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Mutual Funds

ELSS vs ULIP: Choosing the Right Tax-Saving Investment for You

When it comes to tax-efficient investment instruments, ELSS and ULIP are two of the popular options. Both Equity-Linked Saving Schemes and Unit-Linked Insurance Plans offer dual benefits of investment and tax deductions.

However, both products cater to different financial goals. Let’s break down the key features of ELSS and ULIP to help you choose the right tax-saving instrument.

Equity-Linked Saving Scheme (ELSS) is a type of mutual fund that invests at least 80% of the total assets in equity or equity-related instruments. With 3 years of lock-in period. These funds offer tax deductions of up to INR. 1,50,000 under section 80C of the IT Act.

Unit-Linked Insurance Plan (ULIP) is a combination of investment and insurance. Part of your premium goes towards investment and the other part towards insurance. ULIP investments can be either equity-oriented, debt-oriented, or both (balanced funds). You can choose the ULIP investment type based on your financial preferences and risk appetite. With a 5-year lock-in period, the ULIP premium also offers a tax deduction of up to INR. 1,50,000 under section 80C of the Income Tax Act.

ULIP offers life insurance along with an opportunity to grow your money in the market. ELSS, on the other hand, does not offer insurance benefits. ELSS funds and the investment portion of ULIPs are market-linked. Therefore, you get to invest and grow your money in a fund of your choice for the long term.

ELSS mutual funds only have a 3-year lock-in period. It is the shortest among all the tax-saving instruments eligible under section 80C of the IT Act. Please note that if you’re investing in ELSS via SIP, each installment will carry its own lock-in period. You can withdraw the installments that have completed the lock-in.

ULIP, on the other hand, has a 5-year lock-in period, making it less liquid than ELSS.

ULIP allows you to change your investment strategy by switching between ULIP funds. That way, you can realign your investment strategy with your current financial goals.

Since ELSS is a mutual fund, switching strategy is not an option. However, you can redeem the funds after 3 years and invest in a different ELSS fund as per your preferences.

Being equity-oriented, returns on ELSS funds often outperform returns on other tax-saving instruments. These funds are subject to market fluctuations, however, you can expect decent growth in three years of the lock-in period.

In the case of ULIP, part of your investment goes towards life insurance. Therefore, you only get returns on the remaining amount invested in the market. The associated risk depends upon the scheme strategy that you choose.

The overall returns on ELSS and ULIP depend upon the performance of the underlying assets.

ELSS, like any other fund, has charges such as exit load, and expense ratio. Charges on ELSS funds are lower compared to ULIP.

ULIP schemes involve charges such as premium allocation charges, policy administration charges, mortality charges, fund management charges, and surrender charges.

While ELSS charges are always written in the factsheet, ULIP charges may not be as transparent. It is always advised to review the charges behind any investment instrument to understand the cost of investment and how it’ll affect overall returns.

Both schemes offer tax deductions of up to INR. 1,50,000 under section 80C of the IT Act. ULIP additionally offers tax exemption on the return under section 10(10D) of the IT Act.

Redeeming ELSS mutual funds after 3 years of lock-in period attracts Long-term capital gain tax of 10% above INR 1 lakhs.

FeaturesELSSULIP
Investment ObjectiveEquity orientedInsurance + Investment (Equity, or debt, or both)
Lock-In Period3 years5 Years
Flexibility to Switch StrategyNot AvailableAvailable
Return on InvestmentDepends on the performance of the underlying assets, usually more than ULIP as the entire money goes towards equity investments. Depends on the performance of the underlying assets, usually less than ELSS as the portion of the investment goes towards life cover.
ChargesExit load and expense ratio are applicable. Transparent Charges. Premium allocation charges, policy administration charges, mortality charges, fund management charges, and surrender charges are applicable. Lack of transparency in charges.
Tax BenefitsTax deduction of INR. 1,50,000 under section 80C of the IT Act. Tax deduction of INR. 1,50,000 under section 80C of the IT Act. Tax-free return upon maturity under section 10(10D) of the IT Act.

ELSS mutual funds are ideal for investors seeking tax deductions and have moderate to high-risk appetite. These funds invest predominantly in equity instruments. Therefore, the risk could be comparatively higher, but the returns would be superior.

ULIP is ideal for investors who, apart from tax deductions and wealth creation, also want life cover. ULIP scheme divides your investment into life insurance and market investments. You need to factor in the various costs associated with the ULIP before investing

Ultimately, the choice is yours based on your financial goals.

You can always reach out to experts at VNN Wealth for more information. Book your appointment today!

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Mutual Funds

Arbitrage Funds: What Are They and How Do They Work?

Arbitrage funds are hybrid equity-oriented funds that simultaneously buy and sell assets from different markets to book profit. 

Meaning, these funds take advantage of the difference in stock price in two different markets. 

These funds are ideal for investors looking for safer avenues to invest in during volatile markets. 

Read along to find more. 

How Do Arbitrage Funds Work?

Arbitrage funds buy assets from one market at a certain price and sell the same assets at a different market at a higher price. Both ‘Buy’ and ‘Sell’ transactions take place on the same day. 

As per SEBI guidelines, these funds invest at least 65% of total assets into equity and equity-related instruments. 

Let’s take an example:

  • A stock of an XYZ company is trading at INR 500/unit on the Bombay Stock Exchange. 
  • The same stock is trading at INR 515/unit on the Bangalore Stock Exchange. 

There’s an opportunity to earn INR 15/unit profit without any risk. Fund houses will buy the units from the Bombay Stock Exchange and sell them at the Bangalore Stock Exchange. 

Arbitrage funds may also operate within the Spot Market and Futures Market. 

  • Let’s say a stock of an ABC company is trading at INR 1000/unit at the Spot market. Fund houses will buy these stocks and the transaction will settle on the ‘Spot’.
  • The same stock has a value of INR 1020/unit in the Futures market. Fund houses will lock the ‘Sell’ for that price on the same day, which will settle at a future date (a month later.)

After locking the profit, the stock price in both markets has no impact on the returns. In both scenarios, investors will earn the profit they have locked in the beginning. Therefore, these funds are immune to market volatility. 

Factors to Consider Before Investing in Arbitrage Funds

1. Risk vs Returns

Arbitrage funds carry comparatively lower risk than other equity funds. Since the profit will be locked, market volatility would be of no concern. 

In fact, these funds may deliver superior returns during a volatile market. There is a chance that the future price of the asset to be significantly higher during a volatile market. Investors may lock in more profit when the asset prices are aggressively updating. 

However, when markets are flat, the asset price difference might be negligible. The fund may deliver lower returns.

2. Investment Horizon

Arbitrage funds are ideal for 6 months to 2 years of investment horizon. The arbitrage opportunities can deliver superior returns in 6 or more months.

If you want to park a lumpsum amount for a while at a comparatively safer avenue, go with these funds.

Additionally, staying invested for more than 12 months will also be tax-efficient. Plan your investment horizon accordingly.  

3. Fund Manager Strategy

Fund managers are always on the lookout for arbitrage opportunities. They strategically pick up underlying assets to ensure profit.

Additionally, the fund also maintains a small allocation in debt/fixed-income securities to balance the returns. 

Arbitrage opportunities may not be abundant. A fund manager’s strategy makes all the difference in the returns of these funds. 

4. Expense Ratio

The expense ratio is a certain fee you have to pay to the fund house for managing your investments. 

As Arbitrage funds execute trade transactions every day, the expense ratio is often high. You may also be liable for a higher exit load if you redeem your investment between 30 to 60 days. 

Tax Implications on Arbitrage Funds

Arbitrage Funds follow equity taxation rules based on investment duration. 

  • You will have to pay a 15% tax on Short-term Capital Gains (Investments redeemed within 12 months.)
  • Long-term Capital Gains (Investments redeemed after 12 months) are taxed at 10% above 1 lakh.

Who Should Invest in Arbitrage Funds?

Arbitrage funds are ideal for investors wanting superior returns than debt funds, but at the same time lower risk compared to equity funds. 

Investors with higher tax brackets can benefit from better post-tax returns.

For aggressive investors, these funds can bring stability during volatile markets. While you are exploring high-risk equity funds, Arbitrage funds can be your safety net.

It is always advisable to take the opinion of your financial planner before investing in any funds. 

Conclusion

Ever since debt funds taxation changed, the demand for Arbitrage funds has increased.  

These funds can hold your portfolio together during market volatility. Investors with a low-risk appetite can invest in this category. However, note that the returns on these funds may not be as superior as other equity funds. 

If you find these funds appealing, financial advisors at VNN Wealth can help you analyze your portfolio. Give us a call to know if these funds fit your risk profile and financial goals. 

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Mutual Funds

Long Duration Debt Funds: Benefits, Taxation, Who Should Invest?

Long-duration funds invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, etc. The asset allocation of these debt funds maintains a Macaulay duration of 7 years.

These funds are ideal for medium to long duration goals such as buying a house within 5-7 years. 

A worthy competitor to an FD, these funds may deliver superior returns. 

Interested to know more? Read along.

How do Long Duration Funds Work?

As per SEBI guidelines, long-duration funds must invest in debt and money market securities keeping the Macaulay duration to 7 years.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds are riskier than short, low, medium duration debt funds since they carry higher interest rate risk, but offer superior returns in a falling interest rate scenario. 

Benefits of Investing in Long Duration Debt Funds

  • Long-duration debt funds may deliver similar or superior returns compared to FD or other debt funds categories. These funds especially perform well when the interest rates are falling or are stable for a long period.
  • Long duration debt funds can bring stability to your equity portfolio. Equity funds can be risky at times. In such a case, debt funds can balance the overall returns.
  • Debt funds are a great avenue to introduce portfolio diversification. These funds can cater to specific financial goals such as buying a house or funding a child’s education. 

Factors to Consider Before Investing

1. Risk Tolerance

Debt funds come with two types of risks- Interest rate risk and default risk. 

Since these funds hold longer duration bonds, they carry higher interest rate risk compared to shorter duration debt funds. The NAV of the debt fund is inversely proportional to the interest rate. That is, if the rates fall, the NAV goes up, and vice versa. 
Therefore, the returns may drop during rising interest rate scenarios. Holding your investment until maturity can avoid the interest rate risk.

As for the default risk, make sure the underlying bonds in the fund have high credit ratings. Bonds with AA+ credit ratings are safe to invest in. 

2. Expected Returns

Long duration debt funds have the potential to outperform FDs and other debt fund categories. These funds are riskier than short-duration, low duration, medium duration debt funds. However, the returns are also superior.

Both accrued interest income and capital appreciation can contribute towards the overall returns. 

3. Investment Horizon

Long duration funds have an investment horizon of 7+ years. Make sure it aligns with your risk appetite and financial goals. 

Debt funds have 15 categories with variable horizons. Invest in a fund that fits well into your portfolio. 

4. Interest Rate Cycle

It’s important to understand the interest rate cycle currently in the economy and accordingly take an investment call in these funds. As the bond prices decrease with rising interest rates, it’s best to avoid these funds when the interest rates are high.

Tax Implications on Long-Duration Funds

From April 2023, the taxation on debt funds has changed.

Now investors have to pay tax as per their tax slab on both long and short-term capital gains. The indexation benefit on long-term capital gains is no longer applicable.

Find out why debt funds are still reliable after the new tax rules. 

Who Should Invest in Long Duration Funds?

Long duration funds are suitable for savvy investors who understand the interest rate cycle and can tolerate price fluctuations due to interest rate movements. 

Invest in these funds only if you are comfortable with the investment horizon. 

Conclusion

Long duration debt funds can play a crucial role in portfolio diversification and stability. Since the duration would be 7+ years, these funds are prone to changing interest rate scenarios.

It would be wise to evaluate your portfolio to decide your exposure to equity vs. debt funds. Talk to your financial advisor or give VNN Wealth a call to plan your investments. 

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Mutual Funds

Medium to Long Duration Debt Funds: Advantages, Taxation, and More

Medium to Long Duration debt funds invest in debt and money market instruments. The underlying assets in these funds have an average maturity of 4 to 7 years.

These funds can cater to your medium-term financial goals such as- upgrading a car in the next few years, planning a wedding, or a family vacation abroad.

Medium to Long duration funds may deliver superior returns compared to short, low, medium duration funds.

Here’s everything you need to know about these funds.

How do Medium to Long Duration Debt Funds Work?

As per SEBI guidelines, these funds invest in debt and money market instruments keeping the Macaulay Duration to 4-7 years.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have a longer horizon than medium and low duration debt funds. Therefore, the risk could be higher. However, the chances of generating superior returns are also high.

Benefits of Investing in Medium to Long Duration Funds

  • These funds have the potential to outperform fixed deposits of similar tenure. You may also earn better returns compared to medium or low duration debt funds in a falling interest rate market. 
  • Medium to Long Duration debt funds can balance your portfolio by bringing diversification. 
  • You can introduce stability to your equity portfolio by investing in lower-risk avenues such as these debt funds.

Factors to Consider Before Investing in Medium to Long Duration Debt Funds

1. Risk Tolerance

The fluctuations in interest rates are inevitable in 4-7 years of duration. The bond prices will fall during the rising interest rates. However, it will climb back up when the interest rates are falling.

Being patient is the key to fighting the interest rate risk. 

Debt funds may also come across default risk. To avoid it, invest in funds having underlying bonds with high credit ratings. Bonds with AA+ credit ratings are safe to invest in. 

2. Expected Returns

Medium to Long Duration debt funds tend to deliver superior returns than FD of the same tenure. These funds also outperform debt funds with short, low, or medium tenure. 

3. Investment Horizon

You may need to stay invested in these funds for at least 4 years to earn higher returns. Invest only if you are comfortable with 4-7 years of horizon before investing.

Otherwise, you can explore low or medium duration funds for a shorter horizon. Or, long duration funds for a longer horizon. Whichever suits your financial goals. 

Tax Implications on Medium to Long Duration Debt Funds

As per new tax rules from April 2023:

Investors have to pay tax as per their tax slab on both Long-term Capital Gains (investment redeemed after 36 months) and Short-term Capital Gains(Investment redeemed before 36 months).

The old indexation benefit will only be applicable to hybrid funds with more than 35% exposure to equity.

See more here.

Who Should Invest in Medium to Long Duration Debt Funds 

These funds are suitable for investors looking to park their money for 4-7 years. Since debt funds carry lower risk than equity funds, they can bring stability to the portfolio.

Go for these funds if you can accept a slight risk for better returns than fixed deposits. If you have an expense planned within 7 years, these funds can accompany you. 

However, don’t forget to evaluate your risk appetite and portfolio requirements before investing in any funds.

Conclusion

Debt funds have 15 different categories with variable objective and tenure. Medium to Long duration funds make planning financial goals within 7 years quite easier.

You can go with short duration or medium duration funds for a slightly lower horizon. Or long duration funds for 7+ years of financial planning.

Explore all categories of debt funds before planning your investments. Take into account the risks and potential rewards.

If you have any questions, reach out to VNN Wealth advisors for more information. 

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Mutual Funds

Overnight Funds: Advantages and Who Should Invest?

Overnight funds are debt funds that invest in securities maturing in a day. These funds were introduced in 2018 after SEBI reclassified mutual funds.

These open-ended funds are safe, highly liquid, and can be an alternative to your current account.

Overnight funds invest the majority of the assets in:

  • Collateralized Borrowing and Lending Obligation (CBLOs)
  • Reverse Repos
  • Debt instruments with a maturity of one day.

Before we understand who should invest in these funds, let’s explore the benefits.

4 Benefits of Investing in Overnight Funds

1. High Liquidity

As the name suggests, these funds have a maturity of a day. Investment and redemption can take place within trading hours. You can park an idle lump sum amount in these funds instead of keeping it in your current account.

2. Low Risk

The underlying assets in these funds keep maturing every day. Since the interest rate will not change in a day, the risk is negligible.

Additionally, the chances of default for an asset maturing in a day are close to zero. Therefore, these funds are safe to invest in. 

3. Low Cost

Most debt securities charge exit load unless you hold your investment for a longer horizon. Even liquid funds expect you to hold your investment for at least 7 days to avoid exit load.

Overnight funds, on the other hand, do not charge any exit load. You can withdraw funds the next day. 

Moreover, these funds tend to have a low expense ratio of less than 0.5%. 

4. Flexible Investment Horizon

You can keep your money in overnight funds for as long as you want. While being able to redeem in a day is a great advantage, you can keep it longer as an emergency fund.

The redemption process is quick. Therefore, investors have the luxury of a flexible investment horizon. 

3 Things to Consider Before Investing in Overnight Funds

1. Risk vs Returns

Overnight funds are the safest debt funds to invest in. The possibility of default risk is close to zero.

However, investors have to compromise on returns in exchange for low risk. Overnight funds may not deliver superior returns. These funds are an alternative to your current or savings account.

2. Financial Goals

Overnight funds may not be an avenue to boost your portfolio returns. These funds make parking a surplus amount comfortable due to high liquidity.

Take your financial goals into account while investing. Don’t expect high returns. Rely on these funds for security and quick redemption.

3. Tax Implications

Since April 2023, tax implications on debt funds have changed.

Both Long-term Capital Gains (Investment redeemed after 36 months) and Short-term Capital Gains (Investment Redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit is only applicable to hybrid funds with at least 35% equity exposure. 

Explore Mutual Funds taxation rules here

Who Should Invest in Overnight Funds?

Overnight funds are suitable for investors looking to park surplus money overnight with no risk and high liquidity.

Ideally, these funds align more with the financial requirements of mid to large-size organizations than retail investors. Companies can park a large lump-sum amount overnight before reutilizing it. 

Retail investors can explore other debt funds before making a decision. Make sure the fund objectives align with your financial goals. 

Conclusion

Overnight funds offer several benefits such as daily maturity, low risk, low cost, and quick redemption. 

However, it is essential to note that high liquidity and safety come with comparatively lower returns. Corporations can benefit from these funds. Retail investors can use these funds as an alternative to a savings or current account.

We recommend analyzing your portfolio with your financial planner before making a decision. If you don’t have a financial advisor, VNN Wealth is just a call away.

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Mutual Funds

Value Funds Investment Strategy: Who Should Invest

Value funds are open-ended equity funds that invest in undervalued shares. Meaning, these shares are worth more than their current value and may grow significantly over the years.

The reason behind the lower value could be the financial situation, changes in the business model, funding of large in-house projects, or market competition.

These factors temporarily affect the value of the company, which gets restored eventually.

So, the underlying shares will be of organizations that have high reputations and established businesses. 

Read along to find out who should invest in value funds.

How do Value Funds Work?

As per SEBI guidelines, fund managers must invest at least 65% of total assets in undervalued(equity) shares. 

Fund managers analyze the company’s growth plan before including the stock in the fund portfolio.

For example, ICICI Prudential Value Discovery Direct Growth has invested in shares of companies like Infosys, Reliance Industries, Bharti Airtel, Axis Bank, HDFC Bank, SBI to name a few.

Advantages of Investing in Value Funds

1. Significant Capital Gains

You purchase the stocks of companies at a discounted price with Value funds. Sooner or later, these companies will reach their true potential and beyond.

The shares that are undervalued today will grow significantly over the years.

You have to wait for the value to restore by staying invested for the long term.

2. Lower Risk

Fund managers strategically bring undervalued stocks into the scheme. 

You enter the fund when the underlying stocks are underperforming. But, these organizations have a good reputation and great track record. Therefore, the market conditions have a lower impact on these funds. 

3. Lower Volatility Concern

Equity funds can fluctuate frequently over a short duration. However, any equity fund is less volatile when you hold your investment for more than 5 years or so.

In the case of value funds, there’s more possibility of value increment over a longer horizon. Holding your investment for at least 5 years can balance the risk of volatility.

Things to Consider Before Investing in Value Funds

1. Investment Horizon

You may have to hold your investment longer than any other equity funds. 4 to 5 years are ideal to beat volatility.

However, it may take longer than that to reach the desired value. Be prepared to lock your money for 5+ years to benefit from significant growth. 

2. Underlying Assets

The value investment strategy may have large-cap companies or small/mid-cap companies for diversification. The allocation across the market cap will impact the overall risk of the fund.

You may want to consider exploring underlying assets to ensure that the fund objective aligns with your portfolio.

3. Fund Performance

Evaluate the performance of the funds over a longer duration during various market cycles. 

That’ll give you an idea of the fund manager’s value investment strategy and capability to deliver returns. 

4. Expense Ratio

Fund houses charge investors a fee in the form of an expense ratio to manage funds. As per SEBI regulations, the expense ratio ranges from 0.8% to 2.25% depending on the assets under management of the fund. 

You may want to be aware of this fee beforehand to calculate the expected returns. 

Taxation on Value Funds

Value funds are equity mutual funds, therefore, follow equity taxation.

Investors have to pay a 15% tax on Short-Term Capital Gains(investments redeemed before 12 months).

Long-Term Capital Gains (investments redeemed after 12 months) will be taxed at 10%.

To lower tax liability, hold your investment for a longer duration. 

Who Should Invest in Value Funds?

Patience is the key while investing in Value funds. You may have to wait for years to gain significant wealth. 

Investors who are comfortable with a longer horizon, preferably more than 5 years, can invest in value funds. Invest your money and wait for it to steadily grow. 

Investors with moderate to high-risk appetites can take a bet on value funds to explore the potential of the scheme.

Conclusion

Technically speaking, value funds invest in companies having value. Value funds are less vulnerable to market volatility, offering downside protection. 

Therefore, these funds can significantly contribute to your wealth-building journey. 

You can start an SIP with a growth value fund for a longer horizon. But before that, talk to your financial advisor.

Make an informed decision with VNN Wealth. Get in touch with us anytime and plan your investments with us. 

Explore other mutual fund categories.

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Mutual Funds

Thematic Mutual Funds: How They Work and Who Should Invest?

Thematic Mutual Funds are equity funds investing in companies connected to a specific theme. 

For example, rural consumption thematic funds will invest in companies that are likely to contribute to the growth of rural consumption in India. For example, FMCG companies, Retail, Telecom, infrastructure, consumer staples, automobiles, cement, etc. 

These funds allow investors to explore and include a specific theme in their portfolio.

Interested in knowing more? Read along.

How Do Thematic Mutual Funds Work?

Thematic Funds are open-ended equity funds following a certain theme, an idea. Infrastructure Thematic Funds will invest in shares of cement, steel, power plant, etc.

According to SEBI, these funds must invest at least 80% of total assets into equities of the determined theme.

The underlying assets in these funds are researched and strategically placed by the fund manager. 

How are Thematic Funds Different than Sectoral Funds?

As the name suggests, sectoral funds invest in a specific sector. For example, pharmaceutical sectoral funds will only invest in pharma companies. 

Thematic funds, on the other hand, diversify your assets among various companies tied to a single idea. These companies may belong to different sectors. 

Advantages of Investing in Thematic Mutual Funds

1. Exposure to a Specific Theme

Thematic funds allow investors to invest money in a particular trend or rising theme. 

For example, India is now embracing the advancement in healthcare. Therefore, companies directly or indirectly contributing to healthcare progress, such as pharmaceutical, biotech, and medical device manufacturing companies can come under healthcare thematic funds.

Investing in funds that distribute your assets to a growing trend can create a huge impact over the years.

It’s a unique, non-traditional investment strategy based on the economic growth of a certain theme.

2. Diversified Scheme Compared to Sectoral Funds

Thematic funds bring together various industries that other funds may not. For example, Large Cap funds will majorly invest in large-cap companies. Sectoral funds will only invest in a specific sector. 

Thematic funds invest in companies belonging to any sector and market cap. The only requirement is, these companies must be contributing to the growth of the theme.

Therefore, these funds can bring diversity to your portfolio. 

3. Expert Fund Management

Fund managers put their skills, knowledge, and research together to create a thematic scheme. Investors wanting to invest in a specific idea won’t have to pick individual stocks. 

An expert will distribute your assets among shares of the right organizations. 

4. Possibility of Beating the Benchmark

Fund managers take economic growth, upcoming advancements, and various other factors to create a scheme.

A right strategy backed by thorough research may generate benchmark-beating returns. 

Things to Consider Before Investing in Thematic Mutual Funds

1. Financial Goals and Investment Horizon

It takes a significant amount of time for any industry or theme to reach the highest mark. Therefore, thematic funds may take longer to bring the desired outcomes.

You may have to stay invested for 5 or more years to benefit from that peak. 

We advise you to ensure your financial goals and investment horizon aligns with the scheme. Otherwise, you can consider investing in other mutual fund categories. 

2. Associated Risk

Thematic funds can be risky. The underlying theme, though trendy, may go through plenty of ups and downs. 

You may want to consider your risk appetite before investing. Evaluate your existing portfolio with your financial advisor before investing.

If you don’t have a financial advisor, give VNN Wealth Advisors a call. We’ll walk you through the realistic possibilities of thematic or any other funds. 

3. Semi-Diversified Scheme Compared to Other Mutual Funds Categories

Thematic funds offer better diversity compared to sectoral funds. However, other categories such as Large-Cap or Flexi-Cap offer better diversity. 

The underlying assets in other equity funds balance each other. Whereas, in thematic funds, if a theme underperforms, the underlying companies may drop value all at once. 

Therefore, these funds are semi-diverse and the reward depends on the performance of the theme.

4. Expense Ratio

To get expert fund management, fund houses charge you a small fee in the form of an expense ratio.

As per SEBI, the ratio ranges from 0.85% to 2.25% of the total managed assets. You can find the expense ratio associated with the fund in the factsheet.

Make sure you are aware of the expense ratio to avoid confusion about your actual returns. 

Taxation on Thematic Mutual Funds

Thematic Mutual Funds follow equity taxation based on the holding period.

  1. Short-Term Capital Gains(Investments redeemed before 12 months) will attract a 15% tax.
  2. Long-Term Capital Gains(Investment redeemed after 12 months) above 1 lakhs will be taxed at 10%

Who Should Invest in Thematic Funds?

Thematic funds are suitable for investors with high-risk appetites and longer investment horizons. These funds can be risky, hence aren’t ideal for new investors. 

Though fund managers will take care of funds, investors must also be well-informed about the growing industries. 

These funds may go through aggressive volatility before reaching the peak. Investors who panic-sell funds may want to consider another scheme.

Conclusion

Thematic funds can deliver superior rewards with higher risk. Holding your investment for a longer horizon can help generate additional alpha on your portfolio using thematic funds.

As mentioned above, these funds are suitable for evolved and experienced investors. Beginners can consider investing in other(slightly safer) equity funds before exploring thematic funds. 

Reach out to know more about equity or debt mutual funds. Make an informed investment decision with us.

Also Read-

Sectoral Funds

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Mutual Funds

Corporate Bond Funds: Features, Advantages, Taxation & More

Corporate bond funds are the type of debt funds that invest in bonds issued by companies. 

These funds can be of two types. 

  • Funds investing in bonds with the highest possible credit rating, so the default risk is negligible. 
  • Funds investing in bonds with a slightly lower credit rating that may deliver superior returns. 

Ideal for 1 to 4 years of investment horizon, here’s everything you need to know about corporate bond funds.

How do Corporate Bond Funds Work?

Any organization requires funds for smooth business operations. They can either take bank loans or offer equity instruments. 

However, there are several reasons a company would prefer issuing bonds such as exhausted bank limits, banks not funding a sector, or banks slowing down disbursement to name a few. Also, the company may not be ready for equity dilution. 

So instead, companies issue bonds to generate funds for business operations. 

Corporate bond funds open a gateway for investors to explore these debt instruments.

As per SEBI regulations, these funds need to invest at least 80% of the total assets into corporate bonds with an AA+ and above credit rating. The remaining 20% can be allocated to other debt instruments of varying credit ratings, which may or may not be AA+. Fund managers strategically invest the remaining 20% to benefit from the interest rate cycle. 

Underlying bonds can be of variable maturity periods. You may expect between 1 to 4 years of investment horizon with these funds. 

Benefits of Investing in Corporate Bond Funds

1. Superior Returns 

Corporate bonds carry higher credit risk compared to government bonds but at the same time, offer higher coupon rates to match the additional risk.

So if you are seeking higher returns than government bond funds or fixed deposits, and have the required risk appetite, you can invest in corporate bond funds. 

2. Safe to Invest in

Corporate bond funds invest 80% of the total assets in AA+ rated bonds.

The highest bond rating indicates that the company will not default on your investment. 

3. Portfolio Diversification

Corporate bond funds can be ideal for portfolio diversification. 

Equity funds may deliver superior returns than debt funds, but they are quite volatile. Debt funds, being comparatively less volatile, balance the risk and rewards. 

Things to Consider Before Investing in Corporate Bond Funds

1. Allocation

As mentioned above, these funds have two types of allocation strategies. Funds with AA+ rated bonds would be safer than funds having bonds with lower credit ratings.

If you have a low to moderate risk appetite, go with funds that invest in AA+ rated bonds. Else, you can explore lower-credit rating bond funds as they may deliver superior returns. 

Be sure to check the allocation before investing in corporate bond funds. 

2. Risk Factor

With the highest-rated bond funds, the credit risk would be lower but returns may also be lower. On the other hand, slightly low-rated bonds might be risky but may deliver better returns.  

The interest rate risk can also affect the overall returns. The bond prices are inversely proportional to the interest rate. When the interest rate rises, the bond prices fall, and vice versa. 

You can lower the interest rate risk by holding your investment until maturity. 

3. Investment Horizon

Corporate bond funds are best suited for 1 to 4 years of the investment horizon. Invest only if the tenure matches your portfolio and your investment goals.

4. Underlying Assets

In these funds, 80% of the total assets would be high-rated corporate bonds. However, fund managers may invest the remaining 20% in slightly low-rated bonds. 

The overall risk of the fund changes with the remaining 20% allocation.

5. Fund Manager’s Track Record

A fund manager’s strategy plays a vital role in managing debt funds. Their analysis and decisions will reflect upon your portfolio. Hence, it is essential to check the track record of the asset management company and the fund managers. 

Tax Implications

The tax rules on debt funds have been updated since April 2023.

Both Long Term Capital Gains (Investment redeemed after 36 months) and Short Term Capital Gains (Investment redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit on long-term capital gains is only applicable for hybrid funds with more than 35% and less than 65% exposure to equity. 

Find out tax rules across all mutual fund categories.

Who Should Invest in Corporate Bond Funds?

Corporate bond funds are suitable for investors with 1 to 4 years of investment horizon. 

These funds can be an alternative investment avenue to fixed deposits. With slightly higher risk, investors can benefit from superior rewards.

If you are an aggressive investor, you can consider investing in low-rated bond funds. These funds may offer higher returns, but the risk of default increases. We recommend talking to a professional financial advisor before investing in these funds.

Final Thoughts

Corporate bond funds are ideal for investors looking to park their money for 1-4 years. 

Invest in high-rated bond funds to avoid default risk, unless you are an aggressive investor. In that case, you can explore low-rated bond funds provided it aligns with your risk appetite. 

Holding your investment till maturity can lower the interest rate risk as well. 

If you have any further queries, get in touch with VNN Wealth advisors. You can get your portfolio reviewed and plan your next investment strategy. 

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Mutual Funds

Sectoral Funds: Features, Benefits, Taxation, & More

Sectoral funds are equity funds that invest in companies in the same sector or industry. The sectors can be banking, pharmaceuticals, information technology, etc.

These funds can potentially deliver benchmark-beating returns in a rising market scenario (bull phase). 

However, the associated risk can be high when the sector is going through ups and downs. 

Let’s understand further who should invest in sectoral funds.

How Do Sectoral Funds Work?

As per SEBI guidelines, these funds must invest at least 80% of total assets in the given sector. For example, an IT sectoral fund will invest the majority of the assets in IT companies.

Fund managers distribute the assets in large-cap, mid-cap, and small-cap companies in the specific sector. These companies are selected upon the fund manager’s strategy, analysis, and the trend in the market.

How are Sectoral Funds Different Than Thematic Funds?

Sectoral funds invest only in a specific sector. Whereas thematic funds invest in a theme that ties various sectors together. 

For example, an infrastructure thematic fund may invest in cement, steel, and construction firms. A sectoral fund sticks to the defined sector. 

Benefits of Investing in Sectoral Funds

1. Exposure to a Specific Sector

Sectoral funds allow investors to tap a specific industry that may perform well in coming years. Instead of investing in individual stocks of the sector, investors can park their money in these funds.

Fund managers take care of the allocation depending on the sector’s performance against the benchmark. 

2. Potential of Superior Returns

Sectoral funds invest in equity instruments of the same industry across market capitalization. There’s a good chance the sector may outperform and deliver superior returns. 

With thorough research and analysis, the underlying assets may beat the benchmark. Therefore, investors can earn superior returns when the sector is performing well.

3. Portfolio Diversification

The only diversification sectoral funds offer is the allocation across market capitalization. 

However, you can introduce diversification to your overall portfolio by introducing a new emerging sector.

You can take advice from your financial advisor to choose the sector that aligns with your portfolio. 

Factors to Consider Before Investing in Sectoral Funds

1. Your Risk Appetite

Sectoral funds can be risky at times. You can earn higher returns if the sector grows. However, if the sector underperforms, all the underlying companies may drop values. 

As the diversification within funds is limited, these funds can be more volatile than other schemes. So you may want to consider your risk appetite before investing in sectoral funds. 

2. Investment Horizon

Equity funds expect you to stay invested for a longer horizon to beat the volatility. A sector also takes time to grow and achieve the desired outcomes.

Therefore, you may have to consider staying invested for a longer duration. Make sure the expected horizon of the sectoral funds is suitable for your portfolio. Otherwise, you can always explore other equity schemes. 

3. The Growth of The Sector

Make an informed decision by researching what’s expected from the sector. Select a sector that truly has the potential to grow in the coming years.

That way, you will be aware of the timeline the funds take to reach the returns you are looking for. 

However, please note that markets can be uncertain. A few ups and downs along the way are inevitable. 

4. Performance of The Fund Manager

Checking the past performance of the sectoral fund would be of no use. The sector is most likely to perform differently in each economic cycle.

Instead, check the performance of the fund managers. How many times have their analysis delivered superior returns over the years?

That’ll give you an idea of the expertise of the fund manager.

5. Expense Ratio

The expense ratio is the small fee that mutual fund houses charge you for managing your assets. As per SEBI, the fee can be between 0.85% to 2.25% of the total assets under management. 

Make sure you read the factsheet of the fund to understand the expense ratio structure for the fund. 

Tax Implications on Sectoral Funds

Sectoral funds follow equity taxation rules based on the investment horizon. 

Investors have to pay a 15% tax on Short-Term Capital Gains (Investments redeemed before 12 months)

Long-Term Capital Gains (investments redeemed after 12 months) above 1 Lakh are taxable at 10%.

Explore new taxation rules across various mutual fund categories. 

Who Should Invest in Sectoral Funds?

Sectoral funds are suitable for investors with high-risk appetites and longer investment horizons to beat volatility. Similar to thematic funds, these funds are not ideal for new investors.

Investors who can handle high volatility without panic-selling funds can go for it. However, it is important to make an informed decision.

Make sure you are aware of the sector’s growth potential and fund manager’s history before investing.

Conclusion

Equity mutual funds offer a wide spectrum of investment options. Sectoral funds are one such avenue that allow investors to explore a growing industry.

Though the risk can be high, the reward can also skyrocket when the sector expands over the years. 

So if you want to distribute some of your assets to a high-risk-rewards scheme, go for sectoral funds.

Advisors at VNN Wealth can help you choose the right funds as per your risk appetite. Get your portfolio reviewed for free. Sketch an investment strategy to fulfill your financial goals. 

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Mutual Funds

Large and Mid Cap Funds: Stability and Growth

Want the stability of Large-Cap funds and superior returns of Mid Cap funds in a single scheme? The Large and Mid Cap Funds can be your next investment avenue. 

In 2017, SEBI launched this new category to offer Stability and Growth to investors exploring equity funds. 

Instead of separately investing in large and mid cap funds, you can just select a fund that has exposure to both categories. 

Read along to know more.

How Large and Mid Cap Funds Work?

Large Cap Funds primarily invest in the top 100 companies on market capitalization. 

And Mid Cap Funds invest in companies ranked from 101 to 250 on market capitalization.

Therefore, Large and Mid Cap Funds invest across the first 250 companies from various sectors on the market cap. 

As per SEBI regulations, fund houses must invest at least 35% each in large cap and mid cap companies.

The remaining 30% can be distributed among equity, cash, or debt depending on the fund manager’s strategy, 

Why Invest in Large and Mid Cap Funds?

1. Growth and Stability 

Large Cap companies are thriving organizations with comparatively low volatility, hence lower risk. These companies generate significant returns over a long duration. 

Mid Cap funds, on the other hand, can be slightly volatile. However, there’s a good chance these funds will deliver superior returns compared to pure large cap funds. 

2. Portfolio Diversification

A single scheme can give you exposure to Large Cap and Mid Cap funds. Depending on the Fund manager’s strategy, you may also get exposure to Small Cap or Debt securities.

Distributing your assets across various categories of equity and debt can encourage superior returns with lower risk. 

3. Ideal For Long Term Investments

These funds can be ideal for children’s higher education, planning a wedding, or buying a house in the next few years.

Equity funds perform well over a longer horizon, more than 4 to 5 years.

You can rely on Debt Funds for short-term financial goals. And park your money in Large and Mid Cap funds to fulfill long-term financial goals.

Things to Consider Before Investing in Large and Mid Cap Funds

1. Your Risk Appetite

Large and Mid Cap funds are less riskier than pure mid cap or small cap funds. Investors wanting to explore equity funds with lower risk can go with these funds.

If you are an aggressive investor willing to take more risk, you can consider pure mid cap or small cap funds.

However, we recommend discussing this with your financial advisor before taking a call. 

2. Investment Horizon

Align your investment horizon and financial goals with the scheme that you choose. 

Equity funds are volatile in short-horizon. Holding these funds for more than 5 years can lower the risk and generate a handsome outcome.

3. Fund Performance

Check the rolling returns of the funds to evaluate the performance. You can compare the performance of the funds from the same category with the benchmark. 

That’ll give you an idea of the kind of returns the fund has generated over the years.

Remember, evaluating past performance isn’t the only criteria to choose the fund. 

4. Expense Ratio

Fund managers manage your investment by distributing it across stocks of various companies. 

To actively manage your funds, fund houses charge you a fee in the form of an expense ratio. Active funds have a slightly higher expense ratio than passive ones. 

You can compare the expense ratio of funds from similar categories before investing. 

Tax Implications on Large and Mid Cap Funds

The taxation on Large and Mid Cap Funds is the same as any other equity mutual fund.

You have to pay a 15% tax on Short Term Capital Gains (Investments held for less than a year).

Long-term Capital Gains(investments held for more than a year) above 1 Lakh are taxed at 10%.

Check out new taxation rules for Equity, Debt, and Hybrid Funds.

Who Should Invest in Large and Mid Cap Funds?

These funds are riskier compared to pure Large Cap funds, but less risky than pure Mid Cap or Small Cap Funds.

Investors with low to moderate risk appetite and longer investment horizons can invest in these funds. 

These funds are also suitable for diversifying the portfolio across market capitalization. Investors wanting to invest in Mid Cap with lower risk can rely on the stability of Large Cap exposure. 

To align your risk appetite with the fund, you may want to consider the asset allocation. After investing 35% each in large and mid cap, fund managers may invest a small chunk in small cap or increase the exposure to mid-cap. This can change the overall risk of the fund.

To Sum Up

Large and Mid Cap Funds distribute your asset across companies ranking from 1 to 250 on the market capitalization. As these companies belong to various domains, you get an opportunity to diversify your investment. 

As Large Cap maintains stability, Mid Cap encourages growth. If your risk appetite doesn’t align with pure Mid Cap or Small Cap, these funds can be your entryway. 

Got more queries regarding equity funds? Get in touch with our advisors. 

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