Know the common myths related to mutual fund investing

Over the years, investing in mutual funds has emerged as a popular option among a vast population of investors with varied incomes and risk appetites as mutual funds have outperformed most investments avenues in last few years. However, there are many myths or misconceptions related to mutual fund investment which may result in a wrong investment decision.

There are various misconceptions which many investors hold while buying mutual funds. Here are the myths:

History will always repeat

Everyone who tends to invest in mutual funds first looks at the historic performance of the fund and then decides to make the investment. Therefore we can clearly say everyone feels the future performance will be linked to the previous performance and will fall in line. If future was based on past, every analyst would have made money thick & fast which is clearly a myth.

Lower the NAV, cheaper is my fund

Commonly believed that when the NAV is lower, the fund is cheaper and hence will provide higher returns. NAV is nothing but the current market value of the portfolio today. Older the fund, higher is the NAV as the market value grows over a period of time.

The investment has to be for very long-term

When someone suggests a mutual fund, the first question asked is whether it is “long-term ” investment. The fact is it’s good if you invest for a very long term, as you reap the benefits of compounding, but one who needs money sooner can also invest with a view of getting the better return than other asset classes. There are multiple schemes to choose from that suit different types of investors.

The investment sum has to be big!!

A common myth among investors is everyone feels one must have a large number of funds to invest in a mutual fund. But the ground reality is that you can start investing in a fund with as small as Rs 500 only.

One can add or subtract stocks according to their choice

There is a common myth in everyone’s mind that you can customise your portfolio, that is, one can add or subtract a particular stock from a fund if you want which is clearly not true as this feature is only available in PMS (Portfolio Management Services) and is outside the scope of mutual funds.

Mutual fund equals to no risk

Many mutual fund investors feel making investments in any scheme is risk-free and it is certain that it will perform around their expected mark, which is the reason regulators have made it compulsory for the fund runners to apprise the client about the risks of the investments. This acknowledgement is always made to you, when you sign the document of an agreement while investing, which is often missed by investors.

Investing in higher rated funds will fetch higher returns

People believe that the fund which has the highest ratings are safe and will give the best returns. The truth is mutual fund ratings are dynamic and are based on the performance of the fund at that given point. So, a fund that is rated highly today, may not necessarily maintain its high rating tomorrow and it also doesn’t guarantee a better performance going forward.

Dividend declared by mutual funds are windfall income

Mutual fund dividends are not windfall income as it is often projected to be. The dividend amount is paid out of investor’s own investment and hence, the fund’s NAV gets reduced by the amount paid as dividend. Moreover, the dividend amount is calculated on the fund’s face value, not the NAV. For example, assume that a scheme with a NAV of Rs 40 declares a 30% dividend. The dividend amount, in this case, would be Rs 3 (30% of Rs 10 face value) and the NAV of that scheme will come down to Rs 37 after the dividend record date.

Investing in a mutual fund for the purpose of availing dividends is a futile exercise, and not recommended. Instead, opt for the growth option of mutual fund schemes to benefit from the power of compounding effect.


When you should and should not sell your mutual fund investments

confusion2-thinkstockWith thousands of plans from hundreds of mutual funds, it’s difficult to decide which fund to invest in. However, there’s an even more difficult choice that investors face—which funds to sell off and when. This is a problem that more knowledgeable and more involved mutual fund investors face disproportionately.

The reason is those of us who are active and involved investors have a natural bias for action. Such investors do well because they learn, analyse and act more than others. Naturally, they start equating being good investors with doing something, often anything. Unfortunately, along with everything else, in practice, this also translates into being all too ready to sell off their investments.

There are right reasons for selling a fund and there are wrong reasons. Generally speaking, the right reasons tend to be about the investor and the wrong reasons tend to be about the investment. That might sound confusing, so let me explain.

As I have written earlier, overactive investors give three kinds of reasons for wanting to sell off a fund investment. One, they’ve made profits; two, they’ve made losses and three, they’ve made neither profits nor losses. That sounds like a joke but isn’t. Typical explanations are, “Now that my investments have gone up, shouldn’t I book profits?” or “This fund has lost a bit of money recently, shouldn’t I get out of it?” and “The fund has neither gained nor lost, shouldn’t I sell it.” Basically, investors who have a bias for continuous action can create a logic for taking action out of any kind of situation.

None of these, by themselves, are legitimate reasons for selling off a fund. The first is the worst. This comes from the ‘booking profits’ idea that equity investment advisers have promoted. It doesn’t make sense for stocks, and it makes even less sense for mutual funds. In both, this attitude makes investors sell their winners and hang on to their losers. In mutual funds, the whole point is that there is a fund manager who is deciding for you which stocks to sell and which to buy. If the fund manager is doing this job well, then the fund is making good returns. Therefore, selling a fund that has made good returns is the exact reverse of what investors should be doing.

As for selling funds that are not doing well, you need to evaluate the time frame and the degree of underperformance. People try to sell funds that have performed excellently but may have underperformed other funds by small margins. Someone will say that over the last year, my fund has generated 25% but five other funds have generated 25-30% so I will switch to those. This switching based on short-term past performance is counterproductive and does nothing to improve your future returns. Only if a fund underperforms consistently for two or more years, and drops down two notches in its Value Research rating should you switch away from it.

So when should investors actually sell their funds? The correct answer is that they should be guided by their financial goals. You should sell a fund and get your money out when you need it. You invested for five or 10 or 15 years, continued your SIPs, and the money has grown to what you need. Now, you need to make a down payment for a house or pay for your child’s education, or whatever else you need. If you’re getting close to that time, you should sell and redeem, irrespective of the state of the market. In fact, unless it’s an expense that can be postponed if needed, you should start acting one or two years before time. Withdraw the money from the equity fund and start parking it in a liquid fund. You can use an automated STP (systematic transfer plan) for this which will be convenient.

Now you see what is meant by the statement that the right reasons for selling tend to be about the investor and the wrong reasons tend to be about the investment. The purpose of investing is to reach your financial goals. Be guided by that.

Credit TOI #DhirendarKumar

The Cindrella Syndrome!

Are you still searching for your knight in shining armor?I have never read fairy tales to my daughter. To my mind, they perpetuate a very archaic view of women that they always need a man to rescue them. I think a lot of us have got afflicted because of this Cinderella syndrome where we are always looking towards men in our lives to fend for us.

I came across this article by Kim Kiyosaki which very lucidly captures this.

Take Charge of Your Financial Plan

Remember: A man is not a financial plan

When I was a girl, one of my favourite movies was Cinderella. I loved watching the fairy godmother magically transform Cinderella’s rags into a beautiful princess dress so that she could attend the ball, find her prince, and live happily ever after.

Growing up, I dreamed of meeting my own prince who would sweep me off to a castle for a life of royalty.

But the older I got, the more I saw women buying into this fantasy in real life, and saw how many times that prince and castle turned into prisons that kept these women from achieving financial independence and self-sufficiency. It didn’t take me long to realize that my happily ever after was not going to come from a man. It could only come from myself.

The “fairytale”

After watching some of the classic princess movies, it’s no surprise so many women in this day and age turn to a man to solve their financial problems. Instead of taking ownership of their life, they put all their trust in a boyfriend or husband to earn the money and take care of the finances.

This Cinderella Complex has led thousands of women to make some very questionable decisions, like:

  • Marrying for money.
  • Staying in a bad relationship because they’re afraid they can’t make it financially on their own.
  • Letting a man make all key financial decisions.
  • Accepting the myth that men are better with money.
  • Not challenging a man’s financial decisions for fear of hurting their ego.
  • Keeping quiet to keep the peace.

The list goes on and on.

It’s more important than ever to break this cycle and teach the next generation of women that a man is not a financial plan and that only they can take charge of their financial freedom.

The reality

This reliance on men is getting better. More and more women are actively pursuing careers, starting businesses, and investing in assets. Women are also waiting longer to get married. According to the US Census, “The average age for first marriage is 27 for women and 29 for men” a statistic that has steadily risen over the past 50 years.

This bodes well for women having more time to explore a career and learn to control their own finances before getting married.

However, several myths still exist that say that men are better at finances than women, and the running joke about going to college to earn a “Mrs Degree” still circulates among millennial women.

Now, there’s nothing wrong with marriage. Robert and I recently celebrated our 30thwedding anniversary, and he has been a wonderful partner for me in life and business. But that’s the keyword: partner. Robert and I are equals in everything regarding our relationship, especially money. And the sad fact is that that’s not true for many women today.

Many women still face inequality in their own households. Some of them have no say in financial decisions, and instead, let their spouse do all the work. That strategy often comes crashing down on them, however, when life throws them a curveball and shatters that financial plan.

Divorce, death, job loss, economic downturns, these are just a few of the things that can ruin the “perfect” financial plan of relying on someone else to handle your money. Many women are waking up to the reality that they aren’t prepared when life changes overnight. More and more women are taking control of their finances, often for the first time in their lives.

You are your financial plan

You should never depend on anyone to be your financial plan, whether it’s your spouse, the government, a financial advisor, or your family. All of those things can be taken away, for one reason or another. The only person you can rely on to be there for you your entire life is yourself.

Maybe you are happily married. Maybe you have a great financial advisor, or inherited family wealth giving you a cushion. Whatever your situation, you need to take control over your finances, so that no matter what happens, you are able to bounce back stronger than ever. It starts with getting your own unique financial plan together.

Creating your financial plan

There are three key steps to creating your financial plan.

  1. Your Reason Why – Start by figuring out the reason you are finally deciding to become financially free.

Maybe you want more control over your life and your finances. Maybe you are in debt and want to break free of the chains of debt payment. Maybe you have recently gone through a divorce or other change in lifestyle that necessitates you getting your financial plan together. Whatever it is, be crystal clear on the reason you are starting this journey. Hold on to it tight. Write it on a post-it note and put it somewhere you can see it. Your reason why will get you through those times when things don’t go as planned, or when you start to doubt yourself. Having a compelling motive will keep you going.

  1. Where Are You Today? – Before you can get where you want to go, you have to know where you are.

Take stock of where you are today financially. What’s your current financial status? Determine how wealthy you really are by asking yourself this question: If I stopped working today, how many days could I survive financially?

Look at your monthly expenses. Add up how much money you have in savings, stocks, and cash flow. Then, to calculate your wealth, follow this equation:

Your Income / divided by / Monthly Expenses = Your Wealth.

  1. Your Plan – Now that you know where you are financially, where do you want to go from here? And, more importantly, how will you get there? In this part of the planning process, there are two questions to ask yourself:
    1. Am I investing for capital gains or for cash flow?

Capital gains come when you buy an investment like a stock, and it appreciates so that you can sell it for more than you bought it. Or if you buy a house, fix it up, and flip it for capital gains. Cash flow is when you invest in an asset that pays you a certain amount each month, such as buying a house and renting it out. That rent becomes your cash flow.

Both are good investment options, and this decision comes down to personal choice.

    1. The second question to ask yourself is: What’s my goal?

Is your goal to be financially free? Is your goal to get out of debt? Is your goal to earn enough that you can quit your job and devote more time to your family or passions? Whatever it is, have a tangible and attainable goal that you can work towards.

How to get there

You know where you are, you know where you want to go, and you know a little bit how you will move forward. But that’s still not enough. Now’s the time to drill deeper and get a more detailed plan together.

This is where your homework begins. Now you create the plan that will get you to your goal. There are so many investment vehicles available to you, so start researching and find what your preferred investment is. Learn everything you can about your investment choice. Read books, take classes, find a mentor, speak with an advisor, study the financial section of the newspaper. Again, this is only something you can do, no one can learn all this from you.

Be your own Prince Charming

The choice is yours. You can sit back, let someone else make financial decisions for you, rely on a spouse or government policy to take care of you. I’m sure you could live quite comfortably that way, for a little while anyways. But it doesn’t last. The past decade has shown us just how chaotic the economy is, and how quickly things can change overnight.

We can’t control life’s ups and downs. The only thing we can control is how prepared we are to tackle the challenges when they come. Is your financial plan stable? Maybe it’s time to make that change and become your own financial plan.


Mutual fund taxation post Budget: All you need to know

If you are a mutual fund investor or are planning to enter the equity markets by choosing to invest in mutual funds, it is essential to understand your taxation aspects post budget. Finance Minister Arun Jaitley in his last full budget before the 2019 elections announced two major taxation decisions related to equity investments. The first is a 10% Dividend Distribution tax (DDT) on dividend options of equity funds and the second, the reintroduction of long-term capital gains tax applicable for gains exceeding Rs 1 lakh from the sale of equities to be taxed at 10% without indexation.

So does this mean you should reconsider investment in Mutual Funds or look for other alternatives than investing in a growth oriented fund over a dividend pay-out fund? Here is everything you need to know before taking a final decision over your mutual fund investments to make them both tax friendly and financially viable.

Core Factors For Ascertaining Mutual Fund Taxation

Before worrying about the tax on such investments, know that your tax outgo is dependent on three essential parameters — residential status, type of mutual fund investment and the holding period.

Your residential status plays an essential role as tax rates are different for both resident Indians and non-resident Indians or NRI investors. The second essential component is the type of mutual fund investment. Any fund which invests 65% or higher in equity comes under the equity fund category and is taxed accordingly. Funds with a lower equity component than 65% continue to be considered as debt funds for taxation purposes. For all equity funds, a holding period of less than 1 year is short term while over 1 year is considered long term. For debt funds, any investment for less than 3 years is considered short-term and tax rates are applicable accordingly.

Mutual Fund Investments and LTCG Tax

Gains from the sale of any stock or equity oriented fund exceeding a minimum limit of Rs 1 lakh after January 31, 2018, will now be taxed at 10% without indexation. The tax is not retrospective and all gains before Jan 31, 2018, are exempt from the ambit of this tax.

For example, if you invested in equity mutual fund with a NAV of Rs 100, six months prior to Jan 31, 2018, assuming that the NAV of the unit was Rs 120 as on Jan 31, 2018, you will be taxed on LTCG for gains over Rs 1 lakhs. Short-term capital gains tax continues to be in place and taxed at 15%.

Mutual Fund Investments and Dividend Distribution Tax (DDT)

If you have been investing in mutual funds with a dividend option, there was no DDT for individual investors. The amount received as the dividend by the mutual fund company was tax-free in your hands as an investor. Post Budget 2018, DDT at the rate of 10% is now applicable to every individual equity investor.

Mutual fund investments And Security Transaction Tax (STT)

For sale of all equity-oriented mutual funds, an STT of 0.001% is levied by the fund company for all such sales. The STT continues to be the same for all equity-oriented mutual funds along with the DDT taxation.

Mutual Fund Investments And Tax Rates for FY 2018-19

 Here is a quick glance at your taxation liabilities for mutual fund investments as a resident Indian investor for the financial year 2018-19.

With LTCG tax and 10% DDT, investment in growth and dividend mutual fund investments are almost at par. If the final post-tax return on investments continues to be lucrative, the new taxation decision should not lead to any alarming change in your mutual fund asset allocation.

Mutual Funds
 Article Credit: TOI

Best Gift for Your Child is a Life Cover

It’s Sunday morning and all I want to do is relax and enjoy my morning tea. My 4-year-old has decided that she also needs to make the most of her Sunday so has woken up early. Very early I think!

She is riding her little Scooty and all inspired by the republic day motorcycle stunts is trying out a few herself. And there her Scooty turns and before I can reach her she falls. I yell so loud, my heart stops beating. She obviously is not hurt, who can get hurt on it, it moves at a snail’s pace, but is a bit shaken by my scream. I can’t help it.

My most important job these days is to worry about her all the time. To my mind, that’s how it should be as children need protection all the time. I remember once a friend, mother of a young girl had asked on Facebook “when will I now sleep peacefully?” Someone had very wisely commented “Never”!

As parents, we promise the following 3 fundamental things to our children

  1. Protection: Protection from hardships of life.
  2. Security:  We promise, till we make them independent, we will offer them security of
  • Nutrition
  • Good education
  • Healthy environment
  • A decent lifestyle
  1. Unconditional love and affection

When a child loses a parent he or she loses all three.

However, Insurance helps provide protection to the first two. Love and affection are irreplaceable.  This New Year lets gift our children security and protection even when we may not be around. Let’s buy a life cover.

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Women are Smart Savers : Tips to become Smart Investors Too

Women are Smart Savers : Tips to become Smart Investors Too

Women have always been smart savers, kitty parties, chit funds, money in that small shoe box were all smart savings techniques that our mothers have been using over the years. Mothers have quietly passed on these saving habits to their daughters over the years. Sadly as the markets have matured and better investment avenues have come the saver mothers have not really migrated to being investor mothers!

Read More at #GurgaonMoms

Women Are Smart Money Managers

Women are Smart Money ManagersWomen are very smart with money. The entire day they are making smart decisions about money without even realizing. They are running a very big organization called the Home. It is like being the CEO of a company. My husband often says – you are in charge here, you run the show, while it irritates me no end but heart of heart I do know I run this enterprise of mine called HOME! Just think about your day and the money decisions you are making

Catch the conversation LIVE

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