Investment habits to avoid while investing in Mutual Funds

Many persons have made money or have been able to achieve their goals by investing in mutual funds. These have been savvy investors or have got good financial advisors. There are others who also invest in mutual funds because others say they have achieved goals by investing in mutual funds, so they also go about investing in mutual funds. Their way of looking at mutual funds is like investing in the stock market directly without understanding the working. I hear many of them saying invest in the mutual fund when the NAV is low. NAV being low does not mean anything, at that point they argue that they get more units, because they believe that having more at a low price will give them more benefits when the NAV goes up.

In reality it does not matter. Any movement in the NAV depends on the portfolio in which the fund is invested and the number of units. So having more units or less units does not matter. Let me give you an example, if the cost of the portfolio is Rs.10,000/- and there are 100 units the NAV will be Rs.100. So if you buy 10 units at Rs.100 your cost would be Rs.1,000/- Now say there are only 10 units, then the NAV would be Rs.1000/- So you would buy only 1 unit at Rs.1,000/- After a year the Market Value of the portfolio become Rs.11,000/- i.e. an appreciation of 10% in this case in the first scenario the NAV would become Rs.110/- and in the second case it would become Rs.1100/- and your return would be the same i.e. Rs.1100/- so if you see, buying at lower NAV is just a sales pitch. Do not fall for it.

There are others who buy because a scheme is giving dividends, again dividends do not mean anything. You should go for dividend option only if you need the money. Remember that when a dividend is paid out, a portion of the dividend has to pay to the government as Dividend Distribution Tax, so in effect, you get less money in hand. If you let the money remain, the fund manager will be able to generate more income out of this and when you remove the money when you need it, you end up with more money in hand. When Dividend is paid the NAV also comes down. This is one more reason why Dividend reinvestment option is also not good. As what gets reinvested is after some money is paid to government.

You do not need to open a demat account to invest in Mutual funds, this is some mis-selling being done by some banks. There is an ease in investing that is all. There are many more platforms not available where you can still have the ease of investing without having a demat account. As I had mentioned earlier, the NAV depends on the portfolio. Here portfolio does not mean just equities, it means any investment in financial assets viz. Bonds, NCD’s, FD’s etc. So mutual funds are an alternative to investing in stock markets or even banks or Company FD’s, NCD’s etc. When is the right time to invest in mutual funds, actually it should be anytime, all depends on your goal, if it is long term go for equities.

Here you should go for Systematic investment option. By this you average out your investment costs and end up with superior returns than a lump sum investment. How do you choose your mutual fund, go by the long term performance of the fund, and just don’t go by the returns over the last year. Last year almost all funds did well. We have to see how the fund did during both the bull and the bear run. Avoid the above habits and make money by investing in Mutual Funds.

Invest in Equities

Everyone makes money in equities, but wherever I put my money, I don’t make money. Does this ring a bell? Historically the equity market has given a return of around 17%, but this return has always been over long periods of time. If you take yearly rolling returns, they would mostly be positive only if you have invested for 7 years or more. That does not mean you do not make money if you invest for a shorter period. Just like Real Estate, equities also go through their cycles, the longer you stay invested, the more the chances you make money. But we are human beings, we are not ready to stay invested and the reason for this is, it is easy to exit. You would not have done the same with real estate, this is because of the amount of hassles involved with registration and taxation, whereas in equities, it is easy, so you try to make a quick buck or track on a daily basis.

Over the last 3 decades, equities have outperformed gold, bank deposit and real estate by a handsome margin. Post tax the returns are even better. Now that we have seen that equities give better returns and you want to make the money, how do you go about? Yes, you have your work to be done and you do not have the time to do research. One way out is to invest in a good mutual fund scheme. The returns would be a little lower that what you would have got, if done directly in equity, but the risk would also be lower. Go for two or three schemes, one large cap, one mid cap and a small cap fund. This way you would diversify your risks as well as participate in the growth of small and midcap equities. The fund managers will be doing all the research for a very small fee.

If your risk taking capacity is low go for a balanced fund. In addition to investing is equities, these funds also invest in fixed income securities, to give stability to the portfolio. The returns in this case would be a little lower compared to equity funds. If you do not have any risk taking capacity, then go for a pure debt fund. The benchmark should be as follows, investment horizon, 7 years or more, go for equity, 3 to 7 years, balanced funds and less than 3 years debt funds.

Investment habits to avoid

We save money from time to time but we fail as investors, as we do not invest properly. I have noted some points which we should avoid if we want to move from savers to investors.

-    Too young to plan for retirement – A person is never too young to plan for retirement. In fact the earlier you start the lesser you would need to save and you would have more money in hand both at the time of retirement as well as when your income starts increasing. You might reach a stage where you would be able to pursue your dreams and not run after money lifelong.

-    FD’s are the best – This is one of the greatest myths I have ever heard. But if you look around, 90% of the people invest in FD’s only. FD’s give you fixed returns, but they never beat inflation. They are safe but not the best.

-     Equity is for savvy investors – If you feel so, you are not entirely wrong, but you have options. You can get knowledgeable persons to do the investment for you, this is achieved using the mutual funds route or take the help of financial planners.

-     Equity can give quick returns – Many persons whom I try to ask to invest in mutual funds, ask me for tips to invest in Equity market. They all feel that Equity market is there to make a quick buck. Equity market is not a gambling den, when you purchase a stock you indirectly become a part owner of a company. This was the basic we learnt when we went to college, but we have all forgotten this basic, In the Equity market there is money to be made, but not quick money.

-     Timing is the only way to make money – If all of us were able to predict when the market would go up or down, there would not have been poverty. For investment there is never a high or a low. If you think the company would do well for the next 5 years, invest. Do not wait to time the market. If you are still sceptical, invest small amounts on a regular basis, this will help average the costs. But here again stay invested for the long run.

-     Invest in sectors which are good today – This is a good strategy, but what would happen a few years down the line. Therefore it is better to diversify and invest in 3 to 5 different sectors. Returns might come down a bit, but you would not lose too much if the market falls.

-     Tax saving is the best investment – The best option is to invest in such a way that even after you save taxes, your goals would be met.

Just avoid the above habits and rest assured, you would be on your way to successful investment.

Are we saving tax and making money?

Last year the government had increased the deduction under section 80C to Rs. 1,50,000/-. This year there has been no change, but an addition has been made in section 80CCD for investments in NPS. Let us look at our options with the changed scenario.

ELSS Funds – By far this is the most rewarding of all investment options. With a lock-in period of just three years and tax free returns with regards to both dividend and capital gains. To get the best returns, invest using the SIP option.

ULIPS – With management charges reduced, this is also a good option, which is given by ELSS funds as well. There are a bit expensive as compared to ELSS with regards to charges. The lock-in period is longer, you need to stay locked-in for minimum of 15 years and premium would need to be paid for 15 years. Don’t go by what the Insurance advisor would say, as you would benefit only if you keep paying the premium for the full term. Another advantage is there are free shifts allowed from debt to equity and vice versa, check the number of free shifts allowed.

PPF – Though the interest rate is 8.7%, this would be changed on a regular basis by the government depending on the interest rate scenario, which is likely to come down. You need to put in a minimum of Rs.500/- per year and there is a lock-in of 15 years.

Sr. Citizens Saving scheme – Interest rate is 9.2%, is ideal for people above 60 years with a lock-in of 5 years. Interest is paid quarterly which is taxable.

NPS – A good option for those looking to gain from the additional Rs.50,000 investment option, in addition to section 80C. The amount would be locked-in till retirement and then you would start getting pension from then. Pension would be taxable. The maximum deduction is limited to 10% of your salary for own contribution, but there is no limit on employers contribution. This is only for Tier I accounts.

Bank FD – Should be invested for 5 years, interest is taxable.

NSC - There are 2 types available 5 years and 10 years. Any investment is eligible for deduction. Interest amount received is taxable and also can be claimed under section 80C as investment, as interest is treated as reinvested.

Pension Plans – These are issued by insurance companies, at the end of the period, you have to buy an annuity, which would be taxable on receipt.

Insurance plans - Any premium paid for insuring your own life or that of your child or spouse is allowed as deduction. You have to ensure that the premium paid does not exceed 10% of the assured amount.

In addition to the above there is a deduction available for Principal repayment of Home Loan and Tuition fees.

If you have a housing loan, interest paid on housing loan to the extend of Rs. 2,50,000/- is allowed as deduction, under income from house property for self-occupied property.

Premium for health insurance is has been increased to Rs. 25,000under section 80D for self and family and Rs. 30,000/- for Sr. Citizens.

Make use of the options given to you and save tax. Tax saved is money earned. Invest right and make money.

Goal planning for people in their 40's

This is the age when you have done with most of your struggling, you are married, have children, have a career (should I say finalized what you think is what you want to do) and a house. Now you want to make the most of your life. Of course, before you start with that, these are the things you need to take care before spending all your money. Children’s education, retirement and health, you could also think of early retirement, second home or start a new business venture. How to achieve all this, meet a financial planner and work with him. At this age, you would have achieved most of what you wanted if not all, but there could be chances that because of your ambitions and added responsibilities, there could be pressure to achieve more.

Is all this bothering you? If yes, you are not alone, all of us go through such situations. In are quest to achieve what we want, we do not usually have an overall plan. We have individual plans, but our financial plan is left to the end or in most cases there is no plan at all. This is the time to consolidate, sit back a bit and have a relook at your financial situation. Your family needs your time, you now start looking at work-life balance. This is easier said than done. You need to take a call and it is now, children would be growing and would soon reach the time for their higher education. Would you like to be caught on the wrong foot? Running around to arrange for finances and retirement would not be far away. Company is taking care of your medical expenses and insurance and you would retire soon. What happens then? Most of the insurance companies do not give insurance at that age or have a lot of restrictions.

You are not getting any younger and illness would definitely start catching up. Exercise, diet do what you want, nature will catch up, so be prepared, take a health insurance now. It is an investment for your old age. Do what is right, don’t go by what others are doing, as everyone’s situation is different. The longer the time horizon for investment, the lesser the amount needed to be kept aside, this will help you enjoy your life and not struggling throughout your life. So what are you thinking about? Start now.