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Month: September 2023

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Blogs Mutual Funds

Arbitrage Funds: What Are They and How Do They Work?

Arbitrage funds are hybrid equity-oriented funds that simultaneously buy and sell assets from different markets to book profit. Meaning, these funds take advantage of the difference in stock price in two different markets. 

These funds are ideal for investors looking for safer avenues to invest in during volatile markets. Read along to find more. 

How Do Arbitrage Funds Work?

Arbitrage funds buy assets from one market at a certain price and sell the same assets at a different market at a higher price. Both ‘Buy’ and ‘Sell’ transactions take place on the same day. 

As per SEBI guidelines, these funds invest at least 65% of total assets into equity and equity-related instruments. 

Let’s take an example:

A stock of an XYZ company is trading at INR 500/unit on the Bombay Stock Exchange. 

The same stock is trading at INR 515/unit on the Bangalore Stock Exchange. 

There’s an opportunity to earn INR 15/unit profit without any risk. Fund houses will buy the units from the Bombay Stock Exchange and sell them at the Bangalore Stock Exchange. 

Arbitrage funds may also operate within the Spot Market and Futures Market. 

Let’s say a stock of an ABC company is trading at INR 1000/unit at the Spot market. Fund houses will buy these stocks and the transaction will settle on the ‘Spot’.

The same stock has a value of INR 1020/unit in the Futures market. Fund houses will lock the ‘Sell’ for that price on the same day, which will settle at a future date (a month later.)

After locking the profit, the stock price in both markets has no impact on the returns. In both scenarios, investors will earn the profit they have locked in the beginning. Therefore, these funds are immune to market volatility. 

Factors to Consider Before Investing in Arbitrage Funds

1. Risk vs Returns

Arbitrage funds carry comparatively lower risk than other equity funds. Since the profit will be locked, market volatility would be of no concern. 

In fact, these funds may deliver superior returns during a volatile market. There is a chance that the future price of the asset to be significantly higher during a volatile market. Investors may lock in more profit when the asset prices are aggressively updating. 

However, when markets are flat, the asset price difference might be negligible. The fund may deliver lower returns.

2. Investment Horizon

Arbitrage funds are ideal for 6 months to 2 years of investment horizon. The arbitrage opportunities can deliver superior returns in 6 or more months.

If you want to park a lumpsum amount for a while at a comparatively safer avenue, go with these funds.

Additionally, staying invested for more than 12 months will also be tax-efficient. Plan your investment horizon accordingly.  

3. Fund Manager Strategy

Fund managers are always on the lookout for arbitrage opportunities. They strategically pick up underlying assets to ensure profit. Additionally, the fund also maintains a small allocation in debt/fixed-income securities to balance the returns. 

Arbitrage opportunities may not be abundant. A fund manager’s strategy makes all the difference in the returns of these funds. 

4. Expense Ratio

The expense ratio is a certain fee you have to pay to the fund house for managing your investments. As Arbitrage funds execute trade transactions every day, the expense ratio is often high. You may also be liable for a higher exit load if you redeem your investment between 30 to 60 days. 

Tax Implications on Arbitrage Funds

Arbitrage Funds follow equity taxation rules based on investment duration. 

You will have to pay a 20% tax on Short-term Capital Gains (Investments redeemed within 12 months.)

Long-term Capital Gains (Investments redeemed after 12 months) are taxed at 12.5% above 1.25 lakhs.

Who Should Invest in Arbitrage Funds?

Arbitrage funds are ideal for investors wanting superior returns than debt funds, but at the same time lower risk compared to equity funds. 

Investors with higher tax brackets can benefit from better post-tax returns.

For aggressive investors, these funds can bring stability during volatile markets. While you are exploring high-risk equity funds, Arbitrage funds can be your safety net.

It is always advisable to take the opinion of your financial planner before investing in any funds. 

Conclusion

Ever since debt funds taxation changed, the demand for Arbitrage funds has increased.  

These funds can hold your portfolio together during market volatility. Investors with a low-risk appetite can invest in this category. However, note that the returns on these funds may not be as superior as other equity funds. 

If you find these funds appealing, financial advisors at VNN Wealth can help you analyze your portfolio. Give us a call to know if these funds fit your risk profile and financial goals.

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Blogs Personal Finance

SWP vs IDCW: Which Plan is Better for Regular Income From Mutual Funds?

Mutual funds are the best way of building wealth and earning a fixed income from it. Be it a lump sum investment or SIP, mutual funds will deliver superior returns in the long term. 

And once you have enough wealth built, you can start earning income from your mutual funds.

There are two ways of earning a fixed income from your investments:

  • Systematic Withdrawal Plan (SWP)
  • Income Distribution Cum Capital Withdrawal Plan (Previously known as Dividend Plan.)

Let’s compare both in detail.

How Does a Systematic Withdrawal Plan Work?

A Systematic Withdrawal Plan (SWP) is an automated way of withdrawing a fixed amount from your mutual funds at regular intervals. Investors can define the amount and frequency at which they want to earn income. 

To put it simply, SWP is the opposite of a Systematic Investment Plan (SIP). In SIP, a predefined amount goes from your savings account to a mutual fund of your choice. SWP plan sells units of your mutual funds and transfers the amount to your bank account. 

Pro Tip- SWP is more effective when you give time to your fund to grow and benefit from the power of compounding. Stay invested for a longer duration. Once you have enough wealth built, you can start a SWP. It is one of the most tax-efficient ways to generate a consistent inflow, especially post-retirement. 

How Does The Income Distribution Cum Capital Withdrawal Plan Work?

In the IDCW (Dividend) plan, investors periodically receive a profit made by the fund. The mutual fund dividend plan works differently than the stock dividend.

In the case of mutual funds, the unit price increases with capital appreciation, interest earned on bonds, and dividends. Therefore, the income received is not like the dividend from a stock but your own profit.

Example:

The unit price (NAV) of a mutual fund is INR 100. After capital appreciation, bond interest, and dividends, the price goes up to INR 120. 

Now, if the mutual fund declares a dividend of INR 10 per unit, you will receive the amount (INR. 10 x No. of units) in your account but the NAV will go down to 110. 

Let’s say you have purchased 1000 units of a mutual fund with an NAV of 100/unit. You will end up investing INR 1,00,000 in an IDCW mutual fund.
 

Total Amount Invested

1,00,000

Unit Price

100

Units Assigned

1000

Updated Unit price after capital appreciation, bond interest, and dividends

120

Total Amount in a Fund

1,20,000

Dividend Declared

10 per unit

Dividend Amount Received (Dividend x Number of units)

10 x 1000 = 10000

Updated NAV after Dividend Payout (Previous NAV – Dividend)

120-10= 110

Remaining Invested Amount in a Fund (Updated NAV x Number of Units)

110 x 1000 =  1,10,000

The income investors earn from the IDCW plan is pulled out of the profit from their own investments. 

In the case of stocks, investors receive the dividend as an additional payout over and above the appreciated capital. Therefore, neither the principal amount nor the earned profit is reduced after dividend payouts. 

But with IDCW mutual funds, the appreciated amount goes down after the payout. This created confusion among investors. Therefore, SEBI renamed the Mutual fund dividend plan to Income Distribution Cum Capital Withdrawal Plan for clarity. 

In the IDCW plan, investors do not get to choose the amount or frequency of the payout. Therefore, it’s a less flexible plan compared to SWP.

A quick overview of SWP vs IDCW 👇

SWP vs IDCW Plan: Top 3 Differences

1. Flexibility of Choosing the Fixed Income

A systematic Withdrawal Plan allows investors to select the payout amount, frequency, and date. IDCW, on the other hand, depends on mutual fund performance and the fund house’s decisions. 

Let’s say you start an SIP of 20000 at 12% p.a.

You will accumulate:

  • 26,39,580 in 7 years.
  • 46,46,782 in 10 years.
  • 1,00,91,520 in 15 years.
  • 1,99,82,958 in 20 years

The SIP amount and horizon depend on your financial goals. 

Now, after 20 years you can comfortably withdraw 1L/month as a regular income for the next 20 years via SWP.

The remaining amount will keep compounding.

It is clear that SWP offers more flexibility compared to a dividend plan. It also helps you plan a source of income ahead of time. 

2. Surety of Receiving the Income

Receiving a payment via the IDCW plan depends on decisions made by the fund houses. The frequency and amount may change as per the fund’s performance. 

SWP, on the other hand, offers surety of payouts. You have full control over when you want to start SWP, for what amount, and how often.

You will receive the income irrespective of market conditions. 

3. SWP vs IDCW: Tax Implications

One of the important factors to consider before choosing an income plan is the applicable tax. 

Dividends are a form of income, therefore, will be taxed as per your tax slab. So, if you fall under higher tax brackets, a dividend plan may not be ideal for you.

Systematic Withdrawals are a form of mutual fund redemptions. Taxation on mutual fund redemption depends on the holding period.

  • If you start SWP within 12 months of your investment, you will attract a 20% Short-Term Capital Gain tax on your withdrawals. 
  • Holding your investment for more than 12 months will attract a 12.5% Long-Term capital gain tax on withdrawals above 1.25 Lakhs in a financial year.

Therefore, SWP becomes a more tax-efficient fixed-income avenue than a dividend plan. 

Note- It is always better to hold your mutual fund investments for a longer duration. Not only is it tax efficient, but also helps you accumulate larger wealth by the power of compounding. 

Which Fixed Income Option Should You Choose Between the Two?

Investors who do not rely on income from mutual funds but wouldn’t mind a periodic payout often go for the IDCW plan. It is not their primary mode of generating regular income. 

IDCW plan does not wait for the principal amount to grow by compounding. Therefore, many investors prefer the growth plan. 

SWP is suitable for investors looking to generate regular income on their own terms. It offers more flexibility and tax-efficient withdrawals. It is advisable to let your money grow for years and then start the SWP. 

Choosing a suitable plan entirely depends upon your financial goals and preferences. 

Final Thoughts on SWP vs IDCW

To answer the primary questions- SWP vs IDCW (Dividend): Which one is better for regular income from mutual funds?

SWP is the clear winner because it gives you the freedom to choose the amount and frequency. The income withdrawn via SWP is more tax-efficient than the dividend income. Investors wanting to earn a salary even after retirement should go for SWP. 

It is wise to have clear financial goals to select the right plan. If you have any further queries, feel free to reach out to us. Experts from VNN Wealth would be happy to help you shape your investment portfolio. 

Categories
Investing Basics

Mutual Fund Factsheet: How to Read The Technical Aspects

Have you ever read a complete mutual fund factsheet? Bet not.

Investors often only look at past performance when comparing two mutual funds. However, that’s not the only criteria to know which fund may perform better.

A fund factsheet has more information to indicate the volatility and potential returns. This data may help you narrow down your search to a suitable fund.

In this article, we will learn what to compare in fund factsheets. Read along!

Technical Aspects of the Mutual Fund Factsheet

A mutual fund factsheet typically consists of past performance, scheme profile, fund house/manager information, fund composition, holding information, and volatility measures.

While all this information is useful, we are going to focus on volatility measures aka key ratios.

Volatility measures help you understand more about the fund than the past performance ever could. 

Let’s take two Multi Cap Funds to compare as an example. 

1. Nippon India Multi Cap Fund

2. ICICI Prudential Multi Cap Fund

Volatility Measures (Key Ratios) of a Mutual Fund

1. Standard Deviation (SD)

Standard Deviation measures the volatility of the fund’s returns with respect to its mean or average. It basically tells you about the risk associated with the fund. 

A high standard deviation indicates high volatility. 

A Standard Deviation of 17% indicates either a 17% gain or a 17% loss. 

In the above example, the SD of Nippon Multi Cap is 17.89 whereas the SD for ICICI Prudential Multi Cap is 15.1. 

Let’s say you’ve invested 5000 in these funds. 

Fund

Standard Dev

Value after Gain

Value After loss

Nippon India Multi Cap

17.89%

5894.5

4105.5

ICICI Prudential Multi Cap

15.1%

5755

4245

To check if the fund aligns with your risk tolerance, SD is the value you look for. 

2. Alpha

Alpha is the excess returns the mutual fund has generated compared to the benchmark, considering the associated risk. 

Positive alpha indicates that the fund performed better than the benchmark. Negative alpha indicates the fund could not beat the benchmark. 

3. Beta

Beta measures the fund’s volatility compared to the benchmark. The lower beta indicates a lower risk. 

If the Beta is more than 1, the fund is more volatile than the benchmark. And if the Beta is less than 1, the fund is less volatile compared to the benchmark.

In the above example, the Beta of Nippon India Multi Cap fund is 1.1 whereas ICICI Prudential Multi Cap is 0.97. 

Nippon Multi-cap fund is more volatile compared to the benchmark than the ICICI Prudential multi-cap fund. 

4. Sharpe Ratio

Sharpe ratio indicates the performance of the fund with respect to the risk it has taken. It’s the excess returns over and above the risk-free returns divided by the Standard Deviation. 

Note- Risk-free returns are the returns generated by a safe instrument, such as Fixed Deposits. 

A higher Sharpe Ratio indicates the fund will deliver better risk-adjusted returns.

In the above example, the Sharpe ratio of Nippon India Multi Cap Fund is 1.72 and ICICI Prudential Multi Cap Fund is 1.45. 

Therefore, Nippon India Multi Cap fund will deliver better risk-adjusted returns compared to ICICI Prudential. 

5. Mean

The mean value indicates the average returns generated by an instrument over the years in different market scenarios. 

Note that the mean cannot predict future returns nor is it the only measure to evaluate a fund’s performance. It only helps you understand how the fund has performed in various economic cycles. 

Now let’s draw a conclusion on which fund would deliver superior returns. 

  • Standard Deviation of Nippon India Multi Cap: 17.89
  • Standard Deviation of ICICI Prudential Multi Cap: 15.1
  • Beta of Nippon India Multi Cap: 1.1
  • Beta of ICICI Prudential Multi Cap: 0.97
  • Alpha of Nippon India Multi Cap: 9.4
  • Alpha of ICICI Prudential Multi Cap: 3.12

With only a 2.79% additional volatility measure (SD), Nippon is offering higher Alpha compared to ICICI. 

Nippon India Multi Cap fund has the potential to deliver superior returns than ICICI Prudential Multi Cap fund. 

So from now on, whenever you want to compare two funds from the same category, this is how you can compare. Don’t just rely on the past performance or the star rating of the fund. That will not tell you how the fund may perform in the coming years.

The key ratios are a more accurate indication of the fund’s performance against the benchmark and against each other.  

Found the blog interesting? Share it with your fellow investors, follow @vnnwealth, and explore more insights here. 
 

Categories
Mutual Funds

Long Duration Debt Funds: Benefits, Taxation, Who Should Invest?

Long-duration funds invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, etc. The asset allocation of these debt funds maintains a Macaulay duration of 7 years.

These funds are ideal for medium to long duration goals such as buying a house within 5-7 years. 

A worthy competitor to an FD, these funds may deliver superior returns. 

Interested to know more? Read along.

How do Long Duration Funds Work?

As per SEBI guidelines, long-duration funds must invest in debt and money market securities keeping the Macaulay duration to 7 years.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds are riskier than short, low, medium duration debt funds since they carry higher interest rate risk, but offer superior returns in a falling interest rate scenario. 

Benefits of Investing in Long Duration Debt Funds

  • Long-duration debt funds may deliver similar or superior returns compared to FD or other debt funds categories. These funds especially perform well when the interest rates are falling or are stable for a long period.
  • Long duration debt funds can bring stability to your equity portfolio. Equity funds can be risky at times. In such a case, debt funds can balance the overall returns.
  • Debt funds are a great avenue to introduce portfolio diversification. These funds can cater to specific financial goals such as buying a house or funding a child’s education. 

Factors to Consider Before Investing

1. Risk Tolerance

Debt funds come with two types of risks- Interest rate risk and default risk. 

Since these funds hold longer duration bonds, they carry higher interest rate risk compared to shorter duration debt funds. The NAV of the debt fund is inversely proportional to the interest rate. That is, if the rates fall, the NAV goes up, and vice versa. 
Therefore, the returns may drop during rising interest rate scenarios. Holding your investment until maturity can avoid the interest rate risk.

As for the default risk, make sure the underlying bonds in the fund have high credit ratings. Bonds with AA+ credit ratings are safe to invest in. 

2. Expected Returns

Long duration debt funds have the potential to outperform FDs and other debt fund categories. These funds are riskier than short-duration, low duration, medium duration debt funds. However, the returns are also superior.

Both accrued interest income and capital appreciation can contribute towards the overall returns. 

3. Investment Horizon

Long duration funds have an investment horizon of 7+ years. Make sure it aligns with your risk appetite and financial goals. 

Debt funds have 15 categories with variable horizons. Invest in a fund that fits well into your portfolio. 

4. Interest Rate Cycle

It’s important to understand the interest rate cycle currently in the economy and accordingly take an investment call in these funds. As the bond prices decrease with rising interest rates, it’s best to avoid these funds when the interest rates are high.

Tax Implications on Long-Duration Funds

From April 2023, the taxation on debt funds has changed.

Now investors have to pay tax as per their tax slab on both long and short-term capital gains. The indexation benefit on long-term capital gains is no longer applicable.

Find out why debt funds are still reliable after the new tax rules. 

Who Should Invest in Long Duration Funds?

Long duration funds are suitable for savvy investors who understand the interest rate cycle and can tolerate price fluctuations due to interest rate movements. 

Invest in these funds only if you are comfortable with the investment horizon. 

Conclusion

Long duration debt funds can play a crucial role in portfolio diversification and stability. Since the duration would be 7+ years, these funds are prone to changing interest rate scenarios.

It would be wise to evaluate your portfolio to decide your exposure to equity vs. debt funds. Talk to your financial advisor or give VNN Wealth a call to plan your investments. 

Categories
Mutual Funds

Medium to Long Duration Debt Funds: Advantages, Taxation, and More

Medium to Long Duration debt funds invest in debt and money market instruments. The underlying assets in these funds have an average maturity of 4 to 7 years.

These funds can cater to your medium-term financial goals such as- upgrading a car in the next few years, planning a wedding, or a family vacation abroad.

Medium to Long duration funds may deliver superior returns compared to short, low, medium duration funds.

Here’s everything you need to know about these funds.

How do Medium to Long Duration Debt Funds Work?

As per SEBI guidelines, these funds invest in debt and money market instruments keeping the Macaulay Duration to 4-7 years.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have a longer horizon than medium and low duration debt funds. Therefore, the risk could be higher. However, the chances of generating superior returns are also high.

Benefits of Investing in Medium to Long Duration Funds

  • These funds have the potential to outperform fixed deposits of similar tenure. You may also earn better returns compared to medium or low duration debt funds in a falling interest rate market. 
  • Medium to Long Duration debt funds can balance your portfolio by bringing diversification. 
  • You can introduce stability to your equity portfolio by investing in lower-risk avenues such as these debt funds.

Factors to Consider Before Investing in Medium to Long Duration Debt Funds

1. Risk Tolerance

The fluctuations in interest rates are inevitable in 4-7 years of duration. The bond prices will fall during the rising interest rates. However, it will climb back up when the interest rates are falling.

Being patient is the key to fighting the interest rate risk. 

Debt funds may also come across default risk. To avoid it, invest in funds having underlying bonds with high credit ratings. Bonds with AA+ credit ratings are safe to invest in. 

2. Expected Returns

Medium to Long Duration debt funds tend to deliver superior returns than FD of the same tenure. These funds also outperform debt funds with short, low, or medium tenure. 

3. Investment Horizon

You may need to stay invested in these funds for at least 4 years to earn higher returns. Invest only if you are comfortable with 4-7 years of horizon before investing.

Otherwise, you can explore low or medium duration funds for a shorter horizon. Or, long duration funds for a longer horizon. Whichever suits your financial goals. 

Tax Implications on Medium to Long Duration Debt Funds

As per new tax rules from April 2023:

Investors have to pay tax as per their tax slab on both Long-term Capital Gains (investment redeemed after 36 months) and Short-term Capital Gains(Investment redeemed before 36 months).

The old indexation benefit will only be applicable to hybrid funds with more than 35% exposure to equity.

See more here.

Who Should Invest in Medium to Long Duration Debt Funds 

These funds are suitable for investors looking to park their money for 4-7 years. Since debt funds carry lower risk than equity funds, they can bring stability to the portfolio.

Go for these funds if you can accept a slight risk for better returns than fixed deposits. If you have an expense planned within 7 years, these funds can accompany you. 

However, don’t forget to evaluate your risk appetite and portfolio requirements before investing in any funds.

Conclusion

Debt funds have 15 different categories with variable objective and tenure. Medium to Long duration funds make planning financial goals within 7 years quite easier.

You can go with short duration or medium duration funds for a slightly lower horizon. Or long duration funds for 7+ years of financial planning.

Explore all categories of debt funds before planning your investments. Take into account the risks and potential rewards.

If you have any questions, reach out to VNN Wealth advisors for more information. 

Categories
Blogs Mutual Funds

Overnight Funds: Advantages and Who Should Invest?

Overnight funds are debt funds that invest in securities maturing in a day. These funds were introduced in 2018 after SEBI reclassified mutual funds.

These open-ended funds are safe, highly liquid, and can be an alternative to your current account.

Overnight funds invest the majority of the assets in:

  • Collateralized Borrowing and Lending Obligation (CBLOs)
  • Reverse Repos
  • Debt instruments with a maturity of one day.

Before we understand who should invest in these funds, let’s explore the benefits.

4 Benefits of Investing in Overnight Funds

1. High Liquidity

As the name suggests, these funds have a maturity of a day. Investment and redemption can take place within trading hours. You can park an idle lump sum amount in these funds instead of keeping it in your current account.

2. Low Risk

The underlying assets in these funds keep maturing every day. Since the interest rate will not change in a day, the risk is negligible.

Additionally, the chances of default for an asset maturing in a day are close to zero. Therefore, these funds are safe to invest in. 

3. Low Cost

Most debt securities charge exit load unless you hold your investment for a longer horizon. Even liquid funds expect you to hold your investment for at least 7 days to avoid exit load.

Overnight funds, on the other hand, do not charge any exit load. You can withdraw funds the next day. 

Moreover, these funds tend to have a low expense ratio of less than 0.5%. 

4. Flexible Investment Horizon

You can keep your money in overnight funds for as long as you want. While being able to redeem in a day is a great advantage, you can keep it longer as an emergency fund.

The redemption process is quick. Therefore, investors have the luxury of a flexible investment horizon. 

3 Things to Consider Before Investing in Overnight Funds

1. Risk vs Returns

Overnight funds are the safest debt funds to invest in. The possibility of default risk is close to zero.

However, investors have to compromise on returns in exchange for low risk. Overnight funds may not deliver superior returns. These funds are an alternative to your current or savings account.

2. Financial Goals

Overnight funds may not be an avenue to boost your portfolio returns. These funds make parking a surplus amount comfortable due to high liquidity.

Take your financial goals into account while investing. Don’t expect high returns. Rely on these funds for security and quick redemption.

3. Tax Implications

Since April 2023, tax implications on debt funds have changed.

Both Long-term Capital Gains (Investment redeemed after 36 months) and Short-term Capital Gains (Investment Redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit is only applicable to hybrid funds with at least 35% equity exposure. 

Explore Mutual Funds taxation rules here. 

Who Should Invest in Overnight Funds?

Overnight funds are suitable for investors looking to park surplus money overnight with no risk and high liquidity.

Ideally, these funds align more with the financial requirements of mid to large-size organizations than retail investors. Companies can park a large lump-sum amount overnight before reutilizing it. 

Retail investors can explore other debt funds before making a decision. Make sure the fund objectives align with your financial goals. 

Conclusion

Overnight funds offer several benefits such as daily maturity, low risk, low cost, and quick redemption. 

However, it is essential to note that high liquidity and safety come with comparatively lower returns. Corporations can benefit from these funds. Retail investors can use these funds as an alternative to a savings or current account.

We recommend analyzing your portfolio with your financial planner before making a decision. If you don’t have a financial advisor, VNN Wealth is just a call away.

Explore personal finance insights. 

Categories
Blogs Personal Finance

7 Ways to Talk To Kids About Money Management

Have you started talking to your kids about money? Here’s why you should teach your children about personal finances at an early age. 

Kids are way smarter than you anticipate. In fact, children grasp knowledge faster than adults. Their shaping years are the perfect opportunity to teach them about money management. 

School curriculum may not have finance lessons, but you can take the initiative.

Today’s small money talks are going to help them in the long run. So let’s explore simple steps to teach your kids about money.

How to Teach Your Child The Value of Money Management?

1. Teach Your Child How Money Works

Introducing your child to the currency can be your first step. 

You can try a simple fun activity. Ask your child to separate the coins and notes of up to Rs. 50 to begin with. 

Kids learn basic additions/subtractions very early in their school curriculum. You can ask the child to add the total money. 

That way, your child will understand how to use the money they have.

2. Take Your Kids to The Market with You

Take your child with you for groceries and vegetable shopping. That would be the right place to show your kids how to buy things with money.

Children love it when you ask for their opinions. Maybe, you can make them select a vegetable or a fruit of their choice. Encourage them to talk to the shopkeepers about prices.

Your regular mode of payment could be credit cards or UPI. But, for the sake of your child’s understanding, you can pay with cash.

That way, your child will understand how to pay and get the change back from the shopkeeper. 

This fun supermarket activity can teach your child the real-world usage of money.

3. Give Your Kids a Piggy Bank to Save Money

Money saving is crucial learning that’ll stay with your child forever. 

These days, various banks offer special banking for children to learn the whole experience. Parents can take responsibility for the bank account and set transaction limits. 

But you can start with a piggy bank.

The remaining change from the shopping you did together can go in the child’s piggy bank. Make your child understand the importance of saving money.

You can also set a milestone. For example, if your child is asking for a new toy, make them save for it. That way, they’ll value the money and the new toy. The delayed gratification will give them much more joy. 

4. Don’t Impulse Purchase Toys, Gadgets, or Accessories for Your Children

Kids replicate their parents’ behavior in every possible scenario. It won’t set a good impression if you fulfill their demands every time.

As much as you want your child to have every happiness in the world, you’ll have to be reasonable. 

Not just toys, anything that you buy will attract your child’s attention. It is crucial to make them understand the importance of wants vs needs. 

5. Teach Your Kids How to Effectively Manage Their Allowance

You are giving your child an allowance for their day-to-day needs. Instead of deciding the amount yourself, sit with your child to make a budget.

Together, you can write down what they might need to buy in a month. Create a list and set the appropriate budget.

That way, your child will know how to manage their allowance. The budget list will give them a clear idea of how to carefully spend the money.

6. Plan for Your Children’s School/College Fees

The concept of teenagers earning some money in summer vacations isn’t common in India. That decision depends upon you and your child. 

If your teenager wants to earn some money to save for college, that can be a good idea. Otherwise, you can sit with your child to discuss school/college fees. 

Making them aware of the education cost is important. If your child wants to contribute, you can help them figure out safe and simple ways to earn money.

Note: This subject can be tricky to handle. Kids might spend the money they earn carelessly. On the other hand, it can also teach them the importance of hard-earned money. So you may want to proceed with caution. 

7. Gradually Expand Your Children’s Financial Knowledge

Accompany your children in their financial journey. From teaching them to save money to helping them kickstart their investment portfolio when they grow up. 

Academics may not teach your child real-world finances. So you and your child together can navigate the world of finances by researching or talking to experts.

Talk about finances in your family. Make everyone involved and take everyone’s opinion into consideration.

You can consider hiring a financial advisor for your family who can help you set goals. 

Final Words

When was the first time you started learning about money management? Maybe your relative gave you some money to buy ice cream. Or your grandparents gave you coins to put in your piggy bank.

The small things you do with your money early in your life can set the base. That’s why it is important to talk to kids about money management. 

It’s never too early or too late. You can begin today, even if your child is 18+. 

Gaining financial knowledge and having financial goals define your lifestyle. And you can be your child’s finance friend. 

If you want more guidance on personal finance and investments, give VNN Wealth a call. Our advisors would be happy to help you.

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