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.
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.
How can NRIs invest in Mutual Funds?
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.
Capital Gain Tax Rules 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.
Mutual Fund Tax Implications for NRIs
1. Taxation on Equity and Equity-Oriented Mutual Funds
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 Lakh
As per the investor’s tax slab
2. Taxation on Non-Equity Mutual Funds
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:
Non-Equity Funds invested on or after April 1, 2023
As per the investor’s tax slab
As per the investor’s tax slab
As per the investor’s tax slab
Funds with 35% exposure to equity
As per the investor’s tax slab
20% (for listed securities with indexation benefit)
10% above INR 1 Lakh (for unlisted securities)
As per the investor’s tax slab
3. Tax Deducted At Source (TDS)
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 Type
TDS on Short-Term Capital Gains
TDS on Long-Term Capital Gains
TDS on Dividend
Equity and Equity Oriented Funds
15% (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%
Frequently Asked Questions about NRIS taxation rules on mutual funds
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.
Final Words
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.
Portfolio Management Service (PMS) offers customized portfolio management for high-net-worth individuals and Non-individuals such as HUFs, partnerships firms, sole proprietorship firms and body corporate.
A skilled portfolio manager handles your portfolio, which can be crafted as per your financial goals and objectives.
When you invest in a mutual fund, your money goes to the fund house and then into the fund. However, in PMS, the transactions take place through your demat account. Therefore, you can see all the transactions happening on your behalf.
When is the Right Time to invest via Portfolio Management Service?
1. More than 50 Lakhs of Portfolio to Manage
PMS caters to HNIs with a minimum of 50 lakhs (as per SEBI guidelines) of investment.
After spending years with mutual fund investments, you may have gotten comfortable with the risk associated with it. Now, if you don’t mind a slight more risk for even better rewards, PMS can be your next step.
Pro Tip- Entrust a PMS house with 50 lakhs only if that amount is not more than 20% of your overall portfolio.
2. Managing a Large Number of Stocks
Recently, especially right after COVID, we reviewed a lot of portfolios with a large number of stock holdings.
At a certain point, losing track of all these stocks is bound to happen. Investors may not have enough time to study the performance of each company in the current market. This leads to a long tail of underperforming stocks.
The declining performance of multiple stocks creates a significant dent in your overall portfolio return.
Instead, you could invest in stocks that align with your risk appetite and goal by selling underperforming stocks.
Experts at PMS House can help you manage all your stock holdings. You can convey your buy/sell preferences and the portfolio manager will re-shape your portfolio accordingly.
3. ESOPs Holdings
Salaried individuals may have ESOP holdings over the years.
While reviewing client portfolios, we’ve often noticed that the biggest holding in their overall portfolio belongs to ESOP. Sometimes 90% of the portfolio consists of a single ESOP.
This leads to high-concentration risk. The returns will depend on the performance of a single ESOP. Your portfolio may not beat the benchmark.
With PMS, you can filter out the stocks you want to keep or sell. You can set your preferences and invest accordingly.
For example, if you already hold an ESOP of Infosys, you can avoid buying more stocks of the same company. That way, you can truly optimize your portfolio.
A well-balanced and diverse PMS commonly holds 20-30 concentrated stocks. Portfolio managers will readjust your portfolio accordingly by buying/selling stocks. The right asset allocation can minimize the risk and maximize returns.
4. Flexibility
PMS offer more flexibility compared to mutual funds.
Mutual fund categories have to follow SEBI regulations on asset allocation. But also, there are many norms regarding the capping on the underlying stocks, bonds and cash holdings. Additionally, mutual funds do not have exposure to the unlisted stocks.
PMS can choose the asset composition as per investor’s preferences and market opportunities. You can have a concentrated portfolio of 20-30 stocks.
If you are someone who follows Sharia law, you can avoid investing in alcohol, tobacco, gambling, gold, and silver trading, banking and financials, pork and non-vegetarian, advertising, media, and entertainment industries.
It is possible to invest beyond equity, debt, and gold. PMS can open a door towards alternative assets and sectors to invest as per your choice.
How to Select a Good Portfolio Management Service?
Launching a PMS in India is much easier than launching a mutual fund. Therefore, there are a lot more PMSs to choose from.
Without a wealth manager by your side, it would be difficult to narrow down your choices. A certified wealth manager/relationship manager can recommend a list of suitable PMSs. Get in touch with VNN Wealth to know more.
Once you have a bunch of options ready, here’s what to review in a PMS.
1. Evaluate the Credibility of a PMS
Make sure the PMS is registered with SEBI (Securities and Exchange Board of India). Head to their website to review their team’s experience and track record.
Delivering successful results in various economic cycles is a sign of a good PMS.
2. Communication and Transparency
The whole point of having a custom portfolio is knowing what’s happening with it. Having an active communication right from the start is the key to assessing the PMS provider.
Make sure you read the client testimonials on their site. Ask questions about strategies. See the response time and quality. As an informed investor, it is your duty and right to know everything.
3. Fee Structure
PMSs either charge a fixed management fee and an exit load or a profit participation fee. Each PMS has a different fee structure. To give you an idea, the fixed management fee could be between 2 to 2.5% of the total asset value. The exit load depends on the holding period and withdrawal value and could range from 1 to 2.25%.
The profit participation fee depends on the agreement you have with the portfolio manager. For example, the portfolio manager will share a small part of your profit if it crosses a hurdle rate of 10-12% p.a. return.
It is crucial to understand the fee structure before you hand over your portfolio.
4. Strategies and Risk Management
As mentioned above, PMS customizes your portfolio as per your financial goals and the timeframe in which you want to achieve them.
Therefore, the investment strategy and risk management changes as per the investor’s risk appetite.
Similar to mutual funds, PMS also offers large-cap, mid-cap oriented investment options. You can build a strategy to meet your financial requirements and preferences.
Your wealth manager will be able to guide you through the entire process. If you don’t have a wealth manager yet or want to hire a new one, VNN Wealth is just a phone call away.
Final Words
According to SEBI data, the assets under management of PMS have increased to 28.50 lakh crore by 2023, with 14% year-on-year growth.
Many investors are actively seeking personalized investment opportunities to align with their financial goals. If planned right, PMS can offer superior returns compared to conventional investment avenues.
If your portfolio meets the criteria mentioned in this article, you can definitely go for PMS.
Take a complimentary portfolio analysis with VNN Wealth to know where your portfolio stands and which PMS to choose. Contact us to know more.
Follow @vnnwealth for more insights in the world of finance.
A Portfolio Management Service (PMS) is a financial offering where an experienced portfolio manager handles your investments in stocks, bonds, debt instruments, and individual assets.
Unlike Mutual Funds, the portfolio handled by PMS can be customized as per the investor’s goals and objectives to some extent.
Asset management or Wealth Management firms offer PMS catering to high net-worth individuals (HNIs) with a minimum investment value of 50 lakhs.
Here’s everything you need to know about it.
How Does Portfolio Management Service (PMS) Work?
A tailor-stitched suit will always look better on you than a readymade suit. Similarly, an investment portfolio created for your goals will deliver ideal outcomes.
Mutual funds can deliver superior returns over the years, but investors cannot customize the underlying assets. And, retail investors may not have the ideal resources to create their own custom portfolio by investing in direct stocks.
That’s when PMS comes into the picture.
Unlike mutual funds, PMS is flexible. You get to have more control over your investments and shape your portfolio as per your choices.
Types of Portfolio Management Services
1. Discretionary Portfolio Management
Here, the portfolio manager takes investment decisions and actions on your behalf. It includes choosing what and when to buy/sell the asset and how to distribute your money across various asset classes.
These decisions are made keeping your goals in mind. Most PMSs in India operate with this model.
2. Non-Discretionary Portfolio Management
In this model, the portfolio manager will first lay the suitable suggestions in front of you. Once you approve the advice, the manager will go ahead and make the transaction on your behalf.
3. Active Portfolio Management
Active management will focus on maximizing the returns by investing in various asset classes. Portfolio managers will adjust your portfolio as per market conditions to ensure suitable risk-reward.
4. Passive Portfolio Management
Passive management focuses more on safety by investing in avenues that replicate the benchmark-such as index funds. Here, the returns may not be as superior, but the portfolio will carry lower risk.
Why Should You Choose Portfolio Management Service?
1. Freedom to Create a Custom Portfolio
PMS opens up a gateway for you to build your own portfolio.
You can choose:
The allocation across various asset classes such as equity, debt, gold, etc.
Increase exposure to stocks/sectors/themes you want to explore.
Decrease exposure or exclude the stocks/sectors/themes you don’t want to invest in.
Maintain liquidity for emergencies.
Periodically re-shape your portfolio.
2. Having an Expert to Act on Your Behalf
You may not have the time or resources to execute all the customizations on your portfolio. With portfolio management services, a certified expert handles all your transactions.
The portfolio managers have the required knowledge to minimize the risk and maximize returns. They analyze the market, revisit your financial goals, and adjust your investments accordingly.
3. Flexible Cash Holdings
Portfolio managers have the freedom to hold up to 100% cash to use it when the opportunity arises. This flexibility comes in handy to turn the market conditions in the investor’s favour.
4. Direct Communication with the Portfolio Manager
Having an option to directly communicate with the portfolio manager ensures transparency and increases your awareness.
You can discuss the investment strategy with the portfolio manager and seek performance insights at your convenience. Your account statement will highlight all the necessary information regarding your portfolio.
Factors to Consider Before Investing via PMS
1. Minimum Investment Value
PMS has a high minimum investment threshold of 50 lakhs. It is not easily accessible by the majority of the retail investors.
As a thumb rule, investors should go for a PMS only when 20% of their overall net portfolio or net worth is equal to or less than 50 lakhs and they have a prior experience in products like Mutual Funds.
2. Associated Risk
Unlike mutual funds, PMS hold a concentrated portfolio of investments.
Mutual funds usually have a small allocation to about 50 to 60 stocks. PMS, on the other hand, prefers to hold 20 to 30 stocks with high concentration, enabling high-risk-high-reward opportunities for investors.
3. Fee Structure
Every portfolio management service has a different fee structure. You may have to pay fixed maintenance fees, audit fees, exit load, and profit participation fees.
The fixed maintenance fees can be about 2 to 2.5% of the asset value. Exit load may range between 1 to 2.25% of the withdrawal value based on the holding period. And many PMSs also follow profit-sharing fees above 10% returns.
Make sure you review and understand the fee structure of the PMS before investing.
4. SEBI Norms
Before April 2023, PMSs didn’t have as strict norms as mutual funds. Now, SEBI has issued new regulations for PMS houses.
As per new norms, investors can know specific situations in which the transactions will take place from the investor’s account or pooled from the portfolio manager’s account.
SEBI has also set rules to protect investor’s information. As a well-informed investor, you are allowed to seek this information from the PMS house.
Who Should Opt for Portfolio Management Services?
PMS is for sophisticated investors who can comfortably invest 50 lakhs for a longer horizon. As mentioned above, those 50 lakhs shouldn’t be more than 20% of your portfolio.
Investors who possess a long tail of stocks or ESOPs can transfer their portfolio to PMS. That way, you can customize your portfolio as per your preference. For example, skipping the stocks you already hold ESOPs of or investing in companies that fit under Sharia law. Your entire portfolio can be reshaped by an expert portfolio manager.
Investors who have prior experience in the equity market via mutual funds and have an appetite for a higher risk can look into PMS.
Non-individuals such as HUFs, partnership firms, sole proprietorship firms and body corporations can also invest via PMS.
Opting for a Portfolio Management Service is the next step after your mutual fund and stock investments.
As your income and portfolio grow over the years, you can start exploring PMS. Make sure you compare multiple PMSs before choosing the one that works best for you. Understanding how the portfolio manager works is worth looking into.
A wealth manager with years of experience can help you choose the right PMS. If you don’t have a financial planner, VNN Wealth is just a call away. Reach out to us for more information on Portfolio Management Services.
Asset Allocation plays a vital role in the overall performance of your portfolio.
You know how a balanced mix of spices makes a delicious biryani? Similarly, a combination of various asset classes optimizes your investment portfolio.
Market conditions dynamically change with time. No one can predict the accurate performance of a single asset class.
The right asset allocation can hold your portfolio together during changing markets.
Read along to know more.
What is Asset Allocation?
Asset allocation refers to distributing/allocating your money to different asset classes.
The allocation strategy ensures diversification. That way, the poor performance of one asset class can be recovered by another well-performing asset class.
Different Asset Classes Include:
Equity: Stocks or equity-oriented mutual funds invest in companies listed on the stock exchange. This asset class is riskier compared to others but has the potential to deliver superior returns in the long-term.
Fixed Income: Government bonds, corporate bonds, FDs, debt mutual funds, and money market instruments come under fixed-income securities. Safer than equity, this asset class can generate regular income.
Gold: Works as a hedge against inflation, currency fluctuations, geopolitical uncertainties, and global economic ups and downs. Gold/Silver ETFs can deliver superior returns compared to physical gold/silver and are easy to manage.
International Equity: Some selective mutual funds also offer exposure to international markets by investing in companies across the globe.
Real Estate: Purchasing residential buildings, commercial buildings, and lands delivers returns via property appreciation or rent. This asset class is less liquid and may take a lot of time to deliver attractive returns. Investors can alternatively explore Real Estate Investment Trusts (REITs) which do not require buying a physical property.
Importance of Asset Allocation in Portfolio
1. Balancing Risk
Asset allocation avoids dependence on a single asset class. Refer to the image below and you’ll notice that every asset class performs differently in changing economic conditions.
[Data Source: Bloomberg]
In the year 2021, equity delivered 26.53% returns, debt delivered 1.4% and gold was underperforming.
But in 2022, gold picked up pace and equity, debt declined by a large margin.
An equity-heavy portfolio would have delivered significant returns in 2021 but would have underperformed in 2022.
Which is why, allocation across multiple asset classes can together balance the returns.
2. Ideal Returns
Multiple asset classes can significantly improve your chances of earning superior risk-adjusted returns. Explore the above table again. Each asset class goes through its ups and downs every year.
An equity-heavy portfolio would have suffered in 2016, 2018, and 2019 when gold was delivering superior returns. However, a portfolio with a mix of equity, debt, and gold would deliver ideal returns considering the state of the economy at the time.
You can invest in different asset classes with variable horizons to keep your portfolio moving.
3. Adequate Liquidity
You can enter and exit mutual funds as per your preference. However, an investment horizon plays a vital role in receiving the returns you are aiming for.
Equity mutual funds usually deliver superior returns over a longer horizon. Every savvy investor would suggest you stay invested for 5-7 years or more.
And while equity investments are catering to your long-term goals, you need something liquid to withdraw quickly. Liquid funds, short-duration debt funds can be included in your asset mix for liquidity. So that, you can redeem them during an emergency.
4. Tax Optimization
Every asset class has different taxation rules. Asset allocation strategies also focus on lowering tax implications to maximize returns.
For example, the ELSS mutual fund is a popular tax-saving instrument offering a deduction of up to 1.5L under section 80C of the IT Act.
Hybrid debt funds with more than 35% exposure to equity still have the old indexation benefit which pure debt funds don’t have anymore.
Your financial goals are easier and faster to achieve by asset allocation. It avoids confusion, prevents panic-selling during market volatility, and simplifies decision-making.
Factors to Consider For Effective Asset Allocation
1. Risk Profile
Your risk appetite, tolerance, and capacity assessment are crucial to plan asset allocation.
The risk you can comfortably manage depends upon your age, family dependency, monthly income, expenses, and more.
Evaluate your risk profile for FREE with VNN Wealth to know which asset classes fit your profile.
2. Investment Horizon
Asset classes may have a lock-in period or a time-frame in which they deliver ideal returns. It is crucial to ensure the expected investment horizon before entering any asset class.
3. Your Financial Goals
All your investments essentially cater to your financial goals. You can align your investments with goals such as buying a house, funding children’s education, planning for your retirement, etc.
Asset Allocation Strategies
1. Strategic Asset Allocation
Strategic investments maintain a core static mix of assets. For example, if an investor wants to maintain a 65:35 ratio of equity:debt, they will periodically balance the assets to the static ratio.
Let’s say you have distributed 1,00,000 into equity:debt as 65:35%, which will be 65000 in equity and 35000 in debt.
Now assume that your equity investment went up to 1,00,000 and debt went up to 40,000 bringing the total amount to 140,000. The asset ratio became 71.4% equity and 28.5% debt.
In order to bring it back to 65:35, the equity and debt investment amount should be 91,000 and 49,000 respectively. Therefore, you’ll have to sell equity worth 9000 and allocate it to debt.
Note- You can take advantage of market opportunities to rebalance the portfolio. For example, buying more equity when equity markets are down.
2. Tactical Asset Allocation
Tactical asset allocation also follows a core asset mix but with opportunistic expectations.
This strategy takes advantage of market trends and timing, to maximize returns. For example, including gold/silver in your portfolio when there’s an opportunity to earn higher returns on the precious metal investments.
Another scenario is- a portfolio of 65-35% equity:debt can go to 80:20% if there’s the possibility of earning superior returns through equity for a short time. The allocation adapts to the market changes and can go back to the original formation when markets are steady.
3. Dynamic Asset Allocation
Dynamic Asset Allocation is more of a fund-level strategy. It changes the asset mix based on the market conditions.
Counter-cyclical is a common dynamic allocation strategy in which- portfolio managers buy more equity when the markets are cheaper and sell it off at a higher price when markets correct. The debt allocation changes accordingly.
Unlike the above two strategies, here you do not have to predefine the ratio of asset mix. It can go beyond rage if the opportunity presents itself.
Multi Asset Funds offer exposure to equity, debt, gold and international stocks all in the same fund.
You can explore various categories of mutual funds before sketching asset allocation for your portfolio.
Final Words
Now that you know the importance of asset allocation, you can choose the strategy as per your risk appetite. Many investors like to stick to the core asset mix while others explore dynamic allocation.
A lot of investors also go with the thumb rule of age i.e. (100 – your age)% of equity allocation.
However, you must take your risk tolerance and financial goals into account.
It’s always better to start with a set of goals and plan your investments accordingly. Connect with VNN Wealth experts for more insights on asset allocation. Rebalance your investment portfolio with us.
Every investor’s investment journey eventually comes down to one question- Stocks vs Mutual Funds, what to choose? There’s no correct answer. It all depends upon your financial goals and preferences.
Which is why, you should carefully curate your investment portfolio. A balanced portfolio should be your ultimate goal. But…for the sake of understanding, let’s get to know both investment avenues a little better. Shall we?
What are Stocks?
Stocks aka shares are the units of a company. Upon buying them, you officially become a shareholder of a company. Stocks deliver returns in terms of gains and sometimes dividends when the company performs well.
When you invest 1,00,000 in a company with a stock price of 1000, you will get 100 shares of the company. You need a demat account to invest in stocks.
What are Mutual Funds?
Mutual funds are a collection of stocks of various companies. Apart from company stocks, funds also invest in other asset classes such as debt and money market securities.
Now, if you invest those 1,00,000 in a mutual fund of a NAV 1000, you get 100 units of a fund. These 100 units are a combination of multiple companies, enabling instant diversification. You do not need a demat account to invest in mutual funds.
Read along for a detailed comparison below…
Stocks vs Mutual Funds: A Detailed Comparison
1. Portfolio Diversification
Diversification is important to ensure a stable and sustainable portfolio.
Diversification Via Stocks: You cannot invest all your money in one company. Having stocks from multiple companies is one way to introduce diversification. When one company underperforms, the other companies will keep the portfolio moving.
In order to achieve that, you have to study the market, analyze the performance of all the companies, time the investment, and keep track of all your stocks. It can surely be achieved with the right resources and knowledge, which individual investors may not have.
Result? A long tail of underperforming stocks. Poor returns.
Watch a quick overview of why too many stocks can slow down your overall portfolio growth.
Diversification Via Mutual Funds: Mutual funds offer instant diversification. The fund managers use their expertise and resources to analyze the market trends. Therefore, the fund comes with a collection of stocks carefully picked by the experts.
You can further diversify your portfolio by investing in various categories of equity and debt funds.
The only drawback is, you do not get to choose the underlying stocks. However, you can compare the performance of a mutual fund to decide which fund aligns with your goals.
No investment is safe. You cannot avoid the risk but you can balance it. Stocks carry higher risk compared to mutual funds. The returns on your portfolio depend on the performance of the specific stocks that you have bought.
Mutual funds, on the other hand, have fairly diversified, well-researched stock holdings and can also balance the risk by asset allocation across equity and debt. The underlying assets keep moving up/down with the market. You can beat both volatility and inflation by staying invested for a longer horizon.
3. Investment Amount
Let’s take a simple example- you have 10,000 to invest in. With 10,000, you’ll be able to acquire a limited number of good stocks, probably 3 to 4. Or, you may not be able to buy even a single stock of expensive companies.
For example, MRF’s stock price is more than 1 lakhs. Honeywell Automation- 37256. Nestle India- 24000. P&G-17649.
Even if you end up buying a couple of stocks, the entire performance of your portfolio will depend upon those stocks.
However, if you invest those 10,000 in a mutual fund, you will be able to invest across market cap without worrying about the stock price. The corresponding units of your investment value will be allocated to you.
You can either invest a lumpsum amount or start a monthly SIP. Usually, the minimum threshold of a lumpsum investment is INR 5000 and the minimum SIP amount starts from INR 100 per month.
4. Taxation on Stocks vs Mutual Funds
You have to pay tax on gains earned via stocks and mutual funds. Stocks aka listed equity have the same tax rules as equity mutual funds. Investments redeemed before 12 months will attract a 20% Short-Term Capital Gain tax. Long-Term Capital Gains (investments redeemed after 12 months) are taxed at 12.5% above 1.25 Lakhs.
Returns on debt mutual funds are considered as income. Both long and short-term capital gains are taxed as per investors’ tax slab.
You can benefit from the tax deduction of up to 1.5 Lakhs (under section 80c of the IT act) in a financial year by investing in ELSS mutual funds. Stocks do not offer any tax deduction benefits.
Stocks vs Mutual Funds: Who Should Invest in What?
Who Should Invest in Stocks?
Stocks are for investors who want to have complete control over their investments. They can pick the companies they want to invest in.
However, picking stocks is not as easy as it sounds. Say you have 1,00,000 to invest. How would you distribute them among multiple companies? You’ll have to keep track of market trends, performance updates on companies, and a lot more.
Stocks can be risky and you may not know how to balance that risk. And even if you keep investing in stocks, soon it’ll become difficult to keep track of.
So, if you have time, research capability and knowledge to monitor all your stock holdings, only then consider buying individual stocks.
Who Should Invest in Mutual Funds?
Mutual funds are for everyone. From beginners to savvy investors, anyone can craft a portfolio as per their risk tolerance and financial goals.
You can choose the funds aligning with your risk appetite and instantly diversify across various asset classes.
Investors looking to invest a small amount each month can create an SIP. You can also consider investing in ELSS mutual funds for tax optimization.
Let your investment in mutual funds grow over a longer horizon so you can even withdraw a fixed income via SWP.
Final Words
It all narrows down to what your preferences are and how much time you have. Both investment avenues have their benefits and limitations.
You must wisely choose where you want to invest your hard-earned money.
The first step would be to craft your financial goals and the time in which you want to achieve them. Work backwards to plan your investments accordingly.
Consider talking to your wealth manager. If you don’t have one, VNN Wealth experts can review your portfolio and guide you through the process.
Ever wondered what 12% returns on mutual funds mean? Returns on mutual funds depend on capital appreciation, compounding, investment tenure, dividend payouts, and more.Therefore, that 12% holds more meaning than you think. In this article, we will explore all the different types of returns on your mutual fund investment with an example.
As the name suggests, CAGR indicates the returns earned by investors annually including the effect of compounding.It is calculated as-Annualized Returns (CAGR) = [((Current NAV / Purchase NAV) ^ (1/number of years)) – 1]*100Let’s say, you invested INR 1,00,000 in a mutual fund with NAV of INR 100.
If the NAV increased to 110 in one year, the CAGR would be = [((110/100)^(1/1))-1]*100 = 10%
If the NAV increased to 115 in two years, the CAGR would be = [((115/100)^(1/2))-1]*100 = 7.24%
If the NAV increased to 130 in three years, the CAGR would be = [((130/100)^(1/3))-1]*100 = 9.13%
And so on…
Tip: CAGR is a useful measure to compare the returns on two mutual funds over a specific period of time.
2. Absolute Returns
Absolute returns are the percentage growth/decline in a mutual fund between any two points. The duration could be two months, a couple of years, or two and a half years, the percentage will show the growth/decline in your total assets. To put it simply, these are the non-annualized returns over a specific tenure. The formula to calculate absolute returns is-Absolute Returns = [(Final investment value-Initial investment value)/Initial value]*100Your investment of 1,00,000 increased to 1,50,000 at any given point;The Absolute Returns would be= [(150000-100000)/100000)]*100 = 50%
3. Extended Internal Rate of Return(XIRR)
The annualized returns (CAGR) formula works only for the lumpsum or one-time investment. But in case of multiple regular/irregular cash in-flows/out-flows, the calculation will change. One such scenario is the SIP. Let’s say you start a SIP of INR 10000 on the 3rd of every month for 12 months, so your total investment will be 120000. The first 10000 that you invest will compound over 12 months. The next month’s installment of 10000 will compound over 11 months and so on.The XIRR formula captures the time each investment has spent in the market and calculates the returns accordingly. Assume that your 120000 became 135000 on the 13th month. Now, to calculate the returns, you will have to use the XIRR formula. You can use Google Sheets or Microsoft Excel to use the inbuilt XIRR formula = XIRR(values, dates, [guess]). The guess returns can be kept blank, in which case, the formula will by default assume 10%.The negative sign in front of each investment indicates cash outflow. Your monthly investment amount and dates could vary. In such cases, the XIRR formula gives the accurate calculation of returns.
4. Trailing Returns aka Point-to-Point Returns
Trailing returns indicate the returns earned during a specific horizon. Here, you can choose the two points between which you want to calculate the returns.For example, the NAV of a fund on 1 January 2021 was 100 which became 145 on 1 January 2023.The Trailing Returns would be= [(Current NAV/NAV at the start of the trailing period)^(1/Trailing period in years) -1] x 100Trailing returns =[(145/100)^(½) – 1] x 100 = 20.41%
Rolling returns calculate returns on your investment for a particular period on a continuous basis. If you calculate trailing returns on a daily, monthly or quarterly basis, you’ll get the rolling returns.Let’s simplify it.For example, you want to calculate 2-year rolling returns on a mutual fund over the 6-year period, say between 2018 and 2023. Now, if you choose to calculate the trailing returns on a daily basis, you will have to calculate the trailing returns of each day between 2018 and 2023 in sets of 2 years. I.e. 1 Jan 2018 to 1 Jan 2020, 2 Jan 2018 to 2 Jan 2020 and so on. Repeat the same by calculating the daily trailing returns between 2019 and 2021, 2020 and 2022, 2021 and 2023. Rolling returns gives you the range of returns the fund has earned over the year in a specific duration. So, if you are planning to invest in a fund for 2 years, the above data will give you an idea of the returns you can expect for that duration.Rolling returns provide accurate insights as they are not biased towards any investment period. This data is more valuable to understand the fund’s performance.
6. Total Returns
Total returns are the overall gains on a mutual fund including the capital appreciation, interest earned, and dividends.Let’s say you bought 1000 units of mutual fund with NAV 100 by investing 1,00,000. You also received a dividend of INR 10 per share, which would be 10000.After two years, if you sold the mutual fund at a unit price of 120, your capital gains would be (120-100)*1000= 20,000.Your total returns = [(Capital Gains + Dividend)/Total Investment]*100 = [(20000+10000)/100000]*100 = 30%.
Final Words
A mutual fund factsheet usually has all the data you need to understand the performance. Numbers can be confusing but never vague. You can make your investment decisions by trusting the numbers. Next time you analyze two mutual funds, make sure you have this blog in handy.You can always reach out to VNN Wealth for more guidance on investments. Take a look at our Instagram @vnnwealth for more insights.
An Alternative Investment Fund (AIF) is a privately pooled investment avenue consisting of private equity, venture capital, hedge funds, managed funds, etc. SEBI regulation 2(1)(b) defines AIF as a Limited Liability Partnership (LLP) or a company or a trust. These funds open a doorway beyond conventional equity and debt instruments.
Generally caters to Indian, NRIs, and foreign high-net-worth individuals with a minimum of 1 crore of investable amount. AIF typically has a four-year tenure which can be extended by two more years with unit-holders’ approval. Here’s everything you need to know about AIF.
3 Categories of Alternative Investment Fund (AIF)
Category I AIF
Investment across early-stage start-ups, venture capital, angel funds, and the infrastructure sector. The government and regulators refer to this category as socially or economically desirable.
Venture Capital Funds invest in start-ups with high growth potential. VCFs offer funding to these companies by buying the equity stake. These funds often target a specified sector which is declared at the launch of VCF. Social VCFs invest in companies that create a positive impact on society.
Angel Funds raise investments from angel investors with at least 2 crore net tangible assets. Angel investors are required to have investment experience, serial entrepreneurship experience, and ten years of experience in a senior management role. AIF Investors are allotted units of the funds.
Infrastructure Funds invest in companies that develop infra projects such as roads, railways, renewable energy, etc. These funds generate capital from private investors. AIF Investors can purchase units of these funds.
Category II AIF
This category invests across private equity, debt, and funds of funds. It also includes securities that do not fall under category I and III, and do not use borrowing or leverage for other than meeting operational requirements.
Private Equity Funds invest in unlisted private companies. Listed companies raise funds via equity or debt instruments. Similarly, unlisted companies raise capital via private equity funds. These funds may come with four to seven years of lock-in period.
Debt Funds in category II AIF invest in debt instruments offered by listed or unlisted companies. The funds choose the companies with a high growth potential looking to raise funds.
Funds of Funds invest in other AIFs, hence the name. These funds do not have their own portfolio.
Category III AIF
This AIF category invests across listed or unlisted derivatives such as hedge funds, open-ended funds, or funds trading to make short-term returns. These funds use diverse trading and arbitrage strategies. Category III can be both open or close-ended funds.
Hedge Funds gather investments from private investors and invest in both domestic and international markets. Underlying assets in these funds, including listed and unlisted, can have both short and long-term horizons. These funds can be highly volatile and may charge higher fees to optimize returns.
Private Investment in Public Equity (PIPE) invests in publicly traded companies at a discounted price. These funds primarily help small and medium-sized companies to raise capital.
Category III AIFs are more common among the three. Contact VNN Wealth Advisors for more information.
Benefits of Investing in Alternative Investment Fund
1. Specialized Diversification in Your Portfolio
Though mutual funds are diverse, they are regulated and restricted to certain asset classes and exposure to those asset classes. AIFs allow investors to expand their portfolios beyond mutual funds. These funds bring non-conventional investment instruments such as private equity, angel funds, venture capital, unlisted stocks, and more. Investors wanting to explore diverse investment strategies can invest in AIF.
2. Potential of Earning Superior Returns
With a large corpus, fund managers have enough flexibility and scope to explore unique investment strategies. They aim to maximize returns using their analysis and expertise. Therefore, AIFs have the potential to deliver significant returns over the years.
3. Lower Volatility
The underlying assets in alternative investment funds are less volatile compared to pure equity funds. Some of these instruments are not listed on the stock market, hence, do not fluctuate frequently. The wide spectrum of instruments manages the volatility quite well.
Taxation on Alternative Investment Fund (AIF)
Taxation on AIF Category I and II: Since these two categories are pass-through vehicles, the fund doesn’t have to pay tax on the gains. Investors, however, have to pay the tax on capital gains. Short-term Capital gains will be taxed at 20% whereas long-term will be taxed at 12.5% above 1.25 lakhs. Returns on debt instruments will be taxed as per the investor’s tax slab.
Taxation on AIF Category III: This category is taxed at the fund level with the highest income tax slab which is about 42%. Investors will receive the gains after the tax deduction at the fund level, hence, do not have to pay any additional tax.
Final Words
AIFs cater to more sophisticated investors with a minimum of 1 crore of ticket value. Hence, it is not easily accessible to many retail investors. Almost every AIF subcategory accepts investments from only 1000 investors. Angel funds have a limit of 49 investors. Regulated by SEBI, these funds are worth exploring for portfolio diversification.
Though we have briefly discussed all categories above, there’s more to learn. Give VNN Wealth a call if you wish to invest in AIFs. Our team will review your portfolio and guide you through the process. Find more personal finance insights at @vnnwealth.
Arbitrage funds are hybrid equity-oriented funds that simultaneously buy and sell assets from different markets to book profit. Meaning, these funds take advantage of the difference in stock price in two different markets.
These funds are ideal for investors looking for safer avenues to invest in during volatile markets. Read along to find more.
How Do Arbitrage Funds Work?
Arbitrage funds buy assets from one market at a certain price and sell the same assets at a different market at a higher price. Both ‘Buy’ and ‘Sell’ transactions take place on the same day.
As per SEBI guidelines, these funds invest at least 65% of total assets into equity and equity-related instruments.
Let’s take an example:
A stock of an XYZ company is trading at INR 500/unit on the Bombay Stock Exchange.
The same stock is trading at INR 515/unit on the Bangalore Stock Exchange.
There’s an opportunity to earn INR 15/unit profit without any risk. Fund houses will buy the units from the Bombay Stock Exchange and sell them at the Bangalore Stock Exchange.
Arbitrage funds may also operate within the Spot Market and Futures Market.
Let’s say a stock of an ABC company is trading at INR 1000/unit at the Spot market. Fund houses will buy these stocks and the transaction will settle on the ‘Spot’.
The same stock has a value of INR 1020/unit in the Futures market. Fund houses will lock the ‘Sell’ for that price on the same day, which will settle at a future date (a month later.)
After locking the profit, the stock price in both markets has no impact on the returns. In both scenarios, investors will earn the profit they have locked in the beginning. Therefore, these funds are immune to market volatility.
Factors to Consider Before Investing in Arbitrage Funds
1. Risk vs Returns
Arbitrage funds carry comparatively lower risk than other equity funds. Since the profit will be locked, market volatility would be of no concern.
In fact, these funds may deliver superior returns during a volatile market. There is a chance that the future price of the asset to be significantly higher during a volatile market. Investors may lock in more profit when the asset prices are aggressively updating.
However, when markets are flat, the asset price difference might be negligible. The fund may deliver lower returns.
2. Investment Horizon
Arbitrage funds are ideal for 6 months to 2 years of investment horizon. The arbitrage opportunities can deliver superior returns in 6 or more months.
If you want to park a lumpsum amount for a while at a comparatively safer avenue, go with these funds.
Additionally, staying invested for more than 12 months will also be tax-efficient. Plan your investment horizon accordingly.
3. Fund Manager Strategy
Fund managers are always on the lookout for arbitrage opportunities. They strategically pick up underlying assets to ensure profit. Additionally, the fund also maintains a small allocation in debt/fixed-income securities to balance the returns.
Arbitrage opportunities may not be abundant. A fund manager’s strategy makes all the difference in the returns of these funds.
4. Expense Ratio
The expense ratio is a certain fee you have to pay to the fund house for managing your investments. As Arbitrage funds execute trade transactions every day, the expense ratio is often high. You may also be liable for a higher exit load if you redeem your investment between 30 to 60 days.
Tax Implications on Arbitrage Funds
Arbitrage Funds follow equity taxation rules based on investment duration.
You will have to pay a 20% tax on Short-term Capital Gains (Investments redeemed within 12 months.)
Long-term Capital Gains (Investments redeemed after 12 months) are taxed at 12.5% above 1.25 lakhs.
Who Should Invest in Arbitrage Funds?
Arbitrage funds are ideal for investors wanting superior returns than debt funds, but at the same time lower risk compared to equity funds.
Investors with higher tax brackets can benefit from better post-tax returns.
For aggressive investors, these funds can bring stability during volatile markets. While you are exploring high-risk equity funds, Arbitrage funds can be your safety net.
It is always advisable to take the opinion of your financial planner before investing in any funds.
Conclusion
Ever since debt funds taxation changed, the demand for Arbitrage funds has increased.
These funds can hold your portfolio together during market volatility. Investors with a low-risk appetite can invest in this category. However, note that the returns on these funds may not be as superior as other equity funds.
If you find these funds appealing, financial advisors at VNN Wealth can help you analyze your portfolio. Give us a call to know if these funds fit your risk profile and financial goals.
Mutual funds are the best way of building wealth and earning a fixed income from it. Be it a lump sum investment or SIP, mutual funds will deliver superior returns in the long term.
And once you have enough wealth built, you can start earning income from your mutual funds.
There are two ways of earning a fixed income from your investments:
Systematic Withdrawal Plan (SWP)
Income Distribution Cum Capital Withdrawal Plan (Previously known as Dividend Plan.)
Let’s compare both in detail.
How Does a Systematic Withdrawal Plan Work?
A Systematic Withdrawal Plan (SWP) is an automated way of withdrawing a fixed amount from your mutual funds at regular intervals. Investors can define the amount and frequency at which they want to earn income.
To put it simply, SWP is the opposite of a Systematic Investment Plan (SIP). In SIP, a predefined amount goes from your savings account to a mutual fund of your choice. SWP plan sells units of your mutual funds and transfers the amount to your bank account.
Pro Tip- SWP is more effective when you give time to your fund to grow and benefit from the power of compounding. Stay invested for a longer duration. Once you have enough wealth built, you can start a SWP. It is one of the most tax-efficient ways to generate a consistent inflow, especially post-retirement.
How Does The Income Distribution Cum Capital Withdrawal Plan Work?
In the IDCW (Dividend) plan, investors periodically receive a profit made by the fund. The mutual fund dividend plan works differently than the stock dividend.
In the case of mutual funds, the unit price increases with capital appreciation, interest earned on bonds, and dividends. Therefore, the income received is not like the dividend from a stock but your own profit.
Example:
The unit price (NAV) of a mutual fund is INR 100. After capital appreciation, bond interest, and dividends, the price goes up to INR 120.
Now, if the mutual fund declares a dividend of INR 10 per unit, you will receive the amount (INR. 10 x No. of units) in your account but the NAV will go down to 110.
Let’s say you have purchased 1000 units of a mutual fund with an NAV of 100/unit. You will end up investing INR 1,00,000 in an IDCW mutual fund.
Total Amount Invested
1,00,000
Unit Price
100
Units Assigned
1000
Updated Unit price after capital appreciation, bond interest, and dividends
120
Total Amount in a Fund
1,20,000
Dividend Declared
10 per unit
Dividend Amount Received (Dividend x Number of units)
10 x 1000 = 10000
Updated NAV after Dividend Payout (Previous NAV – Dividend)
120-10= 110
Remaining Invested Amount in a Fund (Updated NAV x Number of Units)
110 x 1000 = 1,10,000
The income investors earn from the IDCW plan is pulled out of the profit from their own investments.
In the case of stocks, investors receive the dividend as an additional payout over and above the appreciated capital. Therefore, neither the principal amount nor the earned profit is reduced after dividend payouts.
But with IDCW mutual funds, the appreciated amount goes down after the payout. This created confusion among investors. Therefore, SEBI renamed the Mutual fund dividend plan to Income Distribution Cum Capital Withdrawal Plan for clarity.
In the IDCW plan, investors do not get to choose the amount or frequency of the payout. Therefore, it’s a less flexible plan compared to SWP.
A systematic Withdrawal Plan allows investors to select the payout amount, frequency, and date. IDCW, on the other hand, depends on mutual fund performance and the fund house’s decisions.
Let’s say you start an SIP of 20000 at 12% p.a.
You will accumulate:
26,39,580 in 7 years.
46,46,782 in 10 years.
1,00,91,520 in 15 years.
1,99,82,958 in 20 years
The SIP amount and horizon depend on your financial goals.
Now, after 20 years you can comfortably withdraw 1L/month as a regular income for the next 20 years via SWP.
The remaining amount will keep compounding.
It is clear that SWP offers more flexibility compared to a dividend plan. It also helps you plan a source of income ahead of time.
2. Surety of Receiving the Income
Receiving a payment via the IDCW plan depends on decisions made by the fund houses. The frequency and amount may change as per the fund’s performance.
SWP, on the other hand, offers surety of payouts. You have full control over when you want to start SWP, for what amount, and how often.
You will receive the income irrespective of market conditions.
3. SWP vs IDCW: Tax Implications
One of the important factors to consider before choosing an income plan is the applicable tax.
Dividends are a form of income, therefore, will be taxed as per your tax slab. So, if you fall under higher tax brackets, a dividend plan may not be ideal for you.
Systematic Withdrawals are a form of mutual fund redemptions. Taxation on mutual fund redemption depends on the holding period.
If you start SWP within 12 months of your investment, you will attract a 20% Short-Term Capital Gain tax on your withdrawals.
Holding your investment for more than 12 months will attract a 12.5% Long-Term capital gain tax on withdrawals above 1.25 Lakhs in a financial year.
Therefore, SWP becomes a more tax-efficient fixed-income avenue than a dividend plan.
Note- It is always better to hold your mutual fund investments for a longer duration. Not only is it tax efficient, but also helps you accumulate larger wealth by the power of compounding.
Which Fixed Income Option Should You Choose Between the Two?
Investors who do not rely on income from mutual funds but wouldn’t mind a periodic payout often go for the IDCW plan. It is not their primary mode of generating regular income.
IDCW plan does not wait for the principal amount to grow by compounding. Therefore, many investors prefer the growth plan.
SWP is suitable for investors looking to generate regular income on their own terms. It offers more flexibility and tax-efficient withdrawals. It is advisable to let your money grow for years and then start the SWP.
Choosing a suitable plan entirely depends upon your financial goals and preferences.
Final Thoughts on SWP vs IDCW
To answer the primary questions- SWP vs IDCW (Dividend): Which one is better for regular income from mutual funds?
SWP is the clear winner because it gives you the freedom to choose the amount and frequency. The income withdrawn via SWP is more tax-efficient than the dividend income. Investors wanting to earn a salary even after retirement should go for SWP.
It is wise to have clear financial goals to select the right plan. If you have any further queries, feel free to reach out to us. Experts from VNN Wealth would be happy to help you shape your investment portfolio.
