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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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
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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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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