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FD Vs Debt Funds: Where to Invest?

FD vs Debt Funds: Where to invest your money?

The fixed deposit has been a popular investment option in Indian households for years. If you have a lumpsum amount, your grandparents and parents will suggest investing in FD.

Debt funds, on the other hand, started becoming popular in the past few years. Many investors began preferring debt funds over FD for several reasons. 

However, the changes in the debt funds taxation from April 2023 had thrown everyone off guard. Investors will no longer benefit from indexation on Long-Term capital gains. Both Long and Short-term capital gains will be taxed as per the investor’s tax slab.

So…

Are debt funds still better than FD? The answer is YES! Especially after the new tax regime as per Budget 2025.

Let’s find out how.

FD Vs Debt Funds

A fixed deposit is a financial instrument where you can invest a lumpsum amount and earn returns at fixed interest rates. Usually, banks have predefined interest rates and tenure.

Debt funds are a type of mutual fund in which fund houses allocate your assets into fixed-income securities such as government bonds, corporate bonds, commercial papers, and T-bills. 

Top 4 Differences Between Debt Funds and Fixed Deposit

1. Risk

Fixed Deposit:

FD is known to be the safest investment option. However, in rare cases, if a bank goes bankrupt, it might default on your FD. According to recent RBI rules, even nationalized banks only offer up to INR. 5 lakh of FD default insurance per account. You may not receive the principal amount or interest above INR. 5 Lakh if the bank defaults on your FD.

Debt Funds:

The risk on debt funds depends on the features of the scheme you invest in. There are 15 different types of debt funds, each with variable risk-reward intensity. 

Debt funds primarily come across two types of risks:

1. Interest Rate Risk- Similar to stocks, bonds are also traded in the market. Their price goes up and down based on the interest rate and demand. If the interest rate goes up, the price will decrease and vice versa. These fluctuations can either drop or boost the returns. You can manage the interest rate risk by holding your investment until maturity or by buying short or long-duration funds based on whether the interest rates are going up or down. 

2. Credit Risk- Say, for instance, you loan INR. 1000 to your friend to start a business. The friend promises to return your money with interest. But if his/her business doesn’t do well, then your friend might not be able to honor the commitment. A similar thing can happen in debt funds. Borrowers might not be able to deliver expected commitments, which causes credit risk. You can avoid it by evaluating the ratings of bonds through credit rating agencies like CRISIL. Different credit rating agencies may have different rating parameters. But the most common ratings are AAA, AA, A, BBB, BB, B, C, D, and SD.

AAA and AA are the safest to invest in. ‘A’ may have a slight risk associated with it. All the further ratings have moderate to high risk. Other than credit risk funds, most debt funds maintain credit quality by investing in high-credit quality bonds. 

2. Returns

A fixed deposit delivers returns based on the fixed interest rate offered by the bank. You will be guaranteed to earn a fixed interest rate. But there’s no possibility of earning anything beyond that. At the time of maturity, if you decide to extend the FD, it will get reinvested at the current interest rate, which could be lower/higher than the previous one. 

Debt funds may not guarantee how much returns you’ll earn. But they can deliver superior returns than the FDs, especially in a falling interest rate scenario where bond prices shoot up, offering additional returns.  

3. Liquidity

Both FD and Debt Funds do not have any lock-in period. You can withdraw money whenever you please. However, banks charge a penalty for premature withdrawal.

Debt funds may or may not have an exit load. It’s the fee charged by fund houses if you redeem funds before a certain period of time. You can check the exit load associated with the debt fund before investing in it. 

Taxation on FD vs Debt Funds

Let’s address the elephant in the room. The TAX.

1. Tax on Accrued Interest on FD

You have to pay tax on accrued interest on FD every year even before you receive it. 

Let’s say, you have created a cumulative FD. The yearly interest that you earn will be reinvested in the same FD to benefit from the power of compounding.

Now, as unfair as it may sound, the reinvested interest will be treated as income earned. You have to pay tax as per your tax slab on the interest you technically haven’t received in your account.

2. Tax On Capital Gains Earned on Debt Funds

Unlike FDs, Debt funds do not have the concept of tax on accrued interest. You only have to pay tax on capital gains when you redeem your investment. 

Before April 2023, all Debt funds used to have different tax rules for Short and Long Term Capital Gains. Indexation benefit on LTCG was the key feature of debt funds taxation.

From April 2023, the taxation rule has changed.

As per the new rule:

Both Long and Short-term capital gains will be taxed as per the investor’s tax slab without any indexation benefit. 

Unless…

The fund has more than 35% exposure to equity.

Explore the latest tax regulations across all Mutual Fund Categories.

Now, as per the new tax regime proposed in budget 2025- if you have invested in debt funds after April 2023, capital gains from debt funds can be used to avail rebate up to INR. 60,000. This is more beneficial for taxpayers with gross income (including capital gains earned from debt funds) of INR. 12,00,000.

Here’s how-

Gross Income Tax As Per New Tax Regime FY25-26
0 to 4LNA
4L to 8L 20,000
8L to 12L40,000
Total Payable Tax60,000
Rebate Under Section 87A60,000
Net Payable Tax0

Even if your gross income exceeds INR. 12,00,000, your tax liability will be lower with the new tax regime.

Coming back to our question.

Are Debt Funds Still Better Than FDs?

Of course! Debt funds are still investable for various reasons. 

You can invest in a specific type of debt fund that aligns with your goals. It offers a safety net against equity volatility.

Sure, taxation may no longer be as efficient as it used to be without the indexation benefit. But that’s not the only parameter to judge debt funds. They have a lot more to offer than FDs.

Investors willing to slightly increase their risk appetite to generate post-tax returns similar to debt fund schemes (pre-31st Mar 2023 tax era) can explore hybrid funds. For example, Equity Savings Funds, Hybrid Debt Funds, Multi-Asset Funds, and Various other Asset Allocation Funds.  

FD vs Debt Fund: Where Would You Invest?

Both FD and Debt Funds offer various benefits to strengthen your financial goals. If your focus is on security and guaranteed returns, Fixed Deposits would be a better fit for you. 

Otherwise, debt funds have the potential to offer superior returns without changing your risk profile and also help with portfolio balancing. 

If you are struggling to decide which debt funds to choose, give us a call. VNN Wealth advisors will walk you through all types of debt funds and help you make a decision.

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Blogs Mutual Funds

Exchange Traded Funds(ETF) and Their Benefits

The Exchange Traded Funds are a type of mutual fund with stock-like trading benefits. ETFs follow a benchmark index such as Nifty 50 or Sensex to invest and match the returns.

The returns on these funds change as per the changes in the underlying index. These funds offer the best of both mutual funds and stocks. 

ETFs are nearly similar to Index mutual funds. The only difference is, ETFs are traded in the market and you can access these funds in your Demat account.

What is The Investment Regime of Exchange Traded Funds?

According to SEBI guidelines, fund houses allocate at least 95% of total assets into securities listed on the underlying index. 

The investment strategy may change based on the type of ETF.  

Index ETF- Follows a benchmark index (Nifty 50 or Sensex) to reflect similar returns.

Gold ETF- Investment in Gold without owning physical gold.

Fixed Income ETF- Invest in fixed-income securities listed on the fixed-income indices. For example- Nifty 1D TRI, Nifty 8-13 years.

Sector ETF- Follow specific sector indices to invest and reflect similar returns. For example- Nifty PSU bank, and Nifty Private bank.

International ETF- Invest in international indices such as NASDAQ 100.

Top 4 Benefits of Investing in ETFs

1. Wider Exposure and Diversification 

ETF offers diversification via buckets of various investment securities across different sectors and market segments. 

Anything that can be traded on the market and has flexible liquidity can be a part of ETF.  

You can even opt for international ETFs to explore foreign financial instruments. Instead of investing in a single stock, trading multiple securities via ETF can offer better returns.

2. Low Cost 

Even though traded on the market, ETFs are passive funds. ETFs have a lower expense ratio than actively managed funds and other passive investment instruments.

It enables you to have low-cost investments with decent returns.

3. Trading Opportunity with High Liquidity

The Exchange traded funds allow you to trade the whole bucket of funds on the market. The unit prices of underlying securities go up and down throughout the day over the market. 

As these funds are in your Demat account, you can quickly buy/sell more units at your preferred price. There is no lock-in period for the ETF.

4. Transparency 

Fund houses disclose the holding portfolio of ETFs to the investors on daily basis. Some ETFs send monthly or quarterly holding reports. 

And as these funds follow the specific benchmark index, all the underlying assets and corresponding holdings are known to the investors.

Things to Consider Before Investing In Exchange Traded Funds

1. Your Investment Portfolio 

First thing first, before investing in ETF or any mutual funds, analyze your portfolio. Plan your investment based on your risk profile and investment goals. If your profile still has a scope to diversify, ETF can become a part of your investments. 

2. Risk 

The Exchange traded funds follow the benchmark index and are traded on the market. Here, you have the risk of market volatility. 

If the index drops down, your returns will also drop down. Vice versa is possible too, so you may have the opportunity to bag superior returns.

Some ETFs may have complex investment securities, which could be difficult to keep track of. Make sure you understand all the features of the selected fund. You can always seek help from wealth advisors.

3. Underlying Index 

There are different types of ETFs available for investors to choose from. Gold ETF, sectoral ETF, and even International ETFs.

We would recommend understanding what index benchmark would benefit your portfolio the most. You have the option to follow a generalized underlying index or an industry-specific index to invest in these funds. 

4. Tracking Error 

Tracking error is the standard deviation of the difference between the returns on ETF and returns on the underlying index. 

If the tracking error is positive, that means the funds have outperformed the underlying index. If it’s negative, that means you will gain fewer returns on funds compared to the underlying index. 

Knowing this, you may want to consider funds with lower tracking errors.

Taxation on Exchange Traded Funds 

Index ETFs and Gold/International ETFs have different taxation structures.  

Index ETF Taxation- Index ETFs are considered equity-based investments. The tax on capital gains will be similar to equity mutual funds. 

  • Short Term Capital Gains (Investments held for less than 12 months) come under 20% taxation. 
  • Long Term Capital Gains (Investments held for more than 12 months) above 1.25 lakh will come under 12.5% taxation with indexation benefits. 

Gold/International ETF Taxation-  

  • Both short term and long term capital gains will be taxed as per your tax slab.

Who Should Invest In Exchange Traded Funds?

ETFs are not meant for new investors. Since these funds contain different types of financial instruments, it could be quite complex to understand them. Instead, new investors can go with Index funds. 

Investors who have been investing in the stock market for years can consider ETFs for diversity and the ability to trade. These funds offer high liquidity with no lock-in period. ETFs are also suitable for investors who are interested in International securities.

Conclusion

Funds that follow a benchmark to reflect returns are fairly transparent and moderately safe. Investors who want to have mutual fund security with trading benefits can go with ETF.  

You can access ETF investment through your Demat account and buy/sell at your convenience. This opportunity opens up high liquidity and a flexible investment horizon. 

New investors can consider ETFs with generalized indices. Otherwise, there are ETFs that follow sector-specific indices. 

For investors who don’t want trading features, there are always index funds.

Planning your next mutual fund investment? We, at VNN Wealth, offer portfolio analysis along with a suitable investment plan. Get in touch with us to explore various investment avenues.

Find more mutual fund insights here.

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Blogs Investing Basics

Inverted Yield Curve: The Historic Recession Indicator

Does an Inverted Yield Curve indicate a recession? 

Let’s find out. 

As of Nov’22, the yield curve for 3-month and 10-year US treasury has officially inverted. They are expecting to see the recession by Oct’23. In India, the yield curve seems to have flattened, which could go either way.

Usually, long-term bonds offer a superior yield than short-term bonds, making a yield curve an upward slope. But if not, the curve inverts and may indicate the possibility of an economic downgrading. 

An inverted yield curve was almost always followed by a recession. Though investors must only treat the yield curve as an indication as the economic scenario may flip. You never know.

Read on to find out more about the Inverted Yield Curve.

 

What is an Inverted Yield Curve?

  • A yield curve is a graphical representation of the yield earned from bonds of different maturity periods.
  • Each bond has a fixed coupon rate and a varying yield. The coupon rate gets declared against the face value (the initial NAV) of the bond. It remains the same even if the bond price changes.
  • Yield is collective earnings from the various bonds + the coupon rate + the principal amount. Bonds are also traded in the market similar to stocks. Their price goes up and down depending on the demand.
  • When the demand for a bond goes up -> The price goes up -> And the yield goes down.
  • As mentioned above, long-term bonds offer a higher yield than short-term bonds. The yield curve slopes upwards indicating a positive economy.
  • But, when the demand for long-term bonds increases, decreasing the yield, the curve inverts.
  • Consider, for instance, there are two bonds with similar ratings but different maturity periods. Bond-A is a short-term bond with 3 month maturity period. Bond-B is a long-term bond with 10 years maturity period.
  • If Bond-A offers a 6.78% yield and Bond-B offers a 6.01% yield, then the yield curve would invert. 

 

What Are The Different Types of Yield Curves?

1. Normal Yield Curve

As long-term bonds tend to be riskier, investors demand higher yields to compensate for the risk.

In such a case, long-term yields are higher than short-term yields.


2. Inverted Yield Curve

The yield curve becomes negative/inverted when the short-term yield surpasses the long-term yield. This also indicates increased demand for long-term bonds.


3. Flat Yield Curve

A flat yield curve indicates that both long and short-term bonds are performing the same. It could be the foreshadowing of a weak economy. A flat curve could be a transition phase between the normal and the inverted yield curve.


4. Steep Yield Curve

The yield curve goes steep when long-term bonds are offering far higher yields than short-term bonds. This indicates the growing economy.


 

Does an Inverted Yield Curve Always Means an Incoming Recession?

The Yield Curve was able to forecast recession many times in the past. In fact, in the past 50 years, an economic slowdown or a downgrade was seen with the inverted yield curve.

However, it is essential to understand that the yield curve is only an indicator. 

Let’s put it simply.

Economic ups and downs could happen due to many reasons. Inflation, sudden geographical tension, a wave of life-threatening viruses, or anything. While some changes are sudden, some can be analyzed by observing economical patterns.

Having said that, the yield curve will invert if the investors are expecting a possible downfall in the economy. With a fall in inflation, investors will analyze and predict a potential fall in the yield as well.

If the yield for the long-term bond keeps falling further, it could lead to a recession. 

However, an inverted yield curve isn’t the official parameter to predict a recession. It is merely an indicator.

 

What Should Investors Do When The Yield Curve Inverts?

Many investors closely follow the yield curve to align their investments accordingly. Prices of the bonds may fluctuate as the supply/demand dynamic changes.

Here are a few tips for investors-

1. Stay Calm

With the fear of recession around the corner, many investors start to panic. Some may end up selling without considering the possible risk/loss.

In a situation like this, you must stay calm.

The yield curve doesn’t stay inverted forever. The economy eventually catches up. Most importantly, whenever the yield curve inverts, the recession is not an immediate next step.

Investors get enough time to align their investments, which brings us to our next point. 

2. Align Your Investment

It is always advisable to have a diverse portfolio to minimize the risk. You can check where your portfolio stands with our complimentary portfolio analysis tool.

An inverted Yield Curve is one of the situations where outcomes could go either way. To prepare yourself, you may want to align and readjust your investments. 

You can explore other investment avenues that can balance out the risk and returns.

3. Periodic Re-Evaluation Of Asset Allocation

We would recommend re-evaluating your investment portfolio at regular intervals. It gives you an idea of where your profile stands in a changing economy.

There are many investment opportunities that can help you sustain your financial goals.

 

Conclusion

Many investors closely watch the yield curve to adjust their investments amid the possibility of a recession.

However, if the yield curve doesn’t stay inverted for a prolonged time, the economy may not lead to a recession.

Frequently changing yield curves may shed light on a weak economy, but not necessarily a recession. 

We would recommend following the above tips to stay calm and focus on your investment goals. Take actions that will suit your profile.

 You may also like to read- different types of mutual funds.

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Blogs Personal Finance

What Is a Public Provident Fund Account?

A Public Provident Fund account (PPF) is a long-term tax-saving investment scheme that offers a fixed interest rate and tax-exempt returns. It’s a government-backed savings scheme with guaranteed returns.  

PPF account is as famous in Indian households as fixed deposit. Investors, regardless of their risk appetite, can keep aside a certain amount in a PPF account to gradually build wealth.

Some of the common reasons to have a PPF account are:

  • Child’s higher education
  • Buying a family home
  • Weddings or other milestones
  • Building retirement corpus

You can earn stable returns on your PPF account and take advantage of tax benefits under Section 80C. As of FY22, the interest rate on PPF is 7.1%. 

Before creating a PPF account, here are some things you need to know. 

What are the investment rules of the PPF account?

Any Indian resident can open a PPF account in a bank or a post office. You can only have one PPF account but you can transfer it from one bank to the other or to the post office if needed. 

You can also open a PPF account for your children and manage it until they are old enough. 

Once you open an account, you must invest between INR. 500 to INR. 1,50,000 in one financial year. Any amount beyond INR. 1,50,000 won’t be considered for tax savings under Sec 80C. 

Your investment will be locked for 15 full financial years and you will continue to earn compound interest on it. However, you can withdraw a partial amount in intervals of 5 years.

Let’s elaborate some more.

Top 4 Features of Public Provident Fund Account

  1. Investment Amount

You need to invest anywhere between INR. 500 to INR. 1,50,000 in a financial year on a monthly, quarterly, or annual basis as you get up to 12 installments per year. There’s a small penalty if you miss an installment in a financial year. 

  1. Investment Horizon

PPF account has a tenure/lock-in period of 15 full financial years. This means- if you start your account on, let’s say, 1st Oct 2022, your 1st financial year will start from 1st April 2023. 

Yes, you will earn returns on the investment from 1st Oct 2022 to 1st April 2023. But the financial year will begin on 1st April 2023.

You can withdraw a partial amount (50% of the total available balance) only after the completion of 5 years. Until then, the investment will be locked. Though you can claim a loan against your PPF account.

  1. Loan Against PPF Account

Since your amount is locked-in, you can apply for a loan against your PPF account.

There are two rules to claiming the loan:

  • You can only request a loan from the beginning of the 3rd financial year to the end of the 6th financial year. 
  • You will only be eligible for 25% of the amount from your PPF account calculated immediately preceding the year in which you are applying for a loan. 

The interest on this loan will be 1% + the PPF interest rate. If the PPF interest rate is 7.1%, the loan interest rate will be 8.1%.

  1. Tax Benefits on Public Provident Fund Account

PPF investments up to INR. 1,50,000 are eligible for tax benefits under section 80C.

However, if you have any other investment under section 80C, then you may not be able to claim the tax benefit on PPF. 

If PPF is your only investment under Section 80C, then you can take advantage of Exempt-Exempt-Exempt (EEE) i.e. The amount invested in PPF, the interest earned, and the final corpus withdrawn at the time of maturity are all exempt from tax.

What Happens If You Choose To Extend the PPF Account After 15 Years?

After the full 15 financial years, you can either withdraw the full amount or extend the account in blocks of 5 years,

In that case, you will be able to withdraw the balance that was available before the extension was locked. So if you had INR. 30,00,000 after 15 years and you extend the account, you can only withdraw 30L. Any further investment will be locked. Also, you can only make one withdrawal in each financial year.  

Can You Terminate The PPF Account Prematurely?

In case you need emergency funds, there are 2 cases in which you can terminate the account.

  1. For the medical emergency of a life-threatening disease of you or your parents/spouse/children.

  2. For higher education of children.

How to Maximize The returns On Public Provident Fund Account?

There are 2 simple tips that can maximize your PPF account returns. 

  1. Invest at the beginning of the year

If you invest a large amount once a year in your PPF account, we recommend doing it at the beginning of the year (Preferably before the 5th of April). 

Most people invest a large amount at the end of the financial year to get tax benefits. However, the interest on the amount is calculated throughout the year. You can take advantage of maximum interest if you invest when the financial year begins.

  1. Before the 5th of each month

If you are planning to schedule monthly investments, prefer to do it before the 5th of each month. 

The balance considered for calculating interest on the PPF account is calculated on – the balance in your PPF account on the 5th day of the month and the last day of the month – whichever is lower.

For example, if your balance is INR. 2,00,000 and you invest INR. 50,000 on the 6th of a month, you will earn interest only on INR. 2,00,000 and not on INR. 2,50,000. But if you invest that INR. 50,000 before the 5th of that month, then your interest will be calculated on INR. 2,50,000.

Conclusion

Having a PPF account is a disciplined way of building wealth for the future. You can open an account online and keep transferring money into it. 

It’s a secure investment with stable returns and tax benefits. Continue keeping some money aside for the future and forget about it until maturity. By the time of maturity, you will have a large corpus ready.

Don’t forget to invest money in your PPF account either before the 5th of April each year or before the 5th of each month for monthly installments. That way, you will maximize the returns on your investment. 

 

To know more about long-term investments, give VNN Wealth experts a call or write to us. Get all your queries answered with a thorough portfolio analysis. 

Categories
Blogs Mutual Funds

What Are Flexi Cap Mutual Funds?

Flexi cap mutual funds are a new category of equity mutual funds with flexible asset allocation across the market capitalization. These mutual funds give investors the freedom to invest in small, mid, and large-cap stocks without any restrictions.

How is it different from Multi-cap funds? Multi-cap funds have to compulsorily invest at least 25% of assets each in small, mid, and large-cap stocks. Flexi-cap funds have no such restrictions. Fund managers can dynamically allocate assets to growth-positive companies to maximize returns.

Sounds interesting? Let’s find out more about Flexi Cap mutual funds.

What is the Investment Regime in Flexi-Cap Mutual Funds?

SEBI launched the Flexi-cap scheme in 2020 to offer investment flexibility and dynamic asset allocation.

Fund managers have to invest at least 65% of total assets into equities across market capitalization. They can decide the allocation based on their analysis and expertise to lower the risk and boost profits.

Top 5 Advantages of Flexi-cap Mutual Funds

1. Freedom of Investment

Fund managers can invest the principal amount across a wide spectrum of markets. There is no limitation or rules on asset allocation. Flexi-cap funds are required to invest at least 65% into equities. But they have the freedom to distribute that 65% (or more) into any market cap. 

2. Diverse Portfolio

Flexi-cap schemes are a blend of small, mid, and large-cap companies. They can create a diverse portfolio by allocating assets to different sizes and types of companies. 

3. Balanced Risk

Flexi-cap funds deliver favorable returns with balanced risk. While you can explore small-cap funds for higher returns, large-cap funds can safeguard your investment. Mid-caps are moderately risky with decent returns. They collectively create a perfect balance between risk and returns.

4. Shift Investment

Fund Managers can anytime shift assets between small, mid, or large-cap based on market volatility. They can tilt the funds completely towards a specific market capitalization segment or keep it diverse. 

5. Surpassing Inflation

Flexi-cap funds have the potential to defeat inflation in the long run. As you have a dynamic mixture of various market capitalizations, inflation won’t affect your returns as much.

Things to Consider Before Investing in Flexi-Cap Funds

1. Investment Objectives

You must check if their investment goals align with Flexi-cap funds. Even though these funds have various benefits, that doesn’t mean you should invest blindly. Examine the fund’s features, fund manager’s performance, risk, and returns before investing in any mutual funds.

2. Risk

Flexi-cap funds balance the risk with diverse investments but are not risk-free. You may encounter high risk if the fund has allocated the majority of your assets to small-cap companies. Usually, fund houses have an in-house model to periodically balance Flexi-cap funds to minimize risk and maximize returns. Make sure your risk profile has a scope to welcome Flexi-cap funds.

3. Fund Houses and Managers

It is very crucial to know the in-house policies and strategies of fund houses in the case of Flexi-cap funds. The returns you will earn depend on how well fund managers distribute your assets. 

4. Expense Ratio and Exit Load

Fund houses charge a small amount of fee to handle your funds in the form of an expense ratio. Compare the expense ratio of various Flexi-cap funds with respect to returns before investing in them. Exit load is a fee charged at the time of fund redemption. If you hold the investment for a certain period of time, you might not need to pay an exit load. Check the exit load policy of fund houses beforehand.

Tax Implications

Taxation of Flexi-Cap funds is the same as any other equity mutual fund. You will have to pay a 20% tax on Short Term Capital Gains (Investments redeemed before 12 months). 

Long Term Capital Gains (Investment redeemed after 12 months) above INR. 1.25 lakhs are taxed at 12.5%.

Who Should Invest in Flexi-Cap Funds?

Flexi-cap funds are suitable for investors who can take moderate to high risks. It diversifies your portfolio and balances the risk. You can invest in Flexi-cap funds if you can keep an investment horizon of at least 5 years. 

Conclusion

SEBI launched Flexi-cap as an alternative to multi-cap funds. The aim was to offer flexibility to try different investment scenarios without any restrictions.

With Flexi-cap funds, fund managers can explore market capitalization and periodically update asset allocation. There is a decent chance of earning superior risk-adjusted returns if you can take some risk.

You can always take an expert’s opinion before investing in Flexi-cap funds. VNN Wealth experts can help you shortlist funds and create a strong portfolio, so you won’t have to worry. 

Call us or reach out via email. Start building your wealth today!

Also Read-

Large Cap Mutual Funds?

Mid Cap Mutual Funds?

Small Cap Mutual Funds?

Categories
Blogs Investing Basics

What Are Balanced Advantage Funds?

Balanced Advantage Funds (BAF) follow a hybrid/dynamic asset allocation model between equity and debt with no threshold on asset allocation. Fund managers shift your portfolio between equity and debt based on market conditions. This dynamic asset allocation method offers both growth and stability, especially during market ups and downs.

BAFs are one of the best mutual fund schemes to stabilize returns during market volatility. It’s safe to say that BAFs can balance your investment portfolio and here’s everything you need to know about these schemes:

How Do Balanced Advantage Funds Asset Allocation Work?

Depending on market performance, fund managers allocate 65-80% of total assets into equities and 35-20% into debt. The allocation gets periodically rebalanced to minimize the risk and maximize the returns. 

Fund houses usually have an in-house allocation model which could be any one of the below. 

Counter-Cyclic Allocation Model

This model reduces investments in equity and increases debt allocation when the market is high. When the market is low, the investments tilt more towards equities.

Pro-Cyclic Allocation Model

This model follows the market trend and invests more in equity when the market is growing. Fund managers gradually reduce equity holdings when the market is falling.

Some funds use a combination of both methods depending on market conditions.

Top 4 Advantages of Investing in a Balanced Advantage Fund

1. Stable Returns

As BAFs follow a dynamic asset allocation model, the fund has debt allocation to fight equity market volatility. The portfolio will not crumble dramatically even when the equity market is at its lowest. The debt allocation within the fund balances your portfolio as you explore equity opportunities through BAF thereby generating stable returns. 

2. Low Risk

As BAFs are not completely allocated to equities, the risk factor is relatively lower. The exposure to equity and debt is healthy enough to tolerate market volatility and also generates decent returns. 

3. Dynamic Asset Allocation 

Fund managers use market conditions to your benefit as they dynamically allocate assets between debt and equity. Whenever equity instruments deliver superior returns, fund managers may shift some of them towards debt instruments to balance the risk.  

4. Tax Benefits

When calculating tax, BAFs fall under equity funds in India, allowing investors to gain tax benefits. The tax regime is similar to equity funds. Short Term Capital Gains (investments held for <12 months) will be taxed at 20%. Whereas Long Term Capital Gains above 1.25 lakhs (investment held for > 12 months ) will be taxed at 12.5%.  

3 Important Factors to consider when investing in Balanced Advantage Funds

1. Risk Factor

Although BAFs have lower risk, they are not completely risk-free. If the equity allocation is higher, the risk will also be higher due to equity market volatility.

2. Gain/Returns

The gain in BAFs won’t necessarily be as good as pure equity funds when the market boosts. However, the returns on BAF would be better than fixed-income funds. To gain higher returns, it’s best to keep your investment horizon for at least 3 years or more.

3. Investment Horizon

Again, you should only invest in BAFs if you can keep aside a horizon of 3 years or more. BAF may not be an ideal option for investors looking for short-term investments.

Tax Implications

As mentioned above, BAFs are taxed similarly to equity funds. If you redeem your investment before 12 months, it will fall under Short Term Capital Gain (STCG) tax which is flat 15% on capital gains.

And if you redeem your invested money after 12 months, it will fall under Long Term Capital Gain (LTCG) which is 10% on capital gain above INR 1 Lakh. It is recommended to hold these funds for a longer period of time to take advantage of tax benefits and most likely, higher returns. 

Who Should Invest in Balanced Advantage Funds?

BAF is suitable for investors who are seeking equity-like returns but with slightly lesser risk. BAF funds are less riskier than equity funds. Consider investing in BAF if you are comfortable with moderately aggressive investment or if your risk profile is balanced. BAF funds tend to deliver superior returns over a long period of time. We would recommend you keep a wider investment horizon, possibly 3-5+ years. If any one of the above factors matches your goals, you should definitely invest in BAFs. Call VNN Wealth Experts for more guidance.

Conclusion

Balanced Advantage Funds, aka Dynamic Asset Allocation Funds, are perfect to be a part of your long-term financial goals. You get the best of both equity and debt funds with low to moderate risk. Even though these funds are dynamic, fund managers will divide asset allocation as 65-80% into equity instruments and 35-20% into debt instruments. 80-20 allocation is more aggressive and risk-prone. 65-35 allocation can deliver decent returns with lower risk. 

As you know, the equity market is highly volatile. Even if you have a high-risk appetite, you may want to allocate a certain percentage to this category to bring stability to the portfolio during volatile times. To get equity-like returns with balanced risk via debt instruments, consider investing in BAF. The SIP method may further balance the risk instead of lump-sum. 

Read more about the advantages of SIP.

For any further guidance on investment planning and portfolio building, reach out to us anytime.  

Categories
Blogs Personal Finance

Corporate Fixed Deposits: A Smart Investment Choice

What if you can get FD-like security but higher returns? 

Guess what? You absolutely can.

Corporate Fixed Deposits or Company Fixed Deposits offer all the FD features but with superior returns. You can invest in these FDs for a suitable tenure and earn desired returns by the end of the tenure.

Now, you must be wondering, are Corporate FDs safe? How does taxation work? How to invest in a corporate FD? 

You will find answers to all your questions throughout this article. Let’s dive into it.

 

What Are Corporate Fixed Deposits?

Corporate FDs are offered by Financial Companies or Non-Banking Financial Companies (NBFCs) such as Bajaj Finance, Mahindra & Mahindra, HDFC Ltd., etc. These companies raise funds from investors such as yourself and offer returns in exchange. 

You can create an FD with financial companies or NBFCs for a specific tenure with the promised rate of interest. It’s a safer investment option with promised returns.

If you create a cumulative FD, you will earn interest on the amount as well as the previously earned interest. Cumulative FD can exponentially build wealth over the years. 

 

4 Benefits of Investing In Corporate Fixed Deposits

     1. Superior Returns Than Bank FDs

Corporate FDs often deliver 1-2% higher interest rates than Bank FDs.

Here’s an example of various Bank FDs vs Bajaj Finance Corporate FD for a 5-year tenure.

 

FD rates for 5-year tenure as of Nov’22

 

ICICI 

Bank FD

SBI 

Bank FD

HDFC 

Bank FD

Bajaj Finance

Corporate FD

General

6.35%

6.10%

6.50%

7.60%

Senior Citizens

6.85%

6.60%

7%

7.85%

 

 

     2. Guaranteed Returns

If the corporate/NBFC promised 7% returns by the end of tenure, you are guaranteed to receive it.

However, keep in mind that only RBI-approved and higher-ranked Corporate FDs are safe to invest in. RBI has defined a set of rules that a corporation has to follow in order to raise money via FDs. 

     3. Flexible Tenure

Corporate FDs offer a flexible tenure between 1-5 years. You can choose a tenure suitable for your financial goals. However, the interest rate may vary based on the tenure.

The higher the tenure, the higher the interest you will earn. 

     4. Lower Premature Withdrawal Period 

Both Bank and Corporate FDs have atleast 3 months penalty period for premature withdrawal as per RBI guidelines.

Corporate FDs often have a lower penalty period compared to bank FDs. 

 

4 Things to Consider Before Investing In Corporate Fixed Deposits

     1. Associated Risk

Not all corporate FDs are safe, at least not as safe as bank FDs. The performance of the Corporate/NBFC will affect the safety of the deposit.

With bank FDs, you get security on investments up to 1 Lakhs. Corporate FDs may not offer such security.

Invest only in companies that follow RBI guidelines, have public performance reports, and have higher ratings. This brings us to our next point. 

     2. FD Rating

Platforms like CRISIL often give ratings to various financial instruments. Corporate FDs also have ratings associated with them based on risk and performance.

Deposits with AAA to AA ratings are safer to invest in. Anything below the AA rating may have moderate to high risk. 

     3. Company’s Track Record

Before investing in Corporate FDs, you must check the track record of the company. You can either do your own research or seek help from financial advisors.

Financial experts at VNN Wealth are more than happy to help you select the right Corporate FD to invest in.

     4. Inflation Adaptability

Even though corporate FDs offer superior returns, those returns may not beat inflation. It all depends on the tax slab you fall under.

There is a chance that the returns after tax deduction might not align with inflation. In such a case, you must plan your investment horizon accordingly.

 

Taxation on Corporate Fixed Deposits

The interest earned via Corporate FDs comes under your annual income. You will have to pay tax on the interest earned according to your tax slab. So if you fall under the 20% tax slab, you have to pay 20% tax on the profits earned via corporate fixed deposits.

 

Ready To Invest in Company FD? – Here’s How.

Corporate FDs are best suited for investors who are seeking secure and higher returns. You will get at least a 1-2% higher interest rate with a Company Fixed deposit compared to bank FD.

You have the flexibility to choose a suitable tenure. It will not only diversify your portfolio but will act as a cushion to your overall portfolio during bear markets.

Similar to bank FD, you can create a Corporate FD online. You will have to visit the website of the Company/NBFC to apply for the FD.

After completing the application and submitting the KYC details, you will be able to invest in the FD.

You may also like- FD vs Debt Funds: Where to Invest?

 

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Blogs Personal Finance

Can Robo-Advisors survive without human intervention?

What’s the first thing you do when you wake up? You check your phone.

Be it social media, news apps, or finance, every other field is dominated by technology. 

Not only millennials or Gen-Z, almost every generation relies on smartphones for day-to-day activities.

Fintech apps are no surprise in a world where everything is digital. Robo advisory, for instance, allows anyone to automate an investment portfolio. Doesn’t that sound awesome?

 

 

But is it really reliable?

The questions everyone should be asking right now are- 

  1. Can Robo Advisors handle complex investment portfolios? 

  2. Is it safe to trust an AI algorithm that runs on limited data? 

  3. And does Robo Advisory guide you when the market falls and panic strikes?

Let’s answer each question, shall we?

 

What Is a Robo Advisor?

A Robo-advisor is an algorithm-based automated financial advisor that manages investments and provides investment advice with little to no human intervention.

They usually work by asking a series of preset questions such as goals, risk appetite, income, assets, liabilities, etc. through questionnaires to understand investment behavior and accordingly make investment recommendations. 

This software enables buying and selling of assets and the periodic rebalancing of portfolios.

However, in reality, Indian Robo-advisor apps do not depend on self-learning algorithms but instead are quite simplistic wherein a human consultant codes certain algorithms based on pre-set questions and answers, to understand investor behavior.

 

 

Types of Robo Advisors

 1. Simple Robo-Advisors

Simple Robo-advisory asks a set of questions much like a quiz to understand the investment’s risk preference, goals, net worth, liabilities, time horizon, etc. 

These are more like surveys with options to pick from 3-4 different choices of answers and once the investor makes his pick, he’s then recommended certain investment products to invest into. 

Most Indian advisor platforms use this method for providing investment recommendations and according to Indian rules and regulations, one has to initiate transactions on their own.

 

2. Evolved Robo-Advisors

Evolved Robo-advisors focus on artificial intelligence and data learning to provide investment advice. 

These robots basically dig deep into your financial transactions and assess the spending patterns on your credit/debit card as well as banking transactions, rather than focusing on the claims you’ve made by simply picking one of the few available options.

This method helps to fill gaps by having verified information on what you’re spending, any liabilities you may have failed to remember as well as any other patterns related to your decision-making. 

These mathematical algorithms then use this available data to help provide tailor-made solutions for each individual.

They also allow you to permit auto-pilot mode, which enables auto buying and selling of assets on your behalf.

However, the concept of Robo Advisory in its current form i.e. simple Robo advisors is not new to India. These platforms are more Do It Yourself (DIY)/ Digital platforms.

Platforms like ICICI Direct have existed for almost 2 decades now with basic DIY functioning. We personally believe that the current platforms addressing themselves as Robo advisors, is mostly a marketing gimmick, burning private equity money with hardly a new invention at hand.

In fact, even independent human financial advisors use similar digital platforms to manage your portfolio and at the same time let you log in, filter, select, buy/sell and track funds on your own.

The big difference is that there is an experienced human being handling your investments for you using technology versus a call center executive or a sales executive with hardly any experience in wealth management and a pre-written script on the call trying to add the human touch to these Robo advisory platforms.

When there’s an option for both digital and human interactions, why limit your possibilities with Robo advisors?

 

 

Why Are Investors Trusting Human Advisors Over Robo- Advisors?

Being able to achieve financial goals via online platforms sounds enticing. Then why are many investors still reluctant about Robo-Advisors?

A study published on ResearchGate compared the perception of Human vs. Robo advisors. In the study, the respondents were randomly assigned to human advisors (both high/moderate experience) and Robo advisors. 

The data was gathered from respondents based on various parameters and it showed the following results:

  1. The Trust factor of various advisors was measured on a scale of 1-100. Expert Advisors scored 68.14 whereas Novice advisors and Robo advisors scored 61.24 & 52.25  respectively.

  2. Additionally, the Performance Expectancy was measured on a scale of 1-7. Here again, Expert advisors scored 5.39 while Novice advisors and Robo Advisors scored 4.92 & 4.73.

  3. Furthermore, the Intention to Hire was measured on a scale of 1-7. Based on the above findings, it’s no surprise that Expert advisors scored the highest, which is 5.33. Novice advisors and Robo advisors scored 4.98 & 4.81 respectively.

 

Findings:

From the table below, you can see that there’s not much difference between Novice advisors and Robo advisors on the basis of performance expectation, and intention to hire. Yet, respondents preferred Novice advisors over Robo advisors. 

Expert advisors clearly scored the highest due to their knowledge and ability to build trust by maintaining transparency. 

After analyzing data on various factors such as trust, performance expectation, and intention to hire, it is evident that most respondents chose experienced human advisors over Robo advisors.

 

 

(Image Source- researchgate.net)

 

 

Another study released by Vanguard found that many investors prefer human advisors to tackle complex portfolios. Especially when the markets are volatile, panic-struck people craved human connection instead of an algorithm.

The Vanguard Study also revealed that – 93% of investors working with human advisors said they wouldn’t switch to Robo advisors. On the other hand, 88% of Robo-advisor users said they would consider switching to human advisors for comprehensive portfolio analysis.

 

 

 

 

 

(Image Source- Vanguard’s Study on Robo or Human Advisors?)

It’s clear that – Most investors are trusting human advisors more than Robo advisors. 

Robo advisors may be suitable to manage small investments. But when it comes to real market scenarios, most people would rather go with human advisors.

Let’s dig deeper into the topic.

 

Why are Robo Advisors not trusted by many investors?

As an investor, you must be aware of realistic market scenarios. The market can change quite often, thereby creating uncertainty.

Even though Artificial Intelligence can do unbelievable things, there are certain things that Robo-Advisors might not be able to do.

 

1. Flexibility and Personalization

Robo-advisors do claim flexibility and personalization, but there are limitations to it. The algorithm molds itself based on the questionnaire you answer.

That means the recommendations are suitable for investors like you- not you in particular. 

Besides, most investors are not fully aware of their personality when they answer these quizzes. They may get confused and select unsuitable options.

In our experience, while answering such quizzes, most people often select options based on what they want to be and not based on who they really are.

For example, the majority of investors think they have an aggressive risk appetite. They assume that they can invest aggressively without getting intimidated by market volatility, but that’s not always true. Many investors panic-sell when their portfolio falls.

 

2. Robo Advisors Do Not Have Feelings

Why would feelings matter, you may ask?

Well, you are human and you have feelings. You are most likely to panic when the market falls and would need someone to talk to. Someone with experience, who handles market volatility. 

Robo-advisors have no idea what to do when investors push the panic button. They have no feelings, hence, they cannot give real-time advice.

You have no one to manage your investments and your feelings on digital platforms. 

On the contrary, human advisors can identify gaps in your portfolio. Also, They can assist you during market volatility, help you understand your risk profile better, and guide you to make suitable investments.

 

3. Limited Human Intervention

Who would you rather call? An experienced human advisor or a sales executive with limited knowledge? 

Some Robo-advisors have the option to talk to sales executives or communicate with a chatbot. Both options, even though convenient, aren’t logical.

A sales rep or a chatbot cannot give you ‘real’ advice. They are following a script given to them. So while they may have answers to your basic questions, they cannot tackle complex portfolios.

There’s very limited human intervention, which can endanger your financial goals.

 

4. Algorithm Bias

Robo-Advisor algorithms only follow implicit values provided to them. It’s a piece of code designed after gathering limited and in some cases, biased data.

There are many reasons why an algorithm might reflect biased responses. Social agendas, financial revenue-sharing schemes (kickbacks), conflicts of interest, and many more.

Basically, the algorithm will only respond in a way it has been trained to respond. 

The bottom line is Robo-advisors can kickstart your investment portfolio. You can create a simple portfolio with a small amount of investment within a few clicks. But when your investment portfolio grows and risk profiles expand (which is inevitable), these digital platforms cannot guide you any further. That’s why most investors even today, seek professional financial advice from humans, most of whom, are anyway equipped with digital platforms to enable ease of transaction.

 

Why Should You Choose Human Advisory Services?

1. In-Person Interactions

The major difference between Robo Advisory and Human Advisory is the conversation. Sure, Robo advisors listen to you too, but to a certain extent.

When you seek answers to complex financial queries, only human advisors can help you.

Human advisors can align your portfolio with your long-term financial goals. They can talk to you whenever you want any financial advice.

 

2. Sensible Recommendations and Credible Results

No advisor- neither human nor robot, can guarantee higher outcomes. In fact, they are not supposed to create an illusion of higher returns when it is clearly uncertain.

Nevertheless, human advisors can give you sensible recommendations which can deliver credible results.

For example, we believe that the stock market follows the economy. So, in the long run, as the economy grows, so will your investments, irrespective of everyday market volatility. All you have to do is wait, have patience, and not panic-sell anything. 

These and more such recommendations may not be possible with Robo-advisors who may recommend a sell call in a falling market, when a stop-loss is triggered based on the algorithmic code. Thus, making you book a loss, which may have been avoided if you would have stayed invested.

 

3. Trust and Transparency

How much would you trust a predefined algorithm? At some point, it ought to deliver inconsistent results thereby losing your trust.

You don’t know what’s going on at the backend of Robo advisors. There’s no transparency. 

Human advisors have nothing to hide from you. They can analyze your portfolio in front of you. They can pinpoint gaps and assess risk profiles. At the end of the day, you trust a person who talked to YOU about YOUR portfolio.

If you have any financial queries about your investment portfolio, VNN Experts are just a call away. Give us a call at +91 8408020995 to plan long-term financial goals.

 

 

Key Takeaway

If you are a new investor and would like to kickstart your investment portfolio, Robo-advisory might seem like an easy choice. However, relying completely on the algorithm will not help you achieve your financial goals.

There will come a time when Robo-advisors won’t address all of your questions. There’s a gap between what an algorithm can do, what’s really happening in the market, and your evolving risk appetite, which requires frequent portfolio reviews.

That’s why the data in the studies above show that many investors prefer to communicate with Human Advisors. 

Human advisors can offer you suitable recommendations. You can communicate with them effortlessly and seek advice that aligns with your long-term goals. 

You may want to read these 6 tips before choosing the right financial advisor for you.

Now, if you already have signed up for Robo-advisory, do not worry. You still have the opportunity to seek professional advice. 

At VNN Wealth, we offer a thorough analysis of your investment portfolio and risk profile and help you set financial goals. Give us a call or send us an email whenever you are ready to take your investments to the next level.

 
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Blogs Mutual Funds

What Are Small Cap Mutual Funds?

Small cap mutual funds are the type of equity mutual funds that invest the majority of assets into small-cap companies. Companies from 250 and above rank on market capitalization fall under small-cap. These are relatively new companies trying to grow rapidly. 

Compared to large-cap and mid-cap, small-cap companies are rather unstable and riskier to invest in. But small-cap funds may offer you higher returns than any other equity funds.

If your portfolio can take up some risk, and if you prefer returns over stability, small-cap funds are for you. Before you invest, below are some things that you need to know about small-cap equity mutual funds.

What is the Investment Regime in Small-Cap Mutual Funds?

As per the quarterly released market capitalization chart by AMFI (The Association of Mutual Funds in India), small-cap fund companies are ranked 250 and above. Fund houses follow SEBI’s guidelines to allocate at least 65% of total assets to small-cap companies. Fund managers analyze the market to decide whether to allocate remaining assets into large-cap, mid-cap, or other equity funds.

Top 4 Advantages of Small-Cap Mutual Funds

1. Possibility Of Higher Returns

As small-cap companies are in the process of expansion and diversification, there’s great potential for growth.

These companies, even though slightly unstable or riskier, may offer higher returns.

2. Stocks at a Reasonable Price

Some of the small-cap companies are underrecognized. The stocks of these companies have high growth potential. Investors can buy units at a reasonable price and earn a superior risk-adjusted return over the years.

3. Diversification

Small-cap funds can diversify your investment portfolio if you are willing to take some risk. Investors who have an appetite for risk and can trade off stability will benefit from small-cap funds. These funds have the scope to outperform large or mid-cap funds, thereby generating alpha in your portfolio.

4. Possibility of a Merger or an Acquisition

 It is possible that a well-performing small-cap company will get merged/acquired by a larger company. A merger or acquisition can boost the value of a small-cap company. This opportunity may deliver more than expected returns.

4 Important Points to Consider Before Investing in Small-Cap Mutual Funds

1. High Risk

Small-cap companies may or may not perform well. There is also a chance of these companies shutting down or going into financial ruin. Invest in small-cap funds only if you are aware of the higher risk factor associated with them.

2. High Volatility

Small-cap funds can boost up overnight or can go down drastically. The fluctuations in price range can be rapid, making these funds highly volatile. To stabilize your returns and minimize risk, we recommend starting a SIP with small-cap funds. SIP may safeguard your returns during market ups and downs. 

3. Lack of Transparency 

Small-cap companies may or may not publish information about their performance. As an investor, you cannot get enough information about the small-cap company compared to large or mid-cap. In most cases, fund managers do the research to shortlist small-cap companies for the funds. But you might not receive these updates, which creates a lack of transparency. 

4. Expense Ratio

Some fund houses may charge higher expense ratios to handle highly volatile small-cap funds in your favor. Compare the expense ratio with the net returns you might earn. Note that a higher expense ratio can be beneficial in terms of total returns. In some cases, even if the expense ratio is high, the returns are also higher. When comparing the expense ratio, mapping it with returns will give you a better idea of the scheme.

Taxation In Small-Cap Funds

The taxation on capital gains earned after redeeming the small-cap funds is taxed similarly to all equity funds. It is based on how long the investment was held.  

Investors have to pay a 20% tax on Short Term Capital Gains (investments held for less than 12 months). And only 12.5% on Long Term Capital Gains above INR 1.25 lakhs (investment held for more than a year).

Who Should Invest in Small-Cap Funds?

You should only invest in small-cap funds if you have a high-risk appetite and at least 5 years of the investment horizon. Your portfolio must be able to tolerate small-cap volatility without causing severe losses. Allocation to small-cap funds should ideally be restricted to 10% of your overall equity portfolio. 

Conclusion

Small-cap funds diversify your portfolio by allocating assets to growing small-cap companies. Investors are most likely to receive higher returns with small-cap funds. We would recommend only 8-10% of your total investment in small-cap funds. Large-cap funds are supposed to be the core part of your investment whereas small-cap can be the satellite. 

Note: Core and Satellite is a portfolio construction strategy to balance risk, returns, liability and taxation. The core investments are passively managed and are safer. Satellite investments are actively managed and may have slight risk associated with them.

To understand more about equity funds and how to construct your investment portfolio, get in touch with VNN Wealth Experts.

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Blogs Mutual Funds

What Are Mid Cap Mutual Funds?

Mid cap mutual funds are equity funds that invest most of your invested amount into mid-cap companies. These companies are ranked from 101 to 250 on the market capitalization chart and have a decent track record. These funds could be slightly riskier than large-cap but have the potential to deliver better returns.

Here’s what to expect from Mid cap mutual funds.

What Is The Investment Regime in Mid Cap Mutual Funds?

As mentioned above, Mid-cap companies are ranked from 101 to 250 on the market capitalization chart released quarterly by AMFI (The Association of Mutual Funds in India).

According to SEBI (Securities and Exchange Board of India) guidelines, these mutual fund schemes invest 65% of total assets into mid cap companies. The remaining assets can be allocated to large-cap or small-cap companies. Fund managers decide the allocation to maximize returns.

Top 5 Advantages of Mid Cap Funds

1. Significant Wealth Creation

Mid-cap companies may become large-cap companies in the future. With decent performance, lower risk than small-cap funds, and a high growth factor, you can expect handsome returns. If you hold your investment for 5 to 7 years or more, mid-cap mutual funds can grow your wealth significantly.

2. Diverse Investments

Equity mutual fund schemes allocate your invested amount to various companies. You will have stocks of diverse mid-cap companies from various sectors. 

3. Moderate Risk

These funds might be riskier than large-cap but are less risky than small-cap. Investors with an aggressive risk appetite can certainly consider mid-cap mutual funds. 

4. Liquidity

Equity mutual funds have no lock-in period. You can redeem your investment from mid-cap mutual funds whenever you want. But it is recommended to keep the investment for more than a year for tax benefits and even longer for better returns.

5. Low Investment Amount

You can start investing in mid-cap mutual funds via SIP with only INR 500-1000 per month. Equity mutual funds do not require a higher lump sum amount. You can always invest more when you have more money.

4 Important points to Consider Before Investing 

1. Long-term Investment Goals

Always consider your investment objectives and long-term goals before investing in any mutual funds. It’s important to check whether the fund’s objectives match your investment portfolio.

2. Risk Tolerance

Mid-cap equity funds are riskier than large cap. Even though the fluctuations might not affect the performance over a long period of time, it’s always better to evaluate your risk profile.  

Contact VNN Wealth Experts to get insights on your risk profile.

3. Returns and Investment Period

Mid-cap funds can deliver better returns if you hold the investment for 5-7 years or more. Short-term returns might not be consistent. So if you have a goal in mind, make sure to align the investment period to earn the desired returns.

4. Expense Ratio 

The expense ratio is nothing but a fee you have to pay to fund houses to handle your assets. Before investing in mid-cap funds, study and compare the expense ratio.  

Note-Higher expense ratio is not always bad. Compare the scheme performance, fund manager’s track record, and expense ratio. Many investors are willing to pay a higher expense ratio if the returns are superior.

Tax Implications

Like any other equity funds, Mid cap funds are taxed on Short Term Capital Gains (less than 12 months) and Long Term Capital Gains (more than a year).

Short Term Capital Gains are taxed at 20%. And Long Term Capital Gains are taxed at 12.5% above INR 1.25 lakhs.

Who Should Invest in Mid Cap Funds?

As mentioned above, Mid-cap funds are moderately risky. You can invest in these schemes if you can take moderately high risk. Investors who won’t panic-sell when the market falls can consider adding mid-cap funds to their portfolio. Keep in mind that you may want to hold your investment for 5 years or more to achieve desired returns.

Conclusion

Mid-cap mutual funds can be slightly risky, but you have an opportunity to earn superior risk-adjusted returns. As we always say at VNN Wealth, equity funds follow the trend of the economy over the long term.

Not sure where your portfolio stands and what your risk profile looks like? VNN Wealth experts can help you plan your investments better. We are just a call or an email away.

Also read-

Top 5 Benefits of SIP

Large Cap Mutual Funds: Basics, Advantages, Taxation, & More

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