Systematic Investment Plan (SIP) as we know it, has become the most favoured route of investments for not only the investors but also Financial Advisors in India. That is not surprising since they have so many advantages:
Become a Disciplined Investor
A SIP helps you to discipline yourself. You can commit a fixed amount each month to investments, and the amount gets invested at the pre determined date. This ensures that money does not lie in your savings account at a meagre 3.5% and there is no temptation to spend that amount as it is not there to spend.
Rupee Cost Averaging
Enormous sums of money have been lost by investors in a bid to time the market. But no one has been able to do it consistently. When experts have failed, the rookie investors will obviously not be able to gain much. It is a useless activity, even attempting to time the increasing volatile markets. SIPs ensure that a fixed amount is invested irrespective of the ups and downs in the market and hence the cost of acquisition of investments is averaged out.
The timeless principle is "Buy Low Sell High". However, investors tend to sell out when there is a fall in the markets due to panic. A rising market tempts them to enter the markets at high levels. SIPs help overcome this problem.
Bit by Bit, you can grow your fortune
Achieve your Financial Goals
Your future financial goals like buying a car, buying a house, a child's education can be converted into the required monthly SIPs. For example, if you need INR 6 lakhs after 4 years to purchase a car. Assuming that your investments earn 15% per annum, you will need to save INR 9,198 per month to achieve a corpus of INR 6 lakhs. By converting your goals into monthly investments, you can view the achievability of your goals clearly and this also motivates you to stay on track with your investments.
Compounding Benefits
The biggest advantage of regular long term investments, compounding benefits. The investments made continue to grow year on year and the invested profits participate in growth in future years.
Effortless Investments
Once initiated an SIP can go on for as long as you want it to run with no further intervention required from your side. With a simple instruction, the SIP can be stopped at anytime.
The convenience, returns and all the other benefits of SIPs have made SIPs the most preferred and the favoured form of investments. If you still have any questions, you can ask the same in the comment section below.
Annualized return and CAGR are not technically the same thing. They refer to the returns on various investment options computed on per annum basis. All long term investments multiply by your wealth by compounding.
Where investment has grown at different rates over a few years, CAGR is the formula used to define the number at which the investment has grown year on year.
Compounded Annual Growth Rate (CAGR) shows how much a person’s investment grew in one year. In other words, it is the average returns an investor earns on his investments after one year. The bank or the financial institution calculates this rate in terms of annual percentage.
How to calculate CAGR?
To calculate CAGR, you must know the following:
The investment made in the initial year (the year of investment)
Amount invested in the current year and
Tenure of investments
CAGR = [(End value/beginning value)^(1/year)] – 1
Example:
For example, you bought a stock for ₹100 in 2015. It appreciated by 25% to ₹125 in the year 2016 and further appreciated to ₹150 in the year 2017. Therefore, the appreciation in the rate from 2015 to 2017 was 20%.
If you want to know the growth rate of your investments for the complete period of time, use CAGR. If we put the above values in the formula, Compound Annual Growth Rate for your investment between 2015 and 2017 will be 14.47%.
Mutual Funds/Equity and CAGR
Return on any investment is discussed in terms of CAGR. Especially, in case of equity and mutual fund investments. When you invest in mutual funds, the return that is shown in CAS statements and your Dmat statements are in CAGR.
This is because the actual return % on mutual funds is dependent on the movement in the stock market which keeps changing. It never grows or falls at a fixed rate.
Hence, it could be possible that an investment in mutual fund grew at the rate of 20% in year 1, 30% in year 2, 10% in year 3. In such a case, it becomes very difficult to discuss the actual gains. This is when and why CAGR is used in market-related variable returns investments.
In our Article, how to set goals, we have discussed the expected returns on various asset classes, we are always talking about CAGR.
Wealth Cafe Note:
CAGR is an average rate. Hence, if a CAGR is of 15% of an investment made for 4 years. It could be possible that the first 3 years have 30% gains and the next 2 years lower gains.
The gains are not distributed evenly over the period of investments. One must stay invested for the right time based on the asset class to benefit the most.
CAGR is different from absolute returns and year-on-year gains.
There is a chance that two investments may reflect the same CAGR, with one being more lucrative than the other. This could be because the growth was faster in the initial year for one, while the growth happened in the last year for the other.
Income-tax on Long term gains made from mutual fund investments was introduced in the budget last year. It is very important to know how your mutual fund gains are taxed and report correct numbers in your returns.
3 Factors that determine the Mutual Fund Taxation
Your Residential Status-Resident or Non-Resident (NRI)
Any fund which invests 65% or more in equity is called as Equity Fund. For example, large-cap funds, multi-cap funds, small and mid-cap funds or equity-oriented balanced funds (where the equity exposure is 65% or more) are all called equity-oriented funds.
If the equity portion is less than that, then they are all treated as debt funds or non-equity funds. For example liquid funds, ultra-short term funds, short-term funds, income funds, gilt funds, debt-oriented balanced funds, gold funds, fund of funds or money market funds.
Holding periods of Investment–
The holding period for Equity and Debt Funds will be different for taxation purpose.
Equity
Debt
STCG
If the holding period is less than or equal to 12 months
If the holding period is less than or equal to 36 months
LTCG
If the holding period is more than 12 months
If the holding period is more than 36 months.
Mutual Fund Taxation FY 2018-19 -Capital Gain Tax Rates
Now that you have clarity on what is Short term capital gains (STCG) and Long term Capital gains (LTCG). Let us move further and understand the Capital Gain Taxation for mutual fund investors.
The biggest change from FY 2018-19 is the introduction of LTCG in Budget 2018. The table below will give you a brief of the same:
Note: Surcharge @ 15%, is applicable where the income of Individual/HUF unit holders exceeds Rs. 1 crore. Also, surcharge @10% to be levied in case of individual/ HUF unitholders where the income of such unitholders exceeds Rs.50 lakhs but does not exceed Rs.1 Cr. Further, Health and Education Cess @ 4% will continue to apply on the aggregate of tax and surcharge.
Where an individual/HUF total income (income from all sources) is less than the slab rate, then any income from long term or short term is a part of the slab rates.
Short Term Capital Gains on Equity Mutual funds/Equity Shares
Cost price of MF (10,000*100)
1 January 2018
10,00,000
Selling price (10,000*120)
31 March 2018
12,00,000
Gains
STCG
200,000
Tax payable (15%)
30,000
Note: There is no change in the STCG with the new amendment. STCG remains taxable as it always was. It is to be computed based on the equity or debt fund. There is no impact of 31 January 2018, cut off dates prices for STCG.
Long term Capital Gains on Equity Mutual funds
There is a cut-off date of 31 January 2018, which has been introduced for the purpose of computing LTCG. LTCG is to be computed in 2 parts:
Units purchased on or before 31 January 2018
Units purchased post 31 January 2018
Gains up to Rs. 1,00,000 is exempt while computing LTCG from equity-oriented mutual funds or shares.
Long term Capital gains on mutual funds purchased before 31 January 2018 and sold after 12 months.
There was a benefit introduced to investors by considering the cost on 31 January 2018 for the purpose of computing LTCG. However, this method can be a bit confusing so you may take expert advice. We have described the same below for your understanding:
The Cost to be considered :
Higher of Actual cost or (the formula amount)
The Formula Amount is Lower of
The highest price of the unit on 31 January 2018 from all recognized stock exchange.
Actual Selling Price
For Example:
Date of buying – 1 April 2017
Date of selling – 31 April 2018
Number of Units – 10,000
Price of MF on following Dates
Sr. No
Dates
Price
1
Date of buying (1 April 2017) – Actual Cost
100
2
31 January 2018 (highest price on cut-off date)
150
3
Date of selling ( 30 April 2018)
120
Step 1 – Calculate the Formula Amount i.e. Lower of (2) and (3) i.e. 120 (lower of 150 or 120)
Step 2 – Calculate the cost to be considered i.e. higher of (1) or Step 1 answer – 120 (higher of 100 0r 120)
Hence,
Cost price of MF (10,000*120)
12,00,000
Selling price (10,000*120)
12,00,000
Gains
Nil
LTCG (10%)
Nil
Things to Note:
Comparison of prices on 31 January 2018 is done to compute the considered cost price.
The highest price of the MF/share as on 31 January 2018 is to be considered for this calculation.
Final selling price is the lower of 31 January price or the price on the selling date.
Hence, this cost determination method may lead to nil gains, benefitting the investor.
The gains will not be Nil in all the cases.
This method will never lead to a long term capital loss for an individual/HUF.
Long term Capital Gains on mutual funds purchased after1 February 2018
No comparison of prices as on 31 January is required. However, the exemption limit of Rs. 1,00,000 is available.
Cost price of MF (10,000*100)
1 February 2018
10,00,000
Selling price (10,000*120)
10 February 2019
12,00,000
Gains
LTCG
200,000
LTCG (10%)
20,000
TAX – Savings Equity Mutual Funds
Equity Linked Savings Schemes or tax saving mutual funds are one of the most sort out for financial products under section 80 C of the Income-tax Act, 1961.
ELSS comes up with a lock-in period of 3 years. It means that once you invest in ELSS, you cannot redeem your units before the expiration of 3 years. You can claim a tax deduction of up to Rs 1.5 lakhs and save taxes up to Rs 45,000 by investing in ELSS.
Upon redemption after 3 years, the long-term capital gains (LTCG) up to Rs 1 lakh are tax-free in your hands. LTCG in excess of Rs 1 lakh is taxed at the rate of 10% without the benefit.
You can read about various ways to save taxes under section 80 C in out Article - How to save tax?
Note: It is not compulsory to redeem ELSS mutual funds after 3 years. You can stay invested for a longer duration. To maintain the 80C benefit, you must stay invested for 3 years.
Mutual Fund Taxation FY 2018-19 – Dividend Distribution Tax (DDT)
There are few investors who opt for dividend option in mutual funds. Hence, let us see the taxation on the dividend of such funds. Earlier there was no DDT for equity investors. However, from the Budget 2018, DDT @10% will be applicable to equity investors also.
Base Tax Rate
Surcharge and Cess
Total Tax
Equity Oriented Schemes
Nil
Nil
Nil
Debt Oriented Schemes
Nil
Nil
Nil
Tax Payable by Mutual Fund Companies
Equity Oriented Schemes
10%
12% SC + 4% cess
11.648%
Money Market/Liquid Schemes/debt funds
25%
12% SC + 4% cess
29.12%
Infrastructure Debt Fund
25%
12% SC + 4% cess
29.12%
Note: In spite of the 10% long term tax now payable on mutual fund investments. It is a very good form of investments and the gains made are far more to compensate the taxes to be payable on the Long term. However, it is advisable to get your returns working reviewed by an expert where you have a lot of equity/ mutual funds gains in a particular FY.
In spite of being a financial planner and helping people invest and understand investments, it took me a long time to convince my husband to stop paying his endowment plan and invest the equal amount in the term-insurance and good equity oriented mutual fund.
It is just not him, 9 out of 10 people own an endowment insurance plan rather than a term insurance plan. The only reason for the same is to get their invested money in return.
Further, even after knowing that the endowment plan is not a wise investment choice, they are not convinced to surrender the insurance policy because they do not want to bear the loss on surrender.
We have tried to make your decision of switching much easier by calculating the actual loss that you might incur on surrendering the insurance policy versus the benefit of investing the premium amounts in the mutual funds.
To make it easier for you, I have tabulated below the gains that one would receive in both the scenarios to help you take a smart decision.
Scenario 1 – You continue to invest in the endowment plans such as Jeevan Labh or Jeevan Anand from LIC. (this is purely for an example purpose)
Total Premium over 35
8,40,700
Maturity value after 35 years
12,20,000
Total Gains from Insurance
3,79,300
CAGR
1.1%
Scenario 2 – You withdraw the insurance premium amount and invest the same into mutual funds. You would also incur an additional cost of buying a term Insurance which would give you a cover of 1 Crore for INR 1200 per month.
We have attached the excel sheet here for your own calculation. Just change the numbers in the boxes highlighted in pink, the sheet would compute the gains value and CAGR in each scenario. The same shall help you take a decision of whether you should stay invested in an endowment plan or move out your money and invest in an equity mutual fund.
These decisions are very case specific and factors such as risk-taking ability play a huge rule in deciding the movement. Never forget the following base rules before making the switch:
Understand your risk taking capacity.
An equity mutual fund is very volatile in short-term, investments in them are made from a long-term goal of 10+ years for the best results.
Where you cannot bear the risk, it is best to consult your financial advisor, who shall guide you in the same.
This transition is easier and profitable in the first few years of insurance premium has been paid. If you plan to move after 10-12 years of paying insurance premium it will generally not be profitable. The premium amount lost on surrendering the policy would be higher as compared to what you can receive in the balance tenure in mutual fund investments.
Please note the assumptions and explanations provided in the excel sheet for the computation of gain numbers and do your analysis accordingly.
Setting up a goal is something that no one does these days. I am asking you all to set a financial goal.
Every time I ask someone – Why are you investing? What is the purpose of your investment? 90% people will answer to grow my surplus money.
I have money lying in my bank account. I am just spending too much. I thought it was time to start investing.
My next question is ‘for what do you want to grow your money?’ Their answer is to become rich or help in a financial need or to travel. Travel is a more focused goal but becoming rich? Isn’t everyone working to become richer than what they are today?
In cases, where your goal is more focused and clear, you will be in a better position to achieve it than your investments where it is not.
When you know where you are going, you are halfway there.
I know it is extremely difficult to sit with a pen and paper and jot down your financial goals. However, the difficulty of the process does not reduce the importance of the same.
I have listed below a step by step process of identifying your goals, requirements, money that you need and the products into which you must invest to achieve your goals.
What do you want to achieve in life?
I am sure you have been asked this question by various people ‘What do you want to be when you grow up? Where do you see yourself in 5 years? What do you want to do in life?’ These are all your various goals that people want to know.
What are the things that require money to be achieved – i.e. financial goals?
Yes. All goals need money but all goals are not financial goals. Wanting a promotion at work, Best in your field, learn a new hobby or activity are all personal and professional goals which does not require too much investment or any investment of money from your end.
Owning a house, traveling to Europe, buying that car, your child’s post-graduation are some examples of goals which require a huge investment of money from your end and are called financial goals.
Hence, make a list of all your goals and from that highlight your financial goals.
Prioritise your goals - difference between Need and Wants?
It is very important to prioritise your goals based on its importance and requirement.
Needs are such things that you cannot do without and cannot be canceled, such as your child’s education or your first house.
Wants are things which you desire but can do without them such as a vacation, your second home etc.
Segregating your goals into needs and wants will help you prioritise them better. All the needs can them be numbered based on their importance followed by your wants.
How much money do I need today to achieve these goals?
Once you have made an entire list of your goals and sequenced them, you must identify what is the cost of achieving those goals. For example, if your goal is to buy a car, you must identify which car you want and how much would it cost. 'I want to buy a car like I20 and it would cost me 7 lakhs INR today' - this a well-defined financial goal.
Where you are estimating the cost of goal because you do not have an exact basis to calculate it, always consider the amount on the higher side.
By when should I achieve these goals?
The fact that it is a goal, it means it is futuristic and you do not have sufficient means to achieve it today. Hence, you must identify and apportion a realistic timeline towards your goal.
For example, I want to buy a car in next 2 years.
Goals less than 5 years: Short-term goals
Goals between 5 years to 10 years: medium-term goals
Goals more than 10 years: long-term goals
Adjust the Inflation
Given that goals are a futuristic, the current cost that we have associated to our goals will obviously increase in the future because of inflation. Identify the inflation rate towards your goal. The inflation rate is not the same for all types of goals; it varies depending upon the market conditions and the goal.
After knowing the inflation rate and the current cost, you will be able to compute the future value of your goal.
It is very important to identify the correct inflation rate. If you take a lower inflation rate your goal will cost you more than what you estimate and if you take a higher inflation rate, the future cost may scare or reduce your confidence to be able to achieve the goal.
Asset allocation based on the goal, cost, and tenure
Once you know your goal and its value, it is time to identify the investment products.
The tenure of your goals will help you to identify what asset class you must invest in and in what ratio.
The term is less than 5 years – 100% Debt
The term is 5 years to 10 years – 40% Debt 60% Equity
The term is more than 10 years – 30% Debt 70% Equity
This is a very general method of asset allocation. It may vary depending on your risk taking capacity and ability. Hence, it is important to analyze the same for oneself.
Portfolio Return Expectations
Return expectation from each class of the asset is as follows:
Equity: 12%
Debt: 8%
You will have to invest money in your goals based on the tenure and asset allocation. Each goal will not have one investment but may consist of many investments some in equity and others in debt. Hence, it is important to compute the return expectations for the entire portfolio, to be able to compute the exact amount you must invest to achieve your goals.
For example, my goal of buying a car is a mid-term goal, my asset allocation will be 40:60.
My portfolio return will be (40% * 8%) + (60% *12%) = 11.2%
How much money to invest?
This is the most crucial part, the entire computation of the above working will lead to identifying how much money you need to invest to achieve your goals.
There are various ways of investing but it is better to do it in a systematic manner. You can invest as a monthly fixed investment amount or invest annually with a fixed percentage of investment increasing per annum.
SIP - 7900 per month invested for 7 years will give you a return of 10,14,000 @11.2 %.
Lumpsum-
This method can be a bit complicated when followed step by step especially the last step of computing the actual amount that one needs to invest to achieve their respective goals. However, it is the most defined way of achieving your goals. There are many software used by us - financial advisors where the software does the same calculation for us. When you will sit with an honest financial advisor, the first thing that they will ask you is to define the goal. There is no plan without a goal and hence, such a working is extremely important for your financial planning.
Switching of mutual fund schemes means a change from a direct plan to a regular plan, a growth plan to a dividend plan in the same fund. Switching of mutual fund means to change the mutual fund option. There is this concept of buying and selling, switching makes this change in the option simpler. It is important to know the cost & process associated with it and then take an informed decision.
It is important to note that one can switch from regular to direct plan but vice-versa is not permitted. However, growth to dividend and vice versa can be done.
We have discussed on what is the process to switch between direct to regular plan or a growth plan to dividend plan.
How to switch?
If you are registered for online mutual fund transaction with individual AMCs –
Login to your mutual fund account. The account can be either online transaction facility provided by individual mutual fund house or through direct online mutual fund platforms provided by CAMS, KARVY, MF Utility etc.
Go to transaction page which allows you to purchase/switch/redeem fund. Choose the switch option and select from the ‘switch from’ drop-down the fund name you want to switch.
Select the same fund name in the ‘switch to’ option and make sure the fund name has ‘Direct Plan’ written at the suffix.
Re-login after four days to check if the switched investments have ‘Direct Plan’ as suffix.
If you don’t want online access
Visit the mutual fund office.
Ask for common transaction - Switch form.
Fill in the required details with folio no. and the right fund name.
Sign and submit the same.
You will receive an account statement to your registered email id after the switch is processed.
If you are registered through broker/ distributor /demat form
The switch to direct fund won’t be possible if investor has transacted from online platforms such as ICICI Direct, Funds India, Birla – Myuniverse etc. or held mutual fund in demat form. One needs to activate online transaction at individual AMCs OR process it offline through forms. Both the ways are explained above.
Switching between mutual funds can get you gains if done properly otherwise the costs are too high to opt for the same.
The cost of Switching Funds
Even though the fund value is switched to the same fund, such transaction (change from regular to direct) is considered as selling of old investment and buying new ones and would be charged accordingly. Two main costs involved are to be considered while switching of mutual funds.
a) Exit load – Exit load is the charge of redeeming the mutual fund prior to the ideal fund investment horizon. For equity-oriented funds, this is typically charged as 1 percent of the redemption value if redeemed before one year of investment and no exit load thereafter. For debt oriented funds, the exit load ranges from 0-2 percent and depend on the type of fund. Thus, to avoid such charges, one must ensure that the fund has no exit load or hold on to the fund till there is no applicable exit load.
b) Taxation – Switching funds will have tax implications which are as per regular capital gain taxation. With the change in tax laws, for equity oriented mutual funds, now after 1 year, long term capital gains tax rate of 10% will be levied on the gain amounts more than INR 1 lakh and if done prior, the gains will be taxed at 15 percent or as per slab rates.
In case of debt funds, short-term gains i.e. of less than three years holding period will be taxed according to the tax slab and if switched after three years of holding, the gains will be taxed at 20 percent with indexation benefit.
The cost associated with switching funds would also remain same in case of any kind of switching.
When to switch?
The switch should be made only when you are looking at long term investments (investing spanning for more than 7 years). The cost associated with the switch is not worthy for short term investments.
You must only go for a direct mutual fund option when you are sure that you would be able to manage your portfolio and your investments. Growth or dividend option depends on your requirements, where you need some money on regular intervals you may opt for dividend option, otherwise, growth is always preferable option.
A few points to note
In case an investor wishes to switch current SIP investment in to a direct plan, the investor needs to stop the SIP and restart it in a direct fund. For SIP do not go for switching.
It is recommended that the accumulated amount should be switched only if there is no exit load or tax involved (switch upto gains of 1 lakh each year). Do your cost benefit analysis before taking that decision.
Investor can verify if fund has been switched to direct plan/growth plan/ dividend plan once the new account statement has the terms written as a suffix to the fund name or other name into which it is made.
Also, it is important to communicate with your advisor if you have a considerable investment in your long-term portfolio. As discussed many times, a genuine financial advisor will surely promote and help you with the process of switching to direct plan if he/she places client’s interests first.
When my cousin, Rahul started investing around 5 years ago, he heard of mutual fund (MF) folio for the first time. The MF folio number is the unique code allocated for investments in MF which can be used as a reference for future investments too. However, he did not pay much attention to this and over the past 5 years, he now has investments in around 5 funds with 17 different folio numbers.
This was because, in the case of same AMC, he had a debt fund under one folio, SIP in second, equity in third, fourth from one bank account then another from another. This led to huge mess in his holdings and its management. To avoid this mess, I advised him to consolidate his MF Folio.
What is consolidation of MF folio numbers?
While making investments in Mutual Funds, one may find that one has numerous folio numbers across Funds. At times investors forget what they hold and face difficulties when changes have to be made in folios or at the year-end while filing returns. It would be worthwhile for investors to take stock of their holdings, check if there are numerous folios in the same fund and get the same consolidated into one single folio number for the Fund.
Mutual Funds and Registrars have given investors the option to consolidate all their folios in the same Mutual Fund into one single folio. Consolidation is the merger of two or more folios into one single folio.Requirements for consolidation of MF folios
Basically the below details should be uniform in all the folios:
All Holders' names - should be in the same order in all folios
Address
Bank Details
Tax Status of the Investor
Holding nature - Joint or either or survivor
Nominee registered in the folios
Dividend option of the same scheme should be same i.e. either Re-invest or Payout
If the above details are the same in your folios, the same can be consolidated into one single folio called the 'Target folio'. Some Mutual Funds may have other guidelines and investors may contact the Mutual Fund or Registrar to get more information on these details.
How is the consolidation confirmed to you?
A Statement of Account of the consolidated (target) folio will be sent to investors along with covering letter confirming the processing of the request.
If the folios are consolidated into one, will a statement reflect all transactions for all schemes of the folios?
Yes! The statement of the 'Target' folio will contain all the details of all the transactions of schemes in all your previous folios. If you wish to make a transaction in the same Mutual Fund in future, please mention the folio number in future transaction slips and any new investment will be created in the same folio.
How to consolidate MF Folios? The Process
There is no standard format of consolidation of MF folios. You can use the facility available on the CAMs website for consolidation of 2 MF.
Point to note:
The name appears exactly the same in all folios
The Target folio’s PAN, bank details and addresses will be considered
If you want to update the same- give an application along with consolidation itself.
The form for consolidation of Mutual Fund Folio
The simplest answer to this question is that, more often than not, the banker is more interested in the product than he is interested in you.
To illustrate this better, we have discussed a few examples below:
Say you have been a customer of a particular bank from 2008 tillBelow is what you would have typically experienced over this period of time.
Your first job, 2010: Sir, along with your salary account, we are offering you a credit card, free of cost. There will be no annual charges and you can enjoy a credit limit of INR 50,000. Along with this we are offering you this "Investment product" which gives higher than market returns, especially for our customers. To make it easy for you, you can pay the yearly premium in 12 equal interest free installments using the credit card.
(With this, he introduces you to the world of credit cards plus has latched you on to an investment product mostly a ULIP product (link on ULIP article) without you properly understanding the product. What he doesn't tell you is the charges involved in delayed payments on the credit card, neither does he guide you as to how you can be a disciplined credit card user!)2008, with the markets soaring or currently when the markets are doing very well:
"Sir, XYZ Mutual Fund has come out with a New Fund Offer (NFO). The new Fund promises very good returns since they are focusing on the Infrastructure theme which will give very high returns over the next few years."
"Sir, ABC Mutual Fund has come out with a New Fund Offer (NFO). The new Fund promises very good returns since they have a "new strategy" where they will identify "superior growth" stocks and generate superior returns."
(What he doesn't tell you is the risks involved in investing in equities and that he is selling you a product which doesn't have any track record of good returns!)
Take an informed decision
Immediately after the 2008 crash: A period of silence from your banker. Obviously, he doesn't want to bring up the returns from the ULIPs and NFOs he sold to you earlier in the year!
2009, post ban of entry loads on MFs: Sir, this is a unique investment product. It not only gives you high returns by investing in Equities, it also gives you an insurance cover.
(What he doesn't tell you is that ULIPs hardly take care of your insurance requirements. Neither does he elaborate on the various charges on the ULIP products!)
2010, post reduction in commissions on ULIPs: Sir, you should invest in this product. If you invest INR 25,000 per year you will get INR 13,70,000 tax free after 25 years and also an insurance cover of INR 10,00,000.
(What he doesn't tell you is that the rate of return is a partly 6%!)
I guess many of you (irrespective of your age group!) will be able to relate to the above experience. It clearly demonstrates that your banker is more interested in selling the product that earns him the maximum returns with no consideration to what is the right product for you. He sees the immediate short term benefits for himself from the sales made to you.Why think like your banker and look at the short term?
Think long term. Hire a Financial Planner, pay him a fee to give you the right advice and invest in the right investment product. Over a period of time, the benefits from investing in the right financial product far exceed the fees you pay your Financial Planner. Again, think long term.
Educate yourself! It is very important in today's time, when there is a pool of information everywhere but no good data, learn and understand and take an informed decision, rather than just following someone blindly. It is your money, if you will not treat it right, why would a banker do that.
PS: There can be exceptions to the above kind of bankers. But, more often than not, the story is the same everywhere.
When investing in Mutual Funds, the investor is again spoilt for choices. Just like the numerable mutual fund schemes, the investor has the following routes to actually execute the investments.
Direct Investment: Investing in any Mutual Fund involves getting hold of the Common Application Form of the scheme one wants to invest in, filling it up and signing it and submitting it along with the cheque to the Investor Service Centre of the specific Mutual Fund. If the amount of investment exceeds Rs. 50,000 in a year, then it is mandatory for the investor to first get his KYC (Know your customer) done.
Whatever route you may take, you must invest
Your Advisor: The most obvious choice is to invest through your Financial advisor. As he advises you on the investment choices, most Advisors also facilitate the execution of the investments. It saves you the work of doing the running around.
A Mutual Fund Agent/Distributor: Just like an insurance agent, a Mutual Fund agent will help you make the investments. Post the banishing of entry loads on Mutual Funds(the 2.25% entry load), an agent may charge you a fee for facilitating the transaction. He may also double as an advisor.
Your Bank: If you are a Do-It-Yourself investor, then investing through your bank is a good option. Banks like HDFC bank and ICICI bank offer the facility to do the investments online with no paper work involved as against the conventional route.
Mutual Fund Websites: If your bank doesn't offer you online facility, you can choose to invest through the website of the Mutual Funds directly. Payment can be made online through Netbanking facility offered by the Mutual Funds. However, you needs to remember a separate password for each Mutual Fund you want to transact in.
Third party Websites: The best option for a Do-It-Yourself investor is to purchase mutual funds through the online route provided by some Mutual Fund specialist companies in India. Two of them are FundsIndia.com and fundsupermart.co.in. Both do not charge any fee for opening an online account with them. Even Paytm and other apps have now started mutual funds investments.
The Stock Exchanges: From December, 2009 Stock exchanges in India have started offering the facility to transact in Mutual Funds through their brokers and sub-brokers. This has widened the reach of the Mutual Funds network. However, this route has not been successful because of the brokerage cost and the conflict between the brokers' interest in frequent trading versus Mutual Funds being a long-term investment tool.
At the end of the day you, as an Investor, will choose the route that offers you good service and value for money.
My interactions with a cross section of investors has thrown up weird reasons for not investing and equally strange reasons for investing one's money. Why I term them as weird is because there is no reasonable logic for the same.
REASONS FOR NOT INVESTING
Lack of time!
Many people have all their savings lying in the bank account earning a meagre 3.5% only because they do not have the time to look at their Financial matters.
Lack of Understanding!
There are others who decide not to invest because they do not understand the various investment products. For them Investments mean Fixed Deposit. Major chunk of the individuals fall under this category.
Too many Investment Options!
Some are too perplexed with the various investments options available that they decide not to go through the Investment process at all. Thanks to inflation, the money keeps diminishing in the Savings bank account.
Why not take the Helping hand of an Advisor...
Don't want to pay Financial Advice Fees!
Many investors do a hit and trial, ask friends, search around for information and gather some details. This category makes an effort to invest, which is insufficient. But they are not ready to hire a Financial Advisor. Reason being, we in India are never used to paying fees for Financial Advice and want status quo to remain.
Investments is a specialised field and over a period of time you will realise that the growth in your investments far exceed the fees you pay to your Financial Advisor.
REASONS FOR INVESTING
The Agent was a Friend or a Relative!
I rank this THE MOST WEIRD REASON for investing. Whether the agent is a relative or a friend, Do you earn money for yourself or so that the agent can fill his pockets at your cost? Many people invest without looking at the the suitablility of the investment, just to please the relative/friend agent.
Tax Saving!
While this is the least controversial reason for investing, in India it has become the most important one. Most people invest money only so that they can save taxes. Instead of tax saving being taken into account in the whole investments process, the entire investment process happens to save tax. That way the individual saves tax, but loses out on appropriate returns on his investments.
You have worked hard to earn your money; it’s time to make your money work hard for you.
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WCafe Financial Services Pvt Ltd (formerly known as Wealth Cafe Financial Services Pvt Ltd) is a SEBI registered Authorised Person (sub broker) of Sharekhan Limited with NSE Regn AP2069583763 and BSE Regn AP01074801170742.
