Get an exemption on long-term capital gain tax through 54EC Capital Gain Bonds. Here’s everything you need to know! Selling immovable property such as land or a house brings generous profit; especially after a long duration. However, that profit soon attracts capital gain tax.
Thankfully, there’s an easy way to avoid or lower capital gain tax by investing in 54EC bonds. Let’s find out how.
What are Capital Gain Bonds?
Section 54EC of the IT Act allows taxpayers to avail exemption on the long-term capital gain tax (asset sold after 24 months of purchase). This benefit is only applicable to the capital gains earned through the sale of an immovable property such as land/house/shop. Upon selling the property, taxpayers can reinvest the profit in bonds that fall under section 54EC.
Following bonds are eligible for the exemption on capital gain tax under section 54 EC:
1. Rural Electrification Corporation Limited or REC bonds, 2. National Highway Authority of India or NHAI bonds, 3. Power Finance Corporation Limited or PFC bonds, 4. Indian Railway Finance Corporation Limited or IRFC bonds.
Key Features of 54EC Capital Gain Bonds
1. Capital Gain bonds are backed by the government under the Income Tax Act 1961. These bonds are AAA-rated and, hence, are safe to invest in. 2. 54EC bonds come with INR, 10,000 face value. Investors can invest a minimum of INR. 20,000 (2 bonds) and a maximum of INR. 50,00,000 (500 bonds) in a financial year. 3. With a 5-year lock-in period, these bonds offer a 5.25% interest rate. 4. There is no TDS on the interest earned on capital gain bonds. However, the interest is taxable as per your tax slab.
Note: To avail tax exemption, you must invest in 54EC bonds within 6 months of the sale of immovable property. Otherwise, the investment will not be eligible for the exemption.
How To Calculate LTCG Tax Exemption by Investing in 54EC Bonds?
Let’s take an example to understand how to avail exemption on LTCG after selling an immovable property. You are selling your house at 1 crore after 4 years of purchase. You will have to pay long-term capital gain tax on the profit, unless, you buy a 54EC bond within 6 months.
The sale price of the property: 1,00,00,000 Indexed Cost of Acquisition: 70,00,000 Indexed Cost of Improvement: 2,00,000 Capital Gains: 28,00,000
Since the max limit is 50 lakhs, you can invest the entire 28 lakhs of capital gains in 54EC bonds. That will remove your LTCG tax liability. However, if you invest only, say 20 lakhs, you will have to pay LTCG tax on the remaining 8 lakhs.
Note: 54EC bonds have a 5-year lock-in period. If you sell/redeem it before maturity, the capital gain amount for which you claimed exemption will attract LTCG tax in that financial year.
Who Can Invest in 54EC Bond?
54EC bonds are available to invest for any individuals, Hindu Undivided Families (HUFs), Companies, LLPs, Firms, etc. How to Invest in 54EC Bonds? Capital gain bonds are not available on the stock exchange. If you’re interested in purchasing 54EC bonds, please contact us. You can choose to buy these bonds in either demat or physical certificate format, depending on your preference. However, the demat format is easier to track. Simply fill out a form, and experts from our team will reach out to assist you with the process.
Final Words
The 54EC bonds offer a great opportunity to lower your capital gain tax liability. After selling your immovable asset, you can re-invest the capital gains in the 54EC bond within 6 months to benefit from the tax exemption. These bonds are safe and offer a decent 5.25% interest rate.
If you wish to buy bonds, contact VNN Wealth to simplify the purchase procedure.
Navigating through the ITR process might seem overwhelming, especially for NRIs earning income both in and outside India. As per SBNRI’s survey, 73% of NRIs from the USA, UK, and Canada are trying to file ITR. Filing ITR for NRIs includes managing your tax liabilities in your current country of residence and India. Don’t worry, this step-by-step guide will simplify the process for you. Sit back and go through each point carefully to fulfill your tax obligations.
Let’s get started…
An 8-Step Guide to Filing ITR for NRIs
NRIs/PIOs/OCIs must file an ITR in India if their total annual income is more than 2.5 lakhs as per the old tax regime or 3 lakhs as per the new tax regime. Here’s everything you need to know before filing an ITR.
Step 1: Understand Your Residential Status
The primary step is to confirm your residential status. As per the Income Tax Act 1961 guidelines, you are an NRI if:
1. You have stayed in India for less than 182 days during the financial year. 2. Or, You have stayed in India for less than 365 days during the preceding four years and less than 60 days in the relevant financial year. If you visit India during the year, the 60-day rule mentioned in point 2 will be replaced by 182 days. The same is applicable if you leave India as a crew member or for employment. Finance Act 2020 Updates: The 60-day rule mentioned in point 2 changes to 120 days for Indian citizens or people of Indian origin with an income of 15 lakh excluding foreign income. It also states that if an Indian citizen earns more than ₹15 lakh (excluding foreign income) and is not taxed in any other country, they will be considered a Resident in India.
Step 2: Form 26AS to Reconcile Taxes and Income
Form 26AS is an annual tax credit statement that holds information such as tax deducted at the source, tax collected at the source, etc. You can easily view/download Form 26AS on the income tax portal to analyze your financial activities.
Step 3: Calculate Your Tax Liability
In this step, you have to determine your tax liability on your income earned in India. The income includes salary, interest from FDs and bank accounts, rental income.
NRIs will have to pay tax in India for capital gains earned from stocks, mutual funds, etc. The tax rate depends on the type of instrument and the duration of the investment.
While filing your taxable income, you can also opt for various deductions with your tax-saving instruments. For example, you can claim a deduction of up to 1.5 lakhs under section 80C of the IT act against ELSS mutual funds, Tax Saver FD, Public Provident Fund account, etc. You can invest in various tax-saving instruments to reduce your taxable income in a current financial year.
Step 4: Claim Double Taxation Relief
This is a very crucial step while filing ITR for NRIs. Depending on your residential status, you are obliged to pay tax in India on global income. Fortunately, India has signed a treaty with more than 85 countries to help NRIs avoid paying double taxation.
1. Get tax credit against the tax paid in the resident country and claim it in India while filing ITR. 2. Certain types of income are eligible for exemptions. You can obtain a Tax Residence Certificate to qualify for the exemption. 3. You can also opt for the deduction method which allows you to deduct taxes paid in the foreign country.
Step 5: Select the Accurate ITR Form to Fill
Individuals with NRI status must fill out either an ITR-2 or ITR-3 form.
ITR-2 is applicable for residents or NRIs not having income under the head Profits and Gains of Business or Profession.
ITR-3 is applicable for residents or NRIs who have income under the headings of profits and gains of business or profession.
You must provide a bank account to receive a tax refund (if any). You can either provide an Indian bank account or a foreign bank account as per your situation.
Step 7: Provide Your Asset and Liability Details
You are required to declare all your assets (movable and immovable) and liabilities if your total earnings exceed INR. 50 lakhs. In this step of ITR filing for NRIs, you must report all your assets and liabilities.
Step 8: Verification of Your ITR
After a roller coaster of filing ITR, you can upload your NRI income tax return. Cross-check all the information before submitting the form. Make sure to verify the form within 120 days. Please note that your ITR will be marked as invalid if you fail to verify it within 120 days.
Important Documents to Keep in Handy While Filing ITR for NRIs
1. Passport to prove the duration of your stay in and outside India. 2. Overseas employment contract (if any). 3. All your financial statements, including your investments. 4. Form 26AS for annual tax statements. 5. TDS certificates.
Conclusion
Filing ITR for NRIs isn’t as confusing as it appears. By following the above-mentioned steps, you can easily fill out the ITR form. Keeping your documents in handy will ease the process. Make sure you fill in accurate details. With the help of the Double Taxation Avoidance Agreement, it has become easier for NRIs to invest in Indian markets.
Paying tax in one country is daunting in itself, let alone in two. This is one of the primary concerns for NRIs every year while navigating finances in their country of residence and India. Thankfully, India has a Double Taxation Avoidance Agreement with 85+ countries. Non-resident Indians residing in these countries can avoid paying double taxes on their income.
In this article, we will delve into the Double Taxation Avoidance Agreement and how NRIs can benefit from it.
What is a Double Taxation Avoidance Agreement?
Double taxation occurs when an individual has to pay tax on their income in two countries- the country of residence and the home country. For example, a person working abroad also earns income in India via rent, interest on FDs, etc. In that case, he/she has to pay tax on that income twice, in both countries.
To offer double tax relief for Indians living abroad, India has signed a tax treaty with 85+ countries called the ‘Double Taxation Avoidance Agreement.’ With the help of DTAA NRIs, PIOs, and OCIs can seek exemption for tax they already paid in India while filing an ITR in their resident country.
Methods of Double Taxation Avoidance Agreement for NRIs
DTAA helps NRIs lower their tax liability using three methods:
1. Tax Credit
Non-resident Indians are eligible to utilize tax credits in their country of residence if they’ve paid tax on their income in India. Or, they can claim foreign tax credits to lower their tax liability in India. Let’s say you’re living in the US and have earned $100,000 in salary. You’ll have to pay 22% i.e. $22,000 tax in the US. You’ve also earned INR 5,00,000 as rental income in India. As per the tax slabs in India, let’s assume you owe INR. 1,50,000 in tax. Assuming the currency exchange rate of INR. 85 per dollar, your combined global income will be: INR. 85,00,000 (US income) + INR. 5,00,000 (Rental income in India)= INR. 90,00,000. Your tax liability in India will be approximately INR. 27,00,000. However, you’ve already paid a tax worth INR. 18,70,000 in the US. Therefore, while paying tax in India, you can use foreign tax credits worth INR. 18,70,000 to avoid double taxation on foreign income.
2. Exemption
In the exemption method, you only have to pay tax in the country where you are working on certain types of income. You can obtain a Tax Residence Certificate which allows you to get tax exemption in India on incomes eligible under this method.
3. Deduction Method
This method allows you to claim taxes paid to the foreign government as a deduction.
Documents Required to Claim DTAA Benefits
1. Tax Residency Certificate (TRC): TRC is a crucial document issued by the tax authorities of your country of residence. This document verifies your residential status in the foreign country while filing ITR as NRI in India.
2. Form 10F: TRC may not offer all the information required to claim DTAA. In that case, you can fill the Form 10F online. It’s a self-declaration form to provide the additional information that the TRC lacks.
3. Form 67: NRIs can claim foreign tax credits by filling out Form 67. While paying the tax in India, NRIs can pay tax on global income using foreign tax credits. For example, you’ve received dividend income in the US and already paid tax on it. You can use those tax credits to pay tax on the same income in India.
4. You may also need additional documents such as a PAN card, Passport copy, and Visa copy to claim DTAA.
Note: The process to get relief on double taxation may vary based on your current country of residence. The tax rates and the exemption methods may also vary accordingly.
What Type of Income Comes Under DTAA?
As per the double taxation avoidance agreement, NRIs do not have to pay double tax on the following type of income:
1. Services provided in India. 2. Salary received in India. 3. House property located in India. 4. Capital gains on transfer of assets in India. 5. Fixed deposits in India. 6. Savings bank account in India.
Countries That Have Double Taxation Avoidance Agreement with India
India has DTAA with 85+ countries. The TDS rates for the few are mentioned below.
Country
TDS Rate
USA
15%
UK
15%
Canada
15%
Dubai
12.5%
Oman
10%
Singapore
15%
Malaysia
10%
Spain
10%
Australia
15%
Germany
10%
Conclusion
The aim behind signing the Double Taxation Avoidance Agreement (DTAA) was to provide double tax relief to NRIs/PIOs/OCIs. India has signed the DTAA with more than 85 countries, allowing NRIs to pay a fair tax on their income in two different countries. Non-resident Indians can claim tax exemptions using the combination of methods mentioned above. That way, they do not have to pay taxes twice on the same income.
If you’re an NRI seeking investment opportunities in India, contact VNN Wealth. Our experts will provide detailed insights into your investment portfolio. You may like to read a step-by-step guide to filing an ITR as an NRI.
India is the world’s 5th largest economy with a GDP of $3.9 trillion and will reach $5.1 trillion in 2027. (Source). By 2030, India is likely to surpass Japan and Germany to become the world’s 3rd largest economy. Evidently, the Indian economy is rapidly growing and so are the investment opportunities. While Indians are benefiting from these opportunities, NRIs (non-resident Indians) are not left behind. There’s a wide spectrum of investment options in India for NRIs. NRIs can comfortably invest in Indian markets and diversify their portfolio. Here’s everything you need to know.
How can NRIs Invest in Indian Markets?
Non-resident Indians (NRIs) can invest in Indian markets by creating a Non-Resident Ordinary (NRO) or Non-Resident External (NRE) bank account. Having either of these accounts is mandatory to be able to transact in Indian currency.
Experts at VNN Wealth will guide you through the entire procedure, including KYC, after which you can start investing in the following options.
Read in detail below👇
Smart Investment Options in India for NRIs
1. Mutual Funds
Mutual funds offer instant diversification to your investment portfolio. NRIs can invest in mutual funds via SIP or lumpsum, based on their financial goals and risk appetite. You can choose from equity mutual funds, debt funds, or hybrid mutual funds to balance risk-reward.
Equity funds are ideal for long-term investments. Debt funds offer a range of categories from short to long-term investments. Hybrid funds offer the best of both worlds. The rate of return on mutual funds depends upon the fund type and market movement.
Get in touch with experts at VNN Wealth for further guidance.
Note: Some Asset Management Companies (AMCs) may restrict NRIs from USA and Canada.
2. Alternative Investment Funds (AIF)
Alternative Investment Funds offer non-conventional investment options. NRIs can expand their portfolio beyond mutual funds by investing in AIF. AIFs have three categories: CAT I, CAT II, and CAT III. Each category provides diverse investment avenues such as private equity, venture capital, hedge funds, angel funds, etc. AIF CAT III is more popular among investors. You can contact VNN Wealth and our experts will walk you through the procedure.
Unlisted shares are gaining popularity among investors. NRIs can also buy shares of a company that hasn’t been listed yet. Unlisted stocks are traded off the market (Over-the-counter market). Therefore, it can be tricky to identify promising stocks.
Investing in unlisted shares unlocks the following benefits: 1. Guaranteed allocation if the company goes live on the stock exchange via IPO. 2. Pre-listing gains right before the company goes live.
NRIs can consider parking some of their funds in these shares to further diversify their portfolio.
4. Fixed Deposits
The good old FD is always worth looking into. While the return may not be as superior as the avenues listed above, it’s safe and can accumulate wealth over a period of time. NRIs prioritizing safer investments along with steady interest income can consider fixed deposits.
Here are three ways NRIs can create an FD:
1. Non-Resident Ordinary (NRO) Fixed Deposit allows you to invest your Indian income such as rental income, dividends, pension, etc.
2. Non-Resident External (NRE) Fixed Deposit converts your foreign currency into Indian currency to invest.
3. Foreign Currency Non-Resident (Banks) Fixed Deposit is a term deposit account. You can maintain and invest funds by transferring from your NRE account.
5. Portfolio Management Service (PMS)
Portfolio Management Service (PMS) provides tailor-made investments for HNIs. NRIs seeking personalized investments can also opt for PMS. A dedicated portfolio manager makes decisions on your behalf to optimize your investments & maximize returns. The minimum investment requirement for PMS is INR. 50,00,000. You will have to transfer the entire amount to the PMS house. Or, you can transfer your existing portfolio to the PMS house. If your portfolio is worth less than INR. 50 lakhs, you can invest the remaining funds by transferring the amount.
PMS helps you keep track of your stock, ESOP, and other asset holdings. The portfolio manager leverages market opportunities to deliver superior returns on your investments. You can directly communicate with the portfolio manager to gain insights. Read more about when is the right time to opt for PMS.
Taxation for NRIs
Taxation is an important factor to consider while investing. Tax rules for NRIs are similar to the Indian residents with slight exceptions.
The tax implications will depend upon the investment avenue and the investment horizon. The most important thing is to avoid double taxation. Make sure your country of residence has a Double Taxation Avoidance Treaty (DTAA) with India. You must also file The Foreign Account Tax Compliance Act (FATCA) self-declaration.
1. NRIs with funds lying idle in India can invest without moving funds out of India. This will generate steady income for themselves or dependant parents in India.
2. NRIs returning with foreign assets can explore investment opportunities in Indian markets to amplify wealth.
3. NRIs planning to return to India after retirement can build a solid retirement plan by investing funds in various assets
Final Thoughts
India is likely to overtake Japan and Germany to become the 3rd-largest economy in the world. Sectors like Auto, Cement, Telecom, Financials, etc will significantly contribute to the growth. NRIs can explore plenty of investment options in India across various sectors and expand their portfolio.
A wide range of investment instruments, such as mutual funds, AIFs, unlisted shares, and FDs, are easily accessible. Savvy Non-resident Indian investors can also opt for Unlisted Shares/Pre-IPO to help generate that extra alpha on their portfolio. Make sure you evaluate your risk appetite and align your investments with your financial goals.
For more insights and guidance, contact VNN Wealth, and our experts will streamline your investments.
Unlisted shares in India have become popular over the past few years. Investors are buying unlisted shares of emerging companies showing potential growth as the awareness around them has increased.
By investing in these shares Pre-IPO, you gain returns in two ways.
1. Prices of these shares may go up in the long run via over-the-counter trading.
2. You may bag pre-listing/ listing gains.
We’re receiving more inquiries about unlisted shares than ever before, especially after the Tata Tech IPO’s massive success. Tata Technologies was our second success story after Nazara Technologies in terms of entry and exit for our investors. And now, more unlisted companies have entered our top picks.
Interested to know which unlisted share to buy?
Our team of experts has curated a list of the top 7 unlisted shares in India.
The leading renewable energy company in India, Waaree Energies Ltd manufactures solar PV modules and offers solar energy solutions. Waaree’s manufacturing facility of 12GW is among the largest in India. It started with 2GW in 2021, upgraded to 9GW in March 2023, and rapidly expanded to 12 GW in June 2023. Waaree’s four manufacturing units are located in Surat, Tumb, Nandigram, and Chikhli- collectively across 136.30 acres. The company manufactures a wide range of products such as solar panels, solar water pumps, solar street lights, and solar inverters, to name a few. The company also offers Solar EPC services along with project development, financing, operations, maintenance, and asset management.
Waaree witnessed an incredible revenue boost from 1997cr in 2021, 2950cr in 2022, to 6840cr in 2023. The operating profit margins have also increased from 4.35 in 2021 to 12.37 in 2023. Waaree is aiming to keep contributing towards a green future with its affordable and easily accessible solar energy.
2. Vikram Solar Unlisted Shares
Founded in 2006, Vikram Solar is one of the leading solar PV module manufacturers in India. Currently, with 3.5 GW capacity, the company also provides integrated solar energy solutions, Engineering, Procurement, and Construction (EPC) services, and operations & maintenance. Vikram Solar has 3 manufacturing units in Tamilnadu and West Bengal. The company has 42+ distributors across 600 districts in India. Vikram’s 70% of revenue comes from PV modules and about 20% from EPC services.
It is the first company to contribute to fully solarizing Kochi(Kerala) airport, installing a floating solar plant in Kolkata, and commissioning large-scale rooftop solar plants across India. The company also has sales offices in the USA and has supplied solar PV modules in 32+ countries. The company’s revenue has increased to INR. 2015 crores in fy23, an 18% boost from the fy22 revenue. Vikram Solar has filed a draft with SEBI to raise INR. 1,500 crore via initial public offering (IPO) and an offer for sale of up to 5,000,000 equity shares.
3. TATA Capital Limited Unlisted Shares
A subsidiary of TATA Sons, TATA Capital Limited is registered with RBI as a non-deposit-accepting NBFC. Along with its subsidiaries, TATA Capital offers financial services to corporate, retail, and institutional customers. The company’s product portfolio includes various types of loans, investment advisory, cleantech finance, private equity, wealth products, commercial and SME finance, leasing solutions, and TATA cards, to name a few.
In the financial year 2022, TATA Capital reported the highest profit. The company’s PAT increased from INR 1,245 crore to INR 1,801 in FY22 crore and to INR 2,975 crore in FY23.Tata Capital’s loan book grew by 28% in FY22-23 and the book value increased to 48.36 from 33.82. The RoE also increased from 15.6% to 17.3%.
4. SBI Mutual Funds Unlisted Shares
SBI Funds Management Limited is one of the most popular, largest asset management firms in India. Founded in 1987, it’s a joint venture between the State Bank of India and AMUNDI (A global fund management company.) SBI currently holds a 63% stake and the remaining 37% belongs to AMUNDI. SBI mutual funds offer a wide range of mutual fund schemes such as equity mutual funds, debt funds, hybrid mutual funds, solution-oriented schemes, and Exchange-traded funds, to name a few. The company also launched an Alternative Investment Fund (AIF) in 2015 and may launch more funds in the future.
With over 53+ mutual funds schemes, SBI mutual funds have INR 1.65 trillion assets under management (AUM) and over 12 million investors.SBI fund management has been offering international investor solutions since 1988. The company guides and manages India’s dedicated offshore funds.The company also offers Portfolio Management services catering to HNIs, large provident funds, institutions, and selective trusts.
SBIFM’s AAUM is 44% more than the next largest peer (ICICI prudential mutual fund). And has hit a 27% CAGR when the rest of the market delivered 10% over a five-year horizon. As per the recent financial reports (March 2023), SBI fund management has made a net revenue of INR 2297.27 crores.
5. NSE India Limited Unlisted Shares
Founded in 1992, the National Stock Exchange (NSE) is India’s leading stock exchange with ~1968 companies listed on it.In 1994, NSE launched electronic screen-based trading, and internet trading in 2000. NSE’s flagship index, Nifty 50, serves as a global benchmark for Indian capital markets. NSE is the world’s largest derivative exchange with 21% of the global derivative contract trading. It’s also the second-largest derivatives exchange in the world for currency futures trading. The capital market business model of NSE primarily offers trading services, exchange listing, market data feeds, indices, and technology solutions.
Its cash market offers a platform to trade equity shares, mutual funds, ETFs, REITs, Sovereign Gold bonds, government securities, T-bills, etc. The debt market offers government, corporate bonds, commercial papers, and other debt instruments. NSE also provides index management services for equity indices, hybrid indices, and customized indices for asset management companies, insurance companies, investment banks, PMS, and stock exchanges.The company has performed at a CAGR of 35% over the last three years. NSE’s FY23 revenue has reached INR 12650 Cr. with a 63.27 net profit margin.
6. Chennai Super Kings
The four times IPL winner, CSK is the only sports team in India available for the general public to invest in.CSK is one of the most popular IPL franchises with a strong brand value. The brand was founded in 2008 as an IPL cricket team representing Chennai, Tamil Nadu. It is a wholly-owned subsidiary of India Cements.Being a popular IPL franchise, CSK became the country’s first sports unicorn. The brand’s market cap was raised to 7600 crores (more than 1 billion) with the share prices in the unlisted market trading between Rs. 210-225.
Chennai Super Kings generates revenues from various sources such as- Gate ticket collection, In-Stadium Advertisements, and Merchandise sales. The team earns 60% of the total revenue from Media Rights, which is the highest revenue stream. The revenue from sponsorship makes up around 15-20% of total revenue followed by 10% from ticket sales.While the Pandemic had an impact on many brands, CSK managed to maintain a balance via indirect revenue streams. One of the most loved IPL teams, CSK, will continue to generate solid revenue via merchandise sales, sponsorships, portions of prize money, and digital viewership.
7. Studds
Being a global leader in two-wheeler helmet manufacturing, Studds accounts for almost one-third share of the organized two-wheeler helmet market.Studds had an opportunity to manufacture face shields and protection wear in high demand during Covid-19. Studds’s sales received another boost when The Ministry of Road Transport and Highways declared that India would only manufacture and sell BIS-certified two-wheeler helmets.Demand for two-wheeler helmets is growing rapidly post-COVID-19 as transportation has resumed. Besides, people often replace their helmets within two to three years, enabling more business for the company.
Studds is also expanding its accessories manufacturing with riding gear gloves, goggles, jackets, and safety and storage gear.Additionally, Studds also has an opportunity to dominate bicycle helmet sales. The company is operating in more than 40 countries including Europe and US. Recently, the company has doubled its manufacturing capacity in Faridabad, Haryana.
Our Previous Recommendations
Nazara Technologies: Was listed on the stock exchange on March 30, 2021, at INR 1,981, an 81% boost from the issue price of INR 1,101.
TATA Technologies: Was listed on the stock exchange on 30th November, 2023 at INR 1,200, a whopping 140% higher than the issue price of INR 500.
Kurl On: In July 2023, Kurl On’s biggest rival Sheela Foam acquired a 95% stake in the company and offered a buyback option to shareholders.
How to Invest In Unlisted Shares?
Unlisted shares are not available to invest via the established stock exchanges as they’re traded over the counter or via private platforms. If you want to buy unlisted shares of the above companies, get in touch with us anytime and our team will take care of the rest.
Buying unlisted shares is a great strategy to diversify your investment portfolio. These shares are fairly safer than listed shares due to less volatility. And the major benefit of investing pre-IPO is the allocation confirmation. With Unlisted shares, investors have the opportunity to gain either pre-listing gains or listing gains.
Share prices of unlisted companies often boost right before the IPO. With a huge demand in the unlisted market, you can sell your shares and earn pre-listing gains. Or, you can wait until the IPO is live and get profit from listing gains. Please note that the pre-listing and listing gains are subject to market risk. To avoid any risks, we have chosen known brands with high brand value and promising futures. Get in touch with us if you are interested in buying the above shares. Experts at VNN Wealth will guide you through the process.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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…
Investment Portfolio Mistakes to Avoid
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.
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.
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.
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:
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.
Final Words
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.
