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8 Biggest Investing Mistakes to Avoid Before It’s Too Late

Do you ever feel like your portfolio is not growing as expected? That could be because you may have, unknowingly, made investing mistakes.

I have encountered plenty of portfolio blunders in my clients’ portfolios that go unnoticed by them. If kept unfixed, these errors can slow down your wealth creation journey. 

Don’t worry! It happens to the best of us. Even the savviest investors stumble at times.

In this blog, I’m sharing some of the most common investing mistakes in India and how to fix them. Let’s dive headfirst into it…

Mistake #1: Not Comparing The Mutual Fund to its Benchmark

You know how you love the butter chicken from that one particular restaurant? If you eat butter chicken anywhere else after that, you’ll compare it to the one that you loved. Nah! It’s not the same. Or, Yes! It’s pretty close to that one.

You start treating your absolute favourite butter chicken as a benchmark to compare butter chicken from every other restaurant.

Benchmark comparisons are a part of our life, especially while investing. 

Yet, the majority of investors that I have met, beginners or experienced, ignore the benchmark comparison. 

I’d say, benchmark comparisons are the easiest way to evaluate your mutual fund investments. Indices are clear reference points to review any fund’s performance.

You must compare funds with benchmarks such as BSE 200, NSE Nifty 50, Sensex, etc before investing and periodically evaluate them after investing.

If your fund is beating the benchmark- Great!

But a fund consistently underperforming its benchmark can be a concern. It might be a sign of poor strategy or lack of management. Keeping that fund in your portfolio will slow down your growth.

Fix: Dive deeper into why the fund is not beating the benchmark. And if required, re-allocate that money to funds in the same category that are beating the benchmark. 

Mistake #2: Being Too Hands-Off as an Investor

Imagine this. You build a nice garden in the backyard of your house. It’s gorgeous. Everyone is talking about it. 

But will it stay gorgeous if you forget to water it and take care of it? No! It will soon start to wilt. 

Similarly, not taking care of your portfolio, and being too hands-off with it, can be damaging. 

Your portfolio shows enough symptoms to determine what’s going wrong. For example: multiple fund manager changes, significant asset outflows, and prolonged periods of poor returns.

Fix: Don’t ignore the above symptoms of a fund. You might miss out on better opportunities elsewhere. Periodically review your portfolio’s health and proactively make decisions. Make sure your portfolio is always aligned with your financial goals, risk appetite, and market conditions.

Mistake #3: Long Tail of Underperforming Stocks

This is the most common mistake I notice while reviewing client portfolios. Stocks purchased due to some trend or a friend’s recommendation lead to too many stock holdings

Most times, the investors are unaware of the impact this may cause. It’s one of the reasons for over-diversification, which is as bad as under-diversification. 

You are lowering liquidity and losing out on investing in stocks that may deliver higher returns. 

Let’s say you have invested INR 1,00,000 in 50 stocks. For the sake of example, we’ll assume the average value of each stock is INR 20,000.

Now, say, one of the stocks doubles in value (INR 40,000) with a 100% return. Amazing, right?

Wrong! Despite the 100% return on a single stock, the overall portfolio returns would only be 2%. 

The ‘long tail’ of underperforming stocks can significantly lower the overall returns. Sooner or later, you’ll lose track of all the stock holdings. 

Fix: Discard underperforming stocks and invest that money in stocks or mutual funds that align with your long-term goals. 

Mistake #4: Buying Mutual Funds Based on Past Performance

I cannot stress this enough- past performance is not the only criteria to judge mutual funds. 

The economy keeps changing and so does the market. The fund that performed well in the past may not deliver similar returns in the future.

Fix: Instead of only relying on past performance, focus on the key ratios of the fund mentioned in the factsheet. Look at the rolling returns. It showcases how the fund performed in changing economic cycles. Additionally, always focus on YOUR financial goals and risk appetite before choosing investment instruments.

Learn how to read a mutual fund factsheet here

Mistake #5: Not Focusing on The Right Asset Allocation

I’ve met multiple investors who believe only equity delivers superior returns. Having an equity-heavy portfolio makes sense to them.

Yes. Equity does deliver superior returns over a longer term. However, like any other asset class, equity is also cyclical in nature. In order to be a savvy investor, you must invest in various asset classes to ensure that your entire portfolio is constantly growing. 

Take a look at the table below.

importance of asset allocation across stocks, bonds, gold, international equity, mutual funds

Each asset class has had its own ups and downs over a decade.

An equity-heavy portfolio would have delivered significant returns in 2017 and 2021. But the same portfolio would have underperformed in 2016, 2018, and  2022.

Fix: Invest across various asset classes. A balanced allocation towards multiple asset classes can deliver superior returns with downside protection. This way, when equity performance drops, gold or debt can reduce the downside risk in your portfolio and vice versa.

Read more about asset allocation here

Blunder #6: Accidentally Falling For Schemes with Low IRR

Have you ever been lured in by an insurance scheme that promises guaranteed returns? ‘Invest xyz per month for 7 years and earn this much for the next 8 years.’ Well…something like that. 

Let me tell you, these sales pitches are amazing. They know how to make you believe in those numbers. They throw in the words like minimum risk, guaranteed earnings, and whatnot.

The best of the best have fallen for similar schemes that are nothing but slow torture. If you calculate the IRR (Internal Rate of Return) of the scheme, the overall returns are never attractive considering you’re committing to the product for a really long duration. 

Fix: Don’t blindly invest in such schemes without calculating the actual IRR. You can use a simple Excel formula to calculate the IRR before you make a decision. 

Mistake #7: Investing in Multiple Mutual Fund Schemes from the Same Category

You might create a redundant investment if you invest in more than one mutual fund scheme within the same category.

In most cases, the underlying assets in two funds from the same category might be the same. 

Let’s say, you’ve invested in two large-cap funds. We’ll take ICICI Prudential Bluechip and Kotak Bluechip fund as an example.

These are some of the underlying assets in both the funds:

comparing two mutual funds. ICICI Prudential Bluechip fund, Kotak Bluechip fund

You’ll notice that the majority of the assets in both funds are identical. This can also be viewed as a co-relation matrix, which shows that 97% of the stocks in both funds are exactly the same. 

Here’s a snapshot of the correlation between multiple large-cap funds-

The degree of correlation between these funds ranges from 88% to 99%, which indicates similar underlying assets. 

Fix: To ensure true diversification, invest in different categories of mutual funds or asset classes with low correlation. You can compare the factsheet of the two funds to get an idea of their top holdings. For a more detailed mutual fund comparison and an accurate correlation matrix, contact VNN Wealth advisors via our official email, Instagram Channel or LinkedIn Page

Mistake #8: Panic Selling

Another common mistake many investors make is panic selling. Market volatility may cause anxiety. Understandable!

However, selling off your investments in panic is the last thing you want to do. 

Let’s take the example of the 2008 global economic crisis. The Sensex had fallen by 63% from its all-time high of 21,207. 

Many investors sold their investments in a panic, causing a huge loss. 

If these investors had resisted the urge to panic sell and stayed invested for the next 5 years if not more; their capital would have appreciated by 115%. And about 286% in the next 10 years. 

The point is, you cannot time the market. Instead of looking at small wins, focus on long-term investments. 

Market volatility is inevitable but so is a market rally when the economy stabilizes. Mutual fund returns can beat inflation when you stay invested for a longer horizon. 

Fix: Hold your investments for a longer horizon, especially when the markets are volatile. If you panic during a market crash, talk to your financial advisor. They will provide the necessary reassurance and guide you through the changing economic cycles.

So, there you have it- the top 8 investment portfolio mistakes you must avoid at any cost. 

Building wealth is a journey that takes years. In fact, the more years you spend invested, the larger the wealth you generate.

Invest wisely. Diversify your portfolio across asset classes. Let your investments grow on auto-pilot but don’t forget to rebalance your portfolio periodically. 

Reach out to VNN Wealth if you have any questions.  

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Impact of Elections on the Indian Stock Market

The Lok Sabha elections are right around the corner and the stock markets are already experiencing the impact. If the historical data is any indication, the bull run of the stock market leading up to the general election is inevitable. Many events influence stock market movements. And the Lok Sabha elections are probably the biggest event to move the market before and after the results. In this article, we will shed light on how elections can spark jumps in the stock market. 

History of Market Movements Before and After Elections (Between 1999 to 2019)

The election period is often the time when the market sentiments change. It’s an uncertain period of change causing volatility in the stock market. Indian economy and the policies may shift during these times.  The average returns a year prior and a month prior to the elections are 29.1% and 6% respectively. This indicates the market returns boost a year before the elections. Below is a snapshot of how the market performed before and after the elections.

Lok Sabha Elections 1999 (Took place between Sept 1999 to Oct 1999)

  • The controversy around PM Rajiv Gandhi and his assassination in 1991 took the market by storm. The market instability amplified. However, PV Narasimha Rao regained economic conditions with liberalization policies thereby restoring stability.
  • From 1996 to 1998, the market confidence struggled due to the unstable Coalition Government and the Asian Financial Crisis. Indian prime ministers changed three times during this course of time. 
  • NDA came to power in 1999, prior to which, the market delivered 57.07% returns between Sept’98 to July’99. However, the market corrected by 7.67% a year after the victory. The structural changes and sectoral reforms caused GDP growth of 6-7%.

Lok Sabha Elections 2004 (Took place between April 2004 to May 2004)

  • A year prior to the 2004 election, the market delivered 82.70% returns between April 2003 to Feb 2004. The market declined by 7% following the elections but soon rallied up until 2007.

Lok Sabha Elections 2009 (Took place between April 2009 to May 2009)

  • The market dropped by 41.73% a year before the 2009 election. This was the year when a financial meltdown dramatically changed the worldwide economy. The market delivered 12.92% returns a month before the election. UPA’s second term saw policy uncertainties, scams, a high inflation rate and a struggle to stabilize the economy, which resulted in an economic slowdown.

Lok Sabha Elections 2014 (Took place between April 2014 to May 2014)

  • NDA, led by the BJP, returned with a victory in the 2014 election, reducing market volatility to 9.1%. The market delivered 10.02% gains a year before the win and 10.48% a year after the win, with 37% 2-year returns.

Lok Sabha Elections 2019 (Took place between April 2019 to May 2019)

  • BJP continued governing the nation after the 2019 election, aiming for economic stability. However, COVID-19 made all the nations suffer, causing the markets to drop significantly. The market corrected by 19.12% a year after the election, which was the COVID period. The bull phase was seen when the impact of COVID-19 was fading in 2021-22. 
As BJP won the assembly polls in Rajasthan, Madhya Pradesh, and Chattisgarh, both Nifty and Sensex climbed up the new lifetime highs. The election wave will see the market rally until the elections in April-May 2024. Only the time ahead will tell where the market eventually stands before and after the election. 
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Blogs Investing Basics

Mutual Fund Taxation for NRIs in India

Mutual funds are a popular investment avenue among investors. Similar to Indian residents, NRIs can also explore mutual fund opportunities.

With the right balance of equity mutual funds and debt mutual funds, one can achieve financial goals. However, it is important to know that the capital gains on mutual funds are taxable. Both Indians and NRIs have similar tax implications with slight exceptions for NRIs.

In this blog, we will understand the NRI mutual fund taxation.

NOTE: Tax rules on Mutual funds have been changed after April 1, 2023. Read along to find more details. 

Non-resident Indians (NRIs) can invest in Indian mutual funds as long as they follow the Foreign Exchange Management Act (FEMA). A PAN card and KYC via eligible documents allow NRIs to invest in mutual funds, fixed-income securities, or even real estate. However, the tax rules for each investment avenue will be different for NRIs.

Tax on the capital gains earned from mutual funds depends on the type of the fund and the holding period.

1. Short-Term Capital Gains tax will be applicable on investments redeemed before 12 months for equity funds and 36 months for debt funds. 

2. Long-Term Capital Gains tax will be applicable on investments redeemed after 12 months for equity funds and 36 months for debt funds.

3. Dividends are considered as income. Hence, the tax implications on dividends earned from mutual funds are different from capital gain taxation.

4. The asset management firm may also deduct TDS (tax deducted at source) on the capital gains. 

Now, let’s dive into the tax implications.

Equity Mutual Funds allocate the majority of the assets into the stocks of different companies. There are 7 different types of equity funds that you can explore based on your risk appetite and financial goals. 

Tax on capital gains on equity and equity-oriented funds are as follows:

Short-term capital Gains Tax (STCG)Short-term capital Gains Tax (STCG)Tax on Dividend (Income through mutual funds)
15%10% above INR 1 LakhAs per the investor’s tax slab

Non-equity mutual funds are either Debt funds or Hybrid funds with a combination of both equity and debt. Debt funds allocate your money to debt instruments such as government bonds, corporate bonds, T-bills, commercial papers etc. Debt funds have 15 different categories to explore based on the tenure and associated risk. 

Funds with less than 35% exposure to equity will also have debt fund taxation. Whereas funds with 35% exposure to equity will have the old taxation rule with indexation. 

Taxation on Gains on debt or other than equity funds:

Mutual Fund TypeShort-Term Capital Gains Tax (STCG)Long-Term Capital Gains Tax (LTCG)Tax on Dividend (Income through Mutual Funds)
Non-Equity Funds invested before April 1, 2023As per the investor’s tax slab20% (for listed securities) and 10% above INR 1 Lakh (for unlisted securities)As per the investor’s tax slab
Non-Equity Funds invested on or after April 1, 2023As per the investor’s tax slabAs per the investor’s tax slabAs per the investor’s tax slab
Funds with 35% exposure to equityAs per the investor’s tax slab20% (for listed securities with indexation benefit)

10% above INR 1 Lakh (for unlisted securities)
As per the investor’s tax slab

Indian residents do not have to pay TDS on capital gains. However, the asset management firm will deduct TDS on capital gains for NRIs. 

TDS depends upon the type of the fund and the holding period. 

Mutual Fund TypeTDS on Short-Term Capital Gains TDS on Long-Term Capital GainsTDS on Dividend
Equity and Equity Oriented Funds15%
(Holding period less than 12 months)
10%
(Holding period more than 12 months)
20%
Debt Funds or Non-equity Funds
(Invested before April 1, 2023)
30%20% with indexation for listed securities.
10% for unlisted securities. 
20%
Debt Funds or Non-equity Funds
(Invested after April 1, 2023)
30%30%20%

Question 1: Do NRIs have to pay tax in their current residence country after paying capital gains tax in India?

Answer: No. NRIs do not have to pay the double tax if their country falls under Double Tax Avoidance Agreements (DTAA) with India.

Question 2: Can NRIs set off capital gains with losses?

Answer: Yes. NRIs can also set off capital gains with losses. For example, if an NRI gained profit via one mutual fund but made a loss in another, he/she can set off the gains against losses to reduce the overall gains, thereby reducing the tax on it. 

Understanding taxation rules is crucial to plan your investments accordingly. If you are a non-resident Indian wanting to invest in the Indian stock market, keep this blog in handy. Taxation rules for mutual funds are pretty much the same for both Indians and NRIs, with TDS as an exception.

If you have any questions regarding mutual funds or its taxation, feel free to reach out to us. DM us on Instagram or LinkedIn.

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