Open-Ended Vs Closed-Ended Funds Which One to Prefer cover

Open-Ended Vs Closed-Ended Funds: Which One to Prefer?

A few days ago, I was having a discussion on Mutual Funds with a friend of mine. During the conversation, he asked me to state the key parameters which one needs to consider for investing in a Mutual Fund scheme. Another time, a person in my connection lists on LinkedIn texted me and asked when he should invest in an Equity Mutual Fund. He further wanted to know whether he should invest a lump sum or opt for investing through SIPs. Again yesterday, an old friend of mine called me up in the evening and asked in which fund he should be investing given his risk-return profile.

Well, being a Mutual Fund enthusiast and having an experience in Mutual Fund investing of over two years, I frequently come across many such queries on Mutual Funds from my acquaintances. But, there is one thing which has really surprised me is that till date, no one has ever asked me anything regarding Open-ended and Close-ended Mutual Funds.

I think this is something one needs to know if he/she is a fresher in Mutual Fund Investing. Therefore today, I have decided to talk about Open-ended vs Close-ended funds.

Open-ended vs closed-ended funds

On the basis of the structure, a Mutual Fund can be either termed as an Open-ended Mutual Fund or a Close-ended Mutual Fund. Let us first discuss Open-ended funds.

— Open-ended Funds

Open-ended funds can issue any number of units from the market. These work in a similar manner like some collective investment scheme where you can purchase units directly from the Mutual Fund Company instead of an existing unitholder.

Unlike a Close-ended fund, the units in an Open-ended scheme can be purchased or sold even after the NFO (New Fund Offering) period ends. These funds offer units to you on an everyday basis. Further, you can also redeem your units to the Mutual Fund Company any day.

The units of an Open-ended fund are issued at a price which is termed as the Net Asset Value (NAV). The NAV of a scheme is nothing but the market valuation of the assets minus liabilities of the scheme. If the scheme performs well, its NAV goes up and vice versa. So, having a constant look at the NAV of a fund helps an investor to evaluate its performance.

— Closed-Ended Funds

In a Close-ended fund, a fixed number of units are issued at the NAV to the investors in its New Fund Offering (NFO). After that, no fresh units are offered to investors. Therefore, you cannot invest in the units of a Closed-ended fund after its NFO period ends. Furthermore, you cannot redeem your units to the Mutual Fund Company after the NFO period lapses.

In order to provide liquidity to the existing investors, the existing units of a Close-ended scheme are listed on a recognized stock exchange subsequent to the NFO. Any further transactions with respect to those units are taken place in the stock market.

The transactions of the units of a Close-ended fund in the stock exchange are taken place at a price determined by the interaction between demand and supply in the market. Therefore, in a stock exchange, you would get a unit of a close-ended scheme at a price which could be at a premium over or a discount below its NAV.

Difference between open-ended vs closed-ended funds

So far we have understood the basics of Open-ended and Close-ended funds. Let us have a look at the major differences between them.

1. Open Ended schemes are more liquid in nature. You can redeem your units of an Open-ended fund anytime. Closed Ended schemes come with a fixed lock-in period. If you want to redeem your portfolio to the Mutual Fund Company at the NAV, you have to do it within a specified period of time. Otherwise, you have to dispose of it through the stock exchange at the market determined price.

2. Unlike a Close-ended scheme, an Open-ended fund is not traded on any recognized stock exchange: The price of a unit in an Open-ended scheme is majorly influenced by the prices of its underlying securities. On the other hand, the price of a unit in a Closed-ended scheme is more impacted by the market forces as compared to its benchmarks. So, it is easier to evaluate the performance of an Open-ended scheme as compared to a Close-ended fund.

3. Closed-ended funds offer trade opportunity at real-time market prices: As the units in a Closed-ended fund are traded on a stock exchange like shares, this gives you an opportunity trade on them based on real-time market prices. You can apply share trading strategies like limit orders, margin trading, etc.

4. Less-pressure for Closed-ended fund Managers: The Fund Managers in an Open-ended scheme is having no option but to strictly follow the objective of the scheme. Further, they have to face the redemption pressure of the unitholders off and on. The AUM (Assets under Management) for the Fund Managers to handle in a Close-ended scheme stays majorly fixed from the beginning. Therefore, they can manage the same at their own discretion and are not required to face any external pressure or adhere to stringent compliances.

5. The track records of a Closed-ended fund are not available, unlike an Open-ended fund: It is not possible for you to see the performance of a Close-ended fund over different economic cycles. But, in case of an Open-ended fund, you can always take an informed investment decision.

6. In a Close-ended fund, you have to invest a lump sum in a scheme during the time of their NFO issue: It is of no doubt in saying that it is a risky approach in making investments. Whereas, an Open-ended fund allows you to set up a Systematic Investment Plan (SIP) in a scheme of your choice.

Also read:

Closing thoughts

 In an Open-ended fund, many investors look to redeem their portfolio to book quick profits when the NAV goes up by 5 to 10% in the short run. This hurts the long-term investors significantly who stay invested with an aim to achieve higher returns in the long run. In this regard, a Closed-ended fund seems to be a better option. This is because its lock-in period prevents early redemption by the investors and if they redeem in the stock market, the AUM of the scheme still remains unaffected.

Again, if you have a little or no knowledge of the market and looking to earn a return of 15 to 20% annually, an Open-ended fund is ideal for you. In these funds, the NAVs are updated daily and they offer a higher scope of liquidating as compared to the Close-ended ones.

Moreover, Close-ended funds don’t offer any SIP mode for investing. You can only invest in a lump sum mode either in the NFO or in the secondary market. So, you can choose to invest in a Close-ended fund if you want to trade in a Mutual Fund scheme like any share in the stock market. But, if you are a regular income earner who likes to invest on a regular basis, an Open-ended Mutual Fund is always better for you.

It is not so easy to conclude whether opting for an Open-ended fund is better than investing in a Closed-ended scheme. The performance of any Mutual Fund scheme, whether it is Open-ended or Closed-ended, depends on the fund category it belongs and the effectiveness with which the Fund Managers handle its assets. In addition to that, what matters more is the purpose for which you want to invest in a Mutual Fund.

10 Reasons Why You Should Start a SIP cover

10 Reasons Why You Should Start a SIP

Last Friday, I met my old college friend- Priyanshu. While discussing various stuff, he told me that he has decided not to invest in ‘Fixed Deposits’ anymore. Well, there is no doubt in saying that he has made a good decision. We all know that FD is no longer a strong investment option for creating our desired wealth for the future.

During our conversation, Priyanshu suddenly got eager to know more about investing in Mutual Funds. I told him that Mutual Funds have of late become the talk of the town. I explained to him the benefits of investing in the same. Anyways, he also asked me whether he should invest in Recurring Deposits instead of Mutual Funds. As we went further in our discussion, I realized that he used to think one can invest in Mutual Funds only in a lump sum mode like FDs. But, the fact is that you can even invest in a Mutual Fund through SIPs.

Later, I told him that as he is doing a day job and earning a regular income, he should start investing in the Mutual Funds via SIP mode. Investing through SIPs works in a similar manner like Recurring Deposits (RDs). One key difference between the two is that you get units while investing in Mutual Funds. Another major difference is that through SIP investing you can earn relatively higher returns than RDs. Further, the rate of returns in SIP Mutual Funds is not fixed as in the case of RDs.

In the SIP or Systematic Investment Plan, a fixed sum of money is automatically invested in your chosen Mutual Fund on a specified date of each month. When you set up SIPs, your Bank Account is debited and your desired sum gets invested in your chosen Mutual Fund scheme.

Why You Should Start a SIP?

If you are a beginner in Mutual Fund investing, you might have this doubt why you should opt for investing through the SIP mode. Here are the ten best reasons why you should start a SIP.

1. Automate your investments: You can set up SIPs to activate investments in the Mutual Fund from your Bank Account on a particular date. This results in developing a habit of investing in the Stock Market and helps you create a large corpus in the long run.

2. Developing an investment habit towards your goal: SIP investing builds a regular investing habit for an individual. So, if you have any financial goal, your well planned SIPs can make it more feasible to achieve.

3. Variety of investment plans: SIPs help you invest in Mutual Funds with your desired amount for a chosen term. Moreover, you have a variety of schemes to choose from according to your financial needs like Equity based mutual funds, debt mutual funds, balanced funds, etc.

4. Flexibility in investments: Using a Step-up SIP, you can gradually increase your SIP amount with the increase in your earnings. In Mutual Fund investing, you can choose to stick to your regular SIP amount. But, if you wish, you can also choose to increase or decrease (up to the minimum investment amount) your SIP amount with the help of a Flexi-SIP.

5. Affordable investments: When you invest in the Mutual Funds through SIPs, you can create a huge capital over a long period of time. SIP investing doesn’t require you to invest a large sum of money in every installment. So, your household expenses are not at all hampered due to SIP investing. You can start investing in SIP with an amount as low as Rs 500 per month.

6. Rupee cost averaging: Investing in the Mutual Funds through SIPs fetch you more units when the market moves down and fewer units when it goes up. Therefore, this averages out the overall costs of your investments over time.

7. You do not need to time the market: You don’t need to know whether the Stock Market has hit rock bottom or it has reached its peak. You can invest in the Mutual Funds any time through SIP as its rupee cost averaging feature nullifies the market volatility.

8. Long-term investment: Mutual Funds are typically meant for creating wealth in the long run. Investing through SIP let you invest in the market with small amounts over a long period of time. The higher is the investment horizon, the greater is the scope to earn larger returns.

9. Power of compounding: The returns on your SIP investments are also reinvested in the market. Therefore, you not only earn returns on what you invest but also on your reinvested returns. The longer you stay invested in the market, the greater is your scope of enjoying the power of compounding.

10. Diversification: You get the opportunity to enjoy the benefit of diversification while investing in SIPs. You can easily allocate your investment across diverse asset classes and industries. Diversifying your investment results in reducing your security-specific risks and increases your chances of earning larger returns.

Quick Note: Long term capital gains on an Equity Mutual Fund are tax-free if such gains don’t exceed Rs 1 lakh in a Financial Year. This goes to show that Equity Fund investing via SIPs is a wonderful way to accumulate a huge investment in the long run. Further, Investing in ELSS up to Rs 1.5 lakh in a Financial Year is allowed as a deduction against Gross Total Income for the same period. Setting up SIPs in an ELSS can help you gain tax benefits with ease.

Also read:

Conclusion

Mutual Funds have become extremely popular in recent years among the middle-class Indians because of AMFI’s “Mutual Funds Sahi Hai” campaign. SIP investing is a great way to invest in Mutual Funds for building huge wealth in the future.

People who don’t invest in Mutual Funds are either lacking in knowledge or simply scared to invest in the same. However, the Mutual Fund industry in India is highly regulated by SEBI, which reduces the chances of occurring malpractices to nil.

In this article, we have tried to highlight the major advantages of investing in Mutual Funds via SIP route. Again, you can start investing with as low as Rs 500 per month in a SIP. Mutual Funds can help you fulfill all your financial needs if you invest in it in a systematic manner.

ETF EXCHANGE TRADED FUNDS

What is ETF (Exchange Traded Fund)? And How to Invest in them?

Exchange Traded Fund or ETF is getting a lot of attention among the investing population lately because of the ease and flexibility it offers to the investors. It is a basket of securities like mutual funds but can be bought and sold through a brokerage firm on a stock exchange.

In this post, we are going to discuss what exactly is an Exchange Traded Fund and how to invest in them. But before we start discussing ETFs, let’s brush up the basics of mutual funds as they are somewhere related.

Mutual Funds

Mutual Fund is a financial product where a Mutual Fund company pools funds from its investors and in return, allot them units. The amount collected is invested in a portfolio of securities which are traded in the markets. Mutual Fund schemes are low-cost investment options which help you to plan your personal finance effectively. You can start investing in mutual funds with an amount as low as Rs 500 per month via SIPs. Through Mutual Funds, you can invest your savings across diverse asset classes, industries, and economies.

In Mutual Fund investing, you can either choose to be an ‘Active’ investor or opt for ‘Passive’ investing style. The Mutual Fund schemes where the underlying assets are frequently churned to outperform their benchmarks are known as active funds. Passively managed funds are those which replicate the portfolios of their benchmark indices.

ETFs are the best representatives of passively managed funds. Let’s have a discussion on ETF basics.

Exchange Traded Funds

An ETF or Exchange Traded Fund is a variety of Mutual Fund which tracks any particular index, be it an index of stock, commodity or any other security. ETF invests in a portfolio of assets of a specific nature. For example, you can invest in a Gold ETF or Bond ETF or Currency ETF.

ETFs trade in the stock exchanges and therefore can be bought and sold during market hours like any instruments listed in a stock exchange. The price at which an ETF is usually traded is close to its Net Asset Value (NAV). In order to invest in an ETF, you need to have your own Share Trading Account and Demat account.

You can earn income from your ETF investments in two ways. Firstly, you can earn in the form of dividends. The second one is that you can trade your ETF units like shares and generate income in the form of capital gains.

Some people have this doubt in their minds whether ETF is the same as Index Funds or not. Well, what is the reality then? Let’s dig deep into it.

ETF vs Index Funds

An Index Fund is also a variety of Mutual Fund like ETF. The portfolio of an Index Fund is built in such a manner that its components look similar to that of a specific stock market index. An index fund aims in replicating the performance of a particular benchmark index.

On the other hand, an ETF is a special form of Mutual Fund consisting of similar securities, falling under any specific market index. An ETF is the only type of Mutual Fund which is traded like shares in a stock exchange. Its composition is similar to any index like Sensex or Nifty.

So, both ETF and Index Fund look quite similar except the fact that the ETF is traded in the stock market.

Is this the only difference between the said two investment options? The answer is a big no. Let’s have a look at some more key differences between the two:

  1. You can invest in an Index Fund only during a specified time in a day. But, you would be happy to know that you can trade in the ETFs throughout the day.
  2. The price of any ETF keeps fluctuating throughout the trading hours. On the other hand, the price of an Index Fund is fixed only at the end of the trading day.
  3. The basis for the pricing of an ETF is the demand and supply of the same in the market. Whereas, the pricing of an Index Fund depends on its NAV.
  4. To invest in an ETF, you will have to incur expenses in the form of brokerage. But, for investing in an Index Fund, there is no such transaction charge applicable.
  5. The expense ratio of an ETF is comparatively lower than that of an Index Fund.
  6. If you want to invest in an ETF in the Indian market, the minimum investment required is Rs.10,000. Whereas, you can invest in an Index Fund by paying a minimum lump sum of Rs.5,000. Moreover, you can choose to invest in the Index Funds with a minimum amount of Rs.500, if you choose the SIP (Systematic Investment Plan) route. Please note that investing in an ETF via SIP is not applicable.

Why you should invest in an ETF?

The next question that can come to your mind is why you should invest in an ETF? I can state a couple of reasons in favor of this.

Investing in an ETF is certainly convenient. Buying and selling an ETF unit can be done by having a look at the market price available on the trading platform. The exchanges where the ETFs are listed are well regulated by the concerned authorities. This has resulted in increasing transparency in the trading of ETFs.

Furthermore, you can choose to invest in ETFs as the expense ratio is much lower than any other Mutual Fund. Again, if you are unable to figure out which stocks to invest in, you can invest in a sector-specific ETF instead with a small corpus. 

performance of ETF in India

(Updated till 2nd May 2019 | Source: Moneycontrol)

How to invest in ETF in India?

In order to invest in an ETF you need to ensure the following two things:

  1. You are mandatorily required to open a Share Trading Account with any Stock Broker/ Sub-broker.
  2. You must also possess a Demat Account in your name for the purpose of holding the ETF units which you are going to buy.

Now, to apply for the above two things, you have to submit the following documents for complying with the KYC (Know Your Customer) norms:

  1. A copy of your Passport, Driving License, or PAN Card as your identity proof.
  2. A copy of your Passport or any Utility bill as a proof of your address.
  3. A copy of your Bank Account statement for the last 6 months.

After you have got access to your online trading platform, you can carry out any ETF transaction. You can invest in ETFs via any of the following two modes:

  1. You can place your order in the market through the online trading terminal provided to you. Trading in ETFs is no different than carrying out transactions with respect to stocks listed in the stock market.
  2. The second option is that you can place your order by calling your Broker over the phone and let them know about your trade requirements. 

Also read:

Closing thoughts

If you are willing to take part directly in the stock market but unable to figure out which security to pick, you can start investing with ETFs. In case you are an existing investor in the market and looking to try something different, you can look to include ETFs in your portfolio.

In India, people are still predominantly interested in investing in traditional saving schemes like PPF, FD, and NSC. Stock Market investing is yet to get popular among the Indians at a significant level. Not even ten percent of the income earners in our nation are having their Stock Trading Accounts. Therefore, there is no doubt in saying that the number of participants in ETFs in our economy is still pretty less.

AMFI has been working hard in the last few years to popularize the concept of Mutual Fund investing in our country. So, as the Indian Mutual Fund industry grows, it is expected that more and more investors will show an inclination towards ETFs.

What are STP and SWP in Mutual Funds_ A Beginner's Guide cover

What are STP and SWP in Mutual Funds? A Beginner’s Guide!

Systematic transfer plan (STP) and Systematic withdrawal plan (SWP)

In India, the Mutual Fund industry has started growing off late due to the immense efforts by Association of Mutual Funds in India (AMFI). Previously people used to be more interested in parking their money in Fixed Deposits and Recurring Deposits. Today, many Indians are looking to invest in Mutual Funds for gaining higher returns, ensuring larger security, and enjoying more liquidity.

Unfortunately, the percentage of Indian population investing in the Mutual Funds would not even cross the one-fifth of the total number of income earning Indians. At present, as high as 80% of the Indian income earners are either unaware of Mutual Funds or they have a plethora of misconceptions regarding the same.

One of the myths that many Indians have is that SIP is a feature of the Mutual Fund. The fact is that SIP is a mode of investing in Mutual Funds. You can invest in Mutual Funds either via lump sum mode or through SIPs. Let us have a basic understanding of SIP.

1. Systematic Investment Plan (SIP)

SIP means Systematic Investment Plan. You can invest a fixed sum of money at specified intervals of time, over a time period in a systematic manner. You can choose to make SIP investments yearly, half-yearly, monthly, weekly, or even daily.

SIPs are similar to Recurring Deposits. You are required to invest your money on a predetermined date and the Mutual Fund Company will provide you units based on that day’s NAV.

If you are looking to invest in the Mutual Funds via SIPs, you do not need to time the market. The major benefit that SIPs provide you is ‘rupee cost averaging.’ Therefore, your investments are not subjected to the risk of market fluctuations as SIP investing averages out the cost of your investments.

Now, there are two crucial concepts associated with SIP. The first one is the Systematic Withdrawal Plan or SWP.

2. Systematic withdrawal plan (SWP)

SWPs allow you in withdrawing a specific amount of money at regular intervals of time. SWP plans are more suited for retired people who are looking for a regular income to meet their expenses, preferably on a monthly basis.

After investing a lump sum amount in a Mutual Fund, the fixed amount and frequency of withdrawal are to be set by you. Not only SWPs help in providing you with periodic income but also protects you from the ups and downs of the stock market.

SWPs work in the manner opposite to SIPs. In case of SIPs, your money is invested in the Mutual Funds from your Bank Account. While, in case of SWPs, your Mutual Funds units are redeemed and gets deposited in your Bank Account.

Let us consider an example to understand how SWPs work in reality. Suppose Mr. Akash is having 10,000 units of a Mutual Fund on 1st January. He wishes to withdraw Rs 5,000 per month through SWP for the next three months. Therefore he sets up an SWP to give effect to it.

The units from your Mutual Fund holdings will be redeemed automatically to provide you with a regular income of Rs 5000 per month. The table shared below explains the process.

Date Opening Units NAV Units redeemed Closing units
1st Jan 10000 20 250 (5000/20) 9750
1st Feb 9750 16 312.50 (5000/16) 9437.50
1st March 9437.50 15 333.33 (5000/15) 9104.17

Now let us discuss the second key concept i.e. Systematic Transfer Plan (STP) 

3. Systematic Transfer Plan (STP)

STPs allows you to transfer your money from an Equity Mutual Fund scheme to a Debt scheme. The opposite can also take place. STP acts as protection against market volatility. STP is an automated way of transferring your money from one Mutual Fund scheme to another.

Whenever you feel that the investment made by you in an Equity Fund is being exposed to a higher risk, you can transfer your units to a Debt scheme periodically. Therefore, you can set up STPs which transfers your funds from your Equity scheme to a Debt Fund. When the market settles itself, you can again transfer the money from that Debt Fund to an Equity scheme.

Let us now understand how STPs work. You need to select a Mutual Fund from which your funds should be transferred to another scheme. You can set up STPs in a manner where a transfer can take place. It could be yearly, quarterly, monthly, weekly, or even daily.

STP means redeeming units of a scheme and investing the proceeds in the units of another scheme. Generally, STPs are allowed to an investor by a Mutual Fund company only within the schemes of the same company.

Through setting up STPs, you can keep earning your returns on a consistent basis. Moreover, your investments are also protected against adverse market circumstances. STPs also help you enjoy the benefit of ‘rupee cost averaging’ similar to SIPs.

STPs help you in rebalancing your portfolio. You can keep your funds moving from debts to equity when the Stock Market witnesses a bullish trend. Similarly, you can move your Equity investments away from the market and invest in Debt schemes when the market corrects itself.

Also read:

Systematic transfer plan (STP) and Systematic withdrawal plan (SWP)-min

(Image Credits: Edelweiss)

Taxation rules

Investing via SIPs is not going to fetch you any tax benefit unless you invest in an ELSS scheme. Under section 80C of the Income Tax Act, 1961, you can enjoy a tax deduction on your investments up to Rs 1.5 lakh. This tax benefit is available if you invest in any prescribed securities including ELSS.

SWPs result in the redemption of units of a Mutual Fund. Let us assume that you have invested in a Debt scheme and set up an STP to transfer money to an Equity Fund. Assuming 3 years have not been completed, any capital gain you make due to the redemption of units in Debt Fund will be taxable as per your tax slab. If you withdraw your investments after 3 years, capital gains are taxable @10% and 20%, with indexation and without indexation, respectively.

STPs also result in the transfer of units and therefore the capital gains are subjected to Income Tax. Suppose, you shift your investments from an Equity Fund to Debt scheme within 1 year, the capital gain tax is chargeable @15%. If 1 year exceeds, the tax is attracted @10%, provided capital gains in a Financial Year exceeds Rs 1 lakh.

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

Closing Thoughts

If you lack both time and knowledge for Stock Market investing, you can invest your money in the Stock Market via Mutual Funds. For investing in Mutual Funds, you require making use of SIPs, STPs, and SWPs in any phase of your investment journey.

When you earn regular income in our life, investing in Mutual Funds via SIPs seems ideal. As per changing market circumstances, you can set up STPs to maximize your returns by minimizing your corpus loss. SWPs usually come in the picture when you stop earning income actively and looking for a passive source of regular income for the rest of your life.

Mutual Fund is a great investment option for growing your long term wealth. The systematic arrangement of your investments and withdrawals in the form of SIPs, STPs and SWPs help you live a financially disciplined life.

10 Common mistakes while investing in mutual funds cover 2

10 Common Mistakes While Investing in Mutual Funds

Mutual Fund investment is the talk of the town. These days, many people who earlier used to invest in the traditional saving schemes like PPF and FD are showing more interest in investing in Mutual Fund.

Ideally, if you don’t have a good knowledge of analyzing the security market, instead of directly investing in stocks, buying through Mutual Funds is a lot safer and more convenient. For the middle-class Indians, Mutual Fund investing is a wonderful way of fulfilling their desired goals. You can even start investing with as low as Rs 500 per month.

Irrespective of these advantages, there are many people- especially novice investors, who make a plethora of mistakes investing in Mutual Funds. In this post, we are going to discuss ten of the most common mistakes while investing in mutual funds.

10 Common mistakes while investing in mutual funds

Here are some of the general mistakes which you should avoid while investing in Mutual Funds:

1. Not defining any goal: You should clearly define your financial goals before you jump into Mutual Funds. One requires specifying his/her short and long term goals before deciding over the investment portfolio. If you are planning to go for a tour abroad after a year from now, investing in a Debt Fund seems more appropriate. On the other hand, if you wish to retire after 30 years from today, you should set up your SIPs in an Equity Fund to have a large corpus in hand during your retirement.

2. Not researching the fund properly before investing: Investing in the financial market makes no sense if you haven’t done proper research. Before investing in a Mutual Fund scheme, you need to know its fund type, exit load, historical returns, asset size, expense ratio, etc. You need to have a clear idea about your own risk-return profile before you invest your savings in some scheme. This article can provide you with the necessary guidance regarding making the selection of the right Mutual Fund.

3.  Reacting to short term market fluctuations: There are many investors who get scared when the market witnesses a bearish trend. You need to understand that Mutual Fund investing is basically meant for generating long term wealth. So, you should not react to any sharp correction in the market or short term volatility. Moreover, you should refrain from blindly following the stock market analysts and business channels on television. If you don’t keep yourself away from the noise, your chances of making larger returns from Mutual Funds will decrease.

4. Not having a long-term mindset: People generally invest in the Equity Funds to make huge money. Equity Funds can only generate long term wealth if you stay invested for a substantially long period of time. Many people sell their funds losing their enthusiasm and patience after suffering from short term losses. This doesn’t make any sense if you are aiming for quick money from an Equity Fund scheme.

mutual fund memes

5. Waiting for the perfect time to start investing: I have recently talked to some friend, to whom I had explained about Mutual Fund investing a year back. I was taken aback knowing that he is yet to start investing. He still couldn’t commence investing because he has been looking for the perfect time to invest. I must tell you that when it comes to investing, you should never think of timing the market. Timing the market is important only when you look to trade, and not invest. The market goes through several ups and down in order to reach to point B from point A over a significant period of time.

6. Not having an emergency fund: Many investors invest their entire savings in the Mutual Funds at one go. Therefore, it goes without saying that they don’t have sufficient money for meeting emergencies like medical expenses. So, for paying such expenses, they have no option but redeeming their units and end up paying exit load. Exit load is one type of charge which is levied by a Mutual Fund company if you redeem any units within a specific period of time from the date of investment.

7. Inadequate investment amount: In case of Mutual Fund investing, you should increase your SIPs in accordance with the growth in your income. Many investors don’t understand the importance of this. Therefore, their SIPs remain the same over time and fail to generate their desired wealth in the long run. Moreover, the inflation rate goes up with time. So, this is also a reason that one should step up his/her SIPs with time to achieve the desired corpus.

8. The dilemma of dividend funds: You will find many people opting for Dividend based Mutual Funds. This is to be noted that the dividends from a Mutual Fund are paid to the investors out of that fund’s AUM. This results in decreasing the NAV of the units of such Mutual Fund. Mutual Funds work best only if you stay invested for a significant term and let the power of compounding play its role. So, if you invest in a growth plan instead of a dividend plan, the amount which you are not going to receive as the dividend is reinvested in the market. This results in creating more wealth in the future as compared to the earlier plan.

9. Not diversifying your mutual fund portfolio enough: When an investor invests in too many schemes of a particular type, he/she thinks that diversification is achieved. You should understand that each Mutual Fund scheme is a portfolio of diversified securities in itself. Therefore, investing in multiple schemes of a specific nature results in nothing but portfolio overlapping at a higher expense ratio. Instead of opting for it, investing in 2 or 3 schemes to the maximum helps in achieving the benefit of diversification.

10. Not monitoring your fund’s performances periodically: Among the investors who invest in the market regularly, only a few them track their investments periodically. If you review the performance of your portfolio timely, it would keep you aligned with your financial goals. Lack of periodic evaluation of funds results in keeping your portfolio filled with junk investments which keep pulling your mean portfolio returns down.

Also read:

Closing thoughts

AMFI came out with the campaign “Mutual Funds Sahi Hai” two years back. This four words campaign means that Mutual Funds are good in all respects. The main objective of this campaign was to create awareness among the Indians regarding Mutual Funds and bring more investors in the stock market.

However, it doesn’t mean that you can invest in any Mutual Fund scheme blindly. You must have heard this famous dialogue, “Mutual fund investments are subject to market risksPlease read all scheme-related documents carefully before investing.” Mutual Funds investments don’t guarantee a fixed return. You need to go through all relevant documents and analyze the key aspects of a scheme, before investing in the same.

In this post, we tried to cover some major mistakes which a plenty of investors make while investing in Mutual Funds. If you prevent yourself from committing these mistakes, we hope that you would become a better investor in the long run. Happy Investing!

Portfolio rebalancing cover

What is Portfolio Rebalancing? And Why is it important?

For the investing world, the term ‘Portfolio’ means a basket of securities. There is a popular saying that- ‘Do not put all your eggs in a single basket’. A similar strategy is applicable for your investments too. While investing in the financial market, it is always recommended to spread your investments across diversified securities to reduce risk. And this collection of diversified financial instruments is termed as a portfolio.

While creating a portfolio one should always aim to build a balanced one. A balanced portfolio can reduce portfolio risk and also offers stability. Let us understand it better with the help of an example.

Suppose Arjun, a 25-year-old salaried guy, has a current net worth of Rs 5 lakhs. Out of his entire worth, he has invested Rs 4.5 lakhs is stocks and has kept the remaining money as cash in hand. Here, although Arjun’s portfolio consists of two different assets (i.e. cash in hand and stocks), however, do you think his portfolio can be called balanced?

What, if the market witnesses a bearish trend for the next two years? In such a scenario, Arjun’s portfolio might look almost all reddened as he has invested 90% of his entire net worth in the stock market.

However, let’s consider another scenario where Arjun has diversified his assets smartly in different securities and his portfolio looks something like this:

— Investment in stocks = Rs 2 lakh
— Investment in debt funds = Rs 2 lakh
— Cash in hand = Rs. 1 lakh

The above portfolio looks a little balanced as Arjun has allocated his investments better this time. In this case, even if the stock market fails to perform well for quite some time, the loss on stocks (if any) will be mostly absorbed by the returns from the debt funds. Therefore, despite the things do not work out as well as planned, Arjun will either lose only a minor portion of his corpus or won’t lose anything at all.

Overall, a balanced portfolio helps the individuals to spread their investments across high-risk instruments to low-risk securities. In the simple example discussed earlier, Arjun has constructed a balanced portfolio by investing smartly in stocks (high-risk securities), debt funds (low-risk instruments) and cash in hand (lowest risk of all).

What is portfolio rebalancing?

So far we have just talked about portfolio balancing or a balanced portfolio.

However, as assets appreciate/depreciate with time, this allocation may change in the future and even a balanced portfolio may not remain balanced over time. In Arjun’s case, suppose his portfolio looks like this after 5 years since he originally invested:

— Stocks = Rs. 3.8 lakhs
— Debt funds = Rs. 2.2 lakh
— Cash in hand = Rs. 1 lakh

Here you can notice that Arjun’s assets have gone up by Rs. 2,00,000 in 5 years. This majorly happened because his investments in stocks have performed well and given him amazing returns.

However, his current portfolio is different from his original desired asset allocation. Initially, his portfolio consisted of 40% in stocks, 40% in bonds and the rest 20% in cash. However, his current allocation consists of 54.28% in stocks, 31.4% in bonds and remaining in cash. Obviously, if Arjun wants to restore his original allocation, he will have to sell a few of his stocks and increase the investments in bonds so that both get adjusted back to 40% each. This activity is called portfolio rebalancing.

Portfolio rebalancing involves periodically buying and selling assets for the purpose of keeping the portfolio aligned to the predetermined strategy or risk level. In other words, during portfolio rebalancing, you’re selling off those securities which you do not require any more and reinvesting the proceeds to buy the instruments you need. Another key point to note here is that in portfolio rebalancing, you are not adding any fresh money to your existing portfolio. You are simply adjusting the allocation in your portfolio.

Why does your portfolio need rebalancing?

Here are a few of the biggest reasons why you need to rebalance your portfolio at regular intervals.

1. If you don’t rebalance your portfolio periodically, it may get riskier with time.

You should rebalance your portfolio at regular intervals to maintain the desired risk level, especially in case of big changes in the market. Furthermore, it is a known fact that as you grow older, your risk appetite decreases. Therefore, in that case, you should develop a habit of constantly shifting your assets from equity to debts to add stability to your portfolio against the risk of loss.

2. It helps is keeping your portfolio in line with your goals/needs

Along with maintaining your existing corpus, improving returns is also necessary to grow your wealth. Equities or Equity based Mutual Funds are mostly used for beating the benchmark indices and earning sufficient inflation-adjusted returns. However, if you find any of your stocks are constantly underperforming for a considerable amount of time, you should consider replacing them with some other securities. A disciplined portfolio rebalancing will ensure that your portfolio is aligned with your financial plan.

3. Portfolio rebalancing helps in planning your taxes.

Equities and Equity based Mutual Funds attract 10% long term capital gains tax if such capital gain exceeds Rs.1 lakh.

If you a small investor, you can consider redeeming your equities in a financial year and invest the proceeds elsewhere. This will not only help in booking profits but will also help you in spreading your tax liability uniformly across the years. Similarly, you can also plan to redeem your investments in such a way that you can carry-forward your previously-occurred capital gain losses or to set off against capital gains to save further taxes in future.

Incurred Costs while rebalancing your portfolio

Portfolio rebalancing is not free as it costs money for buying and selling the assets. Here are a few common costs that you have to incur for rebalancing your portfolio:

1. Whenever you buy or sell any financial instrument, you have to incur a few unavoidable expenses in the form of brokerage, STT, commission, stamp duty etc. Although you can reduce the incurred costs by using discount brokers or investing in direct mutual funds, however, you cannot avoid them completely.

2. You may have to pay some unnecessary taxes: When you rebalance your portfolio, you get involved in selling a few of your investments. This might result in capital gains which attract tax liability on the same. Further, if you rebalance your portfolio too fast and sell your assets, you have to pay Short-term capital gain taxes (which is almost always higher than the long-term capital gain taxes).

3. You may have to pay some penal charges:  If you redeem a few investments before a specified time period (or locking period), you may have to pay some penal charges. For example, if you withdraw your money from your ongoing Fixed Deposit Account, your Banker may impose a nominal penalty. Similarly, if you redeem your Equity Mutual Fund units within a year, you may have to pay an exit load.

Also read:

Closing thoughts

If you want to get into physical shape, the balanced diet is a must. Similarly, if you are willing to generate long term wealth through your investments, creating a balanced portfolio is essential. However, your portfolio will remain balanced for long-term only if you keep rebalancing the same at adequate intervals of time.

To be honest, no one can tell what must be the exact time to rebalance your portfolio. Nevertheless, it is recommended that you should keep checking the allocation of your assets in your portfolio at least every year or two. This will ensure that your investments are in line with your goals/needs.

That’s all for this post. I hope it was useful for you. Happy Investing!

balanced mutual fund cover

Why You Should Invest in Balanced Mutual Fund?

The Balanced Mutual Fund is a type of Equity Mutual Fund which combines the feature of both equity and debt in a single instrument. It means that the money pooled from the unitholders are invested both in debt and equity instruments.

However, the equity element in the underlying portfolio of a Balanced Fund should consist of at least 65% of the entire assets under management. The rest portion of the portfolio can consist of debt instruments and cash in hand. In general, the exposure in equity can range from 65% to 85% and is dependent on the market condition and the fund manager’s investing philosophy.

Through a balanced mutual fund, the fund manager tries to achieve portfolio diversification within a single product. The main aim here is to increase portfolio returns by managing financial risks along with maintaining the stability of the fund.

Quick Note: You can read more about Debt Funds and Equity Funds on our website here:

Why You Should Invest in Balanced Mutual Fund?

Risk management:

A Balanced Fund comes with a mix debt-equity portfolio. As stated earlier, a substantial portion of the assets consists of equity instruments and the rest in debts. However, if the stock market returns declines, the loss on equity portfolio can be absorbed by the debts. For example, if the stock market witnessed a drop by 10%, considering your Balanced Fund is having only 65% equity exposure, your portfolio will only get reduced by 6.5%. Moreover, here the debt instruments might help you to constrain the market risks.

Asset allocation:

It takes a significant amount of corpus to create a well-diversified portfolio consisting of both equities and debts. Therefore, if you are looking to create a risk-adjusted portfolio by allocating your savings in both these assets individually, it may demand a huge amount of capital.

However, if you invest in the market through a Balanced Fund, not only your money gets spread across diverse stocks but you can also enjoy a sound equity-debt mix at a lower corpus. Taking positions in equity through Balanced Funds will not only help you grow your wealth but also reduce the fund volatility to a minimum.

balanced funds. market movements-min

(Image Credits: Sanasecurities)

Taxation:

Balanced Funds have a considerable amount of debt instruments in their underlying portfolio. But, they are taxed by the Indian Government as per equity instruments.

So, if you are redeeming your units within a year of investment, short term capital gain tax @ 15% is applicable. Otherwise, for the long-term capital gain, you are required to pay tax @ 10% if the gains exceed Rs 1 lakh. You can learn more regarding mutual fund taxation in India on our blog here. 

Switching Benefits:

Suppose you have a portfolio consisting of equity funds and debt schemes. Now, if you have to rebalance between debt and equity by mutual switching, this would cost you capital gains tax and probably exit load. However, if the fund Manager performs this activity, neither tax nor exit load is attracted on your account.

Overall, it looks relatively profitable to invest in debt and equity through a Balanced Fund than naturally creating a debt-equity mix by yourself.

Things to consider while picking a Balanced Mutual Fund

Your willingness to bear risk:

If you have a moderate risk profile, you can opt for a Balanced Fund. Balanced Fund is meant for providing equity allocation with stability support through debt securities. In case you are looking for a highly aggressive portfolio, you can consider investing in a small-cap or a mid-cap fund instead. On the other hand, if you are a high risk-averse investor, debt fund would be a more appropriate choice for you.

Performance of the fund: 

As a general rule, you should invest in a fund that has consistently beaten its peers and benchmarks over a significant period of time. Although, it may be possible that that fund performed well because it has taken comparatively more risks than its peers. However, you can’t ignore the fact that the fund’s splendid performance has occurred due to the effective asset allocation by its Fund Manager which should be considered as an advantage while investing in that fund.

The expense ratio of the fund:

The expense ratio of a Balanced Fund is the measure of the costs associated with carrying out the operation and management of the same. It is expressed as a percentage and in general, the expense ratio for an active fund can be between 1.5-2.5%. As a thumb rule, a lower expense ratio means more money in the bucket on the investors rather than the fund house. You should choose a particular scheme only after you have thoroughly compared its expense ratio with its peers.

Fund’s underlying portfolio:

As a prospective investor, you should have an overall idea of the stocks and bonds which constitute the portfolio of your fund.  The higher the quality of assets, the more is the probability of earning better returns on your investment. Therefore, always check the fund’s underlying portfolio before investing to understand a better picture.

Fund Manager’s history:

A fund which is managed by a series of Fund Managers over a considerable period of time should be less preferred compared to one which is managed for the long period by a single Fund Manager.

Further, you should also try to avoid a fund whose turnover ratio is on a higher side. Turnover ratio means the frequency of churning the underlying assets of the fund by the Fund Manager in a year. If the turnover ratio is too high, it means your cost of investing will be on a higher side too.

Here are a few other resources to read to get an in-depth knowledge of how to choose a Mutual Fund scheme:

Further, here is the list of a few best balanced mutual fund by Cleartax at the time of writing this article.best balanced mutual fund by groww

(Source: ClearTax)

Closing thoughts

You must have heard the famous dialogue “Mutual Fund investments are subject to market risks, please read all scheme related documents carefully before investing.” The said quote is not a joke but a serious disclaimer which needs to be strictly followed. Before you start off your investment journey, make sure that you have a basic understanding of the Financial Markets.

If you are a fresher in the field of equity investing, it is recommended to start your investing journey with Balanced Funds. Any person who is willing to invest in the equity market but at the same time seeking stability of his/her corpus should consider a Balanced Fund. For example, if you are a middle-aged person who is approaching retirement age, it is safer to opt for equity exposure through balanced Funds.

Investing in a Balanced Fund gives you the scope to enjoy the features of both debt and equity in one product. Moreover, here the job of fund allocation and timing of the market is in the safe hands i.e. Fund Manager of the Asset Management Company. Although, while investing in mutual funds, all you need to do is to simply stay invested and relax. However, here you also need to periodically monitor your portfolio and be active with your investments.

That’s all for this post. I hope you have understood the concept of the balanced mutual fund by now. Happy investing!

6 Common Mistakes to Avoid While Investing Through SIPs cover 2

6 Common Mistakes to Avoid While Investing Through SIPs

Since the past few years, people are increasingly showing their inclination towards mutual fund investments. However, just an attraction is not enough to invest correctly in the mutual funds. They also need to know how to invest effectively and moreover, what mistakes to avoid.

While investing in mutual funds, people can either opt for lump sum or via SIP mode. For example, if you plan to invest a huge amount of money, say Rs 10 lakh in mutual funds all in one go, this is a lump-sum investment. On the other hand, if you choose to make your investments in chunks, say Rs 20,000 per month for the next 10 years, then this is considered a systematic investment plan (SIP).

In general, the SIP mode can be a little more convenient way to invest in the Indian equity market. It facilitates the people in building long term wealth without putting a lot of pressure of making huge investments all at once. Anyways, if SIPs can make your life more comfortable, it can also add trouble if you don’t use it in the right manner.

Here are some common mistakes which majority of investors do while investing in the Mutual Funds through SIPs.

6 Common Mistakes to Avoid While Investing Through SIPs

1. Choosing an incompetent SIP amount

While investing in a Mutual Fund via SIP mode, you should know the right amount to invest in order to reach your goals/needs.

In general, most people start with a small amount for their SIPs. This may be because they do not have much money to invest at that time or any other reason. However, subsequently with time, one should not forget to increase the size of their investments. On the other hand, there are also a few investors who start investing in SIPs with big amounts without performing a proper analysis of the funds. Moreover, they also don’t monitor their investments and thereby later suffer losses.

While investing in mutual funds through SIPs, you need to find the right size to invest that you can maintain on a regular basis. Furthermore, you need to monitor your portfolio closely in order to make decisions regarding whether to increase, decrease or stop your investments in the underlying schemes.

2. Investing for short-term

Mutual Fund investing is generally meant for generating wealth in the long run. One common mistake that majority of investors make is to redeem their investments in the short term in case their portfolios are unable to earn profits.

A lot of people start their SIPs with an objective to make money in a small time period. However, the fact is that when you opt for a small tenure, you are exposing yourself to a higher risk of market volatility. It is highly unlikely that you will get higher returns in a shorter tenure. Remember, SIP investing works on rupee cost averaging approach and helps in creating wealth in the long run.

3. Picking the Wrong fund

Before you start investing, you need to ensure that you have opted for the correct fund based on your financial aspirations, risk appetite, and liquidity requirements.

If you invest in the wrong fund, your SIP investments might not fetch the expected returns. Furthermore, before finalizing your scheme, you need to check some of the key parameters like its historical performance, underlying portfolio, expense ratio, fund manager credentials etc.

You may have a look at this blog on our website to gain a basic understanding regarding how to pick a right mutual fund.

4. Abruptly stopping SIP investments

Mutual Fund is associated with long term investing and it would be highly profitable if you hold your units for a longer period of time. However, on most occasions, the investors tend to lose their patience when they find their portfolio bleeding in the short run. A similar situation was witnessed by the Indian economy last year (2018) when most investors found their Equity Mutual Fund portfolio running at a substantial loss.

It is understandable that people may start to panic seeing their portfolio in red. However, the risk of market fluctuations drives the majority of the investors to shy away from further investments and this is where they make a mistake.

Also read:

5. Completely forgetting the SIPs after commencing

Ironically, you can find many investors who start their SIP and later forgets it completely. A lot many people have this misconception that long-term wealth creation means it doesn’t require monitoring at all.

However, even the soundest mutual fund which is managed the best fund manager requires monitoring. You need to monitor your mutual fund performances after every 6 months or at least a year.

6. Waiting for the perfect time to start

“Time in the market is better than timing the market.”

When it comes to timing the market vs time in the market, it is said time and again that don’t try to timing the market. You will never find the right time to enter. Here, time in the market is more important as the longer you stay in the market, the better will become your investment return.

Nonetheless, it has been seen that many investors keep waiting for the perfect time to start their SIPs.

The best feature of investing in Mutual Funds through SIPs is that it averages out your costs of investing. And that’s why there isn’t any proper time for you to start your SIP. The earlier you can enter, the higher is your chance to build huge wealth and to enjoy the benefit of compounding.

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.

Conclusion

Mutual Fund investing through SIPs can help you reach your financial milestones if you invest in the right way. However, investing via SIP requires focus and discipline.

In this post, we tried to cover a few common mistakes to avoid while investing through SIPs. As discussed earlier, while investing in SIPs, always think long-term. Here, you can’t afford to abrupt your SIPs even if the market starts showing a bearish trend in the short duration. The longer is your investment horizon, the higher will be your scope to build wealth from the market.

That’s all for this post. We wish you all the best in your SIP investing journey. Happy Investing.

What is XIRR in mutual funds and how to calculate it cover 2

What is XIRR in mutual funds and how to calculate it?

Last weekend, one of my friends, Monika, came to my house to meet me. She is an old friend and we met after a long time that day. She told me that she is currently working in an Indian FMCG company after having completed her MBA in HR last year. We discussed a lot about general stuff, our school days and the extent to which our lives have undergone changes over the last few years.

As our conversation gradually progressed, I came to know that she has recently started investing in the Mutual Funds. I remember that a year back, we discussed on a call regarding the importance of investing in Mutual Funds for creating wealth in the future. Ever since she got her job, I have been telling her to invest in the Mutual Funds which would ultimately help her to achieve her financial goals. And that’s why I felt really pleased to know that she has finally started taking her personal finance seriously.

Anyways, I was just taking a sip of coffee when all of a sudden, she fired a wonderful question at me. She asked me how could she correctly calculate how much returns she is making from her Mutual Fund investments. I must tell that most of us focus on the absolute returns that we are generating. Only a minority of the investing population emphasizes on the underlying mechanism to compute our returns in relative terms. And therefore, I found her question truly charming.

How to measure returns on your Mutual fund portfolio?

If you have invested your money in a variety of securities, it is logical to say that the computation of portfolio returns is indispensable for evaluating the performance of your investments. This is because once you know the performance of your portfolio, you can decide whether you want to invest more, continue investing, or redeem your investments.

There are primarily two ways of computing your portfolio returns.

The first one is ‘Simple Return’ or ‘Point to Point return’ method. In this method, you consider the starting value of your investment and the ending value. However, here you do not consider when you made such investments and when did you withdraw.

The other method is by calculating XIRR (extended internal rate of return) of your investment portfolio. It takes into consideration multiple investments and withdrawals occurred at different time intervals– between the first investment and the last redemption.

The former method can be easily applied only if you are investing in Mutual Funds on a lump sum basis. On the other hand, the XIRR method can be applied for lump sum investing and it is also extremely suitable if you have opted for Systematic Investment Plan (SIP).

Also read: SIP or Lump sum – Which one is better?

Simple Return or Point to Point return

Simple Return method gives the absolute return on your investment portfolio. This method only requires your initial Net Asset Value (NAV) and the present NAV. It can be calculated as:

Simple return

Now, sometimes it might be possible that your holding period may not be in a complete number (i.e. not perfectly a year). In that case, you can compute returns using this formula:

Annualized return

Further, instead of using the Simple Return method, one can also opt for the CAGR (Compound Annual Growth Rate) method. The latter works in a similar way and the result is the same too. The only difference is that, even if your investment time period is not perfect one year, it will still calculate your returns in a one step. The formula for CAGR is:

CAGR

Let us take an example to understand how the Simple Return Method works.

Imagine you have invested Rs. 1 lakh in a Mutual Fund scheme on February 23, 2017, when its NAV was Rs. 10. As of March 20, 2018, its NAV has spiked to Rs. 35.

In this case, Simple Return = {(35-10)/10} x 100 = 250%.

On the other hand, Simple Annualized Return = [{(1+2.5) ^ (365/390)}-1] x 100 = 323%

I hope the above example is clear to you. As we already discussed earlier that if you’re simply going to follow ‘buy and hold’ investing strategy, then the Simple Return method would work well for you.

I also explained the same to Monika that evening. However, later what I came to know was that she invests a portion of her salary in Mutual Funds via SIP route i.e. periodic investments. Moreover, she also said that she doesn’t necessarily invest at regular intervals every month. So naturally, she can not even use IRR method for calculating her returns here.

Also read; What is Internal Rate of Return (IRR)? And How Does it Works?

So as discussed previously, the XIRR method can be useful to calculate returns in her case. This is a method that you can use to compute returns on your investments when you are carrying out multiple transactions at diverse points of time.

Calculating returns using XIRR in Mutual Funds

While investing in mutual funds via SIP, you can make multiple investments at different points of time. Further, it might also happen that you redeem some of your units if you required some cash at any particular time. And that’s why I guess by now you would have understood that it is going to be a little tricky to calculate your returns when you are investing via SIPs.

In these cases, the XIRR approach is the most appropriate measurement of the returns that you make on your Mutual Fund investments. Now, let’s understand how you can make use of MS Excel to calculate XIRR

How to use MS Excel to calculate XIRR?

Microsoft Excel provides a financial function called XIRR which you can use to calculate your Mutual Fund portfolio’s rate of return. The expanded formula of XIRR formula in MS Excel is: “= XIRR (value, dates, guess)”

Let us now discuss the step by step process that you can follow to compute XIRR in Excel:

Step 1: Open MS Excel and enter the dates of your transactions in a single column.

Step 2: Go to the next column. Here you have to mention the figures of your cash flows (investments made, dividends received and redemption proceeds).

Date Transaction (Rs)
01/01/19 -5,000

Step 3: Go to the first column and mention the current date (just below the last date mentioned by you) and put the figure of your present value of Mutual Fund in the adjacent column corresponding to the date mentioned by you in the earlier step.

Date Transaction (Rs)
01/01/19 -6,000
04/02/19 -6,000
31/07/19 13,000
XIRR (%)  ?

Now you have to use the XIRR function [“= XIRR (value, dates, guess)”] in MS Excel to find the XIRR for your investments.

To perform the calculation, you have to first select the values which are the series of cash inflows and outflows. Then, you have to select the dates from the dates column. Finally, in the ‘guess’ parameter you may not select anything for it. If you keep it blank, MS Excel is going to use the default value which is 0.1 (10%).

Example to demonstrate the use of XIRR function in MS Excel:

Let us assume that you are going to make seven monthly SIPs of Rs 6000 each. The SIP dates start on 01/01/2019 and it ends on 01/07/2019. Let the date of redemption be 31/07/2019 and the maturity amount is ₹ 43000

You can write the data set on MS Excel in the following manner:

XIRR in excel

As you can see, in the table given above, your cash flows are taking place at different intervals. So, here, we have to use XIRR function for computing the rate of return as a net result of these receipts and payments.

Quick Note: Do not forget to put the ‘minus’ sign before the figures which represent an investment of money.

Now, in the first column i.e. B, please enter dates of transactions. After that, go to the adjacent column, i.e. C. Here, you have to enter the SIP figures of -6,000. Next, again, go to column B and put the redemption date. Against that date, put the redemption figure of 43,000 in Column C.

Next, go to the cell below where you have put 43,000. For calculating the required XIRR, type “=XIRR(C3:C10, B3:B10)” and press ‘Enter’ key on your keyboard. You will get XIRR as 7.84% which will be displayed as a result of this operation.

I used the same example on my laptop to explain the process of XIRR computation to Monika. By this time, she had understood how she can apply this technique in calculating the returns on her Mutual Fund investments. I hope this is also clear to you guys now.

So, what are you waiting for? Open MS Excel and try this function with hypothetical figures to calculate IRR. In case you are an active Mutual Fund investor, try calculating the XIRR of your current portfolio.

Closing Thoughts

In case, if you choose growth scheme Mutual Funds and plan your SIPs at regular intervals, you can definitely opt for the IRR (Internal Rate of Return) method to evaluate your returns. However, in reality, this might be a little difficult to execute. We don’t always follow the ‘buy and hold strategy’ in Mutual Fund investments. As our savings witness debits and credits off and on with regard to our mutual fund transactions, we have no other way but to apply XIRR in computing our returns on investments.

Furthermore, you can, of course, give importance to CAGR as this parameter is useful for you in making a selection of your Mutual Fund scheme. However, when it comes to evaluating your personal investment portfolio, it is XIRR which is always more helpful.

So, if you have a series of cash inflows and outflows occurred over time (which includes withdrawals, dividends, investments, and transfers), the best way of computing the rate of returns is by using XIRR. Through this article, we have tried to make you understand how XIRR works far better for computing returns of your Mutual Fund portfolio in comparison with IRR and CAGR.

Best wishes for your mutual fund investment journey. And happy investing!

A Beginner’s Guide on Debt Investments cover

A Beginner’s Guide to Debt Mutual Funds

Debt investment- this topic has been into a lot of contest since people started investing in the financial world, especially when people compare it with other investment options like equities or real estate. Although equity investments are known for their higher returns, however, investing in debt investments have their own benefits.

In general, if you have some idle funds and looking to invest in the financial market, you have two broad options. The first is to purchase something for a specific value and hope to dispose of at higher returns in the future. Such investment options include Stocks, Mutual Funds, Real Estates, Commodities, and Derivatives.

The other choice could be to lend your savings to some other person (or organization) and keep earning interests until you get your corpus back. This includes Bank Savings Account, Bank Fixed Deposit Account, Corporate Bonds, Government Bonds, and Debt Mutual Funds.

In this post, we will discuss what exactly are Debt Investments (focusing on debt mutual funds), types of debt funds, their benefits and more. However, before getting into that, let us first understand the basics of lending.

Basics of Lending:

basics of lending

The process of lending involves two parties. The borrower borrows the money from the lender as the former is in need of that. The former pays a specific regular payment known as “interest” to the latter for using the funds.

The loan is closed when the borrower repays the entire amount due to the lender. Here, ‘loan’ is also referred to as ‘credit’, ‘debt’ or ‘bond.’

Such instruments are called ‘fixed income securities’ because everything here is predetermined like the interest rate, maturity period, debtor and creditor.

How do Debt Mutual Funds work?

If you invest in a Debt Mutual Fund, you are simply giving loans to the issuing entity. Through Debt Fund investing, you can earn income in the form of interest and capital appreciation. You earn a pre-decided interest on Debt securities for a particular duration after the end of which such debt instrument will mature. Debt securities are also known as ‘fixed-income’ instruments as you are aware of what you will be getting.

In the case of Debt funds, the Fund Managers make investments across diversified securities. This gives ample scope for the Debt Funds for earning decent returns. Although no one can guarantee the returns for the same, however, debt fund yields return to fall in a predictable range. This makes the conservative investors interested in Debt Mutual Fund Investing.

The underlying assets of a Debt Fund usually consist of financial securities having a higher credit rating. The Debt Funds investing in higher-rated financial products will tend to be less volatile in comparison to low-rated securities.

An important thing to note here is that the duration (maturity) of the underlying depends on the Fund Manager’s investment strategy and the rate of interest prevailing in the economy. If the interest rate in the market falls, the Fund Manager may shift the underlying investments from short-term securities to the long-term ones and vice versa. The key differentiating factor among the varieties of Debt Funds is nothing but the maturity period of the underlying investments.

Types of Debt Funds

 debt instruments

    – Dynamic Bond Funds: In these funds, the Fund Managers keep altering the portfolio composition in accordance with the changing rate of interest in the economy. This fund’s average maturity period keeps fluctuating as the underlying portfolio is churned according to the rise and fall in the interest rates in the economy.

    – Income Funds: These funds are similar to Dynamic Bond Funds but on most of the occasions, the underlying portfolio of Income Funds consists of securities having long-term maturity period. This gives more stability to the Income Funds as compared to Dynamic Bond Funds.

    – Short-Term & Ultra Short-Term Debt Funds: These funds invest in the instruments having shorter maturity periods. Owing to their short-term nature, they are likely to be less affected by movements of interest rates.

    – Liquid Funds: These funds invest in the fixed income securities which come with a maturity period of not exceeding 91 days. These funds seem to be a better option than keeping one’s liquidity in a savings bank account. This is because the former provides similar liquidity but at higher returns.

    – Gilt Funds: These funds invest in only government instruments. The Government instruments are having high credit rating thereby come with low credit risk. Therefore, Gilt Funds are ideal investment products for the risk-averse investors who also prefer investing in the debt instruments.

    – Credit Opportunities Funds: These funds aim in earning higher returns by taking a call on credit risks. These funds aim in holding lower-rated bonds that come with higher interest rates. The Credit Opportunities Funds can be riskier than any Debt Mutual Funds.

    – Fixed Maturity Plans: These are closed-end Mutual Funds, which come with a lock-in period and invest in the debt securities. You can invest in Investments FMPs during the time of the initial offer period. An FMP is very similar to a fixed deposit, which yields excellent tax-efficient returns but it does not provide any guarantee for the same.

Who should invest in Debt Mutual Funds?

If you are a conservative investor, Debt Funds are an ideal investment option for you. You can even invest for a short-term period ranging from 3 months to 1 year. Debt Fund investing can also be of a medium-term which can range from 3 years to 5 years.

If you want to invest for a short-term where liquidity is your concern, then investing in the Liquid Funds could be more profitable than parking your money in a Savings Bank Account. Investing in the former would give you almost double the returns that you Bank Savings Account can yield for you.

For medium-term investing, you can go for Dynamic Bond Funds. Investing in such type of Debt Fund will fetch you more returns than a Bank FD of 5 years. For earning a regular income, you can look to opt for Monthly Income Plans (MIP).

What are the benefits of investing in Debt Funds?

    – A perfect starter: During the early stage of your career, your income might be low and so be your savings. You might be unsure of where to invest your meager savings. Investing in debt fund would be a good starter to your investment journey. Gradually, you would learn more about investing, risk-reward relationship, financial planning and can diversify your portfolio with time.

    – Adding stability to your investment portfolio: Debt Mutual Funds usually invest in the debt instruments. Therefore, they are comparatively more stable financial product than the equity investments. Debt Funds can provide some stability to your equity portfolio by diversifying the risk associated with your current investment portfolio.

    – Long term growth: Through a Debt Fund investment, you would earn a return of around 8% without taking any significant risk. Further, if you hold your investment for more than three years, your investment would attract the benefit of indexation. Here, indexation allows you to inflate the purchase price using cost Inflation Index. In indexation, the purchase price is increased (adjusted for inflation) and deducted from the sale price to calculate long term capital gain. And obviously, this will reduce your taxable capital gains.  In short, if you redeem your investments (partly or wholly) after three years, your returns in the form of capital gain would be more tax efficient as compared to keeping your money in a Fixed Deposit Account.

    – Helpful in meeting emergency expenses: You should always have a fund for supporting yourself in unforeseen circumstances. Creating an emergency fund can help you a lot in tough situations. Here, investing in debt funds offer a great alternative to keeping your emergency money in the savings account as it offers similar liquidity, very low risk, and comparatively higher turns.

    – Providing you liquidity: Debt Funds give you easy liquidity. You can keep investing your salaries in a Debt Mutual Fund and withdraw your money from such fund anytime. You can park your money in a Debt Funds and liquidate the same if you want to meet any of your needs.

 debt instruments 3

Things to consider before you invest in a Debt Funds.

    – Debt Funds are not entirely risk-free: Debt Funds are comparatively riskier than the Fixed Deposits as they are associated with both credit risk and interest rate risk. The Fund Manager might choose low-credit rated instruments for the underlying portfolio which gives rise to credit risk. Further, interest rate risk can be witnessed where the prices of the bonds may go down due to a rise in the interest rates.

    – Cost: Debt Funds do charge you for managing your investment. Such fee is called an expense ratio. As per SEBI, the cap with respect to the expense ratio is 2.25%. Although the upper limit of expense ratio might look a little adverse, but over the long-term investment horizon, this would definitely help you in generating even higher money which you have paid in the expense ratio.

    – There is no guarantee for returns: The underlying portfolio of a Debt Fund consists of fixed-income securities, but they don’t guarantee you any returns. The Net Asset Value (NAV) of your Debt Fund will fall if the interest rates in the economy shoot up as a whole. So, you would find Debt Mutual Funds attractive to be invested during the condition of falling interest rates in the market.

    – Higher the holding period, better are the returns: You can consider investing in Debt Funds for any investment horizon as per your needs. However, this is to be noted that, the longer the investment horizon, the higher is the probability of gaining attractive returns.

    – Achieving your long-term goals: Through Debt Fund investing, you can fulfill a plethora of your financial goals. You can make use of Debt Mutual Funds as a passive source of earning for supplementing your monthly salary. Furthermore, if you are a budding investor, you may invest some savings of yours in Debt Funds for meeting liquidity requirements. On the other hand, when you retire after around three decades, you may consider investing the lion’s share of your retirement benefits in some Debt Mutual Fund for receiving a regular pension.

    – Don’t forget taxation on capital gains: When you redeem your units of a Debt Fund, you would earn income which is called capital gain. The capital gain is taxable. The rate of taxation of capital gains is dependent on the holding period of your units in such a fund.

The capital gain which is earned by you over an investment horizon of lower than three years is referred to as a Short-term Capital Gain (STCG). On the other hand, the capital gain of yours made by you on redeeming your units after holding them for 3 years or more is termed as Long-term Capital Gains (LTCG).

STCG earned by you is added to your net income which is thus going to be taxed as per your income slab. The LTCG earned by you will be taxed @ 20% after considering the effect of indexation.

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

Conclusion

Debt Mutual Funds are a wonderful investment option if you are a novice in financial market investing with low-risk tolerance.

As you gradually grow in your career, your earning increases and so does your risk appetite. Your investment keeps increasing and the proportion of Debt Fund in your investment portfolio keeps getting lower. However, when you retire, you would look for a stable source of income and again your financial assets will seem to be debt-heavy. So, your investment journey starts with Debt Fund and ends with the same. Therefore, you can’t really ignore the importance of the same in your professional career.

So, are you a fresher in the financial world and want to invest in low-risk investment options? Have you started investing for your future? If not, then what are you waiting for? Start your investment journey today with investing in the Debt Mutual Funds. Happy investing!

More resources to check:

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

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.

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.

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 of whether the fund is right for you or not.

Anyways, there is also small trouble 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 in the future. 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 Credentials of the Fund Manager

The fund manager is probably the heart of any 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.

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.

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
    1. Equity-based Mutual funds
    2. Debt based mutual funds
    3. Tax Saving Equity Funds (ELSS)
    4. Balanced Funds
    5. 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.

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 equity-based 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