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Mutual Fund Advisory

Wealthpro investment solutions offers tailor – made wealth management services to Retail, High Networth Individual and Corporate Clients. We strongly believe that Investment Planning is the stepping stone to achieve one's financial aspirations.

We focus on advising on numerous schemes offered by Mutual Funds of all AMCs currently acting in the Market based on their performance as well as strategical expertise. We will provide exhaustive investment advisory, portfolio management and all allied support 24*7. Our executive will provide you on call as well door step services.

The entire process of investment advisory will be based on financial planning model which can be summarised as below:

Goal Setting

The most important and foremost part of starting an investment exercise is base on setting of financial goals. Goal setting comes up with following three strategies:We focus on investment with Financial Planning mode. An investor should know few basic things before investing his or her money. He or she shall know the following:

1. Where the money is being invested. The theme that we picked for the investor should match with his or her intention of investing. Basically, investment advising should be evaluated on the basis of the age of the investor as well as their risk taking affinity
2. How long the investment tenure will be!! The client shall know the tenure of investment in priority. Different concepts have different investment horizon before it starts raining profits. Many a times the investor complains about not getting any profit out of their investment. Following a religious way of investment might change their opinion. Just need a pathfinder.
3. Why an investor approach mutual fund or any other product in place of any banking or post office or life insurance products. Because this have a transparent, low cost and massive experience of fund managers with indirect equity approach with no hidden cost precisely. But the investor shall know their expectation from MF investment. All the investors should set a trigger return percentage for their investment. If the investor knows their expectation benchmark of return, it is more effective on our part to suggest the best avenue.

Thus above three thumbrule helps an individual to categorise and priortise their financial goals and help them achieve.

Asset Allocation

There are hundreds and thousands of schemes and options available in the mutual fund industry. For a layman, it is very difficult to select an appropriate option out of them to start with. Even for an existing investor, it is important to keep searching for newer schemes for further investment. This helps optimising an investor financial appreciation.

There are various asset class in Mutual Fund Industry.

  • Equities
  • Fixed income
  • Cash Equivalents
  • Alternative investments

Mutual funds industry have numerous schemes active in the market on the above said asset classes. We help you to decide an appropriate mix of various investment options.

Portfolio Construction

 According to leading experts, portfolio performance is mostly driven by appropriate asset allocation.  Having the right mix of stocks, bonds, and cash is more important than selecting the right security or investing at just the right time.  That is why an investment must follow a disciplined strategy and be monitored on a regular basis, while remaining flexible enough to adjust to ever changing market conditions.  Choosing the appropriate model requires a thorough understanding of your tolerance to risk and a commitment to a minimum time horizon.

Review

Last but not the least, we will keep monitoring the developments of your portfolio over the period. our portfolio will be monitored and never left to chance.  Using disciplined and expert advice, we will help you move toward your financial goals.  Changing economic conditions are often accompanied by the market forces that directly affect your portfolio and prompt the need for realignment of the asset classes.  A member of the team will check your portfolio for re-balancing each quarter and bring the assets back into balance when needed.  Your financial advisor will keep you informed of the investment strategist’s philosophy, market commentary, and up-to-date portfolio allocations. 

You may receive core summary reports for your accounts on a quarterly basis and custodial statements on a monthly basis.  This allows you to review and measure your progress toward your financial goals and suitability of investment strategies.  Your financial advisor will continually monitor the investment portfolio, oversee the investment strategist’s decisions, and keep you on track.

Choice of Mutual funds

There are 8 common types of Mutual funds

  • Money Market Funds .................invest in short term fixed income securities such as government bonds, treasury bills, bankers acceptances, commercial paper and certificate of deposits

Return Grade : Generally safer investment but with a lower potential return then other type of mutual funds

  • Fixed Income Funds...................buy investments that pay a fixed rate of return like Govt Bonds, Investment grade corporate bonds and high yield Corporate bonds.

Return grade......

  • Equity Funds....................invest in stocks. These funds aim to grow faster than money market or fixed income funds, so there is usually a higher risk involved. One can choose from wide range of equity funds with focusing on Growth stocks, income funds (they hold stocks that pay large dividends), value stocks, Large cap stocks, Mid Cap stocks, small cap stocksor combination of these.

Return grade is on higher side in comparison to Bonds and income funds.

  • Debt Funds.....invset in debt instruments e.g company debentures, government bonds a  d other fixed income assets. They are considered safe investments and provide fixed returns
  • Balanced Funds......invest in a mixof equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money. They have more risk than  income funds , but less risk than pure equity funds.

Aggressive BF hold more equities and fewer bonds while Conservative BF hold fewer equities relative to bonds.

Return grade is on higher side in comparison to income funds but lower than pure equity funds.

  • Index funds......aim to track the performance of a specific index such as BSE or NSE. The value of the mutual fund will go up or down as the index goes up or down. Index funds have typically lower cost than actively managed mutual funds. As the portfolio manager doesnot have to do as much research or make as many investment decisions.

Return Grade is at per with the index at any point of time. Is on a lower side in  comparison to actively managed equity mutual funds.

  • Specialty Funds.........  focus on specialized mandates such as real estate, commodities or socially responsible investing. E.G. a socially responsible fund may invest in companies that support environmental guardianship, human rights and diversity and may avid companies involved in alcohol, tobacco, gambling, weapons and the military
  • Fund-of-funds..............invest in other funds. Similar to balanced funds, they try to make asset allocationand diversification easier for the investor.

Debt Funds vs Fixed Deposits

Let’s have a detailed look at the differences between fixed deposits and debt funds. The table below helps you decide which investment is suitable for you.

Particulars Debt Funds Fixed Deposits
Rate of returns 14-18% 6-8%
Dividend Option Yes No
Risk Moderate Low
Liquidity High 2 Years
Investment Option Can choose either an SIP investment or a lumpsum investment Can only opt for a lumpsum investment
Early Withdrawal Allowed with or without exit load depending on the mutual fund type A penalty is levied to withdraw prematurely
Investment Expenditure An expense ratio of 2.5% is charged No management costs

 

Banks offer a pre-set interest rate for fixed deposits based on the tenure chosen. Debt fund returns are solely dependent on the market movement – they have historically earned higher returns (sometimes even more than double) in the form of capital appreciation on top of interest.

One good thing about fixed deposit is, market highs and lows will not impact the returns you earn. So typically, debt funds outdo fixed deposits by a huge margin during market highs and slightly underscore FDs when the market is down.

Taxation on Debt Funds and Fixed Deposits

Short-term debt fund( less than 3 years) gains are added to your income and they are taxed at the applicable tax slab. For long-term gains, they are taxed at 20% after the indexation benefits.

Fixed deposit returns are added to your income and they are taxed according to the applicable tax slabs.

Comparing the inflation adaptability of Debt Funds and Fixed Deposits

Everyone knows that inflation puts a damper on savings as it leads to loss of currency value. Debt mutual funds, albeit the risk, have the potential to pace with inflation. For instance, you have invested in an FD at 7% interest and the inflation rate is 5%, the adjusted return would be a measly 2%. Debt funds deliver better.

Summing up with an illustration

Mutual Funds vs. Fixed Deposits

  Fixed Deposits Debt Mutual Fund Equity Mutual Fund
Investment Amount 100,000 100,000 100,000
Return (% p.a.) 9.0% 9.0% 9.0%
Holding Period 1 Year 1 Year 1 Year
Fund Value 109,000 109,000 109,000
Inflation 7.5% 7.5% 7.5%
Indexed Investment Amount - 107,500 -
Taxable Income 9,000 1,500 -
Tax Paid (as applicable) 2,700 300 -
Post Tax Returns 6,300 8,700 9,000
Post Tax Returns (%) 6.3% 8.7% 9.0%

 

  • Here are 3 scenarios which show an investment of Rs 1 Lakh each, in a bank fixed deposit, debt mutual fund and equity mutual fund. We've assumed in a given year, all 3 investments deliver a return of 9%. Further the assumption is that inflation will grow at 7.5% in the given year.
  • So you see... Rs 1 Lakh invested is now Rs 1.09 Lakh in each of the investment avenues. But in case of fixed deposits, with the interest income being taxable as per tax slab of an investor, the gain of Rs 9,000/- which the investor earns would further reduce to Rs 6,300/- assuming one happens to be placed in the highest tax slab of 30% (where he would have to pay a tax amounting to Rs 2,700/-). So the post-tax returns would be 6.3% in the given year in case of FD.
  • However, in the case of the debt mutual fund, with an indexation benefit available on account of long term capital gain (since having invested for over 1 year), the cost of investment is raised to Rs 1,07,500/- (due to inflation factor) instead of Rs 1 Lakh. Thus considering the indexed cost, the taxable gain would be Rs 1,500/- instead of the original gain of Rs 9,000/-. Here the investor pays long term capital gain tax @ 20% (as he has claimed indexation benefit) and hence the post-tax returns (over a period of 1 year) would be 8.7%, which is higher than the bank fixed deposit.
  • In the case of the equity mutual fund, the entire long term capital gain of Rs 9,000/- made on equity mutual fund is tax free and available to the investor, proving to be the most tax-efficient in the above illustration.
  • But you should choose your investment avenue wisely. Judge your risk appetite and investment time horizon well and understand your return expectation (which should be rational), before zeroing in on the type of investment avenue.

Ultimately, you should weigh your decision on your risk appetite, time horizon, and investment goals. All we suggest is that when the market looks positive and you notice several prospects for economic growth, it makes more sense to opt for debt funds than fixed deposits.

Notwithstanding the above, investing in mutual funds offer advantages:

✓ Facilitates diversification;
✓ The minimum investment amount required is low;
✓ Offers economies of scale, translating into better returns for you;
✓ Offers innovative modes of investing and withdrawing – Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs), Systematic Withdrawal Plans (SWPs), etc.;
✓ You can tactically allocate your investible surplus; and
✓ Your hard-earned money is professionally managed by professionals who hold years of experiencein financial research and fund management.

How should one go for investment in mutual funds?

You ought to choose the category of mutual fund schemes (equity and/or debt) and their type wisely, paying heed to your risk profile, investment time horizon, and the financial goals you’re striving to achieve; so that your asset allocation is done optimally.

For instance, when you’re averse to risk, the investment horizon is relatively short (less than 3 years) and financial goals are approaching, a dominant portion of the investible surplus should be parked in debt instruments, where debt mutual funds can be considered. But here too, tread carefully and take into cognisance of the interest rate cycle. At present, if you hold a slightly high risk appetite and have a long time horizon of at least 3 years, not more than 20% of your entire debt portfolio may be allocated to long-term debt funds via dynamic bond funds (as they are enabled by their investment mandate to take positions across maturity profile of debt papers).

In case you have a time horizon of less than a year and risk profile doesn’t permit, stay away from funds with longer maturities.

If you have a short-term investment horizon of 3 to 6 months, you could consider investing in ultra-short term funds (also known as liquid plus funds). And if you have an extremely short-term time horizon (of less than 3 months) you would be better-off investing in liquid funds. Don’t forget that investing in debt funds is not risk-free. 

Those of you, who have a very high risk appetite or can afford to take risk, diversified equity oriented mutual funds, would be suitable. But take enough care to select to best or winning mutual fund schemes for your portfolio. Focus on mutual fund houses that follow strong investment processes and systems, and make sure you have a long-term investment horizon of at least 5 years and your financial goals too, are afar. It would be best to systematically stagger your investments.  Those who are new to equity investing prefer the mutual fund route by opting for balanced funds and large-caps. Moreover, prefer the SIP mode of investing, which will help you mitigate the risk better. Thoughtlessly investing or speculating can be hazardous to your wealth and health.

Popular Modes of Investing in Mutual Funds

While mutual funds offer various modes of investing, one should preferably consider his or her convenience while investing in mutual funds. Some of the key modes of investment offered by mutual funds are:

  • Lump Sum or One Time Investment (...If you have a big sum of say Rs 1 lakh in your bank account and are looking to invest it in mutual funds at one go, then you can consider investing via lump sum mode. But beware! Investing all your money at one point, may call for market risk. And so to reduce this risk, there is an option called...)
  • Systematic Investment Plan (SIP) (...SIP can help you invest your money gradually every month or quarter. Where you can instruct the mutual fund to buy units of the scheme in your folio, by debiting a fixed amount from your bank account every month or quarter. But do not forget, that the balance money lying in your bank's savings account may continue to earn a lower rate of return. So what can be a better option, to increase returns on your money lying idle? Well, mutual funds offer an opportunity to invest regularly while providing an opportunity to earn better returns on your idle money, through...)
  • Systematic Transfer Plan (STP) (...STP is a mode of investing, where you initially park your entire Rs 1 lakh in a less risky category of mutual fund such as a liquid scheme, and then systematically transfer money on a regular basis from the liquid scheme to an equity fund or any other mutual fund scheme of the same fund house. So, while you are able to invest your money on a regular basis, the liquid scheme provides you an opportunity to earn returns better than your bank's saving account.)

(Let us run you through this in more detail ...)

Lump Sum or One Time Investment

  • Lump Sum Mode helps Invest all your Investible surplus at one go (...Even if you have a large corpus to invest, you can invest all your money in a mutual fund through a single transaction. But as we mentioned earlier...)
  • Lump Sum Investment attracts market risk (...so you need to be careful. You should invest in lump sum only if you have an appetite for higher risk as chances are high that, you may see your investments in the negative for some time. Ideally while investing in lump sum, you should have a longer time horizon. Or, on a cautious note, if you have a short term horizon, then you should invest your lump sum money in less risky options like liquid funds.)
  • LumpSum Investment can be rewarding only if the long term trend of the economy is positive (...you see, the impact of near term market volatility may fade over time.)
  • (...So we can say that lump-sum investment is...) More suitable if you are ready to take High Risk in anticipation of High Return (...or are willing to compromise on the returns by parking your entire surplus in Low Risk option such as liquid funds)
  • (Also as there is a single transaction, ...) You can make your Investment via a Single Cheque (...You need not write multiple cheques or fill any additional forms. So if you have say Rs 1 Lakh to invest, you can make a lump-sum investment by writing a single cheque of Rs 1 Lakh in favour of the mutual fund scheme and submit it along with the application form.)

(The other mode of investing is popularly known as SIP...)

Systematic Investment Plan (SIP)

  • SIP is a disciplined Mode of Investment (...SIP helps develop disciplined investment strategy by spreading your investments over a certain time period. Through SIP you can invest a fixed sum of money on a regular basis, in a mutual fund scheme.)
  • You can start SIP with a lower investment amount (...You see, if you make a one-time investment you may need a minimum amount of Rs. 5,000/-, but opting for the SIP mode you can start with an amount as low as Rs. 500/- per month.)
  • (So...)SIP can help you steadily build a corpus over time (...With the power of compounding SIPs can be a smart financial planning tool that may help you create wealth in the long run.)
  • SIPs provide you the benefit of Rupee Cost Averaging (...Through SIP, you invest a fixed amount every month, irrespective of the market movements. As the investment happens on a regular basis, you get an opportunity to invest at various market levels. So when the markets fall, you buy more units with the same amount; while if the market trends higher, you buy less units and simultaneously the value of your existing units grow. So in the long run your cost of buying is averaged out and your Average Cost per Unit may work out to be lesser than the Average Price per Unit.)
  • You can start your SIP with a One-Time Instruction (...Along with a cheque for the first transaction, you need to fill a one-time instruction form called SIP Instruction form through ECS/Direct Debit, which needs to be submitted only once. Post activation of your SIP instruction, the money can be deducted on a regular basis from your bank account and invested in the respective mutual fund scheme.)

Now let's take an example to see how SIP works...

...Suppose you have Rs 1.2 Lakh in your bank account, you may easily split your investment over a period of 12 months and invest Rs 10,000 per month in the mutual fund scheme through SIP...

    Systematic Investment Plan Lump-Sum
Month S&P BSE Sensex Investment
Amt. (Rs)
Units

Market
Value (Rs)

Investment
Amt. (Rs)
Units Market
Value (Rs)
15-Jan-2013 19,987 10,000 0.50 10,000 120,000 6.0 120,000
15-Feb-2013 19,468 10,000 0.51 19,740 - - 116,886
15-Mar-2013 19,428 10,000 0.51 29,699 - - 116,642
15-Apr-2013 18,358 10,000 0.54 38,064 - - 110,219
15-May-2013 20,213 10,000 0.49 51,911 - - 121,358
17-Jun-2013 19,326 10,000 0.52 59,632 - - 116,032
15-Jul-2013 20,034 10,000 0.50 71,819 - - 120,286
16-Aug-2013 18,598 10,000 0.54 76,670 - - 111,663
16-Sep-2013 19,742 10,000 0.51 91,387 - - 118,533
15-Oct-2013 20,548 10,000 0.49 105,114 - - 123,367
18-Nov-2013 20,851 10,000 0.48 116,665 - - 125,187
16-Dec-2013 20,660 10,000 0.48 125,595 - - 124,039
15-Jan-2014 21,289 120,000 6.08 129,425 1,20,000 6.00 127,821
Returns (XIRR)     14.80%     6.52%

Source: ACE MF, PersonalFN Research)

(The above scenario is shown for illustration purpose only. The actual scenario may differ from the above illustration. Past performance may or may not result in future.)

Say if this was a scenario in the beginning of C.Y. 2013 and, as can be seen in the table, if you invested this money in equities or in S&P BSE Sensex over a period of 12 months in C.Y. 2013; then with the same amount of money, the investments via SIP would have helped you accumulate more number of units than your lump sum investment. We can see that the value of your one-time investment of Rs 1,20,000 was in the negative for a while due to the downside market movement, while simultaneously SIPs helped you accumulate more units. As a result your investment via SIP would have delivered returns better than the lump sum investment. However this is just an example of how SIPs can help you benefit even from market volatility. It is not necessary that SIPs outperform lump sum investment every time; but they do help you with disciplined investment and rupee cost averaging that help you steadily create wealth in the long run.

(The next mode of investing that we would like to explain is...)

Systematic Transfer Plan (STP)

(Though less popular, STP is an advanced version of SIP, which functions with a similar objective... so let's see what makes STP different from SIP...)

  • STP helps in gradually investing a large corpus in a selected asset class (...Like SIPs, STPs help you invest gradually in a selected asset class like equities. But unlike SIP, in STP the investor initially invests in less risky liquid funds that may offer better returns, and over time gradually or systematically transfer a certain amount from the scheme to another scheme which may be an equity fund from the same fund house.)
  • (So can we say...) STP is a relatively safer investment method than lump sum investment and may prove to be a higher yielding method than SIP investment (...As all your money is not invested directly in risky asset class, STP may turn out to be a relatively safe investment strategy. Moreover, it also provides you with an opportunity to put the idle money in your bank's savings account
  • (So if used sensibly...) STPs can be a smart financial planning tool (...that can help you utilise your corpus towards meeting your long term financial goals.)
  • STPs provide you with the benefit of Rupee Cost Averaging (...Like SIPs, STPs too help you invest on a regular basis at various market levels. So when the markets fall, you buy more units with the same amount; while if the market trends higher, you buy less units and simultaneously the value of your existing units grow.
  • You can start your STP with a Single Mandate (...So as an investor, you need to give a single mandate to the fund house to periodically and systematically transfer a certain amount from one scheme to another. While you need to draw the cheque in favour of the initial scheme, you should mention, in the STP application form, the name of the secondary scheme where you wish to transfer the money, along with the amount and period. The fund house will process the transactions as per your instructions.)

Now let's see how STP works...

If you wish to invest Rs 1.2 Lakh lying in your bank account, but without putting all your money directly to market risk, you may opt for STP. Through STP, the entire Rs 1.2 Lakh can be invested in a low risk liquid scheme of the mutual fund house of whose equity scheme you wish to invest in.

Month Opening Balance in Liquid Fund (Rs) Transfer to Equity Fund (Rs) Closing Balance in Liquid Fund (Rs) Return from Liquid Fund @ 7% p.a. (Rs) Return from Equity Fund @ 12% p.a. (Rs) Final Value of each Transfer (Rs) Total Value of Investment (Rs)
1 120,000 10,000 110,000 642 1,268 11,268 -
2 110,642 10,000 100,642 587 1,157 11,157 -
3 101,229 10,000 91,229 532 1,046 11,046 -
4 91,761 10,000 81,761 477 937 10,937 -
5 82,238 10,000 72,238 421 829 10,829 -
6 72,659 10,000 62,659 366 721 10,721 -
7 63,025 10,000 53,025 309 615 10,615 -
8 53,334 10,000 43,334 253 510 10,510 -
9 43,587 10,000 33,587 196 406 10,406 -
10 33,783 10,000 23,783 139 303 10,303 -
11 23,922 10,000 13,922 81 201 10,201 -
12 14,003 10,000 4,003 23 100 10,100 -
Total 1,20 - 4,096 8,093 128,093 132,119

(Source: PersonalFN Research)

(The above scenario is shown for illustration purpose only. The rate of Returns mentioned above is an assumption. Past performance may or may not result in future.)

So here in the table, we can see that Rs 1.2 Lakh invested in a liquid fund is gradually transferred to an equity fund over a12 month period. At the end of 12 months, the Rs 1,20,000 transferred to the equity fund which we assume to have grown @ 12% p.a. would appreciate to Rs 1,28,093; while the liquid fund if it is able to yield 7% p.a. may provide a gain of Rs 4,026. So through STP you can gradually transfer a fixed amount each month from a liquid fund to an equity fund at various market levels and over time create a portfolio of equity mutual funds without putting all your money at risk at one point of time.

It is noteworthy that the Indian mutual fund industry has never stopped itself from trying or innovating strategies that can fulfil your needs as an investor, may it be while investing your money or withdrawing it to meet your financial goals. So let us now shed some light on a few of the other techniques introduced by some mutual funds that may be effective while managing your finances...

Value Averaging Investment Plan (VIP)

(Value-averaging Investment Plan is a relatively new method of investing in equity markets through a mutual fund. While in SIP the monthly investment is a fixed amount, in VIP the monthly investment varies which is calculated as per the targeted performance.)

  • (So based on the market movement...) VIP aims to Invest More when the Markets are Low and Invest Less when the Markets are High (...Therefore unlike SIP the amount invested each month is not fixed, but varies with market fluctuations.)
  • A target investment amount that has to be achieved monthly, needs to beset (...Based on the target, the value of subsequent investments will be derived from the difference between the target and the actual value of the investment.)
  • (Through a flexible investment strategy ...) VIP helps one to lower the Cost of Purchase of Units more effectively than SIP (...as the investor can take benefit of bearish phases in the market and even enjoy the benefit of power of compounding.)
  • (As the investment amount may keep varying on month on month basis...) VIP may be suitable for Investors who are ready to invest different amounts each month
  • Only a few mutual fund houses offer this facility to Investors
SIP vs. VIP in S&P BSE Sensex
Month S&P BSE Sensex Systematic Investment Plan

Value Averaging Investment Plan

 
    Investment
Amt. (Rs)
Units Market
Value (Rs)
Opening
Balance (Rs)
Investment
Amt. (Rs)
Units Market
Value (Rs)
15-Jan-2013 19,987 10,000 0.50 10,000 - 10,000 0.50 10,000
15-Feb-2013 19,468 10,000 0.51 19,740 9,740 10,260 0.53 20,000
15-Mar-2013 19,428 10,000 0.51 29,699 19,958 10,042 0.52 30,000
15-Apr-2013 18,358 10,000 0.54 38,064 28,348 11,652 0.63 40,000
15-May-2013 20,213 10,000 0.49 51,911 44,042 5,958 0.29 50,000
17-Jun-2013 19,326 10,000 0.52 59,632 47,806 12,194 0.63 60,000
15-Jul-2013 20,034 10,000 0.50 71,819 62,200 7,800 0.39 70,000
16-Aug-2013 18,598 10,000 0.54 76,670 64,982 15,018 0.81 80,000
16-Sep-2013 19,742 10,000 0.51 91,387 84,922 5,078 0.26 90,000
15-Oct-2013 20,548 10,000 0.49 105,114 93,670 6,330 0.31 100,000
18-Nov-2013 20,851 10,000 0.48 116,665 101,475 8,525 0.41 110,000
16-Dec-2013 20,660 10,000 0.48 125,595 108,991 11,009 0.53 120,000
15-Jan-2014 21,289 120,000 6.08 129,425 - 113,865 5.81 123,659
Gain/Loss - - - 9,425 - - - 9,794
Returns (XIRR)     14.85% - - - 15.79%

(Source: ACE MF, PersonalFN Research) (The above scenario is shown for illustration purpose only. The actual scenario may differ from the above illustration. Past performance may or may not result in future.)

Let's take an example of VIP and see how it works. Say you, as an investor, want to invest Rs 10,000 a month for a certain period of time in C.Y. 2013. If you start with Rs 10,000 in January 2013, and at the end of the first month, as we see, the market discounts, and the value of your investment becomes Rs 9,740. So now you need to invest Rs 10,260 (20,000-9,740), to make the investment worth Rs 20,000 (over a period of 2 months). Likewise, at the beginning of the 5thmonth in May 2013, if the value of your investment is Rs 44,042, then you need to invest Rs 5,958 (50,000 -44,042) only to make the amount reach the target amount of Rs 50,000in 5 months. So at the end of 12 months you would have invested Rs 120,000 by adjusting the market returns, but the actual money that is debited from your bank account is Rs 113,865. And if we compare the gains on total investment, then we can see that VIP has managed to offer slightly better returns than SIP. But do not forget that here the comparison between SIP and VIP is made for the same underlying investment or scheme and the outcome may be otherwise in actual terms for different schemes, based on their performances.)

(The other similar concept is...)

Value Averaging Transfer Plan (VTP)

(Value-averaging transfer plan works on a similar concept while flexibly transferring money from one scheme to another based on the set target...)

  • VTP is similar to VIP in terms of the concept of investment (...The difference here is that instead of a bank account, the money is transferred from a liquid fund to the selected equity fund)
  • Like VIP, VTP too helps one Invest by Flexibly Transferring More Money in the scheme when the Markets are Low and Less Money when the Markets are High
  • The targeted amount and returns of the scheme are considered for arriving at the amount of subsequent transfers (...from Liquid Fund to Equity Fund)
  • VTP may not be suitable for novice investors (...They should instead consider investing via STP if in the early stage of investing.)

(The next concept is...)

Dividend Transfer Plan (DTP)

  • Dividend Transfer Plan as a concept works similar to Dividend Reinvestment Plan(...but with a difference in structure.)
  • Through DTP one can choose to reinvest the Dividend Income either from a Debt Scheme to an Equity Scheme or from an Equity Scheme to a Debt Scheme (...The idea is to move dividend income to a different asset class.)
  • (So through DTP...)The reinvestment of the Dividend Income can be done in another scheme but from the same fund house (...Unlike dividend reinvestment where the dividend amount gets reinvested in the same scheme, through DTP the investor can instruct the fund house to reinvest the dividend amount in another scheme of his choice, as and when declared.)

(Another less popular but useful concept is...)

Systematic Withdrawal Plan (SWP)

(Systematic Withdrawal Plan is a smart way to plan for your future needs by withdrawing amounts systematically ...)

  • SWP helps Systematically Withdraw an amount of money from the invested mutual fund scheme on a regular basis (...at pre-determined intervals) to meet the ongoing expenses of the investor (...It can be an effective tool to manage one's regular expenses during retirement phase.)
  • The money withdrawn through SWP can be credited to the bank account of the investor (...as per the instruction of the investor)
  • SWP offers Fixed Withdrawal as well as Appreciation Withdrawal facility (...Through fixed withdrawal, you as an Investor can specify the amount you wish to withdraw from your investment on a monthly or quarterly basis, while under Appreciation Withdrawal you can withdraw the appreciated amount on a monthly or quarterly basis.)
  • SWP can help manage regular expenses without keeping the savings idle (...If you withdraw all your investment at one point then the withdrawn money may lie idle in your bank's savings account. But through SWP your money can keep on earning better returns by remaining invested, while you can meet your regular expenses.)

Some Key Takeaway Points!

  • Lump Sum Investment attracts market risk and can be rewarding if the long term trend of the economy is positive (...and so it is suitable for investors who are ready to take High Risk for High Return)
  • Systematic Investment Plan or SIP helps develop disciplined investment strategy(...and so it can be an effective financial planning tool.)
  • (Even with small investments...) SIPs can help you steadily build wealth over time
  • (Moreover...) SIPs provide you with the benefit of Rupee Cost Averaging and Compounding
  • Systematic Transfer Plan (...which helps transfer a certain amount from one scheme to another...) is a relatively safer investment method than Lump Sum investment and higher yielding method than SIP investment
  • Value Averaging Investment Plan helps investors invest more when the markets are low and invest less when the markets are high (...which helps lower the cost of purchase of units more effectively than SIP)
  • (Like Value Averaging Investment Plan ...) Value Averaging Transfer Plantoo helps one Invest by flexibly transferring more money from one scheme to another when the markets are low and less money when the markets are high
  • Dividend Transfer Plan can help reinvest the Dividend Income(...earned by the investor) from one scheme to another scheme (...of the same fund house)
  • Systematic Withdrawal Plan (SWP)helps systematically withdraw a fixed amount of money from the scheme (on a regular basis)to meet the ongoing expenses of the investor (...without keeping the savings idle)

NRI CORNER

Can NRIs invest in Mutual Funds in India?

Investments by NRIs in Mutual Funds can be made on a repatriable or on a non-repatriable basis, as preferred by the investor

Repatriable basis

To invest on a repatriable basis, you must have an NRE or FCNR Bank Account in India. The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on repatriation basis, subject to the following conditions:

  • The mutual fund should comply with the terms and conditions stipulated by SEBI
  • The amount representing investment should be received by inward remittance through normal banking channels, or by debit to an NRE / FCNR account of the non-resident investor
  • The net amount representing the dividend / interest and maturity proceeds of units may be remitted through normal banking channels or credited to NRE / FCNR account of the investor, as desired by him subject to payment of applicable tax
Non-repatriable basis

The Reserve Bank of India (RBI) has granted a general permission to Mutual Funds to offer mutual fund schemes on non-repatriation basis, subject to the following conditions:

  • Funds for investment should be provided by debit to NRO account of the NRI investor. Alternatively, funds may be invested by inward remittance or by debit to NRE / FCNR Account
  • The current income in the form of dividends is allowed to be repatriated

No permission of Reserve Bank either by the Mutual Fund or the NRI investor is necessary.

Does an NRI need any approvals from the Reserve Bank of India to invest in mutual fund schemes?

No. As an NRI one does not need any specific approval from the RBI for investing or redeeming from Mutual Funds. Only OCBs and FIIs require prior approvals before investing in Mutual Funds.

ELSS ( Equity Linked Saving Scheme) or Tax Saving Mutual Funds

Although all equity funds exempt you from paying long-term capital gains tax of 10.4% up to an amount of ₹1 lakh (apart from grandfathering clause), there is one breed of equity funds that give you tax deduction benefits at the time of making an investment. These are equity-linked saving schemes (ELSS), more popularly known as tax-saving mutual fund (MF) schemes.

An ELSS gives you tax deduction benefit of up to ₹1.5 lakh under Section 80C. This is the only pure equity investment vehicle that offers Section 80C deduction benefits.

The only catch here is it comes with a 3-year lock-in. Other equity funds don’t carry a lock-in. Remember, the lock-in also applies to your systematic investment plans (SIP); every monthly instalment you make in an ELSS is subject to a 3-year lock-in.

Other than deduction benefits and the lock-in, an ELSS is quite the same as a diversified equity fund. It invests in equity shares of companies across sectors and market capitalisations. When investing in ELSS, care should be taken to not invest in a new scheme every year to save taxes. One ELSS in the portfolio—in which you keep topping up every year—is more than enough.

Comparison between ELSS and other tax-saving methods

There are a plethora of savings schemes to help you build your wealth, such as FD, PPF and NSC to name a few. But the returns from these schemes are taxed. This is where ELSS stands out with its dual-benefit – its returns are generally higher & partially taxable (Returns are not taxable until 31 March 2018. After 31 March 2018, returns will be taxable at a concessional rate of 10% if gains are greater than Rs. 1 lakh. This coupled with a mere lock-in period of 3 years is all the more reason for you to invest in ELSS now.

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 7% to 8% 5 years Yes
National Pension System (NPS) 8% to 10% Till Retirement Partially Taxable
ELSS Funds 15% to 18% 3 years Partially Taxable

Section-80 of the Indian Tax Act allows deduction upto Rs. 150,000 from your total annual income. This limit was enhanced in the 14-15 fiscal. Yet, many taxpayers find a major chunk of this getting consumed by mandatory deductions

1.5 Lakh Investment in ELSS will double in 5 years
Lowest lock-in period of 3 years