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Blogs Personal Finance

Top 7 Tax Saving Instruments In India

Tax on your annual income is as annoying as pineapples on Pizza, right?

Trust us, we hear you. 

You can pick those annoying pizza toppings and save yourself from misery. Similarly, you can save a ton of tax if you know where to invest. 

As much as you might dislike it, you gotta do the taxes. 

Don’t worry though. Our team has shortlisted some popular and useful tax-saving instruments. So get a pen and paper and note down beneficial investment avenues for you.

Let’s save some tax, shall we?

7 Tax Saving Instruments For Investors

1. ELSS Mutual Funds

Equity Linked Saving Scheme is one of the popular tax-saving instruments among investors. Not only can you save tax but also earn some decent returns over the investment horizon.

Fund houses invest at least 80% of total assets into equity or equity-related instruments. You can invest any amount in ELSS funds. However, you are only eligible to get tax deductions on a maximum of 1.5 lakhs of the total invested amount. 

On top of that, you can also get tax benefits on long-term capital gains of less than 1 lakhs. 

2. Public Provident Fund (PPF)

PPF is another popular investment avenue among Indian households as it’s a government-backed fixed-income scheme. You can build wealth over the years and save tax on the PPF amount.

You can create a PPF account in a bank or in a post office depending on your convenience. Government announces the interest rate on PPF each year which remains the same for that year. 

You can invest from Rs. 500 to 1.5 Lakhs in a financial year to get tax exemption under section 80C of the IT Act. The interest earned is also exempt from tax.

Though the lock-in period for the PPF amount is 15 years, you can withdraw the partial amount in 5-year intervals or get a loan against that amount. Read more about PPF here.

3. Tax Saver Fixed Deposit

Tax Saver Fixed Deposit is a tax-saving FD under section 80C of the IT Act with a lock-in period of 5 years. Individual or joint account holders can create this FD to get tax benefits. 

For joint accounts, only the first holder is eligible for tax benefits. 

If you are planning to create FD, go with a tax saver FD scheme. Please note that any premature withdrawals may compromise your tax benefits. Read the scheme terms carefully before creating the FD.

4. National Pension System

Post-retirement financial security is one of the important decisions one has to make. If you already don’t have a retirement plan, you must create one to safeguard your future.

National Pension System/Scheme can be beneficial for you to build retirement funds and save taxes. It’s a systematic investment policy where both employees and employers can invest funds. You can save tax on up to 1.5 lakhs of the total amount under section 80C of the IT Act. 

Additional Tax Benefits Over and Above 80C: Salaried employees can also save tax on up to 50,000 under section 80CCD(1B) of an IT act. Employees become eligible to get tax exemption by investing up to 10% of their salary into NPS. Self-Employees can get tax benefits of an additional 50,000 under 80CCD(1B) by investing 20% of their annual gross income.

5. National Savings Certificate

Similar to PPF, NSC is also the safest investment where you can earn interest and gain tax benefits. 

NSC is a fixed-income investment scheme available to purchase at any post office branch. With 5 years lock-in period, it offers returns nearly similar to FDs. 

You have to invest atleast 1000 in NSC. Though there is no maximum investment amount threshold, you can only get tax exemption on up to 1.5 lakhs under 80C of the IT Act.

6. Insurance Premium

Individuals who have purchased life insurance are eligible for tax exemption of up to 1.5 lakhs of the total premium paid under section 80C of the IT act. 

The amount on maturity or the amount the nominee gets after the passing of the policyholder is also tax-free.

If you are also paying for your family’s and parent’s health insurance, then you are eligible for tax benefits under section 80D of an IT act. 

Here’s how it works:

Healthcare Insurance Covered IndividualsYourself + Spouse + ChildrenYour ParentsTotal Tax Exemption Under 80c
Yourself, spouse, children (< age 60) + parents (< age 60)25,00025,00050,000
Yourself, spouse, children (< age 60) + parents (> age 60)25,00050,00075,000
All covered individuals (> age 60)50,00050,0001,00,000

7. Senior Citizen Savings Scheme

As the name suggests, the scheme is beneficial for senior citizens. By investing up to 15 lakhs in SCS policy, senior citizens can get tax exemptions of up to 1.5 lakhs. 

The eligibility criteria for the SCSS:

  • Citizens aged 60 and above
  • Citizens aged above 55 who have voluntarily retired
  • Employees of the defense sector of India aged above 50

The Central Government of India determines the interest rate on the SCS scheme, making it safer to invest in.

Conclusion

Section 80C of the IT act is the most popular tax-saving act. Any one or a combination of the options mentioned above can help you get tax exemption on up to 1.5 lakhs in a financial year.

For working individuals, we would recommend ELSS mutual funds or PPF. Starting an ELSS SIP can help you build wealth as well as save tax. 

PPF has some great advantages as you gradually save for a longer duration. It offers a higher interest rate than FD or saving account.

Choose what fits best for your financial goals. Or you can always reach out to our advisors for more guidance and portfolio analysis.

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Blogs Mutual Funds

Floating Rate Debt Funds: A Beginner’s Guide

Floating rate debt funds aka floater funds are open-ended debt funds. These funds invest in debt instruments with varying(floating) interest rates.

The interest rates of underlying debt instruments rise as the RBI repo rate goes up. Hence, floater funds tend to perform better during rising interest rates compared to other Debt funds. 

In a rising interest rate regime like the one we are going through currently, investors have a good possibility of earning superior returns compared to fixed interest rate instruments.

As the interest rates are locked in the latter and can’t be readjusted to the new increased rate which makes floating rate debt funds one of the best asset classes to hold in a rising interest rate scenario.

Investment Regime of Floating Rate Debt Funds

As per SEBI guidelines, fund houses invest at least 65% of the total corpus into floating-rate debt instruments. 

There are two types of floater funds:

Short-Term Floater Funds-

Short-term funds invest primarily in debt instruments with short maturity periods and higher liquidity. For example- Government securities and T-bills.

Long-Term Floater Funds-

Long-term floater funds invest in debt instruments with longer maturity horizons such as corporate bonds and government bonds.

Top 3 Advantages of Floating Rate Debt Funds

1. Returns

Floater funds deliver superior returns compared to other debt funds or fixed-income instruments. Investors can expect to earn more profits from floater funds during rising interest rates. 

2. Open-Ended Funds with Higher Liquidity

Investors can invest in floater funds anytime, with a flexible horizon. You can select a short or long-term horizon depending on your investment goals. And you can invest/sell these funds whenever you want.

3. Diverse Portfolio 

Floating rate debt funds invest at least 65% of the total corpus into various debt instruments. Fund houses might invest the remaining funds in fixed-income instruments.  

You have the opportunity to invest in Government & corporate bonds, T-bills, and loans. With a blend of varying and fixed-income rates, you can achieve a diverse portfolio.

4. Low Risk 

Most debt funds carry credit risk and interest rate risk. But floater funds are less riskier as they carry very little to no interest rate risk. 

Interest rates of the underlying bonds in floater funds often align with the market interest rate. So the risk associated with interest rates is quite low compared to other debt funds. 

While there is a slight possibility of credit/default risk, it can be avoided by choosing the right funds. Only invest in funds with higher ratings (above AA). This rule is applicable to all types of debt funds so you won’t have to face default risk.

Things to Consider Before Investing In Floater Funds

1. Investment Horizon

Consider holding your investment for more than 3 years. You have a chance to earn better returns and tax benefits.  

But, you can also explore short-term funds which may deliver superior returns to fulfill your envisioned investment goals. 

Carefully choose the investment tenure that aligns with your portfolio. 

2. Investment Timing 

Floater funds perform better during the rising interest rate scenario. You may earn exponential gains when interest rates are rising. 

But keep in mind that the RBI repo rate directly affects the interest rate. Don’t consider investing in these funds when the interest rates are falling or may fall.

3. Your Investment Portfolio

Floating rate funds may lower the overall risk on your portfolio. If you invest in funds with good ratings, you won’t come across default risk. 

These funds could be a good addition to managing the risk and also include various debt instruments to your profile.

4. Expense Ratio

Fund houses will charge a certain amount of fee aka expense ratio to manage your funds. Evaluate the expense ratio with respect to possible capital gains before investing. 

Please know that a lower expense ratio doesn’t necessarily mean higher capital gains. In some cases, you might earn even higher returns through a fund that charges a slightly high expense ratio. 

You may also want to consider comparing the expense ratio of funds from similar categories and tenure.

Taxation in Floating Rate Debt Funds

Investors have to pay tax on both Short and long-term capital gains from floater funds.  

  • For short-term capital gains (investment horizon < 3 years), investors have to pay tax as per their tax slab. 
  • Long-term capital gains (investment horizon > 3 years) come under 20% taxation with indexation benefit.

Who Should Invest In Floater Debt Funds? 

Investors who are looking for competitive returns with lower risk can consider investing in these funds. Floater funds may deliver better returns for the same maturity period than other low-risk investment options. 

If you are aiming to diversify your portfolio but don’t want to go with fixed-rate debt funds, then these funds can be for you. 

We highly recommend considering all the above points before you invest in floater funds or any other mutual funds.

Or you can get in touch with our advisors for more details.

Conclusion

Floating-rate debt funds have flexible maturity periods. These funds can boost your overall investment portfolio during rising interest rates. 

However, keep in mind that repo rate fluctuations have a direct impact on these funds. You might come across interest rate risk when the repo rate goes down.

Invest in funds with higher ratings and only during rising interest rates. 

If you are interested in debt securities, you can give us a call or send us an email. Advisors at VNN Wealth have been analyzing debt funds for a while now. 

Review your portfolio and risk profile with us and make a solid investment plan.

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

Learn some easy personal finance tips here. 

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Blogs Personal Finance

Top 10 Financial Planning Tips For Women

Gone are the days when financial planning was the responsibility of a man. Now women are equally financially stable and independent. 

Whether as homemakers, self-employed women, or working professionals, women are becoming increasingly astute in financial planning. Although earning income is a part of financial independence, real stability comes through money management.

Financial planning, in reality, is beyond saving a chunk of monthly salary. It is also about having a long-term wealth goal for a secure future.

Women often plan everything ahead of time. It’s time to now create a plan for financial stability and security. 

Here are some tips to help you achieve your financial goals;

Top 10 Financial Planning Tips For Women

1. Plan Long-Term Goals For Your Retirement

You must already be saving a percentage of your salary each month. That’s good, but that won’t be enough.

Various studies have proved that women live longer than men. And, women’s work-life span is shorter.

We have often come across people who only plan to build wealth until they are, say, 78-80 years old. But what if you live longer than that? What will you do for the next 10 or possibly more years without proper financial planning?

Additionally, women face various challenges in their professional lives. Many women give up their jobs to look after their house and children. On top of that, women often have a lower pay structure than their counterparts. 

As unfair as it sounds, women have fewer resources and less time to build wealth. However, overcoming hurdles and having a secure financial life is achievable. 

You can start building wealth for your retirement by investing early. Allow yourself to think for a longer term. We would suggest adding 10 more years to your retirement savings goals. 

2. Stay Involved in Your Family’s Financial Planning

This is one of the most important tips we would give to all the women out there. Stay involved and stay aware of all your family’s financial planning. We cannot stress this enough.

Even if your husband is responsible for financial planning, you should also have a fair share of thoughts and knowledge.

Sudden circumstances such as the death of the partner or divorce may cause women to trip over finances. Now, who would manage everything? What about that car loan EMI? Or the home loan instalment? And there could be more.

At VNN Wealth, we have come across many women who had no idea about finances after losing their spouse. We have seen women struggle to manage sudden changes in life. While we were able to help them, we would suggest taking the necessary steps to be prepared.

To avoid stumbling across uncertainties in life, always stay on top of all your family’s finances. 

3. Save Every Month Via SIPs

Although women have great money-saving skills, they don’t invest as often. As said above, saving is not enough. You must actively invest too. 

SIPs are the best and easiest way to start building wealth for you and your family. You can invest a small amount of money each month in equity or debt mutual funds. Even INR. 500/month can make a huge difference in the long run. 

Additionally, mutual funds via SIP with compounding interest can exponentially boost your return.

If you already have an investment portfolio, get it reviewed to receive personalized investment tips. VNN Wealth provides complimentary portfolio reviews and our advisors can also help you create and build a portfolio from scratch. 

You may also like- Top 5 benefits of SIP.

4. Invest in Paper Assets Instead of Physical Gold

We Indians have always been buying gold jewellery as an investment for rainy days. But we are also sentimental about the jewellery. Who would want to sell those beautiful earrings that your mother gave you on your wedding day, right?

Understandable! But not so much reliable.

Instead, invest in Gold ETF. Not only will you save making charges but it’s easier to sell too. No sentiments attached is a plus point. 

5. Keep Track of Expenses and Taxes

Expenses come and go as they please. You wouldn’t know where all your money went without keeping a track of it.

Create categories of expenses and assign a budget for each category. Cut down on unnecessary expenses and maintain an expense sheet. It will help you stay within an assigned budget, but will also help you file taxes.

Taxes are both tricky and fascinating. You can save a lot of money with an effective filing of taxes. You can also invest in various tax-saving instruments to save more tax.

6. Separate Financial Support For Your Family

Family emergencies can knock at your door anytime. You may need to arrange money or break your fixed deposits for your family’s well-being.

Keep different investments for you and your family. Take your family and children’s future into consideration. You may want to create separate savings for your family’s healthcare, children’s education, and your own well-being. 

Don’t sell your retirement funds or personal investments sooner than you had planned. The biggest mistake people often make is the early withdrawal of funds. Not only does it shake up your portfolio, but you will also lose potential returns on those funds. 

Instead, build separate financial support for your family. Don’t sell your funds in a panic.

7. Don’t Forget About Expenses During Your Old Age

Today, you are doing everything in your household. Tomorrow, you might not be able to do it.

Old age can cause quite a few difficulties. You may need to hire a househelp or a full-time attendant. You might not have as much energy or health as you have right now. Expenses in your old age might cause a solid dent in your savings if you are not prepared. 

Always plan ahead of time for such expenses for your family and yourself. 

8. Health Insurance Plan 

Many companies often provide health insurance to employees and you may already have it. However, we would advise you to also buy an external health insurance plan for you and your family. It’ll help you cover medical expenses without burdening your savings.

Many health insurance companies offer better coverage if you buy it early in your life. 

While buying health insurance, don’t forget to get life insurance. Be sure to include critical illness or disability in your life insurance as an added support to your health insurance.

You can also opt for whole-life insurance coverage to provide financial support to your spouse. That way, your surviving spouse gets a payout.

9. Re-Evaluate Your Financial Plan Periodically

The expenses you have today may change in a few years. Expenses after getting married, having children, and growing older will be different and probably dramatic.

By re-evaluating your financial plan, you will be able to consider newly added expenses. Update your investment portfolio accordingly.

10. Quick Money Saving Tips

  • Evaluate your money-spending habits to cut down on unnecessary expenses.
  • Unsubscribe to online/offline services that you don’t need anymore.
  • Keep track of your credit card payments, EMIs, and loan installments. 
  • Use your credit card benefits and rewards to save more on each purchase.
  • Set a spending limit on your debit/credit cards.
  • Be vocal about your financial goals with your spouse/family, so you can align your goals. 
  • You can also consider hiring a financial advisor for your family. Here’s how to choose the right financial advisor. 

Plan Your Finances Today!

Have you ever seen your mother or grandmother save money in her rice container? Whenever she could, she would keep a small amount safe somewhere for rainy days.

Women have always been excellent financial planners. However, there is a considerable gap in the technical financial knowledge between men and women. In fact, more than 90% of women in India, do not actively seek financial knowledge. 

It’s time to take it up a notch, ladies! Reading financial news, investment/personal finance blogs, or reaching out to financial advisors can be your next step.

Plan for your and your family’s financial security and well-being. Keep up with your expenses and taxes every year. Invest whenever you can. 

If you are ready to strengthen your investment portfolio, get in touch with our financial advisors. Evaluate your portfolio and rule your finances like a boss. 

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Blogs Personal Finance

What To Look For In a Financial Advisor

Keeping track of finances is the most crucial aspect of building wealth for the future. 

You can surely do it on your own until your financial instruments grow in every possible direction. Your family expands, your needs and wants increase, and your liabilities take a different turn. 

And when that happens, you are going to need a trustworthy and knowledgeable financial advisor. 

Financial Advisors can understand YOUR financial goals to give you the right advice. 

You need a financial advisor for-

  1. Creating a sustainable investment portfolio
  2. Monitoring your investments and taxes
  3. Tracking your expenses
  4. Creating savings for Children’s Education/Wedding 
  5. Emergency corpus building
  6. Retirement Plan
  7. Other liabilities

But the question is: How to select the right financial advisor? Whom can you trust with your wealth?

Not to worry. We have got you covered. Here’s what to look for in a financial advisor.

6 Things to Look for in a Financial Advisor

1. Look for Knowledge

Managing finance isn’t an easy thing. Even financial advisors learn from their mistakes as the market can be unpredictable.

When you look for a financial advisor, always check their knowledge and professional background. You can ask them for references and talk to their clients for more information.

Advisors who have handled finances through various cycles of the economy will bring more knowledge and experience to the table. Apart from the equity market cycles (which everyone seems to be savvy of, considering the information overload), an additional factor to consider is the number of interest rate cycles the advisor has worked through. Bonds and various debt instruments form an important fragment of asset allocation so it’s important to know whether your advisor is well-versed with the impact of interest rates on investments.

The market is full of financial advisors who can claim unrealistic outcomes, but you should evaluate realistic scenarios.

This brings us to the next point.

2. Realistic Expectations

No advisor can promise you how much returns you will get in a year. 

If an advisor is claiming 25-30% returns in a year, that’s a big NO right there. 

In fact, the word ‘Guaranteed Returns’ is not listed in an advisor’s dictionary.

Instead, experienced financial advisors will give you realistic estimates. They can plan your investment based on your risk profile, short and long-term goals, taxation, and insurance.

3. Proper Licenses

Financial advisors must have a license for the financial instruments they are selling. Certified Financial Planners (CFPs) or Chartered Accountants (CA) can guide you with finances and taxes.

If you want to invest in mutual funds, Advisors having a certificate from the Association of Mutual Funds in India are best suited. For insurance products, you may seek advisors who have a license from the Insurance Regulatory and Development Authority of India.

Always prefer working with certified financial experts. 

4. Financial Advisors Should Focus on Your Goals

You might have come across advisors who are more interested in selling financial instruments than to help you. That’s a red flag. 

Your financial advisor should focus on your financial goals, your investments, and your risk profile. The reason you are hiring a financial advisor is to simplify budgeting, taxation, insurance, long-term investments, and more.

If their focus is more on commission than on your needs, you shouldn’t proceed. Work with an advisor who is willing to listen to you before giving any sort of advice.

Tip See if the financial advisors have worked with clients who have similar interests/goals as you. Seek old track records of the advisor’s clients and their progress before making a decision.

5. Financial Advisors Must be Passionate About Wealth Management

Is your financial advisor talking passionately about current market scenarios and industry trends? If yes, you’ve got a good one there. 

Passionate financial advisors tend to constantly be in a learning and researching phase. They love to know what’s happening in the market. They gravitate towards finding out about new financial products, changes in law, new methodologies, and more.

Their passion becomes their primary gateway towards gaining relevant experience. If you want to know if the financial advisor is aware of new trends, ask them- “What’s new in the industry?” and see how they answer.

6. Communication Skills

It’s normal to be skeptical about letting someone else handle your finances. Trusting someone won’t come easily.

That’s why the communication skills of an advisor matter a lot. 

Your advisor should be able to explain finances in simple language. You should be aware of what’s going on with your investments. The advisor must be able to answer your queries and communicate all necessary details with you.

Often, you might come across advisors who talk a lot but offer no useful insights. 

An advisor should be able to share his/her experience, client success stories, suitable investment possibilities for you, and real-time market insights. And as an investor, you must seek this information as often as you can.

Keep communicating with the advisor to be on the same page. 

Conclusion

Everyone loves adulthood until the finances knock on your door with possibly ten arms. Then childhood seems much easier. You had nothing to worry about apart from your piggy bank. 

Remember though, your finances don’t need to be complicated. You can easily get everything sorted with the help of a financial advisor. 

Most of the time, people are not on-board with the idea of letting someone else manage their finances. But think of it as a collaboration. When you let an expert handle your money, you have a chance to earn more. Your money can bring more money with suitable investments.

But don’t forget to do your research as well.

You can analyze your portfolio for free at VNN Wealth to have a thorough glance at your investment. Once you have a clear idea of what you want to achieve in the next few years, our financial experts can guide you. You can explore all types of investment opportunities that can build wealth in the long run.

 

Have more queries regarding investments and finances? Contact us anytime.

Categories
Blogs Investing Basics

Power Of Compounding Interest: Benefits of Investing Early

You must have heard the concepts of the Power of Compounding Interest in your mathematics textbook. Something that seemed boring in childhood can turn out to be pretty amazing in your adulthood. Yes! Compounding can build your wealth exponentially. And it’s even better if you start investing early.

In your 20s, the term ‘Savings’ may not be your first priority. Understandable! You would want to enjoy your own money. But, that’s exactly the right time to start building wealth for the future. The earlier you start, the better outcome you’ll see. And you will be amazed to know what compounding can do with your money.

Interested enough? Let’s find out more about it.

Let’s not get into the whole boring definition that you probably hated in school.

In simple words- The power of compounding is earning interest on both the principal amount plus the previously earned returns. 

The interest that you earn on the principal amount gets reinvested every year. It allows you to earn interest on both the principal amount and the reinvested interest.

Whereas, if you opt for simple interest, you will only earn interest on the principal amount. 

Let’s say you’ve invested INR. 10,00,000 in a scheme with a 12% annual interest rate. You will receive 12% profit on your principal amount every year.

Here’s the comparison of simple interest vs compound interest.

YearsSimple Interest EarnedTotal valueCompound Interest EarnedTotal Value
56,00,00016,00,0008,21,93918,21,939
1012,00,00022,00,00023,19,46233,19,462
1518,00,00028,00,00050,47,85860,47,858
2024,00,00034,00,0001,00,18,8291,10,18,829
2530,00,00040,00,0001,90,75,6362,00,75,636

See the difference in returns between simple and compound interest. 

In 25 years, your 10 lakhs @12% p.a. will become 40 lakhs with simple interest and 2 crores with compound interest. That’s the power of compounding.

Note- Instead of a lumpsum investment, you can also consider starting a SIP of a mutual fund scheme to benefit from the rupee cost averaging and power of compounding.

Now let’s say, Abhishek, Ananya, and Simran are three friends who started a SIP of INR 10000 with 12% compounding interest till age 60. But, Abhishek started at age 25, Ananya at 30, and Simran at 35. 

By the time Abhishek, Ananya, Simran are 60. Abhishek built more wealth than Ananya and Simran.

Now, as you can see in the above table, Abhishek invested an additional 12 Lakhs compared to Simran, who began investing early. By the time both reached the age of 60, Abhishek accumulated a total corpus of 5.09 Crores, which is MASSIVE 3.59 crores more than Simran.

Tip- You can build a large corpus from early investments and convert your lakhs into crores.

Often, newly employed people have the urge to spend money on things they always wanted to own. Investment isn’t on their mind.

However, you will probably have less responsibility and more time to start saving and investing. It’s the right time to build wealth for the future.

Market volatility and global economic changes are uncertain. It’s always better to have your financial goals aligned. Besides, when you are young, you can explore various investment instruments, take more risks, and build a diverse portfolio.

From the above table, you already know the benefit of investing early. That’s the best way to ensure a comfortable life for you and your loved ones.

How to Start Saving Early?

Now that you know how early savings can grow your wealth exponentially, here are some tips that you can try.

1. Plan Your Expenses

It’s natural to have a spending habit in your 20s. After all, you are enjoying your youth. But, these are the years that can make your 30s, 40s, and retirement comfortable.

To have a balance between expenses and savings, note down your budget. It will help you identify certain expenses that can be cut down. As your mom would say- No need to order food online when we have plenty at home.

Also, you will come across some heavy expenses such as weddings, healthcare, child education, house, or car purchase anytime in the future. 

These expenses can be done smoothly with thorough expense planning. Have a clear idea of what you want to financially achieve in the next 10 years. Cut down unnecessary expenses and invest them into mutual funds via SIP. 

Read about the benefits of investing via SIP. 

2. Maintain Discipline 

Discipline plays a very crucial role in investments. You have to be consistent to get desired outcomes. Plan your investments and execute them on time. 

Nowadays, net banking offers an auto-debit feature to ensure you don’t forget an installment. Or simply use app reminders to have a consistent investment plan. 

3. Keep Track of Your Savings

When you have a complex investment portfolio, it could get tricky to keep a track of everything. You can either note down all your finances in a secure folder or seek help from a financial expert who can do it for you.

With VNN Wealth, you can get your portfolio analyzed periodically and take an expert’s advice to manage your finances. 

4. Plan Retirement Horizon

With the right investments, you can plan an early retirement and still have a comfortable life.

The earlier you start saving, the earlier you will have an envisioned wealth. Determining your investment horizon will help you figure out the necessary financial goals. Be it your retirement home or a long-due vacation, you will be able to do it all comfortably. 

5. Be Patient

Patience is the key while building wealth. Most investors seek quick returns, which is not always possible. Remember, the power of compounding works better if you hold your investment for a longer time.

Conclusion

The main highlight of compounding is- your money makes more money. You earn interest on interest. And you use time as a variable to convert your lakhs into crores.

The earlier you invest, the larger the corpus you will build over the years. We would recommend starting a mutual fund SIP to benefit from compounding. It’s never too late to start building wealth. 

The power of compounding works in the background as you continue to invest money. All you need is patience and of course, the right investment instruments. 

Start planning your expenses and set financial goals for the future. If you need help crafting a sustainable investment portfolio, we are here for you.

 

Give VNN Wealth experts a call or send an email to discuss all the possible ways you can build wealth. Start early and save big!

Categories
Blogs Mutual Funds

15 Common Types Of Debt Funds In India

Debt funds are mutual funds schemes that allocate your assets to debt instruments such as government bonds, corporate bonds, commercial papers, and T-bills.

These debt instruments are traded in the market like stocks. Their price goes up and down based on the interest rates and demand. 

In recent years, debt funds are gaining popularity among investors as they offer decent returns with lower risk than equity schemes. 

Debt funds come in various types depending on the investment horizon and risk factor. 

Let’s see how many different types of debt funds are there

Common Types of Debt Funds

Debt funds have three primary categories based on credit profile, duration, and underlying assets.

Type 1: Duration Profile

These debt funds primarily focus on the maturity duration of the underlying investment. 

  1. Overnight Funds

Overnight funds invest in debt instruments with a maturity of 1 day. This bond offers high liquidity with moderate returns. Overnight funds are suitable for investors willing to invest in debt schemes for a very short period of time.

  1. Liquid Funds

Liquid fund schemes invest in debt securities with only up to 91 days of maturity period. These funds are suitable for investors seeking steady returns by investing only for a few months. 

  1. Ultra-Short Duration Funds

Ultra-Short duration funds have a 3-month maturity period. These funds may offer superior yield (rate of return) with low risk when held for more than 3 months. 

  1. Low Duration Debt Funds

Low Duration debt funds expect investors to have an investment horizon of at least 6-12 months. These funds may deliver higher returns than ultra-short duration funds but with moderate risk. To boost the yield, these funds may allocate some assets to bonds with lower credit rank.

  1. Money Market Funds

Money market funds allocate your assets to debt instruments having a maturity period of upto 1 year like commercial papers or treasury bills. The interest income may boost returns on these funds.

  1. Short Duration Funds

Short-duration funds expect you to have 1-3 years of an investment horizon. These schemes invest in both short and long-term debt instruments with different credit ratings. You may receive higher returns than liquid or ultra-short funds but with some fluctuations in the prices. Investors with a slight risk appetite can consider these funds.

  1. Medium Duration

These funds invest in debt and money market instruments with a maturity period of 3-4 years.

  1. Medium to Long Duration

These funds have a maturity horizon of 4-7 years. You may come across high-interest rate risk but with decent returns.

  1. Long Duration

These funds have a 7+ years maturity period. Long-duration schemes might be riskier than any of the above schemes, yet less risky than equity schemes. 

    10. Dynamic Funds

Dynamic funds have no threshold or restrictions on the security type or maturity period of the investment. These schemes are flexible and dynamically change investments depending on the interest rate cycle. 

Type 2: Underlying Assets

These debt funds focus mainly on the specific investment profile of the underlying asset.

  1. Corporate Bond Funds

These schemes invest at least 80% of total assets in AA+ or higher corporate bonds. Investors with a low-risk appetite seeking regular income and safety can consider investing in corporate bond funds.

  1. Floater Funds

Floater funds invest at least 65% of total assets in floating rate instruments. As the coupons (annual fixed income security) on the floating rate get periodically reset, you can take advantage of low interest-rate risk. 

  1. Banking and PSU Funds

These funds invest at least 80% of total assets into debt securities issued by banks, PSUs, and public financial institutions. These funds offer safety, decent yield, and liquidity. 

Type 3: Credit Profile

These debt funds invest based on the underlying credit risk profile. 

  1. Credit Risk Funds

Credit risk funds allocate at least 65% of total assets to AA (or lower) rated corporate bonds. There’s some risk but yields might be superior. If you have an aggressive risk profile and are looking for high risk-high return, these funds are suitable for your portfolio.

  1. Gilt Funds

Gilt funds invest at least 80% of total funds in government securities of varying maturity periods. You may come across a high-interest rate risk but a low default risk. In a falling interest rate scenario, Gilt funds may be an ideal investment option.

On the other hand, Gilt funds with a 10-year constant duration, unlike regular Gilt funds, invest at least 80% of total funds in government securities with a constant duration of 10 years. Here, interest rate risk is stable due to the constant duration. 

Conclusion

Among all the different types of debt funds, it could be confusing to choose one. It’s important to match the current yield to maturity, modified duration, and credit risk of the debt fund to your financial goals, risk profile, and investment horizon.

It’s best to get an expert to help you find which debt fund to invest in. Before letting a financial advisor evaluate your profile, here are some things you need to know.

 

Contact us to get a free portfolio analysis and know about all possible investment options suitable for you.

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Index Mutual Funds: Top 5 Advantages of Investing

Index mutual funds are the type of passive funds that follow a certain index/benchmark to plan investments. The fund managers follow the index such as Nifty 50 or Sensex to invest money in the exact proportion. The returns on these funds are aligned with the underlying index. 

These funds are safer than equity mutual funds, have lower expense ratios, deliver decent returns, and don’t need active attention. Investors who are seeking diverse portfolios with low to moderate risk can take advantage of the index funds.  

Let’s shed more light on the index funds.  

Index mutual funds in India either follow the Nifty 50 or Sensex as the investment benchmark. 

Nifty 50 is the benchmark index that represents the top 50 companies listed on the National Stock Exchange. Sensex represents the top 30 companies listed on the Bombay Stock Exchange. These companies could be of any type and sector.  

Fund houses allocate money to these top companies on Nifty or Sensex. The performance of the index funds completely depends on the performance of the underlying index. 

It is always advised to hold these funds for a longer horizon to receive superior returns.

1. Diverse Portfolio

Index funds are a combination of companies from various sectors. Once you invest in index funds, you invest in all these companies without assessing them individually. 

Not only does it save your time but also diversifies your investment portfolio. 

2. No Active Management 

Index funds are passive investments. Neither the fund manager nor you have to actively reallocate the funds to balance risk and returns. 

Fund managers simply follow the underlying index benchmark and keep the investment as it is.  No headache of active management.

3. Low Expense Ratio 

Fund houses do not need to invest time and resources into analyzing the performance of the fund. They only have to reflect the benchmark into the investment allocation. To do so, they charge a very minimal expense ratio. 

4. No Fund Allocation Bias 

How much funds to allocate to a particular stock is always a question with mutual funds. Fund managers have to analyze the market to decide the percentage of funds to allocate to each company. 

In index funds, the allocation bias doesn’t exist as the benchmark defines it all. There is less chance of human error as these funds are regulated with the index.

5. Risk Transparency 

The fluctuations in the returns from index funds depend on the performance of the top companies from the underlying index.  

Since Nifty and Sensex constantly track the performance of the companies, the risk can be lower. You have complete transparency about the risk factor.

1. Returns on Index Funds 

As index funds are passively managed funds, they are less affected by market volatility. You will be able to earn decent returns even when the market is not at its peak.  However, you may want to consider investing in some active funds to balance the returns. 

2. Risk

Index funds are less riskier than equity funds. Market volatility doesn’t actively impact index funds. You may still get good returns compared to other actively managed investments.

3. Tracking Error and Tracking Difference 

Tracking difference is the difference between the gains of the index funds vs the underlying index. If it’s positive, the funds have outperformed the underlying index. Tracking error is the standard deviation of the tracking difference over a period of time. Fund houses make decisions based on tracking errors with respect to the underlying index. It can have either a positive or a negative impact on the returns.

4. Investment Horizon 

Index funds deliver better returns in a long term. If you keep your investment horizon to 5-7 years, you are most likely to earn better returns. The rule applies to all mutual funds. 

5. Index Category 

You may want to make yourself familiar with the index category. Index funds either follow the Nifty 50 or Sensex with variable or equal weightage. You can choose the index fund category based on your risk tolerance and portfolio balance. 

The capital gains earned via Index funds are similar to the equity mutual funds. It depends on the duration of the investment. 

If you redeem your investment before 12 months (Short term capital gains), you will have to pay a 20% tax. Investments held for more than a year (Long Term Capital Gains) above 1.25 Lakhs are taxed at 12.5%.

Index funds are not as risky as equity funds or stocks. So any new investor can start an investment portfolio with index funds. These funds are suitable for low-risk appetite investors. 

However, index funds are also great to balance the risk. So if you have active funds which are prone to risk, index funds can balance your risk profile.  

Always good to have a blend of active and passive funds in your portfolio.

The top two advantages of index funds are: these funds are passively managed and possess comparatively lower risk. If you are looking for a long-term, risk-balancing investment, index funds can chime in on your portfolio.

You may want to get familiar with the index categories before choosing a suitable index fund. Or you can always seek help from our expert advisors. 

We recommend evaluating your portfolio before deciding on the right index fund for you. Write to us anytime with your investment goals. Get a complimentary portfolio analysis and start building wealth.

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