Category Archives: Mutual Funds

What are debt mutual funds?

When should you invest in it?

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In times of volatile market scenario which we have seen for the past few years, investors often resort to the safest and risk free investment options like FDs, PPF etc. but hardly invest in debt funds. This is mainly due to the ignorance about debt funds in terms of its structure and where it invests. As a matter of fact when the interest rate falls in an economy, debt funds offer higher returns than FDs. Let’s understand it better:

What is a Debt fund?

Debt funds are a type of mutual fund schemes which invests in fixed income securities right from corporate or government bonds and treasury bills. Debt funds have different categories which invest for short term, long term and medium term bonds.

What are different types of debt mutual funds?

  • Ultra Short Term (Liquid Plus): These funds invest in for a shorter maturity from a couple of days to a month and invest the money in commercial paper, treasury bills and certificate of deposits.
  • Short-term Plan:  Invest in fixed income securities or corporate instruments primarily where the maturity of instruments is short term in nature.
  • Floating Rate Funds: These funds invest part of the proceeds in those securities which pays interest on a floating rate and the balance in fixed income bearing securities.
  • Fixed Maturity Plans (FMPs): FMPs corpus is invested in fixed maturity corporate instruments. It comes with different maturity options ranging from one month to three years and these schemes mostly close-ended.
  • Income/ Debt Fund: These schemes invest in corporate bonds, G-Secs mainly and are less risky as compared to equity schemes. These schemes do not get affected by market volatility of equity markets.
  • Monthly Income Plans (MIPs): These schemes are popularly known as MIPs and it mainly invest in debt instruments and only 10-20% money is allocated to equity. But don’t go by the name of this scheme as it does not guarantee monthly income since the returns of these schemes are market linked.

Should you invest in debt funds?

The main objective of investing in debt funds is to protect your principal amount and generating decent returns alongside and to generate better returns than offered by other fixed returns instruments like FDs, PPF etc. So if you intend to invest for short-term period, then debt funds meets your requirement while if you want to invest for long-term then you can invest in multiple instruments and diversify your portfolio. Debt funds provide much stable returns than equities and prove to be a great investment option for investors seeking capital appreciation and tax benefits in terms of lower rates of taxation but more importantly safety of their capital. It is much better than fixed deposits if the capital protection is not the sole and primary concern, so select a debt fund scheme based on your time horizon and risk taking ability.

 

Why should you invest in Mutual funds?

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Investing in mutual funds could surely be one of the best things which can happen to your portfolio but many times investors do not invest in these due to lot of misconceptions and wrong notions. The aim of this article is to simply present various advantages of investing in Mutual funds to be followed by various other aspects of mutual funds on an ongoing basis, till then watch this space.  

What is a Mutual Fund?

A Mutual Fund is a mechanism which brings a group of people together to invest their money in Shares, bonds, money market instruments and other securities with a predefined objective, let’s understand it better;

What are the advantages of investing in Mutual Funds?

  • Diversification: The biggest advantage of mutual fund investing is the diversification of risk it offers by investing in a number of stocks which offsets the risk of loss in one company by the gains it may generate on other stocks. Small investors cannot spread their investment across equity shares of different companies because of the high price of these shares and suffers that risk.
  • Liquidity:  You can easily withdraw your investment amount by simply submitting the signed account statement and the proceeds would be credited directly to your bank account within 4 to 5 working days.
  • Professional management: Mutual funds are managed by qualified professionals. Investors often do not possess the required professional analytical approach & expertise to manage their own portfolio apart from the lack of time which needs to be devoted in managing the funds.
  • Simplicity: Investing in mutual funds is very simple and you can start with as low as Rs. 5000 lump sum or even Rs. 100 per month via SIPs by simply filling up application form and the amount would be deducted directly from your bank account.
  • Governance: Mutual Funds are regulated & governed by the highly regarded organization SEBI, which ensures utmost transparency.
  • Monitoring: You can regularly monitor the performance of your mutual funds and that too online with the detailed reports and statements provided by these companies.
  • Tax benefits: Returns of equity mutual funds are tax free if one sales it after holding it for more than a year and in case you sale your fund within a year, then tax would be charged at a special rate of 15% only.
  • Variety: You can invest in variety of funds like blue-chip stocks, sectoral funds, bonds, money market funds or even balanced funds so as to achieve long term capital appreciation.
  • Inflation adjusted returns: You can easily beat the ever rising inflation and get better returns than your investments in FDs or other fixed instruments which do not keep pace with the inflation. It has the potential to generate higher returns over a longer period and returns on an average ranges from 12 to 20% based on the history of stock market investments.

 

Invest in Mutual Fund ELSS and save tax up to Rs. 30,900/-

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Mutual funds “Equity linked Savings Scheme” (ELSS) is one of the most popular tax saving instruments forming part of Section 80C of Income Tax Act. So if you fall under the highest tax slab of 30.9% (including education cess) then your investment of Rs. 1,00,000/- U/S 80C would give you tax saving of Rs. 30,900/- i.e. tax saving @30.9% on Rs. 1,00,000/-. Let’s understand ELSS in detail:

What is an ELSS?

It is an exclusive diversified mutual fund scheme with a lock in period of 3 years and investment in it qualifies under section 80C. ELSS invests in share market and thus offers dual advantage; first is capital appreciation due to potential of getting higher returns from stock market and second is the tax benefit.

 

Advantages of ELSS:

  • Tax Saving: ELSS is the only dedicated mutual funds schemes which offer tax savings. Your investments of up to Rs. One lakh would be deductible from your gross total income u/s 80C and gives you tax savings based on your slab.
  • Tax free returns: ELSS returns are tax free because long term capital gain on sale of mutual funds is tax free. This makes ELSS a better investment option than tax saving FDs or NSCs where in the returns are not tax free.
  • Shortest lock-in period: 3 years lock in period of ELSS is the shortest lock in period while compared to other tax saving options like PPF (15 years) and NSCs/Tax savings FDs (5years).
  • Monthly investment (SIPs): One can even invest on a monthly basis via SIP mode which is not available while investing in PPF, NSCs or FDs.
  • Higher Returns: Since ELSS invests in stock market, you can expect better & higher returns as compared to fixed tax saving instruments like PPF/NSCs/FDs etc. Past performance of few ELSS has generated a return of 15 to 25% on an average.

 

Disadvantages of ELSS:

Since these schemes invest in stock market, all the risk risks as associated with stock market for e.g. market volatility are applicable to ELSS as well. ELSS returns unlike PPF/FDs & NSCs are not guaranteed and could be more or less depending upon stock market and you should stay away from these schemes if you do not wish to take any risk at all.

Which are the best available ELSS & How to select it?

Some of the best available tax saving mutual funds schemes are Canara Robeco Equity Tax Saver, HDFC Tax Saver & HDFC long term advantage Fund, Birla Sun life Tax relief fun , DSP Black Rock Tax Saver Plan & ICICI Prudential Tax Plan. You should always select an ELSS based on its track record of at least 3 to 5 years rather than short term performance. Also look at its dividend history if any and invest in more than one ELSS scheme to diversify and reduce the risk of investing lump sum in a single scheme.

 

 

Which player will you buy Dhoni, Kohli or Tendulkar?

How IPL Auction can help you choose the right mutual fund scheme

If you are an IPL team owner, about to invest money in buying players, which player would you buy- Kohli, Dhoni, or Tendulkar!  Will you go with the player with a very long successful past track record or the one who is performing currently with a potential to even perform better in future or a player in between? Well you will find yourself in the same situation when you think of investing in Mutual funds, whether to go for Large Cap/ mid cap or small cap schemes? Let’s understand:

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1) Well Established Schemes:

You must have heard of schemes like HDFC Top 200, Reliance growth etc. with a very impressive returns and records, you can call these funds the “Tendulkars of Mutual funds” Schemes.

>Who should invest?

It is suitable for Investors with low risk appetite.

>What can you expect?

These funds have grown phenomenally in size and have large AUM exceeding Rs. 5 to 10,000 Crores. This is a stage where the past performance cannot be replicated by the fund manager as it would be practically impossible to manage so much cash to get the same kind of past returns. The best time to invest in it was 5-10 years back. You can expect moderate returns if you wish to invest in these schemes.

2) Mid-Cap Schemes:

These funds invest in Companies Like “Dhoni” who is in the middle (Tendulkar & Kohli), already performed well but still can go up to greater heights.

>Who Should Invest?

It is suitable for Investors with good risk appetite and those looking for higher returns.

>What can you expect?

Typically these schemes invest up to 55% in mid-cap and small-cap stocks which in case of booming market, will out-perform the benchmark and provides higher returns. These schemes should be a part of your portfolio provided you have an investment period of say 4 to 5 years. Though it comes with the risk similar the way that not everybody like “Dhoni” would become “Tendulkar” but when it does; then sky is the limit.

3). Small Cap or Emerging Funds

Small cap schemes are like investing in Companies like “Virat Kohli” who has been performing well but still has a long way to go to become either Dhoni or Tendulkar.

>Who should Invest?

Investors with a very high risk appetite & looking for very high returns.

>What can you expect?

These funds will take some time to mature and generally young investors can invest in these schemes as they have time and ability to bear the risk & cover up the losses if these schemes do not perform well. And similar to Mid-cap schemes, Small cap schemes will give much higher returns in case of a rising market.

Conclusion

You need to choose wisely before you invest and should be based purely upon your risk appetite and investment horizon.

5 ways to become a Crorepati

5 Secrets to become a Crorepati !!!

                     (1). Getting wealth in inheritance

 (2). Winning a Lottery

    (3). Become a Celebrity

     (4). Marry a rich person

&

(5). Save & Invest !

Well 4 of the out of the five ways are not  in our direct control but the fifth one is surely in our control and that is save and invest.

Eat less and exercise more, that is the rule to be followed if you have a weight-loss goal in mind, they say. Well, it is no different when there is money involved.

A parallel universal truth with regard to money is spend less, save more, for you to reach your ideal level of wealth. The earlier you start saving for your rainy day the richer you will be when it finally arrives.

In this context, you need not be a whiz in your attempt to make yourself financially secure for the future. You simply need to be consistent in saving a portion of your money and let it compound over time. The fascinating effect of compounding gathers up momentum over longer periods of time and becomes an avalanche of wealth.

How does compounding work?

When you save Rs 100 and get an annual interest of 10%, you will have Rs 110 at the end of one year. Due to compounding the next year you will get a 10% interest on Rs 110, which will then leave you with Rs 121. The next year, interest will be calculated on Rs 121 at 10% and so on. In time, these savings will grow exponentially.

The Rule of 72: 72 divided by your return rate = the number of years it’ll take to double your money.

There are certain number rules that have been evolved to figure out a quicker method for calculations, especially in finance. Rule 72, is one such quick method of calculating how much time it will take, for your investment to double.

So, if you invest Rs 100 with a compounding interest of 10% per annum, the rule of 72 gives 72/10 = 7.2 years as the approximate time frame required for the investment to become Rs 200.

like that way you can surely get Rs. 1 crore if you start today and invest 1444 per month for the next thirty years assuming a return of 15% per annum. lets look at the table with the different amount you need to invest to achieve your desire wealth!!!

Desired wealth & amount to be invested per month
Target for years 5 lacs 10 lacs 20 lacs 50 lacs 1 crore
5 5645 11290 22580 56450 112899
10 1817 3633 7267 18167 36335
20 334 668 1336 3339 6679
30 72 144 289 722 1444/-

Power of compounding and why you must start early

Let’s take an example to understand it better. Say ajay who is 30 years old and wants to retire at 60. He has 30 years to go. If he starts investing Rs 1,500 per month for the next 30 years, then at the rate of 15 per cent (assuming s/he is doing a systematic investment plan in equity mutual funds) s/he will have a corpus of Rs 1.03 crore.

Where as if Ajay doesn’t start at an early but decides to invest when he turns 50 the to have a corpus of Rs one crore he will require to invest Rs 41,500 per month, the reason for the huge difference in per month investment is the extra 20 years if Ajay starts early. when he starts at age 30 then with power of compounding his investments got a period of 30 years

While this may not be possible starting your retirement planning when young is. It is not necessary to start with a bang. You can start with small amounts and increase it as your salary increases.

That’s why Albert Einstein said about Compounding of Capital: “Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.” He called it the 8th wonder of the world.

Where to invest?

well I have assumed a rate of return of 10% and 15% in my above mentioned examples, if as seen above one plans to invest regularly and for long term then looking at the history of share market and mutual funds SIPs one can expect a return of 15-20 % per annum but even those who doesn’t want to take any risk then any invest options like PPF, increase in the amount of PF, FDs can get you 8-10% returns. the main purpose of this article is to let you know the power of compounding and we will see in next series of articles about where to invest and the best schemes available for the same looking at the age, income and risk taking appetite of the investor.

So what should You can do to benefit from Compounding?

You don’t have to be rich to invest. In fact, you can surely become rich; just by starting with a very small amount of money and letting it compound over a long period of time.

Here is a practical list of action steps that can help you benefit from Compounding:

  1. Start early: even if you start with a small amount.
  2. Invest regularly: consider investing through the entire period detected.
  3. Leave your money uninterrupted: don’t disturb the process of compounding.
  4. Be patient: Compounding works only over long periods of time.