All posts by Salahuddin

Net Asset Value and its Significance

When thinking of Mutual funds, one of the first terms you will come across is NAV- Net Asset Value. What is this net asset value and how does it have an impact on our Mutual Funds?

Net asset value represents a fund’s per unit market value. This is the price at which investors buy (bid price) fund units from an AMC (Asset Management Company / Mutual Fund House)  and sell fund-units  (redemption price). This value is arrived at by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of units outstanding. An NAV computation is taken at the end of each trading day based on the closing market prices of the portfolio shares. Thus, NAV of a mutual fund unit is nothing but the book value.

Most people assume that NAV is just like the stock prices of various shares. This is where the confusion begins. NAV is based on several underlying assets which is why its value is declared only once (that is at the end of the day) the trading in those underlying assets is completed. Whereas, when it comes to a stock, the price keeps fluctuating all day during market hours. Moreover, unlike the stock price, the NAV does not give an idea about the performance of the mutual funds scheme. One cannot gauge the future of the fund on the basis of its NAV.

Let us now understand what High and Low NAV mean and how they affect us.

Low NAV: Every time a fund house launches a New Fund Offer (NFO), the units of that fund are available for a standard NAV of Rs.10/- this shouldn’t be a deterrent. Further, as we have already understood the calculation of NAV, a fund could have a lower NAV because its net assets are low or the no. of outstanding units is high (due to a temporary transition like NAV split, etc.). Also, a fund’s NAV decreases proportionately whenever it pays out dividends.

High NAV: Similarly, a high NAV could be because of good performance over the years. But one should always keep in mind that mutual funds are not like shares whose performance can be judged on the basis of the NAV.

NAV and its impact on Returns

Sometimes, people think that an MF with a lower NAV value will generate better results. All these perceptions are due to limited knowledge on the subject matter of NAV.

Let’s say you have Rs.10000/- to invest. You have zeroed down on two MF  schemes which are very similar to each other and suit your needs. But let’s say Scheme A has an NAV of Rs.10/- and  Scheme B has an NAV of Rs.50/-. You will either get 1000 units of Fund A, or 200 units of Fund B. Now let us see what your returns would be like had you invested in both these schemes and how they would differ from one another. After one year, both would have grown equally, because essentially they were almost the same apart from the NAV values. If both the funds had increased by 25%, the NAV of Scheme A would be 12.50/- and the NAV of Scheme B would 62.50/-. Thus, the value of your investment in Scheme A after one year would be 1000*12.50=12,500 and for Scheme B would be 200*62.50=12,500. The returns of both the Scheme after one year are the same irrespective of the NAV.

As seen from the example above, you will realise that it is not the NAV that makes a difference in returns that you get, it is the performance of the scheme you have selected that will make all the difference. The money growth will depend on how the fund performs and also on the people managing the fund.

How to invest in uncertain times?

There is nothing in this world that remains constant at all times. Similarly the financial market too goes through ups and downs. These uncertainties are a big cause of concern for those who are not completely familiar with the movements in the stock market. Since India started opening up its economies to the world in 1991 the financial markets have been through many phases.

Investors fail to realise that all asset classes go through both good cycles and bad cycles and they often make the mistake of investing in an asset class that has given them the best near term results.

There are five investment strategies that can protect you from the hurdles and help you keep your eye on the big picture:

1. Stay calm and get professional advice

Avoid making quick moves on your own, as tempting as it may be. Meet your financial advisor instead and make an informed decision. Avoid making decisions on the basis of a single event since that is not necessarily a permanent move in the market. Make it a point to re-examine your risk bearing capacity from time to time so that your goals remain a priority even in uncertain times.

2. Consider Conservative Funds

Diversification will always cushion you in uncertain times since all stocks and sectors do not imitate each others’ performances at all times. Consider selecting a mix of mutual funds that will invest in stocks and bonds. Also keeping an appropriate amount in the cash equivalent mutual funds is always helpful when small amounts of cash are required. Always remember, diversification does not guarantee a profit but it does help in reducing the effects of volatility.

3. Invest regularly

Make sure you never make your decisions under emotional circumstances or in a hurry, without considering every aspect of every situation. This can be in any market condition. Reacting aggressively and investing large sums of money at the hint of making profit or extracting everything at the sight of making a loss is not the right strategy to adopt. Most people forget the basic principle that a falling market is a good opportunity to buy and a peaking market is a good opportunity to sell. Often, people do the exact opposite of this. Markets always rebound and grow in time. If your time horizon permits, buying stock at the bottom will give you time to ride through the rebound.

4. Go for the Tried and Tested

Always avoid focussing your investments in speculative ventures just to make up for earlier losses. Speculative ventures come with higher risks of losing more money than making profits. In challenging times, investors should always invest in blue-chip stocks and reputed companies that have shown long resilience at bearing economic storms. Avoid the temptation of making up earlier losses in one investment decision. It is nice to think that something of that sort may happen, but that is best left to the story books.

5. Avoid frequent market exits and entries

It is extremely difficult to time your more perfectly in sync with the market so as to exit at the peak and enter at the bottom. Thus, it is important to avoid exiting and entering the market frequently in order to prevent further loss in one wrong entry/exit. Investors typically end up buying high and selling low. Even more so in a bear market which is not a straight decline in price but a jagged line with bouts of price rises and consequent declines that get confusing to spot.

When such situations of great uncertainties present themselves, the best offense is defence. Be as well informed as possible; remain updated with newspapers and news segments. Analyze which sectors are performing better than the others or at least presenting a decent resistance to the falling markets. Keep track of the factors that are responsible for the slowing down of markets and follow them as and when they change. Regardless of the kind of strategy you apply, you cannot go wrong if your plan is long-term in nature because eventually the markets will rebound and grow when things reverse. Patience is virtue in times of economic instability. Therefore, make sure you do not make a hasty decision that could cost you your savings.

When is it the right time to Redeem Mutual Fund?

When you consider buying a Mutual Fund Scheme, you weigh all the pros and cons and select a Scheme that is suitable to your needs. Similarly, when you decide to redeem your Schemeunits, there is a check list that needs to be completed in order to make an informed right decision. Many people believe that a bad market run is reason enough to redeem their Scheme-units and they do so without considering several other factors that can in fact help them get better returns.

Mutual Funds are not Stocks

One needs to understand that Mutual Funds are not synonymous with stocks. Which means that the general understanding that a declining market will yield lower returns on your MF Scheme, is in fact wrong. Stocks are single entities with rates of returns associated with what the market will bear. MFs are not single entities, they are portfolios of financial instruments such as stocks, bonds etc, which are selected on the basis of the type of Scheme. The single most important factor of a portfolio is Diversification; where a decline in one or two stocks within a portfolio can be offset by others. Therefore, concluding on the basis of market movement is not advisable because even your MF Manager takes proactive decisions and tries to factor-in the perceived market movements.

Have you achieved your Scheme target?

The first and foremost reason is to ascertain if your MF has served its purpose. Mutual Fund Schemes are taken with certain targets and goals in mind. One way to understand whether or not you should redeem your Scheme-units is to check if your goal has been achieved. It could be buying a car, your marriage, child’s education etc. If you feel that your investment has achieved its objective, then it can be redeemed. If not, you would much rather wait it out. Always keep in mind that every investment is for an end purpose. When that purpose is served, you need to liquidate your position and achieve that end purpose. Any sort of further will lead to speculation. And when your investment turns into a speculation, you have reasons to worry.

Do you need the money?

In dire states of requirement, when you need the money, redeem it. Call your broker and start the process of redeeming. The market may rise by 100% the following day, or fall by 50%. But none of that matters because when you need your money for a particular emergency/event, you have every right to get it back.

If you do not need the money urgently and can wait patiently till your goal is achieved, that is always advisable. Most people sell at a peak only because markets are at a high, not because their target has been achieved. When opting for this method, don’t just sell your MF and sit on your cash. When the market declines and starts rising again, you must invest again to cash in on the subsequent rally. If you are timing the market, you need to be clear about your exit points and re-entry points.

Process of Redemption

Redemption Process

AMC (Asset Management Company) or Distributors are the most common modes of investing in MFs on account of them being direct (offline). To redeem this, you need to send a duly signed redemption request to the AMC’s or the Distributor’s office. Your sign must be a perfect match to avoid any further delay or problems. You will have to fill a standard form which will ask for basic information like your name, phone number, plan and scheme details and number of units you wish to redeem. All the holders will have to sign the slip.

 

Important points to note:

NAV Applicability

The NAV at which your units will be sold depends on the time you submit your redemption request. If you submit your request before 3:00pm, the closing NAV of the same day will be applicable. However, if the request is submitted after 3:00pm, the following day’s NAV will be applicable.

Time to receive redemption proceeds

Once the request has been confirmed and processed, it takes up to three working days for the proceeds to be credited to your bank account.

Funds with a Lock-In period

There are certain funds that cannot be redeemed instantly unlike most others. Funds such as Equity Linked Savings Scheme (ELSS) comes with a minimum lock-in period. In such plans, the units can be sold only after the defined period (3 years) has elapsed, after which they can be sold like normal MF schemes.

Applicable Taxes

Your transaction might attract tax amounts and exit loads on the basis of the duration after which you redeem your investment. Make sure you inquire about all such sundry charges before you make your decision.

Selling a Mutual Fund isn’t something one does impulsively. Great amount of thought and planning goes into deciding the right moment of redeeming the units. It is always advisable to consult your Advisor before making any such decisions. However, if you have weighed all the pros and cons and decide to sell the Scheme-units, sell it and don’t look back.

Can NRIs Invest in Direct Equities and Mutual Funds in India?

As an Indian staying overseas, do you want to take advantage of the high growth in India? NRIs living in any country, except the USA and Canada, can invest in all Indian Mutual Funds. Despite the recent dull phase in Indian equity markets, the economic prospects continue to be bright and its long-term growth story remains intact.

HOW TO GET STARTED?

All investments made by NRIs have to be in rupees. Mutual funds in India are not allowed to accept investments in foreign currency. For investing in Indian mutual funds, therefore, an NRI needs to open one of the three bank accounts-non-resident external rupee (NRE) account, non-resident ordinary rupee (NRO) account or foreign currency non-resident account (FCNR)-with an Indian bank.

An NRE account is a rupee account from which money can be sent back to the country of your residence. The account can be opened with money from abroad or local funds. An NRO account is a non-repatriable rupee account. An FCNR account is similar to the NRE account, except for the fact that the funds are held in a foreign currency.

The amount that is be invested can be directly debited from an NRE/NRO account or received by inward remittances through normal banking channels. An NRI needs to give a rupee cheque or draft from his NRE/NRO account. He can also send a rupee cheque/draft issued by an exchange house abroad drawn on its correspondent bank in India.

If the investment is made through cheques or drafts, the investor should attach with the application form a foreign inward remittance certificate (FIRC) or a letter issued by the bank confirming the source of funds.

FIRC is a proof of payment received by the individual from outside the country in a foreign currency. It is issued by the bank where you have the account to receive the funds.

Other KYC ( Know Your Customer  ) documents such as Permanent Account Number ( PAN ) and address proof are also to be submitted, just as in case of resident investors. If you do not have PAN card, please click here to get one.

Why can’t NRIs in USA/Canada invest in Indian mutual funds?

Most US-registered mutual fund companies which have India operations do not accept investments from Indians living in the US/Canada as they are bound by the cap on the number of non-resident investors they can take.

Regulators in some countries require fund managers to be registered with them if they are handling more than a certain number of accounts of their residents. For example, the Dodd-Frank Act of the US requires fund managers handling over 15 US-based investors to be registered with the US regulators and follow their rules. To avoid dual regulators, many fund houses have stopped taking investors from these countries.

One way  for USA/Canada based NRI’s to invest in the Indian market is to opt for India-specific funds launched by US/Canada mutual funds or go for Indian mutual fund houses that allow US/Canada based NRIs to invest in their schemes. But for millions of NRIs not residing in the US, investing in Indian stock markets or mutual funds is not a tough proposition.

POWER OF ATTORNEY

To mitigate the risk of market movement, mutual funds allow a power of attorney (PoA) holder to take decisions on your behalf. All that the PoA holder needs to do is to submit the original PoA or an attested copy of it to the fund house. The PoA should have signatures of both the NRI and the PoA holder. The PoA holder’s signature will be verified for processing any transaction.

Similarly, an NRI can make a resident Indian his/her nominee in the mutual fund scheme. An NRI can also be the nominee for investments made by a local resident. Fund houses also allow an NRI to have a joint holding with a resident Indian or another NRI in a scheme.

Power of Attorney is NOT allowed for Investing in Direct Equities. An NRI can have a second holder and nominee for the demat account held with a registered stock broker

HOW TO REDEEM ?

Redemption proceeds is very simple. You have to just sign the redemption form and submit. Redeemed amount are either paid through cheques or directly credited to the investor’s bank account. All earnings will be payable in rupees.

As mentioned earlier, investments made through inward remittances or from NRE/FCNR accounts are fully repatriable. Hence, earnings made by redeeming the units or through dividends are fully repatriable.

However, in case of investments made through NRO accounts, only the capital appreciation is repatriable, not the principal amount.

TAX LIABILITIES

While tax liabilities of an NRI investing in India are the same as that of a resident investor, tax is deducted at source in case of NRI’s.

The key difference between investment rules for NRIs and those for resident Indians in case of both MFs and stocks is tax deduction at source (TDS).

Depending on your country of residence double Taxation benefit will apply. If the Indian government has an Avoidance of Double Taxation Treaty (ADTT) with that country, the NRI will be spared from paying tax twice. For the list of countries with ADTT please click here.

To give an example, India has an ADTT with the US. If an NRI based in the US makes short-term capital gains from equity investments in India, he pays 15% tax. However, the rate for such gains is 30% in the US. The investor will need to pay tax only for the difference in rate. This means he gets a deduction on the tax paid in India from his tax payable in the US.

TAX LIABILITIES OF NRIs

NRI earnings from investments in India is taxed at the rate given below:
 EQUITY FUNDS/STOCKS DEBT FUNDS
Short-term Capital Gains Tax15% As per tax slab
Long-term Capital Gains TaxNil10% without indexation, 20% with indexation
Dividend Distribution TaxNil25% on liquid funds, 12.5% on other debt funds
Total NRI investment should not go beyond 10% of the paid-up capital of a company.

NRI EQUITY INVESTMENTS

NRIs can invest in Indian stock markets under the Portfolio Investment Scheme (PIS) of the Reserve Bank of India (RBI). Under this scheme, an NRI has to open an NRE/NRO account with an RBI-authorised Indian bank. An individual can open only one PIS account for buying and selling stocks.

Aggregate investment by NRIs/PIOs cannot exceed 10% of the paid-up capital in an Indian company and a PIS account helps the RBI ensure that the NRI holding in an Indian company does not cross that limit. Each transaction through a PIS account is reported to the RBI.

The next step is to open a demat account and a trading account with a Sebi-registered brokerage firm. An NRI cannot transact in India except through a stock broker.

NRIs cannot trade shares in India on a non-delivery basis, that is, they can neither do day trading nor short-sell in India. If they buy a stock today, they can only sell it after two days.

Short-selling is selling stocks that one doesn’t own in expectation that their prices will drop, and buy them back at lower prices.

NRI SUBSCRIPTION TO INDIAN IPOs

Shares issued through initial public offerings (IPOs) are not covered under the PIS. In case of IPOs, it is the responsibility of the issuing company to inform the RBI the number of shares it is allotting to NRIs.

However, NRIs need NRE/NRO accounts to subscribe to IPOs. The shares acquired through IPOs can also be sold without a PIS account. However, NRIs must furnish their bank details, besides the date of allotment and cost of acquisition of the shares to calculate the tax on any gains they may have made.

Investing in India’s long-term success story is not all that tough after all. All an NRI needs is a right bank account and other documents which even a resident investor will have to submit.

To know more about how we help NRIs, click here.

You can also mail us at helpdesk@zenmoney.com.

NRI’s Should diversify their portfolios with Indian Assets

Most NRIs turn to Indian Fixed Deposits to invest in India. India has one of the highest FD rates in the world with most banks offering FDs in Non-Resident External (NRE) and Non-Resident Ordinary (NRO) accounts around 7.5-8.5% per annum. In most other countries, these rates are less than 4%.

Because of this, many NRI’s just wanted to park their funds in Fixed Deposits. There have been cases when NRIs have taken loan from the country where they reside and put in FDs in India. But the depreciation in Rupee takes away most if not all gains in FDs, (Over the last 5 yrs, INR has depreciated over 40%; 7.25% annualized). Fixed Deposits are a good bet but not the only bet for NRI investment. A tax-free bank fixed deposit sounds like an attractive deal, but you have to consider how much you want to allocate. Fixed deposits usually have a lock-in or a penalty for withdrawal before maturity, so if you need those funds in a year’s time and the deposit hasn’t matured your deal won’t be that good. Real estate is not easy to sell in case you need immediate liquidity.

The power of asset allocation

In a country as economically vibrant as India, the right asset allocation can help NRIs take advantage of their higher investible income and generate higher returns than just putting money in FDs. This allows you to generate funds to meet your financial goals.

Let’s say, you want to send your daughter to study a course 15 years later that costs $100,000. Assuming the fee will increase to $250,000 then, unless you invest that $100,000 today at a post-tax rate of around 6.5-7% per annum, you will not be able to achieve this goal. So the next step is to choose an asset allocation, which could be a combination of fixed deposits, equity and even real estate.

Allocation minimizes your loss when returns fall in one asset class. Relative to other assets, Equities have given better returns in a period of 10-15 years.  Just to protect the downside, it would be advisable to spread your investments in various asset class such as deposits, gold , bonds and fixed income securities. This will ensure that your portfolio in less volatile and at the same time your over all returns match your requirement.

Also, regular rebalancing of a portfolio is very important. Markets don’t remain static year-on-year and your portfolio shouldn’t either. When the markets gets volatile you may have to have an additional tactical allocation till the interim things gets settled.

Investing in Indian assets can be either beneficial or detrimental for you depending on how you approach it. Without realizing it, you may be losing out on an opportunity for higher portfolio returns, simply because your allocation to Indian investments is a small part of your overall investment kitty

The 3 types of Mutual Funds

The simplest way to understand the types of mutual funds is on the basis of maturity period. The first question that any potential investor would ask is the time frame within which they can expect their returns. So let’s try and understand mutual funds on the basis of their maturity period.

Open-ended funds

In an Open-ended Fund, units are purchased and sold perpetually, all through the year. This scheme offers high liquidity and tremendous operational flexibility to the investors since they can buy and sell units as per their requirements. Thus, these funds have no maturity period. Within open-ended fund schemes, there are four major types of MFs namely, Debt, Money market/Liquid, Equity and Balanced.

  1. In a Debt/Income scheme, a major part of investable funds are channelized towards bonds, debentures, government securities (gilts) and money market instruments which provide a regular and fixed return. These schemes are ideal for retired investors looking for a steady income since bonds are liquid and safe investments.
  2. Money market/Liquid schemes are suitable for those investors who have surplus funds, and are interested in utilizing them to get short-term returns. But only the most cautious investors must opt for this scheme since the primary aim of such a scheme is capital preservation. Since it is short term, the risks are considerably higher.
  3. Equity/Growth schemes invest in equity shares. These funds may invest in a wide range of industries or focus on specific sectors. But these schemes are suitable only for investors with a higher risk appetite which results in higher returns. Since the returns are not fixed, they can fluctuate. Within Equity schemes are Index schemes, Tax saving schemes and Sector-specific schemes. Index schemes replicate the performance of a particular index like Nifty, Sensex etc. this portfolio consists of only those stocks that form the index and the returns are similar to that generated by the index. Tax-saving schemes offer tax rebates to investors under specific provisions of the Income Tax Act, 1961. These are primarily growth-oriented schemes where they invest in equities. Just like an Equity fund, the investor interested in such schemes should have a high risk bearing capacity.Sector-specific funds invest in the securities of the sectors that have been mentioned in the schemes. Since these are sector-oriented, the returns on investment are dependent on the performance of that particular sector for example, IT, Pharma, Auto, FMCG, etc. This means that the level of diversification is quite low due to which the risk bearing capacity of the investor must be relatively high.
  1. Balanced Fund schemes, as the name suggests invests in both equities and fixed income instruments having a specified objective. This scheme provides the best of both categories, that is, stabilized returns and capital appreciation to investors. Thus, this is a good combination of regular income and moderate growth. The general ratio of equity to debt is 60:40.

Close-ended funds

  1. Capital Protection scheme’s primary objective is to safeguard the principal amount while trying to deliver reasonable returns. These are funds with an objective to seek capital protection by investing in fixed income securities maturing in line with the tenure of the scheme and seeking capital appreciation by investing in equity & equity-related instruments will form part of this category.
  2. Fixed Maturity Plans (FMPs) have a defined maturity period ranging from one month to five years which comprise of debt instruments that mature at the same time as the scheme. The primary objective is to provide steady returns and protect the investor from market fluctuations. As the securities are held till maturity, FMPs are not affected by interest rate volatilities.

Interval funds

These funds combine the features of both open-ended and close-ended funds where it allows investors to trade units at predefined intervals. Thus, it offers the benefits of a close-ended scheme with the advantage of redemption features in specified intervals of time.

There is no one-point solution for investors to select a scheme that suits their needs. Every investor is different; therefore, the solution to their problems will be unique. In order to decide the scheme that best suits you, approach a Consultant or Advisor. An ideal scheme would be one with the right combination of growth, stability and income keeping the risk appetite in mind.

The 7 Kinds of Risks that you should know before investing in Mutual Funds

Would you consider Driving to be risky?

It can be risky for someone who doesn’t know how to drive or for someone who is unaware of the basic rules of driving. But for someone who knows the rules and drives well, it must seem like a joy ride. The only risks a good driver can encounter are the risks that are out of his control. For instance, bad weather, rash drivers on the road, break failure, etc. Similarly, when it comes to Mutual Funds, despite doing everything right, there are certain aspects an investor will have to keep an eye out for. Risk assessment, Diversification, Determination of objectives etc, are the few characteristics that the investor can control. But just like everything else in life, there are certain unforeseen events that even your Mutual Fund Manager cannot predict. Thus, despite it being one of the most secure investment options, there are certain things that an investor must look into before investing in Mutual Funds. This is not to say that every investment will face problems until its period of maturity, but that the investors should be aware of the possible issues that they might have to encounter while they are invested in the market.

Market Risk

Type of Investment affected: All

There is a certain type of risk called Systematic risk that is inherent to the entire market or an entire market segment.  This risk affects the market as a whole and is not sector-specific. Another characteristic of this risk is that it is unforeseen in nature. It is unpredictable and unavoidable. This risk cannot be mitigated by diversification.  Unsystematic risk is a type of risk that is sector-specific and does not affect the entire market. Such risks can be abated through diversification.

Liquidity Risk

Type of Investment affected: All

Thinly traded securities carry the danger of not being easily saleable at or near their real value. This is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. It is typically reflected in large price movements especially to the downside. The rule of thumb is that, the smaller the size of the security or its issuer, the larger its liquidity risk. The fund cannot sell an investment that is declining in value, because there no buyers.

Credit Risk

Type of Investment affected: Fixed income securities

If a bond issuer cannot repay a bond, it may end up being a worthless investment. In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will pay the interest that it has promised, or repay your principal when the investment matures? If there is even a hint of doubt when you answer any of these questions, you have a lot to think about.

Interest Rate Risk

Type of Investment affected: Fixed income securities

The value of fixed income securities generally falls when interest rates rise. Changing interest rates affect both equities and bonds in many ways. Generally, when interest rates rise, prices of the securities fall and when interest rates fall, prices of the securities rise. Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV (Net Asset Value).

Country Risk

Type of Investment affected: Foreign investments

The value of investments made in other countries depends on the balance of economy and status of the country. Should the political structure change or the conditions in that country become unstable, the value of investments will change accordingly. A simple change in government policies can also have an adverse impact on your investments. Thus, it is important to keep track of the changes in the country in which you have made your investments.

Currency Risk

Type of Investment affected: Investments denominated in a currency other than the Indian Rupee

If you have investments that are denominated in a currency other than the Indian Rupee, the slightest difference in the other currency will have an impact on your investment. If the other currency increases in value against the INR, it is advantageous for you, but if the other currency declines against the INR, the investment will lose value.

Inflation Risk

Type of Investment affected: All

Also referred to as ‘loss of purchasing power’, Inflation risk affects all types of investment. There is uncertainty over the future real value of your investment. For example, a loaf of bread that used to amount to Rs. 20 a few years ago, amounts to Rs.30 today. This means that the purchasing power of Rupee has come down. One cannot get the same number of things in Rs.100 today as a few years back. Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you will actually be able to buy less, not more. Therefore, there is always the risk that Inflation can undermine the performance of your investment.

How Mutual Fund investing could benefit you as an Investor

As an investor your first requirement would be to get the most out of your investment; but you may not have the time or in-depth knowledge of the stock market to keep track of them. While there are some people who base their judgements on their own personal understanding of the market, others prefer to give their savings in the hands of professionals to get greater returns on their investments and benefit in the long run. Mutual Funds not only assist with professional guidance but also provide several other benefits that make the process of investing seem simpler and interesting.

Professional Management

The first and greatest advantage of MFs is Professional Management of investments. You do not need to struggle with the market and try to understand every aspect of it since there are people who can do that for you with great ease! The Research team analyses and studies the market’s performance. With the kind of data and knowledge at their disposal, they can give you timely updates on the movement of the market and your portfolio. This eliminates the need for individual investors to perform detailed studies and analysis and helps them reap in the benefits of a professionally handled portfolio. All you have to do is select a scheme in accordance with your objective.

Diversification

The most important objective of Diversification is to reduce the risk of potential loss that an investor might have to bear. This means that your portfolio (the range of stocks held by you) will consist of stocks from varied sectors, companies and regions in order to balance out the underperformance of a particular security. This diversification can be achieved in a Mutual Fund with far less money than you can do on your own.

Liquidity

In open-ended MFs, you can redeem all or part of your units at any given time, as and when you require funds. Since there is a standardized process to be followed, you can get your cash in hand as soon as possible. There are certain schemes in which there is a lock-in period, during which the investor cannot sell/buy any units until the lock-in period expires. Funds are more liquid when compared to shares, bonds and deposits.

Low cost

Mutual Fund transaction expenses are merely a fraction of what one would pay a broker for an actively traded portfolio of individual securities. Mutual funds buy and sell securities in large volumes which allow investors to benefit from lower trading costs due to the economies of scale. The smallest investor can get started because of minimal investment requirements.

More choice

There are several schemes offered by a Mutual Fund house. As an investor you need to identify your requirements, the time frame of your investment and your risk appetite. Accordingly, you can select a scheme that incorporates all these needs in one scheme and invest in it. There is also no compulsion of making large investments. Since MFs cover virtually all of the major asset classes and investing styles you can enjoy the same degree of diversification as some institutional investors but with choices depending on your requirements.

Tax Benefits

Income earned from MFs as dividend is tax free. Long term capital gains are taxable at a low rate. There are also certain schemes that have various kinds of tax-benefits when compared to others. Always make sure you discuss all these aspects with your Advisor if you are trying to identify a scheme which offers you tax benefits.

Transparency

Mutual Funds are required to make detailed disclosures of investment objective, strategy, portfolio composition, etc., to investors. The performance of a Mutual Fund is reviewed by various publications and rating agencies, making it easier for investors to compare one fund to another.

Regulations

Mutual Funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI). All funds are registered with SEBI and complete transparency is enforced. MFs are required to provide investors with standard information regarding the selected schemes and the investments made by the funds.

Capital Formation

Mutual Funds mobilises small and scattered savings of the public. These mobilised funds are then invested in various businesses and industries. In this manner, MFs also facilitate capital formation and thus, contribute to the growth of stock market in the country. Growth of businesses and industries in turn leads to growth of the economy at large.

How to Use Mutual Funds for Retirement Planning

All our lives we work very hard towards a better future and a better life. It is mandatory to accumulate savings in order to deal with unforeseen events or emergencies. Another event that we tend to plan for is Retirement Planning. The one thing you would like after decades of hard work is peace and comfort in your days after retirement. What if you could ensure that you live a good life in exchange of a few investments? It’s a fair deal, you should consider it.

Mutual Funds can be used for several objectives including Retirement Planning. One of the biggest dilemmas for those approaching retirement is balancing the life the way they want to live today with the life they want to live after retirement. In all likelihood, you have just a vague plan or idea about what you want, not a concrete one. For instance, it is a popular belief that whatever people save in their working life, will be sufficient for their retirement as well. But the problem arises when people do not consider the antagonist of their story that goes by the name of Inflation. Inflation, that chews into the purchasing power of your money every year, leaving you with a weaker financial support than what you predicted. For a person saving for retirement, generating returns that can possibly beat inflation seems far-fetched. It really isn’t. Provided they invest in Mutual Funds. Mutual Funds are tax efficient and flexible investment instruments which can be used for effective retirement planning. This can all be done with fewer headaches (and financial pain) than you might think. All it takes is a little homework, an attainable savings, an investment plan and a long-term commitment.

Know yourself

Before investing in any schemes, you need to ask yourself certain questions. How many years are left to your retirement? How much money will you need at retirement? What is your risk-taking ability? To sustain your current lifestyle, what is the monthly income you will need? If you have the answers to these questions, retirement planning will be easy. You must realise one thing, irrespective of your needs and requirements, there are mutual fund schemes for every individual. You can invest in equity fund for capital appreciation, debt funds for regular income, or gold for securing your future. There is no magical figure that one can arrive at for future needs. But the general understanding is that you will need at least 80% of your current income in your golden days.

Three Stages of Retirement Planning

Retirement Planning has three steps- accumulation, preservation and distribution. In the accumulation phase, you will invest in schemes in accordance with your time horizon and risk appetite for retirement. Preservation and Distribution stages run parallel to each other and you arrive at these stages only after retirement. The first goal of these two stages is to preserve the wealth you amassed in the accumulation stage and second goal is that of getting income out of that amassed amount for retirement expenses.

At the Accumulation stage you can invest in normal schemes after determining your requirements and risk appetite etc. As retirement savings are generally long-term in nature, you can have a diversified portfolio that may include equity, debt and gold. If you are someone who has a flair for real estate, you can invest in real estate portfolios as well. At the preservation and distribution stages you need to be cautious and disciplined in your approach since you will reach these stages only after retirement. As along with preservation, you need to generate regular income, you may opt for Systematic withdrawal option or Dividend payout option. In systematic withdrawal option, you as an investor can give instructions to MF houses to start paying you a fixed amount after selling out the units available.

Retirement Planning is an ongoing, lifelong process that takes decades of commitment in order to receive the final pay-off. You need to revisit your retirement plans every 3 to 5 years or as your life changes with a marriage or children, so adjustments can be made accordingly. By making these timely adjustments, you will stay on track for a better life after retirement.

A Beginner’s Guide to Mutual Funds

Imagine going to a new fast food joint for lunch. The food is new, the flavours are new, something you have never had before; but the reviews about the place have been so great that you want to try it out for yourself. Now when it’s time to order, you get confused because you are not sure as to which flavours complement each other well. Thankfully, that is when your clueless gaze pauses on the combo offers section. You inform the waiter of your taste preference and place an order. Extremely happy that you were economical with your budget by going for a combo instead of ordering expensive separate dishes, you enjoy the rest of the evening basking in the novelty of a new find!

Replace a few words in the above example with some technical terms, and you have yourself a Mutual Fund transaction. Never thought it was that easy? Well, it is. The word Mutual implies a group of people coming together, and Funds implies money. Therefore, Mutual funds suggest a group of people putting their money together to buy stocks or bonds, or in some cases, a combination of both. This fund is managed by professional Fund Managers who manage this pool of money and build a portfolio in line with the investment objectives (short-term or long-term) of the scheme. A mutual fund company collects money from several investors and invests it in different options (like the combo offer) for instance stocks, bonds etc. Since this company is run by a group of professionals, they understand the market and bring their expertise to the table. Ordinarily, it would take a long time for someone to understand the functioning of the markets or the reasons for its highs and lows. This is where the professionals of the MF step up and provide strategic and efficient plans of investing to those who wish to get better returns on their savings. These investments are spread across various stocks and sectors in order to balance out the failure of one stock with the success of others. This invested amount generates returns on the pooled investments and these returns are then passed back to the investors.

There are many types of MF schemes that one can invest in depending upon the personal goals of the investor. These schemes are based on maturity period, investment objectives, tax savings, specific sector, etc. Since the returns in MF are dependent on market conditions, the return on investment, despite being consistent, may not be as precise as a Fixed Deposit in a bank. But the upside to MF is that in a positive market, the returns can be greater than the estimated amount. Thus, there are several advantages of Mutual Funds namely- Easy liquidity, Diversification, Professional Management, Flexibility (mutual funds is for everyone), Low Transaction Cost, Transparency,  Regulation and long term tax benefits.

Despite the fund being managed by professionals, since the markets depend on the economy, Mutual Funds are not risk-free investments. But there are certain risks like lack of Control, which an investor can be exposed to when the decision making ability lie in someone else’s hands (MF). The other common risk that can affect the portfolio of an investor is that of Large Diversification. Large Diversification could limit the upside potential in a scheme, as opposed to investing in just one blue-chip stock. Other risks include change in government policies, economic alterations etc.

Thus, mutual funds are subject to market risks; so when they say ‘read all scheme documents carefully before investing’, they mean it. They are only looking out for you!