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A practical guide to choose the ‘right’ mutual fund

 

In the intricate tapestry of India’s mutual fund market, choosing the best mutual fund might feel like navigating a maze. Amid the myriad of options available, Amit is determined to select the ideal mutual fund tailored to his financial goals.

 

Equipped with a clear understanding of his investment objectives, risk appetite, and time horizon, Amit opts to use the ‘Fund Selector’ on the homepage of ‘Value Research Online’ to identify the right fund.

 

So, let’s join Amit on this exciting expedition.

 

Select the right category of mutual funds

Amit wants to build wealth for retirement, and recognizes the need for a reliable and relatively-safe type of mutual fund.

 

After thorough research and introspection, he decides to focus on the large-cap fund category. Why? Because he prefers stability, lower volatility, and consistent returns – something that large-cap funds typically offer.

 

What you should know

In the vast expanse of India’s mutual fund landscape, selecting the right category is crucial. Investors encounter a variety of equity funds, each with a unique approach. Choices span from large-cap to small-cap, multi-cap, sector-specific, and thematic funds.

 

The challenge lies in identifying the category that matches your financial goals, risk appetite, and investment horizon. For instance, let’s assume you were looking for a more aggressive option and had a five-year investment horizon, we’d suggest looking at a flexi-cap fund.

 

Check the star rating of the mutual funds

Amit discovers there are approximately 152 large-cap funds available in the ‘direct’ category. (For the uninitiated, if you are buying funds on your own, opt for direct plans. Here’s why).

 

Coming back to Amit, he is clearly frustrated. For good reason too. It’s not easy to choose a fund when there are multiple options.

 

This is where ‘Value Research Ratings’ comes to his rescue. (By now, you must be smiling at our blatant pitch, but it’s true. In fact, our mutual fund ratings are used by leading media outlets and fintechs).

 

Amit uses the ‘VR Ratings’ to remove all funds that are rated 2 stars and below. By doing this, he narrows down his options to a more manageable 42 funds.

 

Also, by eliminating the poor funds, he now has access to funds with a proven track record of strong performance, solid management, and robust portfolio composition.

 

What you should know

‘Value Research Ratings’ evaluates funds based on quantitative factors.

 

Compare returns of funds

Having successfully narrowed down his large-cap fund options to 42 high-rated contenders, Amit compares their returns to make an informed investment decision. As a long-term investor, he is keen to know which funds are more consistent in the long run.

 

To accomplish this, Amit selects ‘Long-term’ in the ‘Returns’ tab, focusing on the five-year performance of each fund.

 

With the five-year returns data at his disposal, Amit makes a list of the ten best large-cap funds!

 

What you should know

Past performance is not a guaranteed indicator of future results. But it does tell you each fund’s long-term track record, which is important.

 

Check expense ratio and exit load

Amit, now armed with a shortlist of 10 promising mutual funds, delves deeper into the ‘Fees and Details’ section to examine the expense ratio and exit load. This is a smart move because why should he pay unnecessary fees to a mutual fund.

 

What you should know

Expense ratio and exit loads are fees charged by a mutual fund for various reasons. Hence, the lower the better.

 

But please remember that though this is an important factor, you should not base your fund-selection decision on this criterion alone.

 

Final check

To complete his selection process, Amit refers to the ‘VR Opinion’ available in the ‘Snapshot’ tab.

 

These opinions, provided by Value Research’s analysts, assess mutual funds based on several parameters, including risk-adjusted performance, portfolio diversification, and fund manager’s track record.

 

Backed by expert insights, he finds The One large-cap fund that suits him best!

 

By following these four steps on our platform, Amit has laid a solid foundation for his investment journey, increasing the likelihood of achieving his long-term financial goals.

 

The last word

Selecting the right mutual fund is no rocket science, as you just saw for yourself.

 

All you need to do is explore our platform to find the right fund for you. You can Get Started now.

 

Source – Valueresearchonline

 

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Indexation benefits have not gone from mutual funds completely

 

The Finance Act 2023 has created a third category for taxation in mutual funds. We are all aware that debt funds no longer qualify for LTCG benefits. They will be taxed at marginal rate of taxation irrespective of the holding period.

 

In this context, the Finance Act has defined debt funds as funds having domestic equity exposure of less than 35%. Hence, it includes other categories of funds like gold funds and international FOFs.

 

However, the definition has opened up a new category of mutual funds from the perspective of taxation. This category is funds having exposure to equity between 35% and 65%. These funds will continue to get indexation benefits if the holding period exceeds 36 months. The category of  multi asset fund (at least 10% exposure in three asset classes) may fall under this taxation ambit, depending on the positioning by the AMC. If the equity component of the fund is more than 65%, it will be taxed as equity. If the equity component is between 35% to 65%, it will be eligible for indexation.  Balanced hybrid fund (50% exposure to both equity and debt) fall under this category, but currently there is no balance hybrid fund in the industry.

 

There are couple of multi asset funds in the market answering this description i.e. equity in the range of 35% to 65% and eligible for indexation. Certain fund houses are launching multi asset funds to benefit from this tax arbitrage.

 

Conclusion

 

The extent of indexation benefit for LTCG depends on inflation. However, history shows that post-indexation, the effective LTCG tax rate is less than 10% in most of the years, which is the taxation rate for equity funds.

 

Source: Cafemutual

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How to understand your relationship with money

 

Let me start by sharing a real-life experience and the reaction on social media.

 

The story begins with an individual ordering a sandwich on Swiggy. Let’s call him Kiran.

 

Kiran was telling me how one has to budget for a higher amount when opting for the convenience of an online delivery. And yes, convenience comes at a steep cost. This is what Kiran showed me on his Swiggy account:

 

  • Sandwich: Rs 138.09
  • Packing: Rs 25
  • Delivery Partner Fee: Rs 51
  • Taxes: Rs 6.90
  • Tip: Rs 70

 

I posted this on Twitter with just one statement: A 138 sandwich is now Rs 291!

 

Well, the comments were brutal. Not surprising, as people love to outrage on social media. People questioned as to why the individual could not make a sandwich at home. Labelled the person as lazy. They wondered who would order a sandwich that costs so much. And I was even accused of spreading “fake news” and maligning Swiggy.

 

While I was flummoxed at the judgement received, I want to focus only on one aspect – the money angle. Majority had a huge problem with the Rs 70 tip. There were sarcastic remarks about it as well as Kiran being called stupid (for being so generous).

 

This incident reiterated how personal people get when the subject is money.

 

Money is a touchy subject filled with value judgements.

 

Now let me give you the other side of the story by telling you something about Kiran.

 

Kiran is a well-to-do senior citizen whose children reside elsewhere. Could not step out due to a sprained ankle and was in a fair bit of pain. He does not have a car or a driver who he could direct to go pick it up. The house help who comes during the day was ill. The cook only comes thrice a week and that was her day off.

 

Kiran really felt the urge to have a veg grilled sandwich and decided to order for it. I guess that demolishes the lazy accusation. But the bone of contention was about Kiran paying Rs 70 as a tip for a sandwich that costs Rs 138.

 

I know Kiran and I do know that he firmly believes in using money as a means to give back to society. Kiran is of the opinion that if he does not help the individuals who make his life more easy, he is being selfish and self-centred.

 

I have seen Kiran tip the Urban Clap staff lavishly. He is always sending food for the watchman. When the municipal workers were doing up the road, he ordered samosas for all of them. He pays the househelp well, and whatever is cooked for him, he often shares with them.

 

The default tip that is set on the Swiggy app is at Rs 70. The logic being, whether the dish costs Rs 1,000 or Rs 100, the individual had to make the same effort to go and pick it up and drive in the hot sun and traffic to come deliver it at your doorstep. He believes that they deserve at least Rs 70 as the tip.

 

Because our relationship with money is complex, it gets manifested in various ways.

 

This is why you have no right to judge someone else for their money choices, unless you are directly getting impacted by it. Go easy on your judgements!

 

It is not just about spending, it is also about investing. Have you realised how many of our investment decisions are justified by emotion, and not logic? Innumerable times I have seen individuals invest because they “have a good feel” about the stock. Or the next big theme has caught their attention and they get carried away by the frenzied narrative. Or, they sell in haste because they are afraid that they will lose all their money.

 

In Kiran’s case, there was something else that I noticed. “I think about these young men who deliver the food to my house, and they can’t afford to eat such food or even buy it for their children. How bad they must feel.”

 

When he told me that, I could see what a sensitive human being he is, but I also picked up something else. I believe there is some amount of guilt at his privilege that motivated the lavish spending on those lower down the economic ladder.

 

I have no intention of debating whether Kiran’s intentions are driven by ego or empathy or altruism. That is no concern of mine or yours. But I have every intention of pointing out that our relationship with money is deeply personal and has many layers and facets to it.

 

Our relationship with money brings out an intricate web of motives, interests, passions, desires, needs and compassion.

 

Because our relationship with money is personal, it is emotional. And hence, cannot be ignored or treated with disdain. If you are curious about your relationship with money, answer these questions with brutal honesty. They will help you obtain a better comprehension of the money dynamics in your behaviour patterns.

 

  • Why am I working so hard to accumulate money?

 

Money is a tool – like a hammer, like a chisel, like a scissors, like Zoom. It is there to serve a purpose.

 

Money is a transaction tool. Its purpose is to get you what you desire. It could be status, security, lifestyle, experiences, convenience, a home, a car, a holiday, an iPhone, mental peace… you get the gist.

 

Money is never an end in itself. If money is an end in itself, then you will never have enough. You will never be satisfied. The purpose of money is to support well-being and empower you. So ask yourself, what is it that you want from your money?

 

  • How do I feel when I spend money?

 

The way you spend and manage your money is individualistic. It is shaped by your experiences, upbringing, emotions, how you view society, as well as your religious beliefs. You may feel absolutely no guilt at buying a bag that sets you back by many thousands but will cringe at the cost of replacing the old and worn out upholstery at home. Ask yourself why. You may enjoy a lavish meal at a restaurant and run up a gigantic bill, but will not pay more than 10% as a tip, however large the bill or great the service. Dig deeper.

 

  • Where do I get the most satisfaction?

 

Don’t be swayed by what someone else is doing. You may get joy when you use your money to help others. Others may find fulfilment is spending on numerous outings and vacations in a year. A few may prefer just spending it on wining and dining.

 

I repeat; answer the above candidly. There is no judgement. Your life. Your money. Your choice.

 

Being aware of your relationship with money helps you get the best out of it. Knowing the source of your emotion and the drivers will help you get to the root of the issue and improve your relationship with money.

Source- Morningstar

 

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What’s your Investment Personality?

 

Few investors neatly conform to a single description. The Standard Chartered Investor Personality Study 2020 surveyed 1,200 affluent and high net worth investors and founds that geographic and cultural differences shape behaviours and personalities. For example, Hong Kong has the highest proportion of “Enthusiastic” investors. Singaporean tended to fall into the “Comfortable” category, while Taiwan cornered the “Conservative” archetype.

 

John Rekenthaler, director of research for Morningstar, believes that most investors have blended traits. Here he explains how personalities affect investment behavior. After describing three personality types, he concludes by telling us (in a very amusing way) where he fits it.

 

Loners

 

Investors who belong to this group make their own decisions. They consume investment research neither for its counsel, nor to learn what others are doing, but instead as grist for the mill. Such investors ignore the actions of the crowd. Should they see a line snaking around a block, they will not try to learn what they are missing. They will instead go on their way while pitying the line’s occupants.

 

  • Strength: Buying Low

 

Loners are not the only investors who try to buy low. Equity mutual funds sometimes receive inflows after market declines because the overall marketplace believes that the dip presents a buying opportunity. Overall, though, loners are the likeliest investor type to sift among discounted securities, seeking bargains.

 

  • Strength: Early-Bird Gains

 

Besides receiving “dead cat bounces” from securities that are deeply depressed, loners may also profit from the opposite form of investment: highly expensive emerging-growth stocks. Before Tesla was mainstream, it was owned mainly by iconoclasts who discovered its story. The same holds for all winning startups.

 

  • Weakness: Self-Delusion

 

Unfortunately, not all that glitters is gold. For each dollar they stashed in Tesla or bitcoin, loners squandered thousands on investment dreams that never materialized. Sometimes, wisdom does in fact lurk within the crowd. Loners constantly face the possibility their “insight” is instead self-delusion—the mistaken impression that they have spotted what others missed.

 

  • Weakness: Bear Traps

 

A related problem is bear traps. This error has happily become less frequent, because market-timing has become unpopular, but loners nevertheless tend to exit the stock market, believing they have identified an upcoming bear. (A little knowledge can be a dangerous thing.) Once out of equities, they have trouble getting back in, because doing so before stock prices collapse would be a tacit admission of failure. Loners do not always benefit from having large egos.

 

 

Followers

 

More common than loners are followers, who derive comfort from crowds. Rather than walk past lines, they join them. Followers are strongly influenced by recommendations—from researchers, the media, friends and family, and internet boards. They seek investment allies.

 

  • Strength: Staying Informed

 

Followers listen to others. Doing so helps to keep them knowledgeable about investments, thereby reducing the chance of an unpleasant surprise. As with inflation, which causes the most damage when it is unanticipated, unforeseen investment losses carry the sharpest sting. Followers who listen to both side of the investment debates—which, it must be confessed, does not always occur—are well prepared for bad news.

 

  • Strength: Trading Opportunities

 

By the time that followers learn of an investment possibility, the loners have already found it. Word takes time to spread. Astute followers, however, may still reap ample profits by arriving before the rest of the marketplace. Discovering Tesla in winter 2020 was too late. But buying the stock two years before, when it was well known but not yet the investment rage, would have been a splendid trade.

 

  • Weakness: Tail Chasing

 

A fine line separates being guided by the collective from being controlled by it. Those who appropriately use investment information, by applying common sense and at least a modicum of their own judgments, can prosper. Not so those who become bewildered by the investment gossip, turned this way and that, like dogs distracted by a fluffle of rabbits. Such is the constant danger for followers.

 

  • Weakness: Mob Mentality

Followers are the most prone to being harmed by their emotions. As anybody who has participated in internet forums can attest, chat groups can quickly become mobs. (Whenever I receive an openly insulting email, I know that my column has been posted on a Reddit board.) Investors may benefit from hearing additional views, but rarely will they succeed by sharing others’ emotions.

 

Zombies

 

Most investors are zombies. The less they know about their portfolios, the happier they are. Consequently, they tune out the noise. Back in the day, that meant owning a portfolio that had been assembled by a stockbroker, and then leaving future decisions in the broker’s hands. These days, zombies are typically 401(k) participants or index-fund proponents. Either way, they stand aside.

 

  • Strength: Investment Discipline

 

This one is obvious. To the extent that investment success comes from staying the course—a hoary cliché, but not without truth—zombies are perfectly situated. They possess neither the faith to make their own adjustments, nor the interest to copy other investors’. Their portfolios therefore tend to remain unchanged.

 

  • Strength: Emotional Control

 

In the 1990s, many investment experts speculated that when the long-awaited bear market finally arrived, 401(k) participants would be the first to sell, given their inexperience. They were instead the last. During the technology stock crash of 2000-02, 401(k) assets were more stable than either retail investors’ taxable accounts, or the portfolios run by professional managers. There is an advantage to lacking an investment brain.

 

  • Weakness: Missing Out

 

Although zombies will neither become ensnared by bear traps nor chase their performance tails, neither will they spot investment opportunities. To return to our previous example, some people bought Tesla before the company joined the S&P 500 in late 2020. They might have been loners, or they might have been among the earlier followers. But they assuredly were not zombies.

 

  • Weakness: Structural Changes

 

Over the long haul, the markets are very stable. Roughly speaking, bond yields increased for 30 years, from 1950 through 1980, before subsiding over the next three decades. That made for one inflection point during the Depression generation’s investment lifetime. The long-run performance of equities has been equally predictable. Thus, structural changes rarely leave zombies behind. When such shifts do occur, though, zombies are the last investment type to know.

 

My investment type can best be described as “artificial zombie.” That is, while I am a loner by nature, I have learned through experience the difficulty of outguessing the crowd. Thus, I behave like a zombie, by making few trades and distancing myself emotionally, although of course I am much too informed to be among that breed.

And you?

Source- Morningstar

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Investment in units of Mutual Funds in the name of minor through guardian

 

SEBI Circular no. SEBI/HO/IMD/DF3/CIR/P/2019/166 dated December 24, 2019 has prescribed the uniform process to be followed across Asset Management Companies (AMCs) in respect of investments made in the name of a minor through a guardian. Based on recommendation of Mutual Fund Advisory Committee, it has been decided as under:

 

1. In partial modification to the above SEBI circular, it has been decided as under:

 

i. Para 1(a) shall read as under:

“Payment for investment by any mode shall be accepted from the bank account of the minor, parent or legal guardian of the minor, or from a joint account of the minor with parent or legal guardian. For existing folios, the AMCs shall insist upon a Change of Pay-out Bank mandate before redemption is processed”

 

ii. Irrespective of the source of payment for subscription, all redemption proceeds shall be credited only in the verified bank account of the minor, i.e. the account the minor may hold with the parent/ legal guardian after completing all KYC formalities.

 

iii. All other provisions mentioned in the aforesaid circular shall remain unchanged.

 

2. All AMCs are advised to make the necessary changes to facilitate the above changes in mutual fund transactions w.e.f. June 15, 2023.

 

3. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with Regulation 77 of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

 

Source- SEBI

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National Pension System (NPS) exit rule changed: Now buy multiple annuities of minimum Rs 5 lakh each

NPS rule changed

 

National Pension System (NPS) Exit Rules 2023: The Pension Fund Regulatory Development Authority (PFRDA) has decided to allow NPS subscribers to purchase multiple annuities on exit if their corpus is over Rs 10 lakh and they utilize at least Rs 5 lakh to buy each annuity.

 

“The option of multiple Annuities shall be provided for those Subscribers who earmark the annuity corpus more than Rs 10 lakhs wherein Rs 5 lakhs utilized to buy each annuity scheme,” the regulator said in a circular dated May 10.

 

Under NPS, subscribers are allowed to buy immediate annuities from Annuity Service Providers (ASPs) under the enabling provisions of Exit Regulations of PFRDA. Till now, the subscribers were allowed to buy only one annuity scheme from the ASP at the time of exit.

 

The regulator said that it has taken the decision to allow the purchase of multiple annuities in the interest of subscribers.

 

“In the interest of subscribers’ retirement income optimization and to provide them with a wider range of annuity options, PFRDA is pleased to inform that the choice of multiple annuities from the same ASP will be made available,” the regulator said.

 

What’s new

 

As per the regulator, the option of multiple Annuities will be provided for those subscribers who earmark an annuity corpus of more than Rs 10 lakhs wherein Rs 5 lakhs is utilized to buy each annuity scheme.

 

The regulator has advised CRAs to build the necessary system-level functionality to facilitate the implementation of this change.

 

“Until this feature is developed, ASPs can handle the requests for multiple annuities received from subscribers and provide the necessary information to CRA through Reverse Information Flow (RIF),” the regulator said.

 

“PFRDA believes that this change will greatly benefit subscribers by providing them with a wider range of annuity options and optimizing their retirement income,” it added.

 

Source – Financialexpress

 

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High pension recipients can get short-changed in bailouts

High pension recipients can get short-changed in bailouts

In 1983, the excitement was palpable as Kapil Dev hois­ted the Prudential trophy after the limited-overs World Cup held in England. The 1987 event, initially set for England, was moved to India and Pakistan due to the financial woes experienced by the United Kingdom’s (UK) pension providers, including Prudential, the World Cup’s sponsor then.

 

The pension industry was struggling because pensioners were living longer, investment returns were lower than estimated, and pension payments were fixed and payable for the pensioner’s lifetime. Ultimately, the UK government took over the liability. Some individuals, who were eligible for a higher pension, experienced losses as the government capped the maximum pension amount.

 

A similar situation unfolded in the wake of the 2008 Great Financial Crisis, when General Motors (GM) faced bankruptcy due in part to high pension liabilities towards former employees. The US government nationalised GM, took over the pension liability, again capping the maximum pension amount. Pensioners eligible for a higher pension again suffered.

 

These events show that reckless pension schemes eventually fail. Another lesson is that when the government steps in, it focuses on protecting those who need the pension the most. Those receiving higher pension amounts often suffer.

 

This leads to the current debate among executives about whether they should opt for a hig­­­­­­­her future pension by diverting a portion of their existing Employees’ Provident Fund (EPF) corpus.

 

Let’s say an employee, whose salary is Rs 1 lakh per month, contributes 12 per cent (Rs 12,000) to his EPF account. The employer contributes an equivalent amount (12 per cent of salary or Rs 12,000) over and above the salary. Of this 8.33 per cent, subject to a maximum salary limit of Rs 15,000 (or Rs 1,250 per month) has to be contributed to the Employees’ Pension Scheme (EPS).

 

The balance Rs 10,750 (Rs 12,000 less Rs 1,250) is transferred to the EPF account. The employee’s EPF account receives a total of Rs 22,750 per month (Rs 12,000 from the employee and Rs 10,750 from the employer). The accumulated balance in the EPF account is tax-free, and can be withdrawn fully on retirement.

 

The EPS fund receives Rs 1,250 per month from the employee. Additionally, the central government tops up with a proportional contribution to enable EPS to meet its pension liability. This contribution is Rs 174 per month (1.16 per cent of salary, with a maximum salary cap of Rs 15,000).

 

The pension on retirement is based on the number of years of contribution and the salary at retirement. The maximum salary assumed on retirement remains Rs 15,000 per month and the maximum pension is Rs 7,500 per month (for those who have contributed for 35 years or more).

 

The retirement pension is available only if the employee completes 10 years in the scheme. Those who don’t can withdraw their EPS contributions. Many employees don’t withdraw this EPS amount even though they are eligible to do so. This unclaimed amount is exceptionally large and is likely to be never claimed back. The interest earned on this “surplus” powers many of the unsustainable pension promises, like a minimum pension of Rs 1,000 per month.

 

A Supreme Court decision has allowed some EPF subscribers to receive a higher retirement pension without the constraint of a cap on maximum salary of Rs 15,000 per month. To be eligible, however, they would need to transfer significant amounts from their EPF accounts to EPS, sparking a debate on the advisability of such an action.

 

A valuer assesses whether the resources can meet the liabilities. The latest valuation for the year ended March 31, 2017, revealed a deficit of Rs 15,000 crore. The deficit is expected to grow even larger with the removal of the cap on retirement pensions and growing life expectancies of Indians.

 

Truth be told, employees hoping for a larger pension in the future by contributing more from their EPF corpus are betting on the government ste­pping in to cover the deficit. However, history has shown that when a government intervenes, those receiving higher pensions often suffer losses. Employees with higher salaries would be better off investing their tax-free EPF corpus in suitable financial instruments upon retirement rather than trusting that money to an uncertain future pension.

All data taken from EPFO annual accounts of 2021-22

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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

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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

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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

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