Log In

Month: January 2024

Categories
Blogs Mutual Funds Personal Finance

Top 5 Dos and Don’ts of Mutual Funds

Investing in mutual funds is as easy as ordering your favorite shoes online. 

The financial awareness has increased and so are the number of mutual fund investors. Anyone can start investing with as little as INR 100/month via SIP. Mutual funds can accompany you throughout your wealth-creation journey. And if you want that journey to be smooth, you must incorporate certain practices. 

In this blog, we will cover some of the common dos and don’ts of mutual funds. Let the learning begin…

What You Should and Shouldn’t Do with Mutual Fund Investments

Below are some factors to keep in mind as an informed mutual fund investor. 

Dos of Mutual Funds

1. Understand the Fund Objective

Mutual funds have various categories primarily divided into equity funds, debt funds, or hybrid funds.

Equity funds invest in company stocks across the market cap. Debt funds are a collection of government bonds, corporate bonds, T-bills, etc. Hybrid funds are a combination of both.

Each fund has a different composition, category, and associated risk. You can read the mutual fund factsheet to understand the fund objective before investing in it.

2. Evaluate Your Risk Appetite and Create Financial Goals

Investing in a fund that doesn’t fit your risk appetite is like buying the wrong size of shoes. 

The easiest way to understand your risk appetite is by evaluating your income and expenses. Whatever money you are left with after expenses can be invested. 

Here, you may want to consider your ability to take risk instead of willingness. 
You may like to read-> Invest as per your risk appetite.

Once you understand your risk appetite- define short, medium, and long-term financial goals. For example, buying a car, moving to a bigger home, etc. 

Your risk appetite and financial goals collectively help you plan your investment across mutual funds. 

3. Establish Consistency via Systematic Investment Strategy

Consistent investments can help you achieve your financial goals faster. Systematic Investment Plan (SIP) is a popular strategy for consistent investment.

You can start an SIP of 100/month, 500/month, 5000/month or whatever amount you are comfortable with. 

Benefits of Investing via SIP.

4. Review Tax Implications

Investors have to pay tax on capital gains earned from mutual funds. Equity mutual funds, debt mutual funds, and hybrid mutual funds have different tax implications.

Short-term capital gains will be applicable on investments withdrawn before 12 months for equity funds and before 36 months for debt funds. Whereas, equity investments redeemed after 12 months and debt investments redeemed after 36 months will fall under long-term capital gain taxation. 

Here’s a quick overview of mutual fund taxation rules for Indians and NRIs. 

5. Regularly Monitor Your Investments 

Your income, financial goals and risk appetite will change with time. Update your investments accordingly. 

You can consider increasing the SIP amount, changing asset allocation, and redefining your financial goals. 

Regular portfolio monitoring also helps you restructure mutual fund categories that you’ve invested in. 

Don’ts Of Mutual Funds

1. Don’t Follow The Crowd

Your financial expectations, goals, and horizon will always be different than someone else’s. Just because a friend invested in a certain fund doesn’t mean you should too.

Investing based on other’s opinions might do more harm than good to your portfolio. Instead, consider hiring a wealth manager/financial advisor who can sketch a portfolio of funds for you. 

2. Don’t Choose Funds Based on Past Performance

A lot of investors make the mistake of choosing funds based on past performance. The fund’s history has very little to do with its future performance.

Mutual fund past performance guarantees nothing. It only showcases the consistency of the fund during changing economic cycles.

The better way to judge a fund is by checking the underlying assets, the fund manager’s track record, and the rolling returns of the fund with respect to the benchmark.

3. Don’t Invest All Your Money in One Asset Class

Diversification plays a crucial role in bringing superior returns with downside protection. To achieve true diversification, you must distribute your money among various asset classes such as stocks, bonds, gold/silver ETF, etc.

The right asset allocation encourages balance and diversification. When one asset class declines in performance, the other can keep your portfolio moving. 

Therefore, avoid investing the majority of your money in a single asset class. 

4. Don’t Panic Sell

Seeing your portfolio performance drop during a volatile market may cause emotional turmoil. 

At times like this, panic selling is the last thing you want to do. In fact, correction in the market should be used to invest more. 

The market bounces back as the economy recovers or as soon as the event passes (for example COVID-19). All you have to do is stay patient and let your wealth grow at a steady pace. 

5. Don’t Try to Time The Market

Many investors focus more on timing the market than consistently investing. Let’s assume for the sake of example- Sensex drops by 1000 points from the current 73150 points (as of 15th Jan 2024), i.e. 1.36% drop.

If you plan to stay invested for a longer horizon, that 1.36% drop is not significant enough to time the market. Rather start an SIP and let your investment consistently grow at a steady pace.

Mutual fund investments are meant to achieve financial goals in a given time frame. Therefore, focus on spending more time invested in the market.  

Invest in Mutual Funds

Final Thoughts

Mutual funds are powerful tools for building wealth. However, investing in them requires patience and awareness.

By following the above dos and don’ts, you can certainly navigate through the changing economic situations. Follow your financial goals and stay informed.

If you are looking for financial advisors in Pune, experts at VNN Wealth can meet you in person. Reach out to us via Email. If you’re not based in Pune, you can also book a consultation call at your preferred time. Get a complimentary portfolio review and plan your investments accordingly. 
Read more personal finance insights.

Categories
Blogs Personal Finance

Investing as per Your Risk Appetite and Risk Tolerance

Risk! 

It can feel like a threat for one investor and an opportunity for another. 

So let me ask you this- have you ever evaluated your risk profile before investing? Kudos, if yes.

But if not, you are neglecting one of the crucial factors to consider before investing your hard-earned money.

Got 10 minutes to spare? Let’s understand your risk profile based on your risk appetite and tolerance. And while we’re at it, we’ll also discuss which investment instruments align with your risk profile.

Pour yourself a cup of tea. Let’s begin…

What is Risk Appetite?

Risk appetite is your willingness to take risks in order to generate higher returns on your investments. It’s a comfort zone where you feel safe, brave even.

Ask yourself this- what extent of risk are you willing to take without losing your sleep? 

If you’re comfortable risking 40% of your investment for a short time for larger wins in the long run, then you’re an aggressive investor. Between 20-30%, you have a moderate risk appetite. And only 10% indicates you are a conservative investor. 

If you can sleep peacefully, that’s the extent of risk you can take, which is your risk appetite.

However, appetite is one thing. Being able to tolerate it is another. 

What is Risk Tolerance?

Let’s say you want to buy a new phone. You’ll check the specifications and features of the phone. But most importantly, you’ll check the price. Does the phone fit your budget?

Every time you buy something, you filter it out within the price range. So, even if you would want to buy a flagship phone, you’ll only do so if it fits your budget. 

Similarly, you might be willing to take more risk. But does your risk-taking ability align with your will? Something to think about.

What Factors to Consider to Evaluate Your Risk Tolerance? 

Many times when I review a client’s portfolio, I realize that they have misjudged their risk profile. A lot of investors believe they can invest aggressively, but they find it difficult to digest the volatility of the market or when the market enters a bear phase. 

So here are some things you must consider to understand your risk tolerance. 

1. Your Monthly Income and Expenses

Investors with a steady flow of income can take slightly higher risks. With income coming every month, they can consistently invest and still have money left for emergencies. 

However, investors with unstable incomes will have a different risk appetite and have to invest carefully. 

Your monthly income and expenses play crucial roles in your overall risk profile. Choosing the investment instruments will depend upon your risk profile. 

2. Your Age

Age plays a crucial factor in determining risk tolerance.

Let’s take the example of three investors. A 25-year-old investor with years ahead to earn and invest more. A 50-year-old investor nearing retirement who has generated wealth over the years. And a 70-year retired investor managing a retirement corpus.

A 25-year-old investor can take more risk by holding the investment for years. (Aggressive risk appetite.)

A 50-year-old investor might take a slight risk, however, would prefer safer instruments. (Moderate risk appetite.)

And, a 70-year-old investor would want to keep the retirement corpus safe, hence, would go for the safest options. (Conservative risk appetite.)

As per the thumb rule of ‘100 (minus) age’% of equity exposure: The 25-year-old investor can have 75% exposure to equity. The 50-year-old investor can have 50% exposure to equity. Whereas the 70-year-old investor can have only 30% equity exposure.

However, we have met aggressive investors in the 70+ age group wanting to invest in equities. They understand the equity market and are comfortable with the risk. 

It’s up to the investor’s risk appetite.

3. Your Emotional Strength

How upset would you be if your recent investment declined by 20%? Would you regret your decision or be confident about the future market rally?

Market volatility causes many investors to panic-sell their investments. Historical data clearly shows that the market eventually bounces back from any crash. The post-COVID bull phase is the most recent example.

So, if you panic during a market crash, you might be either a conservative or a moderate investor. An aggressive investor might invest more during a market crash. 

4. Your Investment Horizon

Your investment horizon decides how aggressive or conservative you want to be. For example, say you want to park your money for the next 3 to 6 months. For a timeframe that narrow, you’d prefer safer avenues such as liquid funds, short-term debt funds rather than equity investments. 

Similarly, if you can stay invested for 5+ years, you can consider high-risk investments. A longer time horizon can mitigate the risk. The economy is bound to grow, making the investment less risky. 

What is a Risk Profile?

A risk profile is a collective verdict of risk appetite and tolerance. Your risk profile indicates where you should/can invest to fulfill your financial goals.

So…the moment of truth:

Invest as Per Your Risk Profile

Aggressive Investors can invest in: Pure equity mutual funds, Direct equity, Emerging sectors via sectoral funds, Thematic Funds, Alternative Investment Funds, Unlisted Shares etc. And to manage all that, you can also opt for Portfolio Management Services. 

Moderate Investors can invest in: Hybrid funds such as the Balanced Advantage Fund, and the Multi Asset Fund. A small percentage of pure equity funds would contribute to the portfolio growth.

Conservative Investors can invest in: Various types of debt funds, Fixed Deposits/Corporate Deposits, Public provident funds, etc. 

The above categories are just for reference. You must also factorize your time horizon and financial objectives. 

For example, if you are investing for a short-term goal (say 6-12 months), then investing in pure equity won’t make sense even for aggressive investors.

Similarly, conservative investors with 5-10 years of investment horizon can look at hybrid funds or large cap funds instead of FDs or debt funds. 

Final Thoughts

Risk profiling, a very crucial first step, will give you an idea of the investment instruments you can look at. 

The next step is to finalize your financial goals. It will help you filter out the instruments with the appropriate time horizon. 

Your risk profile and financial goals may change with time. Therefore, you must periodically evaluate and rebalance your portfolio.

If you want to review your portfolio and calculate your risk profile, experts at VNN Wealth can assist you. Get in touch with us. Or schedule a finance consultation call at your convenience. 

 

Categories
Blogs Mutual Funds

How to Choose The Right Balanced Advantage Fund?

Balanced Advantage Funds bring the best of both worlds- The thrill of equity and the safety of debt. 

BAFs are hybrid active funds that distribute your money into equity, debt, and cash. These funds dynamically shift allocation between equity and debt for superior returns with downside protection.

If you are wondering how to choose the balanced advantage fund, this blog holds the RIGHT answer.

Spoiler alert: Past performance is not the only criteria for selecting funds.

Let’s unwind the strategy.

What are Balanced Advantage Funds?

Balanced Advantage Funds invest about 65-80% of total assets into equity and 35-20% in debt. These funds also hold a small percentage of cash for liquidity or capitalizing on market conditions.

Fund managers strategically and dynamically move the allocation from stocks to bonds. 

For example, if the markets are going through a correction, fund managers can increase equity exposure. Similarly, if the markets are overvalued, they can sell off equity and reallocate that money to debt instruments. 

These funds deliver superior returns over the horizon of 3 to 5 years or more. Investors with moderate risk appetite can consider hybrid funds instead of pure equity funds. BAFs are the perfect way to introduce instant diversification to your portfolio. 

Now, let’s answer your question…

How To Select The Balanced Advantage Fund?

Many investors believe that past performance is the only way to evaluate mutual funds. While past performance can help you understand the consistency of the fund against the benchmark. It’s not the only, or the primary, criteria to evaluate funds. 

The most effective way to evaluate any fund is to compare it with benchmark and other funds from the same category. To do so, you can refer to the factsheet of funds to compare key measures.

The key measures AKA key ratios are the technical aspects of the funds. The numbers are always easy to read and they project accurate expectations.

Now, coming back to Balanced Advantage Funds. 

Apart from benchmark comparison, one of the important ways to choose BAF that fits your requirements is to compare Cash vs Equity Exposure. You can find this information in the factsheet of the fund. 

Let’s take a few BAF examples. 

Fund Name

Equity Exposure

Debt Exposure

Cash Holdings

HDFC Balanced Advantage Fund Direct-Growth

59.74

26.07

14.19

ICICI Prudential Balanced Advantage Direct-Growth

46.96

22.38

30.66

Nippon India Balanced Advantage Fund Direct-Growth

60.56

27.51

11.93

Edelweiss Balanced Advantage Fund Direct-Growth

71.97

14.69

13.35

The values were fetched on 3 Jan 2023. Click on the hyperlink on each fund to view current values. 

BAFs with Higher Cash Exposure

Balanced Advantage Funds hold a small percentage of cash for liquidity or to benefit from market movements.

If you think the markets are expensive at the moment and may fall- choose BAFs with higher cash holdings as they can buy more equity.

The more cash holdings, the more you can benefit by increasing equity exposure.

In the above table, ICICI Prudential Balanced Advantage Fund has cash holdings of 30.66%. 

Compared to the other funds, ICICI pru BAF will be able to buy more equity when the markets fall.

BAFs with Higher Equity Exposure 

Contrary to the above filter, if you think the market may rally further, choose the BAF with maximum equity exposure.

When the market boosts, BAF with more equity exposure will naturally deliver superior returns. 

In the table above, Edelweiss Balanced Advantage Fund has 71.97% equity exposure. That fund will deliver higher returns compared to other funds during a market rally.

Final Thoughts

Equity exposure vs Cash holdings is one of the important criteria to consider before investing in Balanced Advantage Funds.

However, as mentioned above, you must also evaluate the fund’s factsheet for more insights. The fund should fit your risk appetite and financial goals.

Now, if you don’t have a view of the market to filter BAFs, you can always contact your financial advisor. They can keep you informed about the market movements and also plan your investments.

Or, you can get in touch with experts at VNN Wealth. If you are looking for financial advisors in Pune, we can meet in person (write to us). Not to worry if you’re not from Pune as you can schedule a virtual meeting with VNN Wealth at your preferred time slot. 

Follow @vnnwealth for more insights into the world of finance.

Categories
Blogs Investing Basics

7 Myths & Facts About Mutual Funds You Must Know

At what age did you realize mutual funds can grow your wealth over the years? And if you haven’t realized it yet, the reason could be the lack of information.  Despite diverse options and ease of investment, mutual funds are surrounded by many misconceptions. Investors are still confused and, hence, are missing out on opportunities. In this blog, we will shed light on the facts about mutual funds to debunk the myths. 

Mutual Fund Myths Busted

Myth #1: You Need a Demat Account to Invest in Mutual Funds

Fact: A demat account is not required to invest in mutual funds.  All you need is a bank account, PAN card, and KYC details. The online interface that you use to invest in mutual funds is not a demat account. Unlike stocks, mutual funds do not have a dematerialized form.  Your existing bank application also has a mutual fund section. You can invest in a mutual fund of your choice without any hassle. It’s an easy way to automate the investments from your savings account to the mutual funds. You will only need a Demat account if you plan to invest in direct stocks. 

Myth #2: You Need Financial Expertise to Invest in Mutual Funds

Fact: Investors do not have to be financial experts to invest in mutual funds.  Mutual funds are designed to make investments easy for anyone. Choosing direct stocks requires knowledge, constant awareness, and time to monitor the investments. Mutual funds, on the other hand, offer instant diversification. Each fund distributes your money in various asset classes such as stocks and bonds as per the category of the fund.  Mutual funds are already managed by an expert, so investors don’t have to. However, it’s always better to be informed about mutual fund categories and scheme objectives which can be found on a fund factsheet. You can consider taking inputs from your wealth planner/relationship manager. They can guide you with the suitable asset allocation.

Myth #3 You Need a Large Sum to Invest In Mutual Funds

Fact: Again, incorrect. A large sum is not required to invest in mutual funds.  You can start an SIP of as little as Rs. 100 per month and gradually increase the amount. A lump sum investment can also be made with a minimum of Rs. 5000. 

Myth #4 You Can Invest in Mutual Funds Only For a Long Term

Fact: Mutual funds are available for short, medium, and long-term tenure.  The investment horizon depends upon your financial goals and risk appetite. There are various categories of equity mutual funds, debt mutual funds, and hybrid funds. Based on your investment horizon, you can choose the category of mutual fund you want to invest in. The longer your time horizon, the more you can invest in equity or equity-related instruments (if your risk appetite allows). For a shorter horizon, you can choose from debt funds. Debt funds have 15 different categories with variable investment horizons. Liquid funds (7 days), Ultra-short duration funds (up to 3 months), and low duration funds(3-6 months) can help you achieve short-term goals. Medium and long-duration debt funds are suitable to achieve long-term goals. 

Myth #5: A Mutual Fund with a Lower Unit Price (NAV) is Better Than One with a Higher Unit Price

Fact: The unit price (NAV) is not relevant to compare two mutual funds. Two mutual funds with identical portfolios will deliver similar returns irrespective of the NAV. The unit price is nothing but the value of all the underlying assets in a fund. These assets include stocks, bonds, and money market securities.  Let’s take an example: You have 5000 to invest in a mutual fund. The NAV of a fund ABC is Rs. 50 and of a fund XYZ is Rs. 100. Both schemes have similar composition.  If you invest in ABC, 100 units will be allotted to you. Whereas, if you invest in XYZ, you’ll get 50 units. Now, let’s assume the underlying assets of both funds appreciated by 12%. Since both funds hold the exact same stocks and bonds, both funds will deliver 12% returns. Fund ABC’s NAV will become 56 and fund XYZ’s NAV will become 112. In both cases, your 5000 will increase to 5600 irrespective of the NAV. 
Fund Name Unit Price Investment Amount Units Allotted Return Rate p.a Total Value of Investment
ABC 50 5000 100 12% 5600
XYZ 100 5000 50 12% 5600
Therefore, while comparing two mutual funds, check the key ratios instead of NAV. 

Myth #6: Mutual Fund’s Past Performance Guarantees Future Returns

Fact: The past performance of a fund is just a way to evaluate the fund’s consistency over the years. It does not guarantee anything for the future.  A fund that performed well in the past may not perform the same in the future. Similarly, a poorly performing fund may show promising outcomes in the future. There are various other factors apart from past performance that can offer better insights about a fund. For example, the underlying assets, the fund manager’s strategy, economic changes, etc. If you still want to check the past performance, analyze the rolling returns of a fund. Rolling returns suggest how the fund has performed in changing economic cycles.   

Myth #7 Equity Funds are Riskier than Other Funds

Fact: Every investment instrument has a risk associated with it. The decision to invest depends upon the time horizon, investor’s risk appetite and financial objectives. Would you buy a house and sell it within 6 months or a year? No! Real estate investment is meant for a longer horizon.  Similarly, equity investments also deliver risk-adjusted superior returns over 5 or more years. For a short horizon, equity investments are not ideal. Instead, you can invest in debt funds with a suitable tenure. Additionally, you must choose investment options based on your risk appetite. That way, you can choose different asset classes to diversify your portfolio and balance the risk. 

Final Verdict

Mutual funds have become a popular investment avenue for many investors. Not only does it offer hassle-free diversification but also significant wealth growth. A Systematic Investment Plan is a consistent way of investing in mutual funds. That way, you can achieve your financial goals in a given timeframe.  Don’t let any misconceptions stop you from becoming financially independent. Craft your investment portfolio and enjoy the benefit of compounding. If you are based in Pune and are looking for a financial advisor in Pune, experts at VNN Wealth can meet you in person to discuss your portfolio. If you’re not based in Pune, you needn’t worry as you can schedule a virtual meeting at your convenience. For more information, follow @vnnwealth and explore investment insights here.
Review Portfolio
Our Products
loader