Investment – Page 6

May 1, 2023

4 things investing is, and is not

Investing is NOT Hectic. Investing is calm and measured.

Today you can check the value of your investments on a minute-by-minute basis if you want. But just because you can doesn’t mean you should. Investors who trade more have lower returns, as Brad M. Barber and Terrance Odean demonstrated years ago. And checking your portfolio more frequently will inevitably lead you to trade more.

Doing nothing and sticking to selected funds for the long term can be a significant source of alpha in the long run. Of course, this requires something that many investors find very difficult to implement: patience and discipline.

Resisting that urge to adjust your portfolio becomes particularly difficult when you’re faced with losses. Loss aversion means you suffer losses more than you enjoy gains. And what’s still the best way to avoid losses? Don’t look at your portfolio.

Assume an equity portfolio with a 10% annual return and volatility of 15%. The probability of a positive return over any given year is 93%. As a result, an investor who evaluates the portfolio once a year will experience a loss once every 10 years or so. If the same portfolio is evaluated quarterly, a loss will occur about once every four quarters, or once a year. And if that portfolio is evaluated daily, roughly 120 days a year will register losses.

It takes superhuman discipline not to change a portfolio when you are confronted with losses 120 times a year. But the best returns in the long run are achieved by adhering to a well-diversified investment strategy that lets you reap the benefits of the different risk premia available to long-term investors.

To stay calm and measured, you need to turn off the noise and look at performance only sporadically, and avoid the temptation to tinker too often with your portfolio.

Investing is NOT precise. Investing is rough and dirty.

Investing isn’t watchmaking either. As an investor or portfolio manager, you cannot precisely manipulate the mechanics of the market the way a watchmaker can the mechanics of a wristwatch. If a stock or a bond has a portfolio weight of less than 2% or an active weight of less than 2% compared to the benchmark, it is almost guaranteed that the effect on the overall portfolio will not be meaningful in any practical sense.

And now think about the time spent analyzing the details of stocks that will end up with an allocation of 2% or less in the portfolio. Each of these details has a miniscule influence on the overall stock performance, and the overall stock performance has a miniscule influence on the overall portfolio.

Just because you can calculate risk exposures to the second decimal place and adjust portfolio positions to the basis point doesn’t mean you should. Fighting for every basis point is best left to money market fund or government bond fund managers who have to because of current central bank policies.

If you work in the equity space, across asset classes, or in any asset that has some volatility, always remember that even the best model can only explain less than 50% of the variation in returns when applied out of sample — and out-of-sample tests are the only ones that count.

What does this mean? Over 50% of your returns will be noise. And that noise will inevitably drown out any benefits accrued from fine-tuning a model or investment portfolio.

Investing is NOT rational. Investing is emotional.

The financial industry is incredibly innovative — mostly when it comes to reinventing the wheel. For most investors, the simple and transparent solution will do just fine most of the time. But every once in a while an innovation comes along that benefits investors as a class. Just think: Where would we be without the limited liability company, the stock exchange, diversification, the mutual fund, the index fund, options, or futures?

Thanks to all of these inventions, investing has become cheaper, risk management more effective, markets more liquid, and access to investments more open. Ultimately, financial markets are among the most democratic institutions in the world today.

But very often financial innovation is a recipe for disaster. Investing may be rational, but money is emotional, and when risks — or opportunities — materialize, emotions take over and investors make crucial mistakes.

I have made it a rule to recommend only those investments that I have experienced myself. If a new innovation comes along, I tend to add it to my own portfolio with a little bit of money just to know what it’s like to live with it. Experiencing a new innovation firsthand will elicit the same emotions in me as it will in my clients. And only then can I judge if the investment is appropriate for a specific investor.

Emotions cannot be imagined. As a portfolio manager or adviser, you have to experience them to improve your recommendations and decisions. Research shows that fund managers who invest much of their personal wealth in their mutual funds generally outperform. Similarly, advisers who eat what they cook tend to cook better.

Investing is NOT entertaining. Investment is boring.

Is there a television on nearby turned to CNBC, Bloomberg TV, or any other financial news channel? If so, please get up and switch it off.

Let me explain why you shouldn’t watch what I call “Bubble TV.”

The people working at Bubble TV and their counterparts at financial newspapers, investment newsletters, etc., are not in the business of providing good advice. They are in the business of selling airtime, newspapers, and newsletters. And the best way to attract attention is to appeal to the emotions and instincts of their viewers and readers.

“If it bleeds, it leads” is an old saying in the news business. Spectacular earnings surprises and cratering stock markets generate more viewers and readers than stories about meeting earnings expectations and stock markets grinding their way up.

“Experts” who want to be mainstays on Bubble TV have to entertain. And it is much easier to accomplish that by stoking people’s fears of a crash or their desire to get in early on the next superstar investment. As a result, Bubble TV is full of “news alerts,” “breaking news,” and pundits predicting imminent doom or eternal bliss — often both at the same time.

TV experts make bad investment advisers. So keep your TV switched off and focus on what really matters in investing: having a thorough understanding of each investment and how they interact in a diversified portfolio.

Source – Morningstar

April 26, 2023

Why I will still continue to invest in certain categories of debt funds

The Finance Bill, 2023, with 64 official amendments, was approved by the Lok Sabha without discussion on 24 March. The key amendment that will affect all fixed income investors is about debt mutual funds. These funds have been stripped of the long-term tax benefit if they invest less than 35% of their assets in equities. Such mutual funds will attract short-term capital gains tax.

I would still invest in target maturity funds even after 31 March because fixed deposits (FDs) don’t give me these flexibilities. Here are my three simple reasons.

If I were to decipher the key amendment in simple words, all the gains will now be taxed as income and you will have to pay income tax. This is a big jolt, especially for debt investors.

There is a chatter that a few categories of debt funds, especially the recently introduced and hugely successful target maturity funds, will not attract investors now as they will move to FDs. Few will but I will still look at investing in them for these reasons:

Higher returns if yields come down

The data on 10 years government security yield from 1998 points out that yield mostly moves in a tight band of 5.5%-7.5%. In fact, over 80% of the time, it’s between 7%- 8.5%. The bond price is inversely co-related to yields. This means if the yields go down, the bond prices go up and if the yields go up, then bond prices go down potentially leading to capital losses too.

Our view is the yields offered by government securities are near their high. So, if I capitalize on higher debt yields and the yields fall, I can make higher returns than just the expected regular yields.

The yields have fallen from high before too and happened in 2008, 2014, and 2019. The total returns from debt funds were close to double the returns of the yield.

Deferral of tax

Investing in target maturity funds that have maturities matching my retirement age or post-retirement age is a smart way of reducing the tax impact. As per the current law, one must pay income tax on accrued interest income out of the investments made in FDs.

Many of you will fall in the 30% tax bracket and this would mean low post-tax returns. My deferral of tax point was more to do with my income levels. If I am, let’s say 50, and plan to retire at 58, where I would have no income, I would invest in debt funds as the redemption will come to me as an income only after I retire thereby helping me reduce my tax liability. Here I pay taxes at much lower rates than what I would have paid during my prime working years leading to higher post-tax yields.

Longer duration

Many banks offer attractive FDs rates only for a maximum period of five years. I also have seen the pattern where the longer the duration of deposits, the lower the rates. For example, the difference in rates between a 1-year FD and a 5-year FD is over 25 basis points. One basis point is one-hundredth of a percentage point.

In the case of a few target maturity funds, the holding duration can go up to 15 years holding too. I think India’s interest rates currently are high enough and hence I would like to lock it in for longer years.

The final point which is applicable to all asset classes that have been forgotten in the last 4-5 days is the fact that the investors can smartly avail the benefits of setting off.

Set off is an option where investors can use the benefits of any losses that they carry to be adjusted against the gains made during the same or different financial year.

While it is mandatory that short-term gains can be set off against short-term losses, for long-term gains both short- and long-term losses can be set off. This can be a big reason for investors to invest in debt mutual funds if they carry some short-term losses or create during the years of investment to adjust later. The losses can be carried forward for seven years. So, the immediate worry of debt mutual funds seeing huge outflows is just a mere exaggeration. Now it’s a level playing field, and this augurs well for the industry and especially target maturity funds.

Source: Livemint

April 19, 2023

6 money lessons Indian Premier League can teach us

If cricket is a religion in India, the Indian Premier League (IPL) is surely its Kumbh mela or Maha Kumbh. Millions of people in India and beyond will watch the cricket carnival that begins March 31.

Lots of talent to watch and cheer for; many current players and many more emerging cricketers who hope to crack the tournament and make it to the national team.

But what is in IPL to do with personal finance? There’s much in common; in fact here’s what IPL can teach us all about how we should manage our money.

1. Past success is past

Mumbai Indians, the winners of IPL 2021, did not qualify for the playoffs of 2022. Three-time champions Chennai Super Kings, have not played the final for two consecutive seasons.

What does this suggest? The fact that past performances count for nothing in IPL. It’s the same in personal finance. Many investment options may have performed well in the past. But that doesn’t necessarily mean they will perform as well in the future.

2. The best cut out the noise

There is a lot of glamour involved in IPL. It’s all about fame, money, endorsements, media, fans, cheerleaders and so much more.

A new player may be overwhelmed by all the hype. But have you noticed how the best players keep their cool and go about their job quietly and efficiently? The best players, often, perform by cutting out the noise around them.

That’s what wise investors do with their money. Often, we are overwhelmed by all the advice, tips and suggestions from our parents, friends, colleagues and the social media. For instance, our parents may recommend the age-old life insurance policy they’ve been investing in for generations to save tax. Never mind if such policies yield returns of only up to 4-5 percent. Or tons of money-making advice about the next best stock to buy or tips doled by social media influencers.

Turning a deaf ear to such noise and understanding our needs is important to achieve our goals.

3. Wait until the last bowl is bowled

IPL is a classic example of matches that go down to the wire. If there is one truth that cricket lovers have learned, it is that the game goes on until the last ball is bowled. IPL has its fair share of last-ball climaxes or even super overs where one over decides the fate of the match.

Similarly, in personal finance, it’s never too late to start. Just because you didn’t start investing in the first 10 years of your working life doesn’t mean all is lost. Just because your salary is low doesn’t mean you cannot build wealth.

Never give up on your financial planning until your objectives are achieved. Sticking to your plan and consistently implmenting it until you reach your destination is the only way to success.

4. Hard work pays off

Two years ago, very few people knew players like Ruturaj Gaikwad, Arshdeep Singh, Umran Malik and Rahul Tripathi. Today two of them have made it to the national team.

Every year, IPL introduces us to a new cricketing sensation who made it because of hard work, perseverance and patience. Be it IPL or personal finance, hard work is rewarded at some point of time.

Here’s a tip: If your salary is low, start a systematic investment plan with as little as Rs 500. Patient, regular and disciplined investing with small amounts to begin with can build a sizeable corpus; you’d be surprised to see how much money you’ve accumulated after a few years. Try it out.

5. Review your finances regularly

From winning the toss to setting your field and choosing the line-up, IPL is a game of strategy. Each match has two strategic time-outs wherein the captain and coaches combine to design a strategy — one at the beginning and one near the end.

In personal finance, with factors such as age, risk appetite, income source and dependents, each individuals needs to ascertain his or her needs and save and invest in different instruments.

Over a period of time and depending on personal milestones such as marriage and birth of a child, you will need to alter your strategy.

6. A good start is work half done

IPL being based on a T20 format, a good start to the game makes the win nearly certain. If it is batting and the batting team scores 200 runs without loss of any wicket or if it is bowling and if half of the batting team is sent to the pavilion within the first 10 overs, the spirit of the team soars and their supporters are jubilant.

Similarly, in personal finance, early financial planning not only ensures early achievement of your objectives but also results in greater returns.

We don’t know who will win this year’s IPL, but if you start saving early, plan your finances well and be disciplined, you will end up the winner in achieving your financial objectives.

Source: Moneycontrol

April 12, 2023

5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning

Do you wonder whether you need to make a financial plan with a financial planner to achieve your life goals? Some individuals believe that saving regularly through bank recurring deposits or investing in mutual funds through SIPs qualifies as financial planning. However, such ad hoc allocation of savings and investments is insufficient to accomplish your financial goals and may result in inefficient utilisation of financial resources. If you want to become wealthy or achieve various life goals such as purchasing a dream home, going on a foreign vacation, or funding a child’s higher education, solely relying on salary or business income may not be enough. This is where financial planning becomes valuable. With a financial plan, you can create a roadmap to fulfil all your financial goals, including building a contingency fund for unexpected expenses. This article elucidates why financial planning is necessary and why you should work with a financial planner for effective financial planning.

What is Financial Planning & Why it is Necessary?

Financial planning is a process that assesses your current and future financial situation, enabling you to systematically achieve all of your goals. This process includes creating a roadmap to cover all of your expenses; both anticipated and unforeseen. To achieve this, financial planning involves budgeting your expenses, setting S.M.A.R.T. goals, selecting the appropriate asset allocation, creating a retirement plan, and more.

Even if you have savings, you need to have a financial plan because inflation can significantly erode the value of your money over time. Inflation refers to a general increase in the prices of goods and services over a period, which can reduce the purchasing power of your savings. For instance, a chocolate bar that costs Rs. 100 today could cost Rs. 110 tomorrow, and the cost will continue to rise over time. A financial plan can help you combat inflation by developing a sound investment strategy.

Financial planning also involves setting and achieving specific life goals, such as retirement, children’s education and/or wedding, purchasing a house, buying a car, and family vacations. Your planner will assess your cash flow and quantify your goals, creating a plan to allocate your funds towards achieving them in a systematic manner. Finally, the plan will recommend suitable investments, which may also include tax-saving investments.

Why Do You Need a Financial Planner to Manage Your Finances?

Now that we know why financial planning is necessary to achieve your life goals and create wealth in the long term, the question arises, how to start financial planning? Well, if you have been reading our articles, you might have come across several articles we published that are about how you can start financial planning by yourself. However, the majority of investors either lack the required knowledge to make a such crucial financial decision or do not have sufficient time to do the intensive research necessary to make informed financial decisions.

By sticking to the fundamentals, you can achieve your life goals. You might assume that if this is true, then there is no need to hire a financial planner and that financial planning is just another task you can handle on your own. However, that’s not entirely true.

A competent and honest financial planner can play a crucial role in helping you reach your financial objectives sooner than expected. With their guidance, the financial planning process can become much easier and more manageable.

However, having a trustworthy financial planner who always meets high fiduciary standards is very important. They should handle your money with care and responsibility, just as they would handle their own personal finances. Their recommendations should be based on research, and their approach should be unbiased. Nevertheless, there is a fee associated with this service that you would need to pay.

In India, financial planners operate under one of three revenue models:

1. Pure commission model – Financial planners are compensated based on the commission they receive from the financial products in which you invest.

2. Pure fee-based model – Financial planners are compensated solely by the fees you pay for their advice and services. They do not earn any commissions on the financial products in which you invest.

3. Fee + Commission model – Financial planners are compensated by both the fees you pay for their advice and services, as well as the commissions they earn on the financial products in which you invest.

Here Are 5 Reasons Why You Should Work with a Financial Planner for Effective Financial Planning:

1. Managing finances can get increasingly complex:

With time, managing finances can become more complex, even without major life changes. It can become overwhelming to keep track of your income, investments, insurance policies, debts, etc. This is where a financial planner comes into the picture. A competent financial planner will aim at optimising your investment returns while reducing your investment risk.

Managing money can be like having a second job that you may not have the time or desire to handle on your own. If you do not have time to research and monitor your investment portfolio, you can hire a financial planner to do it for you. He/she will take care of the tedious work, and you can get involved when it is time to make decisions.

Furthermore, you might not feel comfortable making financial decisions due to the confusing nature of investing. A good financial advisor can support sound decision-making and help educate you on best practices for money management.

2. The one-size-fits-all approach does not work in financial management:

Personal finance advice is often presented in an oversimplified manner, especially by conventional agents and commission-based planners who give the same investment advice to each of their clients. However, you need to realise that a particular financial strategy or recommendation may not be suitable for everyone. This is because we all have our unique objectives, aspirations, and challenges that require personalised financial solutions. Additionally, after the emergence of COVID-19, there has been a lot of instability in the markets. With the abundance of financial information available, it is easy to react impulsively to the news and the fluctuations in the value of our investments. Unfortunately, this can lead to unfavourable outcomes. Engaging the services of a financial planner can help you manage your finances from the right perspective.

3. You will receive unbiased financial advice:

If a financial planner is charging a fee for creating a financial plan without any obligation for you to invest in it, the advice they provide will likely be impartial and unbiased. However, if an agent or advisor is offering a free financial plan, you may need to be wary. There may be underlying motives for this free service, such as a desire to earn commissions from recommending certain financial products. As a result, the recommendations provided may not align with your investment objectives and financial goals.

It is essential to understand that nothing comes for free, and a free financial plan may pose a risk to your financial well-being. It is possible that the planner offering this service is pushing unsuitable financial products that are in their interest to sell, resulting in a disadvantage for you.

To ensure that commission income does not influence the advice provided, it is advisable to choose a fee-based financial planner. This will guarantee that the recommendations made are solely in your best interest.

4. A financial planner will maintain a professional relationship:

Our emotions often influence how we handle our finances, thus, leading to unconscious biases. A financial planner can make informed decisions based on rationale and prioritise our financial well-being.

In addition, financial planners are experts in their field. They have the necessary qualifications to handle financial problems and unexpected situations. Financial planning goes beyond simply investing in a few products. It’s like a test match in cricket, where patience is key and finances must be managed for the long term. You need to navigate short-term volatility, economic downturns, and favourable periods to build your wealth. Working with a professional who can manage your assets under different circumstances and variables is the best approach.

Financial planners guide and support you in the journey towards building wealth and improving your financial health. They uphold strong ethical standards and professionalism, which helps to establish trust in a time when it can be difficult to trust others. When you work with a fee-based financial planner, you can ask important questions and they will be happy to answer to the best of their ability, always keeping your best interests in mind. This can be challenging to do with friends or relatives, and there is also no emotional bias when working with a financial planner.

5. You will need guidance even after investing your money:

It is important to remember that investing is only the beginning – it is crucial to evaluate whether your financial planner offers reliable and sensible support after the initial investment.

Typically, a financial guardian who is readily available and guides you throughout the process of achieving your life objectives with the necessary care and understanding is the most favourable choice.

To conclude:

Finding a competent, experienced, and trustworthy financial planner may seem like a difficult and nearly impossible task. However, it is not. You just need to be patient and willing to take responsibility in the financial planning process. Before hiring a financial planner, ask for references and verify their credentials. Ask relevant questions about how they plan to help you achieve your goals, question their recommendations, and ask for alternatives and backup plans in case their plan fails to meet your expectations.

Furthermore, it’s important to stay actively involved in the investment process. While it’s important to have confidence in your financial planner’s abilities, it’s crucial not to blindly trust them. Always stay within the realm of confidence and avoid crossing over into blind faith.

Source: Personalfn

April 8, 2023

Hybrid mutual funds can be the next big wave. But do they suit everyone?

A big outcome from the Finance Bill amendment on March 24 is that post-April 1, mutual fund schemes will be subject to three different types of taxation. On schemes that invest 35-65 percent in equities, you will now pay Short-Term Capital Gains (STCG) tax in line with your income tax rates; long-term capital gains (LTCG) will attract 20 percent tax with indexation.

To be sure, the Finance Bill has removed the capital gains tax and indexation benefits for debt funds that invest less than 35 percent in equity. In the third category of taxation, nothing changes for funds that invest at least 65 percent in equities.

For the Rs 40 trillion mutual fund industry struggling to come to terms with the latest tax shocker, this new category of taxation has changed little. The fact that hybrid funds were left untouched by the Finance Bill amendment actually opens new opportunities.

The question is: should you really switch to hybrid funds, if you’re affected by higher taxation on you debt fund investments?

MF industry officials and experts say that the 35-65 percent equity category, which largely makes up hybrid mutual fund schemes, would be under the spotlight.

Hybrid funds comprise six categories: Conservative Hybrid, Balanced Hybrid/Aggressive Hybrid, Balanced Advantage, Multi Asset Allocation, Arbitrage, and Equity Savings.

Hybrid schemes with total Assets Under Management (AUM) of Rs 4.87 trillion are the second-lowest open-ended mutual fund category after Solution Oriented Schemes. Compared to this, Growth/Equity Oriented Schemes commanded AUM of Rs 15.01 trillion as of February-end.

Dynamic Asset Allocation/Balanced Advantage funds, which are expected to benefit from the tax changes, are the most popular categories among the hybrid schemes with AUM of Rs 1.91 trillion.

A better alternative?

Experts say that with a slight upgrade in their risk profile, hybrid funds can offer a better alternative when it comes to generating returns, over and above fixed deposit rates.

In this category, equity allocation can move anywhere between 20 percent and 80 percent or even 0-100 percent depending on market conditions. Currently, 30 such funds are available in the market, but most are keeping their equity exposure in the range of 65-100 percent and debt in range of 0-35 percent.

Equity Savings is a neglected category among hybrid schemes with the lowest AUM of Rs 16,445 crore. But that could change soon.

“For retail investors, hybrid funds would make more sense. BAFs and Equity Savings may come in handy for retail investors as they can take debt allocation in a tax-efficient way,” said Niranjan Awasthi, Head of Products Marketing and Digital Business at Edelweiss Asset Management Company.

Equity Savings and Arbitrage Funds

In Equity Savings, minimum investment in equity is 65 percent and minimum investment in debt is 10 percent while arbitrage is also allowed.

In mutual funds, arbitrage is the simultaneous purchase and sale of a stock to take advantage of the price differential in the spot and futures markets. This helps in increasing the equity exposure in the scheme while avoiding a rise in the risk profile.

Experts say that Equity Savings have largely remained neglected as retail investors generally look at equity allocation in hybrid funds. Case in point, Conservative Hybrid, where equity allocation can stay between 10 percent and 25 percent, has a total AUM of just Rs 22,716 crore.

Kirtan Shah, founder of Credence Wealth Advisors LLP, believes that a lot of money will start flowing into Equity Savings.

“Asset management companies will start pushing Equity Savings as a category for fixed income kind of investments. These funds, in four or five years of history, have kept equity in the 20-30 percent range. If you look at all the other hybrids, the equity range is much higher,” he said.

Apart from Equity Savings, the expert also sees money starting to flow into Arbitrage Funds.

“A pure debt replacement will move to Arbitrage and Equity Savings. However, the problem is that in both these categories, if a lot of money starts flowing in, then automatically the spreads will reduce on the arbitrage. That is one big problem that can arise in the future. If we are anticipating that Arbitrage and Equity Savings will see a lot of flows, then the return expectations have to be slightly tempered,” Shah added.

Can hybrid replace debt?

Over the past few days, fund houses have gone on an overdrive suggesting that investors put as much money into debt funds as they can until March 31 to take advantage of lower taxation.

Many experts say that while some people may feel the urgency to shift out of debt mutual funds to save some taxes, they will realise eventually that debt funds can still outperform traditional FDs. There may just not be other credible options available in their risk profile.

Dhirendra Kumar, CEO, Value Research, said, “In terms of taxation, nothing changes for Liquid funds, Ultra-Short Term and Money Market Funds. Debt funds can give investors great convenience, and also a little better return. Plus, for a fixed income investor, equity is risky. In March 2020, the equity went down by around 30 percent in a few days, and that time people were running for cover and they hate equity for that.”

Experts are also of the opinion that investors shifting from debt to equity will risk having a complete change in their risk profile.

Swarup Mohanty, director and chief executive officer (CEO), Mirae Asset Investment Managers (India), does not like selling a hybrid fund to a debt fund investor. “That’s the worst thing that can happen.”

Edelweiss’ Awasthi added: “Specifically, for longer-tenured bond funds and Target-Maturity Funds, there will be times, even like now (high interest rate regimes), where funds which are closely comparable to a fixed deposit, would still do well.” When interest rates fall, bond prices rise; this benefits your debt funds.

What should mutual funds do?

According to Mohanty, the mutual fund industry used to talk about fixed deposits versus income funds in the early 2000s.

“Maybe we have to start from there now, now that the taxation is similar,” he said.

Deepak Chhabria, CEO of Axiom Financial Services, says that if the debt industry has to survive, it has to bring in alpha compared to other fixed-income products.

“In early 2000s, the return on say a long bond fund used to be around 1 percent higher than the corresponding deposit rate. With indexation and tax benefit, it used to be a decent 1.5-2 percent alpha. That alpha over a period disappeared because of the competitive pressure. The pitch has to change, there has to be an additional return and safety will have to come in too,” said Chhabria.

Another aspect debt mutual funds may look to work on is simplification of language so that they can make themselves understood to lay investors.

“The language that we speak; long debt, duration, CAGR (Compounded Annual Growth Rate), compared to a simple FD 8 percent interest is very complicated. We have had the benefit of taxation until now, but debt sales will continue as usual,” said Mohanty.

Source: Moneycontrol

April 1, 2023

Follow These 5Ps to Take Control of Your Finances in the New Financial Year 2023-24

It is critical to plan your finances and investments at the start of the fiscal year in order to avoid a last-minute scramble and to invest based on your needs and financial goals. Every year brings new challenges that we must overcome, learn from, and move forward. As a result, it is prudent to revisit our financial decisions from last year in light of our present financial status and market conditions. Learning from our mistakes in the past can help us make better financial decisions in the future.

Financial planning has evolved in recent years, and more people are recognising the importance of having a long-term financial plan. Today’s digitally-savvy generation prefers to manage their finances using digital platforms or apps. A one-stop solution that allows them to plan, manage, grow, and address their financial needs.

Financial planning plays a pivotal role in allocating funds to the best-suited investment vehicle to add value to your overall financial portfolio. The beginning of the new financial year 2023-24 is the perfect time to reflect on your financial practices or mistakes from the previous year 2023-22 and get started with smart financial planning.

Recently, on the occasion of Gudi Padwa, I met all my cousins. Rohit and Madhu were discussing ITR filing, their investments and how they are struggling with the finances due to last-minute hassle. While our youngest brother Rishi said, “All these financial planning swing like a bouncer over my head. I wish there were a simple concept or theory to understand this.”

To which Rohit replied, “These Gen Z’s want everything readymade and easily available at their fingertips. Rishi, the new financial year is approaching, and you must emphasise on financial planning rather than splurging on irrelevant gadgets online; the early you start the better it is.”

Rishi replied, “Yes, bhaiya, I too, intend to put my finances in place and have better control. But I don’t know where to start. The basic I understand about personal finance management is earning enough to manage one’s daily or monthly expenses and saving enough for the future.”

To which I responded, “Rishi, there is more to financial planning than simply saving from monthly expenses; however, it is one of the elements. The practice of financial planning should be considered as a scientific approach to achieve life’s milestones rather than seeing it as an ad hoc process only to save maximum tax at the end of the financial year. The goal of developing a financial plan is to understand your financial situation, prioritise your goals, and maintain stability even during challenging times.”

Let me help you understand financial planning with a unique approach. You need to follow these 5Ps to take control of your finances.

1. Planning

If you create a plan for any event in life, it is easier to manage; for instance, if you are going on a vacation, proper planning is required. Similarly, your personal finances require structured planning to stay in control and manageable. You can begin with 2 simple steps:

Step #1 – Goal Planning – You need to create S.M.A.R.T (Specific, Measurable, Achievable, Realistic, and Time-bound) goals. A good financial plan is guided by your financial goals. If you approach your financial planning from the standpoint of what your money can do for you, whether to buy a house or help you retire early, it will assist you in saving efficiently towards your goals.

Step #2 – Budgeting – Budgeting is an important aspect of financial planning; developing a budget helps you manage your cash flows, and you can cut back on non-discretionary costs to save more and meet your goals. An accurate picture of your finances is the key to creating a strong financial plan and can reveal ways to direct more to savings, investing, or debt pay-down. There are various budget planning apps available online that can assist you in prudent budgeting exercises.

2. Protection

A common goal that every individual holds is providing a secure financial future for our loved ones and protecting them from any financial challenges. You need to protect your financial worth, to maintain financial stability. An adequate insurance cover helps you do that and is thus considered a vital aspect of financial planning.

You have all seen the necessity of having life and health insurance during the pandemic. One must remember that as we age, the probability of getting insurance coverage at an affordable premium decreases. Therefore, if you already hold insurance coverage for life and health, take a close look at it, and enhance the coverage wherever needed. The best way to cover your life risk and provide financial security to your family in your absence is by getting appropriate health, term or life insurance.

Insurance has several aspects like protection, wealth generation, and a select few that offer the policyholder a combination of both. This is an essential element of your financial planning and should be of utmost importance to avoid having a dent in your savings due to unforeseen contingencies.

3. Provide

Many individuals are charged with the responsibility of managing finances and providing for household expenses and others. With this step of financial planning, you can ensure a better plan tailored for emergencies as well. A major component of financial planning is liquidity management to sustain unforeseen events.

You need to create a financial cushion or safety net to maintain your financial stability in times of emergencies. The future is uncertain; a sudden job loss or an unexpected medical emergency can shake up your finances considerably. Ideally, you need to keep an amount equal to 6-12 months of expenses, including loan EMIs, as a contingency fund. You can start small, and the money can be invested into liquid funds so that you can access the money quickly in case of an emergency.

4. Power

One of the benefits of taking control of your finances through financial planning is the sense of empowerment it brings to you. There are two aspects of financial planning that can strengthen your overall finances.

Investment Planning
Your finances are powerful once you indulge in prudent investment planning. Your savings are best utilised when they are invested in rewarding investment avenues like mutual funds. Starting investments at the beginning of the year through ELSS or SIP in the best suitable mutual funds is a convenient way for novice investors to start off.Do note you need to pick mutual fund investments that meet the risk-return expectations and, eventually, your investment objective. It is essential that you begin investing early so that you can take full advantage of the power of compounding, which has the potential to help multiply your returns exponentially over time. Investments in worthy mutual fund schemes will give you the power to beat the cost of inflation as well.Ideally, investors need to identify their financial goals and align their investments accordingly. I would recommend PersonalFN’s SMART Fund Explorer ; it is a tool that can help you plan your mutual fund investments smartly based on your risk profile to achieve your financial goals. It provides a list of the best suitable mutual fund schemes recommended by our research team that will help you reach your financial goals.

Debt Reduction
You may have debt that you created to fulfil various financial requirements; however, repaying your debt on time is crucial. You need to focus on clearing/paying off your debt burden to be in the pink of your financial health. Eliminating the debt burden gives you the power to have more disposable income to save and invest in rewarding avenues.You need to tackle a high interest debt that pulls out the major portion of your income, leaving you with a small amount to manage the rest of your financial needs. There are numerous approaches to dealing with high interest debt, including the well-known snowball method, which focuses on paying off your smaller bills first. The avalanche method, on the other hand, prioritises paying off your highest interest loans first. You should aim to maintain a debt-to-income ratio of below 40%.

5. Promote

To promote a financially secure life for yourself and your loved ones, you need to be financially literate. All the factors and processes of financial planning will only work for you if you are financially aware of how to implement them.

Financial literacy is the enhances your capability to use knowledge and skills to manage financial resources effectively for your financial wellbeing. Major financial decisions like opening suitable bank accounts, planning for retirement, paying off personal debt from loans or credit cards, and developing a strong investment portfolio for wealth creation are difficult to make when one lacks financial literacy.

Thus, it is vital to bolstering your financial knowledge, and I suggest you consider to enrol for PersonalFN’s latest special initiative, the “Certified Family Guardian,” that offers you an exclusive opportunity to learn the finer nuances of financial planning. Organised into eight modules with 24 extensive videos, the “Certified Family Guardian” will help you with all the relevant tools and learning modules needed to get better at money management.

To conclude…

Personal finance management is crucial for every person mainly to ensure that they have a comfortable present as well as a secure financial future. The beginning of the new year is a perfect time to reflect on the areas of improvement and get a head start on building strong financial health.

Source: Personalfn

March 22, 2023

How your mutual fund gains are taxed

Just like any other income, gains made on your investments are taxable and mutual funds are no exception. However, taxation policy can change depending on the type of mutual fund you hold. Similarly, tax consequences change depending on when you decide to sell your mutual fund.

But worry not because this article will help you understand the different tax implications of mutual fund investments.

Tax arises only when you book a profit
Unlike fixed deposits (FD), where the accrued interest is taxed every year, mutual fund gains are taxable only when they are realised, i.e., at the time of redemption. For example, if you invest in an FD for three years and earn Rs 5,000 interest every year, this amount is added to the taxable income of that year even if you do not realise the interest.

However, in case of mutual funds, if the value of your investment increases by Rs 15,000 by the end of the first year and you remain invested, you don’t have to pay any tax. Only when you redeem your mutual investment do you need to pay tax.

How tax liability is determined on mutual fund gains?
How much tax you need to pay on your mutual fund gains depends on three factors:

The type of fund you have invested in: From a taxation point of view, mutual funds can either be equity-oriented or non-equity-oriented.

Equity-oriented funds are those that invest at least 65 per cent of your money in equities. The others are termed as non-equity-oriented mutual funds.

The amount of time you have held on to your mutual fund: Your holding period can either be short-term or long-term. The duration to define this is different for equity-oriented mutual funds and non-equity mutual funds

Your tax slab: This is only applicable if you invest in a non-equity mutual fund. Tax slabs also apply to Income Distribution cum Capital Withdrawal (IDCW) plans of mutual funds too. But more on this later.

Tax implications on equity-oriented funds
If your holding period is more than a year, the gains are termed as long-term capital gains. In this case, gains up to Rs 1 lakh in a financial year are tax-free, but anything above that is subject to a 10 per cent tax.

If your holding period is less than a year, the gains are termed as short-term capital gains and are taxed at 15 per cent.

Tax implications on non-equity funds

If you invest in a non-equity mutual fund, and your holding period is less than three years, the gains are termed as short-term capital gains and are added to your income. They is taxed as per your income tax slab rate.

If your holding period is longer than three years, then the gains are termed as long-term capital gains and are taxable at 20 per cent after indexation.

The first-in-first-out principle
Another important thing you should know is that the redemption of mutual fund units is based on the first-in-first-out (FIFO) method. That is, the units that you bought first are assumed to be redeemed first.

For example, let’s say you bought 100 units of a non-equity fund in September 2017, and 150 units of the same fund again in September 2021. In total, you would have 250 units. Now suppose you wish to sell 120 units in August 2022, here is how your tax liability would look like. For the first 100 units, gains made will be considered as long-term as they were acquired in September 2017, i.e., more than three years ago. And the gains on the remaining 20 units will be treated as short-term as they were purchased less than a year back. So, keep this in mind while evaluating your tax liability.

Tax on income distributed by mutual funds
If you opt for the Income Distribution cum Capital Withdrawal plan (IDCW) of any mutual fund scheme, the fund house might give you some portion of the gains/capital from time to time. Such distributions are added to your total income and taxed as per your income tax slab rates.

Source: Valueresearchonline

March 20, 2023

Last Minute Tax Saving Investment Ideas for FY 2022-23

Benjamin Franklin famously said, ‘There are only two things certain in life, death and taxes.’ Despite death not being in our hands, we often worry about it but when it comes to taxes which are very much controllable, we tend to put in only last minute efforts. Every year, in the month of March, many of us hastily invest in various tax-saving schemes that offer 80C deduction without proper consideration, resulting in poor financial decisions. However, are 80C investments the only option for tax savings? Many taxpayers are unaware of options such as 80D, 80E, and others. By treating these investments as tools for building long-term wealth, taxpayers can benefit even more.

Here are some handy last-minute tax-saving investment tips that can help you reduce your tax liability. By taking advantage of these tips, you can simplify the investment process and potentially save yourself some money come tax season.

Using Section 80C for last minute investment planning

Section 80C of the Income Tax Act is one of the most popular widely explored options for tax saving investments. With a host of financial investments options ranging from PPF, EPF, ELSS, Life Insurance Policy premiums, Bank FDs, Post Office Schemes etc. There is some or the other investment option available for all types of investors. Investments up to Rs 1.5 lakh in one or more of these are exempt from tax. Here is a quick review of some of the best last minute investment options in Section 80C.

PPF: If you unsure about where to invest and don’t want to take risks for your investments, invest in PPF. PPF investments are backed by government and offer fixed interest rate each year. If you do not have a PPF account, you can open one online and if you have an account then you can just invest the remaining amount to utilize your 80C limit. However, the current rate of interest is low at 7.6% p.a.

ELSS: ELSS is one of the best investment options in the list of financial products as it provides you the opportunity to invest in markets and enjoy tax deductions for the same. If you are a salaried employee, a sizeable amount of your investments go into your EPF account and you can look at investing in ELSS to diversify your portfolio into equities. Even for non-salaried taxpayers, ELSS is the ideal option for equity investment as most of the investments in 80C are debt investments. Another advantage of ELSS is that it has the shortest lock-in period of 3 years. Among all investment options, ELSS mutual funds offer the lowest lock-in with almost the highest returns.

Life insurance policy: Having a life insurance policy is extremely essential and if you do not have insurance policy with adequate coverage then you should look at buying a good term insurance policy. One should have term insurance policy in the portfolio to protect family for uncertainties.

NPS: You should start your retirement planning as soon as you can and NPS can be a great investment avenue for the same. Your investments in NPS enjoy additional deduction of Rs 50,000 under Section 80 CCD(1b) thus taking the total limit of tax deductible u/s 80C income to Rs 2,00,000 for the financial year.

Unit Linked Insurance Plan (ULIP): A Unit Linked Insurance Plan (ULIP) is a financial product that combines both investment and insurance in one package. ULIPs offer the opportunity to build wealth while also providing life insurance coverage.

With a ULIP, a portion of the invested amount is allocated towards life insurance, while the remaining amount is invested in a mix of equities, debt, or a combination of both. This type of investment is suitable for long-term financial goals such as saving for your child’s college education, retirement, or other significant financial milestones.

ULIP premiums are eligible for a tax deduction under Section 80C of the Income Tax Act, up to a maximum of Rs. 1.5 lakh per year. Additionally, the returns earned on a ULIP policy are exempt from income tax under Section 10(10D) upon maturity.

Deduction on your Housing Loans: You can claim repayment of principal amount of your home under Section 80C upto Rs 1.5 lakh. Apart from this, you can also claim additional deduction of Rs. 2 lakhs on the interest component of your home loan for fully constructed self-occupied property under Section 24(b).

Sukanya Samriddhi Yojana (SSY): This is a savings scheme initiated by the government to promote the development of the girl child. Parents can open an account with a minimum investment of Rs. 250 and a maximum of Rs. 1.5 lakh per financial year. The government announces the interest rate every quarter. The scheme offers tax benefits, including a tax exemption of up to Rs. 1.5 lakh per year under Section 80C, exemption from tax on interest earned, and tax exemption on the total amount at maturity. It is an EEE (Exempt-Exempt-Exempt) scheme, which means the investment, interest earned, and maturity amount are all tax-exempt.

National Savings Certificate (NSC): This is a savings scheme supported by the Indian Government. You can open an account at any post office in India, and the investment is locked for five years. After five years, you get the full amount. You can invest up to Rs. 1.5 lakh per year, and you can also avail tax deductions on investments under Section 80C. The NSC can be a good option for those who want guaranteed returns and save tax at the same time.

Tax-saving FDs: These are similar to regular FDs, but offer a tax break on investments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. They have a lock-in period of 5 years, and cannot be redeemed before maturity without penalty. Any Indian resident can open a tax-saving FD with a minimum investment of Rs. 1,000. This is a low-risk investment option suitable for long-term investment with guaranteed returns. The interest earned on tax-saving FDs is taxable.

Tax saving beyond Section 80C

Section 80C is not the only option available for tax saving in India. There are other sections under the Income Tax Act that provide tax benefits and can be used for tax-saving purposes. Some of the popular tax-saving options apart from Section 80C are:

Medical policy premiums: With healthcare costs on the rise, having a medical insurance policy is crucial. You can claim a tax deduction on the premium paid for such policies for yourself, your spouse, children, or parents under Section 80D.

Interest on education loan: If you have taken an education loan for higher studies for yourself, your spouse or children, you can claim a tax deduction on the interest paid on such loans each year under Section 80E.

Donations made to funds and charitable organizations: Donations made to charitable trusts, organizations, or relief funds can be claimed as tax deductions under Section 80G.

Interest earned on your savings account: You can claim a tax deduction of up to Rs. 10,000 for interest earned on your savings account under Section 80TTA. For senior citizens, the limit is Rs. 50,000 per year.

Practical guide for effective tax-saving investments

Many people wait until the last quarter of the financial year to start thinking about their taxes. But this can lead to poor investment decisions. The best strategy is to start planning at the beginning of the financial year. This gives you more time to make informed investment choices and stay invested for a longer period, which can help you reach your financial goals quickly.

Here are some practical steps to help you plan your tax-saving investments:

1- Check if any of your investments or expenses during the year are eligible for tax deductions. For example, contributions to EPF, home loan repayments, and school fees can be tax-deductible.

2- Identify your investment goals and your risk profile to help you select the best investment options.

3- Invest the appropriate amount to reach your financial goals while also taking advantage of tax-saving opportunities.

Conclusion

In conclusion, many taxpayers tend to make hasty investment decisions by only relying on 80C tax-saving options, resulting in poor financial decisions. However, by exploring other options such as 80D, 80E, and others, taxpayers can benefit from long-term wealth creation. The article highlights some of the last-minute tax-saving investment tips that can help individuals reduce their tax liability. Taxpayers can take advantage of options such as PPF, ELSS, NPS, ULIPs, housing loan deductions, Sukanya Samriddhi Yojana, National Savings Certificate, and tax-saving FDs. By utilizing these investment options, individuals can simplify the investment process and potentially save money during tax season. Therefore, taxpayers must carefully evaluate their financial needs and goals before making any investment decisions.

Source: fisdom

March 20, 2023

Money Mindset: Approach problems in a non-linear fashion

My husband and I were contemplating a laid-back retired life when the tables suddenly turned. My partner and dear friend suffered a paralytic stroke just a few months before he was to retire.

Here’s how I tackled it and my advice to younger women.

Don’t minimize your role as a wife or as a woman.

Don’t assume that finances are only your husband’s problem, even if you are not earning. It is a partnership. You both are in the marriage together. Money decisions affect everyone in the house.

Society is always feeding us a narrative. You don’t have the mind for finances. You are too young. You are too old. Who is to make that decision for you? Why must age be a barrier? Why must gender be a barrier?

Take an interest. Question. Do your research. Offer solutions. Discuss. Start investing, whatever be your age or social status. If you husband gives you a monthly budget to run the house, you can even take as little as Rs 1,000 and start a systematic investment plan (SIP) into a mutual fund or a bank recurring deposit.

Never assume that good times are a given.

Besides the emotional and physical impact of me taking on the role of a caregiver, I was forced to take charge of the finances, something he had looked after all our married life.

The best time to educate yourself is when the going is good. I sometimes regret that I wasn’t this financially aware while we had a regular monthly income. I could have done so much more. Now, I even have an emergency fund in case I require it for a sudden medical expense. That way, I do not have to touch my investments.

Be clear on what you want.

When the final settlement cheque of my husband’s company was handed over to me, I realized that it was not the amount I envisaged. We had taken a loan on his provident fund to purchase a 2-bedroom apartment Bangalore.

The remaining amount would rapidly disappear if I did not take charge instantly and invest it.

I had one goal: Be financially independent and not ask my daughter for monetary support. All my actions stemmed from this decisions.

Approach problems from multiple angles.

I was brutally honest and aware of my complete lack of knowledge when it came to stock market. I did not understand chit funds.

This was in the mid-1990s when government undertakings were issuing bonds to the public at around 15% per annum. And, non-banking financial companies, or NBFCs, were passing on huge commissions to investors who invested in their debt instruments.

I began investing in these bonds and lived off the interest. By living frugally, I also was able to reinvest the interest too, and gradually increased the principle. When interest rates began to dip, I started to look at mutual funds.

I scheduled my investments to ensure that cash flow comes from a Systematic Withdrawal Plan (SWP), dividends or interest payments. With these inflows, I managed my daily expenses, outings and pampered my two grandsons. Larger purchases and expenses are put off till an investment matures.

When I was handed the cheque, I realized that I needed to attack the problem from various aspects. For one, I had to cut down on wasteful expenditure and adopt a frugal lifestyle. This would help save my corpus from getting depleted. But simultaneously, I had to grow the corpus. Because the erosion of the value of money due to inflation would continue, irrespective of my circumstances. Hence, I had to invest the money and take a call not to touch the principal, and instead add to it when possible.

Approach a problem from different angles. To be financially independent, I had to do various things – cut down on frivolous expenditure, increase my corpus and ensure inflows. Good investing is not just about knowing where to invest, but what to avoid.

Don’t blindly follow what another is doing. You need to take a hard look at your circumstances, and knowledge and what you are comfortable with.

Never be afraid to ask questions. Never be too arrogant to not reach out for help. Where I am today is because of the sound advice from well-meaning individuals.

Just because I avoided an investment at one time (equity), doesn’t mean I should continue. Allow yourself to evolve, as an investor and as a woman.

Padma Ramarathnam’s husband passed away. Thanks to her decisions, she is financially independent even in her 80s.

Source: Morningstar

March 12, 2023

Procedure of SME Listing on SME Exchange In India

SME Exchange provides a great opportunity to small and medium enterprises to raise equity capital for the growth and expansion of their business. SME exchange is a stock exchange for trading the shares of small and medium enterprises who otherwise would find it difficult and costly to get listed in the main board of a recognised stock exchange.

“SME exchange” means a trading platform of a recognised stock exchange having nationwide trading terminals permitted by SEBI to list the specified securities issued in accordance with Chapter IX of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and includes a stock exchange granted recognition for this purpose but does not include the Main Board. Currently there are 2 stock exchanges providing SME exchange in the country, they are:

NSE’s SME Exchange i.e., NSE EMERGE.
BSE’s SME Exchange i.e., BSE SME.

SME Exchange is growing at a very fast pace which can be seen from the data available with the BSE SME website which states that there currently around 336 companies which have listed their share on SME Exchange with a total market capital of Rs. 27,318.64 Crore till date. Additionally, Rs. 3,492.54 Crore have been raised via various means on the BSE SME Exchange till date.

BENEFITS OF LISTING UNDER SME BOARD

Higher visibility and Recognition.

Higher credibility with stakeholders like customers, vendors, employees, etc.

Equity financing provides growth opportunities like expansion, mergers and acquisitions thus being a cost effective and tax efficient mode.

Higher valuation of the company.

Enables Liquidity for Shareholders.

PROCEDURE FOR LISTING IN SME EXCHANGE

1. Appointment of Intermediaries – This stage includes appointment of various intermediaries required for listing under SME Exchange such as Merchant Bankers registered with SEBI to act as Lead Manager to the Issue, Underwriters and Legal Advisors.

2. Pre- IPO Stage- This refers to the procedural aspects for listing under SME Exchange which includes Increase of Authorised Share Capital, passing of resolution for further issue of share capital under section 62(1)(c) of the Companies Act, 2013, Re-Structuring of Boarde., Appointment of Directors to satisfy the conditions prescribed under the Companies Act as well as the SEBI Regulations.

3. Preparation Stage – This stage includes conducting of Due diligence by the Lead Manager to the Issue i.e., the Merchant bankers who would check all the documentation including all the financial documents, material contracts, Government Approvals, Promoter details etc. This exercise would also help in preparing Offer Document appropriately.

4. In-principal approval of draft prospectus – The Issuer shall file the draft prospectus along with the documents in accordance with the SEBI (ICDR) Regulations, other statutes, notifications, circulars, etc. governing preparation and issue of prospectus prevailing at the relevant time. The Issuers may particularly bear in mind the provisions of Companies Act, Securities Contracts (Regulation) Act, the SEBI Act and the relevant subordinate legislations thereto.

5. Application to BSE SME Exchange – On completion of Due diligence by the merchant Banker along with approval of the Draft prospectus, an application shall be filed with the stock exchange for admission of their securities to dealings in their respective exchange, i.e., taking in-principal approval from the stock exchange.

6. Filing of RHP/Prospectus – Merchant Banker then files these documents with the ROC indicating the opening and closing date of the issue. Once approval is received from the ROC, they intimate the Exchange regarding the opening dates of the issue along with the required documents.

7. Post Listing – Stock Exchange then finalizes the basis of allotment and issues the Notice regarding Listing and Trading.

SOME POST LISTING COMPLIANCE UNDER SEBI(LODR) REGULATION, 2015

1. Regulation 33: Financial Results: -The listed entity shall submit financial results to the stock exchange within forty-five days of end of each half year as compared to quarterly submission prescribed for companies listed on Main Board of the Exchanges.

2. Regulation 47: Advertisements in Newspapers: – The requirements of this regulation shall not be applicable in case of listed entities which have listed their specified securities on SME Exchange.

3. Regulation 31: Holding of specified securities and shareholding pattern: – The listed entities which have listed their specified securities on SME Exchange shall submit to the stock exchange(s) a statement showing holding of securities and shareholding pattern separately for each class of securities on a half yearly basis within twenty-one days from the end of each half year as compared to quarterly submission prescribed for companies listed on Main Board of the Exchanges.

Source: Taxguru