienced and knowledgeable fund managers. (Read more about Mutual Funds here.)

After the re-introduction of long-term capital gain (LTCG) tax on equity and equity oriented Mutual Funds in the Union Budget of 2018, people in India have started to discuss whether ULIPs have become more rewarding than Mutual Funds. In fact, many experts have stated that ULIPs have become more profitable than equity oriented Mutual Funds after LTCG tax has come into effect. ULIPs are not subjected to any capital gains tax.

However, it has to be stated here that taxation is not the only parameter that you should consider for selecting an investment product. There are many other key factors which you should keep in mind before selecting any investment product.

ULIP vs Mutual Fund

Here are some parameters that you should consider before selecting one investment product between Mutual Fund and ULIP.

What is your purpose of investing?

Before getting started, you should clearly define your purpose for investing. Having no clarity in purpose or creating vague goals in mind would never help you meet your financial needs in the future.

Suppose, you have set a goal to accumulate Rs. 2 crores in 30 years, you should go for investing. If your objective is to have your life insured, you should think of going for a term insurance plan.

ULIP is not a financial product which can provide you with an adequate insurance cover. If you already have got an insurance policy in your name, then you can consider investing in ULIP additionallyULIP has an insurance element in it which Mutual Fund lacks.

In short, a ULIP plan is a combo of insurance and investment product at the same time. The premium that you pay on your ULIP plan, a part of the same is meant for providing you with an insurance cover. The rest of your payment is invested in a combo of debt and equity which is as per your discretion.

Further, it is a fact that a mutual fund does not offer any insurance component. But if you’ve planned properly, it is may not be a huge issue. You can start a mutual fund SIP and simultaneously take a term insurance plan alongside. It is going to help you artificially create a ULIP for yourself.

Who is more transparent between Mutual Fund and ULIP?

The disclosures of the underlying portfolio of a ULIP are not as transparent as that of a Mutual Fund because it is not mandatory for the ULIPs to disclose their NAVs on an everyday basis. In addition to that, the exact break-up of load on a ULIP plan is not available, unlike a Mutual Fund scheme.

Apart from the loading, expense ratio which in regard to a Mutual Fund plan is also mandatorily required to be stated clearly in the mutual fund fact sheet.

The Mutual Fund industry in India definitely comes in the list of the most regulated and transparent industries across the globe. From returns to underlying portfolios to sector allocation of investments, one can clearly find all the information in the online platform of an AMC and various other websites.

Furthermore, many analysts track Mutual Funds and publish their analysis time to time. It is not that ULIPs don’t disclose the information on analysis. But, they are not tracked by the analysts in a detailed manner like Mutual Funds.

Which is more tax efficient? ULIP or Mutual Fund?

tax ulip vs mutual fund

If you invest in a ULIP plan, the premium that you will pay is eligible for tax deduction u/s 80C of the Income Tax Act, 1961 up to Rs.1.50 lakhs.

However, you won’t be getting this benefit if you invest lump sum or SIP in any equity or debt fund. Only if you invest (whether lump sum or SIP) in an ELSS Mutual Fund (an equity fund), then you can avail the income tax benefit under the said section.

Again, the capital gain from redeeming your investment in ULIP is fully tax-free in your hands, irrespective of whether the investment is in the nature of equity or debt.

However, this is to be noted that you are required to pay 15.6% effective tax on short-term capital gains in case of Mutual Fund redemption. And also, 10.6% tax has been introduced on long-term capital gains with effect from April 1, 2018, from equity mutual funds, in case the aggregate gains cross Rs.1 lakh.

Taxation rate on short-term gains from the redemption of debt funds is per one’s income tax slab, while the long-term capital gains are subject to tax @20% (excluding Cess) after indexation. From the angle of taxability, ULIP definitely seems to be a better choice, provided it yields higher after-tax returns than Mutual Fund.

Note: If you want to learn more about taxation of ULIPs, you can read this article. For studying more on taxation of Mutual Funds, you check out this post.

ULIP vs Mutual fund Comparison on the basis of costs.

costs ulip vs mutual funds

If you decide to invest in a ULIP through online mode, you would save incurring significant expenses which are not only limited to administrative expenses and fund allocation charges. On the other hand, the expense ratios of Mutual Fund schemes are a little high, especially for the active funds. Furthermore, you can reduce the expense ratios if you invest in the direct plans.

Both these financial products have their own pros and cons. But, it can still be said that if you compare Direct Mutual Funds with ULIP, the former seems more cost effective.

Mutual Funds are more liquid than ULIP.

One of the most important parameters to look into any investment product is its liquidity.

An investment option should be preferred if you are able to liquidate your investments when you are in need of doing so. Mutual Funds are highly liquid in nature. You can redeem your units at any time and would get the proceeds straight into your bank account at most by 3days.

But, you can’t withdraw your investments from ULIPs unless the minimum lock-in period of 5 years gets over.

For mutual funds, it is only the tax saving ELSS funds where your investments get locked-in for 3 years. Rest other funds can be bought/sold/increased/decreased at any time. But, in case of ULIPs, the lock-in periods is an additional two years compared to even tax saving ELSS’s locking period.

Even after the lock-in period of ULIP ends, if you redeem your investments, it will around a week for your money to get credited in your bank account.

In terms of profitability, who is the winner?

In the case of ULIPS, a significant portion of your premium is actually spent towards costs, in the initial five years. The same gradually gets lower over time. So, even in an excellent bullish market, it will take you around half a decade to break even. Hence, if you look to earn returns which would beat the market in the long run, you require staying invested in ULIPs for at least one to decades.

However, the financial situation is not so complicated in the case of Mutual Funds. Many active mutual funds continuously beat the market and give superior returns to their shareholders since their origin. Furthermore, if you are investing in equity funds via the SIP route, you also be gaining the advantages of rupee cost averaging.

Note: To know more about profitability, check out this blog by Economic Times.

Flexibility – Do you know Mutual Funds offer more flexibility than ULIPs?

Investing in Mutual funds is of more flexibility than ULIPs. You can make a move from one scheme to another within the same fund house or another one. But, ULIPs allow you only to switch your investments from equity to debt or debt to equity but only within the same insurance house.

So, if the fund manager of your ULIP plan is underperforming or resigns from the company, it is going to be a matter of concern for you. You simply cannot move in such an adverse situation to a new insurance company without redeeming your existing investments before the end of its maturity period. A similar situation does not arise in the case of a Mutual Fund.

Summary

In this post, we have tried to highlight the features of Mutual Fund and ULIP. We have tried to draw a line by line comparison between these two investment products to help you understand how they both work in real.

Now, let us quickly summarize what we have discussed in this article.

  • ULIP neither gives an adequate life cover nor offers a great investment opportunity.
  • A Mutual Fund plus a Term Insurance Plan can comfortably compensate a ULIP.
  • Mutual Funds are more transparent than ULIPs and also provide more comprehensive disclosures.
  • ULIP is more tax efficient than Mutual Fund, given the former’s after-tax returns are higher.
  • Both Mutual Funds and ULIPS investing are associated with several charges.
  • Mutual Funds are more liquid, profitable and flexible than ULIPs.

From the above summary, it is clearly understood that the Mutual Fund seems to be a better financial product as compared to ULIP.

Generally speaking, the concept of combining insurance and mutual funds into one specific product is against the essence of financial planning. Financial planning means you will buy term policies for covering life risk followed by SIPs on equity funds to grow long-term wealth. ULIPs combine insurance and investment into one financial product thereby making ULIPs prone to mis-selling. This is because it is highly probable that many investors would fail to understand where insurance actually begins and where investing ends.

Anyways, ULIPs have always been more tax friendly as compared to Mutual Funds. On top of that, the introduction of income tax @ 10% on LTCG tax from equity investments, by the Union Budget 2018 has given ULIP more boosts. But, as discussed, you don’t choose an investment product on the basis of one parameter, do you? Mutual Funds do outweigh ULIPs on several grounds like profitability, transparency, flexibility, and liquidity.

ulip vs mutual funds summary

Anyways, if you are sloping towards ULIPs, let us first discuss when you should consider opting for ULIPs.

  • Do you want to have a life insurance cover which comes with an investment opportunity? Are you comfortable with moderate returns? If both of your answers are a yes, then ULIP is suitable for you.
  • Further, can opt for ULIPs if your risk appetite is low or on the medium side.
  • Apart from that, if you are looking for a tax saving financial instrument where liquidity is not of much importance to you, then also ULIP would not be an appropriate choice.

Now, let us discuss when you should give a thought to start Mutual Fund Investing.

  • In case you have a risk appetite of a medium or higher side, then Mutual Fund is going to suit you.
  • In case you are seeking a pure investment product with high returns, then Mutual Fund is the answer.
  • And finally, if you are okay with paying a little additional tax on capital gains, but you want your investment to be liquid (Except ELSS), then you can go for Mutual Funds.

That’s all. We hope this article of ours will add to your knowledge and enable you to take a more rational decision with respect to your investments in the future. Happy investing!

How to invest in Direct Mutual Funds cover

How to invest in Direct Mutual Funds?

You must have heard of the slogan “Mutual Funds Sahi Hai”.

AMFI or Association of Mutual Funds in India has started the campaign in early 2017 as an initiative for making you aware towards Mutual Funds. The purpose of this campaign is communicating to you that Mutual Fund investing is the right choice that you can make.

Investing in Mutual Funds is one of the most appropriate ways that you can opt for generating long-term wealth for yourself. Investing in mutual funds is convenient even at a low cost. Apart from that, it is well-regulated, has transparency, and it offers the benefit of diversification to the investors like you. (If you are fresher in the field of Mutual Fund investing, here are some of the important jargons for you should know).

Direct vs Regular Plans

With effect from the very beginning of the year 2013, the SEBI had made it compulsory for all Mutual Fund houses of having two versions of each scheme i.e. Direct plan & Regular (or Indirect plan).

In a Direct plan, you can invest directly in a scheme of a Mutual Fund AMC at a low cost. The direct plans are cheaper than the regular plans because you will be saving costs in terms paying commission to intermediaries.

Looking at both the plans, the difference in returns seems to be as low as 0.25% which can go up to 1%. In the long-term, these differences result in significant amounts. So, this clearly evident that you should always go for investing in the Direct plans of Mutual Funds. (Have a look at what AMFI says about Direct Plan here)

direct funds

(Image Credits: Livemint)

Also read: How direct plan mutual funds can help you create greater wealth in the long term? -ET Market

How to invest in Direct Mutual Funds?

Now that you have the basic understanding of direct plants, let us have a look at the different ways through which you can invest in the Direct plans of Mutual Funds in India.

Mutual Fund Websites and Apps

These days you will find almost all AMCs operating in India having their online presence. So by creating an online account with an AMC you can easily purchase and redeem your units, switch from one fund to another, set up SIP and SWP with ease. Here, you would be directly transacting with the AMCs through their websites. No third party is there to poke his/her nose in between.

Anyways, a minor problem in this method of Mutual Fund investing is that you need to remember your sign up details for every AMC whose units you have got in your portfolio.

Apart from that the process of investing and redemption varies across the apps and websites of different AMCs. So, it is highly probable that you would find the entire process cumbersome, thereby showing less interest in creating a diversified portfolio and ending up sticking to a single Fund house. Even if you have managed to invest across several AMCs through their online portals, it might be a little difficult for you to analyze your entire portfolio at one place.

Also read: Top AMC (Asset Management Companies) in India: The Biggest to Small Ones

Registrar And Transfer Agents (RTAs)

direct funds sources

(Image Credits: Paisabazaar)

Registrar and Transfer Agents (RTAs) handle transactions of the Mutual Fund entities on behalf of them.

In India, the majority of the Mutual Funds are served by the two RTAs named Computer Age Management Services (CAMS) and Karvy. These two offer Mutual Fund investment services across diverse AMCs through their websites and apps. Here, you just need to remember one or two login details for the same. You can also invest in the Mutual Funds through these RTAs by personally visiting their offices.

In case you also want to invest in those AMCs not covered by the said two RTAs, then you have to check out the other RTAs as well.

Also read: RTAs are the backbone of the mutual fund industry -Live mint

Demat Account

You can perform Mutual Fund investing from almost all demat accounts. However, here you will have the option of investing only in the regular plans.

Few brokers like Zerodha facilitates Mutual Fund investing through Direct plans. Zerodha offers investing in Direct Mutual Fund plans through its “Coin” platform.

Earlier the service charge was Rs 50 per month plus GST if your total investment had crossed Rs 25k and now it is completely free. Through the Coin platform, you can invest in almost all Indian Mutual Fund AMCs. You can view and analyze your portfolio in one place. What you need to do is remember just a single login id.

Note: Although you can invest in the Mutual Funds for free in Zerodha you have to pay the annual maintenance charges associated with your demat account. Furthermore, you are not going to get any free or paid investment advisory services through Zerodha.

MF Utilities (MFU)

MF Utilities (MFU) is an online portal connecting investors, Mutual Fund distributors, Mutual Fund houses, collection banks, payment aggregators, and RTAs.

Having an account with the MFU allows you to invest across 27 AMCs in India. After you have signed up with MFU, it provides you with a Common Account Number (CAN) which you can use across all the twenty-seven participating AMCs.

By logging into the MFU portal, you can easily invest in any of such 27 mutual fund AMCs. You can conveniently carry out multiple transactions across various mutual funds on a single platform.

Furthermore, at a time you need to pay only once to invest across more than one scheme. Well, MFU if is of no use to you if you want to invest in any Fund house falling outside of these 27 AMCs. In addition to that, the user interface of the MFU is not at all great and there is still a substantial scope of improvement. You can read more about MFU here.

Robo-Advisory Apps & Websites

robo advisors

(Image Credits: Investorjunkie)

India has witnessed a lot of websites and apps in the last 2 to 3 years who offer to invest in Direct plans of mutual funds. Some of the platforms are linked with MFU while the rests have direct integration with the Mutual Fund AMC. One of the most popular robo advisor in united states in Betterment which was founded in 2008. Few of the popular robo advisor in India are Arthayantra5nenceInveztaScripbox etc.

Most of such websites and apps are user-friendly in nature and are fee-based robo-advisory services. It means that the investment recommendations come from the algorithms created by the experts. If you would like to get expert advisory services having a human element in it, then it would cost you more.

You would come across some robo-advisory platforms which offer free investment services but let you invest only in the regular funds. Others may allow you to invest in direct funds against some fees or they might charge money from you against rendering investment advice.

Also read: A Quick Guide to Robo Advisors in India.

How to get started?

So far we have discussed the ways of Direct plans Mutual Fund Investing. But, how would you choose the right platform for yourself? Let us throw some light on the same.

First, if you are looking to invest in the schemes of a very few AMCs, you can invest through the online portals of such AMCs.

In case you would like to select from a heavy portfolio, then you should consider investing through an RTA.

Third, do you think you need any professional help for your mutual fund investing? If yes, then you can opt for online platforms where an expert provides you with customized investment recommendations. It might seem to be a cumbersome process for you to choose one such platform for yourself.

Finally, if you are looking for a robo-advisory platform having a better user interface, then you can associate with any of such against a monthly or flat fee for your mutual fund investing. In the long-term, as your mutual fund portfolio will grow, the flat fee structure will seem more cost-effective. On the other hand, in case of the monthly fee system, a percentage of your invested corpus will be charged on your account on a monthly basis. Robo-advisory platforms are new concepts altogether and you may go ahead with it to experience Mutual Fund investing in a newer way.

That’s all for this post. I hope it was useful to you. If you have any additional questions regarding investing in direct plans of mutual funds, please comment below. Happy Investing!

Growth vs Dividend Mutual Funds

Growth vs Dividend Mutual Funds: Which one is better?

The Equity Mutual Fund comes in various forms. You can either invest your savings in a Small-Cap Fund or a Mid-Cap Fund. In addition to this, you have Large-Cap, Balanced Fund or Multi-Cap Fund to go for. You can opt also for an ELSS Fund if you are planning your personal Income Tax for the next Assessment Year.

Whatever be the category of an Equity Fund you choose to park your money in, this will either be in the nature of Growth Plan or Dividend Plan. In this post, we are going to discuss growth vs dividend mutual funds and which one is better for investors.

From the literal interpretation, it is not very unlikely that you might feel more inclined towards investing in the dividend plan at this point in time. Let us discuss why.

You might think that dividends from equity funds can be used for generating regular income. However, the fact is that regular dividend payouts are only possible if the fund generates profit regularly.

Moreover, for an equity fund to be a sustainable profit generating fund, the stock market is also required to be going upwards. If the market shows correction for a substantial period of time, it won’t take much time for the flow of regular dividend to get stopped.

Again, you might be an investor who thinks choosing dividend plan for booking regular profit without redeeming your units held. This might seem to be good as a strategy on the paper but, for its execution, proper planning is required.

Further, it could also be possible that you have just read the names of these two plans for the first time and completely unaware of the idea behind Growth and Dividend plan. You might not know what they actually mean and end up selecting something randomly just for the sake of investing in an Equity Fund.

Growth vs Dividend Mutual Funds

Now, let us understand how Growth Plan and Dividend Plan work in real life.

In the Growth option, the profits in the form of capital appreciation and dividend, made by your scheme are re-invested into the same fund. This will lead to the rise in the Net Assets value (NAV) of the scheme with time.

When the underlying portfolio of the fund makes profits, the NAV of its units rises. Similarly, you’re your fund runs at a notional loss, supposedly due to the market correction, the NAV of the same fund goes down.

In the case of Dividend Plan, the profits made by your fund are not reinvested back into the fund by the Fund Manager of the Asset Management Company (AMC). You get a share in the said profits in the form of dividends from time to time.

The amount of dividend you get and the frequency of getting the same are not predetermined. Dividends are only declared by the AMC when the scheme realizes profits in real.

In the Dividend option, the dividend is paid to you from the NAV of the units you hold, so paying dividend reduces your overall NAV.

growth-vs-dividend-mutual-funds-min

Source: JagoInvestor

Have a look at this write-up to know more about Dividend and Growth option.

Now you have come to know how Growth Plan and Dividend Plan work. So, which option would like to opt for? Our recommendation would be to go for the Growth option.

Why Growth Plans?

Let us discuss why you should choose Growth option over Dividend Plan while investing your savings in Equity oriented Mutual Fund.

In the Finance Act 2018 (Budget 2018), it is said that the Income Tax on Long-term Capital Gain @10.4% (including Health & Education Cess of 4%) will be charged on Equity and Equity oriented Mutual Funds. Now, Income Tax is only going to be applicable if Long-term Capital Gain crosses the threshold limit of Rs 1 lakh in the Financial Year 2018-19.

The said Budget has also introduced Dividend Distribution Tax (DDT) on Equity and Equity oriented Mutual Funds at an effective rate of 12.942%. Let us understand the break-up of the said rate of 12.942%.

Suppose you as an investor has got Rs 1000 as a dividend on your Equity Fund. Now, DDT is chargeable on the basis of “Grossing Up” concept. So, to pay Rs 1000 as a dividend by the AMC, the actual dividend comes to be Rs 1111.11{1000/ (1-10%)}. The rate of DDT is 10% so DDT comes to Rs 111.11.

The surcharge is calculated @12% on DDT which is calculated as Rs 13.33. Health & Education Cess @4% is to be charged on the computed Cess and Surcharge which gives the result of Rs 4.98.

So DDT comes to Rs 129.42 (Rs 111.11 + Rs 13.33 + Rs 4.98).

Although the DDT is chargeable in the hands of the Mutual Fund Company, due to the imposition of the former, you are getting Rs 129.42 less as a dividend. So, indirectly you are paying a hidden tax @12.42% on your dividend income. Whereas, in the case of long-term capital gain, you are only charged 10.4% by the Indian Government which is relatively lower.

Note: To know more about taxation on Mutual Funds for the Financial Year 2018-19, do check out this blog.

The above explanation substantiates that your Equity Mutual Fund investment with Growth Option, subject to Long-Term Capital Gain tax would be relatively more tax efficient than your investment in a Dividend Plan Equity Fund, where DDT is made applicable.

Furthermore, in accordance with the latest Budget, LTCG in an Equity Fund is only subject to Income Tax if the same exceeds Rs 1 Lakh in a Financial Year.

For example, if your Long-term Capital Gain in a growth plan investment is Rs 75000 for the Financial Year 2018-19, you don’t need to pay a tax on it. But, if the same becomes Rs 150000, then LTCG tax is chargeable on Rs 50000, i.e. the amount in excess of Rs 1lakh.

On the other hand, if you have invested in a dividend plan, the entire dividend you have received is subject to DDT. No exemption limit is applicable to an equity dividend option similar to a growth plan equity scheme. (If you want to know more about the Union Budget 2018-2019 please check out this file.) 

The equity funds with growth plan are more appropriate for long-term wealth generation than dividend based equity funds. The amount of dividend you would receive in the latter option is not going to be a significant one.

You are most likely to spend that money in your day to day expenses and it is hardly going to be reinvested by you in the market.

But, if you have invested in a performing equity fund with growth option, the latter refrains from paying you any return in cash. So, the returns get reinvested in the same fund and get compounded year on year. This leads to the generation of substantial wealth in the long term. 

If you like to know how to choose a Mutual Fund scheme for yourself, please check out this blog.

dividend growth mutual funds tax

(Source: Times of India)

What if you have already invested?

If you have invested in a dividend plan and the duration has crossed a year, you are recommended to switch to the growth option within the Financial Year 2018-19. Here, switching means redeeming units of one fund and investing the proceeds in another scheme.

If the holding period of your investment is less than 1 year, the gains are to be treated as Short-term Capital Gains. In that case, you would be taxed @15.6% (including Cess). But, if your portfolio is bleeding (due to recent bearish market), you can even switch irrespective of the completion of 1 year of your investment. As discussed earlier, the Long-term Capital Gains, if any, would be taxed @10.4% (including Cess).

You can even choose to let it complete a year and gradually switch to growth plan so as to ensure that the Long-term Capital Gains do not go over the Rs 1 lakh mark.

Closing Thoughts: Growth vs Dividend Mutual Funds

In this post, we discussed that Budget 2018 has proposed Long-term Capital Gains Tax and Dividend Distribution Tax on Equity schemes.

We have also seen how growth option scores over a dividend plan as the former is more tax efficient and sound more suitable in generating long-term wealth. Therefore, from the entire discussion, it is very clear that the Growth plan is the obvious winner.

That’s all for this post. Happy Investing!

rule of 15*15*15 sip calculator cover

Why You Need to Know The Rule of 15*15*15?

When the newbies enter the world of investing, one of the biggest questions that they may face is ‘how much’ and ‘how long’ should they invest? Enter the rule of 15*15*15.

In this post, we are going to discuss what is the rule of 15*15*15 (and the rule of 15*15*30) and how it can help you to make your investment decisions.

The rule of 15*15*15

The rule of 15*15*15 says that if you invest Rs 15,000 per month in an investment option which gives a return of 15% (CAGR), for a consistent period of 15 years, you will build a final corpus of Rs 1,00,00,000 (One crore).

Here,

SIP Amount = Rs 15k per month
CAGR =15%
Time horizon =15 Yrs
Final corpus = Rs 1 Cr

rule of 15*15*15 sip calculator

(Source: SIP Calculator)

Interestingly, your total invested amount is equal to just Rs 27 lakhs. However, over the time period of 15 years, you will build a total wealth of Rs 1 Crore.

Rule of 15*15*30

The rule of 15*15*15 gets even better when we double the ‘time horizon’ keeping all the other factors the same.

Here, you invest Rs 15,000 per month in an investment option which gives a return of 15% (CAGR), for a consistent period of 30 years.

Can you guess the final corpus build in this case?

The final corpus built after 30 years will be Rs 10,00,00,000 (Rs 10 Crores). And yes, that’s right — not a typo error…

Here,

SIP Amount = Rs 15k per month
CAGR = 15%
Time horizon = 30 years
Final Corpus = Rs 10 Crores

the rule of 15*15*30 sip calculator

(Source: SIP Calculator)

Here your total invested amount is just Rs 54 lakhs. However, as the power of compounding is working in your favor, you will accumulate a final corpus of Rs 10 crores. Only by doubling the time horizon, you can get ten times the amount compared to the rule of 15*15*15.

And that’s why the power of compounding is considered the most substantial factor for wealth creation. Here’s a quote regarding the same by one of the greatest scientist of all time, Albert Einstein:

Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” -Albert Einstein

Quick Note: In the scenarios discussed above, 15% is considered as the average compounded annual growth rate (CAGR) over the years. However, you must understand that it is just an average as no market can give consistent 15% returns. In the bull market, the returns can be as high as 30–40%. On the other hand, in the bear market, the performance can be as low as -10% to 5%. Here, the 15% is taken as the average of the returns over the 15 or 30 years.

Warren Buffett Wealth Creation

The name ‘Warren Buffett’ needs no introduction, especially for the people involved in the world of investing. His wealth creation story is an interesting topic to discuss in this post.

Fascinatingly, unlike the young tech billionaires of this century like Mark Zuckerberg, Evan Spiegel, Bobby Murphy, John Collison, etc. Warren Buffett did not build his wealth by creating a super-tech company like FB, Snapchat, Google, etc.

Warren Buffett built most of his wealth over time through their investments (and acquisitions) by his company Berkshire Hathaway. You may get surprised to know the fact that the World’s third richest person become a billionaire only in his 50’s.

warren buffett net worth growth over time

The biggest factor why Warren Buffett was able to build such a huge wealth was his amazing returns for a consistently longer period. His company, Berkshire Hathaway, give an average yield of around 21.7% per year for over five decades. This return for such an extended time period is way-way better than what we discussed above. The power of compounding played an important role in Warren Buffett’s wealth creation story.

Resources:

Closing Thoughts

The time period is a significant factor when you are investing.

In this post, you can notice how by doubling the time horizon from 15 to 30 years; you can get ten times bigger final corpus. And that’s why it is recommended to start investing as soon as possible.

To end this post, here’s an amazing quote by Mr. Buffett:

“Someone is sitting in the shade today because someone planted a tree a long time ago.” -Warren Buffett

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

what is equity funds

What is an Equity Fund? Basics, Performance, Taxation & More!

“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.” – Scott Cook

An equity mutual fund is a variety of mutual fund where the portfolio management invests the cash collected from the investors in equities of listed companies. The portfolio of an equity oriented mutual fund consists of at least 65% investment in equities or equity related instruments.

(Quick note: An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gains.)

Equity funds can be either the traditional mutual fund variety or it can come in the form of ETF (Exchange Traded Funds).

The ETF trades in the stock exchange like an equity share, throughout the day. A traditional equity mutual fund, on the other hand, settles once in a day, where the buy and sell orders are netted after market hours for the computation of the Net Asset Value or NAV.

Different varieties of Equity Funds

Equity Funds can be classified into the following categories which are consisted of several sub-categories as follows:-

Based on market capitalization:

  • Large Cap Equity Funds: invest in companies having large market capitalization.
  • Mid Cap Equity Funds: invest in companies having medium market capitalization.
  • Small Cap Equity Funds: invest in companies having small market capitalization.
  • Micro Cap Equity Funds: invest companies having market capitalization less than that of companies with small market capitalization.

(Also read: Basics of Market Capitalization in Indian Stock Market.)

Based on the style of investment:-

  • Private Equity Funds: invest in companies that are not listed in any stock market.
  • Equity Income Funds: invest in equities of companies which pay a significant dividend.
  • Dividend Growth Funds: invest in equities of companies having a record of increasing dividends per share (DPS) at a rate much faster than the entire stock market.
  • Index Equity Funds: mimic an index like Nifty. (Also read: The Essential Guide to Index Fund Investing in India.)
  • Sector or Industry Specific Equity Funds: track specific areas of the economy of India like any industry or sector.

types of equity funds

Image source: sipfund.com

Equity Mutual Fund: How does it work?

how mutual funds work

Image source: Corporatefinanceinstitute.com

Mutual funds issue units to its investors according to the amount of money received from the latter by the former.

The assets of the mutual fund are known as a portfolio which is managed by the Asset Management Company or AMC through the qualified fund managers. The value of each unit of a mutual fund is called the Net Assets Value (NAV) of the mutual fund. As the stock prices keep continuously changes, the fluctuations in the value of the portfolio results in the fluctuation of the value of the units.

The AMC offers diverse products of mutual funds called schemes, structured in a way to suit the requirements of the unitholders. A portfolio statement, revenue account, and balance sheet are available for every scheme. (Also read: 23 Must-Know Mutual fund Terms for Investors.)

Calculation of NAV of Equity Mutual Funds

NAV of a fund is used as a parameter to judge the performance of the same. It is referred to the market value of the investments held by the scheme deducting liabilities and dividing the result by the number of units issued under the scheme.

Suppose, the market value of all investments held with respect to a mutual fund scheme is Rs. 100 lakh and 10 lakh units have been issued to the unitholders. In this case, the NAV per unit comes to Rs. 10.

NAV Mutual funds

Source: Moneycontrol

Which is the best way of investing in Equity Funds?

best ways to invest

Source: Clearfunds.com

The most effective way of investing in an Equity Mutual Fund scheme is through SIP or Systematic Investment Plan.

An investor usually invests monthly in a SIP. SIPs give the benefit of rupee-cost averaging. So when the markets go up, an investor ends up getting fewer units.

Again, when the markets are bullish, an investor is rewarded with more units in the same amount. Investing through SIP makes investing a regular habit for investors.

How to analyze the performance of an equity mutual fund?

  • Having a look at the cost of investment as reflected by the expense ratio and exit load.
  • Checking whether the turnover ratio of the underlying portfolio is not too high.
  • It is to be checked whether the investor’s investing strategy or philosophy matches with that of the fund manager.
  • The underlying portfolio should be broadly diversified so to gain the benefit of risk reduction.
  • Comparing the last few years’ returns of the fund under evaluation with that of its peers. Risk-adjusted returns should be the ideal basis for comparison.
  • Alpha and Beta of an equity fund should be given emphasis. Alpha measures the extra percentage of returns generated by the equity fund as compared with the benchmark returns. Beta gives the magnitude of risk of a fund i.e. the variability of returns of the fund about its expected return.
  • An equity fund managed by several fund managers for a long duration is preferred less as compared to one which is managed by the same person for the same period.
  • A prospective investor is required to check the quality of stocks in the portfolio as the latter drives the return of the fund in the future.

Note: New to investing and want to learn how to invest in mutual funds from scratch? Check out this amazing online course: Investing in Mutual Funds- A Beginner’s course. Enroll in the course now to start your journey in the requisite world of investing today.

How to determine the taxation of equity funds in India?

For the financial year 2017-18, no long-term capital gain (for units held for 1 year or more) is charged for both Resident Indians and NRIs.

On the other hand, short-term capital gain (for units held less than 1 year) is charged @ 15%. The TDS rate applicable to the NRIs for the redemption of equity oriented funds is 15% and the same is applicable only for short-term capital gain.

The dividend received by an investor for an equity fund is completely tax-free in the hands of the former. As per the Finance Act 2018, the long-term capital gain of over Rs 1 lakh will attract tax @ 10% and no indexation benefit will be allowed. (Also read: Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?)

Should one invest in Equity Mutual Funds?

mutual funds growth

Source: Amfiindia.com

If an investor wants to invest in equity funds, then he/she should decide on the basis of his/her risk appetite and horizon of investment. Investing in equity funds is meant for someone willing to invest for five years or more. These don’t suit someone willing to make money in the short term.

For an individual and HUF, ELSS sounds a great option for tax saving u/s 80C of the Income Tax Act, 1961. ELSS has a lock-in period of 3 years which relatively lower than other tax saving options like NSC, PPF, and ULIP. Having said this, ELSS also yields higher return as compared to any other investment eligible under the said section.

For a new investor willing to take exposure in the stock market, then large cap funds are highly recommended. Large-cap equity funds invest in the well-established corporate organizations giving stable long-term returns. Small-cap funds are suitable for young investors who are hungry for higher returns and are high-risk takers. Balanced funds represent one-third of debt instruments and the rest equity and are meant for those who are highly risk-averse.

For an investor who is willing to take calculated investment risks, the investment recommendation would be mid-cap equity funds. These funds invest in the shares of companies having diverse market capitalizations.

“Mutual funds have historically offered safety and diversification. And they spare you the responsibility of picking individual stocks.”Ron Chernow

Also read:

A Complete Guide to Tax Saving Mutual Funds - ELSS

An Essential Guide to Tax Saving Mutual Funds – ELSS

Whenever you research how to save taxes in India, you can easily find the experts mentioning to invest in tax saving mutual funds or ELSS. However, for the beginners, getting started with ELSS investment might be a little confusing.

In this post, we are going to cover everything regarding tax saving mutual funds. By the end of this post, you’ll be able to clearly understand why exactly is an ELSS and how it works. Here are the topics that we’ll discuss today:

  1. What is Equity linked saving scheme (ELSS)?
  2. Types of ELSS
  3. What are the features of Tax-saving mutual funds?
  4. How is ELSS fund taxed?
  5. How to choose the right ELSS?
  6. Closing Thoughts

So, if you are a newbie and find it challenging to get started with tax saving mutual funds in India, then please read this article till the very end. It will definitely help you to demystify majority of the questions that you might have regarding ELSS. Let’s get started.

1. What is Equity linked saving schemes (ELSS)?

An ELSS (Equity Linked Savings Scheme) Mutual Fund is a variety of Equity Mutual Fund which allows individuals and HUFs to avail Income Tax deduction from their Total Income for an Assessment Year subject to a maximum limit of Rs.1.5 lakhs u/s 80C of the Income Tax Act, 1961.

ELSS mutual fund is an Equity oriented fund which is having a lock-in period of 3 years. The said duration is counted from the respective allotment date of the unit(s).

Like any other type of Equity Mutual Fund, ELSS comes with both growth and dividend options as well.

Investment in an ELSS scheme can either be made in a lump-sum or through a Systematic Investment Plan (SIP). Investments made in a Financial Year (Previous Year) up to ₹1.5 lakhs can be claimed for tax deduction under the said Act.

Till the Financial Year 2017-18, no tax on income from Long-term capital has been charged from an Assessee on redemption of the unit(s) of an ELSS. As per the Budget (Finance Act) 2018, Long-term capital gain over ₹1 lakh is to be taxed @ 10% by the Government of India.

2. Types of ELSS

ELSS comes in two varieties. The first category is the dividend scheme and the second type is the growth scheme.

In the case of former, when the mutual fund announces a dividend, the unitholders earn income in the form of a dividend on the units held by them. Such dividends can either be withdrawn or reinvested by the unitholders.

Another part of ELSS with dividend feature is that the dividend earned is eligible for tax benefits. Moreover, the dividend earned by the unitholder is not subjected to any lock-in period, i.e. it can be withdrawn any time.

A similar provision is not applicable to the growth schemes.

3. What are the features of Tax Saving Mutual Funds?

Gaurav Munjal

Image source: Richvikwealth.in

–        In order avail the benefit of the tax deduction, an Assessee can make an investment in an ELSS Mutual Fund for as low as Rs. 500. There is no upper limit of investing in ELSS, unlike PPF and NSC, but as said earlier one would only get tax deduction u/s 80C to the maximum of Rs. 1.5 lakh.

–        Investment in an ELSS scheme is, of course, meant for a long duration as it comes with a lock-in-period of 3 years.

–        Irrespective of the short lock-in period of ELSS funds, the later have time and again yielded substantially higher returns in comparison to NSC, PPF, ULIP, etc.

–        ELSS is an equity oriented mutual fund wherein the underlying portfolio majorly consists of equity investments in publically listed companies having strong business models. Being equity oriented mutual fund, it is subjected to market risks.

–        Tax saving mutual funds or ELSS are mostly open-ended.

–        Like any other mutual fund, an investor of ELSS can also make another person as his/her nominee.

–        Like most of the equity funds, many ELSS funds also come with entry and exit loads.

–        Many investors prefer investing in ELSS funds through SIP route. It ensures rupee cost averaging that significantly cuts volatility in the stock market.

4. What are the benefits of investing in an ELSS?

ELSS locking period

Image source: Cleartax.in

Here are a few of the distinguishing benefits of investing in ELSS:

–        As discussed earlier, a taxpayer can enjoy the benefit of deduction from his/her taxable income (for a maximum of Rs.1.5 lakh).

–        We all know that Mutual Fund investments are subject to market risks i.e. systematic risks. Market risks can’t be eliminated but the fund manager invests the funds of investors in diversified equities which eliminate the unsystematic risks.

–        An investor may opt for not withdrawing the investment at all after the end of the 3 years lock-in-period. Holding on the units will result in the growth of the investment and will subsequently yield handsome inflation risk-adjusted return for the investor.

–        As said earlier, the investor can withdraw any dividend earned as no restriction is there on its withdrawal during the lock-in-period. The restriction of withdrawal is there only in respect of the investment.

–        ELSS, being an open-ended mutual fund, allows anyone to invest in the same at any time during the year.

–        One can find popular tax saving avenues like ULIP, NPS, and PPF which offer lock-in period ranging from 6 to 15 years. But, investing in ELSS will reduce the lock-in-period significantly to 3 years only.

–        In case an investor of ELSS is not having knowledge of the market, he/she can be rest assured that his/her funds will be managed by a qualified fund manager.

–        It is not necessary that one has to invest in ELSS for only availing tax benefits. ELSS can also be considered as a long-term wealth generation tool. As the lock-in-period is 3 years, one can even think of investing in ELSS for meeting any future financial goal.

5. How is the Capital Gain from an ELSS Fund taxed?

If an investor sells his/her units of an equity mutual fund after a year, tax on long-term capital gains (LTCG) will be applicable.

Up to 31st March 2018 tax charged on the long-term capital gain was nil. But, as per the Union Budget 2018, tax on LTCG of stocks and equity funds were re-introduced.

If the long-term capital gain exceeds Rs.1 lakh from the redemption of an equity fund, then tax @10% will be charged on such LTCG.

Again, in the said budget it said that if investors sell their equity mutual funds within a year, they will be required to pay short-term capital gains tax @15% on their returns. The provision regarding short-term capital gain (STCG) tax was there in the Finance Act 2017 as well.

ELSS funds as said earlier, are having a lock-in period for 3 years. So, the gain on an ELSS fund by default comes under the long-term capital gain tax.

taxes ELSS

Image source: Tflguide.com

Also read:

6. How to choose the right ELSS fund?

Following key points should be considered by someone who is looking to invest in an ELSS fund:

Looking into the past performance: Past performance does not guarantee future performance of a mutual fund scheme. Looking at historical returns is the initial step of evaluating a scheme. It helps in evaluating the performance of the fund managers over the years.

Age of an ELSS Fund: An ELSS Fund has been in the market for 5 years or more is generally considered ideal for new investors. This is because they generally represent reputed AMCs and have good track records.

Risk of ELSS: Different ELSS schemes come with different risks. An investor should select a specific ELSS Fund based on his/her risk appetite.

Looking at the Expense Ratio: The Expense Ratio refers to the percentage of the fund which an asset management company charges from the unitholders. This is the charge for meeting the cost of operations of the fund.

Assets Under Management (AUM): This is the amount of money which is being managed by a mutual fund scheme. Various types of ELSS Funds have different ideal sizes for AUM.

Checking the Rating of ELSS Fund: Ratings of the ELSS Funds published in a reputed online platform helps a prospective investor to know which fund is the best.

Gaurav Munjal

Source: Mymoneysage.in

Note: New to investing and want to learn how to invest in mutual funds from scratch? Check out this amazing online course: Investing in Mutual Funds- A Beginner’s course. Enroll in the course now to start your journey in the requisite world of investing today.

7. The last few words on ELSS Mutual Funds

With the rise in the equity market over the years, the investors have gained interest in ELSS mutual funds as an income tax saving instrument. ELSS is a category of equity mutual fund that is created by the government to encourage people at large to participate in the equity market of India.

As ELSS funds come with the benefit of the tax deduction, middle-aged people feel interested to invest the major part of their savings in the Indian equity market.

There is no doubt in saying that investing in an ELSS scheme is certainly not risk-free. Even though the NAV graph of an ELSS scheme is not free from frequent ups and downs, the growth of the fund never falls below other tax saving alternatives like PPF and ULIP.

But, owing to a fact of scope for higher returns at a minimum lock-in period, Equity Linked Saving Schemes have emerged as the most demanding tax saving option today.

how to mutal funds make money trade brains

How Do Mutual Funds Make Money?

How Do Mutual Funds Make Money?

Ever seen the “Mutual Funds Sahi Hai!” ads? Have no idea what we are talking about? Check out the ads here!!

We, at Trade Brains, happen to see a lot of these advertisements. In fact, we even love them because although comical and mere advertisements and these ads educate the public about mutual fund investments in a more touching way than what we could ever do.

(Source: Mutual fund Sahi Hai)

But those of you who have seen these ads must have wondered for a long time about how these guys make money? Why give so much wealth away for free? After all, economics says that there are no free lunches, right?

Well, to be honest economics is right. There are no free lunches and mutual funds are not free. This post is aimed to provide a basic insight into answering the above questions. Here are the topics that we’ll cover in this post:

  1. What are mutual funds?
  2. What are the sources of revenue for a mutual fund?
  3. The different costs involved in running a mutual fund.
  4. Industry trends and closing thoughts

Overall, it’s going to be a very interesting post for the mutual fund enthusiasts. Therefore, let’s get started.

1. What are mutual funds?

Mutual funds are investment vehicles managed by professionals that seek to pool investments from many people together before investing them into markets within the financial ecosystem such as equity markets or debt market or a hybrid of both debt and equity. These vehicles are normally managed by professional fund managers or are programmed to follow certain broad indices pertaining to a certain industry or a country.

In general, mutual funds are thought to be best platforms for investors to get the benefits of capital appreciation from the equity markets even if they are not confident to manage their own money in the markets or if they are not able to dedicate time for their own research.

Some retail investors who invest on their own also happen to invest mutual to provide some diversification in their portfolio or reduce the volatility of returns since a lot of the times retail investors tend to have a concentrated portfolio of around 8-20 stocks.

Also read:

2. How Do Mutual Funds Make Money? And what are the sources of revenue for a mutual fund?

The biggest source of revenue for mutual funds is usually the fees that they charge from their investors. This usually comes out in the range of 1.5%-3% of the assets under management. This is commonly known as the expense ratio. Here is the example of the expense ratio for a few popular funds:

expense ratio

However, as of September 2018, it has become legally binding for mutual funds to limit their total expense to 2.25% of the total assets under management. 

References:

The other sources of revenues for a mutual fund come in the form of exit load, front loads, and purchase fees etc. (Also read: 23 Must-Know Mutual fund Terms for Investors.)

3. What are the costs involved in running a mutual fund?

Since most funds hire analysts in research positions a good chunk of the revenues is spent as salary expense for most mutual funds. Other expenses include rent of office and facilities, administrative expenses, payments for research material from data sources etc.

The other major expenses include brokerage fees and transaction costs, costs, investment advisory fees, and marketing & distribution expenses.

4. Current Industry trends

Since this industry is very competitive it can be said that when it comes to profits being the industry tends to follow a bell curve with close to 50% of fund houses making a profit in a year. But lately, the trend has been that some firms also generate profits not from their core operations but also by providing research and analytics to clients based offshore.

Another interesting observation to be made is that fund houses which operate a number of mutual fund schemes tend to have higher profitability than their peers. This is due to the fact that a lot of the core setup required for research and administration is pretty much in place and doesn’t need to be set up from scratch each time a fund house launches a new scheme.

Also read:

Closing Thoughts

Investors in mutual funds could protect their investments if they were to invest in safe fund houses which can generate a decent return from the market even during the worse days. Since it is nearly impossible to get an idea of profitability among mutual fund players, investors could use the financials of the parent companies as a proxy. 

Nevertheless, as always, mutual fund investments are subject to market risksPlease read all scheme-related documents carefully before investing.

New to mutual fund investing? Want to learn how to pick the best mutual funds? Then, check out our online course- Investing in Mutual Funds? A Beginner’s Course. Enroll now and start your journey in the exciting world of mutual fund investing today. #HappyInvesting.

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

select right mutual funds

The Beginners Guide to Select Right Mutual Funds in 7 Easy Steps.

The Beginners Guide to Select Right Mutual Funds in 7 Easy Steps.

But I don’t know anything regarding mutual funds…I’m interested to invest in mutual funds, but always confused where to begin?”, Rajat argued.

That’s the beauty of investing in the mutual funds, Rajat. You do not need to be an expert or even a finance freak to start investing in mutual funds…

…there’s a professional fund manager who will manage your fund and will take all the critical decisions like which securities to buy or sell. Overall, your job as an investor is just to invest your money at the right fund. Rest everything will be taken care of by the fund manager and fund house.”, I explained to Rajat.

Sounds good, so far? But how to find such funds which match my goals? There are hundreds of mutual fund in the Indian market…”, Rajat looked a little excited and cautious at the same time.

Yes, there are hundreds of mutual funds in the market. However, there will only be a few good ones that will match your goals, risk appetite and has a good track record of consistent performance. Although it may take a little time to find such funds, once you find a good mutual fund, you can sit back and relax. Moreover, finding a winning mutual fund doesn’t take too long if you know the right approach…”, I was able to see a grin on Rajat’s face after listening to my answer.

*********

Hi Readers. One of the most frequently asked question by our blog readers is how to select right mutual funds to invest in.

Although mutual funds are managed by professional managers, however, not all funds perform are equally well. There are many funds who are not even able to beat the index. That’s why it’s really important for you to select right mutual funds that will fulfill your investment goals.

While researching the best mutual funds to invest, most beginners just look at the past performance. However, two equally other important factors to be checked before selecting any fund is whether the objective of the fund matches your investment goals and what are the different risks associated with the fund.

Moreover, mutual fund investing is a long-term relationship. Unlike the direct investment in stocks, where the people can switch the stocks fast, mutual funds are a long time period commitment. Most people stick with their funds for over 8-10 years. Therefore, it’s important that you choose a right fund and not get stuck with lagging ones which might result in you to lose both time and money.

In this post, we are sharing a beginners guide to select right mutual funds in seven easy steps. This guide will help you to perform exact step-by-step research to find winning mutual funds. Let’s get started.

A Beginners Guide to Select Right Mutual Funds in 7 Easy Steps

Here are the seven essential steps to select right mutual funds that will help you to meet your investment goals.

1. Read the Offer Document Carefully

One of the most comprehensive documents that every mutual fund provides is its offer document (also known as the prospectus). The first and probably the biggest step while choosing a mutual fund is to read the offer document carefully.

The offer document contains all the important details regarding the mutual fund like its objective, scheme type, past performance, details about the asset management company, classes of the underlying assets etc. (Quick note: If you are not familiar with these terms, check out this post regarding the must-know mutual fund terms). There is a strict instruction by SEBI regarding the filling of offer letter offered by the mutual funds- which you can find here.

In short, begin your research by reading the offer document of the mutual fund. Moreover, it’s not really difficult to understand these documents.

2. Match the objective of the fund with that of yours.

Every mutual fund has a specific objective. And based on the objective, they decide different factors like asset allocation (equity to bond weight), risks, dividend payouts, tax benefits, theme/sector focus etc.

You need to read the offer document of the fund and attentively identify whether the fund objectives meets your investment needs in terms of the above-mentioned factors. If the objectives are not relevant to you, then it might not be a good option to invest in those funds w.r.t. your investment goals.

3. Check Fees and Exit Loads

Mutual fund charges a fee for offering services and to meet different expenses like manager’s fee, operational & administration costs, advertisement costs etc. Generally, this expense ratio for an active fund can be as high as 2-2.5%. Further, some mutual funds may also charge you a fee up front when you invest (entry load), or a deferred sales charge when you sell your shares (exit load).

These pieces of information are present in the offer letter of a mutual fund. As a value investor, you should try to stay away from mutual funds with high fees and loads to avoid unnecessary costs.

Also read:

4. Evaluate the past performance of the fund

Although the past performance of a fund will not guarantee how well it will perform in the future, however, it will give you a rough idea about the returns and expectations. This is certainly an important factor which must be checked. Moreover, you should compare the funds’ past performance to the benchmark as it will give you a better idea of its actual performance.

You can easily find the information regarding the past performance of any fund vs the benchmark on the financial websites like ValueResearchOnline or moneycontrol. Further, focus on the long-term performance (3 years or greater) and compare it with its competitors and index.

5. Analyze portfolio and holdings

This may be a little tricky for those who have zero knowledge of investing. After all, even if you find out which companies that mutual fund is investing in, how will you understand whether the holdings are good or bad?

Nevertheless, analyzing the portfolio and holdings gives you a general idea about the securities in which the fund is investing. Here, the key point is to make sure that the fund is investing in the type of securities in which you are interested. For example- if you are optimistic about electric vehicles and want to invest a major proportion in the automobile sector, look for a mutual fund which has a high percentage of allocation in the automobile sector. Similarly, if you’re interested to invest in other sectors like energy, infrastructure, finance etc- then studying the portfolio will give you a good idea whether the fund is right for you or not.

Anyways, there is also another trouble in while analyzing the portfolio and holding. The portfolio/holdings can change from time to time as the manager may decide to buy or sell securities at their will. Therefore, if you are not regularly reviewing the fund, the current allocation might be a little different from the time when you invested in the fund. That’s why you should always review your fund every six months or a year after purchasing to confirm that your requirements are still met by the fund.

6. Check the Tenure of Fund Manager

The fund manager is probably the heart of the mutual fund. He/She is the one who will be making all the important buy/sell decisions on your behalf. Therefore, it’s important to find out more about the fund manager.

A manager with a long tenure may have done the job well and his/her credentials are tried out. On the other hand, the efficiency of a new manager might not have been tested yet. While researching mutual funds, check the tenure of the fund manager to find how long this fund manager is managing the fund.

Another important factor regarding the fund manager is to check which other funds he/she is managing. If the other funds are also doing equally good, then it is a good sign. On the other hand, if just one fund is performing well- while the other funds that he/she is managing are struggling, then it might be a fluff.

7. Check the size and credentials of the fund house

Although it’s not the biggest factor, however, as an intelligent investor- always invest in the fund which has already established a good track record. It’s important that the fund house has strong credentials because mutual funds investing is a prolonged relationship and you do not want to get involved with a troublesome fund house which might give you headaches in upcoming years.

Nevertheless, in a few scenarios, you may invest in comparatively newer plans or fund houses. For example, if there is an exciting new theme based fund house that meets your asset allocation plan, then feel free to invest a small amount in it and later increase the amount depending on the performance.

Quick Note: If you are new to investing and want to learn how to invest in mutual funds from scratch, check out this amazing online course: Investing in Mutual Funds- A Beginner’s course. Enroll in the course now to start your journey in the requisite world of investing today.

Bottomline

The procedure to select right mutual funds to invest requires a careful study of the fund. In this post, we have covered the seven critical factors that you need to check to select right mutual funds to invest.

Besides, you might have noticed that we didn’t talk about the ratings of the fund. This is because of the reason that the ratings vary from websites to the website. It’s quite rare that you’ll find the same fund listed in the top 10 suggested mutual funds on different financial websites. Which one to trust? Better make your own decisions. Anyways, if you’re really interested to check the ratings, then the CRISIL ratings may be a little helpful.

Here is the final tip- Do not rush with investing. There are hundreds of mutual funds in the Indian market. Take your time to analyze them and find out the one that best suits your goals.

That’s all for this post. I hope it was helpful to you. Happy Investing.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Difference Between Stock and Mutual Fund Investing

11 Key Difference Between Stock and Mutual Fund Investing

11 Key Difference Between Stock and Mutual Fund Investing:

Hi. Welcome to the day 22 of my ‘30 days, 30 posts’ challenge, where I’m writing one interesting investing blog post daily for the 30 consecutive days.

In this post, we are going to discuss the fundamental difference between stock and mutual fund investing. However, before we start talking about the differences, let’s first define what stock and mutual fund investing is.

What is stock and mutual fund investing?

Stock market investing means investing directly in the stocks of the company. Here, you are purchasing the companies listed on the stock exchange with an expectation to earn profits when the price of that stock goes up.

On the other hand, a mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, FDs, bonds, etc. A professional fund manager manages this fund. When you purchase a share in the mutual fund, you have a small stake in all investments included in that fund. Hence, by owning a mutual fund, the investor participates in gains or losses of the fund’s portfolio.

11 key difference between stock and mutual fund investing

Here are the critical differences between stock and mutual fund investing based on eleven crucial factors–

1. Cost of investing  

While investing in mutual funds, you have to pay different charges like expense ratio, load fee (entry load, exit load), etc. For the top mutual funds, the expense ratio can be as high as 2.5-3%.

On the other hand, if you invest in the stock market, you have to open your brokerage account (which includes opening account charges), and you have to pay some annual maintenance charges too. Further, there also different costs while transacting in stocks like brokerage, STT, stamp duty, etc.

Nevertheless, if you compare the charges involved in stock and mutual fund investing, you can find that the costs while investing in stocks are still lower. This is because managing a mutual fund consists of a lot of expenses like management fee, the salary of the managers/employees, administration charges, operational charges, etc. However, for investing in stocks- the most significant burden is only the brokerage.

Also read: 23 Must-Know Mutual fund Terms for Investors.

2. Volatility in investment.

Direct investing in stocks has more volatility when compared to mutual fund investing. This is because when you invest in shares- you generally purchase 10-15 stocks.

On the other hand, the mutual fund consists of a diversified portfolio with investment in different securities like stocks, bonds, fixed deposits, etc. Even the equity-based mutual funds invest in at least 50-100 stocks. Due to the broad diversification, the volatility in the mutual funds is a lot less compared to that of shares.

3. Return potential

Stock market investing has a very high return potential. Most of the successful investors in the world and India like Warren Buffett, RK Damani, Rakesh Jhunjhunwala, etc. have built their wealth by investing directly in the stock market.

However, this is only one side of the story.

The complete fact is that the majority of people lose money in the stock market. Although the return potential is high while investing in stocks, however, the risk is also higher.

On the other hand, most of the good ranked mutual funds have given decent consistent returns to their shareholders. Although the returns are not as high as what many successful investors can make from stocks, however, this return is enough to build a massive wealth for an average person for a secured future.

4. Tax saving

If you invest in ELSS (equity linked saving scheme) under mutual funds, you can enjoy a tax deduction up to Rs 1.5 lakhs in a year under the section 80c of the income tax act.

Another benefit of investing in the mutual fund is that you do not have to pay tax if the fund sells any stock from its portfolio as long as you are holding the fund.

On the other hand, when you sell stock while investing directly in the stock market, you have to pay a tax, no matter what’s the scenario. There are no tax benefits while investing in the stock market. You have to pay a tax of 15% on short-term capital gains and a tax of 10% (above a profit of Rs 1 lakh) on the long-term capital gains.

Also read: Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?

5. Monitoring

Investing in the stock market requires frequent monitoring. This is because stock market investing is a personal thing. Here, no one is going to do this for you and hence you have to monitor your stocks yourself. Moreover, due to the high volatility of the share market, the frequency of the monitoring should be higher. At least every quarter or half yearly.

On the other hand, for the mutual fund -there are fund managers who take care of the investments and make the buy/sell decision on your behalf. That’s why, when you invest in mutual fund, you do not need to monitor your fund much frequently. Anyways, you should watch your funds at least every year so that you can confirm that your fund’s performance is in line with your goals.

Also read: How to Monitor Your Stock Portfolio?

6. SIP Investment   

Mutual funds investment provides you with an option of a systematic investment plan.

A Systematic Investment Plan refers to periodic investment. For example, the investor can invest a fixed amount, say Rs 1,000 or 5,000, every month (or every quarter or six months) to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.

On the other hand, there’s no option of SIP available in stock market investing.

7. Asset class restriction

While investing in the stock market, the only asset where you can spend is stocks of the company.

On the other hand, the mutual fund gives you an opportunity to invest in a diversified portfolio. Here, you can invest in a variety of asset classes. For example- debt mutual funds, equity-based mutual funds, gold funds, hybrid funds, etc.

8. The time required for investing

The total time needed for directly investing in stock is a lot more compared to that of a mutual fund. This is because a fund manager manages a mutual fund.

However, for direct investment in the stock market, you have to do your research. Here, you have to find the best possible stock for investing yourself, and that requires a lot of study, time and efforts.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

9  Ease of investment

For investing in the stock market, you have to open your brokerage account with the help of a stockbroker. Here, you need to start your Demat and trading account which can take as long as a week to open.

On the other hand, you can start by investing in a mutual fund within 10 minutes. You do not require any brokerage account to start investing in mutual funds. There are a number of free platforms (like Groww or FundsIndia) available on the Internet where you can register within a few minutes and start investing in mutual funds.

10. Time Horizon of investment

Generally, the investment time horizon in mutual funds for long-term like 5 to 7 years. Here, you are not trading funds, but investing for the long-run to make money by capital appreciation or regular income through dividend funds.

On the contrary, if you invest in stocks- it can be a long-term or short term. You can even keep the stock for a week and get good returns.

11. Control on investment

If you are investing directly in the stock market, you will have a lot of power and control. Here, you can make critical decisions like- when to buy, when to sell, what to buy, what to sell, etc.

On the other hand, while investing in the mutual fund, you do not have much control over your investments. It’s your fund manager who makes the decisions like which securities to buy, when to buy, when to sell etc. The highest control that you have is to find and invest in a good mutual fund. However, once you have spent your money, everything will be taken care of by the fund manager.

Further, mutual fund performance depends on the efficiency of the fund manager. If the fund manager is efficient, you can get high returns. Otherwise, if the fund manager is not that good, you might get fewer returns. In addition, there is always a possibility that the fund manager may quit or join some other fund house.

Overall, here you have to be dependent on the fund manager. However, while investing in the stock market, there is no dependency on anyone, and you can make your own decision to buy/sell whichever stock you want.

Check out the upcoming course on mutual fund investing here.

Conclusion

No investment is risk-free. There will always be some risk when you invest in the market or even if you invest in the safest fund. Nevertheless, investing in the mutual fund is comparatively less risky than the stock market. However, the returns are also slightly low in mutual funds compared to the stock market.

If you are a novice and new to the stock market, it would be salutary if you start investing with mutual funds.

For investing directly in the stock market, you will require a good knowledge or at least a strong passion for learning. However, if you have limited time, limited money and not enough passion to invest your money on your own- then you should invest in the mutual funds.

That’s all for this post. I hope it was helpful. #HappyInvesting.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

mutual fund taxation

Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?

Mutual Fund Taxation – How mutual fund returns are taxed?

Hi. Welcome to the day 19 of my ’30 days, 30 posts’ challenge, where I’ll be writing one interesting investing article daily for the 30 consecutive days. In this post, we are going to discuss mutual fund taxation.

If you invest in the stock market, you might already know that the taxation on the capital gains through stocks depends on two factors- the type of investment and the holding period. This means that the rate of taxation in ‘delivery’ is different than that of ‘Intraday’. Moreover, the holding period also plays an important role while deciding taxation. Long-term capital gain taxes are lower than short-term capital gains.

Also read: What are the capital gain taxes on share in India?

Similar to stock market investing, mutual fund taxation also depends on the type of fund and the holding period of your investments.

In order to clearly understand the mutual fund taxation in India, first, you’ll need to learn the common types of mutual funds. And then, you will need to understand how short-term and long-term investments are defined based on the holding period of mutual funds.

Here are the topics that we are going to discuss in today’s post regarding mutual fund taxation.

  1. Types of Mutual funds
  2. Short-term vs long-term investments
  3. Taxation on
    • Equity-based Mutual funds
    • Debt based mutual funds
    • Tax Saving Equity Funds (ELSS)
    • Balanced Funds
    • Systematic Investment Plans (SIPs)
  4. Conclusion

Overall, it’s going to be a long post. However, taxation is a very important topic which no one should ignore. Besides, I guarantee it that this post will be worth reading. So, without wasting any further time, let’s get started.

1. Types of mutual funds

Although there are dozens of types of mutual funds in India, however, here is a broad classification based on the asset type and fund characteristics-

A. Equity Funds: These are the funds that invest in equities (shares of a company) which can be actively or passively managed. These funds allow the investors to buy stock in bulk with more ease than they could purchase individual securities. Equity funds have different key goals like capital appreciation, regular income, tax-saving etc.

B. Debt Funds: These are funds that invest in debt instruments (fixed return investments like bonds, government securities etc). Debt funds have low risks compared to the equity funds. However, the expected returns while investing in debt funds are also lower.

C. Balanced Fund: A fund that invests in both equity (shares) and debt instruments (bonds, government securities etc) is known as a balanced fund.

D. SIP: A Systematic Investment Plan refers to periodic investment in a mutual fund. For example, the investor can invest a fixed amount (say Rs 1,000 or 5,000) every month, or every quarter or six months to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.

E. ELSS: It stands for Equity Linked Saving Schemes. ELSS is a diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act (the maximum tax exemption limit is Rs 1.5 Lakhs per annum). However, to avail of the tax benefit, your money must be locked up for at least three years.

Read more here: 23 Must-Know Mutual fund Terms for Investors

2. The short-term and long-term investments in mutual funds

Now, let us understand what is a short-term investment and long-term investment based on the holding period of the funds.

In the case of equity-based mutual funds and balanced funds, if the holding period is less than 12 months, then it is considered a short-term investment. Further, if the holding period is more than 12 months, then it is called a long-term investment. (Holding period is the difference between your purchase date and selling date).

For the debt-based mutual funds, an investment with holding period fewer than 36 months (3 Years) is regarded as a short-term investment. On the other hand, a holding period greater than 36 months for debt-funds are considered as a long-term investment.

Here’s a quick summary of the short-term and long-term investment classification on mutual funds based on their holding period.

Funds

Short-term

Long-term

Equity funds

< 12 months

>= 12 months

Balanced funds

< 12 months

>= 12 months

Debt funds

<36 months 

>= 36 months

3.  Mutual fund Taxation based on fund-type

As mentioned earlier, the mutual fund taxation depends on the type of fund and the holding period. Here is the rate of taxation on different mutual funds in India-

1. Equity-based Mutual funds

Long-term capital gain(LTCG) tax on equity-based schemes is tax-free up to a profit of Rs 1 lakh. However, for the profits above Rs 1 lakh, you have to pay a tax at a rate of 10% on the additional capital gains.

For short-term equity-based mutual funds (where the holding period is less than 12 months), you have to pay a flat tax of 15% on the profits.

Clearly, long-term (holding period greater than 12 months) is a better choice as there is no tax up to a capital gain of Rs 1 lakh. For an average Indian investor, Rs 1 lakh profit is a big amount.

For example, if you invest Rs 5 lakh in mutual funds and get a decent return of 20% in a year, then you’ll make a profit of Rs 1 lakh. This profit will be tax-free. You do not have to pay any tax on the long-term capital gains up to Rs 1 lakh.

In the second case, let’s assume that your profit is Rs 1,10,000 in long-term. Here, you have to pay a tax of 10% on the profit greater than Rs 1 lakh (i.e. Rs 1,10,000- 1,00,000 = Rs 10,000). In short, you have to pay a 10% LTCG Tax on Rs ten thousand.

Quick Announcement: NEW Mutual fund investing course for beginners is launching soon…

2. Debt-based mutual funds

For the debt mutual funds, the long-term capital gain tax is equal to 20% after indexation.

Note: Indexation is a method of reducing the capital gains by factoring the rise in inflation between the years the fund was bought and the year when they are sold. The longer the holding period, the higher are the benefits of indexation. Overall, indexation helps you to save tax on gains from debt mutual funds and enhance your earnings. Read more about indexation here.

For the short term capital gains (STCG) on debt funds (where the holding period is less than 36 months), the profit will be added to your income and is subject to taxation as per your income slab. Therefore, if you’re in the highest income-tax slab, you have to pay a tax up to 30%.

3. Tax Saving Equity Funds

Equity Linked Saving Schemes (ELSS) is used for tax saving along with capital appreciation. It is an efficient tax-saving instrument under section 80C of the Income-tax act of 1961. You can claim a tax deduction of up to Rs 1.5 lakh and save taxes up to Rs 45k by investing in ELSS. However, there is a lock-in period of 3 years for these funds.

After 3 years, LTCG tax will be applicable similar to equity funds. Therefore, the capital gain up to Rs 1 lakh is tax-free. But, profits above Rs 1 lakh is taxable at a rate of 10%.

4. Balanced (Hybrid) Funds

Balanced funds are treated similar to the equity-based mutual funds and hence they have the same mutual fund taxation structure. This is because the balance funds are equity-based hybrid funds that invest at least 65% of its assets in equities. This allocation percentage can differ depending on the goal of the fund.

The long-term capital gain tax on the balanced mutual fund is tax-free up to a gain of Rs 1 lakh. The profits above Rs 1 lakh is taxed at a rate of 10%. The short-term capital gain tax on the balanced funds is equal to 15% of the profits.

5. Systematic Investment Plans (SIPs)

You can start a SIP with either of an equity fund, debt fund or balanced fund. The gains made from SIPs are taxed as per the type of the mutual fund and holding period.

Here, each SIP is treated as a fresh investment and they are taxed separately. For example, if you are investing monthly Rs 5,000 in equity funds, then all the monthly investments will be considered as a separate investment. This simplifies the holding period.

Assume that you bought your first SIP in January 2017 and consequently SIPs in the upcoming months. Then by the end of Jan 2018, only the first investment will be considered as long-investment. The other investment is for a period of fewer than 12 months and hence, you have to pay an STCG Tax of rest SIPs if you redeemed all of them in Jan 2018.

In short, each SIP is considered a separate investment and their holding period are calculated accordingly to define the taxation.

3. Conclusion

Here is the summary of the mutual fund taxation in India.

taxes

(Source: Clearfunds)

The secret to save taxes and build wealth is still the same- Invest for the long term.

In most of the equity-based funds, you can enjoy a tax-exemption for a profit up to Rs 1 lakhs when you invest for the long term. Further, while investing in the debt-funds for the long-term, you can enjoy the benefits of indexation to save taxes. Overall, if you want to save more taxes – Invest longer.

I hope this post is useful to you. #HappyInvesting

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

mutual fund terms

23 Must-Know Mutual fund Terms for Investors.

23 Must-know mutual fund terms for investors:

Investing in mutual funds can be a good alternative for the people who are interested to invest in equities but do not have much time and knowledge to invest individually. As mutual funds as professionally managed, can sit back and relax. However, there are many frequently used mutual fund terms that investor should know so that they can at least understand ‘how’, ‘what’ and ‘where’ of mutual fund investing.

For example- here is the fund description for IDFC Focused Equity Fund-Regular Plan (G) —

mutual fund terms

Source: Moneycontrol

If you are a beginner, there may be a number of terms mentioned in the above table with which you might not be familiar. For example- Open end, Entry load, exit load etc.

In this post, we are going to discuss such key mutual fund terms that every investor should know to make an informed investment decision.

Also read: What is Mutual Fund? Definition, Types, Benefits & More.

23 Must-Know Mutual fund terms for investors-

Here are the 23 most frequently used mutual fund terms that every investor should know.

1. AMC: It stands for Asset Management company. They are financial institutions that manage multiple funds like HDFC mutual fund, SBI Mutual fund etc.

2. NAV: It stands for Net Asset Value. This is the unit price of a fund. When a fund comes out with an NFO (New fund offer), it announces a price (generally Rs 10). Later, depending on the return of the investments, this price could rise or fall.

It’s similar to the share price. For example- Shares represents the extent of ownership in a company. Similarly, NAV represents the extent of ownership in the mutual fund. 

3. AUM: Asset under management is the total value of money that investors have put into a particular mutual fund. Top mutual fund companies in India manage thousands of crores of rupees.

top AUM India

(Source: Moneycontrol)

4. Funds: These are individual funds with specific goals and investment philosophies. For example- HDFC Index equity fund, Sundaram selects mid-cap fund etc.

5. Portfolio: The portfolio shows all the investments made by a fund (including the amount in cash). For example, if a fund has invested in 40 companies and has kept 10% of the amount as Cash (for a better opportunity in future), then this 40 companies and cash consist of the portfolio of that fund.

6. Corpus: This is the total amount of money that you’ve invested in a fund. For example- Let’s assume that you bought 10 quantities of a mutual fund where each unit is worth Rs 100. Then, your total invested amount with the fund is Rs 1,000. This is referred to as the corpus.

7. Expense Ratio: It is the annual fee charged by the mutual fund scheme to manage money on your behalf. It covers the fund manager’s fee along with other expenses required to run the fund administration. A lower ratio means more profitability and a higher ratio means less profitability for an individual investor. Generally, an expense ratio for an active fund can be between 1.5-2.5%.

expense ratio

Source: Cleartax

8. LOAD: It is the fee that is charged when you buy or sell a unit of a fund. The load is a percentage of the NAV. Generally, a fund can charge an entry or exit load.

9. Entry load – This is the initial fee that you pay while entering a mutual fund. Here, you pay a percentage of the NAV. For example, if the entry load of the fund is 2% and you are investing Rs 10,000. Then it means that you pay Rs 200 as the entry load and Rs 9,800 will be invested in the fund.

10. Exit load – This is the charge for redeeming your unit i.e. this is that amount that you have to pay (as fees) when you sell your fund. Generally, the exit load is applied if you decide to sell your shares before a specific time period. Usually, it’s 0.5% when you withdraw before 365 days. For example, let’s say that the exit fee of a fund is 0.5% and the current NAV of your fund is Rs 10,000. Then, you’ll have to pay Rs 50 as the fee and you’ll get back Rs 9,950.

11. Redemption: Selling your fund back to the fund house (not to the general market) is called redemption. While redeeming, the value that you’ll receive is equal to NAV – exit fee. 

12. Lock-in Period: This is applicable for the Tax-saving funds. Usually, there is a 3 years locking for closed-ended tax-saving funds.

13. SIP: A Systematic Investment Plan refers to periodic investment in a mutual fund. For example, the investor can invest a fixed amount (say Rs 1,000 or 5,000) every month, every quarter or six months to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.

14. ELSS: It stands for Equity Linked Saving Schemes. ELSS is a diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act (the maximum tax exemption limit is Rs 1.5 Lakhs per annum, under section 80C). However, to avail of the tax benefit, your money must be locked up for at least three years.

15. Open End Funds: The majority of mutual funds in India are open-end funds. These funds are not listed on the stock exchanges are available for subscription through the fund. Hence, the investors have the flexibility to buy and sell these funds at any time at the current asset value price indicated by the mutual fund.

16. Closed-End Funds:- These funds are listed on the stock exchange. You cannot buy/sell units form the fund house- but only from investors. They have a fixed number of outstanding shares and operate for a fixed duration. The fund is open for subscription only during a specified period. These funds also terminate on a specified date. Hence, the investors can redeem their units only on a specified date. This is complex compared to the open end funds.

17. Equity Funds: These are the funds that invest in equities (shares of a company) which can be actively or passively managed. These funds allow investors to buy stock in bulk with more ease than they could purchase individual securities. Equity funds have different key goals like capital appreciation, regular income or tax-saving.

18. Diversified Equity mutual Fund: This is a kind of mutual fund that invests in equities (stocks) of various companies in various sectors. As the investments are diversified across different sectors, it is called a diversified equity mutual fund.

Also read: The Essential Guide to Index Fund Investing in India.

19. Debt Funds: These are funds that invest in debt instruments (fixed return investments like bonds, government securities etc).

20. Balanced Fund: A fund that invests in both equity (shares) and debt instruments (bonds, government securities etc) is known as a balanced fund.

21. NFO: A New Fund Offering (NFO) is the term given to a new mutual fund scheme.

22. CAGR: It stands for compounded annual growth rate. This is the percentage of return per year which is compounded (not simple).

23. CRISIL Rating: It stands for credit rating information services of India. CRISIL ranks the mutual funds in India based on its research. Obviously, a higher ranking is better. (Read more about CRISIL Mutual fund ranking methodology here)

That’s all folks. If I missed any key mutual fund terms that are frequently used, feel free to comment below. #HappyInvesing.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

index fund investing in india

The Essential Guide to Index Fund Investing in India.

The Essential Guide to Index fund investing in India:

Hi. Welcome to the day 11 of my ’30 days, 30 posts’ challenge- where I’ll be writing one interesting post daily for the 30 consecutive days. In the last couple of days, I received multiple emails to cover the topic- Index fund investing in India. So, today’s post is based on the public demand.

Here are the sub-topics that we are going to discuss in this post.

  1. Introduction
  2. What is an index?
  3. What are index funds?
  4. Pros of Index funds
  5. Cons of Index funds
  6. Why are Index funds more popular in developed countries?
  7. Conclusion

It’s going to be a long post as I’ll cover everything from the perspective of a beginner. However, I guarantee that it will be worth reading. So, without wasting any more time, let’s get started–

Introduction

There are more than 5,000 publicly listed companies in Indian stock market. Therefore, selecting a few good stocks to invest can be a cumbersome work for any fund manager.

There are two popular approaches to managing a fund- Actively managing and passively managing.

In an active fund, the fund managers choose the stock to invest based on the goal of that fund. Here, the manager tries to beat the market by choosing better stocks. Nevertheless, the problem with active funds is that the return on these funds depends on the goal and efficiency of the manager. Moreover, even if you are able to find a good fund with a coherent manager, still there is some danger of what might happen in the case the manager quits and moves to some other company. 

On the other hand, the passive funds are process driven. Here, the fund invests in an index and the manager doesn’t have to choose the stocks to invest.  For a passive fund, even if the manager leaves, it won’t create much trouble. 

Anyways, before we start discussing index funds in details, let’s quickly brush up the basics.

What is an index?

Since there are thousands of company listed on a stock exchange, hence it’s really hard to track every single stock to evaluate the market performance at a time. Therefore, a smaller sample is taken which is the representative of the whole market. This small sample is called Index and it helps in the measurement of the value of a section of the stock market. The index is computed from the prices of selected stocks.

For example, Sensex also called BSE 30, is the market index consisting of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). And Nifty, also called NIFTY 50, is the market index which consists of 50 well-established and financially sound companies listed on National Stock Exchange of India (NSE).

Read more here— What is Sensex and Nifty?

Few other popular indexes in India are Senex, Nifty 50, Nifty next 50, BSE Smallcap, BSE midcap etc.

What are index funds?

Index funds are a passive strategy that attempts to generate similar returns as a market index. These funds try to replicate the performance of a specific index by entirely copying the stocks in the same composition as of the index.

For example, if an index fund is benchmarked to Nifty 50, it will buy all the 50 stocks in the Nifty index in the same proportion as nifty 50.  Here is another example- Reliance Index -Sensex -Direct (G) fund is benchmarked to Sensex. Hence, it copies all the 30 stocks of Sensex in the same proportion. Therefore, its return will be similar to Sensex.

Few of other popular Index funds in India—

(Source: The Best Index Funds for 2018 -GROWW)

Pros and Cons of Index fund investing in India

No investment strategy is perfect. Here are a few advantages and disadvantages of index fund investing in India —

Pros of the Index funds-

  • Low expense ratio– As these funds are passively maintained, the expense ratio of index funds are relatively lower compared to the active funds. This ratio can lie somewhere between 0.2-1.2%.
  • No dependency on the fund manager – In the index funds, the stocks are not picked by the fund managers. These funds are merely copying the index. That’s why even if the fund manager of an index fund quits, it won’t create any havoc (unlike actively managed funds).
  • Easy to understand and select the funds — For the active funds, you need to read and understand the reason why the fund manager believes any stock can perform well in future. And this can be a very tedious job.  On the other hand, the stock selection in the index fund is quite straightforward.

Cons of the Index fund-

  • No flexibility to the fund manager— In an index fund, the managers cannot pick stocks of their choices. So, even if he/she knew some amazing stocks- the fund cannot invest in it.
  • Index funds can’t beat the returns from the market: The best an index fund can do is to match the returns of the specified index. Nevertheless, if you subtract the expense ratio and other charges- the returns are even lower.
  • Have to stick with the poor stocks: An index fund can’t sell a stock which is a part of the index. For example, if a fund invests in the Nifty 50 stocks- even if some of the stocks (out of 50) are not performing well/doesn’t have good potential, still, the manager can’t sell that stock. An index fund has to keep as the stocks similar to the index in the same proportion.
  • An index fund holds all the risks associated with the asset class: If a particular index has some definite set of risks, then the associated index fund will also have the same risks.
  • Tracking Error in Index funds: Many times, the index fund does not perfectly track the composition of the fund. This can be because of a number of reasons like the difference in the time between accepting investment and buying stocks, rounding off the stock units, dividend adjusting etc.

In short, index fund investing in India has both pros and cons- as discussed above. Nonetheless, there’s one additional sub-topic regarding index fund investing in India, that you should also know.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Why are Index funds more popular in developed countries?

There are various studies that suggest that investing in index funds outperforms actively managed funds over the long-term. But most of these studies have been made in developed countries like US, UK, etc. And hence, the conclusion might not be the same for the developing countries like India.

For the developed countries, the stock market is somewhat efficient and they have a broader index. In addition, the expense ratio for the Index funds in the US is also quite low (less than 0.2% for most of the funds). That’s why people prefer investing in the passive index funds in the developed countries.

However, India is a developing country. It has a lot of opportunities outside the index fund that an active fund manager can explore. Moreover, there are a number of active funds in India which has consistently beaten the market. And that’s why active funds are more popular than index fund investing in India.

Also read: Is the stock market efficient?

Conclusion:

Index fund investing in India is a good alternative for the people who like a straightforward way of investing in funds. These funds have no dependency on the fund manager, a pre-set defined stocks and a low expense ratio compared to the active funds. The best part- unlike active funds- Index funds are easy to select. 

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

How to Pick a Mutual Fund?

How to Pick a Mutual Fund? A Beginner’s Guide.

How to Pick a Mutual Fund?

Are you a financial newbie and just learning to pick things piece by piece? Don’t worry; you are in the right direction. Considering you are here, reading this article, you are one step ahead.

Now, let’s quickly clear all your queries associated with picking the best deal out of many. Needless to say, investing in a mutual fund is a matter of lacks of rupees and sometimes a matter of crores, one needs to be very deterministic while picking out the best suitable option. When we say “best”, we are doing two things, mainly.

  1. Evaluating different options for mutual funds.
  2. Comparing those with their past (historical) records.

A good head start, therefore, can be done by self-evaluating the needs. In layman’s terms, what are you planning to achieve after you get an access to your matured fund?  – Housing? Marriage? Home Development? … Or Education? 

While the reason can vary from a person to person, the risk-bearing also does.

To explain it better, if you’re planning to clear your debts with the matured amount, you can’t tolerate greater risks associated with your fund. That’s the reason for taking the end goal into clear consideration. Further, in this article, let us know what all you need to know to pick the best possible option for a mutual fund. Stay tuned!

1. Get Acquainted with Risk Tolerance:

Clearly, the objective or end goal does alter the consideration of “Risk Tolerance” moreover; it helps you know how much risk you can sustain in your portfolio. Personally, if you can’t toleration too much of underperformance in your portfolio then picking out highly volatile mutual funds is not an option for you.

What exactly is risk tolerance? – It is explained as the amount of deviation (negative) associated, from the expected returns on an investment which an investor can withstand.

Since mutual funds are influenced by the movement of the market, one can’t accurately predict the happenings but estimation never hurts. However, there’s a quick math for you to remember “maximum risks = maximum returns”. But the question is again, “can you sustain it?”

Pro Tip: Aggressive Risk Tolerance (ART) understanding can help various high scaled investors to put their chances on portfolios with super high risk.

On the other hand, Conservative Risk Tolerance (CRT) does give a little to no scope for a risk to penetrate into a portfolio.

Also read: How to Measure Risks in Mutual Funds?

2. Know about Different Fund Types: 

There are several types of Mutual Funds in the market. In fact to count in all 4 directions of the world, one has 8000 choices to make for mutual funds. But it again comes down to one single point – the end goal.

  1. If your needs are for the longer term and you can sustain risk, you can choose the capital appreciation funds. As mentioned, the risk associated is on the higher side but given that, the growth of return is also magnificent.
  2. If your needs are to be catered for a shorter term with minimal risk, you can go for the income funds. The income funds give you a stable return with a realistic percentage. What’s the advantage? – Minimal to no risk.
  3. If your needs are for the longer term, however, you don’t want any risk to be associated with your portfolio, balanced funds are the best choice you. Sure, the return wouldn’t be magical but you can get the benefit of “long-term investment” and can minimize the question of risk as much as possible.

There are several more types of funds to be explored in the market. Choose the one that you think is best suitable for your end goal.

3. Know about the charges and fee structure: 

When you purchase a mutual fund, you have to pay a charge or fee initially or when the shares are sold. In both the cases, the fee is known as a load.  

The load can be further classified into

  1. Front-end load – When you have to pay the fees initially while starting a mutual fund for yourself.
  2. Back-end load – When you have to pay the fees when you sell your shares in the fund. (Generally, a Back End Load is applied if you decide to sell your shares before a specific time period, say 7 years of purchase). This limits your activities of “share selling”.)

Administrative charges are another kind of charges that are associated with an investment. The administrative charges are charged by an insurer mainly for record keeping or t=other important administrative facilities given on an investment.

What do you need to keep in mind? – Make sure to read the literature of Mutual Fund before & after purchasing it to keep track of administrative charges, management expense ratio, and other charges. This will help you clear all the hidden complexities about the return on investment.

Also read: Best Mutual Funds in India -Policy Bazaar

4. Evaluate Past Trends and Fund Manager’s Activities:

The final but very important step is to bring in the case of historical data. When it comes to a prediction, historic data helps in backing up the decisions.

When it comes to evaluation, let’s quickly know what pointers to keep in mind:

  1. What are the previous results that a Fund Manager has managed to deliver without a fail?
  2. Does the past trend show that the portfolio is extremely volatile under specific conditions?

Peeking into the literature of a fund manager can help you with this case, mostly. Also, taking an expert advice is always recommended for better decisions.

Lastly, you must know that in the market, the history does not (read never) repeats itself. That is, don’t rely blindly upon the past data without bringing in the possibilities for future prediction. Both the cases help in their own way when it comes to mutual funds. A little research with a proper guidance can take you one step forward to your end goal (high return on your investment) – that’s the bottom line.

Also read: What Would You Rather Have: Rs 10 Lakhs Right Now or 1 Paise Doubled Every Day For 31 Days?

risks in mutual funds

How to Measure Risks in Mutual Funds?

How to Measure Risks in Mutual Funds?

Before you jump start your monthly-SIP or lump-sum equity plan, let’s get this clear that these investments are subject to market risk. Now when this statement pops up or scrolls by on the big fat TV Screen, what do you think it means? To put it in layman’s term ‘You cannot expect a fixed return on your fund invested.’ There’s always a risk of market volatility gawking on your funds.

Fret not; you can always research better to invest better and make sound investment decisions when it comes to mutual funds. Let’s quickly come to risk measuring.

Yes, it’s possible and within your means to delve into the true basics of indicators; alpha, beta, and r-squared that tells you what risk is associated with your fund portfolio. Other statistical measures such as calculation of standard deviation and shape ratios are important to calculate or estimate the risk.

Sure, all backs up the estimation values as when it comes to the volatility of the market, no one can put a word to it. Market volatility is altogether a sensitive scenario which depends upon several factors including politics. Let’s know learn how can we calculate/measure risks!

Also read: What is Mutual Fund? Definition, Types, Benefits & More.

Modern Portfolio Theory:

Or should we say a bible for expert investors? Although there are various “SIP-Calculators” and other calculators that track “Mutual Fund’s Growth and Return” but without considering the omnipresent risk factor, one cannot take his pick. Let’s tell you why!

MPT or Modern Portfolio Theory is a theory defined as:

For a given market risk level, the maximization of investment return is supported by the theory of Modern Portfolio. 

The objective of these portfolios is to maximize the return (profit) on a fund investment while considering (and hence minimizing) the level of market risk.

As mentioned, the market is not static, it is ever changing. Therefore, to make an estimation of how the market will deviate and how will it affect your own fund. For a desirable return, it’s possible for an investor to construct a portfolio such that he/she could minimize the whole lot of risks.

The question is, how? The answer lies in the introductory part of this piece. There are a handful of indicators and other statistical measures that help us calculate the risk involved. Once we track down the possible risks (in numbers – thanks to the statistical measures), we can find ways to minimize those risks.

One thing to keep in mind is that return of your portfolio is calculated as the weighted sum of the return of the individual assets in your portfolio.

For example, (6% x 25%) + (4% x 25%) + (14% x 25%) + (10% x 25%) = 8.5%

The portfolio is divided into four parts (assets) for which the return is expected as 6%, 4%, 12%, and 10% respectively. The total becomes 8.5% and the risk associated with the assets giving 4% & 6% return is mitigated or balanced.

modern potential theory

How to Measure Risks in Mutual Funds?

Alpha:

Risk-adjusted calculation on a fund can be done using the alpha measure.Alpha uses a benchmark index which is the center of calculation for this indicator.

Basically, alpha takes the risk-adjusted return (performance) of a fund investment and compares it with the benchmark index. This comparison yields out the possible value for alpha which specifies the performance or underperformance for a fund.  

Alpha is commonly a measure that specifies the security of a fund as per the benchmark index. Let’s say, after the calculation, the value of alpha is 1.0. It means that the fund has outperformed as compared to the benchmark index by 1%.

On the other hand, if the value of alpha is -1.0 – it means that the portfolio fund has underperformed as per its benchmark index (mostly due to the volatility of the market).

Also read: The Best Ever Solution to Save Money for Salaried Employees

Beta:

The next indicator to measure the risk associated with a mutual fund is beta. Beta talks general i.e. it takes the whole market into consideration and analyzes the systematic risk associated with a specific fund portfolio. Just like alpha, the values of beta or “beta coefficient” also tell us a “market-compared” result.

However, the value of Beta can be calculated using advanced statistical analysis technique known as “Regression Analysis”. Beta is affected by the movements in the market. By the standards, the market has a value of 1%.

If the value of beta comes out to be less than 1, the volatility of the fund will be lesser than that of the market. Similarly, if the value of Beta is captured to be more than, say 1.1% then the volatility of the fund is 10% more as compared to the volatility of the market.

What’s favorable for the fund with least risk associated? – Low beta. 

Standard Deviation:

The calculation of Standard Deviation has a plethora of applications around the globe in various sectors. And luckily, one in the sector of Finance. Standard Deviation graphically shows how scattered a particular distribution is. In plain and simple words, SD or Standard Deviation makes use of the historical data to put an analysis over the current funds.

Generally, an SD-graph would tell how deviated is your “annual rate of return” from what it is expected from the historical sources. Using this calculation, the future predictions can be made most naturally.

A volatile stock has a higher Standard Deviation.

Mean is a measure of central tendency which holds an importance while calculating the values of Standard Deviation. SD tells how much dispersion of data is there from its mean. Various expert investors make use of this indicator to minimize the risk factors in a portfolio.

standard deviation

Also read: Where Should You Invest Your Money?

Summary:

As we have seen, there are various possible ways through which one can estimate the risks in mutual funds.

A portfolio consisting of different assets would have different risk factors associated individually. Therefore, to make the best decision and to minimize the individual risks in your portfolio, the indicators mentioned above can lend you a helping hand.

For a finance newbie, these things might be no less than a rocket science right now. However, eventually one can get a hang of it. After all, a good investment is most naturally important for a good return.

What is Mutual Fund? Definition, Types, Benefits & More.

A mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, bonds etc.

When you purchase a share in the mutual fund, you have a small stake in all investments included in that fund. Hence, by owning a mutual fund, the investor participates in gains or losses of all the companies in the fund. For instance, you can take a mutual fund as a basket of investments. When you purchase a share of that mutual fund, you are buying one share of this basket and hence has an ownership in the all the investments in one such basket.

how mutual funds work

Image source: Corporatefinanceinstitute.com

Major Types of Mutual Funds:

Based on Asset Class

  1. Equity FundsThese funds invest the amassed money from investors in equities i.e. the stocks of different companies. The associated risks for these funds are comparatively higher as they invest in the market. However, they also provide higher returns.
  2. Debt Funds: These funds invest in debt instruments like bonds, securities, fixed income assets, the company’s debentures etc. They provide a safer investment option for investors looking for small regular returns with low risk.
  3. Hybrid Funds: As the name suggests, Hybrid or balanced funds invests in both equity and debt instruments like stocks, bonds etc. This ratio can be variable or fixed depending on the fund. This fund helps to bridge the gap between entirely equity or debt fund and suitable for investors looking to take higher risk than debt funds in order to get bigger rewards.
  4. Money Market Funds: These funds invest in liquid instruments such as bonds, T-bills, certificate of deposits etc. The risks associated with these funds are relatively low and suitable for short-term investments, less than 12 months.

Based on Structure

  1. Open End Funds: The majority of mutual funds in India are open-end funds. These funds are not listed on the stock exchanges are available for subscription through the fund. Hence, the investors have the flexibility to buy and sell these funds at any time at the current asset value price indicated by the mutual fund.
  2. Closed-End Funds:- These funds are listed on the stock exchange. They have a fixed number of outstanding shares and operate for a fixed duration. The fund is open for subscription only during a specified period. These funds also terminate on a specified date. Hence, the investors can redeem their units only on a specified date.

types of mutual funds

(Image Credits: Kotak Securities)

Benefits of Mutual funds:

There are a couple of benefits in investing in a mutual fund.

For example, if there is an investor who wants to invest in stocks but has no time to analyze and create a portfolio. Then he can be benefited from the mutual fund. This investor just has to buy a mutual fund and hence, in a single purchase he gets an investment similar to purchasing the entire portfolio of stocks.

mutual funds trade brains5

The various benefits of investing in a mutual fund are described below:

  • A simple way to make a diversified investment: A mutual fund has a number of securities like stocks, bonds, fixed etc already in its portfolio. Therefore, buying a mutual fund is a simple way to make a diversified investment. Further, diversification also reduces risk which is an added benefit of buying a mutual fund.
  • Managed by a financial professional: The Fund manager or managers actively manage a mutual fund. They try to give the maximum returns to the investors using their professional expertise. Hence, those investors who don’t have time to invest by their own can get benefits from the expertise of these fund managers.
  • Allow investors to participate in a wide variety of investments: This is one of the greatest advantages of buying a mutual fund. There are a variety of mutual funds available to invest in equity fund (Index funds, growth funds, etc.), fixed income funds, income tax saver funds, balanced funds etc. An investor can easily select the best one which suits his strategy.
  • Investors can buy/sell/increase/decrease their mutual funds whenever they want: There is great flexibility to for the investors while investing in mutual funds. They can easily buy, sell, increase or decrease their investment in different funds within seconds. However, please note that it’s suggested to read the mutual fund prospectus carefully before subscribing as some mutual funds have an entry or exit-load.

If you are new to mutual fund investing and want to learn from scratch, I highly recommed you to check out this online course: Investing in Mutual Funds? A Beginner’s Course.

Which mutual fund to buy?

After understanding the benefits of a mutual fund, the next question is which mutual fund to buy? There is a variety of mutual funds available in the market which you can find online. These mutual funds have different ratings & rankings and you can choose a suitable mutual fund according to your goal. Here are the two few sites where you can search online:

Generally, you need to read the prospectus of a mutual fund which gives a wide variety of information about the fund. The fund prospectus has details like fee & charges, minimum investment amount, performance history, risks, and other particulars. Here are the few examples of mutual funds (provided by moneycontrol website):mutual funds trade brains2

Disadvantages of Mutual Funds:

Here are the few disadvantages of buying a mutual fund:

  • Fees and Expenses: There are a couple of possible fees in mutual funds like expense fee, exit fees etc which might reduce the overall returns.
  • No Insurance: There is no guarantee of success in the mutual funds. The mutual fund providing companies always state the following in the declaimer in their advertisements:
  • Mediocre Performance: On an average, a majority of mutual funds are not able to beat the market indices.
  • Loss of Control: The fund managers are responsible for buying and selling of the securities and you have no say in managing the portfolio. You are trusting someone else with your money when you invest in mutual funds.

mutual funds trade brains 1

How to make money by the mutual fund?

There are basically two ways to make money by a mutual fund –

  1. Appreciation: When the mutual fund appreciates i.e. when the fund grows in value. You can sell the mutual fund at the appreciated value and get a good return on your investment.
  2. Dividend Payment: Mutual funds also provide dividends to the investors when they receive the dividend from the companies they own in their portfolio. Please read the prospectus carefully if you are buying a mutual fund for dividend payments.

Also read: Growth vs Dividend Mutual Funds: Which one is better?

So, that’s all for the basics of the mutual fund. In the next post, I will describe how to buy a mutual fund.

In the meantime, if you need any help or have any doubts, feel free to comment below. I will be happy to help you.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting