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nformation provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. , its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.
At the end of 2017, a friend of mine asked me if it was a good time to start investing given the markets were at a high. I advised him to start investing through the SIP route. A few months later, in mid 2018, I was talking to the same friend again. This time he asked a different question. The markets had been falling for a few months. So he wanted to know if it was a good time to start investing or he should wait for the markets to fall further.
People who are afraid of putting their money in the stock markets find a variety of excuses to delay their investments. No time seems like a good time to invest. However, delaying your investment hardly does any good for your corpus. In most cases you end up spending the money that’s lying in your bank account. But even if you don’t, does starting to invest late help you accumulate more money? Let’s look at some data to find out.
Suppose you had to choose between starting an SIP of Rs. 4,000 today for 5 years or an SIP of Rs. 5,000 one year from now for four years. In both cases, the SIP would end on the same date and in both cases you would have invested Rs. 2,40,000. You would think that in some cases, the 5-year SIP would do better whereas in other cases, the 4-year SIP would give you better results. So what does the data say?
We took a portfolio of 5 different funds* and ran SIPs in them starting at various points in time. One set of SIPs were run for 5 years and another for 4 years. Some SIPs started as early as mid-2007. Four year SIPs were started one year after the 5 year SIP, such that they would end on the same day. Collectively, we compared the results of over 2500 SIPs.
The following graph compares the values of the 5-year SIP with the 4-year SIP as on the last day of the SIP:
As you can see from the graph, the 5-year SIP always beats the 4-year SIP.
Not only this, to remove any fund selection bias, we also tried SIP in Nifty 500 index. The following graph shows the result:
We see the same result here as well, the 5-year SIP almost always beats the 4-year SIP.
In terms of numbers, the value of 5-year SIP in mutual fund portfolio beat the value of 4-year SIP 98.5% of the times. In the index, the 5-year SIP grew more on 96% of the occasions. The odds are overwhelmingly in favour of your funds giving you more return if you start early.
The data clearly shows that waiting to start your investments almost never pays off. Most of the time, you end up accumulating lesser units, which will grow to a smaller value. Essentially, delaying your SIPs, even if you make it up with a higher monthly amount, does not help. Staying invested longer matters more!
So to get ‘highest returns’, the best time to start investing is today.
How many of you want to wear the same clothes as your friends or neighbors? Not only is your size and fit different, your taste too will likely be different. And importantly, you want to look different and feel different. But when it comes to investments, why is it that you think FDs suit you because they suited your father, or the insurance policy your neighbor bought or the mutual fund your colleague bought, is what you also need? Just as your clothes need to be tailored to suit you, your investments need to be tailored to your needs. What may suit someone else may not suit you. Nor would they give the same results. This article is about how your unique needs call for unique investment decisions.
Your goals are different
In all aspects of life, what our friends, colleagues, or other people do have an influence on us. More often than not, you hear about a fund that gave enormous returns. Or how investing in a particular fund was a bad decision. Or the claim that FD is the most stress-free option. You have multitude of opinions coming from various sources. But acting based on just that can be detrimental.
You may ask how your goal is different, if you are saving for your retirement and so is your friend. Yes, some goals are generic. Like retirement, education or just wealth building. But do you have the same number of dependents? Are you going to send your kids to the same college? Or do you envision a similar kind of lifestyle? There are distinctive characteristics about your life that make each of your goals different. How much you will need will also depend on when you need it and how much you already have. You may start investing for your retirement by the age of 35 while someone else started only at 45. With a longer time frame, you can up your portfolio risk.
Your risk profile is different
More importantly, your appetite for risk is also different. By that, I don’t just mean the risk you are willing to take. There are also other factors. Whether or not you have a stable income, loans to tend to or other commitments; all have an effect on how much risk you can take. Someone may have ancestral assets to fall back on, while you need to build your own assets. Some of you may be prone to higher medical expenses while some are not. And these, in turn, will determine how much risk you can actually take.
You deal with your investments differently
Finally, there are behavioural aspects. Running SIPs on different dates spread throughout the month may help you catch volatility. But let’s say, you are the kind who doesn’t have a track on your bank balance and a SIP date falls somewhere in the last week of the month. It may so happen that you don’t have enough balance in your account and it gets bounced. In that case, you are better off with SIPs in the first week of the month. With the return differential between different days being very low, you will lose more by skipping an SIP.
In that way, your attitude towards money and how you manage investments can vary. And you need to figure what works for you. Spending patterns and how you prioritise needs are unique to you. Systematic plans, be it SIPs, STPs or SWPs can come in handy. According to your requirements, they can be used for different purposes.
Therefore, making investment choices is simply not limited to going for a fund that a friend told you about or picking from the top performers. For an investment to work for you, all the risks and limitations should be considered. So should be the opportunities and strategies that may give you optimal returns. Talk to your advisor today to make sure you are on the right track.
In an investor-gathering addressed by a renowned fund manager, a presentation on the returns delivered by equities over several years was put up. One of the investors asked him, “you are showing these returns. I have been investing for over 5 years now but have not seen this return in my investment. So, are these really returns that an investor gets?”
This question rang a familiar bell as many of you have asked us variants of this question. Some of you also compare your holding’s returns with the fund’s return shown on any website and think you did not get the same returns for the same fund.
The answer to this question depends either on your investment behavior (predominantly) or how the comparison is made – in terms of time frame and the product being compared. Let me try to list a few common reasons as to why you would not have got the same returns as the market.
Your investment behaviour
If you are the kind prone to reacting to market volatility by investing money when the returns are high or taking away money when the markets fall or remove a large chunk and keep some, your returns are bound to be different.
This is irrespective of the fact that you are comparing for the same time frame whether 5 years or 7 years.
The question is about what you did in the in-between period. Please remember that the index is always fully invested. It does not move profits out like you do and then try to re-enter later. Hence, if you tried to do these ‘market timing experiments’ chances are that the index got the better of you.
Even if you had beautifully booked out profits at a market peak and then reinvested in the same fund, what you see, unfortunately, is your return from the reinvestment date. It is not your returns over ‘full period’ of holding that fund. Let me explain with an example:
You invested Rs 5 lakh in Fund A say on January 1, 2011 and your value as of December 31, 2015 grows to Rs 12 lakh. Now you feel the market is at a high and want to exit and decide to withdraw the money that day. However, a month later, you see that the market has corrected quite a bit in January and decide to re-enter, investing the same Rs 12 lakh on January 31, 2016. As of October 2018, this value is at say Rs 14 lakh. So, between January 2016 and October 2018, your returns are shown as 5.7% and you wonder if your returns are quite bad. What you forget is the returns you totally made on this fund, from January 1, 2011. If you do a quick XIRR, you will see the ‘lifetime returns’ (returns over the entire period of holding that fund) to be 14.2%. So, first, your returns were not low and second, Rs 5 lakh was your cost, not Rs 12 lakh.
Wrong time frame
Some of you also tend to be misguided by the 1-year returns of a fund and compare it with a different period of your holding, especially in years of very high 1-year returns. A single year return of 20% (absolute returns) when compared with your annualized (IRR) return of say 14% in the same fund, may seem quite different, if your time frame was, say, 2 years and a chunk of the returns came in the last 1 year. Annualised returns does not mean that the fund delivered the latest 1 year return in every one of your holding years. It may have been low in one year and high in another year.
Next, in the said SIP in the above period, you would have bought a good chunk when the fund rallied. Now with the fall, the SIP returns will seem worse simply because you averaged at a high and it is now low. If you had invested lumpsum, you did not invest when the fund rallied in 2016 and 2017, and so you did not increase your cost. Now that does not mean that SIP is bad. Consider a period when your lumpsum purchase was made at a high and the markets fell later. Then the SIP’s returns would beat out that of lumpsum’s. Hence, if you wish to compare, compare the SIP returns of the index or the peers over similar periods of your investment and not the point-to-point returns.
This holds good if you invested lumpsum and also kept investing now and then. Here again, comparing with point-to-point returns will not be correct.
If you have taken care of all the above errors and your fund still seems to pale in comparison with the rest in performance, then, of course, it is time for you to evaluate your choice of fund and consider the possibility that you may be holding a poor performer in your portfolio. At a portfolio level too, there could be various reasons when your comparison may not work. It could be as simple as your comparing an asset allocated portfolio with a pure equity index or as complex as one or two fund pulling down the entire returns. These are best addressed by checking with your advisor.
Thinking about investing in mutual funds? Knowledge of how different kinds of mutual funds are taxed is important, as it can help you and other potential investors decide what kind of investments to make and identify how to bring down the tax outgo, thereby increasing savings.
Well, among the various factors to consider in the selection process like returns yielded, credibility of mutual fund houses, investment style, fund management team, etc., the tax implications of mutual fund investments should not be overlooked. The income tax rules applicable on mutual fund gains come down to the kind of fund where investments are made — debt or equity — as well as the duration of investment. Here is a look at how the kind of fund determines the tax rate applicable:
How are Mutual Fund Investments Taxed?
Should 65% or more of the corpus of a mutual fund scheme be put into equities, for the purpose of taxation, it will be treated as an equity scheme.
In case of gains made from investments in an equity mutual fund scheme (ELSS mutual funds, tax saving mutual funds, etc.) held for more than 12 months, it will be considered as a long-term capital gain. Here, a 10% tax is applicable on gains surpassing Rs. 1,00,000 a year on equity investments.
If you wish to redeem your equity fund investments within 365 days, the returns or gains will be treated as short-term capital gains. Short-term capital gains are taxed at 15%.
For investments made in equity mutual funds before 31 January 2018, the gains till that date shall be considered as grandfathered, which means it will be tax exempt.
Dividends from equity mutual funds will not be taxed in the hands of the investors. However, dividends are paid after deducting a dividend distribution tax of 11.648% (which includes surcharge and cess).
Gains from debt funds that are sold after less than three years of holding will be treated as short-term capital gains for the purpose of taxation. Such gains get added to the income and will be taxed as per the applicable income tax slab.
If debt mutual funds are held for over three years, the returns are regarded as long-term capital gains for taxation purpose. The tax applicable will be 20% with indexation benefit.
Dividends from debt mutual funds will not be taxed in the hands of the investors. However, dividends are paid after deducting a dividend distribution tax of 29.12% (which includes surcharge and cess).
Arbitrage mutual funds that park money into arbitrage opportunities in cash and derivative sections of the equity markets, for the purpose of taxation, will be treated as equity funds.
Tax Saving Options under Equity Investments
Investments made toward ELSS mutual funds or tax saving mutual funds qualify for tax deduction under Section 80C of the Income Tax Act, 1961. The maximum tax deduction that can be claimed under this section for investments in ELSS mutual funds or tax saving mutual funds is Rs. 1,50,000.
Given that such schemes mostly invest in equity, the risk that you, the investor, take on is higher. However, ELSS mutual funds or tax saving mutual funds can reward you with higher returns for the extra risk. Such funds are a suitable option for investors with a high-risk appetite and who would like to park funds for a period of five to seven years. An essential point to be noted is that ELSS mutual funds come with a lock-in of three years. This means that the gains on ELSS mutual funds will be regarded as long-term gains and therefore will be subject to long term capital gains tax of 10%.
Now that you know all there is about the taxes applicable on different mutual funds, make this a factor under consideration while picking a plan to invest in. It is advisable to stay invested for the long term since the tax implications are lesser. Also, if the intent is to save on tax, you can consider going for tax saving mutual funds or ELSS mutual funds since you can claim tax deduction up to Rs. 1,50,000 under Section 80C on the investments made. Tax can affect your gains significantly, hence, make sure to factor this in while assessing which type of mutual funds to invest in.
Please do not reply back to this mail. This is sent from an unattended mail box.
Please mark all your queries / responses to
Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. , its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.