I’m always surprised by how often people wrongly plan for their short-term financial goals. 

I recently met someone who invested in the Quant Small-Cap Fund. Great for the long-term, I encouraged, until they mentioned it was for buying a car within a year! I couldn’t help but sigh. 

Out of curiosity, I talked to a bunch of other people regarding their short-term financial goals. Turned out, many of them are investing in high-risk instruments for their short-term goals. 

If there’s one thing my financial journey has taught me- it’s that every goal needs a timeline. And every timeline has a suitable investment option.

So in this blog, I’m particularly focusing on smart investment planning for short term goals. We’ll talk about how to plan your short-term goals, what options to choose, and how to optimize your portfolio. 

Let’s get started…

What are Short-Term Goals?

Any goal you aim to achieve within 3 years is a short term financial goal. It could range from a couple of months to a couple of years. 

For example,

Goal	Timeline
New phone	1 month
Going on a vacation	2 to 3 months
Buying a car	3 to 6 months
Home renovation	1 year
Child’s education fees	1.5 to 2 years
Down Pay for a new home	3 years

To optimize it further, assign priorities to your goals. For instance, your child’s education fees are more important than home renovation. Or maybe buying a car can wait until you renovate your home. It’s up to you.

Since these goals have a shorter timeline, your investments need to be liquid and low-risk. Which brings us to the next, rather important, point…

Why Avoid Equity Mutual Funds for Short-Term Goals

As I talk to investors from different age groups every day, I have noticed a common misconception. They think equity mutual funds offer quick growth. This thought process comes from the bull run they noticed a couple of years ago. They’ve probably experienced some quick wins.

However, equity mutual funds can be highly volatile and risky for short term goals. The time horizon is simply too short for these funds to recover from potential losses. 

Most people are unaware that every mutual fund category has an ideal time horizon. It’s always mentioned in the fund’s factsheet. 

Here’s an example of the ICICI Prudential Bluechip Fund. As you can see in the highlighted segment, the indicative investment horizon is 5 years and above. 

If you can’t find the ideal time horizon on a factsheet, here’s a general rule:

Goal Timeline	Mutual Fund Category
0 to 3 years	Debt Mutual Funds / Hybrid Funds
3 to 5 years	Large Cap Mutual Funds
5 to 7 years	Mid Cap Mutual Funds
7+ Years	Small Cap Funds

Mutual Funds for Short-Term Financial Goals

For short-term goals, you should ideally explore debt funds or hybrid funds; NOT pure equity funds. 

Debt funds specifically have categories based on duration profiles ranging between 1 day to 7+ years. Common underlying assets in debt funds are Treasury Bills, government bonds, corporate bonds, certificates of deposit, etc. These assets are not as volatile as stocks in equity funds. They offer predictable annual returns and are less risky. Most importantly, these funds have the potential to deliver superior returns compared to savings accounts or FDs. 

Hybrid funds are a combination of equity, debt, gold, and international equity. These funds are slightly riskier than debt funds but less riskier than pure equity funds. Hybrid funds can cater to your short-term goal with a 3-year timeline. 

Factors to Consider to Choose Investment Options for Short-Term Financial Goals

1. Principal Protection

Every investment product carries a certain amount of risk. You have to choose the ones that ensure capital protection. Pure equity funds can be extremely risky over a short horizon. You might end up losing money. Debt funds, on the other hand, carry low risk on capital. 

2. Liquidity

Liquidity is extremely important as you’ll be withdrawing money in a short timeline. While mutual funds don’t have a lock-in period, they certainly have an ideal investment horizon. As shown above, pure equity funds usually demand 5+ years to recover from potential losses. Plus, it is ideal to stay invested for a longer horizon to benefit from compounding. 

Debt funds are clear winners when it comes to liquidity. The ideal investment horizon is usually much smaller for debt funds based on the category. 

3. Somewhat Predictable Returns

You cannot predict the outcome of equity mutual funds, especially in the short term. You might look at the past performance and think, this seems promising. However, past performance does not guarantee future returns. It all depends on the market conditions. The chances of the market performing in your favor in the short horizon are very slim. 

On the flip side, debt funds at least deliver predictable returns. It depends on the interest rate cycle. So, the interest rate might affect returns on debt funds, but it also holds true for FDs, savings accounts, etc.  In fact, debt funds often outperform FDs, and Savings accounts for a similar horizon. 

Having said that, let’s explore some mutual funds for your short-term goals.

Best Investment Options for Short-Term Financial Goals

1. Liquid Funds 

Liquid funds invest in securities maturing between 7 to 91 days, which means, you can withdraw your money anytime you need. 

Here are some of the examples of liquid funds:

1. Bandhan Liquid Fund

2. Franklin India Liquid Fund

3. Quant Liquid Fund

Tip: Liquid funds are also suitable for investing a lumpsum amount for a few months and starting an STP (Systematic Transfer Plan) afterward into an equity fund of your choice. Read more about STP here. 

2. Ultra-Short Duration Funds

Ultra short-duration funds invest in instruments that mature within 3 to 6 months. These are moderate to low-risk funds that often deliver better returns than liquid funds. 

Below are some examples of ultra-short duration funds you can explore:

1. Aditya BSL Savings Fund

2. Bandhan Ultra Short Term Fund

3. Mirae Asset Ultra Short Duration Fund

3. Low Duration Funds 

Low duration funds hold underlying instruments with 6 to 12 months of maturity period. With relatively lower risk, these funds deliver decent returns over a year.  

Examples of the low duration funds:

1. ICICI Prudential Savings Fund

2. Axis Treasury Advantage Fund

⁠3. UTI Low Duration Fund

4. Money Market Funds 

Money market funds are ideal for your financial goals with 1 to 1.5 years of horizon. These funds invest in securities maturing within a year.

Some examples of money market funds:

1. Nippon India Money Market Fund

2. Axis Money Market Fund

3. TATA Money Market Fund

5. Hybrid Funds

As mentioned above, hybrid funds are ideal for short-term goals with a 3-year horizon. This category includes Balanced Advantage Funds, Multi-Asset Funds, Dynamic Asset Allocation Funds, Equity Savings Funds, etc. The funds invest in stocks, bonds, gold, and international equity, depending on the fund’s subcategory and objectives. 

Unlike pure equity, these funds are moderately risky and cater to your short to medium term goals. And the allocation in various asset classes offers instant diversification. 

Taxation

Whenever I mention debt funds to investors, I get two kinds of responses. One- they’re not aware of these funds. Two- they’re aware of the debt funds taxation and aren’t convinced. 

Yes, taxation is absolutely an important factor in your financial goals. You should calculate post-tax returns for all your investments.

But, since we’re talking about debt funds for your short term goals, let’s clear all your doubts.

As per the taxation rule set in April 2023, both short and long term gains on debt funds are taxed as per the investor’s tax slab. Ever since this new rule, investors began turning their backs on debt funds.

I get it. Previous taxation rules were much better but that’s not the case anymore. So then why do debt funds still make sense?

For these reasons:

1. Interest earned on your savings account, FDs are also taxed as per your tax slab. 

2. Debt funds have the potential to deliver 1 to 2% extra returns, which means, you earn better post-tax returns.

3. Plus, if you keep your money idle in your savings account, you might end up spending it on something unplanned. On the other hand, redemption from debt funds takes up to 24 hours to land in your account. So debt fund withdrawals are not as swift as the savings account, protecting your capital from your spending habits.

4. And, you can invest for the timeline suitable for you. 

Read more about FD vs Debt Funds. 

Steps to Plan and Achieve Short-Term Financial Goals

Here’s how you should plan your short-term goals:

1. Define Goals

Note down all the financial goals you want to achieve in a year or two. Assign priorities and timelines to each of them. This gives you a clear picture to invest accordingly. 

2. Assess your risk appetite

Many investors skip this step, but knowing your risk appetite is important. Take the risk profiling quiz to understand your risk tolerance. This step helps you plan your short, medium, and long term goals.

3. Choose the right investment product

Invest as per the timeline of your goals. Equity funds can cater to your long term goals. Debt and hybrid funds are suitable for your short-term goals. 

4. Review your overall portfolio

Your current investments also need to be evaluated against your new investments. That way, you can optimize your entire portfolio and generate superior post-tax returns. Regular portfolio review also helps you realign your investments as per your ever-changing financial situation, goals, and risk appetite. 

Conclusion

Short-term financial goals are often mismanaged. People either invest in the wrong instruments or don’t bother investing at all. However, short-term goals are equally important. With the right mutual fund categories, you can streamline your finances. 

Don’t make the mistake of investing in high-risk avenues for the short term. Instead of chasing quick wins, focus on liquidity, capital protection, and risk-adjusted returns. Assign priorities to your goals, assess the timeline, and invest wisely. 

Ready to Invest?

If you need help planning your financial goals, get in touch with VNN Wealth, a widely trusted wealth management firm in Pune. Our experts will review your portfolio, and assist you in choosing the funds and investing. Explore our products for more information. 

Did you know- Over 60% of civil cases in India are related to land/property disputes? Reason – lack of estate planning.

Estate planning is one of the crucial pillars of your financial plan. It sets your financial affairs in order, ensures tax efficiency, and offers financial security for your loved ones.

Yet, people often ignore or delay it. Many think estate planning is only for the rich when in fact, it is essential for everyone.

And if you think it’s a lengthy process- it would probably demand less of your time than planning for a vacation or deciding which movie to watch or where to eat.

So, dedicate some time to an estate plan if you don’t want your legacy to go to waste.

Your planning starts here! In this blog, we will shed light on what is estate planning and various methods in India to efficiently handover your legacy.

What is Estate Planning?

An estate plan is a process of distributing a person’s assets such as property, savings, and personal belongings among his/her legal heirs after the person’s incapacity or demise. It’s a legal procedure to ensure a fair legacy transfer to the successors.

There are two ways to create an estate plan based on the complexity of your financial situation.

1. Drafting a Will
2. Creating a Trust

We will discuss both methods in detail.

But before that…

What Happens If You Don’t Do Estate Planning in India?

If you don’t create an estate plan, your heirs will inherit your property based on the applicable succession law.

Each succession law has defined rules about your legal and alive heirs. While these laws are created to ensure the seamless transfer of your legacy, they may not align with your preferences.

Therefore, to ensure a proper legacy handover as per your wishes, you ought to talk to your financial advisor to create an estate plan.

If you don’t have a financial advisor, you can get in touch with VNN Wealth. Our experts are happy to assist you.

Why Should You Create an Estate Plan?

To Financially Protect Your Family

Estate and succession planning isn’t only about transferring your assets to your heirs. It also includes establishing guardianship for your children (minors or children with special needs), ensuring your spouse/dependents will continue to have financial support as per your wishes.

To Minimize Family Disputes

Family disagreements are bound to happen without a predefined estate plan. The legal challenges may lead to long court battles and broken families. With a well-crafted will, you can pass on your assets as per your wishes, avoiding family conflicts.

Tax-efficient Wealth Transfer

If you’ve accumulated substantial wealth over the years, you’ll have to consider tax liability. An estate plan can offer a tax-efficient approach to transferring your assets to your loved ones. Your wealth manager can assist you in minimizing your taxes.

To Preserve Your Wealth

There are thousands of crores of assets lying unclaimed in India due to heirs not being aware of it. An estate plan will not let your assets go to waste. Set clear instructions and ensure your wealth is preserved for your family’s financial well-being.

How to Safeguard Your Financial Assets?

Joint Account

Creating a joint account with your heir while you are alive helps them understand and control your assets. The same joint account can be used to create FDs, invest in mutual funds, etc. After the demise of the primary account controlee, survivors will have to submit a death certificate to get complete control over the account.

Nominations

People confuse nomination with inheritance as everyone often adds their legal heirs as nominees. The nominee is not necessarily a legal heir. The nominee is only responsible for ensuring that your assets reach your legal heirs. You can add nominations to all your assets and change them anytime. While you can add your legal heirs as your nominee, it is recommended to add a trustworthy nominee who can take care of the handover after you.

Power of Attorney

Power of Attorney, or POA, is a legal document that gives an agent aka attorney-in-fact the authority to act on your behalf. The attorney-in-fact can make decisions regarding your medical care, finances, property, etc. The POA plays an important role in case of your absence, unavailability, or incapacity.

Married Women’s Property Act

When you buy term insurance, you aim to protect your wife and children financially. But, simply purchasing the insurance and adding nominees doesn’t guarantee financial security for your wife and children. The insurance payout could go to people you owe money to.

The solution is to purchase the term/life insurance under the MWP Act (1874). The MWP Act legally protects the insurance payout from any creditors or family members. It ensures the money goes to your wife/children. Even you, the policyholder, cannot cancel the policy without obtaining consent from the beneficiaries i.e. your wife/children. This method is ideal to protect your family especially if you have significant debt to repay.

Now, let’s unwind the methods of estate planning.

2 Methods for Estate Planning in India

Drafting a Will

A will is a legal document defining how you wish your property/assets to be distributed after your demise. It also includes clear instructions on guardianship of your children and financial security for your spouse.

You can also create a living will to outline your preferences for medical treatment in circumstances where you may not be able to convey your wishes. This includes decisions about treatments, life support, and critical care if required. A joint will is also an option where two people, usually married, create and sign a single will.

A will is created when you (the testator) are alive and can be changed any number of times. But it will only be disclosed after the testator’s demise.

Going through a probate process is mandatory for the execution of a will. It’s a court-supervised process to validate the will, settle debts, and distribute the remaining assets to the beneficiaries.

Creating a Trust

A trust is a legal arrangement in which you (the settlor) can transfer your assets to a trustee to manage those assets for the benefit of your beneficiaries. A trustee can be a person you have confidence in or an entity. Trusts are private, hence, the probate process is not required.

In India, settlors must register the trust deed under the Indian Trusts Act, 1882. It has clear instructions for the trustee to distribute the assets as per the settlor’s wish.

Appointing a trustworthy individual or an entity as your trustee is important. Their responsibilities must clearly be defined in a deed to avoid conflicts.

There are various types of trusts:

Public Trust: Created for a large group or general public. Eg: Charitable institutions, Non-profit NGOs.
Private Trust: Created for a closed group of beneficiaries such as families.
Living Trust: Created during the lifetime of a person.
Testamentary Trust: Indicates transfer of estate after the person’s demise.
Revocable Trust: Is changeable. It can be amended or terminated as per the settlor’s wishes during their lifespan.
Irrevocable Trust: Cannot be revoked after the person transfers his/her assets to the trustee.

The type of trust applicable to you depends upon your financial situation, the types and complexity of the assets.

Will Vs Trust: What to Choose?

Who Should Create a Will?

A will is ideal for people with a relatively simple estate who want to distribute their assets according to their wishes. It’s a good option if you don’t mind the probate process and are looking for a cost-effective way to financially protect your family.

Who Should Create a Trust?

A trust is better suited for people with complex and large estate. It’s ideal for those who want to provide for their family under specific conditions, take care of minor children or children with special needs, and keep their estate plan private. Trusts also offer protection from creditors and potential tax benefits.

How to Prepare Your Heirs to Receive an Inheritance?

Discussing your estate plan with your heirs depends on your family dynamics. It also depends on how complex your financial affairs are. Many individuals prefer to keep their estate plan private until the right time to disclose it.

Here are certain things you can do to ensure your heirs are ready to receive an inheritance:

Financial Awareness

Your children/heirs may use your inheritance irresponsibly if they’re not financially aware. To preserve your legacy and make it last long, teach your children about savings, taxes, investments, properties, etc. Financial literacy is important if your successors are going to receive significant wealth.

Open Communication

Communicate with your family to know their preferences and opinions. Share your goals and plans with them. Make sure you and your family are on the same page. It can help you create a better estate plan.

Discuss Roles and Responsibilities

If you’re choosing one of your heirs as executor, trustee, nominee, or a power of attorney, you may want to discuss their responsibility with them. If you have minor children or a child with special needs, you can assign your family member as their guardian. Provide them with proper instructions. Train them if required and ensure they know their role.

Address Sensitive Issues

Your estate plan may have fair but variable distribution among all your heirs. In such a case, family conflicts may arise. To ensure seamless execution of your estate plan, you can address and acknowledge sensitive issues. Make them understand your decision. Change your plan if their argument (if any) is valid.

Tip: Take your financial advisor’s and lawyer’s opinion.

Final Thoughts

Estate planning is an essential aspect of your financial planning to ensure the smooth transfer of your assets. Whether you opt for a will or a trust, it’s crucial to make informed decisions based on the complexity of your estate and your family’s needs.

If you don’t create an estate plan, your estate will be distributed as per the succession law applicable to you. The law does not take your wishes into account. Therefore, everyone should have an estate plan.

You can draft a will or create a trust as per your preferences, prepare your heirs to receive an inheritance, and have open communication with your family before making your decision.

For further assistance, get in touch with VNN Wealth. Our experts will assist you with a proper financial and estate plan. Book your appointment today!

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Market timing risk is the biggest fear of every investor, especially while investing a large amount. No one can predict a market crash and the time it takes to recover. The anxiety of a potential loss is the reason many investors hesitate to invest a lump sum. That’s where a Systematic Transfer Plan comes into the picture.

Systematic Transfer Plan (STP) is a way to strategically invest and distribute your lump sum amount in mutual funds. In this blog, we will learn what an STP is, how it works, and how to utilize it to mitigate risk.

What is STP and How Does it Work?

A systematic Transfer Plan is an investment strategy that lets you systematically transfer funds from one mutual fund scheme to another mutual fund scheme. You can invest your lump sum amount in a source fund and periodically transfer it into the target fund(s) in installments. The source fund is usually a debt fund (preferably liquid fund). The target fund(s) can be equity, debt, or a hybrid based on your risk appetite.

Once you park your money in a liquid fund, you can decide the amount and frequency of the installments toward the target fund. Please note that both source and target funds have to be from the same fund house. For example, your source fund can be SBI Liquid Fund and your target fund can be SBI Bluechip Fund.

Types of Systematic Transfer Plan (STP)

Fixed STP: A fixed installment amount decided by the investor to be transferred from the source fund to the target fund at regular intervals (eg: monthly). This method provides a steady and predictable transfer of funds, helping to average out the cost of investment in the target fund.

Flexible STP: In this method, you can change the installment amount as per your preferences. This provides greater flexibility in managing investments, as the transfer amount can be adjusted to take advantage of market opportunities or to respond to changing financial goals.

Capital STP: Instead of transferring the principal, this method transfers the capital gains earned from the market appreciation of the source fund to the target fund, keeping the capital intact

In order to mitigate the market timing risk and achieve a disciplined investment strategy, a fixed STP is ideal.

Benefits of a Systematic Transfer Plan

Risk Management

STP balances out market timing risk by distributing your investments in installments over a specific period. That way, even if you invest a lump sum, you don’t have to worry about investing at the market peak and volatility affecting your entire corpus.

Rupee Cost Averaging

Rupee cost averaging helps in averaging out the purchasing cost of your investment. Let’s say you’re investing INR. 10,000 via STP. You will purchase more units of a mutual fund when the unit price is low and fewer units when the unit price is high. That way, your investment amount remains fixed but the number of units that you acquire changes based on the unit price.

For example: Monthly STP Amount- INR. 10,000

Unit Price (Fund NAV)	Units Purchased with INR. 10,000
50	200
60	166.6
65	153.84
62	161.29

Total amount invested in 4 months = INR. 40,000
Total units purchased = 681.73
Average Unit price = 58.67

Ideal Returns

With STP, you earn returns from both the source as well as target funds. A source fund, usually a liquid fund, can offer higher returns than your savings account. The target fund, either equity or balanced, tends to deliver superior returns over a longer horizon.

Flexibility

You have the flexibility to choose the STP amount, frequency, and number of installments based on your preferences. If you wish to change the STP amount, you can stop the existing STP and easily start a new one.

Diverse and Balanced Portfolio

A systematic transfer plan initially parks your money into low-risk instruments, i.e. debt funds. It reduces the impact of market volatility on the principal amount by transferring it into the target fund over a period of time. Therefore, you’re diversifying your investment with a combination of debt fund (low risk) and equity fund (moderate to high risk), and balancing out your portfolio’s risk.

Now let’s answer the question you must be thinking about after reading the STP features.

How is STP Different From SIP?

A systematic transfer plan (STP) shares some features of the systematic investment plan (SIP).

What is SIP?

A systematic investment plan is a method to transfer a certain amount every month from your savings account to the mutual fund(s) of your choice. You can start SIPs across multiple mutual funds matching your risk profile and financial goals.

Use our SIP calculator to plan your monthly installment to fulfill your goals.

STP vs SIP

In the case of STP, each installment is a withdrawal from a source fund. You can only transfer funds into the target fund(s) of the same mutual fund house. For example, if you want to invest in Quant Small-Cap Fund via STP, you will first park your lumpsum into Quant liquid fund.

SIP, on the other hand, takes place directly from your savings account. You can auto-schedule SIPs from your preferred bank account to any mutual fund of your choice.

Let’s take an example: You have INR 10,00,000 to invest. You can either keep it in your savings account and start an SIP of INR. 20,000. Or you can deploy it into liquid funds and start an STP of INR. 20,000 for the next 4 years.

Total Investment Amount	Money Kept In	Investment Type	Monthly Investment Amount (for 4 years)	Total Wealth Gained (Interest + Returns on Mutual Funds Avg 12% p.a.)
10,00,000	Savings Account @ 4% interest rate	SIP	20,000	13,06,636
10,00,000	Liquid Fund @ 6.5% interest rate	STP	20,000	13,56,688

Your monthly installment of INR. 20,000 will start compounding with the chosen mutual fund. With STP, you earn more interest and generate more overall returns.

When to Choose STP over SIP?

A systematic transfer plan (STP) is ideal to manage your lump sum amount. For example, a large amount that you receive from a gig, by selling a property, your yearly bonus, from PF after retirement, or an inheritance. You’d rather keep that money safe than invest it all into the market at once.

While you can keep it in a savings account and start SIP, a savings account offers a lower interest rate. Instead, a liquid fund or a short-duration debt fund delivers better post-tax returns.

STP is not an alternative to SIP, it’s a companion to SIP. You can have a combination of SIPs and STPs. STP is better for managing large corpus that needs to be deployed monthly instead of in one go. Whereas SIP handles regular monthly investments.

STP vs Lump Sum Investment

What is Lump Sum Investment?

Lump sum investment is a straightforward technique in which you invest a large amount all at once. Investors usually prefer investing a lump sum to capitalize on a market decline or when the market is steadily growing.

However, volatility in the market can affect that entire amount. Therefore, it is usually better to spread out the investment over time to benefit from rupee cost averaging.

Systematic Transfer Plan	A strategy to systematically transfer your lump sum investment from one mutual fund to another.  Park your lumpsum amount in a source fund (liquid fund or short-duration debt fund) Set up an STP to gradually transfer that amount into target mutual fund(s) in regular installments. Benefit from rupee cost averaging.
Systematic Investment Plan	A disciplined approach to regularly invest in mutual funds of your choice. Invest in various categories of mutual funds that align with your risk appetite, investment horizon, and financial goals. Start a SIP to regularly transfer a specific amount from your savings account to mutual funds.  Benefit from rupee cost averaging.
Lump Sum Investment	Investing a large amount at once to capitalize on market decline or upcoming market rally. Ideal only in specific scenarios.

3 Ideal Scenarios To Use STP for Investing In Mutual Funds

Risk Management During Market Volatility

A systematic transfer plan is ideal to overcome market volatility by spreading out your investment over time. Market movements can be unpredictable. Hence, investing a large amount at once in the market can be risky. STP helps stabilize the risk by gradually transferring funds from the source scheme to the target scheme.

Effectively Managing Surplus Funds

STP comes in handy in managing surplus funds. You can park it in a liquid or short-term debt fund and benefit from higher interest rates than a bank account. These funds can gradually be shifted to an equity-oriented or hybrid fund.

Choosing an ideal target fund depends upon your financial goals and risk appetite. You can take a risk profiling quiz to understand the asset-class concentration suitable for you.

Rebalancing Your Portfolio

STP is often a preferred solution to rebalance your portfolio.
Investors who prefer to maintain a fixed ratio of equity to debt often use STP to periodically rebalance their portfolio. Learn more about asset allocation here.

Investors who are nearing retirement also use STP to gradually shift their equity investments to safer debt instruments.

Factors to Consider Before Starting an STP

Market Conditions

It is crucial to analyze market conditions before investing. However, you shouldn’t try to time the market. It often doesn’t work in anyone’s favor. Instead, get an idea of the current yield of debt funds and choose a suitable target fund matching your financial preferences. Savvy investors prefer to start STPs and SIPs in a sideways or bearish market to acquire units at lower prices. You can reach out to VNN Wealth to strategically plan your STPs.

Taxation and Exit Load

Each installment from the debt fund (source fund) to the equity or equity-oriented fund (target fund) is considered a withdrawal from the debt fund. Therefore, you will have to pay capital gain tax on each STP installment.

You will also have to pay capital gain tax on withdrawals from the target fund. The tax will depend upon when you withdraw funds. A short-term capital gain tax of 20% is applicable for investments redeemed within 12 months of investment. Otherwise, you’ll have to pay a 12.5% capital gain tax above 1.25 lakhs on investments redeemed after 12 months.

Psychological Factors

A lot of investors get anxious with uncertainties in the market. A volatile market can trigger decisions against the growth of your investment. Once you start a systematic transfer plan, do not worry about market volatility. Pausing STPs and SIPs in fear of expensive markets can break the flow of your investment strategy. So don’t let your emotions such as fear or greed come in between your portfolio’s growth.

Who Should Choose a Systematic Transfer Plan (STP)?

1. Mitigating Equity Market Risks: Conservative Investors looking to participate in the equity market while minimizing risk on investment.
2. Strategic Lumpsum Investment: Individuals who have received a lump sum amount (for example, payment from a project, bonus, inheritance, retirement fund, etc) and want to systematically invest it. STP is ideal for freelancers/self-employed individuals or professionals practicing on their own such as doctors, lawyers, etc. Or for salaried professionals who have received a yearly bonus, or sold property.
3. Portfolio Rebalancing: Investors seeking to rebalance their equity and debt exposure but want to do it over a period of time and not in one switch.

How to Create STP?

In order to create an STP, you first have to choose the target fund. The target funds depend upon your risk profile, financial goals, existing investments, etc. An experienced financial advisor will help you choose the right funds to add to your portfolio.

Reach out to VNN Wealth to evaluate your portfolio.

Once you choose the target fund, you have to park your lumpsum in a liquid fund of the same mutual fund house. Afterward, you can gradually transfer the funds into the chosen target fund.

You can easily create an STP with VNN Wealth. Here’s a step-by-step process.

1. Login to the VNN Wealth portal and make sure your KYC process is completed.
2. Navigate to ‘Invest Online BSE’ from the side menu.
3. Locate ‘New Investment’- Choose a liquid fund to park your lump sum. For example, Quant liquid fund. Click on Transact and complete the lump sum investment.
4. Then, locate ‘Additional Transaction’ under the same menu. Find your liquid fund investment and click on transact.
5. Select the transaction type- in this case, STP.
6. Choose your target scheme. For example, Quant Flexi Cap Fund.
7. Select ‘Growth’ as your scheme type.
8. Now set the frequency, amount of STP, and start date (or number of installments).
9. Confirm all the details and place your order.

While you can do this on your own, our team is happy to assist you in setting STP. Contact VNN Wealth for further guidance.

Conclusion

A Systematic Transfer Plan (STP) is a disciplined investment approach. Investors aiming to mitigate market timing risk and optimize their lump sum investments in a volatile market can choose STP. The combination of debt funds and equity funds offers diversification and risk balancing to your existing portfolio. STP offers SIP-like features to the lump sum investment. You can benefit from rupee cost averaging and mitigate market volatility by distributing your investment over time. STP also helps you gradually rebalance your portfolio without having to sell your investments.

So next time you’re wary of investing a lumpsum amount, choose a systematic transfer plan.

Start your STP Today!

Are you seeking an investment avenue to park a lump sum but are scared of market volatility? Book a call back from our experts and seamlessly start your STP today. Explore our products and don’t forget to review your portfolio before investing.

Get an exemption on long-term capital gain tax through 54EC Capital Gain Bonds. Here’s everything you need to know! Selling immovable property such as land or a house brings generous profit; especially after a long duration. However, that profit soon attracts capital gain tax.

Thankfully, there’s an easy way to avoid or lower capital gain tax by investing in 54EC bonds. Let’s find out how.

What are Capital Gain Bonds?

Section 54EC of the IT Act allows taxpayers to avail exemption on the long-term capital gain tax (asset sold after 24 months of purchase). This benefit is only applicable to the capital gains earned through the sale of an immovable property such as land/house/shop. Upon selling the property, taxpayers can reinvest the profit in bonds that fall under section 54EC.

Following bonds are eligible for the exemption on capital gain tax under section 54 EC:

1. Rural Electrification Corporation Limited or REC bonds,
2. National Highway Authority of India or NHAI bonds,
3. Power Finance Corporation Limited or PFC bonds,
4. Indian Railway Finance Corporation Limited or IRFC bonds.

Key Features of 54EC Capital Gain Bonds

1. Capital Gain bonds are backed by the government under the Income Tax Act 1961. These bonds are AAA-rated and, hence, are safe to invest in.
2. 54EC bonds come with INR, 10,000 face value. Investors can invest a minimum of INR. 20,000 (2 bonds) and a maximum of INR. 50,00,000 (500 bonds) in a financial year.
3. With a 5-year lock-in period, these bonds offer a 5.25% interest rate.
4. There is no TDS on the interest earned on capital gain bonds. However, the interest is taxable as per your tax slab.

Note: To avail tax exemption, you must invest in 54EC bonds within 6 months of the sale of immovable property. Otherwise, the investment will not be eligible for the exemption.

How To Calculate LTCG Tax Exemption by Investing in 54EC Bonds?

Let’s take an example to understand how to avail exemption on LTCG after selling an immovable property. You are selling your house at 1 crore after 4 years of purchase. You will have to pay long-term capital gain tax on the profit, unless, you buy a 54EC bond within 6 months.

The sale price of the property: 1,00,00,000
Indexed Cost of Acquisition: 70,00,000
Indexed Cost of Improvement: 2,00,000
Capital Gains: 28,00,000

Since the max limit is 50 lakhs, you can invest the entire 28 lakhs of capital gains in 54EC bonds. That will remove your LTCG tax liability. However, if you invest only, say 20 lakhs, you will have to pay LTCG tax on the remaining 8 lakhs.

Note: 54EC bonds have a 5-year lock-in period. If you sell/redeem it before maturity, the capital gain amount for which you claimed exemption will attract LTCG tax in that financial year.

Who Can Invest in 54EC Bond?

54EC bonds are available to invest for any individuals, Hindu Undivided Families (HUFs), Companies, LLPs, Firms, etc.
How to Invest in 54EC Bonds?
Capital gain bonds are not available on the stock exchange. If you’re interested in purchasing 54EC bonds, please contact us. You can choose to buy these bonds in either demat or physical certificate format, depending on your preference. However, the demat format is easier to track. Simply fill out a form, and experts from our team will reach out to assist you with the process.

Final Words

The 54EC bonds offer a great opportunity to lower your capital gain tax liability. After selling your immovable asset, you can re-invest the capital gains in the 54EC bond within 6 months to benefit from the tax exemption. These bonds are safe and offer a decent 5.25% interest rate.

If you wish to buy bonds, contact VNN Wealth to simplify the purchase procedure.

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

Mutual Fund Myths Busted

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

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

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

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

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

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

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

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

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

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

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

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

Myth #7 Equity Funds are Riskier than Other Funds

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

Final Verdict

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

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:

Mutual Fund Type	Short-Term Capital Gains Tax (STCG)	Long-Term Capital Gains Tax (LTCG)	Tax on Dividend (Income through Mutual Funds)
Non-Equity Funds invested before April 1, 2023	As per the investor’s tax slab	20% (for listed securities) and 10% above INR 1 Lakh (for unlisted securities)	As per the investor’s tax slab
Non-Equity Funds invested on or after April 1, 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.

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. 

Also Read- When is the right time to invest via PMS

Conclusion

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. 

Explore more personal finance tips here. 

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. 

Types of Returns in Mutual Funds

1. Annualized Returns aka CAGR (Compounded Annual Growth Rate)

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]*100 Let’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]*100 Your 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 100 Trailing returns =[(145/100)^(½) – 1] x 100 = 20.41%

You may also like to read- Mutual Fund Factsheet: How to Read The Technical Aspects. 

5. Rolling Returns

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.