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Month: November 2022

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Blogs Mutual Funds

FD Vs Debt Funds: Where to Invest?

FD vs Debt Funds: Where to invest your money?

The fixed deposit has been a popular investment option in Indian households for years. If you have a lumpsum amount, your grandparents and parents will suggest investing in FD.

Debt funds, on the other hand, started becoming popular in the past few years. Many investors began preferring debt funds over FD for several reasons. 

However, the recent changes in the debt funds taxation have thrown everyone off guard. From April 2023, investors will no longer benefit from indexation on Long-Term capital gains. Both Long and Short-term capital gains will be taxed as per the investor’s tax slab.

So…

Are debt funds still better than FD? The answer is YES!

Let’s find out how.

FD Vs Debt Funds

Fixed Deposit:

A fixed deposit is a financial instrument where you can invest a lumpsum amount and earn returns at fixed interest rates. Usually, banks have predefined interest rates and tenure.

Debt Fund:

Debt funds are a type of mutual fund in which fund houses allocate your assets into fixed-income securities such as government bonds, corporate bonds, commercial papers, and T-bills. 

Top 4 Differences Between Debt Funds and Fixed Deposit

1. Risk

Fixed Deposit:

FD is known to be the safest investment option. 

However, in rare cases, if a bank goes bankrupt, it might default on your FD. According to recent RBI rules, even nationalized banks only offer up to INR. 5 lakh of FD default insurance per account. You may not receive the principal amount or interest above INR. 5 Lakh if the bank defaults on your FD.

Debt Funds:

The risk on debt funds depends on the features of the scheme you invest in. There are 15 different types of debt funds, each with variable risk-reward intensity. 

Debt funds primarily come across two types of risks:

1. Interest Rate Risk– Similar to stocks, bonds are also traded in the market. Their price goes up and down based on the interest rate and demand. If the interest rate goes up, the price would decrease and vice versa. These fluctuations can either drop or boost the returns.

You can manage the interest rate risk by holding your investment until maturity or by buying short or long-duration funds based on whether the interest rates are going up or down. 

2. Credit Risk– Say, for instance, you loan INR. 1000 to your friend to start a business. The friend promises to return your money with interest. But if his/her business doesn’t do well, then your friend might not be able to honor the commitment. A similar thing can happen in debt funds. Borrowers might not be able to deliver expected commitments, which causes credit risk. You can avoid it by evaluating the ratings of bonds through credit rating agencies like CRISIL.

Different credit rating agencies may have different rating parameters. But the most common ratings are AAA, AA, A, BBB, BB, B, C, D, and SD.

AAA and AA are the safest to invest in. ‘A’ may have a slight risk associated with it. All the further ratings have moderate to high risk.

Other than credit risk funds, most debt funds maintain credit quality by investing in high-credit quality bonds. 

2. Returns

Fixed Deposits:

A fixed deposit delivers returns based on the fixed interest rate offered by the bank. You will be guaranteed to earn a fixed interest rate. But there’s no possibility of earning anything beyond that. 

At the time of maturity, if you decide to extend the FD, it will get reinvested at the current interest rate, which could be lower/higher than the previous one. 

Debt Funds:

Debt funds may not guarantee how much returns you’ll earn. But they can deliver superior returns than the FDs, especially in a falling interest rate scenario where bond prices shoot up, offering additional returns.  

3. Liquidity

Both FD and Debt Funds do not have any lock-in period. You can withdraw money whenever you please. However, banks charge a penalty for premature withdrawal.

Debt funds may or may not have an exit load. It’s the fee charged by fund houses if you redeem funds before a certain period of time. You can check the exit load associated with the debt fund before investing in it. 

Taxation on FD vs Debt Funds

Let’s address the elephant in the room. The TAX.

1. Tax on Accrued Interest on FD

You have to pay tax on accrued interest on FD every year even before you receive it. 

Let’s say, you have created a cumulative FD. The yearly interest that you earn will be reinvested in the same FD to benefit from the power of compounding.

Now, as unfair as it may sound, the reinvested interest will be treated as income earned. You have to pay tax as per your tax slab on the interest you technically haven’t received in your account.

2. Tax On Capital Gains Earned on Debt Funds

Unlike FDs, Debt funds do not have the concept of tax on accrued interest. You only have to pay tax on capital gains when you redeem your investment. 

Before April 2023, all Debt funds used to have different tax rules for Short and Long Term Capital Gains. Indexation benefit on LTCG was the key feature of debt funds taxation.

From April 2023, the taxation rule has changed.

As per the new rule:

Both Long and Short term capital gains will be taxed as per the investor’s tax slab without any indexation benefit. 

Unless…

The fund has more than 35% exposure to equity.

Explore the latest tax regulations across all Mutual Fund Categories.

Coming back to our question.

Are Debt Funds Still Better Than FDs?

Of course! Debt funds are still investable for various reasons. 

You can invest in a specific type of debt fund that aligns with your goals. It offers a safety net against equity volatility.

Sure, taxation may no longer be as efficient as it used to be. But that’s not the only parameter to judge debt funds. They have a lot more to offer than FDs.

Investors willing to slightly increase their risk appetite to generate post-tax returns similar to debt fund schemes (pre 31st Mar 2023 tax era) can explore hybrid funds. For example, Equity Savings Funds, Hybrid Debt Funds, Multi-Asset Funds, and Various other Asset Allocation Funds.  

FD vs Debt Fund: Where Would You Invest?

Both FD and Debt Funds offer various benefits to strengthen your financial goals. If your focus is on security and guaranteed returns, Fixed Deposits would be a better fit for you. 

Otherwise, debt funds have the potential to offer superior returns without changing your risk profile and also help with portfolio balancing. 

If you are struggling to decide which debt funds to choose, give us a call. VNN Wealth advisors will walk you through all types of debt funds and help you make a decision.


 
Categories
Blogs Mutual Funds

Exchange Traded Funds(ETF) and Their Benefits

The Exchange Traded Funds are a type of mutual fund with stock-like trading benefits. ETFs follow a benchmark index such as Nifty 50 or Sensex to invest and match the returns.

The returns on these funds change as per the changes in the underlying index. These funds offer the best of both mutual funds and stocks. 

ETFs are nearly similar to Index mutual funds. The only difference is, ETFs are traded in the market and you can access these funds in your Demat account.

What is The Investment Regime of Exchange Traded Funds?

According to SEBI guidelines, fund houses allocate at least 95% of total assets into securities listed on the underlying index. 

The investment strategy may change based on the type of ETF.  

Index ETF- Follows a benchmark index (Nifty 50 or Sensex) to reflect similar returns.

Gold ETF- Investment in Gold without owning physical gold.

Fixed Income ETF- Invest in fixed-income securities listed on the fixed-income indices. For example- Nifty 1D TRI, Nifty 8-13 years.

Sector ETF- Follow specific sector indices to invest and reflect similar returns. For example- Nifty PSU bank, and Nifty Private bank.

International ETF- Invest in international indices such as NASDAQ 100.

Top 4 Benefits of Investing in ETFs

1. Wider Exposure and Diversification 

ETF offers diversification via buckets of various investment securities across different sectors and market segments. 

Anything that can be traded on the market and has flexible liquidity can be a part of ETF.  

You can even opt for international ETFs to explore foreign financial instruments. Instead of investing in a single stock, trading multiple securities via ETF can offer better returns.

2. Low Cost 

Even though traded on the market, ETFs are passive funds. ETFs have a lower expense ratio than actively managed funds and other passive investment instruments.

It enables you to have low-cost investments with decent returns.

3. Trading Opportunity with High Liquidity

The Exchange traded funds allow you to trade the whole bucket of funds on the market. The unit prices of underlying securities go up and down throughout the day over the market. 

As these funds are in your Demat account, you can quickly buy/sell more units at your preferred price. There is no lock-in period for the ETF.

4. Transparency 

Fund houses disclose the holding portfolio of ETFs to the investors on daily basis. Some ETFs send monthly or quarterly holding reports. 

And as these funds follow the specific benchmark index, all the underlying assets and corresponding holdings are known to the investors.

Things to Consider Before Investing In Exchange Traded Funds

1. Your Investment Portfolio 

First thing first, before investing in ETF or any mutual funds, analyze your portfolio. Plan your investment based on your risk profile and investment goals. If your profile still has a scope to diversify, ETF can become a part of your investments. 

2. Risk 

The Exchange traded funds follow the benchmark index and are traded on the market. Here, you have the risk of market volatility. 

If the index drops down, your returns will also drop down. Vice versa is possible too, so you may have the opportunity to bag superior returns.

Some ETFs may have complex investment securities, which could be difficult to keep track of. Make sure you understand all the features of the selected fund. You can always seek help from wealth advisors.

3. Underlying Index 

There are different types of ETFs available for investors to choose from. Gold ETF, sectoral ETF, and even International ETFs.

We would recommend understanding what index benchmark would benefit your portfolio the most. You have the option to follow a generalized underlying index or an industry-specific index to invest in these funds. 

4. Tracking Error 

Tracking error is the standard deviation of the difference between the returns on ETF and returns on the underlying index. 

If the tracking error is positive, that means the funds have outperformed the underlying index. If it’s negative, that means you will gain fewer returns on funds compared to the underlying index. 

Knowing this, you may want to consider funds with lower tracking errors.

Taxation on Exchange Traded Funds 

Index ETFs and Gold/International ETFs have different taxation structures.  

Index ETF Taxation- Index ETFs are considered equity-based investments. The tax on capital gains will be similar to equity mutual funds. 

  • Short Term Capital Gains (Investments held for less than 12 months) come under 20% taxation. 
  • Long Term Capital Gains (Investments held for more than 12 months) above 1.25 lakh will come under 12.5% taxation with indexation benefits. 

Gold/International ETF Taxation-  

  • Both short term and long term capital gains will be taxed as per your tax slab.

Who Should Invest In Exchange Traded Funds?

ETFs are not meant for new investors. Since these funds contain different types of financial instruments, it could be quite complex to understand them. Instead, new investors can go with Index funds. 

Investors who have been investing in the stock market for years can consider ETFs for diversity and the ability to trade. These funds offer high liquidity with no lock-in period. ETFs are also suitable for investors who are interested in International securities.

Conclusion

Funds that follow a benchmark to reflect returns are fairly transparent and moderately safe. Investors who want to have mutual fund security with trading benefits can go with ETF.  

You can access ETF investment through your Demat account and buy/sell at your convenience. This opportunity opens up high liquidity and a flexible investment horizon. 

New investors can consider ETFs with generalized indices. Otherwise, there are ETFs that follow sector-specific indices. 

For investors who don’t want trading features, there are always index funds.

Planning your next mutual fund investment? We, at VNN Wealth, offer portfolio analysis along with a suitable investment plan. Get in touch with us to explore various investment avenues.

Find more mutual fund insights here.

Categories
Blogs Investing Basics

Inverted Yield Curve: The Historic Recession Indicator

Does an Inverted Yield Curve indicate a recession? 

Let’s find out. 

As of Nov’22, the yield curve for 3-month and 10-year US treasury has officially inverted. They are expecting to see the recession by Oct’23. In India, the yield curve seems to have flattened, which could go either way.

Usually, long-term bonds offer a superior yield than short-term bonds, making a yield curve an upward slope. But if not, the curve inverts and may indicate the possibility of an economic downgrading. 

An inverted yield curve was almost always followed by a recession. Though investors must only treat the yield curve as an indication as the economic scenario may flip. You never know.

Read on to find out more about the Inverted Yield Curve.

 

What is an Inverted Yield Curve?

  • A yield curve is a graphical representation of the yield earned from bonds of different maturity periods.
  • Each bond has a fixed coupon rate and a varying yield. The coupon rate gets declared against the face value (the initial NAV) of the bond. It remains the same even if the bond price changes.
  • Yield is collective earnings from the various bonds + the coupon rate + the principal amount. Bonds are also traded in the market similar to stocks. Their price goes up and down depending on the demand.
  • When the demand for a bond goes up -> The price goes up -> And the yield goes down.
  • As mentioned above, long-term bonds offer a higher yield than short-term bonds. The yield curve slopes upwards indicating a positive economy.
  • But, when the demand for long-term bonds increases, decreasing the yield, the curve inverts.
  • Consider, for instance, there are two bonds with similar ratings but different maturity periods. Bond-A is a short-term bond with 3 month maturity period. Bond-B is a long-term bond with 10 years maturity period.
  • If Bond-A offers a 6.78% yield and Bond-B offers a 6.01% yield, then the yield curve would invert. 

 

What Are The Different Types of Yield Curves?

1. Normal Yield Curve

As long-term bonds tend to be riskier, investors demand higher yields to compensate for the risk.

In such a case, long-term yields are higher than short-term yields.


2. Inverted Yield Curve

The yield curve becomes negative/inverted when the short-term yield surpasses the long-term yield. This also indicates increased demand for long-term bonds.


3. Flat Yield Curve

A flat yield curve indicates that both long and short-term bonds are performing the same. It could be the foreshadowing of a weak economy. A flat curve could be a transition phase between the normal and the inverted yield curve.


4. Steep Yield Curve

The yield curve goes steep when long-term bonds are offering far higher yields than short-term bonds. This indicates the growing economy.


 

Does an Inverted Yield Curve Always Means an Incoming Recession?

The Yield Curve was able to forecast recession many times in the past. In fact, in the past 50 years, an economic slowdown or a downgrade was seen with the inverted yield curve.

However, it is essential to understand that the yield curve is only an indicator. 

Let’s put it simply.

Economic ups and downs could happen due to many reasons. Inflation, sudden geographical tension, a wave of life-threatening viruses, or anything. While some changes are sudden, some can be analyzed by observing economical patterns.

Having said that, the yield curve will invert if the investors are expecting a possible downfall in the economy. With a fall in inflation, investors will analyze and predict a potential fall in the yield as well.

If the yield for the long-term bond keeps falling further, it could lead to a recession. 

However, an inverted yield curve isn’t the official parameter to predict a recession. It is merely an indicator.

 

What Should Investors Do When The Yield Curve Inverts?

Many investors closely follow the yield curve to align their investments accordingly. Prices of the bonds may fluctuate as the supply/demand dynamic changes.

Here are a few tips for investors-

1. Stay Calm

With the fear of recession around the corner, many investors start to panic. Some may end up selling without considering the possible risk/loss.

In a situation like this, you must stay calm.

The yield curve doesn’t stay inverted forever. The economy eventually catches up. Most importantly, whenever the yield curve inverts, the recession is not an immediate next step.

Investors get enough time to align their investments, which brings us to our next point. 

2. Align Your Investment

It is always advisable to have a diverse portfolio to minimize the risk. You can check where your portfolio stands with our complimentary portfolio analysis tool.

An inverted Yield Curve is one of the situations where outcomes could go either way. To prepare yourself, you may want to align and readjust your investments. 

You can explore other investment avenues that can balance out the risk and returns.

3. Periodic Re-Evaluation Of Asset Allocation

We would recommend re-evaluating your investment portfolio at regular intervals. It gives you an idea of where your profile stands in a changing economy.

There are many investment opportunities that can help you sustain your financial goals.

 

Conclusion

Many investors closely watch the yield curve to adjust their investments amid the possibility of a recession.

However, if the yield curve doesn’t stay inverted for a prolonged time, the economy may not lead to a recession.

Frequently changing yield curves may shed light on a weak economy, but not necessarily a recession. 

We would recommend following the above tips to stay calm and focus on your investment goals. Take actions that will suit your profile.

 You may also like to read- different types of mutual funds.

Categories
Blogs Personal Finance

What Is a Public Provident Fund Account?

A Public Provident Fund account (PPF) is a long-term tax-saving investment scheme that offers a fixed interest rate and tax-exempt returns. It’s a government-backed savings scheme with guaranteed returns.  

PPF account is as famous in Indian households as fixed deposit. Investors, regardless of their risk appetite, can keep aside a certain amount in a PPF account to gradually build wealth.

Some of the common reasons to have a PPF account are:

  • Child’s higher education
  • Buying a family home
  • Weddings or other milestones
  • Building retirement corpus

You can earn stable returns on your PPF account and take advantage of tax benefits under Section 80C. As of FY22, the interest rate on PPF is 7.1%. 

Before creating a PPF account, here are some things you need to know. 

What are the investment rules of the PPF account?

Any Indian resident can open a PPF account in a bank or a post office. You can only have one PPF account but you can transfer it from one bank to the other or to the post office if needed. 

You can also open a PPF account for your children and manage it until they are old enough. 

Once you open an account, you must invest between INR. 500 to INR. 1,50,000 in one financial year. Any amount beyond INR. 1,50,000 won’t be considered for tax savings under Sec 80C. 

Your investment will be locked for 15 full financial years and you will continue to earn compound interest on it. However, you can withdraw a partial amount in intervals of 5 years.

Let’s elaborate some more.

Top 4 Features of Public Provident Fund Account

  1. Investment Amount

You need to invest anywhere between INR. 500 to INR. 1,50,000 in a financial year on a monthly, quarterly, or annual basis as you get up to 12 installments per year. There’s a small penalty if you miss an installment in a financial year. 

  1. Investment Horizon

PPF account has a tenure/lock-in period of 15 full financial years. This means- if you start your account on, let’s say, 1st Oct 2022, your 1st financial year will start from 1st April 2023. 

Yes, you will earn returns on the investment from 1st Oct 2022 to 1st April 2023. But the financial year will begin on 1st April 2023.

You can withdraw a partial amount (50% of the total available balance) only after the completion of 5 years. Until then, the investment will be locked. Though you can claim a loan against your PPF account.

  1. Loan Against PPF Account

Since your amount is locked-in, you can apply for a loan against your PPF account.

There are two rules to claiming the loan:

  • You can only request a loan from the beginning of the 3rd financial year to the end of the 6th financial year. 
  • You will only be eligible for 25% of the amount from your PPF account calculated immediately preceding the year in which you are applying for a loan. 

The interest on this loan will be 1% + the PPF interest rate. If the PPF interest rate is 7.1%, the loan interest rate will be 8.1%.

  1. Tax Benefits on Public Provident Fund Account

PPF investments up to INR. 1,50,000 are eligible for tax benefits under section 80C.

However, if you have any other investment under section 80C, then you may not be able to claim the tax benefit on PPF. 

If PPF is your only investment under Section 80C, then you can take advantage of Exempt-Exempt-Exempt (EEE) i.e. The amount invested in PPF, the interest earned, and the final corpus withdrawn at the time of maturity are all exempt from tax.

What Happens If You Choose To Extend the PPF Account After 15 Years?

After the full 15 financial years, you can either withdraw the full amount or extend the account in blocks of 5 years,

In that case, you will be able to withdraw the balance that was available before the extension was locked. So if you had INR. 30,00,000 after 15 years and you extend the account, you can only withdraw 30L. Any further investment will be locked. Also, you can only make one withdrawal in each financial year.  

Can You Terminate The PPF Account Prematurely?

In case you need emergency funds, there are 2 cases in which you can terminate the account.

  1. For the medical emergency of a life-threatening disease of you or your parents/spouse/children.

  2. For higher education of children.

How to Maximize The returns On Public Provident Fund Account?

There are 2 simple tips that can maximize your PPF account returns. 

  1. Invest at the beginning of the year

If you invest a large amount once a year in your PPF account, we recommend doing it at the beginning of the year (Preferably before the 5th of April). 

Most people invest a large amount at the end of the financial year to get tax benefits. However, the interest on the amount is calculated throughout the year. You can take advantage of maximum interest if you invest when the financial year begins.

  1. Before the 5th of each month

If you are planning to schedule monthly investments, prefer to do it before the 5th of each month. 

The balance considered for calculating interest on the PPF account is calculated on – the balance in your PPF account on the 5th day of the month and the last day of the month – whichever is lower.

For example, if your balance is INR. 2,00,000 and you invest INR. 50,000 on the 6th of a month, you will earn interest only on INR. 2,00,000 and not on INR. 2,50,000. But if you invest that INR. 50,000 before the 5th of that month, then your interest will be calculated on INR. 2,50,000.

Conclusion

Having a PPF account is a disciplined way of building wealth for the future. You can open an account online and keep transferring money into it. 

It’s a secure investment with stable returns and tax benefits. Continue keeping some money aside for the future and forget about it until maturity. By the time of maturity, you will have a large corpus ready.

Don’t forget to invest money in your PPF account either before the 5th of April each year or before the 5th of each month for monthly installments. That way, you will maximize the returns on your investment. 

 

To know more about long-term investments, give VNN Wealth experts a call or write to us. Get all your queries answered with a thorough portfolio analysis. 

Categories
Blogs Mutual Funds

What Are Flexi Cap Mutual Funds?

Flexi cap mutual funds are a new category of equity mutual funds with flexible asset allocation across the market capitalization. These mutual funds give investors the freedom to invest in small, mid, and large-cap stocks without any restrictions.

How is it different from Multi-cap funds? Multi-cap funds have to compulsorily invest at least 25% of assets each in small, mid, and large-cap stocks. Flexi-cap funds have no such restrictions. Fund managers can dynamically allocate assets to growth-positive companies to maximize returns.

Sounds interesting? Let’s find out more about Flexi Cap mutual funds.

What is the Investment Regime in Flexi-Cap Mutual Funds?

SEBI launched the Flexi-cap scheme in 2020 to offer investment flexibility and dynamic asset allocation.

Fund managers have to invest at least 65% of total assets into equities across market capitalization. They can decide the allocation based on their analysis and expertise to lower the risk and boost profits.

Top 5 Advantages of Flexi-cap Mutual Funds

1. Freedom of Investment

Fund managers can invest the principal amount across a wide spectrum of markets. There is no limitation or rules on asset allocation. Flexi-cap funds are required to invest at least 65% into equities. But they have the freedom to distribute that 65% (or more) into any market cap. 

2. Diverse Portfolio

Flexi-cap schemes are a blend of small, mid, and large-cap companies. They can create a diverse portfolio by allocating assets to different sizes and types of companies. 

3. Balanced Risk

Flexi-cap funds deliver favorable returns with balanced risk. While you can explore small-cap funds for higher returns, large-cap funds can safeguard your investment. Mid-caps are moderately risky with decent returns. They collectively create a perfect balance between risk and returns.

4. Shift Investment

Fund Managers can anytime shift assets between small, mid, or large-cap based on market volatility. They can tilt the funds completely towards a specific market capitalization segment or keep it diverse. 

5. Surpassing Inflation

Flexi-cap funds have the potential to defeat inflation in the long run. As you have a dynamic mixture of various market capitalizations, inflation won’t affect your returns as much.

Things to Consider Before Investing in Flexi-Cap Funds

1. Investment Objectives

You must check if their investment goals align with Flexi-cap funds. Even though these funds have various benefits, that doesn’t mean you should invest blindly. Examine the fund’s features, fund manager’s performance, risk, and returns before investing in any mutual funds.

2. Risk

Flexi-cap funds balance the risk with diverse investments but are not risk-free. You may encounter high risk if the fund has allocated the majority of your assets to small-cap companies. Usually, fund houses have an in-house model to periodically balance Flexi-cap funds to minimize risk and maximize returns. Make sure your risk profile has a scope to welcome Flexi-cap funds.

3. Fund Houses and Managers

It is very crucial to know the in-house policies and strategies of fund houses in the case of Flexi-cap funds. The returns you will earn depend on how well fund managers distribute your assets. 

4. Expense Ratio and Exit Load

Fund houses charge a small amount of fee to handle your funds in the form of an expense ratio. Compare the expense ratio of various Flexi-cap funds with respect to returns before investing in them. Exit load is a fee charged at the time of fund redemption. If you hold the investment for a certain period of time, you might not need to pay an exit load. Check the exit load policy of fund houses beforehand.

Tax Implications

Taxation of Flexi-Cap funds is the same as any other equity mutual fund. You will have to pay a 20% tax on Short Term Capital Gains (Investments redeemed before 12 months). 

Long Term Capital Gains (Investment redeemed after 12 months) above INR. 1.25 lakhs are taxed at 12.5%.

Who Should Invest in Flexi-Cap Funds?

Flexi-cap funds are suitable for investors who can take moderate to high risks. It diversifies your portfolio and balances the risk. You can invest in Flexi-cap funds if you can keep an investment horizon of at least 5 years. 

Conclusion

SEBI launched Flexi-cap as an alternative to multi-cap funds. The aim was to offer flexibility to try different investment scenarios without any restrictions.

With Flexi-cap funds, fund managers can explore market capitalization and periodically update asset allocation. There is a decent chance of earning superior risk-adjusted returns if you can take some risk.

You can always take an expert’s opinion before investing in Flexi-cap funds. VNN Wealth experts can help you shortlist funds and create a strong portfolio, so you won’t have to worry. 

Call us or reach out via email. Start building your wealth today!

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