9 steps to Financial Freedom

9 steps to Financial Freedom

How incredible would it be to quit your day job and retire early, spending the rest of your life doing things you love? When you become financially independent, the income your assets generate for you are greater than your expenses, meaning your job is no longer necessary. Sound appealing, right?

Let’s go through all the 9 steps that will help you achieve your Financial Freedom. We have linked all our 9 videos below- you can check them out to learn more about it:

1. START NOW.

Still believe that small savings cannot generate big wealth? Think again. If you plan well, then even small savings can help you generate a good amount of corpus, as starting is important even if it means taking baby steps. Check out our YOUTUBE video - to know more about it.

Video Link - https://youtu.be/9Xh5FRaA0cE

2. AVOID DEBT.

While balancing the rising expenses and lifestyle changes on a day-to-day basis, it becomes difficult to save for our own financial goals. However, there is often a simple solution which can help you achieve some of your life goals: LOAN. But remember, borrowing should not be your go-to option always, you should opt for it only when it is extremely crucial and you are out of options.

Debt is one of the biggest roadblocks in your journey toward financial independence. Plan for it wisely! When you aspire to get to a state of financial independence or stability, living within your means is the best advice you can follow. We are not challenging you to adopt a minimalist lifestyle - It simply means learning to distinguish between the things you need and the things you want—and then making small adjustments that drive big gains for your financial health.

Video Link - https://youtu.be/X1F-GcyyA_g

3. JUST SAVE.

It is easy to say that saving can easily be done on a monthly basis, but it becomes very difficult when you actually start saving practically. The habit of saving regularly cannot be developed in a day. You only need to make sure that you end up developing this habit no matter how much time it takes. The more you save, the earlier you save - the faster you can become financially free - Your savings will act as fuel in your financial journey.

Video Link - https://youtu.be/_GE8iDjkn6k

4. GET GULLACKING.

Rent, utility bills, debt payments and groceries might seem like all you could afford when you're just starting out. However, you can still save a good amount of savings if you get your finance in place and give it a direction. Try our Gullacking Approach! Through this method, you will be able to start your investment journey in a better way.

Video Link - https://youtu.be/1Ajk5rKY6Sg

5. MORE IS BETTER.

“I am very happy with my salary and I don’t think I need a raise,” said no one ever. Most of us usually find ourselves thinking that the income we earn through our jobs or business is not enough. The bottom line is that no matter what we earn, we’d like to earn more. There are multiple ways to set up additional sources of income today - check out our YOUTUBE video to know more.

Video Link - https://youtu.be/jB8WQDEQaR4

6. TAKE RISKS.

Not focusing on risk is like not focusing on the amount of salt you put in food, it is very important. Risk is what you have to bear to get any return in life or investments. It is important to know the different types of risk that you have to bear when you make investments and how you can manage those risks to achieve your financial goals.

Don’t hesitate to take risks. Rather than being afraid, learn to manage it. Start taking Measurable Risks!

Low Risk = Low Return.

High Risk = High Return.

Video Link - https://youtu.be/tsoPAOVyT3g

7. SAFETY FIRST

We never know what the future holds for us, Right? So it's always best to be prepared by putting money aside. This will help you to avoid taking on an additional financial burden, without the clarity of how you would pay it back.

Let's go over the three most common contingencies that you could come across:

Financial emergencies → Emergency Fund.
Untimely Death → Life Insurance.
Health Issues → Health Insurance.

Video Link - https://youtu.be/XlCqCbokJAw

8. STAY AWAY

There is nothing known as ‘QUICK MONEY.’

Avoid taking shortcuts!

Video Link - https://youtu.be/5d1BtheuEXo

9. DON’T STOP LEARNING.

Money is something that we need to deal with every day. We have ample information ready on Youtube as well as various websites. We always suggest you never stop learning about it. Because if you do not learn about it or research about it - you will have to learn the hard way from your mistakes.

You can check out our courses to learn more about how to manage your money at https://courses.wealthcafe.in/s/store

Video Link - https://youtu.be/fQ14nVIdD-4

Wealth Cafe Advice:

Knowing exactly what you want to achieve makes achieving financial freedom a million times easier. But, financial freedom isn’t just about having enough money today – it’s about knowing that you’re covered in the future. Once you’ve got an emergency savings fund and you’re making progress towards short and medium-term goals, it might be time to think about diversifying your savings through other types of investments. If you’re a young investor with a steady job, you can consider higher-risk investments, such as stock funds, that offer higher potential returns in the long run. If you’re at a more conservative stage in life, close to retirement for example, then lower-risk options may be what you’re looking for. Either way, always consider how to make the most of the available tax advantages on investment and retirement accounts.

Therefore, financial freedom can help you take ownership of your finances and, more importantly, your life. It’s about living within your means, being a bit frugal, and making sure that money is spent on things you really need like food, shelter, and yup even vacations (relaxation is important too, you know). By following the financial freedom tips mentioned above, you’ll inch closer to achieving the financial freedom you deserve. Hence, take a look at those finances, build additional streams of income, pay down that debt, and before you know it you’ll be free.

So, how close are you to achieving financial freedom?

5 myths of Investing in Mutual Funds

Being popular comes with its own set of disadvantages. While celebrities have to face rumours, mutual funds have to face misconceptions. :P So let’s get to the chase.

Below, we bust some of the myths associated with mutual funds.

1. Investing in mutual funds is the same as investing in direct equity

Investing in mutual funds is way too different from investing in direct equity. You need expertise as well as time to research when you invest in the stock market as the market movements keep changing. Whereas, if you lack the skill set to invest in the securities market you can invest in Mutual Funds. Here, the fund manager takes decisions on behalf of you and manages the fund’s portfolio.

Second benefit of investing in mutual funds is Diversification! When you invest in Mutual Funds you get exposure to many stocks under various sectors and market capitalisations whereas when you invest in direct equity you might not have the bandwidth to diversify your portfolio in such a manner. However, it is advisable to invest in approx 5 Mutual Fund Scheme - if you invest across many schemes - you may di-worse-ify your portfolio. Also, not all mutual fund schemes invest in the share market - if your risk appetite is low you can opt for debt mutual fund schemes that invest in instruments such as Treasury Bills, Commercial Papers, Certificate of Deposit, etc.

2. One needs a large amount of money to invest in mutual funds

This is the most common myth that one needs to stop worrying about. You can invest in Mutual Fund with an amount as small as INR 100 - you need not have huge savings for it. We advise you to set your SIPs today and start your investment journey as soon as possible.

3. Buying a top-rated mutual fund scheme ensures better returns.

Do you go to a mall and buy the best shoe in the store or do you buy the one that fits you perfectly? Of course the second option, right? Similarly, when you invest in Mutual Funds, you need not invest in the top-rated scheme but the one that fits your risk profile and helps you to achieve your financial goals.

To know more about it - Read Here

How are investors buying mutual funds - looking at the best-performing ones?

4. Mutual fund scheme with lower NAV is better

Does low NAV means that the scheme you got is cheap? Or does Higher NAV means that the scheme has reached its peak? Both the statement mentioned are wrong! NAV should not be a deciding factor when buying a Mutual Fund Scheme. A high NAV does not mean the fund is expensive nor does it mean the scheme has reached its peak. In fact, at times, a high NAV indicates the good performance of the scheme over the years. Also, if the Fund Manager feels that a particular stock has peaked, they can choose to sell it.

5. Mutual fund investment has a lock-in period

Liquidity is one of the main advantages of investing in mutual funds, which means you can buy and sell them at your convenience. The only exception is ELSS with a lock-in period of three years and closed-ended mutual funds with a lock-in period of 3-5 years. However, exit load might be applicable on premature withdrawal for some schemes based on the type and period of your investment. Even though there is no lock-in period do not withdraw your investments anytime as per your convenience - when you invest in a scheme you need to have a withdrawal plan at that stage itself and stick to it. Be disciplined while investing.

6. Buying more funds every time I save more

Do you invest in a new mutual fund when you have money? If yes, you need to stop it now. We advise you to have only 5 mutual fund schemes. Just like too many cooks spoil the broth - too many Mutual Funds will di-worse-ify your portfolio.

Conclusion:

Stop looking for the best mutual fund scheme and start investing in the one that is right for you. You can check out our article where we have shared a checklist that you need to check while you are looking to invest in a Mutual Fund.

Investments / Mutual Funds - 11/12/2022

How to Add Biller for SIP Transactions in Kotak Mahindra Bank?

STEP 1: Log into Your Account & Click on BillPay/Recharge

Log in to your account using your credentials to initiate the bill payment process through net banking. Once you have successfully logged in, navigate to the top of the screen and click on the BillPay/Recharge tab. Refer to the image below where the BillPay/Recharge section is highlighted in yellow.

STEP 2: Click on Add a Biller

Upon clicking on the BillPay/Recharge section, a new screen will appear with a prompt to add a biller. Simply click on the "Click here to add a biller" option to proceed. Refer to the image below where the prompt is highlighted in yellow.

STEP : 3 Add URN & Other Details

After clicking on "Continue," a new screen will appear where you must enter the URN provided. After entering the required information, click on the "Add Biller" button. Refer to the image below where the URN and Add Biller options are highlighted in yellow.

STEP 4: Verify URN Summary & Confirm

This is the second-last step in the process, where you will be prompted to verify the URN details you have entered. If the details are correct, click on "Confirm." If not, you can click on the "Go Back" option and rectify the errors.

Step 5: Final Confirmation

In the final step, you will receive a confirmation message stating that the biller has been added successfully. You can refer to the image below for sample confirmation.

We hope that this article has been informative. If you have any questions or concerns, please do not hesitate to contact us at iplan@wealthcafe.in.

Equity / Income Tax / Investments / Money tips / Mutual Funds / stock market - 11/01/2022

How to Add Biller for SIP Transactions in ICICI Bank?

To add a biller in ICICI Bank for SIP payments, follow these simple steps:

STEP 1: Log in to your ICICI Bank account and select the "Payments & Transfer" tab from the homepage.

STEP 2: Click on "Bill Payments" and then select "Pay New Bills."

STEP 3: Choose the "Mutual Funds" option and select "BSE ISIP#" from the list of billers.

STEP 4 : Enter the URN number and other required details, such as the registration date, full amount for auto-pay, and account number to be debited.

STEP 5: Preview the confirmation and click on "Submit."

STEP 6: Confirm the registration of the biller by entering the URN received on your registered mobile number.

STEP 7: Enter the URN or OTP number received on your mobile number to confirm the biller registration.

STEP 8: Once the biller is confirmed, you will receive a confirmation message.

We hope that this article has been informative. If you have any questions or concerns, please do not hesitate to contact us at iplan@wealthcafe.in.

Investments / Money tips / Mutual Funds / Uncategorized - 10/31/2022

This Diwali - financial importance - deep clean your portfolio

Bursting crackers, playing card games, or decorating the house--a lot of customs are associated with the festival of Diwali. Among these typical Diwali rituals, there is one aspect which we may dread or enjoy, but cannot avoid i.e. Deep cleaning our house. Every single drawer, wall or corner, is washed, cleaned and dried.

15 days before Diwali, my mother would stop going anywhere and her sole focus would be to clean everything around our house. My sister & I would find every way to avoid it. As we grew older, I have now started looking forward to this deep cleaning experience :D. Let us tell you why and how it affects you and maybe it can also be applied to your finances!

It helps you to declutter your mind, it just relaxes you the way many 2 therapy sessions would (or not). You just have this dopamine rush of completing some tasks. And also, it's great to be in a house that is dust-free and has more space.

Take stock of everything: It helps you understand what you have and how much. Take a stock of everything you own - clothes, books (I found some great books I got and I haven't read yet, finishing it before the year ends), home decor, candles, and shoes (omg not used them for 2 years now).

Discard all that you don’t need - Simple rule - what you don't use please discard. I am everything but a hoarder and I love my mother for this. If I don't use something, I discard it and then I buy less of things I don't want to use because discarding them is extremely painful. Thus, becoming a smart shopper. I do not decide after shopping, I decide before shopping.

No mindless Diwali/Festive Shopping - Ugh I hate it when people buy things just because it is Diwali. Yes, it was great when you did that only once a year. But now we are shopping literally all the time. We always have Myntra or Amazon tabs open on our phones. Hence just shop what you want or don't shop.

Set budgets - Diwali is all about budgeting guys. Look closely, you will see savings everywhere but Marketing is only showing Spending more. So be careful.

Once your regular expenses and savings are taken care of. Lets understand how you can deep clean your portfolio.

Ways to Deep Clean your Portfolio

Let's put everything together: Collect all the data about all your investments, this is the most time-consuming process if you have not been maintaining it properly. However, if you have maintained your data well it shouldn't take much of your time. You can check Mprofit software to maintain your investment information - it is available for free for up to 50 lakhs portfolio value.

Review your existing investments: Just like your clothes, some of your investments would hold more emotional place than real value in your wardrobe. Therefore, if it does not match your risk profile or your financial needs, it is time to book your profit (or losses) and remove such investments from your portfolio. Things which have gone bad have to go. Investments which are not a good option anymore have to go. Learn to identify the weeds of your portfolio.

Now check your Asset Allocation - You can evaluate your Asset Allocation by knowing your Risk Profile - a basic analysis to understand your risk appetite. Once you calculate your Risk Profile and have identified the investment you do not need - Check how much you have in debt, equity , gold and other asset classes. It’s time to evaluate your portfolio!

Rebalance or reallocate your Investments: Rebalancing, primarily means, buying and selling different asset classes to build your ideal portfolio mix in order to meet your risk tolerance and financial goals (basically your asset allocation). Once you know your ideal asset allocation start rebalancing your portfolio in order to achieve it.

Declutter your Investments - When we are talking about decluttering, remember that one of the first things to do is to stop hoarding on mutual funds, buying every other mutual fund is going to make your portfolio messy, and having too many things of one type is only making your diversification worst. So ensure that you have 5 to 6 mutual funds and not more than that and have 1 fund in each category. Time to declutter your mind, wardrobe, and portfolio.

Read the following article to understand this in more detail - When to exit from a Mutual Fund or a SIP

So remember, let it be cleaning your house or your portfolio, both ways you would be welcoming more Laxmi in your life 🙂

Insurance / Investments / Mutual Funds - 10/21/2022

What is Cost Averaging?

In a marathon, participants are advised to go easy on sudden bursts of high speed during the race, especially at the beginning. This may sound confusing. How can one win such a long distance without speed? However, running at full speed would be pointless if the participant loses stamina mid-way.

Similarly, investors gain when they are steady and consistent even in volatile situations instead of looking at high-speed sprints. We all have heard that one should buy more when the market is low and reap profit when the market is high. However, with limited time, resources, information, and skillset it gets very difficult to time the market and actually buy and sell with every dip. In fact, there are costs such as brokerage, taxes, and STT involved when you buy and sell with every small change. These costs would eat into your profits. So what is the easiest way to make use of the saying and buy more when markets are at a low and less when markets are at a high?

SIP (Systematic Investment Plan) is one of the best modes to invest in such a situation. Let us understand this better with an example.

What is cost averaging?

The concept of cost averaging lies in averaging out the cost at which you buy units of a Mutual Fund. it guides the investor to - buy- low and sell- high’. However, at times an investor ends up doing just the opposite. By investing on a fixed schedule, you avoid timing the market and figuring out the exact best time to invest. Cost averaging helps you to take advantage of market volatility.

How does SIP help with averaging?

Take a look at the following table to understand the concept better:

Date	NAV	Unit	Amt
Dec-19	524.64	9.530345	5000
Jan-20	525.27	9.518914	5000
Feb-20	509.31	9.817204	5000
Mar-20	468.77	10.66621	5000
Apr-20	348.51	14.34679	5000
May-20	409.96	12.19631	5000
Jun-20	405.4	12.3335	5000
Jul-20	429.29	11.64714	5000
Aug-20	446.72	11.19269	5000
Sep-20	467.35	10.69862	5000
Oct-20	449.9	11.11358	5000
Nov-20	455.46	10.97791	5000
Dec-20	522.39	9.571393	5000
Jan-21	560.57	8.919493	5000

Total Investment: INR 70,000

Total Number of Units: INR 153

Profit: INR 15,504

If the same amount i.e INR 70,000 was invested by lump sum route in December 2019, one would have earned a profit of only INR 4,794 in Jan 2021.

In the above example, we can see that SIP helps us to reap more profit in comparison to lump sum due to cost averaging. We often hear people saying buy more when the market is down, but one cannot time the market and invest according to it.

You can refer to the following articles to know more about SIPs:

SIP Impact: Well Illustrated

Timing the market for your SIP investments?

Should I pause/stop my SIP?

Wealthcafe Advice:

We recommend you invest based on your asset allocation. As said earlier, one cannot time the market, however asset allocation will help you to buy and sell accordingly. If the ratio of equity: debt changes by 10% it is time to revisit and rebalance your portfolio. This will help you to buy- low and sell- high. You can read this article - How am I investing in current times - Akruti Agarwal- to understand how asset allocation helped me to earn profit during a pandemic situation.

Mutual Funds - 01/10/2022

Are Mutual Funds Safe?

Are mutual funds safe? No it is not! Mutual funds are subjected to all investment risks that your underlying investment asset class is subject to and many more.

Going back to the fundamental investing rule - High Risk = High Return; Low Risk = Low Return. Your returns are the rewards for managing the risk of an asset class. So if you are earning any kind of return from your mutual funds (which in most cases you are), there is a risk associated with them.

The question should not be: Are Mutual Funds safe? Which are the safest Mutual Funds? You must understand the underlying risk of these mutual funds and invest in them based on your risk taking capacity.

How to Check the Risk of Investing in Mutual Funds?

Riskomter in fact sheet - As per SEBI's product-labelling guidelines, AMCs have started disclosing the new riskometers for their funds. The five risk levels are ‘low’, ‘moderately low’, ‘moderate’, ‘moderately high’ and ‘high’. This helps investors get a better picture of the right risks associated with a particular fund. You must check the riskometer to get a brief idea of the risk of the particular mutual fund scheme.

Standard deviation - A fund's standard deviation tells you how volatile or risky a fund can be compared to the benchmark and its peers.

When prices move wildly, standard deviation is high, meaning an investment will be risky. Low standard deviation means prices are calm, so investments come with low risk. Instead of just looking at the standard deviation of a fund, you should compare the standard deviation of a fund with the standard deviation of the benchmark index to get a better idea of the risk

When it comes to Debt Mutual Funds, there are some specific factors that one can check to know the underlying risk of the same i.e.

1. Credibility of the fund

Debt Mutual Funds can invest in securities with different credit ratings, as per the scheme's investment strategy. The credit rating of the security is listed alongside its name in the mutual fund factsheet. These ratings are assigned by different rating agencies and indicate the credit worthiness of the borrower. Higher the rating, higher is the creditworthiness of the borrower, although the returns may be lower as compared to a bond issued by an entity that has a lower rating.

2. Duration of the fund

SEBI has defined categories of mutual funds based on maturity or Macaulay duration of the fund. Put very simply, Macaulay Duration is the time taken for a bond to repay its own purchase price in present value terms. Generally, the longer the maturity of the instruments that the mutual fund holds, the higher the Macaulay duration of the fund. Typically the longer the maturity/duration of the fund, the higher the expected returns. But higher duration also leads to higher volatility in returns with change in interest rates.

Simply put, ultra short duration funds, liquid mutual funds being the one with the shortest duration and underlying better credit securities (you must check the portfolio before investing) are the safe debt mutual funds to invest in. That is why we generally recommend these for any short term goals and emergency fund needs of our investors.

You can learn more about the underlying risk of Investing in Equity - here and Investing in Debt - here

Wealth Café Advice:

As explained above, mutual funds are not safe, there will always be a certain level of risk in them. You must analyze that risk based on your risk taking capacity and invest only in those funds which you understand and are okay to bear/manage the risk to achieve your goals. Do not invest in small cap funds or thematic funds because they are trending and you are a conservative person. The funds will trend while you will have sleepless nights. You can’t entirely escape risk, but you can always manage it. Understanding your risk capacity is the very first key step to help investors gain without pain. -What is a Risk profile? How to Invest basis that?

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

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

Investments / Mutual Funds - 12/02/2021

Pay taxes on Mutual funds - Unrealized vs Realized Gains

Whether you are putting money away for a rainy day, retirement or anything in between, you are likely to be taxed. Investors do not think about tax expenses when making investment decisions, even though it is one of the crucial aspects of investing.

Do you check pre tax and post tax returns before you invest your money ? Do you know how fixed deposits and debt mutual funds investments can impact your tax differently? Let's discuss how the difference in taxability of Debt Mutual Funds versus Fixed deposits becomes one of the factors you must consider when you make an investment decision.

Difference between realized and unrealized gains in a mutual fund.

Realized gains are the returns you make after actually redeeming(selling) your mutual funds. Unrealized or notional gains or losses are the ones which you see based on everyday market movements but do not book it. Unrealized gains only exist on paper and results from an investment which has yet not been sold.

Taxation of gains

Where there are unrealized gains - no tax is payable as you have not booked any profits. Only in case of realized gains, do you have to pay taxes in case of a mutual fund. So once you sell your Mutual funds and the funds are credited to your bank account, you have to compute your tax liability and pay capital gains taxes on the same.

To know more about the taxability of mutual funds, check here - Taxation of Mutual Funds for FY 2021-22 (AY 2022-23).

It is not that every other asset class, you pay taxes on actual basis, in fact in a fixed deposit, you pay taxes on interest accrued to you, even where the same is not credited to your bank account each year. This way Fixed deposit income is taxed differently as compared to debt mutual funds (because the gains are taxed only on realisation)

Let's take an example to help you explain how tax eats into your profits.

For the purpose of this example, we shall consider that the returns from fixed deposits and debt mutual funds are the same. They will be taxed as per the relevant tax laws and how that would impact the net returns you can make from the investment.

Ria is the investor and she falls under the 20% tax bracket. She has made an investment of INR 10 lakhs in FD and debt mutual funds for 3 years, giving a return of 8% per annum.

https://financial.wealthcafe.in/blog/2021/06/cost-of-inflation-index-fy-2021-22-ay-2022-23-for-capital-gain/

In case of FD, interest will accrue to her every year, and she has to pay taxes on the same as per her slab rate every year, even where the same is not credited to her bank account. Infact, the interest after the taxes are paid will be reinvested.

FD = INR 10,00,000

Interest - INR 80,000

Tax - 16,000

Reinvestment of Interest in year 1 = 64,000

(same reinvestment would happen in year 2 and year 3 - after tax)

After 3 years:

Total tax paid - INR 48,000

Net cash in hand = INR 12,04,288

In case of debt mutual funds, she will have to pay taxes only on realization of profits. She decided to sell the same after 3 years and will have to pay long term capital gains on the same at 20% (with indexation benefits). So effectively, the tax she has to pay is less than what she had to pay for her fixed deposits. Also, the reinvestments would be of the entire earnings and not just post tax earnings in case of fixed deposits.

Amount invested - INR 10,00,000

Gains = INR 80,000

Tax - Nil (No sale)

Reinvestment of gains = INR 80,000*

After 3 years

Total Tax Paid - INR 32,565 (indexation benefit)

Net cash in hand - INR 12,27,147

*the returns are not assured in a debt mutual fund. We have considered this for explanation purposes here.

From the above example, you can understand that the net cash in hand that ria would earn is 102% of the final amount from fixed deposits. Infact, if she was in the 30% tax bracket, she would make 104% more in the case of debt mutual funds than fixed deposits.

This is how realized and unrealized gains impact your tax in various asset classes and also become one of the factors that one must consider when they are investing their money.

You can also check our blog on -Why you should avoid investing all your money in a FIXED DEPOSIT?

Wealth Café advice:

Please note that tax is not the only but one of the criteria that one must look at when investing their money in debt funds and Fixed deposits. Fixed deposits are safer and provide assured returns as compared to debt mutual funds. Debt mutual funds have many types and each has a different risk parameter. You can look at the liquid funds, or ultra short duration debt funds for lower risk and comparable returns to Fixed deposits. Please note that returns in all debt mutual funds are volatile and invest in them only after considering all the possible risks.

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

Investments / Mutual Funds / Tax - 12/01/2021

What are the fees you pay on your mutual funds? - fees on the fund is charged and NAV is after that

There are many different investment options available to help you reach your financial goals. Regardless of which investment you choose, it is important to understand the costs involved and how they can affect your investment.

What are these charges??

When you go out to eat pizza, are you charged only for the ingredients that were used to make the pizza? Of course not. The bill you pay includes other charges incurred by a restaurant including its rent, electricity, etc. as well as the chef’s expertise. Similarly, when you buy a mutual fund you do not just pay for the securities that your fund buys and sells.

The majority of these expenses are Investment and Advisory fees. Apart from this, there are some other fund management expenses like marketing and selling expenses including agents’ commission, brokerage and transaction cost, registrar fees, trustees fee, audit fee, custodian fees, costs related to investor communication, and more. The total expenses charged by a Mutual Fund are capped in what is called the Total Expense Ratio.

Total Expense Ratio

Currently, in India, the expense ratio is fungible, i.e., there is no limit on any particular type of allowed expense as long as the total expense ratio is within the prescribed limit. The regulatory limits of TER that can be incurred/charged to the fund by a Mutual Fund AMC have been specified under Regulation 52 of SEBI Mutual Fund Regulations.

Effective from April 1, 2020 the TER limit has been revised as follows.

Assets Under Management (AUM)	Maximum TER as a percentage of daily net assets
Assets Under Management (AUM)	TER for Equity funds	TER for Debt funds
On the first Rs. 500 crores	2.25%	2.00%
On the next Rs. 250 crores	2.00%	1.75%
On the next Rs. 1,250 crores	1.75%	1.50%
On the next Rs. 3,000 crores	1.60%	1.35%
On the next Rs. 5,000 crores	1.50%	1.25%
On the next Rs. 40,000 crores	Total expense ratio reduction of 0.05%for every increase of Rs.5,000 crores of daily net assets or part thereof.	Total expense ratio reduction of 0.05%for every increase of Rs.5,000 crores of daily net assets or part thereof.
Above Rs. 50,000 crores	1.05%	0.80%

Source: https://www.amfiindia.com/investor-corner/knowledge-center/Expense-Ratio.html

How are these charges levied to the investor? Where can I see this charge?

The expenses are deducted from the NAV of your Mutual Fund Scheme on a daily basis. The NAV that is listed every day is published only after deducting expenses of a mutual fund. For example, if your investment value today is Rs. 100,000 and expense ratio of your fund is 1% then today’s expense amount charged to your Fund will be 100,000 X 1% / 365 i.e. Rs.2.73. The total value of your investments will be reduced to INR 99,997.27.

Basically, you do not get a separate report of your charges in the account statement but it is deducted from your fund NAV. You can check the expense ratio as a % to know whether the fund you own has a high or low expense ratio compared to other funds. It is one of the factors to refer to but remember that it is not the only one.

Wealth Café advice:

Before investing in a fund, you should always check the expense ratio. If it’s possible, read the Scheme Information Document to see what all expenses have been charged for. Also, remember, a good fund is the one that delivers good performance with optimal expenses.

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

Mutual Funds - 11/29/2021

What are the factors you must check when you are looking at a mutual fund?

Are you someone investing in mutual funds using app filters like 4-5 stars or sorting it based on highest to lowest returns? Do you invest in mutual funds with low NAV and believe you bought it for cheap? Do you feel that lower the expense ratio of a mutual fund scheme, cheaper the investment for you? Do you make mutual fund investments based on hearsay or advice from your relatives, colleagues or train companions? Or, are you investing in the Best 2021 Mutual Funds suggested on someone's Instagram reels?

Well, if your answer to any of the above questions is yes, then you are at the right place. Selecting a mutual fund is an art and science that is tough to learn but rewarding in the long run.

FACTORS TO CONSIDER

Personal Needs: Your Individual requirements

Investment Objective - Every investor has an objective, a set of goals behind their investments. We all save and invest money to achieve our goals such as travelling, buying a car, buying a house etc. If nothing, then the basic objective of achieving wealth creation or financial freedom is a must for everyone. So before you start your investment it is important to pen down your goals along with the amount needed for that goal. You can learn more about this on this article here - Goal based investment
Goal Tenure - Once your objective is in place, you need to calculate the time required to achieve that goal. It will also help you to choose the right investment for you. Simply put - short term goals - invest in debt ; long term goals - invest in a mix of debt & equity as per risk profile.
Risk Profile - Now that you know the amount you need and when you need it, the next step is to understand your risk profile i.e. how do you want to reach the amount that you need. You must understand how much risk you are comfortable taking to achieve your goals. A person with an aggressive risk profile has a higher risk taking capacity and can invest, say 80% of his savings, in equity whereas a conservative person would invest a lot less in equities. The idea is that you take only so much risk that allows you to sleep peacefully, invest consistently and have a smooth ride to achieving your goals. Know more about your risk profile and how it helps you invest better in this article - What is a risk profile? How to invest basis that?

Quantitative factors: Evaluating the Fund

1. Past Return Performance

Past performance of a Fund is a starting point of what to expect from investing in a fund. However, ensure that you do not look at this number in isolation.

Every mutual fund scheme has a benchmark against which it tracks and evaluates its performance. Check how the mutual fund scheme has performed compared to its benchmark. Has it been under-performing its benchmark or been able to beat the benchmark consistently?

You should then check the returns of the mutual fund in comparison to other funds in the same category. If you are choosing a Large cap fund, you must check how well your fund has performed in comparison to other large cap funds.

All this while you must bear in mind that there is no guarantee of the past performance of the fund being repeated in the future.

2. Risk Statistics

Risk is uncertainty and variability in returns. Returns are the result of managing the risk. Some of the statistics that will help you understand the risk your fund is taking to achieve the returns you just analyzed include:.

Standard Deviation: It measures the mutual funds’ investment risk and is indicative of the stability of returns of a portfolio. With this information, you can judge the range of returns your fund is likely to generate in the future. Higher the standard deviation of a fund, higher is the risk associated with the investment.
Beta: It measures volatility of the fund compared to its benchmark. If the beta of a scheme is more than 1, then the scheme is more volatile than its benchmark. If beta is less than 1, then the scheme is less volatile than the benchmark. Lower the beta, lower the risk associated with the fund.
Sharpe Ratio: Unlike the previous two measures, the Sharpe Ratio gives you the risk adjusted returns of a portfolio. If two funds have similar returns, the one with the higher standard deviation will have a lower Sharpe Ratio. A fund with a higher Sharpe Ratio is considered better than its peers as it is able to deliver higher risk adjusted returns.

3. AUM of the Fund

AUM is the total amount invested by that particular fund. It is the total market value of the assets that a mutual fund manages at a given point in time.

Only because a Fund has a large AUM, it does not mean it is a good Fund. You need to consider other factors as well. Having said that, avoid Mutual Fund Schemes that have a very small AUM as the returns from such schemes can be very volatile and subject to large movements on exit by large investors of that scheme.

4. Cost of the fund:

As with any business, running a mutual fund involves costs. This cost is called the Expense Ratio. If you have 2 identical funds w.r.t. to the above discussed parameters, then you choose the fund with the lower Expense Ratio. Check out our article to understand it more in detail

III. Qualitative factors: Fund Manager and Fund’s philosophy

The fund manager is the professional who takes the investment decisions for your money after you invest in a scheme. The fund manager plays a key role in how your investment performs, as he/she is the person to decide on which stocks or securities to invest and how to distribute the money for a particular mutual fund.

Obviously the Fund manager is not alone and he has a team helping him do the analysis and his decisions will be based on the Objectives of the particular Scheme and the overall Fund Management philosophy.

Apart from looking at the qualifications of the Fund Manager, you must look at his experience and how long he has been managing the Mutual Fund Scheme and the performance of the Fund under him. Longer his tenure with the fund with a consistent performance should give you confidence in selecting the Fund.

A strong Mutual Fund team, guided by well defined Investment Fund Philosophy will be a great aid to an experienced Fund Manager.

Wealth Café Advice:

These pointers will give you a headstart to start evaluating the various Mutual funds schemes and shortlist them. You need to regularly track these parameters of your invested Funds, track the Fund Managers and see how your Fund is performing vis-à-vis the market.

If your day to day job does not give you the time to keep a track of your funds, you can always consult an expert whoa will do this for you. If you want us to manage your investment, you can learn more about us at ria.wealthcafe.in and reach out to us.

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

Mutual Funds - 11/25/2021