Focus on financial goals
Are you chasing returns? Focus on goals instead
Tell anyone that you have invested in mutual funds, and the first question that they are most likely to ask is how they are performing, i.e. what are the returns? Returns are the first and probably the last thing on many investor’s minds.
Chasing mutual funds returns
But chasing returns is not a healthy option. Investing in a fund because it tops the charts of one-year returns is a wrong way to look at investing in general. It is seen that many investors keep jumping from one fund to another based on one year’s return. While they may presume that it will help them to build greater wealth, but in reality, it is detrimental to their financial health. Investors forget to take into account the cost and taxation associated with exiting from one fund and investing in another. Also, the ranking of the top-performing funds keeps on changing regularly.
Chasing top-performing asset class
The scenario is not just limited to mutual fund investment. Investors also look at the current top-performing asset classes. These asset classes may include gold, real estate etc. Thinking that they will miss a rally, investors invest in a specific asset. But they are most likely to get the timing wrong and invest when the prices are at the highest. Stagnant or falling prices disappoint investors, and soon, they exit the asset class and invest in another investment product.
As a result, investors fail to build wealth over time. The right approach would be to focus on financial goals rather than chasing after returns. It may not sound exciting, but investing is not supposed to be exciting.
Focus on the goals
Staying focused on your goals can help you to achieve your goals. Whether it short term goals or long term goals, it is essential to stay focused. Knowing the timeline of your goals and investing in appropriate funds will help you to stay focused and achieve your goals with ease. E.g. if you have a goal of buying a house in 10 years, then chasing the funds based on the current returns is not the right approach. Also, if your goal is to save for a vacation in 6 months, looking at the 1-year return will still not make sense. It is because, in this case, your objective should be to protect your capital rather than focussing on returns. Hence, the importance of focusing on goals far outweigh the compulsive tendency to look for better returns.
Moreover, in the case of equity funds, one-year returns are not adequate to judge the performance of the funds. One should only invest in equity funds if they have a time horizon of five years or more.
Our financial goals are similar to our career goals. Achieving our goal of working in our dream company or setting up a business requires discipline. The image of the end goal is what keeps us motivated, and distractions do not stand a chance. Investing is no different. It is the discipline and focuses that count and makes dreams a reality.
- Investing in a fund because of its one year is not healthy.
- Investors typically invest in an asset class at its peak.
- Investors should focus on their goals.
- Financial goals is similar to career goals.
- Investing in a fund because of its one year is not healthy.
- Investors typically invest in an asset class at its peak.
- Investors should focus on their goals.
- Financial goals is similar to career goals.
Do not rely only on EPF for your retirement
Why you shouldn’t depend only on EPF for your retirement?
When most people think of retirement, they think of employer benefits like Employee Provident Fund (EPF). While this is a great option, but it is not the only one. You can supplement with other investment options such as mutual funds. This blog will highlight the importance of investing in mutual funds for your retirement.
EPF is a tax-efficient investment instrument and has the backing of the government.
Mutual funds and EPF can help boost your retirement savings and ensure that you don’t run out of your retirement savings.
Here are some reasons you shouldn’t rely entirely on your employer for your retirement benefits:
EPF is primarily a debt-based product:
EPF is primarily a debt-based product. It is essential that you understand that EPFO can invest up to 15% of its incremental flow in equities.
Equity-based instruments have the potential to make real returns on your money. Real return is the return given by the investment option after subtracting the effect of inflation.
You can build a retirement corpus if you invest in options that beat inflation, especially if you start early. You can invest in equity-oriented mutual funds, which involve higher risks than most other investment instruments but offer impressive returns over time.
Minimal investment amount:
In EPF, employees and employers both contribute 12% monthly to EPF. They can contribute up to 12% of Rs.15,000, or Rs.1800. However, if your income exceeds Rs.15,000, the company is not required to contribute 12%. So, regardless of your income, the employer’s contribution may be smaller.
Basically, the overall amount that gets credited to your EPF account may not be sufficient to fund your retirement goals.
You can invest more in your EPF account. This option is called Voluntary Pension Fund (VPF), and it is an extension of EPF.
Previously, VPF investments were tax-free. However, according to Budget 2021, if your EPF and VPF contributions exceed Rs. 2.5 lakh in a financial year, they tax the interest that you earn on such contributions.
Cap on maximum investment amount:
As an employee, you can make tax-free contributions of up to 12% of your basic to EPF. If you want to invest more towards your retirement plan, you can invest in mutual funds. You may choose from a variety of mutual funds depending on your investment objectives and time horizon.
If you invest in mutual funds, there is no cap on the maximum investment amount. Moreover, taxes apply on redemption.
Availability of different investment options:
Mutual funds offer different investment options such as lumpsum and Systematic Investment Plans. It means that you can make investments at any time of the day from anywhere.
A systematic Investment Plan (SIP) is a regular investment plan through which you can invest a predetermined amount at regular intervals. You can also increase or decrease your SIP per your financial conditions. So, mutual funds offer investment flexibility that EPF does not provide.
The importance of retirement preparation cannot be overstated. It’s possible that relying on EPF isn’t the greatest option. Inflation might deplete your savings faster than you expect, so your retirement fund may not be sufficient to pay your daily expenses. You might use a Systematic Investment Plan (SIP) to invest in mutual funds for retirement income. SIP allows you to invest a set amount at regular intervals. It’s completely optional, and you may increase, decrease, or stop your SIP investments at any time. As a result, you may develop a retirement plan and invest to meet your retirement objectives.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
Retirement cannot be financed
What’s your retirement plan?
Let’s play a small game.
Pick the odd one out:
Could you figure the odd one out?
It is retirement.You can take a loan for everything else but retirement. Hence, planning for retirement should be on everyone’s top of mind. Starting to plan for retirement as early as possible is the best way as you don’t have to stress about investing a considerable sum of money in the later part of your life.
Everyone’s retirement plan and needs are different. The size of the retirement corpus will not just depend on how much you save and invest, but also how you want to spend after retirement. If you're going to live a frugal life, you may need to accumulate less than someone who wants to pursue expensive hobbies or go on world tours after retirement.
As retirement is a long term goal, knowing how much to invest in the different phases of your life and how much you should have invested until now are crucial steps in retirement planning. There are various ways to find out how much you should have saved for retirement. One method is the 80% rule. According to this rule, you need to have 80% of your annual salary before retirement for each year. According to another method, you should have saved 50% of your annual income towards retirement by the time you hit 30, two times your salary by 40 years and four times by 50 years.
While these methods can help us to have an idea on how much we need to accumulate as per our life stage, a better way to do so would be to invest a proportion of the monthly income consistently.
The FOMO generation and millennials
For the people who are fresh graduates, may feel that retirement is in the distant past. Today, young people believe in having experiences and have a ‘You Live Only Once’ attitude. Many don’t want to invest for their retirement as they think it is a waste of money and the entire invested amount will go down the gutters if they don’t survive till 60. But what if you live?
People in the mid-20s to early 30s can start accumulating their retirement corpus by investing 5% of the monthly income regularly. Investors can start investing regularly in a midcap fund or ELSS funds through Systematic Investment Plan(SIP). Equity funds are recommended as they give higher returns in the long run. As investors in this stage have just started working, their earning potential may be limited. And if they are staying alone in a big city, essential expenses such as rent and food constitute a large chunk of their income. Hence, taking baby steps will go a long way in accumulating the desired retirement corpus.
The middle-aged people
In the late 30s and 40s, the earning capacity of individuals increases. By this time, many individuals would have stopped job switching. They are also likely to have one or two kids. While their earning capacity increases, so does their burden of financial responsibilities. Whether it is taking care of their children’s education, paying loan EMIs and insurance premiums, and vacations, all these responsibilities constitute a large proportion of their income. Hence, individuals who are in this stage should aim to save at least 10% of their income for retirement. Also, one has to keep in mind to top up their investment amount as and when they get an increment.
Almost near retirement
In this stage, many of the responsibilities would have been over. It is the time that your kids are most likely to be in college, and they are on the verse to becoming financially independent. Loans are most likely to be out of the picture by this time. With the decrease in responsibilities, you can increase your investment to 15% of your income or more. As an individual approaches retirement, say 55 years, investors can shift their investments to a debt fund. The objective of the debt funds is to protect capital. They can continue their regular investments in the debt fund. This will help individuals to set up a systematic withdrawal plan (SWP) in the debt fund and redeem a monthly sum of money to take care of the day-to-day expenses after retirement.
To summarise, one can gradually increase their investment in retirement. The key here is to start investing as early as possible.
What should you choose to save tax?
ELSS vs PPF: Which Tax Saving Instrument Is Better
“...but in this world, nothing can be said to be certain, except death and taxes.”
While we can’t get clever with death, we can be smart with taxes and save our hard earned money. One can save tax by investing in various instruments such as Equity Linked Savings Scheme (ELSS), Public Provident Fund(PPF) and National Pension System(NPS) and tax saving fixed deposit etc.
Out of these tax saving options, ELSS and PPF are the most popular. Investment of up to Rs.1.5 lakh in a financial year in these two options among others qualify for tax deductions under Section 80C of Income Tax Act 1961.
Have you invested in PPF or ELSS? In this article, we will compare these two tax saving instruments which will help you to figure out the right one for you.
Lock-in Period:Both ELSS and PPF come with a lock-in period. ELSS funds have a lock-in period of three years while PPF comes with a 15-year lock-in period. However, in PPF, you can make partial withdrawals after the seventh year. Hence, we see that ELSS has a shorter lock-in period than PPF. This means that you can redeem the ELSS fund’s units after three years. However, it is suggested that you do not redeem it, as by being invested your capital will appreciate over time.
Returns:The returns is one of the key factors that distinguishes PPF and ELSS. The government of India fixes the interest rate of PPF every quarter. On the other hand, the returns in ELSS is not assured and is linked to the equity market. If we see the historical performance of both the two options, ELSS funds, in the last ten years has given returns of 13.55%* while the interest rates in PPF has ranged from 7.6% to 8.8%.
According to research by Value Research, an investment of Rs.1.5 lakh every year over the last 20 years, has grown to Rs.79.39 lakh in PPF. While in the same time frame, investment in ELSS has increased to 2.28 crore. Hence, in terms of returns, ELSS has outperformed PPF.
Investment amount: In the case of PPF, you can only invest up to Rs.1.5 lakh in a financial year. However, there is no such restriction in the case of ELSS. While the tax benefit will apply to Rs.1.5 lakh, you can invest more and earn returns on the entire investment amount. As a result, ELSS is also a popular option to plan for long term goals.
Taxation: Gains from ELSS funds are taxed as per the equity funds and is subject to short term and long term capital gains. Short term capital gains are applicable if the units are sold before the 1st year. In this scenario, a tax of 15% will be applicable. If the units are held for more than a year, gains up to Rs.1 lakh in a financial year is exempted. If the gains are higher than Rs.1 lakh, long term capital gains will be applied in ELSS funds.
On the other hand, PPF falls under the EEE(Exempt, Exempt, Exempt) category. This means that the interest earned by investing in PPF and the principal amount is exempted from taxation.
By now, you may have become familiar with the differences between PPF and ELSS. PPF is the darling of the Indian masses, but its long term performance is not attractive while ELSS funds have given attractive returns. Also, with the interest rate trending down from 7.9 % to 7.1% (Jan - March 2023), it is unlikely that PPF will give a better return.
ELSS is not only a tax saving instrument; it can also help you to achieve your long term financial goals such as retirement. It is because you can invest over and above the Rs.1.5 lakh mark and still earn returns on the entire corpus.
If you have just started working or have no exposure to the equity market, you can invest in ELSS funds. Once you are comfortable with ELSS funds, you can start investing in other equity funds to achieve your financial goals.
In case of any queries, please get in touch with a financial advisor. He or she will be able to help you out with the best ELSS funds.
* Data as on 3rd Jan 2023
Direct Stock Vs Equity Mutual Funds
Direct Stocks vs Equity Mutual Funds: Which is Better?
If you ask anyone if they have invested in equities, the most common response that you will get from them is, ‘no baba; it is very risky. I am happy with my fixed deposits.’ Their response stems from what they have seen in their friend circle or what they have experienced. While everyone knows that equities give the highest return on a long-term basis, the risk associated with it deters many investors from investing in equities.
However, what many people do not know is that there is another smooth way to take equity exposure, and that is through mutual funds.
Mutual funds pool money from many investors and expert fund managers manage it. While you can pick up the stock of your choice when you are directly investing in equities, the fund manager takes the investment calls in a mutual fund.
Here’s some of the differences between Mutual Funds and Direct Stocks that will help you to figure out the right option for you.
You don’t need to be an expert to invest in mutual funds
When you invest in equities through mutual funds, you don’t need to be an expert in stock picking. Fund managers pick up stocks that they expect will be the best for their investors according to their investment objectives. In the case of direct equities, you will have to do the research and pick up stocks. In many cases, it is seen that many people invest in stocks as per their friend’s suggestion, and this is where they go wrong and end up with sour memories. Investing in direct stocks requires expertise. If you are new to the world of investing, investing in mutual funds will be the better option for you.
The risk in mutual funds is lesser than investing directly in stocks
The risk associated with direct stocks is higher than investing in mutual funds. Mutual funds have a diversified portfolio, and fund managers invest on an average of 30 stocks across different sectors and market capitalization. This reduces the risk associated with an individual stock. E.g., if stock A is not performing well due to some sector-specific problem, the underperformance of the stock will be offset by the other stocks in the portfolio.
Moreover, the market regulator has capped the investment in a single listed stock at 10%. That means that if the total assets of the fund are say Rs.100, then the total investment in one stock can’t be more than Rs.10. This reduces the risk when compared to investing in direct stocks, where the total allocation to a single stock in your portfolio would be higher.
Equity mutual funds are for the long run
Equities tend to be volatile in the short term, but in the long term, the returns tend to average out and give more attractive returns than other asset classes. Direct stocks can be for trading and investing purposes. However, equity mutual funds are only for the long term. Equity funds may give attractive returns if you stay invested for more than five years.
Fulfill your goals through SIPs in equity mutual funds
One of the most important parts of investing is discipline. Having a disciplined approach will make sure that you can meet your goals. Mutual funds have a facility through which you can invest a fixed sum of money periodically called as a systematic investment plan(SIP). By investing in equity mutual funds through SIP, you will be investing in a fixed amount of money irrespective of the market levels. Rupee cost averaging is one of the most important benefits of SIP. Through SIPs, you will be allotted lesser units when the market is going up and more units when the market is low. Once the SIP mandate is set, the investment amount will be automatically debited from your bank account. This gives you the best of both worlds. However, in the case of direct stocks, you do not have the option to automate your investments and pay a certain amount of money every month.
When choosing whether to go for direct equities or through mutual funds, you need to ask yourself what kind of investor are you. Do you have the market knowledge or the time to do extensive market research to pick the right stocks for yourself? Can you bear the risk associated with investing in just a few stocks? If the answer to these questions is a resounding NO, then investing in equities through mutual funds may be the best option for you.
If you want to know more about investing in mutual funds, get in touch with a financial advisor. He or she will be able to guide you and clear all your doubts. Happy Investing!
Active fund vs Passive fund
Active funds vs passive funds: Which one should you choose?
Mutual funds have become a hot topic of discussion among everyone. The general curiosity among people about mutual funds has increased, especially after the ‘ Mutual Fund Sahi Hai’ campaign that went live a few years ago. Mutual funds come in different shapes and sizes, and they can be classified into various segments. Mutual funds can be broadly classified into active and passive funds.
Actively managed funds are the most common category of mutual funds. In an actively managed fund, the fund manager is responsible for stock picking based on the scheme’s objectives. His objective is to beat the fund’s benchmark. This leads us to the concept of the benchmark. To gauge the performance of the fund, every fund tracks a specific benchmark. The benchmark is typically the broad market indices such as Nifty 50 TRI or BSE 200 TRI. The benchmark of the fund depends on the category of the fund. E.g., if the fund is a small cap equity fund, then its benchmark is most likely to be Nifty 500 TRI than Nifty 50 TRI.
Passive Funds mirror the benchmark. That means that the fund will invest in stocks as per the index. The goal of the passive fund is not to beat the index but deliver the same returns as the index. The extent to which the fund does not track the index is called the Tracking Error. Tracking error is an essential determining factor in passive investment. Tracking error is the percentage of deviation from the index. E.g., if the index has gained 5% in a month and the return given by the index fund is 4.5%, then the tracking error of the fund is 0.5%. In the second scenario, if the index fund has given a return of 5.5%, then the tracking error of the fund is still 0.5%.
There are two main reasons behind tracking errors in index funds.
The constituents and the proportion of the different companies in the index keep on changing. If there is any such significant change such as the addition and removal of stocks in the index, the fund will show a higher tracking error till the fund manager can align the portfolio as per the new changes. Large scale redemption pressures from investors is another reason behind the tracking error. If the redemption requests are more than inflows, the fund manager has to sell shares to honor the redemption requests. It will lead to a higher tracking error as the fund won’t be in sync with the index.
Difference between active and passive fund
Aims to beat the benchmark
Aims to mirror the benchmark
Fund manager plays an active role in stock picking
The fund manager does not play a role in stock selection
Has shown to give higher returns
Gives returns as per the index
Has a higher expense ratio
Has lower expense [PC1]
Objective: The objective or the goal of the active funds is to beat the benchmark. The higher the outperformance, the better is the fund. On the other hand, passive funds seek to give index returns. The lower the deviation from the underlying index, the better is the fund.
Returns: Active funds have the potential to deliver high returns as the experienced fund managers manage these funds. During a phase of falling markets, active funds tend to fall lower than the broader market.
Fund manager’s role: In active funds, fund managers play an active role in stock picking. However, there is no role of the fund manager in passive funds. The fund manager has to increase or decrease allocation to a specific stock as per as the underlying index.
Expenses: Active funds charge a higher expense ratio than passive as the fund managers play an active role in stock selection, which is not the case in passive funds.
Which one is best for you?
Passive investment is still in the nascent stages in India. Many top fund managers have beaten the benchmark by a higher margin. As the Indian market is still growing, fund managers have ample opportunity to identify growth stocks with their strong research team and beat the benchmark. Thus, investors tend to earn higher returns by investing in active funds.
Volatility is part and parcel of the Indian market as geo-economic factors like trade wars and internal factors like elections and politics play a significant role in the Indian market. Hence, by taking the active route, you can be assured that the fund will give better returns or fall less than the overall market.
One of the drawbacks of the active funds that has been a constant topic of discussion is the higher costs. However, the market regulator has addressed this issue by cutting the expense ratio of equity funds to 2.25% from 2.5% and debt funds to 2% of their daily net assets.
To summarise, in the current scenario, investors may be better off by investing in active funds as it has the potential to earn higher returns.