A vehicle for investing in stocks and bonds
A mutual fund is not an alternative investment option to stocks and bonds; rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.
Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.
Objectives of a mutual fund are -
|Fund Objective||What the fund will invest in|
|Equity (Growth)||Mostly in stocks|
|Debt (Income)||Only in fixed-income securities|
|Money Market (including Gilt)||In short-term money market instruments (including government securities)|
|Balanced||Partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in returns and risk|
A SIP is a systematic investment plan which lets you invest a fixed amount periodically in a mutual fund. For example, if you start a monthly SIP of ₹1000 in a mutual fund, that amount will automatically be deducted from your bank account and invested in that mutual fund every month on the pre-decided date. SIP is essentially an automated investing plan.
What are the benefits of investing in SIP?
Yes, investing in SIP is always a good idea. It keeps you disciplined, is easy to monitor, takes advantage of rupee cost averaging, can be increased or reduced anytime.
SIP is considered the best investment habit because of the following reasons:
- Flexibility - Increase or decrease the investment amount according to your convenience
- Liquidity - Withdraw the investment amount when you need it
- Simplicity - Simple and disciplined way to create wealth
- Inflation-Proof - Regular interval investment reduces the impact of inflation on savings
How long should I invest in SIP?
There is no fixed rule for this but a SIP for five years and above, especially in equity or ELSS mutual funds have a low risk for loss. Short-term investments in these funds can have higher returns but also come with a high risk of loss Did you know that just ₹ 10,000 invested per month in HDFC Top 200 from Jan 1999, would have given you ₹ 1.7 crores TAX-FREE* on 1st July, 2016!! FD would have given approximately ₹ 40 lakhs post tax. Still looking for FDs?
*Equity mutual funds had Zero LTCG tax till 31st April 2017. From April 1 2018, there will be 10% LTCG tax on gains withdrawn above ₹1 lakh in a financial year. Inspite of this, post-tax returns from equity mutual funds remain substantially higher than FD returns.
SIP or One-time : How Should I Invest?
Often first time investors get confused choosing between an SIP investment or one time investment.
In this mode, you make a one time payment of a considerable sum of money.
On the other hand, in an SIP, a fixed amount of sum is deposited at regular intervals of time in a mutual funds scheme. In short, one-time investment mode can be chose if you have money in hand right now that can be invested and an SIP can be chosen if you are expecting a regular inflow of money in future.
|SIP Investmnet||One-time Investment|
|Periodic investments in a tenure||One-time investment in a tenure(lump sum)|
|Earns better during market lows||Earns better during market hights|
|SIPs can protect investments from potential market crash||One-time investments can lead to major loss during market crash, which happens often enough|
Tax Saver Funds
1. What are Best ELSS Mutual Funds?
ELSS, as the name suggests, are equity-based mutual funds. These are the only set of mutual funds that help you avail tax deductions. These mutual funds come in with a lock-in period of 3 years. The investment route can be either lump sum investment or an SIP. The monthly investment could be as low as Rs. 500 and there is no maximum limit.
2. Who should invest in Best ELSS Mutual Funds?
ELSS funds are chosen by investors who are willing to take risks as these investments are equity oriented. Since there is a risk of volatility, it is advised that you invest for a longer duration as compared to the lock-in period of 3 years.
People nearing their retirement could opt for other tax savings investments like PPF or NSCas they are less volatile. However, people who have just started their career and can invest for a long period of time can opt for the more risky ELSS funds which would give higher returns compared to others.
3. Advantages of Best ELSS Mutual Funds
1. The lock-in of 3 years is considerably less as compared to other close-ended mutual funds.
2. These mutual funds usually have the potential of earning higher returns compared to other tax saving instruments like PPF or NPS.
3. Earnings are taxed only at 10% of the gains.
4. There is no maximum limit to invest.
5. As an investor, you are not required to have extensive knowledge of the markets in order to invest in these funds. The funds you invest in are run by expert and experienced fund managers who are qualified to handle your investment.
4. Disadvantages of Best ELSS Mutual Funds
a) ELSS is not completely risk averse like other tax saving instruments like PPF. Their risk profile is similar to any equity oriented mutual fund scheme. It is just that these provide tax deduction benefits.
b) ELSS are shown to have delivered good returns on if invested for more than 5 years. So it is advisable that an investor must enter into equity (or ELSS) only if the holding period is more than 5 years, and that also with proper asset allocation.
c) Most mutual funds won’t accept investments from people living in Canada and the US.
5. Options for Investing in Best ELSS Mutual Funds
a) Growth option
One option for investment in ELSS is the growth option- where the holder will not get any benefits in the form of dividends. The investor shall only receive the gains at the end of the tenure. This will help appreciate the total NAV and thus multiply the gains. The only caveat being since these returns would be subject to market conditions, it may work in the investor’s favor or maybe completely bad but it is possible that the profits might be great.
b) Dividend Option
In this option, the holder gets timely benefits in form of dividends which are completely tax-free.
c) Dividend Reinvestments option
This is an option wherein the investor gets the option of giving back the dividends received in order to add to the NAV. It is a good option if the market has been performing well and is likely to continue the same way.
Comparison between ELSS and other tax-saving methods
The comparative between ELSS and popular other tax-saving options in India
|Investment||Returns||Lock-in period||Tax on Returns|
|5-Year Bank Fixed Deposit||6 to 7%||5 years||Yes|
|Public Provident Fund (PPF)||7 to 8%||15 years||No|
|National Savings Certificate (NSC)||7 to 8%||5 years||Yes|
|National Pension System (NPS)||8 to 10%||Till retirement||Partially Taxable|
|ELSS Funds||12 to 15%||3 years||Partially Taxable|
Portfolio Management Services (PMS) is a type of wealth management service, usually offered to HNI & wealthy investors. With greater flexibility and higher customization, PMS aims to generate superlative returns in comparison to other investment avenues focusing on the same asset class with aggressive nature.
While mutual funds pool assets from several investors, under PMS you can choose whether to invest in a scheme with limited subscribers or opt for a personalized service. Hence, under PMS, there are different types of portfolio services.
Types of PMS
An investor can opt for portfolio service on a discretionary, non-discretionary, or advisory basis.
- Discretionary - The portfolio manager makes the investment decisions and has the power of attorney (PoA) to buy and sell shares on behalf of the investor. The portfolio manager individually and independently manages the funds of each client.
- Non-discretionary - The portfolio manager needs the client to confirm whether to buy or sell the stock recommended. The portfolio manager cannot make buy-sell decisions at his own discretion; he has to refer to the client for every transaction.
- Advisory - The portfolio manager mainly gives advice on the portfolio; it’s up to the investor to execute the decisions.
What is the minimum investment in PMS?
The minimum investment stipulated by the regulator in a PMS is Rs 25 lakh.
What are the fees charges by a PMS?
The fees charged to investors consist of three components – the upfront fee, the management fee, and the performance fee. Some PMS might also have a fixed fee.
- Entry Load - PMS schemes may have an entry load of around 0% to 3 % depending upon the ticket size. It is charged at the time of buying the PMS only.
- Management Charges - Every Portfolio Management Services scheme charges Fund Management charges. Fund Management Charges may vary from 1% to 3% depending upon the PMS provider.
- Profit Sharing/Performance Fee - Some PMS schemes also have profit sharing arrangements, wherein the provider charges a certain amount of fees/profit over the stipulated return generated in the fund.
- Fixed Fee - Some PMS schemes might have a fixed component in the place of the profit sharing component and charge investors a fixed monthly fee. This is not a percentage based fee and is decided before availing the PMS. It could depend on the size of the portfolio.
- Exit Load - A fee charged if you redeem the investments before the minimum investment period defined in the agreement.
Apart from the fees above, you may also incur brokerage charges each time a security is bought or sold.
Ease of investing
PMS: Being a high-end product with a minimum investment of Rs 25 lakh, there is a lot of paperwork involved. Each scheme offered has an agreement to be signed. Depending on what you have opted for, the discretionary or non-discretionary portfolio services, you need to give a power of attorney to allow the PMS to transact in your stock broking account.
PMS: Taxation of gains from PMS under the I-T Act was earlier a matter of debate. There was a difference of opinion on characterisation of gains from PMS as business income or capital gains. However, in 2014, the Delhi High Court clarified, that income from shares purchased through a discretionary PMS is taxable as Capital Gains and not Business Income. In PMS, you will pay short term/long term capital gains, depending on the churn that the fund manager has done. Do consult with a chartered accountant or tax consultant before investing through PMS.
What is an Alternative Investment
An alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds and cash. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and limited regulations of the investments. Alternative investments include private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts.
Alternative Investments for Diversification and Hedging
Alternative investments typically have a low correlation with those of standard asset classes, which makes them suitable for portfolio diversification. Because of this, many large institutional funds such as pensions and private endowments have begun to allocate a small portion of their portfolios, typically less than 10%, to alternative investments such as hedge funds. Investments in hard assets such as gold and oil also provide an effective hedge against rising inflation, as they are negatively correlated with the performance of stocks and bonds.
Alternative Investment Costs and Tax Considerations
Although alternative assets may have high initial upfront investment fees, transaction costs are typically lower compared to conventional assets, due to lower levels of turnover. Alternative investments held over a long period of time may result in tax benefits, as investments held longer than 12 months are subject to a lower capital gains tax in comparison to shorter-term investments.
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