6 Benefits of Financial Planning

What is the first thing that we do to accomplish our career goals and other goals? We plan. Planning is the first step towards fulfilling our goals. Similar is the case with our finances and financial goals. Financial goals are the goals you hope you to achieve and money plays an integral part. 

Proper financial planning will help you achieve these goals. Financial planning is a step-by-step process to fulfil various financial goals. Just like any other plan, a financial plan acts as a guide to navigate the various financial aspects of your life.

Let us take an example. If you want to plan your child’s education and the current cost of the course is Rs.20 lakh. If your child’s education is five years away, you may have to accumulate more than Rs.20 lakhs, say Rs. 25 lakhs. Financial planning will provide you with a step-to-step process to save up money to fulfil your child’s dream education while covering other important aspects of your finances. 

Benefits of financial planning

There are many benefits of financial planning. Financial planning will help you to:

1. Streamline your savings and expenses

Creating a financial plan will give insights into your income and expenses. While we have a fair idea of our income, most of us have trouble figuring out our expenses. When you check your expenses, you can find out the ways to cut down your costs and save more. In this way, you would spend money consciously and take a disciplined approach towards your money.

2. Prepare for emergencies

Emergencies come unannounced. Creating an emergency fund is one of the first steps of financial planning. An emergency fund with at least 6 months of expenses can help you tide over emergency situations such as job loss, urgent car or home repair and accidents. An emergency fund will also help to keep your savings earmarked for other goals safe.

3. Secure your family

Having an adequate insurance cover is also an essential step in financial planning. It will provide peace of mind for you and your family members. In your absence, insurance cover will take care of your family’s needs and help them fulfil their goals with no hassles. Health insurance will cover your hospitalisation expenses so that hospital bills do not affect your savings and you can steer clear of debt.

4. Plan for your goals

As financial planning opens up money saving avenues, it is important to use the money to save towards your financial goals.  Financial planning will help you understand your goals better, the impact of the goal on other areas, prioritise your financial goals and plan your goals.

Financial planning will check the various parameters of your goals such as timeframe, current cost and future cost and chart out a route with the required investments. You can track the development of goals and revise your plans accordingly. Buying a house, children’s education and marriage, and foreign vacations are some financial goals that need planning.

5. Plan for your retirement

Financial planning will assist you to plan for your retirement. The earlier you plan for your retirement, the lesser amount you will need to save to accumulate the same amount. This is the power of compounding. Financial planning will help you figure out the amount that you might need after retirement to maintain the same standard of living and invest accordingly.

6. Save tax

If you pay a lot of tax, you can lower your tax outgo by taking advantage of the various tax saving options. Financial planning lets to plan for your taxes in advance, invest in tax saving instruments and take other legal avenues to reduce your taxable income. Low taxable income may translate into higher savings toward your goals.

Conclusion: If you are serious about having a disciplined financial life and fulfilling your life goals, financial planning is a must. Proper financial planning with your financial advisor will help you fulfil your financial goals, save for emergencies, get adequate insurance, plan for retirement and save taxes. So, consult your financial advisor today.

4 Ways to Prioritise Your Financial Goals

Most of us have many financial goals. Buying a car, buying a house, and vacations are a few of the different financial goals. However, if we list all our financial goals, we may get overwhelmed looking at the things we want to achieve. Hence, just as we prioritise different aspects of our life, we need to prioritise our financial goals.

In this article, we will show you how to prioritise your financial goals in four ways.

Steps to prioritise your financial goals:

Prioritising your financial goals will depend on the importance of your needs and wants. Financial Planning Pyramid is a simple way to prioritise your financial goals and plan for them accordingly.

1. Check your financial health

Before you decide on your financial goals, it is important to check where you stand in terms of your income, expenditure, assets and liabilities. These aspects form the foundation of everyone’s finances.

To fulfil your financial goals, it might be important to cut your expenditures to build assets. If you have any bad debt such as credit card or personal loan debt, look at paying off your debt as soon as possible. Check these aspects and determine the proper ratios between them. Checking your financial health will also assist you in planning for your goals.

2. Manage your risks

Life is uncertain. Risks such as untimely death, job loss, health problems, and accidents may hurt you and your family’s finances. Situations such as hospitalisation may drain all your lifelong savings. Hence, insuring these risks is the starting point for a stress-free financial life.

List down all such situations and build a plan as per your requirements. E.g. having a backup plan for running EMIs or a child’s education plans.

You can park around six months of expenses in an emergency fund to take care of emergencies such as job loss, minor health problems and urgent house repairs.An adequate health insurance will help you take care of your hospitalisation expenses. Life insurance or term insurance is important to safeguard one’s life. A life insurance cover will allow your family members and dependents to lead respectable life and fulfil their goals. 

3. Primary Goals or Important Goals

After you have taken care of the different risk aspects, it is time to invest towards your goals. If you have many financial goals, you can segregate them into two parts: primary goals and secondary goals.

Primary Goals are the important goals that you need to prioritise over secondary goals. Buying a house, retirement planning, and planning for children’s education are a few of the common primary goals. These goals can differ from person to person. So choose the goals that are important to you.

Once you have made the list of your primary goals, figure out the current cost of these goals and the expected future cost. Also, decide the timeline of these goals.

Now, you need to choose the right investment products to fulfil your goals. Systematically investing in an equity fund through Systematic Investment Plan(SIP) can help you plan and reach your long-term capital goals. 

4.Secondary Goals

Your wants determine your secondary goals. You can postpone these goals with no adverse impact. Foreign holidays, buying a car and a second holiday home are a few examples of secondary goals. As the list of secondary goals may be endless, you can plan for your secondary goals after you have planned for your primary goals. It is a good idea to fund your secondary goals through savings rather than taking loans.

Depending on the goal timeline, you can have a separate investment strategy for your short-term and long-term goals. 

Conclusion: Investing for your financial goals is a better option than investing for returns. However, we may have many financial goals and investing in each of these goals may not be the right approach. Prioritising your goals can help you focus on the important aspects and goals before secondary goals. This will streamline your financial life and take care of you and your family members. Consult us to know more. 

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. 

Gold Mutual Funds or Gold ETFs? Which one is right for you

"Don't put all your eggs in one basket"

This old saying is still true. And, one of the areas of our life where we should not keep all our eggs in the same basket is our investment portfolio. Diversification of our portfolio is not a luxury but a necessity. The recent situation has made us all aware of the importance of diversification and has shown us that we cannot rely on just one investment option.

While the equity markets may recover, having a haven asset like gold can help you to put your worries on the back burner. Typically, gold and equity returns move in the opposite direction. Gold performs better when clouds of pessimism float in the market.

Please remember to see gold as a hedging option rather than an investment option. The role of gold in your portfolio is to protect your portfolio from drastic swings. The price of gold rises whenever there is uncertainty in the market. And the prices come down when normalcy returns.

We Indians love to hoard gold and we are the top consumers of gold. However, buying physical gold is not an effective way to invest in gold.

There are a few ways to invest in gold with none of the risks associated with physical gold. Gold mutual funds and gold ETFs are the two investment options offered by mutual fund houses that let you take part in the price movements of gold online.

In this article, we will discuss gold ETFs and gold mutual funds to help you to decide the right choice for yourself.

What is Gold ETF?

Gold ETFs are funds that invest in physical gold of 99.5% purity. As a result, the returns given by gold ETFs are in tandem with the gold returns.

One unit of the gold ETF is equivalent to one gram of gold. The units of gold ETF like stocks are listed on the stock exchanges. This makes gold ETFs a liquid investment. However, the liquidity may vary across mutual fund houses.

A Demat account is needed to invest in gold ETFs.

As gold ETFs are listed on the exchanges and there is no active involvement of the fund manager, the management cost of these funds is very low compared to other actively managed funds.

What are gold mutual funds?

Gold mutual funds are open-ended funds that invest in gold ETFs. As gold funds invest in gold ETFs which are backed by gold, the returns given by gold funds are similar to gold returns.

Gold funds are an easier investment option for retail investors who don't have a Demat account.

Investors with a regular sum of money can also invest in gold mutual funds through Systematic Investment Plans(SIP). In SIP, investors can invest a specific sum of money periodically.

The management cost of gold ETFs can be a tad higher than gold ETFs.

Who should invest in Gold ETFs and gold mutual funds?

Investors who have a Demat account and want to take benefit of price fluctuations in gold can invest in gold ETFs. As gold ETFs are listed on exchanges and offer easy liquidity, investors can invest in gold ETFs from the short-term horizon.

Gold mutual funds are better suited for retail investors who don't have a Demat account. Investors can invest in gold funds to plan for their children's marriages or diversify their portfolios through the SIP route.

How are Gold ETFs and gold funds taxed?

As GoldETFs and gold funds are non-equity investment options, capital taxation is similar to debt funds. Short-term capital gains and long-term capital gains taxes are applicable on units held less than 36 months and more than 36 months respectively. Short-term capital gains tax is applicable as per your tax slab while you have to pay 20% of capital gains along with indexation benefits.

Conclusion:

If you want to invest in gold, you can look at investing in gold mutual funds or gold ETFs than physical gold. Gold ETFs and funds have several benefits over physical gold as there are no risks that are associated with buying physical gold. Feel free to call us to know more about Gold Funds.

How to Calculate SIP Returns?

There is no doubt that Systematic Investment Plans (SIP) has become one of the popular means to invest in mutual funds. After setting up an SIP, the investors invest a pre-determined amount of money at regular intervals in a specific mutual fund. You can invest in several mutual funds through SIP.

Many investors have the misconception that SIP investment is safer than onetime investment. It is just a myth and the returns on SIP investments depend on various factors such as the mutual fund category, the performance of the market and time.

In this article, we will discuss the different ways to calculate SIP returns.

Return Calculation for SIP

The calculation of SIP returns is a little different from calculating returns on onetime investments. It is because SIPs are regular investments throughout the course of a period, while lump sum investment is a onetime investment.

One way that most investors calculate SIP returns to understand the growth in their SIP investments is by adding the total investment amount in the year and calculating the returns on the entire investment. However, it is not the right way to calculate the returns on SIP.

Here are some methods to calculate SIP returns:

Absolute Return

Absolute return is the easiest way to calculate mutual fund returns. It is also known as the point-to-point return, as the initial and present unit price (NAV) is used to calculate the returns.

Absolute return = (Present NAV – initial NAV) / initial NAV x 100

The absolute return can be used to calculate the annualised returns.

Let us assume that the NAV of a mutual fund has increased from 20 to 35 in 7 months or 210 days. In that case, the absolute return is 75%.

However, considering absolute returns to calculate SIP returns won’t be right, as the investor does not invest the total amount of SIP at one time.

Simple Annualised Return

The returns that are shown are typically yearly returns of an investment option. But what if your holding period is less than 12 months? In that case, you can annualise the returns.

Simple Annualised Return: ((1 + Absolute Rate of Return) ^ (365/number of days)) – 1

If we take the example where the absolute return was 75%, the annualised return will be

= {(1 + 75%) ^ (365/210)} – 1 = 164%

XIRR Method

XIRR is the most widely used method to calculate SIP returns as it considers the different cash flows to calculate the internal rate of return.  

You can use the XIRR formula in excel to calculate the SIP returns.

XIRR formula in excel is: XIRR (value, dates, guess)

Conclusion

Calculation on SIP is little different from return calculations on onetime investment, as the SIPs are regular investments and the investment amount may vary. XIRR is the best way to calculate SIP returns. You can also use a SIP calculator to check out your SIP returns. 

 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.

What Is Digital Rupee?

The demand for private cryptocurrency has witnessed tremendous demand in the last few years. Many illegal activities and money laundering have taken place through private cryptocurrency transactions. And the government of India sees the mushrooming of these private cryptocurrencies as a threat to the formal financial system.

To tackle these issues and more, the Indian government has clearly mentioned that cryptocurrencies will never be legal tender. In this year's budget, the finance minister announced RBI would launch a digital rupee that will work on blockchain and act as a legal tender.

This article will talk about the digital rupee and how it differs from other cryptocurrencies.

Countries around the world are planning to launch their cryptocurrency. The cryptocurrency that a country's central bank launches is the Central Bank Digital Currency or CBDC.

The digital rupee, when introduced, would be India’s CBDC.

Digital rupee, as the word sounds, will be the digital version of the rupee. Currently, the Indian currency is available as paper notes and coins. After introducing the digital rupee, the digital rupee will be another form of Indian currency. So, people can exchange a paper note of Rs.100 for Rs.100 for the digital rupee.

The Reserve Bank of India will issue the digital rupee, and the central bank will decide on the supply of the digital rupee just like it does for regular paper currency.

Benefits of Digital Rupee

The government and experts believe that the digital rupee will bring about a change in payments and make digital transactions faster and safer. 

Move towards a cashless economy: Compared to other developed countries, cash is widely prevalent in India. There is a cost associated with paper currency, such as printing, storing and transportation. It is estimated that the cost of a paper note is 17% of the value of the paper note. Moreover, the paper notes don't last forever, and new paper notes have to replace soiled paper notes.

The introduction of the digital rupee may reduce our dependence on paper notes. The government may end up saving money in this way.

The introduction of the digital rupee may be the first step towards an ultimately cash-free India.

Prevent money laundering and illegal activities

Many money laundering and illicit activities are currently taking place through cash and private cryptocurrencies. The anonymity of cash and private cryptos lets people continue with their dealings without getting caught. But, as the digital rupee will be in the digital format, the government may be able to track each rupee. The wide adoption of the digital rupee may make it harder for people to carry out money laundering and other illegal activities.

Difference between the digital rupee and digital transactions

One of the key differences between the digital rupee and digital transactions like UPI and net banking is the underlying technology. CBDCs use distributed ledger technology (DLT), often combined with traditional central bank and payment infrastructure in a hybrid architecture.

Moreover, an intermediary, such as a bank or a platform like Google Pay, is needed to carry out digital transactions. However, in the case of the digital rupee, the RBI can directly issue a digital rupee through a new platform without the help of a bank or another company.

UPI payments are now made with the digital equivalents of current cash notes. This means that every rupee sent via UPI is backed by paper currency.

Difference between the digital rupee and private cryptocurrency

The digital rupee or any other central bank digital currency (CBDC) isn’t a cryptocurrency in the truest sense.

A CBDC will be created and stored in a more centralised manner than other cryptocurrencies, which are stored on a decentralised blockchain network.

This means that the digital rupee can be monitored and regulated, unlike a private cryptocurrency. Your personal information will be 'linked' to your CBDC and may be subject to examination and regulation by the authorities.

Conclusion

While the RBI may come out with the digital rupee in the financial year 2022-23, it may go through a series of trials before the citizens at large can actually access the digital rupee.

It would be interesting to follow the developments of the digital rupee.

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 Mutual Fund Vs NPS: Which one is better for you?

After retirement, life offers fresh experiences. It is time you start enjoying your life stress-free. But it can only happen if you have sufficient funds, as working in old age seems a little overwhelming. If you plan your retirement well during your working years, you will worry less and enjoy more.

Currently, different investment options can help you to plan for your retirement. But in this article, we will look at the two investment options: Retirement Fund and National Pension System.

What is a retirement mutual fund?

A retirement mutual fund is a solution-oriented mutual fund that aims to help people plan for their retirement. Typically, these funds invest in a mix of assets such as equities and debt. These funds come with three plans with different asset allocations. The aggressive plan has a higher equity exposure and is more suited for young investors. On the other hand, the conservative plan has the lowest equity exposure for investors close to their retirement.

Advantages of retirement funds:
The lock-in period of five years or until retirement age (whichever comes first) can assist you in staying focused on your retirement plan.

       You can take advantage of automatic rebalancing of your portfolio by switching between different plans.

       It takes into account the changing risk tolerance levels and fluctuating levels of comfort that investors have with risk

What is NPS?

The National Pension System(NPS) is a scheme launched by the government of India to benefit employees in the public/private sector, including the ones in the unorganized sector. Individuals can contribute a minimum of Rs.6000 per annum in one go or Rs.500 every month.

The scheme matures at 60 years of the subscribers and may be extended to no more than 70 years. In specific situations, subscribers can withdraw up to 25% of the money invested after three years of opening an NPS account.

Benefits of NPS:
Comes with tax-deduction benefits

       Government-backed scheme

       Ease of access

Retirement fund Vs NPS

Though the objectives of both schemes may be similar, they have basic differences. Let’s discuss them.

Equity Exposure

In the case of retirement funds, the equity exposure of the aggressive plan of the fund is the highest. The maximum equity allocation of these plans depends on the respective fund house. So, there is no mandated maximum equity exposure.

However, in the case of NPS, the maximum equity exposure permitted is 75% up to 50 years under the active choice.

Investment plans:

Retirement funds come with three plans. Investors can choose the plan that best suits them, and the fund manager takes the investment decisions.

While in NPS, you have two choices: auto choice and active choice. In auto choice, a manager is appointed to take care of your investments, while in active choice, you’re free to choose different types of investments as per your requirements.

Taxation

Currently, there are no tax benefits for investing in a retirement mutual fund.

However, in the case of NPS, investments up to Rs.1.5 lakhs come under section 80C. In addition, an additional amount of Rs 50,000 is exempted. This means that a total of Rs 2,00,000 per year is exempted from tax under NPS. The NPS falls under two sections: 80CCD (1) and 80CCD (1B).

However, after retirement, the income from annuities is applicable to tax.

Withdrawals

Investors can redeem their investments after five years or when they turn 60. However, withdrawal from NPS is only allowed under special circumstances. Under regular circumstances, when a subscriber becomes 60 or reaches the age of superannuation, they must spend at least 40% of the total pension fund to buy an annuity that would pay a regular monthly income. The remaining money is available for lump sum withdrawal.

Which is a better option: retirement funds or NPS?

When it comes to investments, you must remember that no investment is right or wrong. Any investment that aligns with your financial goals is perfect for you. If you have pre-set retirement goals like traveling the world, retirement funds may be an ideal option for you. For example, you can invest in equity instruments that would generate relatively higher returns but do not forget they come with a little high risk too. NPS may be ideal for individuals who want a fixed monthly income after retirement.

However, it is best to consult a financial expert while making long-term financial decisions.

Can NRIs Invest in Mutual Funds in India?
Are you an NRI looking to invest your money in mutual funds in India? Look no further!

In this blog, we will cover in detail if you can invest in mutual funds as an NRI, the process to invest, and the taxation and redemption process.

Are NRIs allowed to invest in mutual funds in India?
The short answer is yes, of course. The Foreign Exchange Management Act of 2000 has allowed Foreign Institutional Investors and Non-Residents of India to invest in mutual funds. The Reserve Bank of India (RBI) has put forward the rules for investing and redeeming from mutual funds in India. So if you follow certain rules/conditions, you can invest in mutual funds as an NRI.

Procedure to invest in Mutual Funds for NRIs
The procedure to invest in mutual funds for NRIs is not complicated. Let's have a look at it.

Setting up an account

If you're an NRI wanting to invest in mutual funds in India, you must set up an NRO or NRE account. Fund houses don't accept foreign currency payments, and you can't park your money in savings accounts, so you'll have to open one of the above-mentioned accounts.

Investing (either of 2 methods)

As an NRI, you have two methods to invest in mutual funds, i.e. direct method and through power of attorney.

• Direct method: You can directly invest in MFs in India through this method. You may be asked to furnish your KYC details and other documents, such as recent photographs, bank statements, resident proof of other countries, copies of PAN cards, etc. An in-person verification can also be asked for and done via the Indian embassy.
• Power of Attorney: You can invest in MFs through Power of Attorney by allowing a third party to make transactions on your behalf. You may need your and Power of Attorney's signature on KYC papers for this.

Getting the KYC done

Your KYC process must be completed as an NRI to invest in MFs. To complete your KYC process, you may be asked to submit a few documents, such as photographs, current address details, copies of passports, etc. It is also possible that you will be asked to complete an in-person verification process.

Note: If you're in Canada or USA, you may be asked to submit additional documents. Also, a few fund houses do not accept investments from NRIs in these countries. Hence, check for those who accept investments from these countries too.

Redeeming your investments

There is no one fixed redemption process that all mutual fund houses in India follow. Hence, it would help if you read the policies related to redemption before investing your money.

A basic process that each fund house follows is to credit your entire corpus, including the invested amount and gains, to your respective NRE or NRO bank accounts. The amount credited will be done after deducting taxes.

Taxation on Mutual Funds
The gains from mutual funds are taxable. The rate of tax depends on the holding period and asset class.

Taxation on equity-oriented funds

STCGs are taxed at a 15% rate when these funds are redeemed within 12 months.

LTCGs are taxed at a 10% rate (without indexation for amounts exceeding Rs 1 lakh) if withdrawn after 12 months.

Capital gains on debt funds

STCGs (i.e. when debt fund units are redeemed within three years) are taxed at your income tax slab rate.

LTCGs (i.e. when such funds are redeemed after three years) are taxed at a 20% rate after indexation and surcharges and cess as applicable.

If India has signed a DTAA, i.e. Double Taxation Avoidance Treaty Agreement with your country, you won't have to worry about paying double taxes on your gains. However, TDS is deducted from capital gains when you redeem your investments.

Final words

As an NRI, you are allowed to invest your money in mutual funds in India, provided that a certain fund has allowed investments from your country. Hence, you must invest in mutual funds as an NRI only after performing detailed research.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.

Here’s How To Select The Right Type Of Mutual Fund

We all love to have choices in different aspects of our life. Whether it is books, clothes or a career, options are essential.  Everyone has different inclinations and tastes, and hence, selecting the right choice is of utmost vital.

Similar is the case with mutual funds. Mutual funds also come in various shapes and sizes to suit every investor and make their dreams come true. No matter what kind of investor you are or what your goals are, there will be a mutual fund for you. But finding the right type of mutual fund may not be easy for a lot of new investors.

Mutual funds can be classified into various categories based on their assets, options etc. In this article, let us try to understand these types of mutual funds that will help you to find out what will suit you the best.  

Based on asset class:

Equity and debt are two major types of assets where mutual funds invest. They have different objectives. While equities are mostly for capital appreciation in the long term, the aim of the debt is capital protection along with moderate returns.

There are three different types of mutual funds based on the asset classes: equity funds, debt funds and hybrid funds.

The type of fund that will suit you the best will depend on your investment horizon. For example, if you want to buy a house in 15 years, then 15 years is your investment horizon. In another instance, if you are planning for an exotic vacation in less than a year, then one year is your

limit.

For long term goals of five years and more, an equity fund is the best option. Equity funds tend to be volatile in the short run, and the risks are evened out in the long run. Debt funds are good investment options for short term goals of around three years or less. For your financial goals of 3 to 5 years horizon, hybrid funds can be the ideal category.

Open-ended and close-ended funds

A fund remains open for initial subscription for a limited number of days during its launch. It is the new fund offer (NFO) period. In close-ended funds, investors can only invest during the NFO period. Close-ended funds come with a specific period of say three years. Also, investors do not have the option to invest more or exit during the period. After the period is over, investors have to redeem the mutual fund units. Also, a systematic investment plan(SIP) is not available for close-ended funds.   

Open-ended funds do not have these limitations.  These funds remain open for entry and exit, making it an ideal choice for goal planning. It helps you to adjust your goals according to your life stage. It allows prioritising your goals. For example, buying a home is your priority; you can invest more and increase your SIP regularly. Once, you reach your target amount, you can easily redeem your units. You do not have to wait for the maturity date. Hence, an open-ended fund is a  better option than a close-ended fund.

Growth and dividend options

Fund houses also offer two options: growth and dividend option. In the growth option, the fund reinvests the profits back in the fund. As a result, the net asset value (NAV) of the fund keeps on rising as the scheme gains. This helps you to take advantage of the power of compounding. In the case of the dividend option, investors get the profits declared by the fund. Hence, the NAV comes down as and when the dividends are declared.

The growth option is better to build wealth over time and fulfill your financial goals. And if you're looking for a regular income source, then you can choose a systematic withdrawal plan (SWP) instead of a dividend option. In the case of SWP, you receive a fixed sum of money regularly, and the remaining corpus in the fund will continue to grow.

Hence, go for the growth option to fulfill your financial goals. 

Conclusion: We have seen that the category and type of fund that you need to select depending on your financial goals. Moreover, the growth option in open-ended funds is a better option for investors. It gives the benefits of compounding, along with liquidity.

To know more, consult your financial advisor.

3 Asset Allocation Strategies That You Need to Know

Most of us want to reduce the risk and get a better outcome in our investment portfolio or other areas of life. And, one of the ways to improve investment returns is through asset allocation. Asset allocation is an investment strategy that involves investing in a variety of asset classes to optimise risk and return.

Historical data have shown that the various asset classes, such as equity, fixed income or debt, and gold, indicate a low or negative association. As a result, diversification across asset classes can significantly lower risk while potentially generating higher long-term returns.

There are three main ways to carry out asset allocation: strategic asset allocation, tactical asset allocation and dynamic asset allocation.

Strategic Asset Allocation

If a mutual fund has a static asset allocation mix, then we can say that it follows a strategic asset allocation. The static asset allocation mix is usually in a range, and the fund managers can invest in the investment instruments within that range.

For example, if the asset allocation of a fund mentions that 65-80% of its assets need to be in equity instruments, then the fund manager has to invest 65-80% of the portfolio in equities at all times. In this case, the state of the market and economy doesn’t influence the fund’s asset allocation.

The fund’s asset allocation may change as the price of various investment options such as stocks fluctuates regularly. So, the fund manager may need to rebalance the fund’s portfolio from time to time to maintain the asset allocation breakup of the fund.

Let us consider the previous example where the fund maintains an equity allocation within 65-80% of the portfolio. The fund’s equity allocation may cross the maximum limit if the equity market rises more than the other assets. In this scenario, the equity allocation of the fund may become 90%. So, the fund manager has to sell stocks and/or buy other asset class instruments such as debt securities to bring the asset allocation back to the intended asset allocation.      

Tactical Asset Allocation

You may feel that strategic asset allocation is too rigid. However, market conditions may generate additional returns from time to time that a static asset allocation strategy may be unable to take advantage of. Tactical Asset Allocation is a variation of Strategic Asset Allocation in which the fund managers may deviate a little from the strict asset allocation to take advantage of the market opportunities and earn extra returns for the investors. 

To carry out tactical asset allocation, one needs to know market timing and in-depth market and investment knowledge. For instance, if the strategic asset allocation calls for 70% in equity and 30% in debt and the fund manager believes that equities in the short run can provide attractive returns, then they might hike up the equity allocation to 75% to take advantage of the possible upswing in the equity markets. And after the window of opportunity closes, they can revert it to the original asset allocation.

Dynamic Asset Allocation

The counter-cyclical asset allocation method is the most prevalent dynamic asset allocation method implemented by mutual funds. In this asset allocation method, you regularly modify your asset allocation mix based on market conditions. When stock valuations fall, i.e., the stock prices become cheaper, these funds increase their equity allocation and reduce debt allocations. This is also known as a counter-strategy because it is based on the investment principle of buying low and selling high. For dynamic asset allocation, different fund managers utilize different valuation criteria. The most commonly used valuation metrics are the P/E and P/B ratios. In a dynamic asset allocation strategy, some fund managers employ multi-factor asset allocation models, which integrate two or more components, such as P/E, P/B, Dividend Yield, and so on.

Conclusion: There are different asset allocation strategies that investors and fund managers use. Strategic asset allocation, tactical asset allocation and dynamic asset allocation are the three common asset allocation strategies.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.

Before we understand the importance of financial advisors, answer this one simple question.

Did you take the help of a CA or a tax consultant to file your ITR returns this year? While it can be done for free in the income tax department, we still consult our tax consultant so that we don't go wrong anywhere. 

However, when it comes to managing money, most people do not want to take any help from financial planners or advisors. There are many reasons for this attitude. Some think it is a waste of money, while others believe that they can handle their money.

Financial advisors can provide immense value to any individual’s portfolio.

Here’s why you need a financial advisor:

Assess your financial health:

An advisor examines an individual’s financial situation and health. He may pinpoint weak points that need strengthening. For example, the advisor may alert you about wasteful expenditures. He may identify investments that are not giving optimal returns and accordingly suggest you the right way forward.

Teach you the basics of investing:

There are many resources on Google through which you can learn the basics of investing and personal finance. However, there is a high probability that you get lost in this maze. Some articles will suggest plan A, while others will tell you to follow plan B. This can increase the confusion. And as a result, you may postpone starting your investment at a later date.

When you have a financial advisor, he or she will make sure that you understand the basics of investing. The world of finance is vast. Hence, it is always better to know and understand the parts that are important to you.

Choosing the right products to invest and aligning your investments with your goals

Even if you know the basics of investing, choosing the right products to invest may be uphill for many. It is because there are different types of products in a particular category. Also, the companies keep on coming up with products, some of which are too complicated to understand.

A financial advisor will suggest the right financial products for you and ignore the noise. Financial advisors regularly meet the investment teams of the financial products to understand their investment rationale. For example, in case of mutual funds, financial advisors use a lot of ratios and parameters that help them to collate the list of top funds under the different categories. In addition, they regularly compare the various financial products with its peers to suggest you the right product.

Selecting the investment product will not mean much if it is not aligned with your financial goals. Not just your financial goals, the investment product should also go with your risk-taking capacity and time horizon. E.g., the best small-cap fund may not be the right choice if your investment horizon is just three years.   

Help you to stay focused on your goals

While we may like to believe that personal finance and investing is all about numbers and selecting the product that has given the highest returns in the recent past, it is mostly about habits. It has more to do with behaviour and discipline than returns. In this journey, many investors tend to make avoidable mistakes.

Investors are likely to be carried away by discussions with their colleagues and friends. They become tempted to follow the footsteps of their friends, even without knowing if that will be the right approach for them or not.

In this scenario, the financial advisor will handhold you and suggest you the right steps and make you stay on the course to reach your financial goals.  Also, financial advisors carry out portfolio review at regular intervals to make sure that you are on the right track to achieve your financial goals.

These were the four main reasons why having a financial advisor is the best that you can do for your financial health.

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.

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.

Conclusion:

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 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.

Active 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

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

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. 

Worried about investing in debt funds? Debt funds are now safer

In the last few months, there has been a lot of volatility in the debt market. For many investors, investing in debt mutual funds was riskier than equity funds. It all started with the IL&FS fiasco in September 2018 when the group companies defaulted on their payments. Many mutual fund houses had invested in these companies. Essel Group and other similar episodes followed. In short, it has been a wild ride for debt fund investors who had invested in liquid funds and other debt funds with the notion that debt funds are completely safe.

To safeguard the interest of the mutual fund investors, the market regulator, the Securities and Exchange Board of India (SEBI) has laid down guidelines that will govern debt funds.

Here are some of the changes laid down by SEBI are as follows:

Liquid funds to hold at least 20 percent of assets in liquid assets

This move aims to enhance the liquidity of liquid funds. Mutual funds have to keep 20% of their assets in liquid and safe instruments such as cash, government securities, treasury bills and repo instruments. It will make sure that the fund houses will be able to manage large-scale redemption requests without adversely affecting the unit price (net asset value) of the liquid funds.

Cap on the maximum exposure to one sector

Liquid funds will now not be able to invest more than 20% in a single sector. The earlier limit was at 25%. This aims to reduce the risks associated with a single sector. Also, the exposure of liquid funds in housing finance companies cannot be more than 10%, down from 15% earlier. This is over and above the 20% limit on each sector.

Penalty for withdrawing before seven days

Liquid funds do not have any exit loads, and as a result, many large investors used to redeem from the funds within a day or so. As large investors such as institutions have the lion's share in liquid funds compared to retail investors, the question of the stability of liquid funds had sprung up. Now, mutual funds can impose a graded exit load on investors withdrawing before seven days. It means investors who redeem after a day will have to pay a higher exit load than the investors who redeem later, say on the sixth day.

All papers to be valued on mark-to-market:

Securities that mature over 30 days will now have to be marked according to the market rate, i.e. on a mark-to-market basis. Earlier, securities that matured after 60 days had to be mark-to-market. With this new change, NAVs of liquid funds will reflect a realistic value of the fund. However, it is also likely that the rate of fluctuation in NAV may also go up.

Debt funds to invest only in listed NCDs and CPs

Many companies raise nonconvertible debentures (corporate bonds) and commercial papers through private placements. Now, funds can only invest in listed securities, and no private placements will be allowed. As a result, it will increase the transparency of the quality of the papers, as listed securities have to adhere to the regulations and disclose accordingly. 

Tighter lending norms:

Mutual funds can now only lend to corporate against pledged equity shares with a cover of at least four times. Simply put, if a mutual fund lends Rs. 100 to a group company, the company would have to pledge shares worth Rs.400 with the mutual fund. If the share prices fall, the company would have to make up for the loss by paying cash to the fund. If that does not take place, the fund house can sell the shares to recover the money and to protect itself against a further fall in the share prices of the borrower company. With this new regulation in place, fund houses have no choice but to sell the pledged shares if the company’s share price falls to recover the money from promoters.

These were some of the crucial steps taken by SEBI to make debt funds safer for investors like you and me. So, leave your worries behind and start investing in debt funds. Understanding debt funds may be hard, and this is where a mutual fund advisor comes into the picture. He will be able to guide you better and clarify all your doubts regarding debt funds.

Why you should get term insurance right now

We all love our families and want the best for them. We try to fulfill their wishes to the best of our abilities. One easy and simple way to show your love for your family and to make sure that they continue to live a dignified life even in your absence is to take a term insurance.

Life is unpredictable, and there will be times when things don’t go according to the plan. Term insurance is one of the simplest financial products which can safeguard your family in times of an unfortunate event.

Getting insurance is the first and most crucial aspect of financial planning. In term insurance, the beneficiary receives the sum insured after the death of the insured person. However, one needs to remember that the term plan does not pay back any amount if the insured person survives the tenure of the policy. You can avail of higher life cover by paying a lesser premium.

Who should take term insurance?

If you have dependents whether it is your spouse, young children or elderly parents, taking insurance is necessary. However, even if you have no dependents, but have outstanding loans like home loan or vehicle loans, taking term insurance is also essential in this scenario.  

It is beneficial to take term insurance at the earliest because the premium paid and the age of the insurer is directly proportional. This means that the longer you wait to get term insurance, the higher will be your premium. The premium is likely to increase as the number of responsibilities and health issues may crop up. Also, unlike health insurance, where the premium covered keeps on growing, the premium for term insurance remains the same throughout the tenure.

What should be the ideal insurance cover?

Figuring out the ideal insurance cover is one of the most important things to consider when taking a term insurance cover.

A cover of Rs.50 lakh may be sufficient if you don’t have dependents. But it will not be enough after you have a family. You will have to increase your cover after every significant event like marriage, the birth of the first child and second child etc.

As a thumb rule, life cover should be equivalent to 10 times of your annual income. However, that is just the tip of the iceberg. Loans and debts, future expenses, savings and investments, are some of the other factors that should be kept in mind while calculating the insurance cover. The outstanding dues on your home loans and vehicle loans should be considered in the term insurance. However, you don’t have to calculate your credit card debt in this scenario.

The other important part is providing for future expenses such as children’s education, marriage and day to day expenses. Consider a reasonable inflation rate while calculating future costs. You may also be investing in these goals through systematic plans in mutual funds, but it is essential to consider these goals as accumulating for these goals may come to an abrupt to end in your absence. Having adequate term insurance will make sure that your children don’t have to compromise with their education.  You can use a ‘Human Life Value’ calculator available on the websites of insurance companies to find out the ideal life cover for you. Don’t make the mistake of rounding of the amount to the nearest round figure.  It is better to take higher insurance cover than to take less insurance cover.

You can take the help of a financial advisor to calculate and find out the right amount necessary for you.

Another essential aspect of term insurance is tenure. Many people make the mistake of taking the term insurance to 75 or more. Typically, you should consider term insurance till your retirement age of 60 as the family’s dependency after your retirement will come down drastically.  

Term insurance is one of the vital steps in financial planning. Take one now and relax. 

Investing as a newbie

After one lands in a job, the first thing that most parents will tell is to save money.  Saving money, especially for someone who is in their first job and living alone in a big city, may not be easy. But it is also not difficult. Saving is necessary as it will help you to tide over emergencies and fulfil your financial goals. Here are a few essential steps that you can take as a beginner.

Your salary is less than what you get

We always think that we will start investing once we have enough money. But it is never going to work out this way. One way to change this habit is to imagine that you get less than your take-home salary. For, e.g., You can imagine that your salary is Rs.30,000 if your actual salary is Rs.35,000. Thinking in this manner will help you to save a little amount of money every month.

How much should I save/invest?

Knowing how much to save is on everyone’s mind, but there is no easy answer to this question. It is because the lifestyle and needs of different individuals varies. While it may be easy for someone who stays with their parents to save 95% of their income, it may not be the same for someone living alone in a city.  As a rule of thumb, it is advised to save at least 20% of your income for your future goals. If you can’t start at 20%, start at 10% and gradually increase your allocation. The main point is to start somewhere.

What to do with the savings?

The next question that must have automatically come to your mind would be what to do with the savings. It is better to invest in your financial goals. However, it is most likely that you still haven’t figured out a financial goal. If you don’t have a financial goal in sight, the easiest way to save money would be to set up a one-year recurring deposit. Investing in an RD is extremely safe and very easy to open. Nowadays you don’t have to fill documents or visit the bank branch. You can create an RD in just two minutes through your bank app. All you have to do is add the tenure, the date on which money will be debited from your savings account, and the sum of money that you want to save every month. Remember to set the date within the first week of the month. 

Instead of RD you may also look at Liquid Mutual funds where you get the convenience of withdrawing at anytime just like you saving bank account and also get a chance to earn better return than savings account.

Once your financial goals are decided you can channelize your RD money or Liquid fund money into Mutual funds.

How to invest in mutual funds?

Mutual funds are an effortless and popular way of investing. Mutual funds invest in a pool of stocks and securities, and a dedicated fund manager manages it. It is especially useful for individuals who do not have the time and expertise to select stocks. To invest in mutual funds, every investor needs to complete the KYC process. The KYC is a one-time procedure. Your financial advisor will be able to help with the process. After the required processes are in place, it is time to select mutual funds. There are many categories of mutual funds for different goals and different types of investors. You should discuss your financial goas and requirements in detail with your financial advisor so that he/she can help you to choose the right product for you.

For e.g., if you want to save money for a vacation that is six months away, taking high risk and investing in equities won’t be the right way to go forward. A liquid fund can help you to save for your vacation. Similarly, for your financial goals that are 15 years away, a small-cap fund may be a good investment option. Ultimately, you financial advisor analyses your requirement, your risk appetite and your financial goals to ensure that you get right schemes in your portfolio suitable to your profile.

There are two ways to invest in mutual funds: lumpsum and through Systematic Investment Plan(SIP). SIP is one of the easiest and convenient to start investing in mutual funds, especially for salaried individuals. In a SIP, a fixed sum of money is deducted every month automatically from your savings account. SIP helps form financial discipline, which allows you to achieve your financial goals. If you have lumpsum amount at hand, you can invest lumpsum in the mutual fund of your choice. You can also invest lumpsum in the fund where you have set up a SIP. This will help you to reach your financial goals faster.

While it is reasonable to have the temptation to spend, it is crucial to save and invest money for the future as well. Investing should be appropriately planned, and mutual funds are one of the best ways to invest your hard-earned money and achieve your financial goals. If you are confused about which mutual funds to invest or how to go about it, a financial advisor can help you in your journey.

By now your organisation must have handed out the bonus and increment. If you are one of the few lucky people to receive an increment and bonus or at least one of the two, it is crucial that you use it wisely and don’t squander it. Planning your increment and bonus money can help you to achieve your financial goals and be debt free.

You may have got a single digit percentage hike or double digit, but the percentage of your hike is not of much significance. The essential part is that you plan your finances according to your bonus and salary hike. There is no wrong in splurging once in a while but planning for it will help you to avoid burning a hole in your pocket or regretting about your decision later.

Choosing the right way to handle your bonus and increment is comfortable with these simple steps.

Build an emergency fund: If you haven’t yet built an emergency fund, now will be the right time to do so. It is recommended that you keep at least three months’ worth of expenses in your emergency fund. The emergency fund can help you to tide over any unfortunate scenarios such as job loss or minor accidents. You can use your bonus to create an emergency fund. It is essential to have funds earmarked for emergencies as with an emergency fund in place; you will not be tempted to dip into your long term investments.

While building an emergency fund, it is essential to park it in a product with the highest liquidity. Savings account and the liquid fund have the highest liquidity and individuals can redeem money within minutes. You can keep one-third of the emergency fund in a savings account for easy access and the rest in a liquid fund. Liquid fund is a category of debt mutual fund with the lowest risk. Also, liquid funds give a higher rate of returns than savings accounts.  

Start Investing or Increase your SIP amount:

If you always waited for the right time to start investing or have enough money to start investing, this is the right time for you. If you don’t have the technical knowledge of investing directly in stocks, mutual funds would be the best option for you. There are different types and categories of mutual funds to suit and cater to the various kinds of investors. No matter how many days or years you want to invest, or what kind of risk-taking capability you have, there is at least one mutual fund for you.

Typically, before investing, you need to list your financial goals and time horizon. Your financial advisor can help you through this investment journey. You can invest the bonus amount as a lump sum investment, and you can set up a systematic investment plan(SIP) with your monthly increment. It is advisable that at least 20% of your take home salary should be invested.

If you already have SIPs running, you can step up your SIP as per your increment percentage. Stepping up your SIP amount regularly can help you to reach your financial goals faster. If you invested Rs.5,000 per month for ten years at a 12% rate of return, your corpus at the end of the ten years would be RS. 11.6 lakh. On the other hand, if you had increased your SIP by 10% per year, your corpus would be grown to Rs.15.36 lakh.

You can also invest your bonus in that fund. You can segregate the bonus equally between the different funds, or you can invest in a financial goal that you want to achieve at the earliest. 

Lessen your debt obligations:

No one likes to live in debt, especially when the loan attracts a high-interest rate. If you are on a journey to cut your debts, repaying your loans with your bonus can be a move in the right direction. You can start by paying off your credit card debts and personal loans as it carries a high interest rate and gives you no tax benefit. Once you pay off these debt obligations, you can move to the vehicle and home loans.

You can also invest a portion of your increment towards repaying of the loan. However, before you do that, it is vital to check the prepayment charges as many banks charge prepayment charges for foreclosing the loans.

To summarise, knowing how to maximise your increment and bonus can go a long way in helping you achieve your financial goals. Thanks to technology, various facilities such as step up SIP among others can automatically increase your SIP amount every year by a certain predetermined percentage. Use your increment and bonus wisely so that your future will thank you.

From our childhood, we are taught not to waste money and always go for the cheapest available option. But not all things that appear to be expensive are bad for your pocket. Some of the things have far fetching positive impacts, help us save us a ton of money in the future and boost our wellness.     

You can say that these are necessary expenses. Here we would like to talk about three areas of our lives where we should not think about saving a few pennies. These areas are physical, mental and financial aspects of our life. After all, you should not be ‘penny wise and pound foolish’.

Physical aspect:

In today’s mad rush of earning more money, we tend to ignore our body. We only pay attention when we are diagnosed with a particular health disease. The best way to keep lifestyle-related conditions at bay (and save thousands of rupees) would be to do any form of physical activity regularly. Studies have shown that physical activity is not just good for your physical health; it is also essential for your mental health. But before you take that annual membership in your nearest gym, it is crucial to understand what kind of physical activity would you like to do. If you love to dance, then Zumba or other dance classes can be the best fit for you. If you want to run in a marathon, you can join a marathon-training group.

It is also essential to go for regular health checkups along with your other family members as it can help to diagnose early signs of any disease. You can preventive measures and control the disease from blowing out of proportion. 

Mental aspect

Mental wellbeing is as important as physical well being. When you are happy, you can give your best in your work life and increase your productivity leading to higher increment, bonus and more profits. A contented mind is essential not just for your work life but your personal life as well. There will be less emotional stress between the family members. Being stressed can lead to improper decision making, which can have serious consequences, especially in your financial life.

One of the best ways to have a calm and happy mind is through mediation. Meditation can help lower your stress level and clear your negative thoughts. Doing the things that you love can also lower your stress levels. Many activities and workshops on various art forms, outdoor activities are held every other weekend or make plans with your friends and family members. It will also strengthen the bond.

"People who are more socially connected to family, friends, and community are happier, healthier, and live longer than people who are less well connected," says Dr Waldinger, a psychiatrist with Harvard-affiliated Massachusetts General Hospital. Hence, it is a win-win situation in every aspect.

Investing in yourself through attending workshops, training programs, and reading is very vital in today’s world of cutthroat competition. Don’t rely solely on the training programs provided by your organisation and take initiatives to attend some of the best events within your industry. It will give you an edge over your colleagues who have not participated. Staying up to date with the latest happening in your industry and taking courses to upgrade your skills can go a long way in increasing your income potential. Books, workshops and courses are just one-time investments, and you can reap the benefits for many more years.

Financial aspect   

We have seen how investing your money in your physical and mental aspects can help you increase your income. But everything will come crumbling down if you don’t manage your money wisely. A financial advisor can help you do that. We may think that we can handle our finances, but when we are faced with not-so-good scenarios, we fail to make the right decisions. Such decisions may be investing in ULIPs to save tax at the last moment, investing in five ELSS funds, withdrawing money from your provident fund after the 15-year lock-in and shuffling between the high performing funds. All these financial mistakes can hurt your finances. A financial advisor will hand hold you and help you make the right financial decisions. With the right financial advisor, your life goals are within your reach.

These are the three aspects of life where being a miser can backfire. Remember to plan your budget properly so that you can have the best of both worlds. 

Emergencies come unannounced. No one can predict when it is going to strike. The only thing that we can do is to prepare ourselves for any unforeseen circumstance. Having an emergency fund will help you to tide over emergencies like accidents, job loss etc.  Hence, building an emergency fund should be the first thing on your mind before you start investing for your financial goals. 

So, here’s everything you need to know about emergency funds.

What are emergency funds?

An emergency fund is like a cushion that helps you to sleep soundly at night. It is money that you put aside against life’s unexpected events. It is not to be used for planned purchases such as buying a house or new car or your child’s higher education.

An emergency fund helps you to be prepared for anything that life throws at you. These emergencies can be accidents, immediate house repairs and job loss as well. Sorry, the late night pizza craving is an emergency.

Ideally, an emergency fund should be in liquid investments such as liquid funds or savings account. Liquidity is the essential feature when it comes to emergency funds, as you would need the money at short notice. You should park two-thirds of your emergency corpus in liquid funds and the rest in a savings account. In case of short-term emergencies such as house repairs, you can withdraw money from your savings accounts. The liquid fund can help you save for significant emergencies like job loss.

How much should you have and how to build your emergency fund?

You should have at least three to six months of expenses in the emergency fund. E.g., if you are earning Rs.50,000 per month and around Rs.30,000 goes in meeting your expenses, then you should have at least Rs.1 lakh in your emergency fund.

This amount is likely to cover most unpleasant surprises like a big car repair or house repair. Keeping aside three months worth of expenses is the bare minimum. The more you can save in your emergency fund, the better. However, you may want to consider what would happen in case of your job loss or non-payment of salary. It is because job loss is a big emergency. If you are in a field or position where finding a new job is tough, it is advisable that you save up to a year’s expenses. 

Let us take the Jet Airways fiasco to highlight the importance of saving money in case of a job loss. Jet Airways employees were not paid salary for a couple of months, and now many of them are staring at a bleak future. An emergency fund can help you to overcome such challenging scenarios.

The amount in your emergency fund also depends on your responsibilities. A person in their forties with kids and elderly parents will have higher responsibilities than someone in their 25s who recently joined the workforce and does not have any financial obligations.

There are two ways to calculate your expenses. The first way is to figure out the essentials that are utmost necessary such as bills, groceries, and in the second way, you also take the luxuries such as eating out and movies into account. It is always better to have a conversation with your spouse before considering the total amount that you need to save for your emergencies. 

Once you know how much you need to save for your emergency fund, the next step would be to build the emergency fund. Just like investing for any financial goal, building an emergency corpus also takes time. Keep aside a specific sum of money every month in a different bank account or a liquid fund. Building an emergency fund should be your priority. Hence, it is okay if you have to cut your investments. You can also do so by cutting back your expenses on luxury items or selling things that you do not use.

To summarise, emergency funds are the first step in financial planning. Use an emergency fund calculator or talk to your financial advisor to know how much you have to save in your emergency fund. Your financial advisor will be able to help in this entire process. So, start saving for your emergencies today. 

Things you always wanted to know about asset allocation

Imagine that you have a pizza in front of you. But the pizza has six different types of toppings with different crusts. Would not that be awesome?

Now think that the pizza is your investment portfolio with different assets. This is called asset allocation, which describes where you have put your money. Although there is a high probability that you will like all the different pizza slices,  in case of investment, you need to be sure about where you have put your money and in what proportion. We don’t want you to invest blindly in different assets just because your colleague suggested you.

Asset allocation is essential as it helps to reduce the risks associated with an investment option through diversification. Different asset classes such as equities, debt or commodities react differently to a particular event. While one asset may outperform during a specific time frame, other assets may underperform.

Here are some of the questions that you need to ask yourself to come to the right asset allocation.  

When are going to need the money?

This question will determine which asset class you should put in money. If you are likely to need the money within 2 to 3 years, you can invest in conservative investment options such as debt mutual funds. It will be better to stay away from equities as the equity market can be volatile in the short run. But it has been historically seen that equity markets give attractive returns in the long term. Hence, if you won’t need this money for five years or more, investing a higher proportion in equities would be the right approach.  

What are your financial goals?

In addition to your timeline, your financial goals are also essential to determine your ideal asset allocation. For your short-term financial goals, debt mutual funds such as liquid funds, ultra-short term and short-term funds are good investment options. Invest in pure equity funds for your long-term financial goals.  

How much risk can you take?

What will be your reaction if your investment value drops by 15% in a single day? If you are okay seeing your portfolio swing from one extreme to another, you can digest volatility; equities will be a better investment option. However, you can minimise the risks associated with equities by taking the mutual fund approach. High-risk investment options have the potential to give higher returns.

Now, that you have answered the questions, you begin thinking about allocating your money among the different asset classes. According to a thumb rule, your equity allocation should be 100 minus your age. E.g., if you are 25, 75% of your portfolio should be in equities. The younger you are, the higher should be your equity proportion. As you grow older, you can add more debt instruments or cut your equity proportion. It is because as you get older, your risk taking capacity also decreases.

It is also important to keep a specific proportion of your investment proportion (at least three months) as liquid cash for emergency purposes.

These were a few basics of asset allocation. But asset allocation does not stop with equity, debt or cash. Sophisticated or seasoned investors can include alternative investment funds in their portfolio. It is becoming a popular asset class among HNI and UHNIs. It has the potential to deliver higher risk-adjusted returns. Alternative investment funds include start-ups, private companies and hedge funds among others.

Among precious metals, gold is used as a hedging instrument. Gold performs better when the equity markets are in red. Geopolitical tensions and continuous rupee depreciation has made gold one of the must-haves in the investment portfolio of HNIs. However, ideally, gold should not constitute more than 5% of the investment portfolio. 

Real estate is another asset that investors can look at to diversify their portfolio. Besides investing in real estate, investors can now invest in real estate investment trust(REIT). Through REITs, investors can invest in high-end commercial real estate.  

Conclusion: Coming up with the optimal asset allocation may not be an easy task as there are various factors at play. Prudent asset allocation can help you to achieve your financial goals, fetch maximum returns, minimise risks and have sufficient liquidity. If you are not sure where to begin or need further clarity, your financial advisor will be able to help you out.  

Diversification is investing in investment options to limit exposure to any particular asset class or investment. This practice helps to reduce the risk associated with your portfolio. Simply put, diversification helps you to yield higher returns as well as reduce the risk in your portfolio. Balancing your comfort level with risk against your time horizon is one of the keys to a long successful investing journey. For e.g., keeping pace with inflation may not be easy if you start investing in conservative investment options from a young age. On the other hand, taking a large exposure to high-risk instruments near retirement could erode the value of your portfolio. Hence, it is important to balance the risk and reward in your portfolio so that you don’t lose sleep on market ups and downs.   

What are the components of a diversified portfolio?

The major components of a diversified portfolio are equity, debt and money market instruments.

Equity investments carry the highest risk in your portfolio and it has the potential to give higher returns over the long run. But with higher return comes greater risk especially in the short run. Equities tend to be more volatile than other asset classes. Investing in equity mutual would be the best way to take exposure in equities. Equity mutual funds are diversified funds as fund managers invest in different stocks and across sectors (except sectoral funds) which optimizes the risk in your portfolio.

Another important component of a diversified portfolio is debt securities. While equities have the potential to grow your wealth, debt investments provide stability and act as a cushion through the market cycles. Debt instruments include debt mutual funds, fixed deposits, bonds etc. The main objective of debt instruments is not to provide high returns like equities but capital protection along with inflation-beating returns. Debt investments can also be a source of income.

While equity investments give higher returns and debt instruments protect the capital to help us fulfil our financial goals, a part of the portfolio should be in liquid and money market instruments such as liquid mutual funds or a separate savings account. It provides easy access to money during emergencies such as job loss or accident.

Why is diversification important?

Diversification helps to minimise the risks associated with your portfolio. Let us assume that two years ago, you had invested your entire savings in a particular airline stock. Now, the airline is near bankruptcy and the stock price went down 60% in one month. Would you be comfortable in that kind of scenario? Most people wouldn’t. You would have less stressed out if you had diversified your portfolio and invested in a few other companies rather than taking 100% exposure in one particular stock. 

Diversification is important because different investment options react differently to the same development or move in a different pattern. For example, real estate and gold tend to underperform when equity markets are soaring. A cut in the interest rate may benefit the bond market but may not be good news for individuals with fixed deposits.   

How to diversify your portfolio?

Diversifying your portfolio is as healthy as consuming green leafy vegetables, fruits, exercising and meditating on a regular basis. However, eating just one kind of fruit may not be very effective. Hence, it is important to diversify. Investment is no different. Here are some of the ways through which you can diversify your portfolio:

Spread your investments among different asset classes:A diversified portfolio should include equities, debt and cash. Exposure to international market and commodities such as gold can help you in further diversifying your portfolio. It is because different investments come with different risk and returns. Higher the returns, higher will be the risk and vice versa.

Diversify within individual types of investments: Diversification is also necessary within an asset class. For e.g. in case of equity mutual funds do not concentrate on one category. It is recommended that you have mutual funds across market capitalisation such as large cap funds, mid cap funds and different investment strategies. Different funds and stocks come with varying risks thus minimises the risks.

Rebalance your portfolio regularly:Diversification is not an one-off exercise. Rebalancing your portfolio depends on two important things which are the number of years until you expect to need money(time horizon) and risk-taking capacity(risk tolerance). 

To summarise, diversification is important for every investor whether it is across asset classes or within an asset class. The nature of diversification depends on financial goals, time horizon and risk tolerance. It is also important that the diversification of the portfolio is updated on a regular basis.

Capital Safety, the rate of returns, the lock-in period and taxation are some of the key features that can help you select between debt mutual funds and fixed deposits.  

When it comes to investing, for many of us safety comes first and returns come second. After all, no one wants to play gamble with his or her much hard-earned money. Hence, fixed deposits and gold became our favourite investment options. In this craze of safe investment options, we forget that fixed deposits may not be the most ideal investment option. 

However, for investors whose priority is capital safety along with inflation-beating returns can look at debt mutual funds. Debt mutual funds are a category of mutual funds that invests in fixed-income securities issued by various companies and governments.

Now, let us understand the difference between debt mutual funds and fixed deposits that can help you to compare the two investment options and choose your pick accordingly.

Interest rate/Rate of returns

Return from Fixed deposits are fixed and are in the range of 7% to 7.5% currently. While interest rates remain the same during the fixed tenure but it may change through the years. Hence, when you want to reinvest the fixed deposit’s maturity amount, interest rates might be different at that time. With the interest rates moving south, banks may trim the interest rates on deposits going forward.

On the other hand, the returns on debt mutual funds are not assured and are linked to the debt market. Debt mutual funds have the potential to deliver higher returns than fixed deposits as fund managers make investment decisions based on the current debt market scenarios and select papers based on credit ratings and internal research. The expected returns from debt mutual funds are normally the Yield to Maturity minus expense ratio if one remains invested till the duration of the fund keeping all other parameters the same. Also, debt funds stand to gain from the lowering of interest rates as the price of a mutual fund unit i.e. net asset value rises when the interest rate falls.

Debt mutual funds have the potential to generate higher real returns. Real returns are the returns given by an investment option above the inflation rate. E.g. if the average rate of inflation in that year was 5% and the interest rate on fixed deposits was 7%, the real rate of return is 2%.  A higher real return helps in fulfilling financial goals.

Capital safety:

When it comes to capital protection, bank fixed deposits have an edge over debt mutual funds. However, fund houses cannot guarantee capital safety. In the case of FDs, capital protection differs from the issuer of fixed deposits. Non-banking financial companies give higher returns on fixed deposits but it also comes with higher risk than a bank deposit. Though capital erosion risk is very less in debt funds as the portfolio consists of well-researched securities and also due to diversification.

Liquidity:

Fixed deposits have a maturity period and you have to pay penalties if you want to redeem your fixed deposits before the maturity date. However, you can redeem from your debt funds anytime you want. However, a few debt funds may have exit loads if you redeem them within the specific time frame. Hence, debt funds are more liquid than fixed deposits.

Taxation: The taxation structure of debt funds is better than fixed deposits as it comes with indexation benefits. There are two types of taxation on debt mutual funds i.e. short-term capital gains and long-term capital gains. Short-term capital gains are applicable if the units are redeemed before three years and gains are taxed as per the income slab. If you stay invested for more than three years, you are eligible for long-term capital taxation at 20% with indexation. Indexation is nothing but accounting for the rise in inflation. In this case, you only pay tax on gains if the rate of returns is higher than the inflation rate. However, in the case of FD, the entire gains are taxed according to the tax bracket of the investor.

Conclusion: Debt mutual funds are a good investment option if you are looking for a relatively stable investment option along with inflation-beating returns. Investors who are in the higher tax brackets can also look at debt mutual funds for tax-efficient returns.

Recently the data published on one of the new websites said that 'New SIP growth falls 61% from April to December.' What does it mean? Does it mean that investment through SIPs is no longer attractive? Does it mean that Investors are moving away from SIPs?

There could be only two reasons for the fall in Net SIP growth. The number of New SIP registration is slowing down and another reason may be that some investors are stopping their existing SIPs.

Historically it is observed that people start SIPs when the past performance looks good. When the market is in bull run people start an SIP expecting the similar return in the future. But the market can never go up in a linear fashion. There are going to be ups and down. Volatility is the part of the stock market. So when the market corrects and the return in the portfolio is negative or not as per expectation people stop the SIP and book the loss.

Remember! In the long run, correction is temporary and growth is permanent. But when you press the panic button and stop your SIP your temporary loss gets converted into a permanent one.

Creation of wealth through SIP requires two elements in place; first good financial advice and second discipline. Returns from SIP are never going to be proportional every year. There would be a few volatile years before you create a wealth. Those are the years where Investors need to stay disciplined and stay invested. In fact, if you want to become an even smarter investor you need to increase your SIP amount or add more money to your existing SIP folios. That would help you to accumulate more units and when the market recovers your portfolio would grow even faster.

If you had started a SIP of Rs 10000/month in September 2010 in a large cap fund (There were 43 Large Cap funds available), the value of your investment of Rs 3,60,000 after three years would have been Rs 3,48,896. Many investors were in a panic and stopped their SIPs due to this negative return. But for those investors who continued their SIP for even one more year, the value of their investment of Rs 4,80,000 was Rs 6,99,858/- after the fourth Year.

The market is always going to test your patience. If you lose your patience, you shall not be able to create wealth. Remember what legendary Warren Buffett has said when you are losing your patience, "Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant."

While investing for any specific goal, we always assume some rate of return from the investment based on some rationale. Actual return may vary from time to time from the assumed return, so it becomes very important to check whether we are getting that return or not. We also need to check how various asset classes and schemes are performing in our portfolio. This exercise is known as review and it should be done on periodic bases. Ideally once in a year, you must review your portfolio.

Reviewing doesn’t necessarily mean frequent buying and selling based on performance. The return which we assume is for the CAGR return for the entire period of investment and need not to be equal to the assumed CAGR every year.

How to review your mutual fund schemes:

You can review the performance of your scheme and compare it with the performance of the benchmark. Apart from the benchmark, you can also compare it with peer group performance.

The performance of a good scheme also may lag at some times, so short term performance should not be given too much of weight while doing the review of the portfolio. Rather than short term performance, you must consider long term return and consistency in performance.

Apart from the return you also need to compare your portfolio on other parameters like risk, risk adjusted return and quality of portfolio while reviewing the scheme.

If the scheme underperforms on all the above parameters you should exit the same and invest in some other scheme.

But, remember reviewing doesn’t necessarily mean buying and selling every time while you review. The decision of exiting should not be based on short term underperformance noticed during the review. You need to adopt a holistic approach of reviewing the scheme by taking into consideration of other important parameters also apart from short term return.

Once you know where you are going by setting appropriate investment objectives, your portfolio review will help you reach your destination. How? By identifying problems and mistakes that you can correct mid-course. Much like a pilot, your job is to stay on course so that you can reach your destination safely and in a timely manner.

Have you ever got stuck up in traffic? I am sure you have. Just imagine your car is  new brand with a powerful engine, but unable to move an inch because of heavy traffic. And you get what? Frustrated! What happens when you cannot move but the smaller cars in lane next to you are moving faster than you because that lane has lesser traffic than the one in which you are driving. More Frustration! Right?

As a human being, it is obvious that you would have a strong urge to change the lane and move to the faster lane. And using your driving skills you change the lane. The moment later the lane which you left starts moving and the new lane in which you entered stops moving due to traffic. Now what? Height of frustration!

If there is a smile on your face while reading this, it means you have already have experienced it, probably not just once but more than once you have changed the lane and mostly reached the height of frustration.

Not just driving whenever in our life when we see someone is moving faster than us we try to change the course and find ourselves caught in the trap and then feel like we should have stayed in our lane.

Changing Mutual Fund scheme based on Past Performance

So is the case with Mutual Fund schemes. Most investors after investing in mutual fund schemes start comparing the return of their schemes with that of other mutual fund schemes. And many a time we change the mutual fund schemes and switch our money to other better performing mutual fund schemes in the recent past. And what happens next?

In recent times, Past Performance has become a major criteria of the mutual fund selection system. Investing based on recent past performance is as risky as driving a car by looking only into rear view mirror. While driving, rear view mirror is useful but more than rear view it is your front view that is more important for smooth and safe journey.

Past track record definitely helps in understanding the quality of the scheme and the ability of the management team but recent past performance is not the guarantee for the future.

What else matters while selecting a scheme?

Apart from Recent past performance, one should look at the consistency of return which can be derived from rolling return analysis for various periods, which requires a lot of data crunching rather than just finding out the past one year return.

One should also look at how the fund has performed during the best and worst period in past compared to its benchmark and category return.

You also cannot avoid looking at risk parameters. If some fund is generating superior return then it is also necessary to check at what cost. How much risk or volatility is it adding to the portfolio.

Choosing a fund from a basket of hundreds of funds requires lots of data, analytical skills, education and experience. One can do it by own but it is very risky. It is always advisable to take the help of qualified professionals for building a quality portfolio and stick to it with discipline.

Frequently changing lanes rarely helps, in driving or investing.

Happy Investing!

If you want to go around the earth and start with 100 metres on first day and double the distance every day, How long do you think it will take?

1 year?

10 Year?

Let’s find out, within 19 days you would have covered 39,321  Kilometers, while the equatorial circumference of Earth is about 40,075 km. you would have travelled around the world in less than 20 Days.

But, What if you stop after 10 days? You would have hardly covered a little less than 77 km.

This is the power of compounding. Power of compounding can help you to create a great wealth as well.

How to leverage the power of compounding for maximum benefit to create a wealth!

Start Early & Invest Regularly

Key ingredient to avail the benefit of power of compounding is TIME. You need to keep investing regularly for long term. The sooner you start investing in your life, more wealth you will be able to create.

For Example,

Nisha invests 5000 rupees every month since the age of 25, while Nilesh invest 7000 rupees every month since the age of 35. Both of them kept investing till the age of 60 years with the objective of creating a corpus of retirement.

By the age of 60 both would have invested 21 Lac rupees. Assuming a return of 12%, How much wealth both of them would have created for their retirement?

Nisha will accumulate 2.75 Crore rupees, while Nilesh will get only 1.19 Cr rupees, which is 59% lesser than Nisha’s corpus.

This is why starting early is important.

Challenge:

"I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” Bruce Lee

One requires a lot of discipline in doing the same things again and again for long term, though it is the most proven method to create a great result in any area.

To avail the benefit of power of compounding the biggest challenge is to keep investing every month with discipline. And as a human being, most of us lack discipline, when it comes to follow the same routine in the absence of instant gratification. For creating wealth in long term, one needs a lot of discipline to start early and keep investing regularly.

Solution:

Start a SIP (systematic investment plan) in Equity Mutual Fund for the long term to automate the process of investing. You need to exercise your willpower just once to decide the amount and tenure to start your SIP. The biggest benefit of investing in mutual funds through SIP is that it helps you in investing with discipline regularly. You need not do paperwork or pay every month manually. This automation makes this long-term powerful process of wealth creation easier for you.

So remember, to avail of the power of compounding starting early and remaining invested for the long term is the Key.

As the classic proverb says, ’Don’t put all eggs in one basket, Investors also must diversify his/her portfolio into different asset classes. Why? The reason is very obvious – to reduce the risk.

There are mainly 5 asset classes, namely; Equity, Debt, commodity, real estate, and cash. One must allocate his/her savings into different asset classes based on the various parameters and their own risk appetite. Dividing your investment into different asset classes based on different parameters is called asset allocation.

Considering the ease of investing and liquidating, we shall focus on two asset classes – Equity & Debt, to understand the process of asset allocation.

Deciding the right Asset Allocation Mix:

One of the most important criteria while selecting the asset class is the time horizon.

• Short Term - If you are looking to invest for less than 3 years, your portfolio should consist of mainly Debt investment as equity is very volatile and market risk is higher in short term.
• Medium Term - If you are looking to invest for a  period of 3 to 5 years, your portfolio should be a mix of equity and debt both.
• Long Term - In case of investment for longer than 5 years, you can invest more into equity. Equity as an asset class is lesser volatile in long term.

Rebalancing Asset Allocation:

The investment horizon keeps on changing over a period of time. So as the years passed by, asset allocation needs to be re-adjusted based on the remaining number of years till you need to withdraw. So for example, if you are going to need money in the year 2027, you must start shifting money gradually from equity to debt by the year 2024.

Other important Parameters:

Risk appetite, the required rate of return to achieve your financial goals, tax implications, etc. are other parameters that are also crucial while deciding the right asset allocation mix.

One must be able to control GREED in a bull market and FEAR in a bear market to ensure the right asset allocation mix in the portfolio. One must be focused and disciplined to save from the emotional decisions which might deviate himself/herself from the asset allocation.

“Most important key to successful Investing can be summed up in just two words Asset-Allocation.” Michael LeBoeuf

Understanding Return

Calculating return would have been easier if we had been investing exactly for one year. But that doesn’t happen in the practical world. Investment is normally done in a staggered manner and each investment is not kept for the same period of time. Withdrawal also might happen over a period of time.

To compare the return from various investment plans, it is necessary to have a common parameter that can be used for all types of investments with different investment amounts and different holding periods. That common parameter is to assume that all investment returns get compounded annually.

If the investment is held for lesser than one year, then we need to calculate the return in percentage terms by assuming that the investment is held for one year.

CAGR – Compounded Annual Growth Rate

If you want to calculate the return for one time investment then CAGR (Compounded Annual Growth Rate) is used. But when the investment is done periodically or staggered over a period of time, CAGR is not useful to calculate the return.

In the case of staggered investment, either IRR or XIRR can be used.

IRR – Internal Rate of Return

If the investment is done in a strict periodic manner, you may use IRR to find out the rate of return. For example, if an investment is done at a fixed interval (Monthly/quarterly/yearly) and withdrawal only at the end of the entire tenure, IRR can be used to find out the return.

XIRR

If cashflow includes frequent inflow as well as outflow over a period of time, we need to use XIRR for calculating the rate of return. XIRR gives you the flexibility to assign specific dates for each cash flow, making it a much more accurate calculation.

Though Return is one of the most important criteria but we should also look at other parameters like consistency, portfolio quality, risk, risk-adjusted returns, etc.

For most Indians, retirement is the most ignored financial goal. From the beginning of our career, we start chasing short-term goals which give us short-term gratification like buying a car, buying a New smartphone, vacation, etc. Most of our savings are channelized into achieving our Retirement goals.

However, we all have a desire to save tax. We can channelize this desire to achieve two goals,

1. Saving Tax
2. Creating Retirement Corpus

Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. This deduction is allowed to an Individual or a HUF.

To save tax, we normally invest in PPF and other instruments which has a long lock-in period. When you are ready to invest for such a long period, investing in equity is a better idea, as equity is less risky and more rewarding in long term. You may choose to invest in Equity Linked Savings Schemes (ELSS) of mutual funds to save tax under section 80 ( C ).

What is ELSS?

An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn't just help you save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act.

Along with the tax deductions, an ELSS offers you the opportunity to grow your money by investing in the equity market. ELSS carries a lock-in period of 3 years. Furthermore, you can also choose to invest through a Systematic Investment Plan and bring discipline to your tax planning.

Here's how it will work. Say, one invests Rs 12,500 monthly in ELSS (Rs 1.5 lakh annually) for 25 years of one's working life towards retirement. Assuming a growth rate of 12 percent a year, the corpus could be nearly Rs 2.12 crores, which could be part of one's retirement portfolio in addition to other investments earmarked for retirement. 

Past Performance may or may not sustain in the future. The above table shows the value of Rs. 1 Lac invested in PPF, Sensex and various ELSS Schemes as on 31ˢᵗ May of every year. (Valuation Date: 31ˢᵗ May 2018) Note: Amount assumed Rs. 1 Lac in PPF & ELSS. However, deduction u/s 80C has been increased from Rs. 1 Lac to Rs. 1.5 Lacs w.e.f 22ⁿᵈ August 2014.

Disclaimer: The information contained in this report has been obtained from various sources. While utmost care has been taken for the preparation of this report, we do not guarantee its validity or completeness. Neither any information nor any opinions expressed constitute an offer, or an invitation to make an offer to buy or sell any fund. Investors should take financial advice with respect to the suitability of investing their monies in any fund discussed in this report. Mutual fund investments are subject to market risk. Please read the Scheme Information Document and Statement of Additional Information carefully before investing. 

Combination of EMI and SIP can save you lot of money

What if your Home loan tenure is reduced without increasing EMI, even if the interest rate remains the same? Sounds interesting? Read it.

In the year 2010, I bought a flat in Ahmedabad for which I took a home loan of Rs 48 Lacs from one bank. At that time the interest rates were around 10.5%. So I decided to take the loan for the maximum tenure available, i.e. 20 years as I could afford the EMI of Rs. 47922/-.

The bank RM came to my office for completing the paperwork. While filling out the forms he asked me about the tenure which I would like to go for. I told him to go for maximum tenure i.e. 20 years. Bank’s RM told me, “Sir maximum limit is not 20 years it is 25 years”. According to my calculation, I was ready for paying  Rs 47992/, an EMI amount for 20 years of tenure considering 10.5% interest, and a Loan of Rs 48 Lacs.

So if I chose to go for 25 years, EMI would be lesser. I tried to do the exact calculation and ended up with some unique Ideas which I am sharing through this article. The EMI for the 25 years tenure was worked out to be Rs 45302/, resulting in the saving of Rs 2600/ per month in the EMI. So I decided to go for the longer tenure i.e. 25 years.

Now financially and mentally, I was ready to pay for Rs 47992/ of EMI per month. So I decided to start a SIP of this Rs 2600/- (saving in EMI due to increased term) and to use the amount accumulated through this particular SIP to repay the Loan in the future.  I did some calculations in excel to check with the help of this combination of reduced EMI and SIP, how would it affect my loan repayment schedule.

My older SIPs were giving me some 18% kind of a CAGR, while doing the calculation I assumed that my future SIP would generate a 15% CAGR. I found out that with this combination and an assumed return of 15% CAGR from SIP, I can repay the loan in just 18 years and 2 months.

Sounds interesting?

Let me explain,

Case 1: 20 years loan – Outflow (EMI – 47992)

Case 2: 25 years loan + SIP of saving into the EMI (EMI 45302 + SIP 2600 = Total 47992)

In both the above cases my monthly outflow is the same, the only difference is into the methodology. In the first case, I am only paying EMI in the second case by increasing tenure I am making saving into the EMI and doing the SIP of that saving, making my monthly outflow the same as that in case 1.

After 18 years and 2 months, the value of my SIP of Rs 2600/- per month assuming the 15% CAGR* would be approximately Rs 26.29 Lacs, which I can use to fully repay the Home Loan outstanding. In other words, the outstanding loan principle amount would equal to the Fund Value of SIP after 18 years and 2 months.

In the whole process, I would pay 22 EMIs less compared to Case one, making an absolute saving into the EMI worth Rs 10.54 Lacs. Though Bank charged me 10.5% interest for me the effective interest worked out to be only 10.03%.

If you are planning to buy a Home loan and if you have decided to take the loan for a shorter period then you can use the above idea to save some EMIs. So if you have decided to go for 15 years of tenure and your bank is ready to provide you maximum tenure of 25 years, I suggest you go for the higher tenure and utilize the monthly saving into EMI due to increased tenure to start a SIP into some good diversified equity mutual fund.

If you have already taken the loan you can still utilize the above idea by asking the bank to increase the tenure or you can also transfer your loan from one bank to another and while doing so, go for the maximum tenure.

I transferred the above-said loan to some nationalized bank at the time 22 years of tenure were pending in the earlier bank. I opted for 30 years of tenure in my second bank where I transferred my loan, further reducing my EMI. I added that saving also into the SIP and that would again save a few more EMIs.

Thus, selecting the maximum tenure and doing the SIP can help you repay your loan earlier. The return assumed in the above calculation is not the guaranteed return but I can safely assume that kind of return from SIP into my portfolio. My current portfolio has a CAGR of around 18%, while in the calculation I have assumed a 15% CAGR only.

*The return showcased is the assumed return and is not to be treated as any assurance or guarantee.

Tax on Digital Assets

All That You Need to Know About Tax on Cryptocurrency & NFT

Taxes on digital assets were pretty vague up to Budget 2022. The finance minister didn't notify the tax structure on corporate or individual levels. But, under new norms, all profits from cryptocurrencies are to be taxed at 30%. It is quite a steep rate and one that might lead you to think twice about investing in digital assets. To understand this move from the government, we have broken down the entire subject of taxes on digital assets into three main sections: tax on income, tax on gifts and the 1% TDS.

People who make money from digital assets must pay tax on that money

In Budget 2022, the finance minister said it would tax digital asset profits at 30%. That doesn't mean that digital assets are legal just because they are taxed. The legality of cryptocurrency as an asset class is still not clear.

Government officials say digital assets include cryptocurrency and NFTs. 

At 30% tax, the people who make different amounts of money will pay the same tax rate.

They would calculate this tax on income after subtracting the cost of acquisition, which could be the price of the cryptocurrency and the fees for transactions.

Moreover, crypto investors can’t set off their losses against any capital gains of other asset classes. However, it's not clear if the profits from one type of digital asset can pay for the losses of another digital asset.

If you use the foreign exchange, a peer-to-peer marketplace like LocalBitcoins or mine your own, you'll have to pay 30% of your profits. On the other hand, miners may be able to write off the cost of things like electricity, the depreciation on their mining computers, and so on.

Moreover, it is crucial to note that you still have to pay tax on your cryptocurrency gains made before April 2022.

Tax on digital assets as gifts

The budget also said that digital assets that were given as gifts would also be taxed. Concerned authorities may include digital assets as ‘property’.

Free digital assets that you receive, such as airdrops, learn-to-earn schemes, and games where you can earn money by playing games, are also included as gifts.

However, under the Income-tax Act of 1961, gifts made to specific relatives or as a wedding gift are not taxed, no matter how big the gift is. Parents, siblings, and other relatives who give money to you don't have to pay tax on it. Gifts that are given at weddings, through a will or inheritance, or in anticipation of the donor's death are also not taxed, no matter how much they are worth.

But, if your friend gets you a gift that costs more than Rs. 50,000 on your birthday, you will have to pay tax on it.

So now, the question is whether the same gift taxation rules that apply to real things would also apply to virtual digital things.

As part of their pay package, people who got digital assets like cryptocurrencies or NFTs will have to pay a 30% tax because, as per the new tax law, it will be considered a gift.

They will have to pay the tax even though they have sold none of the coins yet. Not only that, but in many cases, employees may have to pay tax on more money even though the value of the coins they got has gone down since they got them.

Impact of the 1% TDS

Taxes on income and gifts aren't the only things the government announced in this budget. They also announced a charge of 1% tax on all crypto transactions.

The new section 194S of the Income Tax Act says that crypto exchanges will have to withhold 1% TDS for most transactions starting July 1, 2022. People who use crypto will have to tell the government about all of their transactions to track them.

This TDS may be applicable only if the total amount of cryptocurrency transactions in a year reaches Rs. 50,000 for the following individuals:

• Each person, as well as Hindu Undivided Families (HUF), who have annual sales, gross receipts, or turnover above Rs. 1 crore.
• People who make more than Rs.50 lakh a year.
• People or HUFs who don't have a job or business to make money.

For the other individuals, this TDS may apply if the total amount of crypto transactions in a year is more than Rs. 10,000.

Moreover, as crypto trading takes place all over the world, the foreign cryptocurrency exchange will not deduct 1% TDS, but it is still not clear if and how TDS would be deducted if the transaction took place between an Indian buyer and a seller from another country.

What is your opinion on the taxation of digital assets? If you have any doubts, it will be best to consult us.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme related documents carefully.