Smart investing: Time to re balance your investment portfolio

Investing isn’t something that’s a one-time exercise. Sure, you need to put a great deal of thought into selecting the investments that make up your portfolio. But once your investment portfolio has been ideally constituted, does that mean your job is done? Surely not. Your investment portfolio needs to be analyzed from time to time to check if it’s still ideally aligned with your risk-return profile

For instance, you invested in a mutual fund. The fund is up 50%. You are pleased and redeem your money. 

Before we discuss if it was a good idea to redeem and exit your mutual fund investment, we have to ask, why did you invest in the fund? Was it for a specific goal? Was it to create long-term wealth? 

If you redeemed because you reached your financial goals, then BRAVO!!!  On the other hand, if you are a long-term investor, then you probably need to rebalance your portfolio on a periodic basis. It is important for two reasons: risk management and improved returns.

As markets fluctuate, rebalancing your investments will require buying or selling some portion of your mutual funds so that your asset allocation is in line with your risk profile.

Why do you need to rebalance?

Rebalancing is probably one of the most overlooked aspects of Investing. 

If pedaling is like injecting savings into your portfolio (by far, the hardest part) and wheels are transforming it into returns then what is rebalancing?

As conditions change, gears help to keep the legs spinning at the pace you want.  The same goes on with rebalancing. Adjusting the gears so that you won’t injure yourself when facing an uphill battle or strong winds.

Over time your strength may not be the same anymore, at which point the gears you use may change more permanently.

Bulls and Bears - when you need to take action!

 

When should you rebalance your portfolio?

Now that you’ve understood the portfolio rebalancing meaning, it’s time to move on to the next big question – when should portfolio rebalancing be done? Typically, there are different triggers that make portfolio rebalancing necessary.

Here’s a preview of some such scenarios or situations when you need to revisit your portfolio and check if it’s still aligned with your goals.

Market Condition

A standard rule of thumb is to rebalance when an asset allocation changes more than 10%. You can refer to my article- How am I investing in current times 

Changes in your risk profile

When you first constituted your investment portfolio, you may have been an aggressive investor who was open to taking more risks. But with time, your risk profile could have undergone changes. You may have become less tolerant of risks, reducing your risk taking capacity. In such a case, with changes in your risk profile, portfolio rebalancing becomes necessary.

A new financial goal on the horizon

Over time, new financial goals may be added to your objectives. When you start a family, for instance, you will have to make room for additional goals like paying for your child’s college education. When new goals like this are added to your investment objectives, you may need to revisit your portfolio to ensure that it’s capable of meeting these new targets. If it’s not so equipped, portfolio rebalancing can help.

Fast-approaching retirement

When you’re nearing retirement, it becomes increasingly essential to ensure that your investments are properly aligned to meet your retirement goals. Rebalancing your investments may be necessary to help you achieve that target corpus you have in mind. So, if you find yourself just a few years from the big day, check your portfolio and use portfolio rebalancing strategies to adjust the asset allocation, if needed.

 

Portfolio rebalancing strategies: How to rebalance your portfolio?

Rebalancing your portfolio will depend specifically on your investment needs and goals. However, a few simple steps can help you understand the process better. 

  1. Have a target asset allocation in place. Factor in your life goals, your risk appetite, and your retirement goals to make your asset allocation aligned with your investor profile. 
  2. Constitute your investment portfolio based on your required asset allocation.
  3. Revisit your portfolio every six months or every year to check if the assets therein continue to adhere to the original target allocation.
  4. Also, revisit your asset allocation target periodically to ensure that it is in tune with your life goals.
  5. In case your target allocation is not met, you may have to purchase new units of some assets or sell off existing units of other assets as needed, till the right asset allocation is achieved once more.

Wealth Cafe advice: 

Rebalancing is an important part of managing an investment portfolio and is typically needed just once per year. Through rebalancing, you can keep the risk level of your portfolio consistent and perhaps even enhance your returns. Essentially, rebalancing will help you stick to your investing plan regardless of what the market does and also help you maintain your original asset-allocation strategy. When rebalancing, though, you have to be careful not to trigger excessive taxable income in taxable accounts. 

If you’re unsure about how to rebalance your portfolio, it’s always a good idea to seek the help of a financial advisor. We are SEBI registered investment advisors and can help you make sound investment decisions - you can reach out to us at iplan@wealthcafe.in, in order to help you make a financial plan for yourself.

Money tips - 09/30/2021

Mistakes a couple should avoid about money

While it's true that love might not cost a thing, plenty of romances fall victim to money -- or at least to money mistakes.

Money and relationships are inseparable, and if you mismanage the former, the latter hardly stands a chance. Openly discussing financial matters is a touchy subject for many, and it’s no different when it comes to couples and money. Depending on each of our own personal histories, our financial problems, our values, and our relationship with money, it can symbolize different things to different people, which can make it difficult to talk about.

Personal finance is difficult – sometimes embarrassing – topic to discuss with our significant other, and sometimes it seems easier just to ignore the elephant in the room. It’s important to discuss managing money and finances early on in the relationship so we can avoid fighting over money in the future. However, if “early on” has long since passed, there’s still hope for your marriage or relationship.

Here are a few common money mistakes couples make and how to fix them.

1. Keeping Money a Secret

Keeping something money-related a secret from your loved one can be a huge problem. They can feel like they were left out, that you didn’t trust them, and/or that you are financially cheating.

Money secrets may include:

  • Secret debt.
  • Secret money saved.
  • Lying about how good or bad the family is financially doing.
  • And more, of course!

It's important to be open about money as it is to be open about even the most intimate aspects of your love life. 

2. Leaving Financial Responsibilities to Just One Partner

It takes two to tango -- and this has never been truer than when it comes to financial heavy lifting. This includes paying the bills and the management of investments

Where one of you can take charge of your finances, but both of you must be aware and doing it together. - we have discussed it in detail in our session 1 of the course.

 

3. Not talking about your money past

Many of our beliefs about money form at a young age, and we’ve all had different financial experiences as adults. You and your partner are not going to agree on everything when it comes to money, but understanding each other’s money beliefs and experiences can help you appreciate why they make the financial decisions that they do.

4. Neglecting to talk about your financial future

Many of the money decisions that you’re making now impact not only your current financial security but also the way you’ll be able to spend and enjoy your money in the future. Thinking about that future together — and making a plan for how you’ll pay for it — is a great way to make sure you’re both on track to make it happen. It can also be one of the most enjoyable money-related conversations that many couples have.

5. Income Shaming

Even in relationships that began at work, it's likely that one partner makes more money than the other.

It's never okay for the bigger breadwinner to hold the wage gap over the head of the lower earner. Instead, it's important to remember that you're two equal parts of a team moving toward the same goal.

6. Not having a plan for your accounts. 

There is no 'right' way to manage your accounts. Couples can choose to have exclusively joint accounts, a joint account as well as separate accounts for saving or personal spending or keep things entirely divided. Discuss your preferences together and decide what makes you both the most comfortable.

However, keeping money in one account is risky and outright wrong. Keep a balance to bring equality. Divide your savings and investments equally. We do this by having two separate bank accounts.

  1. Income account – in which your salary/fees, basically any earnings, are credited each month.
  2. Investment Account – in which you shall transfer your savings from your salary account. This account will be for all your investments. You will make all your investments, for example, insurance premiums, mutual fund (SIP), deposits, and equity, from this account.

This system of having two bank accounts will ensure that you are saving first – as you MUST transfer a fixed sum of money from your income account to your investment account.

7. Failing to set up an emergency fund.

Life is full of surprises and unfortunately, some of these surprises can be expensive. Having an emergency fund will help you avoid precarious financial situations should something come up. You must decide together how you'll set aside the money.

8. Not establishing a minimum cost for discussing big expenses. 

While not all purchases demand a conversation, more expensive ones that impact the family budget should. Determine what that threshold is as a couple. For any expenses above a particular cost, you both should agree on whether it's a necessary purchase.

9. Forgetting To Have a Laugh

Financial anxiety can be all-consuming stress. That's why it's so important to find a little levity wherever you can.

Money issues are serious. You shouldn't take them lightly. But a lighthearted approach to a heavy subject matter can take the edge off of the stress that financial strain can put on even the healthiest relationships. You have someone to weather the storm with -- be happy for that and don't forget to laugh when you can.

We all have our share of financial mistakes, for sure, as a married couple. But, if we value each others’ advice and respect each others’ take on things, it will surely blossom as a happy marriage with surely fewer financial mistakes.

Now that you've read this list of don'ts after saying the “I do's”, it's time for you to start the steps to better secure your financial stability to pair with your matrimonial bliss. 

Pre-book to our course- Honey & Money to get  70% discount now - click here.

Uncategorized - 09/22/2021

Advice to to-be married/newlywed couples on money

Starting your new life as newlyweds means blending your worlds, and that includes your finances. Talking about your finances may not be the most romantic topic of conversation, but it is an important one to have. That's why it's crucial to find the best advice for newlyweds that will help you manage your money the best way possible.

Even if you already lived together before getting married, managing your money will change after you become legal partners. These money matters may be awkward to talk about at first, but doing so will improve your communication skills and prevent any money misunderstandings in the future.

Also, working together as a team with your finances will strengthen your relationship and help you achieve your money goals together! 

In order to help you out, we are finally announcing the pre-booking of our course- Honey & Money.

Financial Advice for Newlyweds

Don't let your money matters put a damper on your relationship. Here is some advice to newlyweds to keep their finances in order!

1. Discuss Financial Priorities

Talking about money can be stressful, but it’s important to talk about your financial priorities with your partner.

  • Is saving and investment a major priority for you, or do you prefer to spend money at the moment?
  • How much of your income are you willing to spend on luxuries versus necessities?
  • If you plan to have children, how much do you want to support them financially?
    • Will you pay for child care, or will one of you be a stay-at-home parent?
    • Will you pay for the entirety of their college education?
    • Do you expect your children to support you financially in your old age?

These questions don’t have a “correct” answer. Making sure that you and your partner have similar priorities, or can find a compromise somewhere in the middle, can help avoid financial arguments in the future.

2. Talk about your family financial history

Discussing your family financial history is one of the most critical newly married couple tips you can do. Talking about your family's history with money is a great way to open up the conversation about your marriage finances. 

Revealing how your parents handled money, what you learned from their financial resume, and how they taught you to save or spend can be helpful information for couples.

This can also help you figure out if you've inherited financial insecurities or have any money blocks you need to work past. This way, you can tackle them as a team and work towards financial success!

3. When in Doubt, Spend Less on Your Honeymoon

Keep this in mind as you’re planning your honeymoon. Your memories won’t revolve around where you were cheap – you won’t even remember it at all. It can be memorable even if you stayed way out of the city center in a much less expensive hotel. 

This is a prime opportunity to learn about one of the fundamental rules of personal finance together. Money spent on nonessential stuff that you won’t remember is money wasted. Remember what’s essential is you being with your partner. Don’t burn money on other stuff if you are out of budget. All you’ll do is hurt you and your partner in the future.

4. Don't hide your spending habits

A common issue that causes conflicts in marriage is problems with overspending. Overspending can rack up debt, cause mistrust between partners, and shows a lack of respect within the marriage.

Avoid these relationship issues by consulting your partner before making big purchases and being open and honest about your spending habits.

5. Open A Joint Account But Keep Existing Separate Accounts

Before it is even a question of making decisions about retirement planning in a partnership, couples often face a tense conflict in their relationships much earlier. The conflict regarding the allocation of financial resources comes almost unavoidably to all couples.

We advise that both partners should first keep their existing accounts and also open a joint account to which each partner makes a monthly deposit. This joint account will ensure that all your expenses are running from the common account. We have discussed it in detail in our session 1 of the course - Managing cash flows.

6. Start an emergency fund

You never know what the future holds for you, so it's always best to be prepared. You will never regret starting an emergency fund after marriage. For example: if you lose your job, if you are suddenly expecting a baby, if the roof leaks, the car breaks down, and the list goes on.

The size of the fund would depend on several factors such as your income, lifestyle, and number of dependents, existing debt, and so on. It is advisable to save for 3-4 months at least so that the amount should ideally cover your expenses.

Some of the options available to you are:

  1. Fixed Deposit (should be linked to your net-banking)
  2. Liquid Mutual Funds
  3. Cash at Home - Up to 1 month’s expenses (For super sudden need!)

It would be useful to keep reviewing your emergency fund requirements at least once a year, as there may be changes in your life like starting out a business, taking a sabbatical from work, the addition of a new family member, or a change in your lifestyle.

7. Create financial goals as newlyweds

Some of the best advice for newlyweds is to create financial goals together. Having goals set can help you achieve your big visions in life! It will be much easier to reach your goals if you can work toward them together, and it can help reduce tension if you make sure you don’t have goals that directly contradict one another’s.

  • Do you want to live in a lavish house or a small one?
  • Would you rather rent or own your home?
  • Do you want to retire early or work full careers?

8. Discuss your finances with your spouse regularly 

Your marriage finances should not be swept under the rug. Circumstances are bound to change at various points in your married life. So make it a habit to review your finances on a monthly or bi-monthly basis to ensure you are staying true to your household budget.

This is why it’s so important to have “money dates”. In simple terms, a "money date" is a regularly scheduled conversation between you and your partner where you discuss finances. They’re an opportunity to talk about your day-to-day finances, as well as prepare for any short or long-term financial plans in a fun manner.

While money dates can be enjoyed by couples at all stages of their relationship, we recommend you start as soon as you move in together and begin sharing large expenses together. This allows you to build the habit of talking about money together and makes the conversations easier over time. Best of all, you'll quickly start to feel like you're on the same team, working towards shared goals together.

Getting married is an exciting but potentially stressful time. These newly married couple suggestions can help you budget better, create goals, and most importantly find enjoyable things to do together too. Why not get started by taking our free financial courses together to work towards financial success!

Pre-book to our course- Honey & Money to get  70% discount now - click here.

Making Money / Money tips - 09/22/2021
Article Headers (22)

What is e-Rupi? All you need to know about India's new digital currency.

There have been incidents of poor people being regularly robbed of their pensions and scholarships by corrupt banking correspondents who take their fingerprints citing different excuses. To eliminate such problems, on 2nd August 2021, the Prime Minister of India Mr. Narendra Modi launched a digital payment platform called e-RUPI Digital Platform. 

The US, South Korea, and several other countries have used similar voucher-based incentives for welfare services.

What is e-RUPI?

e-RUPI is an e-voucher, which is cashless, contactless, and is a person and purpose-specific payment solution. A beneficiary will be required to show the QR code or the SMS message to the merchant, who will scan the same and a verification code will be sent to the beneficiary’s phone number. The latter will have to share the code with the merchant and the payment will be successful.

For instance, if you have an e-RUPI voucher for the Covid-19 vaccine, then it has to be redeemed for vaccines only. Before e-RUPI coupons are sent to the mobile numbers, the mobile number and identity of the citizen will be verified. This could also help in preventing corruption in the system (at least until the corrupt officials find a way to circumvent this too :P)

State Bank of India (SBI), ICICI Bank, HDFC Bank, Punjab National Bank (PNB), Axis Bank, and Bank of Baroda will provide both issuance and redemption facilities for e-RUPI coupons. Meanwhile, Canara Bank, IndusInd Bank, Indian Bank, Kotak Mahindra Bank, and Union Bank of India will only issue e-RUPI coupons for now.

As a one-to-many payments facilitator, it will help the government sharpen targeted welfare programs. The private sector will find it helpful to disburse non-cash benefits to employees and support focussed CSR programs. Later, individuals could use it for gifting.

What are the uses of e-RUPI?

Many services will be provided by the government through e-RUPI in the country. It can also be used to ensure leak-proof delivery of wellness services. To be used for leak-proof delivery of fertilizer subsidies, TB eradication programs, Ayushman Bharat, Pradhan Mantri Jan Arogya Yojana, Mother, and Child Welfare Schemes, etc.

The government has also talked about giving the benefit of this digital voucher for the private sector employee welfare and corporate social responsibility. This app is not released as a normal payment app. Soon you will be able to get many services through e-RUPI after it is released by the government today. E-RUPI will be spread across the country through SMS string or QR code.

  • COVID Vaccine Registration
  • SSC CGL Admit Card 2021
  • Download Window 11 ISO file
  • Upgrade Window 10/7 to 11
  • OLA Electric Scooter Dealership
  • Delta Plus Variant Symptoms
  • T20 World Cup Schedule
  • IPL Schedule 2021 Remaining matches

Benefits and loopholes

Aimed at bridging the digital gap among the unbanked population, the beneficiaries or users of this payment mechanism will not require a card, digital payments app, or internet banking access to redeem the voucher.

e-RUPI transaction process is said to be secure and will be keeping the details of the beneficiaries completely confidential, maintaining their privacy.

The introduction of the Covid vaccination voucher is also aimed at ramping India’s vaccination drive as e-RUPI allows beneficiaries to easily book appointments for the shots. However, with the beneficiary not required to disclose their identity, these vouchers are also likely to be claimed by other people.

With the help of the E Rupi application, digital payment has been done simply. Many institutes have shown their interest in this application. The adoption of e-RUPI in various government programs will enhance business efficiency, simplicity, transparency, and accountability in various programs with tax implications such as meals, education, travel, and health. So, if you want to enjoy this app, download it from the online interface.

Official Portal Click here
MPNRC Home Click here

e-RUPI opens up a world of opportunities to the government, people, and businesses to provide, avail, and pay for services seamlessly. You will soon be able to use e-Rupi Digital Payment System. 

Through this article, we have provided you with all the basic details regarding e-RUPI digital payment. If you are still facing any kind of problem then you can write us your questions related to your e-Rupi Digital Payment in the comment box.

Uncategorized - 09/15/2021

I am unable to ‘Save’ any money ! Guide me.

A common question people ask is, "Where does all my money go?" Though they mean it as a joke, it's said with a sense of sadness. But the reason they don't know where their money goes isn't that they lost it or forgot the pin number to their bank card. They don't know where their money is going because they don't control the cash flow pattern of their money, their money controls them.

Once a young man named Raj approached us for our advice, as he was facing the same issue - how should he manage his expenses?. Raj is a bachelor living in Pune alone in a rented house away from his hometown, Lucknow. It's his first job so he wanted to enjoy his money but he is also responsible to send some back to his parents however, he just cannot save. Every month he feels, this is it, I am going to save money today but it just never happens. He approached us as he had no surplus of money left at the end of the month and hardly had any savings.

Are you A RAJ !!?

Does this happen to you? Do you feel you are doing everything right but you are still not saving any money at the end of the month? Let us help you with it.

Let's review Raj’s monthly income and expenses and help him find some money to save!

We believe everyone can save a bit if they just push themselves a bit.

 

Step 1 -Review of his monthly income & expenses - HIS CASH FLOWS

Raj’s Expenses:

Particulars Amounts
Rent 15,000
Toiletries + Basic monthly expenses 5,000
Bills 5,000
Sending to his family 10,000
Food  18,000
Traveling 6,750
Misc 2,500
TOTAL 62,250

Raj’s Income = INR 60,000

Extra Spend/Loss = INR 2,250

Looking at his expenses it was a little difficult to figure out until we had a close look at it. Most of the expenses like Rent, Toiletries + Basic monthly expenses like utility bills & the amount that he uses to send his family were expenses that we couldn't fidget with and were his absolute needs. Further, we noticed that he was spending INR18,000 on food! So we asked him to share more details of the same. Traveling expenses and Miscellaneous expenses were also much more than one would expect someone to spend in Pune on a monthly basis. Therefore, we further explained to him how such expenses were harming his savings.

On a closer look at his expenses, we guided him to look at cheaper alternative options for things he was splurging (provided he was ready to make the shift). We also guide him on how these reduced expenses would increase his savings and when these savings are invested it would grow to be a substantial amount for him.

Wealth Cafe Solution:

Food:

So Raj was ordering in every meal (almost) and while it seemed fun and easy, it was making a huge hole in his pocket. So, rather than ordering we advised him to opt for having help to cook at home. Making food at home isn’t free, but it could probably squeeze out savings if, 

  1. you buy your groceries in bulk 
  2. if you are ready for home-cooked ‘good’ and ‘healthy food’
Principal No of meals 

(per day)

 Cost per meal Days Total cost a month
When you order from outside
How much do you spend 2 300 30 18,000
When you cook at home/or have help to do that
Help expenses 3,500
Grocery spends 5,000
once a week you still order 1 300 5 1,500
10,000
Monthly Savings 8,000

Further, we explained to him how grocery shopping should be done, with the intention of saving money. The key here to save money is by buying groceries in bulk and managing it wisely. I have shown it in detail in the table below by taking an example of rice and wheat flour.

Ration Rice* Flour* Total
Where I order 1 kg 180 55
how many times ordered 5 5
The total cost of 5Kg 900 275 1175
Where I order 5 kg directly 639 269 908
Monthly Savings 261 6 267

*Price referred from dmart website.

By buying Rice and Flour in bulk, one could save approx 23% in comparison to buying in small quantities. Raj could follow this with other grocery items as well so as to save his money.

By just shifting your monthly habit of ordering into cooking at home, he can have enough savings to start investments and SIPs. This may seem a very small thing but trust us many people get stuck to order in and this just changes everything in your monthly budget.

Traveling: (7 km)

Principal Cost per day (both side travel) Days Total cost a month
Uber/Auto/Taxi 270 25 6,750
Public transport (train + bus) 50 25 1,250
Monthly Savings 5,500

By using an alternative, i.e, public transport Raj could save INR5,500 every month. That is INR 66,000 every year. Public transports are everywhere and paid for by our taxes. Which means it’s a bit of a waste if we don’t use them at all, right?

Miscellaneous

A major proportion of Raj’s miscellaneous expenses consisted of buying cigarettes. It is easy to look at small purchases and say “whatever, it’s only INR 15.” As standalone instances, INR 15 for anything isn’t a lot of money. However, spending INR 15, on a cigarette 5 times a day adds up to a lot of money per year.

In fact, it’s INR 27,000!

Principal No of cig Days Cost per cig Total cost a month
How much do you spend 5 30 15 2250
Reduce it 1 a day 1 30 15 450
Monthly Savings 1800

If Raj could decrease his cigarette intake from 5 times a day to once a day, it would save INR 1800 a month whereas INR 21,600 a year. I need not tell, as a bonus, it saves his doctor's expense as well in the coming future.

His expense now:

Principal Amounts

(Before)

 Amounts

(After)
Rent           15,000           15,000
Toiletries + Basic monthly expenses             5,000             5,000
Bills             5,000             5,000
sends family             10,000             10,000
Travelling               6,750                  1250    
Food order (does not cook)             18,000           10,000
Misc                2,500                      700
TOTAL             62,250              46,950


We do not deny the fact that savings are easy but it is not impossible. You can start with savings of INR 2000 each month or look at at least 10% of your monthly income and move forward. By cutting down his expense wisely Raj could save 15,300 (approx 25%) in comparison to before. He is saving INR 13000 monthly (INR 1,56,000 yearly) from his income, whereas he was spending more than his income with no surplus of money before.

Where we always talk about the approach of pay yourself first, where you transfer your fixed savings to a second bank account so even the urge of spending your money does not come in the way of your savings - NM 101: Maximise your Savings

 

So now that you know what you could be saving. Why not invest it? 

As you see, he has a savings of 13,000 Rs, but by giving him INR 3000 for overheads, he could still invest INR 10,000. When making investment decisions, and investors’ portfolio distribution is influenced by factors such as personal goals, level of risk tolerance, and investment horizon. As Raj was towards balanced investment, his Debt-Equity Mix will be 50% debt and 50% equity. He invested INR 5000 in equity mutual funds which he could keep untouched for long-term goals whereas the other INR 5000 was diversified in liquid/short-term debt funds for emergency and short-term plans.

Did you see how easily the portfolio was diversified? You can learn more about diversification and how to invest in our course - NM 105: Plan & achieve your goals. Once he had a proper hang of investing and could increase his risk tolerance, he could diversify his investments even more after doing proper research. But remember, diversification of assets should be up to a limit. Over diversifying can hurt your investment returns. 

 

LET’S GIVE HIM AN ADDITIONAL INCENTIVE TO SAVE! LET’S GIVE ONE TO YOU TOO !!

Spoiler: something beautiful happens. He builds more wealth!

Let’s assume Raj makes a 11.50 % average return on investing INR 10,000 (expected equity return =15%, Expected debt return = 8% and based on his ‘balanced’ risk profile)

Five years from now… he would have  ₹8,05,849

Ten years from now… he would have  ₹22,34,032

And in Twenty years… he would have  ₹92,51,011

Don’t wait. Don’t hesitate. Don’t ponder and contemplate. Get started. Chances are good that at least some of the suggestions on this list will work for you and help you spend less money. By reducing your outflow and directing more money to financial goals, you'll be more successful in saving for big things so you can grow your net worth and build real wealth over time. It's worth the effort. 

 

To learn more about Saving & Investments enroll in our course NM 101: Maximize your savings

Money tips - 09/15/2021
Article Headers (20)-min

FMP? - Know everything about Fixed Maturity Plan

Many of us want to invest in instruments that are not very risky and generate good risk-free returns. Here comes the concept of investing in Fixed Maturity Plans (FMPs). 

What are FMPs?

These are closed-end debt funds, sold as if they were replacements for multi-year fixed deposits. The idea was:

  • You bought a fund
  • The fund bought some debt securities scheduled to mature in a certain period say 3 years.
  • After three years, the fund gave you back the maturity amount minus their fees and all that.

FMPs invest in commercial instruments, highly rated corporate bonds, and various money market instruments. The basic rule in the FMP is to park money in an instrument that has a similar maturity date.

Features of FMPs

  1. Fixed Maturity - The maturity period of an FMP is fixed and once you have invested through NFO (new fund offering), your investment is essentially locked in till maturity. The maturity period of FMPs is usually more than 3 years from the date of unit allocation. This ensures that indexation benefits can be obtained on FMP investments. Read more about indexation and capital gains here
  2. Reduced Interest Rate Risk - FMPs are least exposed to interest rate risk, as the fund holds instruments till maturity-getting a fixed rate of return. Interest rate risk indicates that whenever there is a change in the interest rate, the value of the underlying security and hence, the NAV of the fund would change (more or less) depending on the movement of interest. Locked-In Rates: While locked-in rates are an excellent choice during a falling interest rates regime, the same can become a problem during a period of rising interest rates. When market rates move upwards, locked-in rates can lead to missed opportunities concerning potentially higher returns coupled with possibly lower risk levels. You can learn more about it here -NM 104: Basics of Mutual Funds
  3. Low Liquidity - FMPs are not liquid, you cannot withdraw before the completion of full tenure. So, if you invest in an FMP of 3-year tenure, you can withdraw only after 3 years and not in between. 
  4. Lower tax liability - A majority of new FMPs feature a maturity period of 3 years or more. This ensures that long-term capital gains tax rules including indexation benefits apply to capital gains from these non-equity investments. Indexation provides investors with the benefit of factoring in inflation, which reduces overall tax liability on gains. Read more about mutual fund taxation rules
  5. Returns Not Guaranteed: Fixed Maturity Plans provide investors with the benefit of locked-in returns from instruments held till maturity and high-quality investments minimize the credit risk for investors. That said, the low potential risk does not mean zero risks for the investors, and returns from FMPs are still market-linked. As a result, returns from FMPs are not guaranteed unlike other fixed return instruments such as fixed deposits.
  6. Not similar to fixed deposit
    Comparison Criteria Fixed Maturity Plans Fixed Deposit
    Returns Market – Linked Returns Guaranteed Returns
    Taxation Capital Gains Taxation Rules apply to the  benefit of indexation Interest is taxed as per the Income Tax slab rate of the investor
    Liquidity Low Liquidity Premature withdrawal options and sweep-in fixed deposits make it very liquid.
    Maturity Options Varies for each scheme (typically 3-4 years) Varies by a bank (typically 7 days to 10 years)
  7. Banks waive penalties

On the other hand, an increasing number of banks are not levying any penalties on premature withdrawal of fixed deposits. The State Bank of India, for instance, does not charge any penalty on premature withdrawals from short-term deposits of Rs 15 lakh and above after seven days.

In cases of tenure of more than one year, there is a small penalty. The deposit earns 0.5% below the rate applicable for the period the money remained with the bank or 0.5% below the contracted rate, whichever is lower.

This makes bank FDs a better proposition for those in the lower tax brackets. The tax on FMPs will only be marginally lower and not make a significant difference for someone who earns less than Rs 5 lakh a year. Even though the tax will be higher on FDs, they will offer greater liquidity to the investor.

What are the things you must check before investing in an FMP?

While FMP offers several advantages over other fixed-income products, there are still certain factors that investors should keep in mind before taking the plunge. Here are a few of them.

  • Check Indicative portfolio:  If the indicative portfolio shows the portfolio will invest the majority of the corpus in bank certificates of deposits (CDs), then the portfolio may have lower risks compared to FMP’s which invest predominantly in Commercial Papers (CPs). Seen from the other side, having Commercial Papers in the portfolio may mean slightly higher rates. So as an investor before investing in an FMP you should have a clear idea about the risks you are willing to take and how does the portfolio looks like.
  • Credit rating of the securities:  You should also check the scheme’s offer document for the minimum credit rating of the securities the fund intends to invest in. The investors should also note that the higher the credit ratings of their securities, the lower the returns would be for the FMPs and vice versa. However, lower credit rating securities have higher credit risks; hence investors should keep in mind the same. Credit risk indicates the risk of default. 
  • Expense Ratio of the scheme – Investors should select a scheme that has a reasonable expense ratio as per the tenor of the FMP, as a higher expense ratio reduces the overall yield on the FMP.
  • Maturity of the Scheme: Some of the FMPs launched between January and March every year offer double-indexation benefits. Double Indexation helps reducing long term capital gains thereby reducing overall tax liability

TAXATION OF FMPS

As FMPs are a type of debt fund, they are taxed like other debt funds. Investments held for more than 36-months are taxed at the rate of 20%. But there is an indexation benefit available here. With indexation, you get to increase the purchase price of FMP units in accordance with the inflation during the period. This helps in reducing your taxable returns from FMPs. Do note that tax-saving FDs falling under 80C do not allow premature withdrawal. Where FMPs score over FDs is indexation benefit, which results in paying lower taxes.

 

Who Should Consider Fixed Maturity Plans?

Investors who are looking for higher returns in comparison to FDs and RDs and are willing to accept frequent market fluctuations can invest in FMP’s. Additionally, investors must be willing to lock in their funds for a time period of 3 years. In a bid to provide higher income to their investors, FMPs invest in instruments that bear some credit risk so ensure that you understand the risk when you invest in FMPs and do not invest in them as a replacement for fixed deposits.

Separately, for all your emergency funds - we would advise you to continue to invest in fixed deposits or liquid mutual funds. For short-term goals of up to 3 years - you can invest in short-term debt funds or could consider FMPs. But do remember that FMPs come with Fixed Tenure and hence, you cannot access it unless the tenure is completed.

 

Consult your financial advisor to understand how these funds fit into your risk appetite and goals. We are SEBI registered investment advisors and can help you make sound investment decisions - you can reach out to us at iplan@wealthcafe.in, in order to help you make a financial plan for yourself.

To learn more about Asset classes enroll in our course NM 103: Basics of Asset Classes

You can also check our course on Mutual Funds NM 104: Basics of Mutual Funds

Mutual Funds - 09/09/2021

When to exit from Mutual Funds or stop SIP?

One of the most common themes of discussion about Mutual Funds is – When it is a good time to invest? While answers to this question are readily available, a relatively less discussed theme is – When is a good time to exit your Mutual Fund investments? 

If you have been paying those SIP installments over a period of time, chances are that at some point, you would have asked yourself whether you should discontinue the payments.

So what are the triggers that should prompt you to exit from mutual funds or stop your SIP? In this blog, we will discuss specific instances of when you should consider exiting from your Mutual Fund investments and also how to come up with a viable exit strategy that works for you. 

Things To Know Before You Exit the Fund

It’s essential to choose your alternatives before you exit a fund. You need to ensure that the new fund is in sync with your needs. For instance, if you had invested in large-cap funds because they are less risky and find that your fund has now been merged with a mid-cap fund, then you can redeem the combined fund for a fund composed of pure large-cap units only.

Along with this, you also need to take the LTCG (Long-Term Capital Gains) tax into account and see to it that the exit and redemption do not cause you huge losses.

Know when to exit from investments in mutual funds

Sometimes even during your goal period, there might be instances demanding you to exit from investments. In such scenarios, exiting the investment is suggested only when:

  • When you achieve your financial goal

The basic reason you invest is to achieve your goals and if your goals are achieved or are at the stage where you need the money for the goal, you exit the fund. It is very simple right. However, your debt: equity allocation would tell a different story. If you had invested in a long-term goal say your kid's education of 15 years then you start exiting equity in the 12th year when it becomes a short-term goal and switch your money to liquid debt funds (safer options). From this debt fund, you redeem your units as and when you need money for the goal. Now after the 12th year you are sure that you will have money whenever you will need it for your child’s education. You no longer have to continue to invest after the 15th year. This is the most important reason or timing to exit the fund.

  • Consistent poor performance of the fund

If a scheme has underperformed consistently versus its category peers over the past several quarters, you should consider exiting the scheme in favor of a more consistent performer. There can be many reasons behind your fund’s dipping performance.

It might have taken exposure to an unsuitable sector or theme at an inappropriate time. In yet another case, your debt fund might have invested in low-credit-rated securities and failed to earn high returns as planned. 

Therefore, in order to gain the benefits, the mutual fund's investments should be tracked regularly. The performance of the mutual funds has to be seen in the right way. Following are some of the measures:-

  1. Compare your fund with the benchmark index
  2. Compare with the category average
  • Fund level changes are making you uncomfortable

This is quite a common problem. For example, the fund manager who was doing a wonderful job for the last 10 years may have moved on. Occasionally, the AMC gets sold to a new fund manager and you may be uncomfortable with the strategies of the fund. There are also occasions when the fund may have made some changes to the objectives of the fund or its asset mix which may be incongruent with your goals. These are again genuine cases for you to terminate your SIP or exit from the particular scheme. You can look for other funds that are consistent with your objectives.  

  • To Rebalance Your Investment Portfolio

Rebalancing and asset allocation are crucial parts of your investment strategy. 90% of your returns are determined from your rebalancing rather than the exact fund you invested in. For instance, when you started investing your asset allocation was 70:30 into equity and debt. After completion of one year, your target allocations might have skewed. It might be the result of the recent rally increasing NAV of the equity component of the portfolio.

Or, in another case, a macroeconomic policy shift may have made large-cap stocks more favorable over others. All of these would trigger a portfolio rebalancing. In this, you sell those funds which have become irrelevant in the current context. You invest that money in other funds which look more favorable. 

Ideally, SIPs should be investments in perpetuity. However, like all investments, one must review, re-balance and reset portfolios in line with current requirements and their risk appetite (which are always changing)

  • The fund is all over the media for the wrong reasons

Let us start with a caveat here! Not everything that appears on the media or social media needs to be entirely believed. They must be taken with a pinch of salt. But when you see consistent negative cues like SEBI investigations, penalties imposed, customer dissatisfaction, services issues, allegations of circular trading, etc, there is obvious room for worry. Random media reports are understandable. However, do your own research that if you find such news temporary and you have the risk of holding on, you could consider not selling. Just the media news cannot be a reason, otherwise, you will be changing your portfolio every 6 months.

  • There is an emergency

In case of financial emergencies, when your emergency fund isn’t sufficient to meet your requirement, you need to consider exiting your mutual fund investments. Therefore, funds should be parked in liquid funds for contingencies like emergencies.

 

If not for the above reasons, holding your investments for longer durations is always suggested. Along with an investment plan, always have an exit strategy ready for your investments. 

 

Always remember why you invested in a particular fund (and please may that not be ‘best funds of 2020’). Once you map your investments to your goals, these questions will not be very difficult for you to answer. As you exit when your goals are due or only when something gravely is wrong with the fund. Otherwise, it is Janam Janam ka Saath (especially in equity funds).

 

Hence, we always recommend learning about goal setting and investing properly to achieve your goals - check our course- NM 104: Basics of Mutual Funds

Mutual Funds - 08/26/2021

Income-tax Rates FY 2021-22 (AY 2022-23)

Before knowing the tax rates, it is very important to understand the terms Financial year (FY) and Assessment Year (AY).

The below-mentioned tax rates/ slab is on the income earned for the period 1 April 2021 to 31 March 2022. FY stands for the ‘financial year’ which is from 1 April 2021 to 31 March 2022. AY stands for Assessment year which is 1 April 2022 to 31 March 23.

For individuals, the due date to file the income tax return for the income earned from 1 April 2021 to 31 March 2022 is 31 July 2022. 

Income tax Rates 

  1. Income Tax Rate & Slab for Individuals & HUF:
    1. Individual (Resident or Resident but not Ordinarily Resident or non-resident), who is of the age of less than 60 years on the last day of the relevant previous year & for HUF:

 

Taxable income Tax Rate

(Existing Scheme)

 Tax Rate

(New Scheme)
Up to Rs. 2,50,000 NIL NIL
Rs. 2,50,001 to Rs. 5,00,000 5%  5% 
Rs. 5,00,001 to Rs. 7,50,000 20% 20%
Rs. 7,50,001 to Rs. 10,00,000 20% 15%
Rs. 10,00,001 to Rs. 12,50,000 30% 20%
Rs. 12,50,001 to Rs. 15,00,000 30% 25%
Above Rs. 15,00,000 30% 30%

 

  1. Resident or Resident but not Ordinarily Resident senior citizen, i.e., every individual, being a resident or Resident but not Ordinarily Resident in India, who is of the age of 60 years or more but less than 80 years at any time during the previous year:
Taxable income Tax Rate

(Existing Scheme)

 Tax Rate

(New Scheme)
Up to Rs. 2,50,000 Nil Nil
Rs. 2,50,001 to Rs. 3,00,000 Nil 5%
Rs. 3,00,001 to Rs. 5,00,000 5% 5%
Rs. 5,00,001 to Rs. 7,50,000 20%  10%
Rs. 7,50,001 to Rs. 10,00,000 20%  15%
Rs. 10,00,001 to Rs. 12,50,000 30%  20%
Rs. 12,50,001 to Rs. 15,00,000 30%  25%
Above Rs. 15,00,000 30%  30%

 

  1. Resident or Resident but not Ordinarily Resident super senior citizen, i.e., every individual, being a resident or Resident but not Ordinarily Resident in India, who is of the age of 80 years or more at any time during the previous year:

 

Taxable income Tax Rate

(Existing Scheme)

 Tax Rate

(New Scheme)
Up to Rs. 2,50,000 Nil NIL
Rs. 2,50,001 to Rs. 5,00,000 Nil 5%
Rs. 5,00,001 to Rs. 7,50,000 20% 10%
Rs. 7,50,001 to Rs. 10,00,000 20% 15%
Rs. 10,00,001 to Rs. 12,50,000 30% 20%
Rs. 12,50,001 to Rs. 15,00,000 30% 25%
Above Rs. 15,00,000 30% 30%

 

  1. Surcharge:
    a) 10% of Income-tax where total income exceeds Rs.50 lakh
    b) 15% of Income-tax where total income exceeds Rs.1 crore
    c) 25% of Income-tax where total income exceeds Rs.2 crore
    d) 37% of Income-tax where total income exceeds Rs.5 crore
  2. Note: The enhanced surcharge of 25% & 37%, as the case may be, is not levied, from income chargeable to tax under sections 111A, 112A, and 115AD. Hence, the maximum rate of surcharge on tax payable on such incomes shall be 15%.
  3. Education cess:4% of income tax plus surcharge
  4. Note: A resident or Resident but not Ordinarily Resident individual is entitled to a rebate under section 87A if his total income does not exceed Rs. 5, 00,000. The amount of rebate shall be 100% of income tax or Rs. 12,500, whichever is less. rebate under section 87A is available in both schemes I.e. existing scheme as well as the new scheme.

 

  1. Income Tax Rates for AOP/BOI/Any other Artificial Juridical Person:
Taxable income Tax Rate
Up to Rs. 2,50,000 Nil
Rs. 2,50,001 to Rs. 5,00,000 5%
Rs. 5,00,001 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

 

Surcharge:

  1. a) 10% of Income-tax where total income exceeds Rs.50 lakh
  2. b) 15% of Income-tax where total income exceeds Rs.1 crore
  3. c) 25% of Income-tax where total income exceeds Rs.2 crore
  4. d) 37% of Income-tax where total income exceeds Rs.5 crore

Note: Enhanced Surcharge rate (25% or 37%) is not applicable in case of specified incomes I.e. short-term capital gain u/s 111A, long-term capital gain u/s 112A & short-term or long-term capital gain u/s 115AD(1)(b).

Education cess: 4% of tax plus surcharge

 

  1. Tax Rate for Partnership Firm:

A partnership firm (including LLP) is taxable at 30%.

Surcharge: 12% of Income-tax where total income exceeds Rs. 1 crore

Education cess: 4% of Income-tax plus surcharge

 

  1. Income Tax Slab Rate for Local Authority:

A local authority is Income taxable at 30%.

Surcharge: 12% of Income-tax where total income exceeds Rs. 1 crore

Education cess: 4% of tax plus surcharge

 

  1. Tax Slab Rate for Domestic Company:

A domestic company is taxable at 30%. However, the tax rate is 25% if turnover or gross receipt of the company does not exceed Rs. 400 crore in the previous year.

Particulars Tax Rate(%)
If turnover or gross receipt of the company does not exceed Rs. 400 crore in the previous year 2019-20 25%
If the company opted section 115BA (Note 1) 25%
If the company opted for section 115BAA (Note 2) 22%
If the company opted for section 115BAB (Note 3) 15%
Any other domestic company 30%

 

Note 1: Section 115BA – A domestic company which is registered on or after March 1, 2016, and engaged in the business of manufacture or production of any article or thing and research in relation to (or distribution of) such article or thing manufactured or produced by it and also It is not claiming any deduction u/s 10AA, 32AC, 32AD, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB), 35AC, 35AD, 35CCC, 35CCD, section 80H to 80TT (Other than 80JJAA) or additional depreciation, can opt section 115BA on or before the due date of return by filing Form 10-IB online. The company cannot claim any brought forward losses (if such loss is related to the deductions specified in the above point).

Note 2: Section 115BAA – Total income of a company is taxable at the rate of 22% (from A.Y 2020-21) if the following conditions are satisfied:

– Company is not claiming any deduction u/s 10AA or 32(1)(iia) or 32AD or 33AB or 33ABA or 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB) or 35AD or 35CCC or 35CCD or section 80H to 80TT (Other than 80JJAA).

– Company is not claiming any brought forward losses (if such loss is related to the deductions specified in the above point).

– Provisions of MAT are not applicable to such companies after exercising of option. The company cannot claim the MAT credit (if any is available at the time of exercising section 115BAA).

Note 3: Section 115BAB – Total income of a company is taxable at the rate of 15% (from A.Y 2020-21) if the following conditions are satisfied:

– Company (not covered in section 115BA and 115BAA) is registered on or after October 1, 2019, and commenced manufacturing on or before 31st March 2023.

– Company is not formed by splitting up or reconstructing a business already in existence.

– Company does not use any machinery or plant previously used for any purpose.

– Company does not use any building previously used as a hotel or a convention center, as the case may be.

– Company is not engaged in any business other than the business of manufacture or production of any article or thing and research in relation to (or distribution of) such article or thing manufactured or produced by it. Business of manufacture or production shall not include the business of –

  • Development of computer software;
  • Mining ;
  • Conversion of marble blocks or similar items into slabs;
  • Bottling of gas into the cylinder;
  • Printing of books or production of the cinematographic film; or
  • Any other notified by Central Govt.

– Company is not claiming any deduction u/s 10AA or 32(1)(iia) or 32AD or 33AB or 33ABA or 35(1)(ii)/(iia)/(iii)/35(2AA)/(2AB) or 35AD or 35CCC or 35CCD or section 80H to 80TT (Other than 80JJAA and 80M).

– Company is not claiming any brought forward losses (if such loss is related to the deductions specified in the above point).

– Provisions of MAT are not applicable to such companies after exercising of option. The company cannot claim the MAT credit (if any available at the time of exercising of section 115BAA).

Surcharge:

  1. a) 7% of Income-tax where total income exceeds Rs.1 crore
  2. b) 12% of Income-tax where total income exceeds Rs.10 crore
  3. c) 10% of income tax where domestic company opted for section 115BAA and 115BAB

Education cess: 4% of Income-tax plus surcharge.

 

  1. Tax Rates for Foreign Company:

A foreign company is taxable at 40%

Surcharge: 

  1. a) 2% of Income-tax where total income exceeds Rs. 1 crore
  2. b) 5% of Income-tax where total income exceeds Rs. 10 crore

Education cess: 4% of Income-tax plus surcharge.

  1. Income Tax Slab for Co-operative Society
Taxable income Tax Rate

(Existing Scheme)

 Tax Rate

(New Scheme)
Up to Rs. 10,000 10% –
Rs. 10,001 to Rs. 20,000 20% 22%
Above Rs. 20,000 30% –

 

Surcharge:

  1. a) 12% of Income-tax where total income exceeds Rs. 1 crore
  2. b) In the case of Concessional scheme, the surcharge rate is 10%

Education cess: 4% of Income-tax plus surcharge.

Disclaimer: – The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Income Tax / Uncategorized - 08/20/2021

Things you must know about the new income tax portal for easy filing of the return for FY 21-22.

Income Tax Return ITR E-Filing Direct Link

  1. There is a direct link for the e-filing of Income Tax returns. It is the official portal of Income Tax India.
  2. You need to visit – www.incometaxindiaefiling.gov.in to file your income tax return.
  3. Taxpayers can file ITR, verify income tax returns, link Aadhaar with PAN, know Aadhaar-PAN link status, e-pay tax, track status of e-filed Income Tax Return status, know tax deductors across India etc.

Here are key things to know about filing ITR:

 

What are the new options for filing ITR on the new portal?

The I-T department has encouraged taxpayers to update their profiles to avail accurate pre-filled ITRs and enhanced user experience.

On the top of the new website, one can find the tab to access individual-based help content. Clicking on the application tab takes an individual to view guidance on how to file ITRs and applicable forms for the same. Deductions, refund status, tax slab and other related information are also present there.

The department has claimed that the new IT return e-filing portal and the new mobile app will be easy to use for taxpayers.

 

What are the additional features of the new portal in terms of ITR filing?

The new portal has a drop-down menu for taxpayers for checking instructions on ITR filing, refund status, and tax slabs. The new site also has detailed user manuals, FAQs and videos to help taxpayers understand various services available on the portal.

 

What are the forms of return prescribed under the income tax law?

The Income Tax Department has notified 7 forms for filing ITR this year. These forms include Sahaj (ITR-1), Form ITR-2, Form ITR-3, Form Sugam (ITR-4), Form ITR-5, Form ITR-6 and Form ITR-7.

 

What are the different modes of filing the return of income?

The return form can be filed with the Income-tax Department in any of the following ways, -

(i) by furnishing the return in a paper form;

(ii) by furnishing the return electronically under digital signature;

(iii) by transmitting the data in the return electronically under electronic verification code;

(iv) by transmitting the data in the return electronically and thereafter submitting the verification of the return in Return Form ITR-V;

 

How to file the return of income electronically?

The Income-tax Department has established an independent portal for e-filing of return of income. The taxpayers can log on to https://www.incometax.gov.in for e-filing the return of income.

 

What are the benefits of filing my return of income?

Filing of return earns an individual the dignity of consciously contributing to the development of the nation. Apart from this, income tax returns validate an individual's credit-worthiness before financial institutions and make it possible for him/her to access many financial benefits such as bank credits, etc.

Income Tax / Tax - 08/10/2021

What is loss aversion bias in investing?

Loss aversion is a tendency in behavioral finance where investors are so fearful of losses that they focus on trying to avoid a loss more so than on making gains. The more one experiences losses, the more likely they are to become prone to loss aversion.

For instance, say you bought 100 shares of Yes Bank at Rs 50 per share. If the stock fell to Rs 30, and you bought another 100 shares, your average price per share would be Rs 40.  If the stock further fell to Rs 15, and you bought another 100 shares, your average price per share would be Rs 30. And if you now feel the need to sell, you would be facing a loss of approx 53%. (We have taken this only for an example purpose, no recommendation or fundamental is done for the stock)

Purchasing more shares to average down the price wouldn't change that fact, so do not misinterpret averaging down as a means to magically decrease your loss. This is a very common practice followed by investors where they keep buying more shares at the dip, thinking they are lowering their cost, without understanding that they are just incurring more losses. Such methods of buying at a lower cost must be followed only and only where the company has strong fundamentals and you are sure that the current dip in the price is due to some change in the market scenario. If the losses continue, then do you think buying more is the solution or booking your losses is?

Research on loss aversion shows that investors feel the pain of a loss more than twice as strong as they feel the enjoyment of making a profit.

EXAMPLES OF LOSS AVERSION

Below is a list of loss aversion examples that investors often fall into:

  • Investing in low-return, guaranteed investments over more promising investments that carry a higher risk
  • Not selling a stock that you hold when your current rational analysis of the stock clearly indicates that it should be abandoned as an investment
  • Selling a stock that has gone up slightly in price just to realize a gain of any amount, when your analysis indicates that the stock should be held longer for a much larger profit
  • Telling oneself that an investment is not a loss until it’s realized (i.e., when the investment is sold)

HARMFUL EFFECTS OF LOSS AVERSION

  • Loss aversion causes investors to hold on to loss-making stocks or funds for a very long period. They refuse to sell a stock or fund at a loss and can hold on to it for long periods of time even if there are better alternative investment options available.
  • Aversion for losses makes investors hold on to loss-making stocks or funds till the loss is recovered. Ultimately, when the investor sells the stock or fund, a long time may have elapsed and the return on the investment is very low.
  • There are also instances of investors holding on to loss-making stocks/funds and then finally selling them at a much bigger loss than what they would have incurred if they sold earlier.
  • Loss aversion is commonly seen in property / real estate investments. Investors refuse to sell their property at a loss and hold on to it hoping the investment will turn profitable someday. Throughout the holding period of the investment, they pay interest on their loans which could have been avoided if they sold earlier.

RATIONAL STRATEGIES FOR AVOIDING LOSSES
Let’s look at some examples of how a company or an individual can reasonably minimize risk exposure and losses:

  • Hedge an existing investment by making a second investment that’s inversely correlated to the first investment
  • Invest in endowment plans/debt products that have a guaranteed rate of return so you have your safety net in place
  • Invest in government bonds directly or via mutual funds (but be aware of the liquidity and the interest rate risk over there)
  • Purchase investments with relatively low price volatility and only after thorough research. Do not just buy because something is priced low. Understand the value of it before investing.
  • Consciously remain aware of loss aversion as a potential weakness in your investing decisions and make more conscious smart decisions.
  • Invest in companies that have an extremely strong balance sheet and cash flow generation. (In other words, perform due diligence and only make investments that rational analysis indicates have genuine potential to significantly increase in value.) and DO NOT MAKE INVESTMENTS BASED ON TRENDING TWEETS AND TELEGRAM GROUPS.

CONCLUSION
No one likes to make a loss, but loss aversion can cause you to lose more money or make less money than what you feared to lose. Sometimes, it is better to book a loss and move on to alternative investment options. This moving on will help you invest for the long term better and make money eventually. 

It is difficult to separate emotions from investing, but successful investors are able to do it. You should do what is right to meet your financial goals including selling funds that are underperforming consistently and switching to better funds. A good financial advisor can help you overcome this behavioral bias. You should have a rational and objective portfolio performance evaluation process; take the help of a financial advisor if required. We are SEBI registered investment advisors and can help you make sound investment decisions - you can reach out to us at iplan@wealthcafe.in, in order to help you make a financial plan for yourself.

Uncategorized - 08/05/2021

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