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Category
Mutual Fund
An informed investor is always a better investor. Systematic Investment Plans (SIP) into mutual fund scheme is now so commonplace that many of us overlooks some of its features or characteristics. Thus, we remain not-so-informed investors after all. Same goes true for its cousins – SWP and STP. Let’s understand some of the not-so-common features of SIP, SWP and STP here. Let the fun ride begin.
**SIP – Systematic Investment Plan**
It is a nice, convenient package solution for making repeated additional purchases in a mutual fund scheme. We need to choose a particular date of the month, how long we are going to invest and a fixed amount that should get debited from our bank account and get invested in the chosen scheme.
Through SIP investments, we purchase some units of the scheme in the current NAV i.e. price per unit. Now suppose, you are doing SIP in an ELSS (Equity Linked Saving Scheme). In that case, number of units that you buy in each SIP transaction, will remain locked for 3 years. So, if you do a 12 months’ SIP in an ELSS, you would be able to redeem all the purchased units only after the end of 4 years from the starting date of your SIP.
SIPs can be topped-up i.e. instalment amount can be increased after every 12 months. This is a very powerful and practical feature of SIP investment that not many investors exercise. This way a goal can be achieved with less strain on your pocket at start.
**SWP – Systematic Withdrawal Plan**
It is a nice, convenient package solution for making repeated withdrawals / redemption from a mutual fund scheme. We need to choose a particular date of the month, how long we are going to withdraw and a fixed amount that should get credited to our bank account and get redeemed from the chosen scheme. This will go on till the time your fund lasts or the mentioned fixed tenure – whichever is earlier.
Like step-up SIP, step-up or inflation adjusted withdrawal through SWP is not that straightforward, but still can be achieved with some minor adjustments and tweaking. But it makes perfect sense, that your withdrawal amount does not remain fixed, and you get to withdraw slightly larger amount after every 12 months to support the increased household and lifestyle expenses for instance.
Very few investors know / understand / realize that the entire withdrawal amount from SWP is not taxed but only the resultant capital gain part. Let me explain it. In every withdrawal, you redeem some number of units, say X. Now, these X number of units have some purchase NAV and as well as sale NAV. Your capital gain will thus be calculated as – Number of Units Redeemed * (Sale NAV – Purchase NAV).
**STP – Systematic Transfer Plan**
Suppose you are not feeling that confident in investing a large lump-sum amount of money into an equity scheme at a go. Instead, you want to get it invested within, say, next 6 months’ time in a systematic manner while earning interest on the not-invested money higher than the savings bank account. Again, it may happen that you change your mind after 4 months and want to invest the rest amount immediately as you feel that the market has reached its bottom. Such flexibility can only be offered by STP.
To make STP work, you need to park (i.e. invest) your money first into a liquid scheme of the same mutual fund house whose equity scheme you have chosen as the final destination of your money. Thereafter based on your given instruction, a fixed amount of money will get invested into that equity scheme from the liquid fund where you have parked your money into, every month in a particular date or at whatever chosen frequency.
STP work best when market keeps on tanking from your date of investment. Thereby, you keep on buying larger sum of units with the same investment amount. Or in other words, if you are feeling bearish about the market in near term or expecting huge volatility, then STP could be the right choice. Otherwise not.
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In a recently conducted survey by an insurance company on urban Indians across 25 cities, revealed that top priority goal for maximum investors (62%) is to accumulate enough fund for their children’s education and marriage. Not surprising. The tendency of choosing investment product for the same varies. Though almost any investment product can be linked to the goal of your choice, often investors prefer to invest in a product which is labelled accordingly. Today let us discuss the features, pros and cons of one such ‘labelled’ product – **Sukanya Samriddhi Yojana (SSY)**.
**Features:**
The scheme currently provides an interest rate of 8.2% (For Jan -Mar 2024 quarter). This rate gets revised every quarter.
The account can be opened at any India Post office or branch of PSU banks and few private sector banks (ICICI, HDFC, Axis).
The account can be opened anytime between the birth of a girl child and the time she attains 10 years of age. Only one account is allowed per child. Parents can open a maximum of two accounts for each of their children (exception allowed for twins and triplets).
A minimum of Rs. 250 must be deposited in the account initially. Thereafter, any amount in multiples of Rs 100 can be deposited. However, the maximum deposit limit is Rs. 150,000 in a financial year.
The account reaches maturity after 21 years from the account opening date (or at any time after the girl gets married after the age of 18 years). Deposits in the account can be made for 15 years from the date of the opening of the account. So, in the last 6 years, the account will only earn only the applicable rate of interest, no fresh deposits will be made then.
Sukanya Samriddhi Yojana is an EEE (Exempt – Exempt – Exempt) product from the taxation point, like PPF.
Partial withdrawal of up to 50% of account balance can be opted for the purpose of higher education only after account holder’s age of 18 years.
Pros:
Tax benefits are surely a plus here. The forced discipline is another plus point for many casual investors.
**Cons:**
The biggest con of this product can be the fact that it cannot be used for boys.
Also, the product seems more aligned to a girl child’s marriage than to her higher education.
Liquidity is a major concern here, as a parent may require funding any time after the girl child attains the age of 15-16 years.
Considering the low interest rate and limit on maximum investment that can be made in a year – the product alone can almost never be sufficient to achieve both the goals of higher education and marriage considering the current cost and high inflation.
**Conclusion:**
As you are investing here for the long term, starting here with higher equity exposure through mutual fund is definitely a good idea. Later, when the goal year comes nearby, safer debt exposure can be increased in your portfolio. Higher liquidity, no maximum limit on making investment, flexible topping up with additional investment – all these are definitely a plus here, provided you are disciplined and focused.
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If your decision of making investment or choosing insurance policies has often been taken for the sole purpose of saving some tax – then you have reasons to worry. This tendency of jumping on the bandwagon i.e. saying ‘yes’ to a product just because it offers some tax saving can backfire or do harm to your overall portfolio of investments and insurance. Let us see, how.
**Tinkering with the horizon**
When an investment allows to claim deduction from your taxable income under some section, then it often comes with some lock-in period. In other words, you have to sacrifice liquidity for availing the tax benefits. This can be problematic. If you may need money in short-term, then locking-in majority of your investment will make you feel helpless and force you to take desperate measures. Or, if your financial goal may require money sooner or later than the pre-decided timeline – then you will be stuck with your locked-in investments.
**Ignoring Risk Profile**
If I say capital gains that you made from your equity investment is taxed much lesser or not even taxed at some situations compared to your investment in other asset classes (debt or commodity) – does that mean you ignore your risk profile, goal horizon and invest maximum in equity? You should not.
**Compromising Asset Allocation**
Investing separately in Gold Fund, International Equity Fund or Debt Fund is not that tax efficient. But that does not mean that you ignore your exposure in such funds and instead invest only in multi-asset allocation fund just because that is tax efficient (though that can be a topic on its own for some other day).
**What should be done?**
Give achieving your financial goal the topmost priority. Check your risk profile, consider your surplus, find out how much return you should earn – choose your asset class and investment product accordingly. If features of a tax saving product get perfectly aligned with your goal and risk-return profile – then of course go ahead and make that part of your portfolio. Otherwise not.
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Money habits make or break us. It has been proved time and again. But based on our money habits, how are we perceived by others around us? As it is all about a character trait, it is therefore very personal. You may feel concerned about it, or not. But if you are ready for a casual discussion around this topic on a Sunday morning – here you are! Read on.
Habits build characters. Taking a cue from that, our spending / saving habits mostly lead us to become either of the three characters – spendthrift, miser or frugal. How are they different from each other?
**Spendthrift** – A spendthrift is an individual who spends money extravagantly and often beyond their means. They engage in impulsive and excessive spending, often on non-essential items or luxury goods. They typically do not follow any budget. Spendthrifts are impulsive spender. They live in the moment, not much concerned about the future consequences for their spending habits. They mostly save little and inconsistent in their saving habits. It is not uncommon to find them taking loans to fund some of their expenses.
**Miser** – A miser is reluctant to spend money even when it is necessary. This impacts their social life negatively. Extreme miserliness often leads to compromising on quality of life. This could mean, for example, cutting short on a vacation trip wherever possible, not indulging in any hobbies whatsoever etc. Misers are in a way obsessed with their money and are afraid of losing it all the time. They almost never or rarely socialize. Of course, they mostly end up accumulating good amount of wealth but rarely enjoying that in their lifetime.
**Frugal** – Frugality is the practice of being economical and avoiding unnecessary expenses. Frugal individuals make thoughtful choices when it comes to spending, stick to a budget, prioritizing value and necessity over impulsive purchases. They enjoy life often by making some creative choices in case budget does not allow them doing that. In short, they make most of what they have. They save that much what is necessary to achieve a financial goal. They avoid debt to maintain a certain lifestyle or for buying luxury goods.
Being frugal brings high probability of achieving financial freedom in life while maintaining a balanced lifestyle and not compromising on quality of life. Life, of course, does not go in straight line. It has its own demand and priorities change along the way. Still, the money habits that we build and follow, makes a solid impact in living a stress-free, guilty-free and worry-free life. All the best!
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Like in every aspect of life, we behave quite differently in managing our finance than mentioned in books and in theories. Of course, those books are written for our benefits and those theories are formulated for our financial wellbeing, but still, most of us rarely could follow such guidelines ditto in our everyday life. How funny or contradictory it may sound, but it is the reality. Let’s discuss few such areas of personal finance where theories and practical implementations differ a lot. Again, such things cannot be said in general, as there are exceptions, but still such a discussion may hit us when we will tend to divert again, if ever, from the theory.
**Deciding on Financial Roadmap** – This includes fixing a financial goal with definite time-period, target, and priority. This may sound simple but requires serious time and effort. Very few people do it with sincerity. This is either done in half-hearted casual manner or never done it at all. This exercise often gets postponed for ever. For example, finding out the current cost of education to plan for child’s higher education goal, is often not done properly. Even if the goals are fixed and planned, implementation of the same are often not done immediately or required investment amounts are compromised.
**Related Actions (e.g. review / documentation / technology)** – This is by far the most ignored area of managing personal finance by many. People rarely sit for a review session with their advisors in time. Also, the outcome of review is rarely followed by many. Still many investors do not include their family members in this journey. Documenting all investments and insurance in one place, is again an ignored area of action. Getting acquainted with latest technology, following its safety guidelines and best practices, are also overlooked unfortunately.
**Behavioural Finance** – In books or in insights shared by famous investors, it is frequently mentioned, that real wealth is created through long-term regular investing – but very few of us rarely practice this (unless we forget about an investment!). Though we are not supposed to compare the returns generated by our portfolio with others – still many of us do that and feel good or bad about this. Coming out of an investment is equally difficult for many of us – as either we feel greedy or egoistical about it.
The more seriously we follow the sermons of great investors – the better for us and our family. Let’s give it a try, once more. Never say never. All the best!
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Category
Financial Planning
In personal finance, many a times, we use certain quick and easy calculations to find out investment or insurance related insights. ‘Rule of 72’ is one such calculation method to find out how many years it would take to double our investment given a certain compounding rate of return. But how accurate is the result? Can you trust the result for critical high value calculation? Read on.
Let’s start with an example of using Rule of 72. Say we are assuming that our investment will give a return of 9% p.a. Now if I invest Rs. 1 lakh in this product, by when my investment value would become Rs. 2 lakhs then? If we use Rule of 72, then we can find the answer the below way:
No. of years to double my investment = 72 / Given rate of return = 72 / 9 = 8 Years
So, after 8 years, my investment of Rs. 1 lakh will become Rs. 2 lakhs. Let’s verify this result with an Excel function viz. NPER:
=NPER(9%, , -100000, 200000,) = 8.0432 Years
The difference is of almost 15 days. Still the result is quite close compared to what we found using Rule of 72.
Now, let’s assume a higher rate of return e.g., 18% from my investment – rest everything remains the same. Number of years would take to double the money –
**Using ‘Rule of 72’:**
=72/18% = 4 Years
**Using Excel NPER function:**
=NPER(18%, , -100000, 200000,) = 4.1878 Years
The difference is now of almost 73 days. So, the accuracy of result is getting compromised here.
**The conclusion is:**
The ‘Rule of 72’ works well or serves the purpose in most cases. But if accuracy really matters for you, then you must remember that **Rule of 72 works best or gives quite close to accurate result when the assumed rate of return is between 6% to 10%.**
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Category
Mutual Fund
Consider a simple scenario – you had purchased some mutual fund units before 31st January 2018, and you sold those units sometime after 1st April 2018 (assuming in the meantime more than a year has passed between the purchase and sale date) – then how your long term capital gains will be calculated and taxed? Let us understand this in an easy way through example and without any complication. Read on.
Taking a cue from the above example, let’s say you purchased one unit of ABCD mutual fund scheme at a price of Rs. 10 on 1st September 2016. You sold the same on 1st August 2023 at a price of Rs. 22. So, what is the capital gain in this case. To find out that, we also need to know the NAV of the scheme as on 31st January 2018. Why? That is because gain made from 1st Feb to sale date would only be taxed.
**Capital Gain = Sale Price – Cost of Acquisition**
There is no confusion here on ‘Sale Price’. But how is ‘Cost of Acquisition’ calculated? Let us express that in form of an Excel function.
Cost of Acquisition = MAX ( MIN (31st Jan 2018’s NAV, Sale NAV), Purchase NAV)
**Let us now calculate capital gain 3 different scenarios.**
**Scenario 1:**
Purchase NAV = 10; NAV as on 31st Jan 2018 = 15; Sale NAV = 22
Cost of Acquisition = MAX ( MIN ( 15, 22), 10) = MAX ( 15, 10) = 15
Therefore, Long Term Capital Gain = Sale NAV – Cost of Acquisition = 22 – 15 = 7
**[This is going to be the most likely scenario in maximum cases]**
**Scenario 2:**
Purchase NAV = 10; NAV as on 31st Jan 2018 = 22; Sale NAV = 15
Cost of Acquisition = MAX ( MIN ( 22, 15), 10) = MAX ( 15, 10) = 15
Therefore, Long Term Capital Gain = Sale NAV – Cost of Acquisition = 15 – 15 = 0
**Scenario 3:**
Purchase NAV = 10; NAV as on 31st Jan 2018 = 22; Sale NAV = 8
Cost of Acquisition = MAX ( MIN ( 22, 8), 10) = MAX ( 8, 10) = 10
Therefore, Long Term Capital Gain = Sale NAV – Cost of Acquisition = 8 – 10 = -2
Hope, this clarifies.
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Category
Mutual Fund
**Mutual Fund Distributor (MFD)** is there to help you in managing your personal finance better. It is therefore quite an important factor that your MFD fits the bill perfectly. Here, I am assuming that you understand the need of an MFD at the first place and you are not a full-time investment expert knowing all your behavioural finance pitfalls and still being able to take unbiased financial decisions over and again. The following 6 important factors are among the top few qualities that you must expect in your MFD:
**Trust and confidentiality:** Your MFD must be trustable enough that you can freely discuss with him/her all your financial (and sometime non-financial) aspirations and concerns. If your MFD is referred by someone whom you know quite well – then your job becomes easier. Otherwise spend some time, do some transactions with your MFD and see how things are going. Remember, this factor outweighs every other factor.
**Backed by someone:** Preferably, by your MFD, you must also be introduced to a second person or an organization whom you can approach to, in absence of your MFD. This gives lots of comfort to you as you and your family are never without support, at any situation whatsoever.
**Service and approachability:** Most of the times your investment and insurance go smooth without any hiccups. But there are times, when you require quick help regarding financial (payment and portfolio related) or non-financial (holding pattern, nomination, change of details etc.) transactions. Your MFD, in such cases, must be contactable and forthcoming with timely solution. This can even be made way simpler with right technology platform support offered by your MFD.
**Technology handholding**: Your MFD must be equipped with best of technology. Be it making transactions or checking your portfolio – should be done through an easy-to-use and trustworthy technology platform. Your MFD must be well-connected with the technology service provider and the technology platform must have proper offline presence as well.
**Multi-Products offering**: Your MFD must also be well-connected to be able to offer multiple products based on your need and choice. The list of products can include – Mutual Funds, Insurance, Stock Broking, Fixed Deposit, Secondary Bonds, PMS, AIF, P2P Loan Product (LiquiLoans), Curated Portfolio Service (smallcase), Unlisted Equity, NPS, Sovereign Gold Bonds, Loans etc.
**Always up to date:** We are well aware that getting information about anything and everything is no longer an issue. But the real issue is to get exactly what you need in your own way without any noise and distraction. Here, your MFD should be able to help you if he is always up to date with products and processes.
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Category
Financial Planning
What is the formula of finding future value of an investment? Let us talk plain arithmetic here. The formula is FUTURE VALUE = PRESENT VALUE OF INVESTMENT * (1 + ANNUAL COMPOUNDING RATE OF RETURN) ^ NUMBER of YEARS. What lessons can we learn from this seemingly easy looking formula? Let’s check.
One thing is pretty clear from the above formula, if somehow, we can increase either present value of investment or rate of return or number of years – the overall future value would increase for sure. But how easily that can be done and how much control we have in each one of these three factors? Let’s check one by one.
**Present value of Investment:** This can be increased, but up to a certain limit which is our investible surplus amount. Naturally, we cannot and should not borrow and invest. This can be increased only if somehow, we can earn more and save more. Earning is the only one thing, that can be increased without any upper limit. But for that we have to work hard and also need to invest in ourselves. But even then, it is not that simple.
**Rate of return:** On this factor, we have the least control among all three. Very few of us have the time, skill and resources to continuously study and research various investment avenues so that return can be increased continuously for years.
**Investment period:** This is the last and the only factor that can be increased beyond any limit by each of us, only if we start investing early. But the greatest irony is that very few of us consider and focus on this factor. We blame ourselves for not being able to earn more or save more. We blame our investment advisors for not being able to suggest us investment schemes with higher return. But the factor which is in everyone’s control – that is increasing the period of investment – hardly gets any notice!
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The awareness of opting for adequate health insurance cover is quite low in our country. The top two reasons for the same could be as follows –
**> Lesser number of insurance advisors than required for a hugely populated country like ours.
**> Limited scope of cashless hospitalization and complicated process of claim settlement. The good news is that the second reason may soon be a thing of past!
**
Read on.
At present around 37% of health insurance policyholders have to go for ‘Pay first – Claim later’ or in other words – claim settlement through reimbursement procedure, in cases of claiming expenses incurred due to hospitalization. This happens in case of unplanned hospitalization or when policyholder gets treated in a hospital which is outside the network of the insurer.
This process is time-taking and complicated to say the least. Also, this reimbursement process makes the whole purpose of taking health insurance cover at the first place meaningless – at least to some extent as you have to maintain a sufficient amount of liquid balance to shell out in case of emergency hospitalization.
This ordeal is coming to an end. **Policyholders will now be able to approach any hospital and avail of the cashless facility for their medical expenses, irrespective of whether the hospital is part of their insurers' cashless network or not.**
General and health insurance companies, through the General Insurance Council, have come together to enable **‘Cashless Everywhere’** under which you can get admitted across any of the almost 40,000 hospitals in the country (hospitals registered under the Clinical Establishments Act, 2010, with a capacity of at least 15 beds) and still get entitled for cashless treatment – provided the following conditions are met –
**> For elective procedures, the customer should intimate the Insurance Company at least 48 hours prior to the admission.
**> For emergency treatment, the customer should intimate the Insurance Company within 48 hours of admission.
**
**> The claim should be admissible as per the terms of the policy and the cashless facility should be admissible as per the operating guidelines of the Insurance Company.**
More specific details regarding this facility are expected to come from the insurer’s side soon. It is therefore recommended that check with your insurer for finer details regarding the same. We are keeping an eye on the ongoing developments and will try to keep you posted here with follow-up blog posts.
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Category
Financial Planning
Any time is good time to invest – this sentence has almost become a common parlance for all investors like us and largely for long-term investors – this is true also. But not many are talking about right time to take our money out of investments. Whether you consider redemption as a part of personal finance strategies or as a need – it makes lot of sense to know a thing or two about redemption.
**Following 3 things must be considered while making redemption from any investment:**
1. **Goal is due / Target return is achieved –** There are investments which we make keeping a goal in mind (mostly in mutual fund or in bouquet of products). Such investments are ideally to be reviewed and monitored regularly and often get moved to less volatile products as the goal year is coming nearby. Then there are investments which are made keeping a target return in mind (mostly from investments in stocks). Exiting from all these planned investments should be a no-brainer provided you do not get greedy or fearful during such time.
2. **Non-performance / Change in strategy –** Such decisions often come out of a review meeting where your portfolio is analysed in detail. If certain investments in your portfolio have been consistently lagging in performance compared to peer group of products – then it could be the right time to exit and switch to some better alternatives. Or there may be a change in fund objective or strategy which is not fitting your requirements – then also exiting could be an option.
3. **Financial emergency –** Despite having a sizeable amount in emergency or contingency fund – there could be scenarios, where taking money out of the investments is the only option - we are left with. In such situations, though considering market level or outlook is secondary – but it is of primary importance to consider – which investment to part with. Consider the potential gain you are sacrificing, tax impact, exit load etc. before finalizing on which product to exit from.
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Category
Financial Planning
If you want to secure regular income payout throughout your life starting now or later – Annuity Plans (also often referred as Pension Plans) are worth to consider. Mostly such plans are opted by retirees. But even if someone continues to work and still want a regular payout for whatever reason – annuity plans can be opted. What are the options available? What do you must know before buying? Read on.
**Immediate or deferred Annuity -** First thing first – decide whether you want regular payout to start immediately or later. If you want to start receiving income immediately – go for **Immediate Annuity Plans**. For immediate annuity plans, you must pay a single premium in lump sum. If you do not want to receive income immediately but after say, 5 – 10 years – then go for **Deferred Annuity Plans.** For deferred annuity plans, you may choose to pay a single lump sum premium (in such cases you can defer the payout receiving to commence by minimum 1 year or multiple of 1 year). For deferred annuity plans, if you choose to pay regular premiums – then there must be a minimum deferment period (in most cases, minimum 5 years – though it may vary depending on insurer and plan opted).
**Payment Frequency** - Next, you must choose **payment frequency**. Depending on plan chosen, you may opt to receive regular payouts – monthly, quarterly, half-yearly or annually.
**Annuity Option** – Last but not the least – you must choose an **Annuity Option**. There are so many annuity options available – that you may find it overwhelming. Let’s discuss here two most common options –
**Life Annuity with Return of Purchase Price:** Annuity will be payable to you throughout your life and on death the Purchase Price will be returned to your nominee.
**Joint Life Last Survivor with 100% of annuity to spouse with Return of Purchase Price:** Annuity will be payable to you throughout your life; and on death, your spouse will receive 100% of the prevailing annuity throughout his/her life. On death of the last survivor, the Purchase Price will be returned to the nominee.
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Category
Mutual Fund
Shakespeare said – What’s in a name? But in reality, naming a thing has lot to do with how we perceive a thing. Take, for example what we used to refer earlier (many of us still use that in casual terms) as ‘Dividend’ in a mutual fund. That time, it was often thought that dividend received from a mutual fund scheme is same as dividend received from a stock we hold, which it is not. To clear that confusion, SEBI rechristened it as IDCW (Income Distribution cum Capital Withdrawal). Did this rename help? Let’s see.
**How IDCW (earlier known as mutual fund dividend) is different from stock dividend?**
When we receive a dividend from a stock we hold, it is sharing of profit earned by the respective company. When a company declares dividend on its stock, it does not bring down the stock price anyway. In layman’s term, we can refer receiving dividend from stocks as ‘extra income’ which is over and above the unrealized or realized gains we receive from holding that stock.
But in case of mutual fund, ‘dividend’ is compulsorily to be paid out from realized gains by the fund manager. So, paying out such ‘dividend’ of course results in a drop of its unit value or NAV as it is distributing income to certain unit holders (who opted for it) by withdrawing from its capital – thus the apt name for this activity is Income Distribution cum Capital Withdrawal.
**What is SWP (Systematic Withdrawal Plan) then?**
In case of SWP, fund manager has no role to play. Instead, you are at the driver’s seat. It is nothing but you are redeeming your units, irrespective of whether that means realizing gain or loss. In case of IDCW, it must come from realizing gains, no exception there. Also, declaring ‘dividend’ from a mutual fund scheme depends solely on the fund manager. It is up to him or her to decide, both the ‘dividend’ amount and frequency.
**How are SWWP and IDCW taxed?**
IDCW or ‘dividend’ income received from a mutual fund scheme adds to a unit holder’s income (under ‘income from other sources’) and therefore taxed accordingly. So, if you are in 30% tax bracket, you are then taxed accordingly. In case of SWP, it comes to you as ‘capital gain’ (short-term or long-term) and not as income for you. Now, we all know that short-term gain from equity mutual fund is taxed at 15% and long-term gain from equity mutual fund is taxed at 10% (beyond Rs. 1 lakh gain from equity holding in a financial year). So taxing of SWP income has nothing to do with what tax bracket you fall into.
**Conclusion**
If you want to receive regular income from your mutual fund holdings at your preferred terms – that is frequency and amount of income are decided by you – then go for SWP. The added benefit here is SWP’s tax efficiency over IDCW option.
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Should Gold be part of your investment portfolio? If yes, then how much? In that case, in what form should we buy gold – physical gold jewellery, bars, coin, Gold ETF or SGB (Sovereign Gold Bond)? Questions are many. As usual, in many other cases of personal finance, here also the answer is – “It depends”. But it depends on what and how much? Let’s discuss.
First things first – gold itself should not be considered as an asset class, the right asset class in this regard could be ‘commodity’ as a whole. But the awareness and availability of other forms of commodity is still very rare and sparse. So, in that case if we consider gold itself as an asset class, then how it is placed against all other asset classes (e.g. equity, debt, real estate etc.)?
Still in our country, gold is largely bought and kept in physical form and mostly in form of jewellery. It is somehow considered as holy, a part of social custom, an ideal gift on some occasions and above all – a status symbol. In all these cases, gold actually turns out to be a dead asset, as it is never sold neither it results in any sort of income stream. If you ignore the notional value of it and consider the cost of maintaining a locker to keep your physical gold safe, it even results in negative return.
Off late, people started buying gold in digital form, where gold as a unit gets credited in your demat account like shares and bonds. Here, your holding reflects the gold price. So, when you decide to trade, equivalent amount of money gets credited in your bank account. With that money, you can then buy physical gold or spend in whatever way you want.
Sovereign Gold Bond (SGB) tries to address this issue by giving you a regular income stream at the rate of 2.50% (taxable) p.a. payable half-yearly. If you hold the SGB till its maturity i.e. 8 years, then post maturity you need not pay any capital gain tax. After 5th year, you can sell it back to government on the date of interest payout. Anytime you sell it whether back to issuer or to a buyer (as it is tradable in exchange) after 3rd year and before maturity – you end up paying long term capital gain @ 20% with indexation (i.e. inflation factored in). Selling it before 3 years will attract short term capital gain tax as per your tax bracket.
Now the question is – should gold be part of your investment portfolio? The answer is – need not be in case of long-term goal-based investing. If your investment horizon is long term and you are overall bullish about India growth story and economy – you can very well keep predominantly equity and some percentages of debt asset.
If your investment horizon is medium term or short term and you are worried about economic downturn, rapid rise of inflation, Indian currency losing purchasing power – then you can very well consider gold as part of your investment portfolio.
But if your purpose is diversifying your portfolio to generate certain benchmark return, keeping 5 – 10% of gold asset in portfolio often proved out to be a good strategy. Of course, in such cases gold must be bought/kept in paper or digital form. Multi-Asset Allocation Mutual Fund schemes also offer a readymade solution in this regard and can be considered.
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The purpose of making investment may differ – going to an expensive vacation, foreclosing an outstanding loan, funding for children’s higher education or securing own retirement years etc. But while implementing any of these investment decisions – we must pick and choose some or other financial products. At this juncture knowing investor’s risk profile is said to be of paramount importance, which consists of his/her risk appetite and risk capacity. What is what? Let’s check. Read on.
**Risk appetite** is how much risk an investor is ready / willing to take. On basis of his answer, we often mark him as an aggressive, moderate, or conservative investor. Based on only this criterion, if financial products are chosen – chances of going wrong is high. Why? Because such answers, given by investor, largely depends on – current market outlook, investor’s experience with some or other investment products, and finally, herd mentality that exists in that period. None of these are ideal or reliable ways to measure one’s risk profile. Even if we agree that investor is giving genuine, unbiased, and informed answers to risk profile questionnaire – still this may not lead to ideal and optimized investment decisions. What is the alternative then? The answer is – Risk Capacity.
**Risk capacity** of an investor is determined based on – individual financial net-worth, age, income level and above all the time horizon of the planned investment. Trusting risk capacity over risk appetite while finalizing on investment products – is often considered a better choice. Let us understand this with an example of cricket.
**Example 1:** Suppose, Team A, batting first, scored 199 runs in a 50 over match. Now, while Team B is coming to bat second – they can afford to not take any risk and keep a run rate of 4 per over should be sufficient. Here, even if Team B’s risk appetite is high, it makes sense to take a conservative or moderate approach to win the game (or achieve the goal).
**Example 2:** Suppose, Team A, batting first, scored 399 runs in a 50 over match. Now, while Team B is coming to bat second – they cannot afford to go slow as they must maintain a run rate of at least 8 per over. Here, even if Team B’s risk appetite is low, it makes sense to take an aggressive approach to win the game (or achieve the goal).
Relating this to personal finance, suppose a young investor of 30 years age (with not much of net-worth and surplus) is planning to achieve a long-term goal like retirement – choosing only low-yield fixed income assets for the same, will not be recommended – even if he is having a conservative risk appetite. Instead, he should take calculative exposure in well-managed equity assets as the goal is long-term and available surplus is not sufficient.
On the other hand, when the same young investor is planning to achieve a short-term goal like making a down-payment to purchase a house – choosing equity assets for the same will be a strict no-no. Instead, he should consider a non-volatile fixed-income instrument for the same.
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Category
Mutual Fund
Financial freedom is a dream for many, where you have the resources and flexibility to live life on your terms. While it may seem like an elusive goal, mutual funds can be a powerful tool to help you achieve this aspiration. In this blog, we will explore how mutual funds can contribute to your journey to financial freedom.
**→ Diversification and Risk Management**
One of the fundamental advantages of mutual funds is their ability to diversify your investments. Diversification means spreading your money across a range of assets, such as stocks, bonds, commodities. By investing in a mutual fund, you become a part of a larger pool of investors, which, in turn, allows the fund manager to diversify your investments effectively. This diversification helps to reduce the impact of poor-performing assets and manage risk.
**→ Professional Management**
Mutual funds are managed by experienced fund managers who make investment decisions on your behalf. These professionals are equipped with the knowledge and expertise to navigate the complex world of financial markets. They conduct research, analyze market trends, and strategically allocate the fund's assets to maximize returns while mitigating risks. This professional management ensures that your investments are in capable hands.
**→ Accessibility**
Unlike some investment options that require substantial initial capital, mutual funds offer accessibility to a wide range of investors. You can start investing with a relatively small amount of money. This accessibility makes mutual funds an attractive choice for individuals at various stages of their financial journey.
**→ Liquidity**
Mutual funds provide liquidity, meaning you can easily buy or sell your units. This flexibility ensures that you have access to your money when you need it. Whether you're saving for short-term goals or maintaining an emergency fund, mutual funds allow you to maintain financial flexibility.
**→ Automatic Investment with SIPs**
Achieving financial freedom often requires discipline and consistent saving. Mutual funds offer a solution through Systematic Investment Plans (SIPs). SIPs allow you to set up automatic, periodic investments, helping you save and invest consistently. Over time, this disciplined approach can significantly increase your wealth.
**→ The Power of Compounding**
Mutual funds harness the power of compounding, which can significantly impact your wealth over time. As your investments generate returns, those returns are reinvested, and your investment base grows. This leads to exponential growth and can be a key driver in achieving your financial goals.
**→ Flexibility**
Mutual funds come in various categories and cater to different investment goals. Whether you're saving for retirement, your child's education, or buying a home, there is likely a mutual fund category that aligns with your specific financial objectives. This flexibility allows you to tailor your investments to meet your unique needs.
**→ Transparency**
Investors receive regular updates on their mutual fund investments, ensuring transparency. You can easily track the performance of your investments and make informed decisions about your portfolio.
**→ Tax Benefits**
Certain mutual funds offer tax advantages. For example, Equity-Linked Savings Schemes (ELSS) can provide tax deductions under Section 80C of the Income Tax Act.
→ Goal-Oriented Investing
Mutual funds can be a vital tool for goal-oriented investing. Choose funds that match your financial goals to help you reach them in an organized way. This approach ensures that you are not just saving money but actively working towards your aspirations.
**Conclusion**
Financial freedom is not a distant dream; it's a tangible goal that you can work towards with the help of mutual funds. Through diversification, professional management, accessibility, liquidity, compound growth, and other advantages, mutual funds provide a path to financial independence. To make the most of this investment option, it's essential to select funds that match your risk tolerance, time horizon, and financial objectives. Regularly reviewing your investments and staying committed to your goals will help you realize your vision of financial freedom. So, start your mutual fund journey today and take the first step towards achieving your financial aspirations.
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Category
Mutual Fund
**How to invest in mutual funds without any prior knowledge about it?**
Investing in mutual funds can be a smart way to grow your wealth, even if you have no prior knowledge of the financial markets. Here's a step-by-step guide on how to start your mutual fund investment journey without any prior expertise.
**1. Educate Yourself:** The first and most crucial step is to educate yourself about mutual funds. A mutual fund is a pool of money collected from many investors which is managed by a professional fund manager. The manager invests the pooled money in a diversified portfolio of stocks, bonds, or other securities.
There are various types of mutual funds, such as equity funds, debt funds, hybrid funds etc. each with its own risk and return profile. Take some time to read articles, watch videos, and gain a basic understanding of these concepts.
**2. Set Clear Financial Goals:** Determine your investment goals. Are you investing for retirement, a major purchase, or simply to grow your wealth? Knowing your objectives will help you choose the right type of mutual fund and develop a strategy.
**3. Seek Professional Guidance:** If you're unsure about where to start, it's highly recommended to seek professional guidance. An expert can assess your financial situation, risk tolerance, and investment goals, and suggest suitable mutual funds thus reducing costly financial mistakes.
**4. Select a Mutual Fund:** Always makes sure that you choose a mutual fund that aligns with your investment goals and risk tolerance.
**5. Open an Investment Account:** To invest in mutual funds, you'll need to open an investment account. The account setup process is typically straightforward and involves providing some personal and financial information. The platform you choose will guide you through the necessary steps.
**6. Start with a Small Investment:** It's a good idea to start with a small amount of money, especially if you're new to investing. Many mutual funds have a minimum investment requirement, which can vary from scheme to scheme and AMC to AMC too. Make sure to check this requirement and ensure that it fits your budget. Starting small helps you understand how investing works without risking a lot of money.
**7. Monitor your investments:** After investing in a mutual fund, it's crucial to review your portfolio. You can track your investments through the online platform where you opened your account. Check the performance of your funds periodically and compare it to your investment goals. Be prepared to make adjustments to your portfolio if your goals change or if a fund consistently underperforms.
**8. Continuous Learning:** Investing is an ongoing process. As you gain more experience, continue to educate yourself about mutual funds and investment strategies. Read books, attend seminars, and stay updated with financial news. The more you learn, the better equipped you'll be to make informed investment decisions.
Investing in mutual funds without knowledge is possible, but it's important to know that all investments have risks. Mutual funds too can fluctuate in value, and it's possible to lose money.
If you ever feel uncomfortable making investment decisions on your own, don't hesitate to seek professional guidance. Education, planning, and expert advice can lead to a successful mutual fund investment journey.
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