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All you need to know about Asset Allocation

November 12th, 2022 Growreal

Things you always wanted to know about asset allocation

Imagine that you have a pizza in front of you. But the pizza has six different types of toppings with different crusts. Would not that be awesome?

Now think that the pizza is your investment portfolio with different assets. This is called asset allocation, which describes where you have put your money. Although there is a high probability that you will like all the different pizza slices,  in case of investment, you need to be sure about where you have put your money and in what proportion. We don’t want you to invest blindly in different assets just because your colleague suggested you.

Asset allocation is essential as it helps to reduce the risks associated with an investment option through diversification. Different asset classes such as equities, debt or commodities react differently to a particular event. While one asset may outperform during a specific time frame, other assets may underperform.

Here are some of the questions that you need to ask yourself to come to the right asset allocation.  

When are going to need the money?

This question will determine which asset class you should put in money. If you are likely to need the money within 2 to 3 years, you can invest in conservative investment options such as debt mutual funds. It will be better to stay away from equities as the equity market can be volatile in the short run. But it has been historically seen that equity markets give attractive returns in the long term. Hence, if you won’t need this money for five years or more, investing a higher proportion in equities would be the right approach.  

What are your financial goals?

In addition to your timeline, your financial goals are also essential to determine your ideal asset allocation. For your short-term financial goals, debt mutual funds such as liquid funds, ultra-short term and short-term funds are good investment options. Invest in pure equity funds for your long-term financial goals.  

How much risk can you take?

What will be your reaction if your investment value drops by 15% in a single day? If you are okay seeing your portfolio swing from one extreme to another, you can digest volatility; equities will be a better investment option. However, you can minimise the risks associated with equities by taking the mutual fund approach. High-risk investment options have the potential to give higher returns.

Now, that you have answered the questions, you begin thinking about allocating your money among the different asset classes. According to a thumb rule, your equity allocation should be 100 minus your age. E.g., if you are 25, 75% of your portfolio should be in equities. The younger you are, the higher should be your equity proportion. As you grow older, you can add more debt instruments or cut your equity proportion. It is because as you get older, your risk taking capacity also decreases.

It is also important to keep a specific proportion of your investment proportion (at least three months) as liquid cash for emergency purposes.

These were a few basics of asset allocation. But asset allocation does not stop with equity, debt or cash. Sophisticated or seasoned investors can include alternative investment funds in their portfolio. It is becoming a popular asset class among HNI and UHNIs. It has the potential to deliver higher risk-adjusted returns. Alternative investment funds include start-ups, private companies and hedge funds among others.

Among precious metals, gold is used as a hedging instrument. Gold performs better when the equity markets are in red. Geopolitical tensions and continuous rupee depreciation has made gold one of the must-haves in the investment portfolio of HNIs. However, ideally, gold should not constitute more than 5% of the investment portfolio. 

Real estate is another asset that investors can look at to diversify their portfolio. Besides investing in real estate, investors can now invest in real estate investment trust(REIT). Through REITs, investors can invest in high-end commercial real estate.  

Conclusion: Coming up with the optimal asset allocation may not be an easy task as there are various factors at play. Prudent asset allocation can help you to achieve your financial goals, fetch maximum returns, minimise risks and have sufficient liquidity. If you are not sure where to begin or need further clarity, your financial advisor will be able to help you out.  

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3 most critical aspect of your life

From our childhood, we are taught not to waste money and always go for the cheapest available option. But not all things that appear to be expensive are bad for your pocket. Some of the things have far fetching positive impacts, help us save us a ton of money in the future and boost our wellness.     

You can say that these are necessary expenses. Here we would like to talk about three areas of our lives where we should not think about saving a few pennies. These areas are physical, mental and financial aspects of our life. After all, you should not be ‘penny wise and pound foolish’.

Physical aspect:

In today’s mad rush of earning more money, we tend to ignore our body. We only pay attention when we are diagnosed with a particular health disease. The best way to keep lifestyle-related conditions at bay (and save thousands of rupees) would be to do any form of physical activity regularly. Studies have shown that physical activity is not just good for your physical health; it is also essential for your mental health. But before you take that annual membership in your nearest gym, it is crucial to understand what kind of physical activity would you like to do. If you love to dance, then Zumba or other dance classes can be the best fit for you. If you want to run in a marathon, you can join a marathon-training group.

It is also essential to go for regular health checkups along with your other family members as it can help to diagnose early signs of any disease. You can preventive measures and control the disease from blowing out of proportion. 

Mental aspect

Mental wellbeing is as important as physical well being. When you are happy, you can give your best in your work life and increase your productivity leading to higher increment, bonus and more profits. A contented mind is essential not just for your work life but your personal life as well. There will be less emotional stress between the family members. Being stressed can lead to improper decision making, which can have serious consequences, especially in your financial life.

One of the best ways to have a calm and happy mind is through mediation. Meditation can help lower your stress level and clear your negative thoughts. Doing the things that you love can also lower your stress levels. Many activities and workshops on various art forms, outdoor activities are held every other weekend or make plans with your friends and family members. It will also strengthen the bond.

"People who are more socially connected to family, friends, and community are happier, healthier, and live longer than people who are less well connected," says Dr Waldinger, a psychiatrist with Harvard-affiliated Massachusetts General Hospital. Hence, it is a win-win situation in every aspect.

Investing in yourself through attending workshops, training programs, and reading is very vital in today’s world of cutthroat competition. Don’t rely solely on the training programs provided by your organisation and take initiatives to attend some of the best events within your industry. It will give you an edge over your colleagues who have not participated. Staying up to date with the latest happening in your industry and taking courses to upgrade your skills can go a long way in increasing your income potential. Books, workshops and courses are just one-time investments, and you can reap the benefits for many more years.

Financial aspect   

We have seen how investing your money in your physical and mental aspects can help you increase your income. But everything will come crumbling down if you don’t manage your money wisely. A financial advisor can help you do that. We may think that we can handle our finances, but when we are faced with not-so-good scenarios, we fail to make the right decisions. Such decisions may be investing in ULIPs to save tax at the last moment, investing in five ELSS funds, withdrawing money from your provident fund after the 15-year lock-in and shuffling between the high performing funds. All these financial mistakes can hurt your finances. A financial advisor will hand hold you and help you make the right financial decisions. With the right financial advisor, your life goals are within your reach.

These are the three aspects of life where being a miser can backfire. Remember to plan your budget properly so that you can have the best of both worlds. 

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All you need to know about Emergency Fund

Emergencies come unannounced. No one can predict when it is going to strike. The only thing that we can do is to prepare ourselves for any unforeseen circumstance. Having an emergency fund will help you to tide over emergencies like accidents, job loss etc.  Hence, building an emergency fund should be the first thing on your mind before you start investing for your financial goals. 

So, here’s everything you need to know about emergency funds.

What are emergency funds?

An emergency fund is like a cushion that helps you to sleep soundly at night. It is money that you put aside against life’s unexpected events. It is not to be used for planned purchases such as buying a house or new car or your child’s higher education.

An emergency fund helps you to be prepared for anything that life throws at you. These emergencies can be accidents, immediate house repairs and job loss as well. Sorry, the late night pizza craving is an emergency.

Ideally, an emergency fund should be in liquid investments such as liquid funds or savings account. Liquidity is the essential feature when it comes to emergency funds, as you would need the money at short notice. You should park two-thirds of your emergency corpus in liquid funds and the rest in a savings account. In case of short-term emergencies such as house repairs, you can withdraw money from your savings accounts. The liquid fund can help you save for significant emergencies like job loss.

 

How much should you have and how to build your emergency fund?

 

You should have at least three to six months of expenses in the emergency fund. E.g., if you are earning Rs.50,000 per month and around Rs.30,000 goes in meeting your expenses, then you should have at least Rs.1 lakh in your emergency fund.

This amount is likely to cover most unpleasant surprises like a big car repair or house repair. Keeping aside three months worth of expenses is the bare minimum. The more you can save in your emergency fund, the better. However, you may want to consider what would happen in case of your job loss or non-payment of salary. It is because job loss is a big emergency. If you are in a field or position where finding a new job is tough, it is advisable that you save up to a year’s expenses. 

Let us take the Jet Airways fiasco to highlight the importance of saving money in case of a job loss. Jet Airways employees were not paid salary for a couple of months, and now many of them are staring at a bleak future. An emergency fund can help you to overcome such challenging scenarios.

The amount in your emergency fund also depends on your responsibilities. A person in their forties with kids and elderly parents will have higher responsibilities than someone in their 25s who recently joined the workforce and does not have any financial obligations.

There are two ways to calculate your expenses. The first way is to figure out the essentials that are utmost necessary such as bills, groceries, and in the second way, you also take the luxuries such as eating out and movies into account. It is always better to have a conversation with your spouse before considering the total amount that you need to save for your emergencies. 

Once you know how much you need to save for your emergency fund, the next step would be to build the emergency fund. Just like investing for any financial goal, building an emergency corpus also takes time. Keep aside a specific sum of money every month in a different bank account or a liquid fund. Building an emergency fund should be your priority. Hence, it is okay if you have to cut your investments. You can also do so by cutting back your expenses on luxury items or selling things that you do not use.

To summarise, emergency funds are the first step in financial planning. Use an emergency fund calculator or talk to your financial advisor to know how much you have to save in your emergency fund. Your financial advisor will be able to help in this entire process. So, start saving for your emergencies today. 

 

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All you need to know about Asset Allocation

Things you always wanted to know about asset allocation

Imagine that you have a pizza in front of you. But the pizza has six different types of toppings with different crusts. Would not that be awesome?

Now think that the pizza is your investment portfolio with different assets. This is called asset allocation, which describes where you have put your money. Although there is a high probability that you will like all the different pizza slices,  in case of investment, you need to be sure about where you have put your money and in what proportion. We don’t want you to invest blindly in different assets just because your colleague suggested you.

Asset allocation is essential as it helps to reduce the risks associated with an investment option through diversification. Different asset classes such as equities, debt or commodities react differently to a particular event. While one asset may outperform during a specific time frame, other assets may underperform.

Here are some of the questions that you need to ask yourself to come to the right asset allocation.  

When are going to need the money?

This question will determine which asset class you should put in money. If you are likely to need the money within 2 to 3 years, you can invest in conservative investment options such as debt mutual funds. It will be better to stay away from equities as the equity market can be volatile in the short run. But it has been historically seen that equity markets give attractive returns in the long term. Hence, if you won’t need this money for five years or more, investing a higher proportion in equities would be the right approach.  

What are your financial goals?

In addition to your timeline, your financial goals are also essential to determine your ideal asset allocation. For your short-term financial goals, debt mutual funds such as liquid funds, ultra-short term and short-term funds are good investment options. Invest in pure equity funds for your long-term financial goals.  

How much risk can you take?

What will be your reaction if your investment value drops by 15% in a single day? If you are okay seeing your portfolio swing from one extreme to another, you can digest volatility; equities will be a better investment option. However, you can minimise the risks associated with equities by taking the mutual fund approach. High-risk investment options have the potential to give higher returns.

Now, that you have answered the questions, you begin thinking about allocating your money among the different asset classes. According to a thumb rule, your equity allocation should be 100 minus your age. E.g., if you are 25, 75% of your portfolio should be in equities. The younger you are, the higher should be your equity proportion. As you grow older, you can add more debt instruments or cut your equity proportion. It is because as you get older, your risk taking capacity also decreases.

It is also important to keep a specific proportion of your investment proportion (at least three months) as liquid cash for emergency purposes.

These were a few basics of asset allocation. But asset allocation does not stop with equity, debt or cash. Sophisticated or seasoned investors can include alternative investment funds in their portfolio. It is becoming a popular asset class among HNI and UHNIs. It has the potential to deliver higher risk-adjusted returns. Alternative investment funds include start-ups, private companies and hedge funds among others.

Among precious metals, gold is used as a hedging instrument. Gold performs better when the equity markets are in red. Geopolitical tensions and continuous rupee depreciation has made gold one of the must-haves in the investment portfolio of HNIs. However, ideally, gold should not constitute more than 5% of the investment portfolio. 

Real estate is another asset that investors can look at to diversify their portfolio. Besides investing in real estate, investors can now invest in real estate investment trust(REIT). Through REITs, investors can invest in high-end commercial real estate.  

Conclusion: Coming up with the optimal asset allocation may not be an easy task as there are various factors at play. Prudent asset allocation can help you to achieve your financial goals, fetch maximum returns, minimise risks and have sufficient liquidity. If you are not sure where to begin or need further clarity, your financial advisor will be able to help you out.  

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Why & How To Diversify Your Portfolio?

 

Diversification is investing in investment options to limit exposure to any particular asset class or investment. This practice helps to reduce the risk associated with your portfolio. Simply put, diversification helps you to yield higher returns as well as reduce the risk in your portfolio. Balancing your comfort level with risk against your time horizon is one of the keys to a long successful investing journey. For e.g., keeping pace with inflation may not be easy if you start investing in conservative investment options from a young age. On the other hand, taking a large exposure to high-risk instruments near retirement could erode the value of your portfolio. Hence, it is important to balance the risk and reward in your portfolio so that you don’t lose sleep on market ups and downs.   

What are the components of a diversified portfolio?

The major components of a diversified portfolio are equity, debt and money market instruments.

Equity investments carry the highest risk in your portfolio and it has the potential to give higher returns over the long run. But with higher return comes greater risk especially in the short run. Equities tend to be more volatile than other asset classes. Investing in equity mutual would be the best way to take exposure in equities. Equity mutual funds are diversified funds as fund managers invest in different stocks and across sectors (except sectoral funds) which optimizes the risk in your portfolio.

Another important component of a diversified portfolio is debt securities. While equities have the potential to grow your wealth, debt investments provide stability and act as a cushion through the market cycles. Debt instruments include debt mutual funds, fixed deposits, bonds etc. The main objective of debt instruments is not to provide high returns like equities but capital protection along with inflation-beating returns. Debt investments can also be a source of income.

While equity investments give higher returns and debt instruments protect the capital to help us fulfil our financial goals, a part of the portfolio should be in liquid and money market instruments such as liquid mutual funds or a separate savings account. It provides easy access to money during emergencies such as job loss or accident.

Why is diversification important?

Diversification helps to minimise the risks associated with your portfolio. Let us assume that two years ago, you had invested your entire savings in a particular airline stock. Now, the airline is near bankruptcy and the stock price went down 60% in one month. Would you be comfortable in that kind of scenario? Most people wouldn’t. You would have less stressed out if you had diversified your portfolio and invested in a few other companies rather than taking 100% exposure in one particular stock. 

Diversification is important because different investment options react differently to the same development or move in a different pattern. For example, real estate and gold tend to underperform when equity markets are soaring. A cut in the interest rate may benefit the bond market but may not be good news for individuals with fixed deposits.   

How to diversify your portfolio?

Diversifying your portfolio is as healthy as consuming green leafy vegetables, fruits, exercising and meditating on a regular basis. However, eating just one kind of fruit may not be very effective. Hence, it is important to diversify. Investment is no different. Here are some of the ways through which you can diversify your portfolio:

Spread your investments among different asset classes:A diversified portfolio should include equities, debt and cash. Exposure to international market and commodities such as gold can help you in further diversifying your portfolio. It is because different investments come with different risk and returns. Higher the returns, higher will be the risk and vice versa.

Diversify within individual types of investments: Diversification is also necessary within an asset class. For e.g. in case of equity mutual funds do not concentrate on one category. It is recommended that you have mutual funds across market capitalisation such as large cap funds, mid cap funds and different investment strategies. Different funds and stocks come with varying risks thus minimises the risks.

Rebalance your portfolio regularly:Diversification is not an one-off exercise. Rebalancing your portfolio depends on two important things which are the number of years until you expect to need money(time horizon) and risk-taking capacity(risk tolerance). 

To summarise, diversification is important for every investor whether it is across asset classes or within an asset class. The nature of diversification depends on financial goals, time horizon and risk tolerance. It is also important that the diversification of the portfolio is updated on a regular basis.

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Should you invest in debt mutual funds or FDs?

Capital Safety, the rate of returns, the lock-in period and taxation are some of the key features that can help you select between debt mutual funds and fixed deposits.  

When it comes to investing, for many of us safety comes first and returns come second. After all, no one wants to play gamble with his or her much hard-earned money. Hence, fixed deposits and gold became our favourite investment options. In this craze of safe investment options, we forget that fixed deposits may not be the most ideal investment option. 

However, for investors whose priority is capital safety along with inflation-beating returns can look at debt mutual funds. Debt mutual funds are a category of mutual funds that invests in fixed-income securities issued by various companies and governments.

Now, let us understand the difference between debt mutual funds and fixed deposits that can help you to compare the two investment options and choose your pick accordingly.

Interest rate/Rate of returns

Return from Fixed deposits are fixed and are in the range of 7% to 7.5% currently. While interest rates remain the same during the fixed tenure but it may change through the years. Hence, when you want to reinvest the fixed deposit’s maturity amount, interest rates might be different at that time. With the interest rates moving south, banks may trim the interest rates on deposits going forward.

On the other hand, the returns on debt mutual funds are not assured and are linked to the debt market. Debt mutual funds have the potential to deliver higher returns than fixed deposits as fund managers make investment decisions based on the current debt market scenarios and select papers based on credit ratings and internal research. The expected returns from debt mutual funds are normally the Yield to Maturity minus expense ratio if one remains invested till the duration of the fund keeping all other parameters the same. Also, debt funds stand to gain from the lowering of interest rates as the price of a mutual fund unit i.e. net asset value rises when the interest rate falls.

Debt mutual funds have the potential to generate higher real returns. Real returns are the returns given by an investment option above the inflation rate. E.g. if the average rate of inflation in that year was 5% and the interest rate on fixed deposits was 7%, the real rate of return is 2%.  A higher real return helps in fulfilling financial goals.

Capital safety:

When it comes to capital protection, bank fixed deposits have an edge over debt mutual funds. However, fund houses cannot guarantee capital safety. In the case of FDs, capital protection differs from the issuer of fixed deposits. Non-banking financial companies give higher returns on fixed deposits but it also comes with higher risk than a bank deposit. Though capital erosion risk is very less in debt funds as the portfolio consists of well-researched securities and also due to diversification.

Liquidity:

Fixed deposits have a maturity period and you have to pay penalties if you want to redeem your fixed deposits before the maturity date. However, you can redeem from your debt funds anytime you want. However, a few debt funds may have exit loads if you redeem them within the specific time frame. Hence, debt funds are more liquid than fixed deposits.

Taxation: The taxation structure of debt funds is better than fixed deposits as it comes with indexation benefits. There are two types of taxation on debt mutual funds i.e. short-term capital gains and long-term capital gains. Short-term capital gains are applicable if the units are redeemed before three years and gains are taxed as per the income slab. If you stay invested for more than three years, you are eligible for long-term capital taxation at 20% with indexation. Indexation is nothing but accounting for the rise in inflation. In this case, you only pay tax on gains if the rate of returns is higher than the inflation rate. However, in the case of FD, the entire gains are taxed according to the tax bracket of the investor.

Conclusion: Debt mutual funds are a good investment option if you are looking for a relatively stable investment option along with inflation-beating returns. Investors who are in the higher tax brackets can also look at debt mutual funds for tax-efficient returns.

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Should You continue or stop your SIP?

Recently the data published on one of the new websites said that 'New SIP growth falls 61% from April to December.' What does it mean? Does it mean that investment through SIPs is no longer attractive? Does it mean that Investors are moving away from SIPs?

There could be only two reasons for the fall in Net SIP growth. The number of New SIP registration is slowing down and another reason may be that some investors are stopping their existing SIPs.

Historically it is observed that people start SIPs when the past performance looks good. When the market is in bull run people start an SIP expecting the similar return in the future. But the market can never go up in a linear fashion. There are going to be ups and down. Volatility is the part of the stock market. So when the market corrects and the return in the portfolio is negative or not as per expectation people stop the SIP and book the loss.

Remember! In the long run, correction is temporary and growth is permanent. But when you press the panic button and stop your SIP your temporary loss gets converted into a permanent one.

Creation of wealth through SIP requires two elements in place; first good financial advice and second discipline. Returns from SIP are never going to be proportional every year. There would be a few volatile years before you create a wealth. Those are the years where Investors need to stay disciplined and stay invested. In fact, if you want to become an even smarter investor you need to increase your SIP amount or add more money to your existing SIP folios. That would help you to accumulate more units and when the market recovers your portfolio would grow even faster.

If you had started a SIP of Rs 10000/month in September 2010 in a large cap fund (There were 43 Large Cap funds available), the value of your investment of Rs 3,60,000 after three years would have been Rs 3,48,896. Many investors were in a panic and stopped their SIPs due to this negative return. But for those investors who continued their SIP for even one more year, the value of their investment of Rs 4,80,000 was Rs 6,99,858/- after the fourth Year.

The market is always going to test your patience. If you lose your patience, you shall not be able to create wealth. Remember what legendary Warren Buffett has said when you are losing your patience, "Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant."

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Importance of Portfolio review

While investing for any specific goal, we always assume some rate of return from the investment based on some rationale. Actual return may vary from time to time from the assumed return, so it becomes very important to check whether we are getting that return or not. We also need to check how various asset classes and schemes are performing in our portfolio. This exercise is known as review and it should be done on periodic bases. Ideally once in a year, you must review your portfolio.

Reviewing doesn’t necessarily mean frequent buying and selling based on performance. The return which we assume is for the CAGR return for the entire period of investment and need not to be equal to the assumed CAGR every year.

How to review your mutual fund schemes:

You can review the performance of your scheme and compare it with the performance of the benchmark. Apart from the benchmark, you can also compare it with peer group performance.

The performance of a good scheme also may lag at some times, so short term performance should not be given too much of weight while doing the review of the portfolio. Rather than short term performance, you must consider long term return and consistency in performance.

Apart from the return you also need to compare your portfolio on other parameters like risk, risk adjusted return and quality of portfolio while reviewing the scheme.

If the scheme underperforms on all the above parameters you should exit the same and invest in some other scheme.

But, remember reviewing doesn’t necessarily mean buying and selling every time while you review. The decision of exiting should not be based on short term underperformance noticed during the review. You need to adopt a holistic approach of reviewing the scheme by taking into consideration of other important parameters also apart from short term return.

Once you know where you are going by setting appropriate investment objectives, your portfolio review will help you reach your destination. How? By identifying problems and mistakes that you can correct mid-course. Much like a pilot, your job is to stay on course so that you can reach your destination safely and in a timely manner.

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Why you should stop looking at "Past Performance"

Have you ever got stuck up in traffic? I am sure you have. Just imagine your car is  new brand with a powerful engine, but unable to move an inch because of heavy traffic. And you get what? Frustrated! What happens when you cannot move but the smaller cars in lane next to you are moving faster than you because that lane has lesser traffic than the one in which you are driving. More Frustration! Right?

As a human being, it is obvious that you would have a strong urge to change the lane and move to the faster lane. And using your driving skills you change the lane. The moment later the lane which you left starts moving and the new lane in which you entered stops moving due to traffic. Now what? Height of frustration!

If there is a smile on your face while reading this, it means you have already have experienced it, probably not just once but more than once you have changed the lane and mostly reached the height of frustration.

Not just driving whenever in our life when we see someone is moving faster than us we try to change the course and find ourselves caught in the trap and then feel like we should have stayed in our lane.

Changing Mutual Fund scheme based on Past Performance

So is the case with Mutual Fund schemes. Most investors after investing in mutual fund schemes start comparing the return of their schemes with that of other mutual fund schemes. And many a time we change the mutual fund schemes and switch our money to other better performing mutual fund schemes in the recent past. And what happens next?

In recent times, Past Performance has become a major criteria of the mutual fund selection system. Investing based on recent past performance is as risky as driving a car by looking only into rear view mirror. While driving, rear view mirror is useful but more than rear view it is your front view that is more important for smooth and safe journey.

Past track record definitely helps in understanding the quality of the scheme and the ability of the management team but recent past performance is not the guarantee for the future.

What else matters while selecting a scheme?

Apart from Recent past performance, one should look at the consistency of return which can be derived from rolling return analysis for various periods, which requires a lot of data crunching rather than just finding out the past one year return.

One should also look at how the fund has performed during the best and worst period in past compared to its benchmark and category return.

You also cannot avoid looking at risk parameters. If some fund is generating superior return then it is also necessary to check at what cost. How much risk or volatility is it adding to the portfolio.

Choosing a fund from a basket of hundreds of funds requires lots of data, analytical skills, education and experience. One can do it by own but it is very risky. It is always advisable to take the help of qualified professionals for building a quality portfolio and stick to it with discipline.

Frequently changing lanes rarely helps, in driving or investing.

Happy Investing!

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Power of Compounding

If you want to go around the earth and start with 100 metres on first day and double the distance every day, How long do you think it will take?

1 year?

10 Year?

Let’s find out, within 19 days you would have covered 39,321  Kilometers, while the equatorial circumference of Earth is about 40,075 km. you would have travelled around the world in less than 20 Days.

But, What if you stop after 10 days? You would have hardly covered a little less than 77 km.

This is the power of compounding. Power of compounding can help you to create a great wealth as well.

How to leverage the power of compounding for maximum benefit to create a wealth!

Start Early & Invest Regularly

Key ingredient to avail the benefit of power of compounding is TIME. You need to keep investing regularly for long term. The sooner you start investing in your life, more wealth you will be able to create.

For Example,

Nisha invests 5000 rupees every month since the age of 25, while Nilesh invest 7000 rupees every month since the age of 35. Both of them kept investing till the age of 60 years with the objective of creating a corpus of retirement.

By the age of 60 both would have invested 21 Lac rupees. Assuming a return of 12%, How much wealth both of them would have created for their retirement?

Nisha will accumulate 2.75 Crore rupees, while Nilesh will get only 1.19 Cr rupees, which is 59% lesser than Nisha’s corpus.

This is why starting early is important.

Challenge:

"I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” Bruce Lee

One requires a lot of discipline in doing the same things again and again for long term, though it is the most proven method to create a great result in any area.

To avail the benefit of power of compounding the biggest challenge is to keep investing every month with discipline. And as a human being, most of us lack discipline, when it comes to follow the same routine in the absence of instant gratification. For creating wealth in long term, one needs a lot of discipline to start early and keep investing regularly.

Solution:

Start a SIP (systematic investment plan) in Equity Mutual Fund for the long term to automate the process of investing. You need to exercise your willpower just once to decide the amount and tenure to start your SIP. The biggest benefit of investing in mutual funds through SIP is that it helps you in investing with discipline regularly. You need not do paperwork or pay every month manually. This automation makes this long-term powerful process of wealth creation easier for you.

So remember, to avail of the power of compounding starting early and remaining invested for the long term is the Key.

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Understanding Asset Allocation

As the classic proverb says, ’Don’t put all eggs in one basket, Investors also must diversify his/her portfolio into different asset classes. Why? The reason is very obvious – to reduce the risk.

There are mainly 5 asset classes, namely; Equity, Debt, commodity, real estate, and cash. One must allocate his/her savings into different asset classes based on the various parameters and their own risk appetite. Dividing your investment into different asset classes based on different parameters is called asset allocation.

Considering the ease of investing and liquidating, we shall focus on two asset classes – Equity & Debt, to understand the process of asset allocation.

Deciding the right Asset Allocation Mix:

One of the most important criteria while selecting the asset class is the time horizon.

  • Short Term - If you are looking to invest for less than 3 years, your portfolio should consist of mainly Debt investment as equity is very volatile and market risk is higher in short term.
  • Medium Term - If you are looking to invest for a  period of 3 to 5 years, your portfolio should be a mix of equity and debt both.
  • Long Term - In case of investment for longer than 5 years, you can invest more into equity. Equity as an asset class is lesser volatile in long term.

Rebalancing Asset Allocation:

The investment horizon keeps on changing over a period of time. So as the years passed by, asset allocation needs to be re-adjusted based on the remaining number of years till you need to withdraw. So for example, if you are going to need money in the year 2027, you must start shifting money gradually from equity to debt by the year 2024.

Other important Parameters:

Risk appetite, the required rate of return to achieve your financial goals, tax implications, etc. are other parameters that are also crucial while deciding the right asset allocation mix.

One must be able to control GREED in a bull market and FEAR in a bear market to ensure the right asset allocation mix in the portfolio. One must be focused and disciplined to save from the emotional decisions which might deviate himself/herself from the asset allocation.

“Most important key to successful Investing can be summed up in just two words Asset-Allocation.” Michael LeBoeuf

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Understanding Return


 

Understanding Return

Calculating return would have been easier if we had been investing exactly for one year. But that doesn’t happen in the practical world. Investment is normally done in a staggered manner and each investment is not kept for the same period of time. Withdrawal also might happen over a period of time.

To compare the return from various investment plans, it is necessary to have a common parameter that can be used for all types of investments with different investment amounts and different holding periods. That common parameter is to assume that all investment returns get compounded annually.

If the investment is held for lesser than one year, then we need to calculate the return in percentage terms by assuming that the investment is held for one year.

CAGR – Compounded Annual Growth Rate

If you want to calculate the return for one time investment then CAGR (Compounded Annual Growth Rate) is used. But when the investment is done periodically or staggered over a period of time, CAGR is not useful to calculate the return.

In the case of staggered investment, either IRR or XIRR can be used.

IRR – Internal Rate of Return

If the investment is done in a strict periodic manner, you may use IRR to find out the rate of return. For example, if an investment is done at a fixed interval (Monthly/quarterly/yearly) and withdrawal only at the end of the entire tenure, IRR can be used to find out the return.

XIRR

If cashflow includes frequent inflow as well as outflow over a period of time, we need to use XIRR for calculating the rate of return. XIRR gives you the flexibility to assign specific dates for each cash flow, making it a much more accurate calculation.

Though Return is one of the most important criteria but we should also look at other parameters like consistency, portfolio quality, risk, risk-adjusted returns, etc.

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Save tax and Plan retirement with Mutual Funds


For most Indians, retirement is the most ignored financial goal. From the beginning of our career, we start chasing short-term goals which give us short-term gratification like buying a car, buying a New smartphone, vacation, etc. Most of our savings are channelized into achieving our Retirement goals.

However, we all have a desire to save tax. We can channelize this desire to achieve two goals,

  1. Saving Tax
  2. Creating Retirement Corpus

Under section 80C, a deduction of Rs 1,50,000 can be claimed from your total income. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income through section 80C. This deduction is allowed to an Individual or a HUF.

To save tax, we normally invest in PPF and other instruments which has a long lock-in period. When you are ready to invest for such a long period, investing in equity is a better idea, as equity is less risky and more rewarding in long term. You may choose to invest in Equity Linked Savings Schemes (ELSS) of mutual funds to save tax under section 80 ( C ).

What is ELSS?

An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn't just help you save tax, but also gives you an opportunity to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act.

Along with the tax deductions, an ELSS offers you the opportunity to grow your money by investing in the equity market. ELSS carries a lock-in period of 3 years. Furthermore, you can also choose to invest through a Systematic Investment Plan and bring discipline to your tax planning.

Here's how it will work. Say, one invests Rs 12,500 monthly in ELSS (Rs 1.5 lakh annually) for 25 years of one's working life towards retirement. Assuming a growth rate of 12 percent a year, the corpus could be nearly Rs 2.12 crores, which could be part of one's retirement portfolio in addition to other investments earmarked for retirement. 

SCHEME NAME 1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 12 Year 15 Year
Capital Invested
Rs 1 Lac Rs 2 Lacs Rs 3 Lacs Rs 5 Lacs Rs 7 Lacs Rs 10 Lacs Rs 12 Lacs Rs 15 Lacs
Returns Generated from Various Schemes
Maximum ELSS Return ₹ 1,21,559 ₹ 2,75,071 ₹ 4,41,203 ₹ 8,98,110 ₹ 16,13,266 ₹ 26,14,434 ₹ 35,18,416 ₹ 82,92,953
Minimum ELSS Return ₹ 1,00,030 ₹ 2,29,534 ₹ 3,50,048 ₹ 7,25,657 ₹ 12,12,686 ₹ 19,86,361 ₹ 25,83,101 ₹ 48,77,739
Average ELSS Return ₹ 1,10,884 ₹ 2,51,585 ₹ 3,89,498 ₹ 8,08,623 ₹ 13,58,294 ₹ 23,01,979 ₹ 30,64,690 ₹ 69,33,800
S & P BSE Sensex ₹ 1,13,410 ₹ 2,45,862 ₹ 3,72,791 ₹ 6,97,401 ₹ 11,06,090 ₹ 17,71,240 ₹ 23,53,781 ₹ 47,32,426
PPF Calculated @ Actual Rates ₹ 1,07,829 ₹ 2,24,307 ₹ 3,50,839 ₹ 6,37,886 ₹ 9,76,743 ₹ 15,94,563 ₹ 20,93,314 ₹ 30,01,347


Past Performance may or may not sustain in the future. The above table shows the value of Rs. 1 Lac invested in PPF, Sensex and various ELSS Schemes as on 31ˢᵗ May of every year. (Valuation Date: 31ˢᵗ May 2018) Note: Amount assumed Rs. 1 Lac in PPF & ELSS. However, deduction u/s 80C has been increased from Rs. 1 Lac to Rs. 1.5 Lacs w.e.f 22ⁿᵈ August 2014.

Disclaimer: The information contained in this report has been obtained from various sources. While utmost care has been taken for the preparation of this report, we do not guarantee its validity or completeness. Neither any information nor any opinions expressed constitute an offer, or an invitation to make an offer to buy or sell any fund. Investors should take financial advice with respect to the suitability of investing their monies in any fund discussed in this report. Mutual fund investments are subject to market risk. Please read the Scheme Information Document and Statement of Additional Information carefully before investing. 

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HOME LOAN EMI VS SIP

 

Combination of EMI and SIP can save you lot of money

What if your Home loan tenure is reduced without increasing EMI, even if the interest rate remains the same? Sounds interesting? Read it.

In the year 2010, I bought a flat in Ahmedabad for which I took a home loan of Rs 48 Lacs from one bank. At that time the interest rates were around 10.5%. So I decided to take the loan for the maximum tenure available, i.e. 20 years as I could afford the EMI of Rs. 47922/-.

The bank RM came to my office for completing the paperwork. While filling out the forms he asked me about the tenure which I would like to go for. I told him to go for maximum tenure i.e. 20 years. Bank’s RM told me, “Sir maximum limit is not 20 years it is 25 years”. According to my calculation, I was ready for paying  Rs 47992/, an EMI amount for 20 years of tenure considering 10.5% interest, and a Loan of Rs 48 Lacs.

So if I chose to go for 25 years, EMI would be lesser. I tried to do the exact calculation and ended up with some unique Ideas which I am sharing through this article. The EMI for the 25 years tenure was worked out to be Rs 45302/, resulting in the saving of Rs 2600/ per month in the EMI. So I decided to go for the longer tenure i.e. 25 years.

Now financially and mentally, I was ready to pay for Rs 47992/ of EMI per month. So I decided to start a SIP of this Rs 2600/- (saving in EMI due to increased term) and to use the amount accumulated through this particular SIP to repay the Loan in the future.  I did some calculations in excel to check with the help of this combination of reduced EMI and SIP, how would it affect my loan repayment schedule.

My older SIPs were giving me some 18% kind of a CAGR, while doing the calculation I assumed that my future SIP would generate a 15% CAGR. I found out that with this combination and an assumed return of 15% CAGR from SIP, I can repay the loan in just 18 years and 2 months.

Sounds interesting?

Let me explain,

Case 1: 20 years loan – Outflow (EMI – 47992)

Case 2: 25 years loan + SIP of saving into the EMI (EMI 45302 + SIP 2600 = Total 47992)

In both the above cases my monthly outflow is the same, the only difference is into the methodology. In the first case, I am only paying EMI in the second case by increasing tenure I am making saving into the EMI and doing the SIP of that saving, making my monthly outflow the same as that in case 1.

After 18 years and 2 months, the value of my SIP of Rs 2600/- per month assuming the 15% CAGR* would be approximately Rs 26.29 Lacs, which I can use to fully repay the Home Loan outstanding. In other words, the outstanding loan principle amount would equal to the Fund Value of SIP after 18 years and 2 months.

In the whole process, I would pay 22 EMIs less compared to Case one, making an absolute saving into the EMI worth Rs 10.54 Lacs. Though Bank charged me 10.5% interest for me the effective interest worked out to be only 10.03%.

If you are planning to buy a Home loan and if you have decided to take the loan for a shorter period then you can use the above idea to save some EMIs. So if you have decided to go for 15 years of tenure and your bank is ready to provide you maximum tenure of 25 years, I suggest you go for the higher tenure and utilize the monthly saving into EMI due to increased tenure to start a SIP into some good diversified equity mutual fund.

If you have already taken the loan you can still utilize the above idea by asking the bank to increase the tenure or you can also transfer your loan from one bank to another and while doing so, go for the maximum tenure.

I transferred the above-said loan to some nationalized bank at the time 22 years of tenure were pending in the earlier bank. I opted for 30 years of tenure in my second bank where I transferred my loan, further reducing my EMI. I added that saving also into the SIP and that would again save a few more EMIs.

Thus, selecting the maximum tenure and doing the SIP can help you repay your loan earlier. The return assumed in the above calculation is not the guaranteed return but I can safely assume that kind of return from SIP into my portfolio. My current portfolio has a CAGR of around 18%, while in the calculation I have assumed a 15% CAGR only.

*The return showcased is the assumed return and is not to be treated as any assurance or guarantee.

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Tax on Digital Assets

                                                    

Tax on Digital Assets


 

All That You Need to Know About Tax on Cryptocurrency & NFT

Taxes on digital assets were pretty vague up to Budget 2022. The finance minister didn't notify the tax structure on corporate or individual levels. But, under new norms, all profits from cryptocurrencies are to be taxed at 30%. It is quite a steep rate and one that might lead you to think twice about investing in digital assets. To understand this move from the government, we have broken down the entire subject of taxes on digital assets into three main sections: tax on income, tax on gifts and the 1% TDS.

People who make money from digital assets must pay tax on that money

In Budget 2022, the finance minister said it would tax digital asset profits at 30%. That doesn't mean that digital assets are legal just because they are taxed. The legality of cryptocurrency as an asset class is still not clear.

Government officials say digital assets include cryptocurrency and NFTs. 

At 30% tax, the people who make different amounts of money will pay the same tax rate.

They would calculate this tax on income after subtracting the cost of acquisition, which could be the price of the cryptocurrency and the fees for transactions.

Moreover, crypto investors can’t set off their losses against any capital gains of other asset classes. However, it's not clear if the profits from one type of digital asset can pay for the losses of another digital asset.

If you use the foreign exchange, a peer-to-peer marketplace like LocalBitcoins or mine your own, you'll have to pay 30% of your profits. On the other hand, miners may be able to write off the cost of things like electricity, the depreciation on their mining computers, and so on.

Moreover, it is crucial to note that you still have to pay tax on your cryptocurrency gains made before April 2022.

Tax on digital assets as gifts

The budget also said that digital assets that were given as gifts would also be taxed. Concerned authorities may include digital assets as ‘property’.

Free digital assets that you receive, such as airdrops, learn-to-earn schemes, and games where you can earn money by playing games, are also included as gifts.

However, under the Income-tax Act of 1961, gifts made to specific relatives or as a wedding gift are not taxed, no matter how big the gift is. Parents, siblings, and other relatives who give money to you don't have to pay tax on it. Gifts that are given at weddings, through a will or inheritance, or in anticipation of the donor's death are also not taxed, no matter how much they are worth.

But, if your friend gets you a gift that costs more than Rs. 50,000 on your birthday, you will have to pay tax on it.

So now, the question is whether the same gift taxation rules that apply to real things would also apply to virtual digital things.

As part of their pay package, people who got digital assets like cryptocurrencies or NFTs will have to pay a 30% tax because, as per the new tax law, it will be considered a gift.

They will have to pay the tax even though they have sold none of the coins yet. Not only that, but in many cases, employees may have to pay tax on more money even though the value of the coins they got has gone down since they got them.

Impact of the 1% TDS

Taxes on income and gifts aren't the only things the government announced in this budget. They also announced a charge of 1% tax on all crypto transactions.

The new section 194S of the Income Tax Act says that crypto exchanges will have to withhold 1% TDS for most transactions starting July 1, 2022. People who use crypto will have to tell the government about all of their transactions to track them.

This TDS may be applicable only if the total amount of cryptocurrency transactions in a year reaches Rs. 50,000 for the following individuals:

  • Each person, as well as Hindu Undivided Families (HUF), who have annual sales, gross receipts, or turnover above Rs. 1 crore.
  • People who make more than Rs.50 lakh a year.
  • People or HUFs who don't have a job or business to make money.

For the other individuals, this TDS may apply if the total amount of crypto transactions in a year is more than Rs. 10,000.

Moreover, as crypto trading takes place all over the world, the foreign cryptocurrency exchange will not deduct 1% TDS, but it is still not clear if and how TDS would be deducted if the transaction took place between an Indian buyer and a seller from another country.

What is your opinion on the taxation of digital assets? If you have any doubts, it will be best to consult us.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme related documents carefully.

 


 

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