10 Common Myths about Mutual Fund Investments

10 Common Myths about Mutual Fund Investments

Below is a list of 10 common myths about mutual fund investments:

1. Investment in mutual fund (MF) is always risky: No, it is not. Mutual fund is not necessarily all about equity or stocks. Mutual funds also deal into debt instruments like Certificate of Deposits (CDs), Bonds, Govt. Securities (G-Sec.), Non-convertible Debentures (NCDs) etc. This means that a mutual fund scheme can also have all or some of these debt instruments in its portfolio. Different debt instruments have different maturity periods. MF schemes which are having debt papers of very small duration are least risky. Such schemes are known liquid MF schemes. These schemes can be as safe and as liquid as your savings bank a/c. Similarly carefully chosen debt MF schemes can be as safe as fixed deposits along with better tax-adjusted return.

2. Investment in MF requires demat a/c: No, it does not. Though equity MF scheme does invest into stocks of companies, but you need not to have a demat a/c to hold units of such MF schemes. All you need is to be KYC compliant (i.e. having PAN and valid address proof) and have an active bank account. That’s it. At FundzBazar site you can even invest completely online and instantly that too without having any demat a/c!

3. Investment in MF requires timing the market: No, you need not to time the market if you are investing for long term through Systematic Investment Plans (SIP) i.e. investing a small amount at regular intervals for a number of years. If you do that then, your investments will reap the benefit of rupee cost averaging i.e. buying more units when price is low and buying lesser units when price is high by investing same amount every time.

4. Higher unit value (NAV) means a costly purchase: No, it does not. Let me give you an example. Suppose you asked me, the rate of inflation in last 2 financial years (FY) and I told you that in FY 2013-14 cost inflation index (CII) stood at 939, and in next two FYs CII values were at 1024 and 1081. Does it mean anything to you? No. It would have helped you instead if I had told you that in last two FYs rate of inflation were 5.57% (FY 2015-16) and 9.05% (FY 2014-15). So what matters is percentage of relative change and not the value itself as the base values in cases of both inflation (at 100) and mutual fund NAV (at 10) are assumed for ease of understanding and measurement. So look at yearly growth rate of a scheme’s NAV rather than NAV itself. If it’s consistently beating its benchmark return then it’s worth considering.

5. Having many schemes in portfolio means diversification: Remember one fundamental advantage of a mutual fund scheme – the diversification that it offers. Say, I am investing directly into stocks of companies and with the money that I have, I bought two stocks. On the contrary, you are investing into MF. In that case with the same money that I have, you bought some units of MF scheme and that MF scheme’s portfolio might consist of many stocks, say, 30 stocks. So your investment portfolio is much more diversified than mine. Now when a single MF scheme offers me enough diversification, investing more into similar type of schemes will not make much sense. But I can surely buy some other type of schemes to get exposure into different types of investment styles.

6. Returns from all MF investments is taxed similarly: If in portfolio of a MF scheme, percentage of exposure into equity type of instruments is more than or equal to 65% - such schemes are then known as equity schemes. Similarly if percentage of exposure into debt type of instruments is more than or equal to 65% - such schemes are then known as debt schemes. Equity schemes and debt schemes are taxed differently. Taxing also depends on how long you hold the investment before you sell. If equity schemes are sold after holding for more than a year – then NO tax is to be paid. If debt schemes are held for more than three years then on indexed gain 20% tax is to be paid. If investments are held for shorter term then short term capital gain tax is to be paid.

7. Redeeming from MF investment is a cumbersome process: No it is not. Investments can be redeemed anytime online or offline (signing on a transaction slip) provided it is not within the lock-in period (like in cases of ELSS or close ended scheme). Redemption amount will be credited to your registered bank account within a stipulated time period.

8. MF investment is mandatorily for long term: No, not necessarily. As discussed above one can keep money in liquid MF schemes also which is often used to park money for a very short term. There are other debt schemes (arbitrage fund, accrual fund, income fund) which can be held for short to medium term. Contact your financial advisor for the same and mention clearly about your investment horizon.

9. MF investment cannot be used for regular periodical income: No, it can definitely be used. Like you can invest systematically, you can withdraw also from a scheme systematically i.e. withdrawing a fixed amount at a regular interval for a specified period or till the money lasts whichever is earlier. This is known as Systematic Withdrawal Plan (SWP). This is really helpful for retired people or for anyone who needs regular income. 

10. MF is full of strange abbreviations: Agree to some extent. But we should look into each abbreviation and understand it fully – what it stands for. There are too many – NFO, NAV, SIP, STP, SWP, MIP, FMP, ELSS etc. Then there are terms like Growth, Dividend, Regular, Open Ended, Close Ended. All these can be intimidating at start. But please note that there are plenty of helps available online if you Google any of these terms. A good financial advisor also should help you to understand relevant terms and abbreviations. You need not to know everything but only the terms that matter to you. Ask questions in the comments section. Take some effort from your side. These small efforts will take you miles

Multiple mediclaim policies settlement

Many of us or may have multiple health insurance policies. Most of the salaried persons anyway have a group mediclaim from their employer. Someone might have bought a health insurance cover from PSU insurer long back and now took a higher cover from a private insurer.

Let's take an example here: I have a health insurance cover from company A of Rs. 2 lakhs and from company B of Rs. 3 lakhs.

If my claim amount is less than Rs. 2 lakhs - I can then choose any insurer (A or B) to settle the claim; if  claim amount is more than Rs. 2 lakhs but less than Rs. 3 lakhs - I can only approach company B for settling the claim.

But if my claim amount is more than 3 lakhs (say 4 lakhs) - then I have to approach both the company A and B.

In such a scenario 'contribution clause' may come into effect. Out of my total cover of 5 lakhs - company A's contribution is 40% ((2/5)×100) and company B's contribution is 60% ((3/5)×100). So out of my total claim Rs. 1.60 lakhs (40% × 4 lakhs) will be reimbursed by company A and Rs. 2.40 lakhs (60% × 4 lakhs) will be reimbursed by company B. Some companies may also decide to settle the maximum claim amount that it can within its limit without resorting to 'contribution clause'.

But in such a case you cannot send the original bills and original discharge certificate to both the companies. So before sending the original documents to first company - take photocopies of everything and also attest. Once the claim is settled by the first company - take the 'settlement certificate' from them and if possible also ask from them for a declaration that they have all the original documents with them. Now approach the second company with duly filled claim form, attested photocopies and 'settlement certificate' received from the first company.

While taking a new policy you must declare details of your existing policies, if any. Though in most of the cases group mediclaim policy details are not asked but still read the instructions in proposal form carefully. Preferably you should have one large cover from a single insurer rather than having several small covers from multiple insurers.

If you have any experience in helping your clients settling multiple claims - please share.

The Story of Eggs and Baskets

Do not put all your eggs in one basket. We heard this from time immemorial. This is frequently quoted whenever we discuss the topic of asset allocation. Let us look deeper into the characters of this story - namely eggs and baskets.

Eggs are nothing but my investments (amount of money that I am going to invest) and baskets are different asset classes (debt, equity, hybrid, gold, real estate etc.)

Who came first - egg or chicken? Mystery unsolved. But when we talk of asset allocation we know the answer. Eggs came first. And depending on the number of eggs (amount of money to be invested), baskets are chosen. Not the vice versa. The amount of money that you are going to invest - you will invest that anyway. Because that is your investible surplus - you cannot increase that and you should not decrease that. As far as choice of basket is concerned it depends on many things and hence can be little complicated at times.

Let us talk of two scenarios here:

Mr. A can invest Rs. 1 lakh now and also Rs. 20 thousand every month. He does not have any critical goal left to map with this investment. All his goals are either fulfilled or are already taken care of. He just wants to see his money growing. At this scenario Mr. A has ample choices to make. He may decide to invest fully into equity (if his risk appetite is high) or fully into fixed deposit (in case of low risk appetite) or into an appropriate mix of debt and equity (moderate). So choice of basket is entirely at Mr. A's discretion.

Mr. B can also invest Rs. 1 lakh now and Rs. 20 thousand every month. But he has goals to achieve - short term, medium term as well as long term goals. Let whatever be Mr. B's risk appetite - he doesn't have much choices. For short term goals he cannot put his eggs in a basket which can shake anytime. Similarly for long term goals even if he wants to invest only into FD - he may not be able to do so - as he may fall short of his target. If that happens then he will have to either increase his investment amount or adjust his target to a lower level. If none of these is possible then he has no choice but to choose the optimal set of baskets suitable for him.

The crux of asset allocation lies in minimizing risk. If my different asset classes respond differently to a particular event – then my overall portfolio is in a very healthy shape. Lesser risk needs not necessarily lead to lesser return but assuming a realistic return from the portfolio is a very important step while planning investments. If that means more amount of money to be invested – check if you can. If not, then adjust your goal amount. Somewhere somehow you have to strike a balance, otherwise get ready for a nasty surprise. No one knows, what future will turn out for us. But if you assume a lesser return than the market standard and also set a higher target value for your goal – and your investible surplus matches the requirement – then chances are more that you will achieve your goal comfortably.

What should be the right mix of assets for a goal? There is no right or wrong answer here. It depends on many factors like – thecriticality of the goal, your overall net-worth, market trend, available investible surplus, your understanding about different asset classes and so on.Still if we try to present a standard set of rules for asset allocation (which may or may not fit your particular case – hence it is highly recommended that you contact your financial advisor for the same) that may look like this:

If my goal is very short term (< 1 year), I should not look beyond pure debt instrument with assured return. If my goal is short term (<=3 years), majority of my investments should go into debt and/or hybrid instruments. If my goal is medium term (<=7 years), 50 to 70% of my investments can go into equity and the rest(30 to 50%) into debt/hybrid instruments. If my goal is long term (> 7 years) majority of my investments (70% or higher) should go into equity and rest into debt/hybrid.

Also remember here that a long term goal does not always remain long term. A goal which is 10 years away from now – is surely a long term goal today. But after 7 years from now that same goal will turn medium term and thereafter short term. So we have to change asset allocation accordingly.

[While we talk of assets, it should be noted that ‘mutual fund’ as a whole doesn’t fall in any asset class. It can take different shape (equity, hybrid or debt) depending on your choice of schemes.]

Here is how to apply for an IPO through ASBA

Here is how to apply for an IPO through ASBA

Fixed Deposits vs Debt Funds: Which is a better investment option?

Fixed Deposits vs Debt Funds: Which is a better investment option?

Happy Financial Independence Day

Happy Financial Independence Day

To win independence India had to wait for 200 years. Consider yourself lucky enough that to become financially independent, you need not to wait that long. By the way what it takes to become financially independent?

As per definition if you can achieve all your financial goals without making any further investment, you are then truly financially independent. But in real world this definition may not work for most of us. So how and when can we become financially independent? We need to secure only 3 things:

(1) We cannot achieve all our financial goals today itself. Fine. Agreed. And we need not to worry for that, because we are earning well and will keep on doing the same for years down the line as long as we enjoy our work. But life is unpredictable - so we need to secure our family's future in case tomorrow I am not there for them. So calculate and get adequately insured yourself. Also take sufficient amount of health cover to cater to medical emergencies and hospitalization. Last but not the least keep emergency fund (equivalent of 4 to 6 months of expenses) ready always. This helps you to live a stress free life.

Two more points: (a) Invest in yourself. If you improve / sharpen your skill-sets regularly then only you can expect a steady upward earning curve. (b) Exercise. Have good and healthy food in time. Keeping yourself fit is a must.

(2) Manage your liabilities properly, if any. Ideally you should live a loan-free life. With loans running, you can never taste the sweetness of independence. Can you? But at some phases of life, most of us have to live with liabilities. That is ok, if loan has been taken for some crucial goal. But again affordability should always be kept in mind here. It is desirable that our loan EMI never crosses 30% of our net monthly income. Never. And we should also have a clear road map ready to payoff the loan as soon as possible but not in the price of sacrificing any critical family goal.

(3) We should also be able to make sufficient investments to achieve all our financial goals - number one among them is retirement goal. While making investments for our goals preferably we should not assume that our salary will keep on increasing steadily and hence we will make increased investments in future. Better we go for a fixed SIP approach instead of a top-up SIP approach. Your salary will increase, but so is your expenses and social status. Then why take additional stress? After all we are talking here about financial independence. How much to invest for each financial goals of yours? Click here to calculate in detail. There you can plan your goals and come to know how much to invest. Or better call your financial advisor and ask him/her what, when, how, where about all your investment queries.

Take necessary steps today. And check your steps at regular frequency to make sure that you are on the right path. If you start taking your finances a little bit seriously and with lots of discipline then no one can stop you from becoming FINANCIALLY INDEPENDENT.