The announcements on tax on long-term capital gains and income distributed by equity oriented Mutual funds in the budget are still echoing. Equity or Mutual Fund investors are asking the same filmy question – God why us?
But my question is – Is 10% LTCG on Equity so bad?
LTCG Tax
There were some rumors that there will be a proposal to tax long term capital gains and the rumors turned out to be true! It has been announced that there will be a tax of 10% on long term capital gains over Rs. 1,00,000. Gains earned up to January 31, 2018 will be exempt. The long-term is defined as 1 year. If you have purchased shares last year and sell it in 2018, the gains the stock made till 31st January, 2018 will also be exempt from tax and only the difference in price from date of sale and price on 31st January, 2018 will be taxed. For more details, you can read FAQs shared by govt.
Why?
Some experts believe that corporate sector will be more affected by this than individual investors. This will help in generating more income for the government. The tax is an attempt to reduce fiscal deficit & support social programs.
Moreover, this will help curb fraud in cases where a lot of income is converted into investments and taken back in the form of long-term capital gains.
For You
Individual investors who are into long term investments are there for the growth potential and the tax may not make much of a difference to them in long term.
Most countries tax capital gains & much higher than 10%. Now that India has proposed to levy taxes, there are only 5 countries that do not levy tax on capital gains. US, China, Germany, South Korea, Brazil all charge tax on capital gains. So the argument that foreign investors will stay away because of tax may not be a strong one. If India continues with a strong economic growth rate and remains politically stable, global investors would not shy away from investing.
Indian’s love tax saving – they can invest in even suboptimal products to save that. That’s purely your choice…
Equity Capital Gain Tax – World
BUT
But this could also set a trend where the tax rate keeps getting increased. That will not be beneficial to the common man. There is already a lot of tax on equity transactions – Service Tax, Securities Transaction Tax, GST, SEBI charges and Stamp charges. Now there will be additional tax on the income earned. Cont……
Focus on things that are under our control…
Dividend Distribution Tax
Equity Oriented Mutual Funds will have to pay a dividend distribution tax of 10% post this budget. This is to bring parity across growth funds and dividend funds. If they haven’t introduced this – we all would have shifted to dividend options : )
Now what?
Long Term Capital Gain & Dividend Distribution Tax means the amount to be distributed to investors or growth after tax will be less. But that does not mean that you stop investing in equity mutual funds as they still have the potential to give good returns in the long run.
The total amount in your hands or the value of your investment will be lesser than it was in the previous years and that can be handled by reviewing the financial plan.
Tax saving should be part of your investment planning, not vice versa.
My view till this point is 10% is reasonable & you should stick to your existing investment strategy.
The markets always seem to be in action if we go by the news, views and experts’ comments. As per them, there are a lot of events happening that might affect our investments – the budget, elections, US Interest Rates, Immigration issues etc.
It may seem that we need to constantly do something with our investments. It seems that we should always be taking some action to protect our investment portfolio or reinforce it.
We almost feel scared if we do not do anything!
This constant need of doing something is called action bias.
We humans have a tendency to do something whether it is of use or not. We stand in a queue and constantly check other queues and many times change the queue. We start in our car on a certain route but keep thinking if another route would have been better.
In case of investments, we want to take some action as we believe taking action will improve our returns and we will build more wealth.
But the reality is different. Action bias just keeps us busy but it does not always lead us to more wealth or better returns. Many times, investors end up losing money as they take some action in panic or they buy or sell investments hastily reacting to some news or view. We have seen people reacting badly to some news items and selling their investments in panic. This leads to a fall in the prices of those investments and there is more panic and more people sell it off leading to erosion of value.
When it comes to personal finance, apart from gaining knowledge, analysing investment options, deciding on targets to buy and sell, the one activity that takes a lot of time is ‘to do nothing’. Doing nothing means waiting. Waiting for investments to grow in value.
Stay away from action bias using the following techniques
1) Be Patient
Markets go up and down. It is not always possible to buy and sell at the best prices. Your investments might be at a loss now. But if you have researched well and chosen the right product, it will bounce back in some time.
Think and observe what is happening, analyse the situation and then take a decision. When you are doing this, it does not mean you are doing nothing. It means you are not biased with taking action but can wait and watch and make the right moves if required.
2) Do not Track Investments Too Much
A long-term investor does not care about the price shifts and volatility in the short-term. If you keep checking your portfolio, you are biased to take action.
Do not evaluate the performance of your portfolio frequently. Keep it away from your mind unless there has been some radical in your life or world and you know you have to take some action. Read – Medium Maximisation – another factor in action bias
3) Invest as per your Risk Profile
Before investing, check your risk profile. How much risk can you stomach? How much capability do you have in terms of taking the risk in your finances?
You should know the answers to these questions before you start investing. If you have a low-risk profile and you invest in risky instruments, you will lie awake in the night.
At the same time, if you can take risks but are stuck with low-risk low returns investments, you will worry constantly that you could have made more money.
4) Be wary of success stories and investment experts
Such stories tempt us to take action to improvise on the portfolio. But you need to be aware and in control of yourself.
You should invest as per your requirements, current market condition (or an all-weather asset allocation strategy) and using some common sense. If you have an effective financial planner to manage your wealth, you are in good hands.
Action bias is inherent in humans. It is important to have an investment strategy. But it is more important to know when to acquire assets and when to sell them off.
A strong investment strategy will remain so only when the investor is patient and take a cool-headed decision.
Please share your observations & experience in the comment section.
Earn more from your gold – GOLD MONETIZATION SCHEME
India’s love for gold has been prevalent for centuries. No celebration is complete without adding a touch of gold in it, be it in any form.
This love for gold by our ancestors and us has resulted in a lot of reserved gold lying idle in homes. Either it was passed on through generations or it was bought. In either of the case the gold is just lying idle after investment.
Of course, the investment brings capital appreciation but it comes with an added cost of storage and the risk of theft or loss. But what if we could earn additional income from the idle gold along with capital appreciation and that too without the cost and risk?
The Gold Monetization Scheme introduced by the Government of India does just that. It helps you earn more from the gold you already have, without further investment.
What is Gold Monetization Scheme?
The Gold Monetization Scheme is like a savings account for gold. Here you deposit your gold with the bank and the corresponding value of gold gets credited to your account. On this account you also earn interest along with the capital appreciation that comes with the change in price of gold.
Let us take a look at the features to learn more about the scheme.
● Flexibility in deposit
The Gold Monetization Scheme gives you the flexibility to deposit gold in any form, be it gold bars, coins or jewellery. Every kind of gold is accepted in the scheme. However, gold jewellery studded with stones or gems are not accepted.
● Deposit limit
The minimum amount of gold that you can deposit in the Gold Monetization Scheme is 30 grams. There is no maximum limit for the deposit. You can deposit as much gold as you deem fit.
● Purity testing
The gold deposited by you first goes through a purity test. There are over 300 Purity Test Centres certified by the government that are eligible to conduct the purity test. Once the test is complete a certificate is issued stating the purity of the gold deposited.
The purity test is a mandatory step in the Gold Monetization Scheme. The gold that you intend to deposit is first tested for purity at the Purity Test Center.
Here, the gold is first scanned to give an estimate of purity. After the scan is complete the depositor has the option whether to take it to the next step, which is melting of gold. Here the gold is melted to remove impurities and calculate the exact weight and purity.
Once the gold has been melted the depositor still has the option whether to deposit it or not. He can collect his certificate and the gold after paying the charges of the test. But if you decide to deposit, these charges will be borne by the bank. The only catch here is that it will lose the form it was brought in, as it has been melted.
● Bank deposit
After receiving the purity certificate, the depositor can take the certificate to any notified bank that supports the Gold Monetization Scheme. Upon receiving the certificate, the bank will open an account called ‘Gold Savings Account’ in which the amount of gold reflecting in your certificate will be credited.
Thus, you will be holding the exact amount of gold that you were holding previously but in a paperless form.
● Gold Monetization Scheme Interest Rate
The gold invested in the Gold Monetization Scheme earns you an additional annual interest of up to 2.5% p.a. depending upon the term of deposit. Therefore, along with the capital appreciation in gold, you also earn additional interest income.
● Lock-in-period
The gold can be deposited in the Gold Monetization Scheme for a period ranging from 1 year to 15 years. It is divided into three plans:
Short term plan – 1 to 3 years
Medium term plan – 5 to 7 years
Long term plan- 12 to 15 years
● Maturity option
At the end of the term the depositor can redeem the value either in gold or cash. The decision to choose between gold or cash has to be taken at the time of deposit and cannot be reversed.
If you choose gold then at the maturity you will receive pure gold bars or coins corresponding to the value in your gold savings account. If you had deposited jewellery, you will not get the jewellery back.
If you choose cash then you will receive the value of gold prevalent on the date of maturity.
You can withdraw before the end of the term i.e. premature withdrawal is permitted. However, in case of premature withdrawal it is at the option of the bank how they want to pay. Banks can either pay in cash or gold irrespective of what you had chosen at the time of deposit.
● Tax exemption
The capital gain and the interest earned at the end of maturity is exempt from tax. No income tax will be levied on withdrawal.
These were some of the features of the Gold Monetization Scheme. Now let us have a look at the benefits of the scheme to understand how exactly is this scheme beneficial.
Along with capital appreciation in the price of gold, the Gold Monetization Scheme lets you earn an added interest of up to 2.5% p.a. over and above the increased price of gold.
2. Save storage cost:
Keeping idle gold in your home adds to the cost of storing it. Since it is a precious metal it needs to be stored cautiously. Usually people keep it in lockers or so for which some maintenance charges are required to be paid. These maintenance charges decrease your net earnings.
3. No risk:
Keeping the gold at home is always a risk. SInce gold is of high worth there is an inherent risk of theft or loss while storing it physically. With Gold Monetization Scheme your gold is safe and secure and that too without an added cost.
4. Capital appreciation:
The price of gold is dependent on the market forces of supply and demand. And since the demand has always been high than the supply, there is usually an increase in the price of gold.
With the Gold Monetization Scheme, you get to enjoy the benefit of the increased prices of gold (capital appreciation) just like you would with physical gold but without any added cost.
5. Tax Benefit:
Traditionally people sell gold to get cash on which capital gain tax is charged since it a capital asset. But if you invest in Gold Monetization Scheme you get an exemption from tax since gold invested in Gold Monetization Scheme is kept out of the definition of capital asset in the Income Tax Act.
Hence, you not only earn interest and capital appreciation but also save tax on the same which you would have to pay had you been selling it in the market.
This is pretty much about the Gold Monetization Scheme. In our opinion it is a great scheme to earn additional income from the idle gold lying in your home. So don’t think anymore and make the most of this amazing scheme.
Have you thought of wealth? Have you thought of what is wealth means to you? At which point will you say or did you say, ‘I am wealthy?’.
In this post, you can check what does wealth means to me & the results of a Twitter poll on this topic.
Wealth does not just mean money in the bank or a successful business. It means different things to different people. Here are some responses to the question – When will you consider yourself wealthy?
When I have enough money to have a comfortable lifestyle for me and my children.
When I have Rs. 1,00,00,000.
When I have so much money that I do not have to work again.
When I can do what I like and do not have to worry about money.
Some people may not be able to buy luxury homes or vacations but still might consider themselves wealthy. Some people might have enough money to last the next two generations but still, want more.
Money and Wealth are different – Money is a medium of exchange. It has some value. It can be used to possess something – food, car etc. Money helps to measure wealth. On the other hand, wealth is having enough money and other possessions to live life the way you want now and in the future. For example, you may have a lot of money and you will buy a BMW car, a big house and the latest PlayStation games for your children. But suppose you get stuck in somewhere in the city away from home due to heavy rains and flooding will any of this help? If you have clean drinking water, some food, the presence of mind and fitness to reach home, you would be wealthy.
Wealth is not just about money – Some people might want a lot of money. Some others might want to be able to pursue their hobbies or passions without worrying about daily expenses. Some people might want to have wealth to support their ageing parents and children. If you are constantly stressed, work long hours and do not spend any time doing what you love, even if you have a lot of money, you might consider yourself poor as your mind and spirit are not healthy. If you have a balanced life in terms of money, health, and social/family life, you might feel more wealthy than anyone.
Long-Term Satisfaction – Being wealthy means you are able to manage your financial goals with money you earn easily for the long term. You win a lottery and you become cash-rich. If you spend it within a week, you were not wealthy, you just had some extra money for a small period of time. Being wealthy means you have money to take certain risks, be able to create income streams, and lead a comfortable life with your personal and financial goals being achieved or on the course of being fulfilled.
How will the definition of wealth help you develop a better financial plan?
If you are the kind of person who believes that being wealthy means having a lot of money and to be able to buy a lot of material things, you would need to incorporate your expenditure in your financial plan. You would have to allocate funds for them and also determine how will manage to get money to satisfy your needs.
If you are a person responsible for a family, you would want to provide the family a comfortable life and provide them for their needs and wants. This means your financial plan needs to have short-term and long-term goals involving all family members.
If you are a person, who wants to make some money and then go the spiritual path, you may not require to reach up the corporate ladder to make more money. You could take care of basic expenses and follow your passion.
Being wealthy can mean being cash-rich, being able to run a different marathon in a different city every year, or taking time off from work to be with family. You should define the meaning of wealth for yourself. You will be able to make better financial decisions that will benefit you and your close ones.
Do you think you are wealthy? Let us know why you think so… If you like this post – must share it with your friends…
Albert Einstein and Sir Issac Newton are still considered the greatest scientists. They both were geniuses.
Einstein developed the theory of relativity and published more than 300 scientific papers.
Sir Issac Newton discovered the laws of motion and did path-breaking work in gravity, optics, mathematics etc.
They both are considered as extraordinary geniuses. But even they have lost money in the stock market!
(maybe he said this after he lost money)
Sir Issac Newton invested in South Sea Company. He made a handsome profit initially – He invested when prices were low and sold at a good price. But when the price continued to rise, he bought them again close to the peak price. When the bubble burst, the price collapsed to a price much below the purchase price and Newton had to exit at a very low price. He lost £20,000 which is equivalent to £3,000,000 in today’s prices.
Albert Einstein squandered most of the money earned from the Novel Prize win in the 1929 stock market crash!
It does not matter if you have the highest IQ or are a stock market expert. You have to be careful while investing. You need to research and analyse and make the right moves in the market. Buy at the right time and sell at the right time. (don’t even think of this as strategy)
Remember that the stock market is subject to many factors – people’s behaviour, economic conditions, political events etc. So you are not immune from making a loss. You should work towards making the right investment decisions that can help you achieve your goals in long term.
Emotional bias results in wrong decision making. Newton had made profits in the South Sea company. But he saw that his friends sold at a higher price than him and earned more. He bought the stock again at a high price. The stock then collapsed.
When the price started falling, he did not sell it immediately. He sold it when it was reaching towards the initial price at which it was floated.
There are many emotional biases at play here. Greed to make more profits, envy of profits of other investors and loss aversion. He held on to the stocks for too long thinking the price will rise again. One has to be objective and rational while making investment decisions.
It is a human tendency to avoid loss as much as possible. A loss of Rs. 1000 gives us much more pain than the joy we derive when we gain Rs.1000. Stock markets rise and fall. If you made losses in an investment do not dwell on it too much. It is part of the game. Read – Does loss aversion impact my investments?
Learn from your mistake and move on. In some cases, it might not have been your mistake too! If you think too much about it, it will do no good.
Keep in mind the following to be a successful investor –
Diversify your investments across different assets to minimize risk and maximize returns.
Keep working towards increasing your learning and skills to improve your investment strategy.
Work constantly towards managing the portfolio so that the financial health is closely checked.
Rebalance your portfolio regularly.
Keep emotional bias away while making investment decisions.
This post clearly suggests us to be humble, if such geniuses were not spared by the markets – we are no one to make big claims.
Please share one key financial or personal lesson that you have learned this year – it will be an awesome learning experience for everyone 🙂
Over last couple of decades, the definition of ‘retirement’ has undergone sea change. Will Retirement Rules of Thumb be good enough to achieve our most important goal?
Rather than viewing retirement as relaxed life filled with leisure, most people nowadays dread retirement. Indeed, some go as far as pleading with their employers to extend their terms beyond the acceptable working age of 60 years. Some people “retire’ early from jobs only to pursue careers like consulting or enter business. Few avail of voluntary retirement for financial benefits it brings but most don’t have a retirement plan.
Retirement Rules of Thumb
Regardless of what age one decides to retire from work, people tend to follow the flock by following the proverbial flock. They invest in mutual funds to ensure continuum of lifestyle they enjoyed while working. Health concerns, fears over destitution in old age, vulnerability to crime and a lot of considerations come into play prior to retirement. This forces most women and men to take decisions based on traditional ‘rules of the thumb.’
These much-hyped rules of the thumb can very often prove counterproductive. Rather than ensuring you have a happy retired life, they bog you down with financial worries, loneliness and in extreme cases, mental and physical trauma. Thousands of unfortunate retirees end up penniless destitute or live life of penury with charity from their children or institutions.
Here we list some of these typical rules of the thumb you may consider flouting.
Generally, most people plan their retirement when they are around 40 years old. Fair enough. Residents of large metro cities are eager to settle in smaller towns or villages in their native state. One of the rules of thumb is to invest in a dwelling in these places, where life is sedate and far from the hustle and bustle of cities.
Firstly, relocating to a small town or village is not advisable in India. The reason: Every state of India is at different levels of development. Facilities, amenities and services you take for granted in large cities including uninterrupted power supply, superior healthcare facilities, faster transport systems, telecommunication infrastructure are conspicuously absent in towns and villages.
Selling your apartment in a city to live in a palatial bungalow in village can thus prove disastrous. Firstly, you will have sold an urban property whose rates would rise to invest in a house in semi-urban or rural area that will have few takers. Further, money you get from sale of this property has to be invested in other real estate worth an equal amount, within a stipulated period. Failing to do so can attract heavy capital gains tax. Of course, you have options to invest in government bonds and other financial instruments. However, low interest rates and the minimum ‘lock-in’ period make such investments useless. Never leave your urban home since you will have distanced yourself from friends and relatives. You can also lose lots of money on relocating.
Life insurance
Contrary to popular belief, life insurance does not offer you any hedge against inflation. Nor does your life insurance policy earn any attractive interest. With due respect to insurance companies and their agents, life insurance often earns you what we define as “negative interest.” Meaning, your money can work and earn better in other financial investments when compared with life insurance.
Understandably, you would want to ensure your spouse or kids have sufficient money in event of your death. Life insurance provides a solution. Deft marketing techniques combined with fear account for sales of most insurance policies. Tax benefits offered by the Indian government on insurance policies add to their charm.
However, any good financial expert will explain, life insurance is not a great long-term investment option. There are several others such as Mutual Fund Systematic Investment Plans (SIP), real estate, stocks and even gold, which offer better hedging to your family compared with life insurance.
Public Provident Fund
Over the years, Public Provident Fund schemes offered by banks and India Post have lost their gleam. Interest rates are dropping consistently, making returns on your investment lesser attractive than a few decades ago. PPF requires you to deposit a fixed amount in your bank account over a certain number of years, based upon your age. Your capital and investment is returned with the interest by the bank.
While PPF is a relatively safe investment, current interest rates hover around 7.5 percent to 7.8 percent and sometimes eight percent, depending upon where you open the account. You can open a PPF account with as low as Rs.500 per month deposit. The maximum amount you can invest in PPF is Rs. 12,250 per month or Rs. 150,000 per annum.
The flip side of PPF: You have to lock-in your money for a minimum period of 15 years. Partial withdrawals are possible only during the sixth year of your PPF account operations. SIPs and select Mutual Funds with low risk offer higher returns than PPF, in some instances.
Health Insurance
Another so-called ‘rule of thumb’ for retirement is to buy health insurance. Understandably so, since nobody knows what illnesses and ailments old age can bring. However, it is worth remembering that most health insurance does not cover medical conditions that prevail while buying the policy. Insurers insist on a health check before issuing you such policies since they want to safeguard their interests and are least bothered about your wellbeing.
Secondly, most health insurance policies cost a higher premium if you buy them at an older age. You may inadvertently end up wasting your precious earnings for anticipated treatment for disease that may never strike in your lifetime. Instead, this money can be better invested for quicker and higher returns that can adequately cover any medical emergencies.
Further, most health insurance policies come with fine print: They do not cover a large spectrum of illnesses during the first, second and third year of holding. In the unfortunate event of you getting afflicted with a major illness during these years, a health insurance policy is as good as useless. You will cough up large amounts of cold cash for your treatment.
Living frugally after retirement is fine only if you are unfortunate not to have a pension. A lot of retirees fail to enjoy life in their old age fearing their money would run out before they pass away. Instead of spending on a good life, they stash away cash in fixed deposits or other financial instruments that are of little use once they cease to exist on Planet Earth.
The ‘rule of the thumb’ that dictates retirees should exercise thrift is a sheer myth. Should you have sufficient investments made during lifetime in SIPs, stocks and bonds, own a house and have regular income from these to draw upon, there is no point in saving your pension.
Sadly, a lot of retirees live poor to die rich. Of course, we do not encourage you to get reckless and splurge your pension on stuff you do not require. Yet, we see no reason why you should be deprived of comforts and leisure during your old age. You can earn a decent monthly income through various investment options that can be funded through your pension.
In conclusion
Without prejudice towards any banking or insurance schemes that flourish in the market, we strongly recommend you seek advice from reputed experts about your money and investment plans for retirement.
Also, remember that joint accounts also come with various clauses. In the event of your death, your survivor has to inform the bank about your demise and get nominated as the primary account holder. The ‘either-or-survivor’ clause can be used against your spouse or other beneficiaries, if they fail to notify the bank.
Additionally, we also recommend you draw a proper will, with explicit details of who inherits your money and property. Leaving for heavenly abode intestate can cause extreme hardships for your survivors.
This is a Guest Post by Garima from SureJob
Please share your views on Retirement Thumb Rules in the Comment Section.
Mutual Funds have started getting a decent wallet share at least from major cities in India but are Mutual Fund Risky? Yes!! Let’s check Mutual fund Risk – this post will give you a good idea of:
Risks of Mutual Funds
Risk Factors of Mutual Funds
Low-Risk Mutual Funds
Risk in Mutual Fund SIP
Debt Mutual Fund Risk & in other categories
Don’t forget to get our secret weapon to reduce a major Mutual Fund Risk – from the bottom of this post.
Mutual Fund Risk
All investments are subject to some risk. Mutual Fund investments are less risky as compared to direct investment in equity but riskier than Bank Deposits. The degree of risk in mutual funds differs from one scheme to another. This can be due to the investment portfolio, management, and how the underlying investments are affected by micro and macroeconomic conditions.
People don’t understand (or don’t want to understand) risks in mutual funds in India. Check this comment which forced me to write this post. I have heard that Bankers are giving similar suggestions to their clients – Beware!
What are the risks in Mutual Funds?
Let us understand the risks that we have to be aware of different kinds of mutual funds –
Type of Mutual Fund
Risks
Debt Mutual Funds
Interest Rate Risks
Credit Rate Risks
Balanced Mutual Funds
Higher exposure to Equity
Debt Holdings
Money Market Mutual Funds
Inflation Risks
Opportunity Loss
Equity Mutual Funds
Volatility Risks
Performance Risks
Concentration Risks
Risks in Mutual Funds In India
Debt Mutual Fund Risk
Interest Rate Risk – When the interest rate rises, the price of bonds goes down which means you can lose investment value. So you have to invest as per the interest rate movement or better will match investment horizon with debt fund average maturities.
Credit Rate Risk – Bond MFs are dependent on debt instruments. They are rated on the basis of parameters such as safety, quality, returns, and liquidity. If the quality of debt instruments which are part of the MF scheme is bad, you can lose your money. If the bond issuer does not make the stipulated payments, the MF scheme loses value.
The risks in debt mutual funds are complex & it is definitely beyond the 2 points that I have mentioned. You should check 15 types of Risks that affect your investmenthere
Risks of Balanced Mutual Funds
Higher exposure to Equity – Some fund managers in hope of higher returns, increase exposure to equity and sometimes to volatile equity. This can backfire and the scheme can lose value.
Debt Holdings – If the fund has long-duration bonds and the interest rates rise, the portfolio can lose value.
Risks of Money Market Mutual Funds (Liquid Funds)
These funds fall under the low-risks category of mutual funds but are not risk-free. Normally they don’t play on credit risks but in past, we have seen a few of the fund houses burn their hands by trying this.
Inflation Risk – If inflation is higher than money market returns, your investment loses value.
Opportunity Loss – You will probably get higher returns if you invest in the right equity funds or even other debt funds instead of money market funds. This results in opportunity lost.
Risks of Equity Mutual Funds
Equity funds are considered high risks mutual funds in India due to market volatility.
Volatility Risk – The majority of investment in an equity MF is in equity and equity related instruments. If the market is volatile, there can be fluctuations in the NAV value. If the underlying stocks lose a lot of value, then the NAV will decrease.
Performance Risk – Return on Investment in equity funds is low when the market is not doing well unless the fund manager manages the portfolio very well.
Concentration Risk – If a large proportion of the portfolio is in one stock or one sector, there is a risk of higher losses in case that stock/sector underperforms. Sector/thematic funds can face these risks.
Risks of closed-end Mutual Funds
In every bull market asset management companies behave like asset gathers rather than asset managers. In 2007 they brought a flood of close-ended NFOs (New Fund Offers) – this trend is again visible now. (AMC pay more commission to agents as money will be blocked for few years)
Liquidity Risk – why lock our funds when open-ended funds are available with the same features.
Most of these risks will also apply to insurance products like ULIP – check ULIP or Mutual Fund.
Risk-Free Mutual Funds India
You must have seen this ad – I don’t want to comment but anyone who is looking for a Risk-Free return will get Free Risk. I was surprised by the statement of someone from EPFO – expecting a risk-free return on equity on their contribution. Sahi Hai!! Check – Low-Risk High Return Mutual Fund – is it possible?
Risk in mutual fund SIP
Systematic Investment Plans (SIPs) are a way to invest in Mutual Fund schemes. SIPs are good for regular investment and cost balancing. It is a good tool for people who cannot invest a lumpsum amount in an investment. But the SIP method of investment is not a sure-shot way to gain great returns. If the market was high when you invested but then has kept falling and you did not invest in the SIP method, you would have lost money.
Just imagine if the equity market remains high when you are accumulating & falls when you require that for your goal. That’s why we keep repeating that a rising market is not good for young investors.
What about Fund Manager Risk?
If the fund manager makes mistakes, does not read the market properly, or is not proactive enough to manage the portfolio to avoid lower returns, your investment will suffer. (some time proactive fund managers create a higher risk for their investors)
The fund manager cannot always manage or foresee risks due to political inter conditions and local or global macroeconomics. In such cases, the scheme returns might suffer.
Risk Factors of Mutual Funds
For few investors “Mutual Fund investments are subject to market risks, read all scheme related documents carefully” – has become a joke. Neither they hear the first part about market risks nor they read scheme-related documents. If you read – you may find 5-6 pages on risk. If returns are real Risk of Mutual Funds or any other investment are also real.
Risks In Mutual Funds That You May Not Know
Mutual Fund Risk Analysis
Risk-Adjusted Returns
It shows the MF scheme’s returns by measuring how much risk is involved in producing that return. It is defined as a rating or a number. There are formulae to calculate risk-adjusted returns.
Measurement of Risk
There are different ways to measure the risk associated with an MF scheme.
Risk and Return Analysis of Mutual Funds
1) Alpha – It will give an indication of how much more returns did the MF Scheme give in comparison to the benchmark associated with it. A negative alpha will mean that the MF scheme underperformed by that figure as compared to the benchmark.
2) Standard Deviation – It is a measure of difference from the average returns. For example, if the average return is 12% and the standard deviation is 3%, it means the returns can deviate by 3% on the positive and negative sides. So here the returns can range from 9% to 15%.
The higher the volatility, the higher the standard deviation. Higher the risk.
3) Sharpe’s Ratio – This ratio gives the information of how much better has the MF scheme performed compared to risk-free investments. You can know how much you have earned by taking the risk.
4) Beta – It shows the sensitivity of the MF scheme to the market movements or the benchmark. The Beta of the benchmark or market is taken as 1. If the MF scheme has Beta less than 1, it is less volatile and if it is more than 1, it has more volatility as compared to the benchmark/ market.
There are many other rations but these are most commonly used. Ratios of 4 random funds in equity multicap category.
Fund
Alpha
Beta
Sharpe
Standard Deviation
Downside Risk
Info Ratio Rel.
A
2.32
1.08
1.05
16.52
13.06
0.77
B
2.12
1.04
1.03
15.77
13.39
0.69
C
-5.45
1.27
0.56
20.16
17.44
-0.20
D
-0.04
0.71
0.69
11.04
11.00
-0.84
SEBI Riskometer
Sometime back SEBI introduced riskometer – it has 5 levels of risk and every mutual fund house has to specify the risk level for each scheme. Here are the levels what each means –
Level
Meaning
Which Mutual funds would be covered?
Low
Low-risk Investment
Liquid Funds
Moderately Low
Investment at moderately low risk
Gilt funds, Short term and Medium-term bond funds, Income funds
Moderate
Investment at moderate risk
Balanced Funds, Long term Income Funds
Moderately High
Investment at a higher risk
Index Funds, Balanced Funds, Large Cap Funds
High
High-risk investments
Small-Cap Funds, Mid Cap Funds, Sector funds
SEBI also introduced colour codes – like BROWN for low-risk mutual funds, YELLOW for medium risk MF & BLUE for high-risk MF. Not sure why SEBI wants to showcase funds as eatables RED for non-veg.
Risks of Mutual Funds
MF research agencies have their own way to define risk.
Here is a list of some MF and their risk rating by one research agency. They give the fund’s risk grade on the basis of the fund’s risk of loss and downside volatility. Here ‘Low risk’ means that the fund has usually delivered more than how much a risk-free investment would have given.
Name
Category
Risk Grade
SBI Bluechip Fund
Equity
Above Average
DSP BlackRock Top 100 Equity Fund – Regular Plan
Equity
High
L&T Equity Fund
Equity
Average
Baroda Pioneer Short Term Bond Fund
Short Term Debt
Low
UTI Gilt Advantage Long Term Plan
Long Term Debt
Average
(this also applies to your investments)
To invest in mutual funds, you should select MF schemes not only based on past performance. You should evaluate them from various angles including MF risk and then decide your investments. Let us know how you selected MF schemes to invest in and how they fared.
Hope now you have a clear idea of – What are the risks of investing in Mutual Funds. If you liked the post must share it with your friends.
Helicopter Parent is used for people who excessively step into their children’s lives and make decisions on everything ranging from what to eat, what to wear, homework, socializing, college choices, career choices, investments and financial planning.
They do it with the intent to support their children and protect them from stressful situations. They might do it with the best intentions but in the long run, this over-parenting is not beneficial. Instead, it might do more harm than good.
Note: Helicopter Parents term is not discovered by me – so please don’t blame me, if you relate to this post 🙂 When it comes to parenting, I am good in theory but when it comes to practice haha. (this article is based on reading & my observations) You can read expert views on ‘Parent Induced Wastefulness’ in this post.
Examples of Helicopter Parents
A mother complaining to the school about her daughter getting bad grades and making it the fault of the school and teachers.
Parents hovering around the soft playground to cushion the kids if they fall.
Parents feeding their kids before a birthday party and then taking snack boxes for them in the party!
Fathers filling up forms for college admissions for their children!!
Parents taking care of financial transactions such as cheque deposits, insurance payments and other investment decisions for an adult child!
Parents giving money to adult children for buying a house and other expenses without any terms of getting it back!
Such parents are helicopter parents. They do it because they want the best for their child but it is not the best way to raise children.
1) Inability to make decisions – People who have had over-involved parents lack the confidence to do something on their own. They always have someone to take a decision for them right from what to eat to what to wear to which college to go.
They are not able to decide on the investments to make. They find it difficult to manage the budget or plan their income and expenses. They have not taken any independent steps for which they are responsible and therefore lack experience.
2) Financial Irresponsibility – People who have over-protective parents do not learn to be responsible. They spend recklessly. They do not think much about balancing their budget. They do not think of long-term finances as they know in the back of their head that their parents are there to save them from their mistakes.
3) Zero knowledge of personal finance – People who are used to their parents taking care of all their financial transactions lack any knowledge of personal finance. They will not know basic tasks like –
Manage filing of tax returns – at least providing the right information to CA.
These are Must-Know activities for any grown-up!
4) Financial Dependence – Managing bills, buying grocery, paying rent and taking care of household expenses are skills that adults should learn over a course of time. People with hover parents conveniently pass on these duties to their ever obliging parents. Parents manage these tasks and also finance the living expenses of their children.
Such children refuse to grow up and do not want to be independent as they know their parents will take care of everything. Parents who are doing this by dipping into their retirement funds are putting not only their kids but also themselves at financial risk.
Moreover if in the future, the parents stop funding, these adults have a hard time coping up with it and are not able to manage everything. They may also turn against their parents much to the parents’ despair.
5) Behavioural Issues – People who are not responsible for their lives can have many behavioral issues – loss of self-confidence, loss of self-worth, indulging in extreme behavior like intake of too much alcohol. They do not learn to deal with issues and overreact and get too anxious even when they face minor problems.
A few days back I got a message on parenting from a friend – that was similar to Helicopter Parents concept that I knew. That post was really an eyeopener so I searched on google.
The article (Don’t) Take it Easy!! was written by Dr. Sapna Sharma (life coach & counselor) on LinkedIn. Few real-world examples from her post…
Are You a Helicopter Parent?
Do you see some traits of a helicopter parent in you? Do you think you are a helicopter parent? Here are some actions that you can take to stop helicopter parenting –
Give your child some space, some freedom. Do not hover around her throughout the day. Let her handle tasks independently and it is okay if she fails. She will surely learn to do better.
Do not interfere too much into her activities, her friendship related issues or her homework. She will figure them out. Handling her stuff independently will boost her self-esteem too. You should definitely keep an eye on what is happening but not live her life for her.
You can give older children tasks such as depositing cheques in banks, buying grocery or involve them while you balance your budget. This will prepare them for the real world.
It is important to let go of your children slowly but surely so that they learn to be independent. You can give them encouragement and help them in some situations. At the same time show some tough love by not jumping in to rescue them at every situation so that they know how to face obstacles and solve problems.
For example, from a financial perspective, you can open a savings account for your college going children or invest some amount in a mutual fund account for them. You can then talk to them about financial planning and show them tools that you use for financial management. You can encourage them to think about investments and also make some low-risk financial decisions.
If any of you have indulged in helicopter parenting, it’s important to be aware of the consequences and stop doing it. If not, you might be stuck taking care of your children even in your old age and they will never be financially independent.
Please share your experience in parenting – this will help everyone, including me 😉
I was damn sure that I will not write on Bitcoins or any other cryptocurrency but something nudge me. My friend, who is a techie asked me about my interest in cryptocurrency? My instant reaction is captured in below WhatsApp screenshot. Check this post why “I feel” it’s not currency or an investment – just a bubble.
Why I highlighted “I feel” – because I am not an expert in this field & not even expert in spotting bubbles. Do you remember Speak Asia ads – even Mutual Fund & Insurance advisor started suggesting that to their clients. I feel that “when something is too good to be true – avoid” or if you don’t understand avoid.
What are bitcoins?
[Theoritically] Bitcoin is cryptocurrency or digital currency. It is a system for payments for electronic transactions. In simple terms, just like you pay your electricity bill or insurance premium using your net banking account where there is no physical transfer of the money, bitcoins can be used to pay online retailers for goods and services.
Bitcoins can be earned using a process called mining. There is no regulatory authority managing this cryptocurrency. Mining is a process where processing power of your computer is used to verify transactions. This results in a consistent, accurate and complete record of bitcoins in circulation and who owns how much. People who participate in mining get paid in the form of bitcoins when their work is successful. Bitcoins can also be bought with other currencies and earned by selling products and services.
The value of bitcoins has risen more than 500 times in the last 5 years. But the rise has been more due to speculation. It has caught the fancy of people worldwide as something hi-tech and they just buy and sell it just like they trade in stocks. In earlier years, the value of bitcoin currency has zoomed up and crashed dramatically.
Currency is something that is accepted widely, liquid, easy to get.It has to be relatively stable. For example, even if a retailer accepts online payments, he can easily convert it to cash. Can you imagine a shopkeeper accepting bitcoins & price goes down by 25-30%. (every quarter in last 4-5 years – bitcoin price went down by 20-50%)
On the other hand, bitcoin currency cannot be converted to a physical entity. It is not accepted worldwide. It is also used in dubious transactions online. Many countries have outlawed it.
There have been instances of hacking in the bitcoin network leading to drastic fall in value or loss of control over one’s bitcoins.
Whyis Bitcoin Not an Investment?
Investment experts like Warren Buffet have warned against getting into the Bitcoin bubble in 2014. He had a harsh stance on it. <(Bitcoin) Stay away from it. It’s a mirage basically,” and went on to say “The idea that it [Bitcoin] has some huge intrinsic value is just a joke in my view.>
I am a technical handicap so even I can’t see any value. If it’s just about price appreciation – it’s speculation, not investment.
Earlier, such high returns were given by tech companies in 1990s and this led to the dot cum burst. Most of the use of bitcoins has been speculation.
It is highly volatile.
Here is a chart to show its volatility.
Price rose from US$13 in January 2013 to US$1044 in November 2013 and then fell down. When Japan declared it as legal currency, it went up by around US$ 200 which is extreme. The process by which bitcoins are earned consumes tremendous amount of energy which is expensive. It is akin to spending a lot of money to buy something which has no value as of now.
It is based on blockchain technology where records are linked to each other using cryptography. The technology is nascent and if someone manages to break it, he/she will control the entire bitcoin corpus. Unless it becomes a mass technology, usable by all, bitcoin currency cannot be adopted universally. If governments start controlling it, then they will use it for inappropriate uses like writing off debt (wild guess). There are many cryptocurrencies in the market and none of them are completely secure.
Problem with a bubble is it can be as small as a pearl or as big as a truck. Buffett called this a bubble in 2014 & its up 10 times after that. Today I am trying to call it (please don’t follow my advice – I can be absolutely wrong) – it can go up another 10-20 times. Read – Indian Real Estate Bubble
Bitcoins in India
In India, the number of users of bitcoin currency is increasing. The RBI has declared it will not allow cryptocurrencies in India. If you still want to invest in bitcoins, I am not the right guy for advice.
Do not get swayed by price appreciation – you will find many such examples in history from tulip mania to south sea bubble to LTCM to subprime.
If you like this post must share with your friends – let’s save few more financial lives. Please feel free to share your views on Bitcoins in the comment section.
My view was that debate between ULIP Vs Mutual Fund was settled long back but I was wrong. 🙁
A few days back someone asked – Which is better ULIP or SIP? His banker told him that Ulip vs Mutual Fund + Term Insurance is a gimmick by mutual fund industry.
Note – Get Investor Behavior Tool from the end of this post, which is most important to manage your Mutual Funds or ULIP or any market related product.
What is ULIP?
Unit Linked Insurance Plans also known as ULIPs are insurance products that combine investment and protection against risk. A ULIP holder pays a periodic premium. Part of the premium is for life insurance and part of it is invested just like in a mutual fund scheme. This continues for many years.
The investor can choose the type of investment. Investment can be made in debt or equity or in both. The investor can choose depending on his/her risk profile and financial situation.
ULIPs are neither 100% investment options nor 100% insurance schemes. They lie somewhere in between –
ULIP Vs Mutual Fund
Let us look at the difference between a mutual fund scheme and a ULIP –
ULIPs
Mutual Fund Schemes
They are investment-cum-insurance products. ULIP investors are offered a sum assured of about 7 or 10 times the annual premium depending on the age and get the option of investing in a variety of investment products.
Mutual Fund Schemes are primarily investment products. Investors can invest in money market instruments, corporate bonds, Government bond and equity.
ULIPs offer flexibility in investment options. You have the flexibility to switch from a debt oriented option to an equity-based plan. (switch without tax implication)
A mutual fund scheme usually follows a theme – Equity, Balanced or sectoral. The allocations are pre-decided up to a large extent. (switch but consider Mutual Fund Taxation)
The plan holder can withdraw money. There is usually a minimum withdrawal amount. But the value of the fund should also not fall below a pre-decided amount. There will be a charge.
A full withdrawal of the policy can be done before the maturity date subject to a surrender charge & in some cases tax.
Different mutual funds have different exit methods. In many schemes, an exit load (fee) is charged if the investor withdraws within a specified period (usually a year).
Mutual funds are much more liquid in comparison to ULIPs.
ULIP Investments can be used for Section 80C benefits in tax calculation.
Maturity receipts of ULIPs are considered to be tax exempt.
Mutual Funds investments cannot be considered for Section 80C benefits in tax calculation except for ELSS funds.
Equity Funds – Capital gains tax is applicable if you withdraw within 1 year of investment. Post that, withdrawals are exempt from tax.
Debt Funds – Withdrawals are taxed at income tax rate applicable to you if you withdraw within 3 years.
Withdrawal after 3 years attracts a tax of 10% tax without indexation or 20% with indexation.
There are many expenses which makes it costly – Premium Allocation Charges, Policy Administration Charges, Mortality Charges, Fund Management Charges and Surrender Charges.
Usually, there are three types of expenses – Transaction charges (one-time – if your bank or advisor charge), Fund management charges and Exit load. The exit load is only applicable if the investment is withdrawn before a specific period (usually 1 year)
Premium has to be paid regularly or as a lump sum.
Investments in Mutual Fund can be made anytime or in the form of regular SIP investments. Investment can be made only once also.
Many people still have the question of whether it is better to buy a ULIP (a combination of insurance and investment funds) or a Mutual Fund and a Term Plan. Let us look at how they compare with this example –
Mr. Rajiv Jain invests Rs. 50,000 for 5 years in HDFC Life Click2Invest ULIP plan for a tenure of 10 years. He has selected for the funds to be invested in a balanced fund.
HDFC Life Click2Invest ULIP
Total Premium Paid
Rs. 2,50,000
Total Cost of ULIP Plan
Rs. 10,933
Rate of Return on Investment
8% p.a. (assumed)
Surrender Benefit at the end of 10 years
Rs. 7,05,097
Death Benefit
Rs. 5,00,000 in the unfortunate case of his death in the first 9 years of the policy and
Rs. 5,25,000 in case of death in the 10th year of policy.
Here is the illustration of ULIP this will be base of ulip vs mutual fund cost comparison-
Source
Investing in ULIP is good or bad?
ULIPs are better structured today than when they were introduced. But for an astute investor, it still makes better sense to invest in Mutual Funds and purchase a term plan. It is better to keep investment and insurance separate. You should consider the following factors before you make tour investment and insurance decisions –
Selection of the appropriate mutual funds as per your risk profile
Current insurance cover
Number of Financial Dependents
Investment goals and time horizon
My View – ULIP vs Mutual Fund for long term ?
Till this point, I don’t find any good reason to prefer ULIP over Mutual Fund. The kind of flexibility & choice that you can get in Mutual Fund is not available in ULIP. I feel still there’s room to reduce expenses – both in Mutual Funds & Ulips. The worst part about ULIP in my view is Commission Structure which is still front-loaded (more in initial years) so there’s no incentive for an agent to service & advice after initial years.
Finally, I think you would have got the answer – which is better ULIP or Mutual Fund India?
Now answer my simple question & you will get the tool to manage investor’s behavior. (It is scientifically proven that Investor behavior is the biggest factor when it comes to investment returns.)
Have you ever purchased a ULIP? If Yes, why? If Not, why?
Please, leave your answer below in the comment section.
You will receive the free PDF with Simple But Most Powerful Tool To Improve Investor Behaviour.
