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Personal Finance

Filing ITR for NRIs: Step-by-Step Guide

Navigating through the ITR process might seem overwhelming, especially for NRIs earning income both in and outside India. As per SBNRI’s survey, 73% of NRIs from the USA, UK, and Canada are trying to file ITR. Filing ITR for NRIs includes managing your tax liabilities in your current country of residence and India. Don’t worry, this step-by-step guide will simplify the process for you. Sit back and go through each point carefully to fulfill your tax obligations.

Let’s get started…

NRIs/PIOs/OCIs must file an ITR in India if their total annual income is more than 2.5 lakhs as per the old tax regime or 3 lakhs as per the new tax regime. Here’s everything you need to know before filing an ITR.

The primary step is to confirm your residential status. As per the Income Tax Act 1961 guidelines, you are an NRI if:

1. You have stayed in India for less than 182 days during the financial year.
2. Or, You have stayed in India for less than 365 days during the preceding four years and less than 60 days in the relevant financial year.
If you visit India during the year, the 60-day rule mentioned in point 2 will be replaced by 182 days. The same is applicable if you leave India as a crew member or for employment.
Finance Act 2020 Updates:
The 60-day rule mentioned in point 2 changes to 120 days for Indian citizens or people of Indian origin with an income of 15 lakh excluding foreign income. It also states that if an Indian citizen earns more than ₹15 lakh (excluding foreign income) and is not taxed in any other country, they will be considered a Resident in India.

Form 26AS is an annual tax credit statement that holds information such as tax deducted at the source, tax collected at the source, etc. You can easily view/download Form 26AS on the income tax portal to analyze your financial activities.

In this step, you have to determine your tax liability on your income earned in India. The income includes salary, interest from FDs and bank accounts, rental income.

NRIs will have to pay tax in India for capital gains earned from stocks, mutual funds, etc. The tax rate depends on the type of instrument and the duration of the investment.

While filing your taxable income, you can also opt for various deductions with your tax-saving instruments. For example, you can claim a deduction of up to 1.5 lakhs under section 80C of the IT act against ELSS mutual funds, Tax Saver FD, Public Provident Fund account, etc. You can invest in various tax-saving instruments to reduce your taxable income in a current financial year.

This is a very crucial step while filing ITR for NRIs. Depending on your residential status, you are obliged to pay tax in India on global income. Fortunately, India has signed a treaty with more than 85 countries to help NRIs avoid paying double taxation.

The Double Taxation Avoidance Agreement (DTAA) offers three methods:

1. Get tax credit against the tax paid in the resident country and claim it in India while filing ITR.
2. Certain types of income are eligible for exemptions. You can obtain a Tax Residence Certificate to qualify for the exemption.
3. You can also opt for the deduction method which allows you to deduct taxes paid in the foreign country.

Individuals with NRI status must fill out either an ITR-2 or ITR-3 form.

ITR-2 is applicable for residents or NRIs not having income under the head Profits and Gains of Business or Profession.

ITR-3 is applicable for residents or NRIs who have income under the headings of profits and gains of business or profession.

Make sure you fill out accurate details of your income and exemptions. Refer to the in-detail manual of filing ITR provided by the income tax portal.

You must provide a bank account to receive a tax refund (if any). You can either provide an Indian bank account or a foreign bank account as per your situation.

You are required to declare all your assets (movable and immovable) and liabilities if your total earnings exceed INR. 50 lakhs. In this step of ITR filing for NRIs, you must report all your assets and liabilities.

After a roller coaster of filing ITR, you can upload your NRI income tax return. Cross-check all the information before submitting the form. Make sure to verify the form within 120 days. Please note that your ITR will be marked as invalid if you fail to verify it within 120 days.

1. Passport to prove the duration of your stay in and outside India.
2. Overseas employment contract (if any).
3. All your financial statements, including your investments.
4. Form 26AS for annual tax statements.
5. TDS certificates.

Filing ITR for NRIs isn’t as confusing as it appears. By following the above-mentioned steps, you can easily fill out the ITR form. Keeping your documents in handy will ease the process. Make sure you fill in accurate details. With the help of the Double Taxation Avoidance Agreement, it has become easier for NRIs to invest in Indian markets.

Explore the top 5 investment avenues in India for NRIs.

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Personal Finance

Double Taxation Avoidance Agreement: A Guide for NRIs

Paying tax in one country is daunting in itself, let alone in two. This is one of the primary concerns for NRIs every year while navigating finances in their country of residence and India. Thankfully, India has a Double Taxation Avoidance Agreement with 85+ countries. Non-resident Indians residing in these countries can avoid paying double taxes on their income.

In this article, we will delve into the Double Taxation Avoidance Agreement and how NRIs can benefit from it.

Double taxation occurs when an individual has to pay tax on their income in two countries- the country of residence and the home country. For example, a person working abroad also earns income in India via rent, interest on FDs, etc. In that case, he/she has to pay tax on that income twice, in both countries.

To offer double tax relief for Indians living abroad, India has signed a tax treaty with 85+ countries called the ‘Double Taxation Avoidance Agreement.’ With the help of DTAA NRIs, PIOs, and OCIs can seek exemption for tax they already paid in India while filing an ITR in their resident country.

DTAA helps NRIs lower their tax liability using three methods:

Non-resident Indians are eligible to utilize tax credits in their country of residence if they’ve paid tax on their income in India. Or, they can claim foreign tax credits to lower their tax liability in India. Let’s say you’re living in the US and have earned $100,000 in salary. You’ll have to pay 22% i.e. $22,000 tax in the US. You’ve also earned INR 5,00,000 as rental income in India. As per the tax slabs in India, let’s assume you owe INR. 1,50,000 in tax. Assuming the currency exchange rate of INR. 85 per dollar, your combined global income will be: INR. 85,00,000 (US income) + INR. 5,00,000 (Rental income in India)= INR. 90,00,000. Your tax liability in India will be approximately INR. 27,00,000. However, you’ve already paid a tax worth INR. 18,70,000 in the US. Therefore, while paying tax in India, you can use foreign tax credits worth INR. 18,70,000 to avoid double taxation on foreign income.

In the exemption method, you only have to pay tax in the country where you are working on certain types of income. You can obtain a Tax Residence Certificate which allows you to get tax exemption in India on incomes eligible under this method.

This method allows you to claim taxes paid to the foreign government as a deduction.

1. Tax Residency Certificate (TRC): TRC is a crucial document issued by the tax authorities of your country of residence. This document verifies your residential status in the foreign country while filing ITR as NRI in India.

2. Form 10F: TRC may not offer all the information required to claim DTAA. In that case, you can fill the Form 10F online. It’s a self-declaration form to provide the additional information that the TRC lacks.

3. Form 67: NRIs can claim foreign tax credits by filling out Form 67. While paying the tax in India, NRIs can pay tax on global income using foreign tax credits. For example, you’ve received dividend income in the US and already paid tax on it. You can use those tax credits to pay tax on the same income in India.

4. You may also need additional documents such as a PAN card, Passport copy, and Visa copy to claim DTAA.

Note: The process to get relief on double taxation may vary based on your current country of residence. The tax rates and the exemption methods may also vary accordingly.

As per the double taxation avoidance agreement, NRIs do not have to pay double tax on the following type of income:

1. Services provided in India.
2. Salary received in India.
3. House property located in India.
4. Capital gains on transfer of assets in India.
5. Fixed deposits in India.
6. Savings bank account in India.

India has DTAA with 85+ countries. The TDS rates for the few are mentioned below.

CountryTDS Rate
USA15%
UK15%
Canada15%
Dubai12.5%
Oman10%
Singapore15%
Malaysia10%
Spain10%
Australia15%
Germany10%

The aim behind signing the Double Taxation Avoidance Agreement (DTAA) was to provide double tax relief to NRIs/PIOs/OCIs. India has signed the DTAA with more than 85 countries, allowing NRIs to pay a fair tax on their income in two different countries. Non-resident Indians can claim tax exemptions using the combination of methods mentioned above. That way, they do not have to pay taxes twice on the same income.

DTAA has also made it easy for NRIs to invest in Indian markets without having to worry about taxes. NRIs can invest in mutual funds and various other avenues to build wealth in India.

If you’re an NRI seeking investment opportunities in India, contact VNN Wealth. Our experts will provide detailed insights into your investment portfolio. You may like to read a step-by-step guide to filing an ITR as an NRI.

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Personal Finance

Should You Invest in Solar Energy Stocks in India? 

The sun is shining bright on solar energy stocks in India.

The green energy sector is booming as India aims to achieve 500GW capacity of renewable energy by 2030. Investing in this sector is a promising opportunity for both seasoned investors and beginners. There are plenty of solar energy stocks to bring into your portfolio.

On 7th April 2021, The Union Cabinet approved the Production Linked Incentive (PLI) Scheme to boost the manufacturing of solar PV modules. The total of INR. 24,000 cr dedicated towards the sector aims to produce 39,600 MW capacity. India is set to create solar cities across the nation. The 1st solar city, ‘Sachi’, has already been launched in Madhya Pradesh in 2023. As the country marches ahead in this sector, many big solar panel manufacturers are raising INR. 5,800 cr this year. These funds will be used to establish 500 GW capacity by 2030. Along with Solar Panels, the manufacturers will also produce cells, wafers, and ingots under the PLI scheme.

The top three solar module manufacturers are:

1. Waree Energies
2. Vikram Solar
3. Premier Energies

All three of these companies are coming up with their IPO, out of which, Waree Energies and Vikram Solar are available for purchase in the unlisted market for allocation confirmation. To inquire about the Waree Energies share price and Vikram Solar share price, get in touch with VNN Wealth.

waree energies share price

Waree Energies is playing a crucial role in expanding India’s renewable energy sector. The largest manufacturer of solar modules in India, Waree has rapidly boosted its capacity to 12GW in recent years. The company occupies about 50% of the market share in solar PV module export, surpassing Adani and Vikram Solar. In December 2023, Waree Energies filed a draft with SEBI to raise INR. 3,000 crore through an initial public offering. The funds will be used to further expand the capacity from 12 GW to 38 GW over the next five years. While the IPO dates are yet to be released, Waree Energies IPO is most likely to get oversubscribed. Buying unlisted shares of Waree Energies can guarantee allocation and significant growth over the years. (Please note that the unlisted shares are subject to availability.)

Read more about Waree Energies and other unlisted shares here.

vikram solar share price

Vikram Solar is another big player in the green energy sector. With 3.5GW capacity, it is among the largest exporters of solar PV modules. Additionally, the company provides engineering, procurement, and construction (EPC) services, as well as operations and maintenance. Vikram Solar’s 70% of the revenue comes from PV modules and about 20% revenue comes from EPC. In the previous year, the company also received approval from the government to set up 2.4GW of additional capacity under the PLI scheme. Currently, Vikram Solar is available to purchase in the unlisted market. The company has filed a draft with SEBI for an initial public offering (IPO). Vikram Solar IPO will offer a fresh issue of up to INR. 1,500 crores and an offer for sale of up to 5,000,000 equity shares.

premier energies share price

Premier Energies is one of the largest integrated solar cells and solar module manufacturers in India. With 29 years spent in the solar sector, the company now has an installed capacity of 2GW for integrated solar cells and 3.36 GW for solar module manufacturing. Premier Energies has filed the draft with SEBI to raise INR. 1,500 crore via initial public offering (IPO). The company will utilize INR. 1,168.74 to establish a 4 GW solar PV TOPCon cell and 4 GW solar PV TOPCon module manufacturing facility in Hyderabad. The remaining funds will go towards general corporate purposes. The company is also aiming to execute EPC projects, independent power production, and O&M services.

India’s solar energy sector is rapidly expanding with the PLI scheme in place. The government is taking the initiative to encourage growth in the capacity of renewable energy production. This is the right time to enter the sector by investing in solar energy stocks. It has the potential to deliver a significant return on your investment. Buying unlisted shares of Waree Energies or Vikram Solar will ensure allocation before the IPO. However, it is subject to availability. Get in touch with experts at VNN Wealth for the unlisted shares you wish to buy. Explore all unlisted shares here.

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Personal Finance

Our Top 7 picks of Unlisted shares in India

Unlisted shares in India have become popular over the past few years. Investors are buying unlisted shares of emerging companies showing potential growth as the awareness around them has increased. 

By investing in these shares Pre-IPO, you gain returns in two ways. 

1. Prices of these shares may go up in the long run via over-the-counter trading.

2. You may bag pre-listing/ listing gains. 

We’re receiving more inquiries about unlisted shares than ever before, especially after the Tata Tech IPO’s massive success. Tata Technologies was our second success story after Nazara Technologies in terms of entry and exit for our investors. And now, more unlisted companies have entered our top picks. 

Interested to know which unlisted share to buy?

Our team of experts has curated a list of the top 7 unlisted shares in India. 

But before we dive into it, read everything about unlisted shares here

waree energies share price

The leading renewable energy company in India, Waaree Energies Ltd manufactures solar PV modules and offers solar energy solutions. Waaree’s manufacturing facility of 12GW is among the largest in India. It started with 2GW in 2021, upgraded to 9GW in March 2023, and rapidly expanded to 12 GW in June 2023. Waaree’s four manufacturing units are located in Surat, Tumb, Nandigram, and Chikhli- collectively across 136.30 acres. The company manufactures a wide range of products such as solar panels, solar water pumps, solar street lights, and solar inverters, to name a few. The company also offers Solar EPC services along with project development, financing, operations, maintenance, and asset management.

Waaree witnessed an incredible revenue boost from 1997cr in 2021, 2950cr in 2022, to 6840cr in 2023. The operating profit margins have also increased from 4.35 in 2021 to 12.37 in 2023. Waaree is aiming to keep contributing towards a green future with its affordable and easily accessible solar energy.

vikram solar share price

Founded in 2006, Vikram Solar is one of the leading solar PV module manufacturers in India. Currently, with 3.5 GW capacity, the company also provides integrated solar energy solutions, Engineering, Procurement, and Construction (EPC) services, and operations & maintenance. Vikram Solar has 3 manufacturing units in Tamilnadu and West Bengal. The company has 42+ distributors across 600 districts in India. Vikram’s 70% of revenue comes from PV modules and about 20% from EPC services.

It is the first company to contribute to fully solarizing Kochi(Kerala) airport, installing a floating solar plant in Kolkata, and commissioning large-scale rooftop solar plants across India. The company also has sales offices in the USA and has supplied solar PV modules in 32+ countries. The company’s revenue has increased to INR. 2015 crores in fy23, an 18% boost from the fy22 revenue. Vikram Solar has filed a draft with SEBI to raise INR. 1,500 crore via initial public offering (IPO) and an offer for sale of up to 5,000,000 equity shares. 

tata capital share price

A subsidiary of TATA Sons, TATA Capital Limited is registered with RBI as a non-deposit-accepting NBFC. Along with its subsidiaries, TATA Capital offers financial services to corporate, retail, and institutional customers. The company’s product portfolio includes various types of loans, investment advisory, cleantech finance, private equity, wealth products, commercial and SME finance, leasing solutions, and TATA cards, to name a few. 

In the financial year 2022, TATA Capital reported the highest profit. The company’s PAT increased from INR 1,245 crore to INR 1,801 in FY22 crore and to INR 2,975 crore in FY23. Tata Capital’s loan book grew by 28% in FY22-23 and the book value increased to 48.36 from 33.82. The RoE also increased from 15.6% to 17.3%.

sbimutualfund

SBI Funds Management Limited is one of the most popular, largest asset management firms in India. Founded in 1987, it’s a joint venture between the State Bank of India and AMUNDI (A global fund management company.) SBI currently holds a 63% stake and the remaining 37% belongs to AMUNDI. SBI mutual funds offer a wide range of mutual fund schemes such as equity mutual funds, debt funds, hybrid mutual funds, solution-oriented schemes, and Exchange-traded funds, to name a few. The company also launched an Alternative Investment Fund (AIF) in 2015 and may launch more funds in the future. 

With over 53+ mutual funds schemes, SBI mutual funds have INR 1.65 trillion assets under management (AUM) and over 12 million investors. SBI fund management has been offering international investor solutions since 1988. The company guides and manages India’s dedicated offshore funds. The company also offers Portfolio Management services catering to HNIs, large provident funds, institutions, and selective trusts. 

SBIFM’s AAUM is 44% more than the next largest peer (ICICI prudential mutual fund). And has hit a 27% CAGR when the rest of the market delivered 10% over a five-year horizon. As per the recent financial reports (March 2023), SBI fund management has made a net revenue of INR 2297.27 crores.

NSE India limited share price

Founded in 1992, the National Stock Exchange (NSE) is India’s leading stock exchange with ~1968 companies listed on it. In 1994, NSE launched electronic screen-based trading, and internet trading in 2000.  NSE’s flagship index, Nifty 50, serves as a global benchmark for Indian capital markets. NSE is the world’s largest derivative exchange with 21% of the global derivative contract trading. It’s also the second-largest derivatives exchange in the world for currency futures trading. The capital market business model of NSE primarily offers trading services, exchange listing, market data feeds, indices, and technology solutions.

Its cash market offers a platform to trade equity shares, mutual funds, ETFs, REITs, Sovereign Gold bonds, government securities, T-bills, etc. The debt market offers government, corporate bonds, commercial papers, and other debt instruments. NSE also provides index management services for equity indices, hybrid indices, and customized indices for asset management companies, insurance companies, investment banks, PMS, and stock exchanges. The company has performed at a CAGR of 35% over the last three years. NSE’s FY23 revenue has reached INR 12650 Cr. with a 63.27 net profit margin. 

csk share price

The four times IPL winner, CSK is the only sports team in India available for the general public to invest in. CSK is one of the most popular IPL franchises with a strong brand value. The brand was founded in 2008 as an IPL cricket team representing Chennai, Tamil Nadu. It is a wholly-owned subsidiary of India Cements. Being a popular IPL franchise, CSK became the country’s first sports unicorn. The brand’s market cap was raised to 7600 crores (more than 1 billion) with the share prices in the unlisted market trading between Rs. 210-225. 

Chennai Super Kings generates revenues from various sources such as- Gate ticket collection, In-Stadium Advertisements, and Merchandise sales. The team earns 60% of the total revenue from Media Rights, which is the highest revenue stream. The revenue from sponsorship makes up around 15-20% of total revenue followed by 10% from ticket sales. While the Pandemic had an impact on many brands, CSK managed to maintain a balance via indirect revenue streams. One of the most loved IPL teams, CSK, will continue to generate solid revenue via merchandise sales, sponsorships, portions of prize money, and digital viewership. 

studds share price

Being a global leader in two-wheeler helmet manufacturing, Studds accounts for almost one-third share of the organized two-wheeler helmet market. Studds had an opportunity to manufacture face shields and protection wear in high demand during Covid-19. Studds’s sales received another boost when The Ministry of Road Transport and Highways declared that India would only manufacture and sell BIS-certified two-wheeler helmets. Demand for two-wheeler helmets is growing rapidly post-COVID-19 as transportation has resumed. Besides, people often replace their helmets within two to three years, enabling more business for the company. 

Studds is also expanding its accessories manufacturing with riding gear gloves, goggles, jackets, and safety and storage gear. Additionally, Studds also has an opportunity to dominate bicycle helmet sales. The company is operating in more than 40 countries including Europe and US. Recently, the company has doubled its manufacturing capacity in Faridabad, Haryana. 

Nazara Technologies: Was listed on the stock exchange on March 30, 2021, at INR 1,981, an 81% boost from the issue price of INR 1,101.

TATA Technologies: Was listed on the stock exchange on 30th November, 2023 at INR 1,200, a whopping 140% higher than the issue price of INR 500.

Kurl On: In July 2023, Kurl On’s biggest rival Sheela Foam acquired a 95% stake in the company and offered a buyback option to shareholders. 

Unlisted shares are not available to invest via the established stock exchanges as they’re traded over the counter or via private platforms. If you want to buy unlisted shares of the above companies, get in touch with us anytime and our team will take care of the rest.

Invest in unlisted shares.

Buying unlisted shares is a great strategy to diversify your investment portfolio. These shares are fairly safer than listed shares due to less volatility. And the major benefit of investing pre-IPO is the allocation confirmation. With Unlisted shares, investors have the opportunity to gain either pre-listing gains or listing gains.

Share prices of unlisted companies often boost right before the IPO. With a huge demand in the unlisted market, you can sell your shares and earn pre-listing gains. Or, you can wait until the IPO is live and get profit from listing gains. Please note that the pre-listing and listing gains are subject to market risk. To avoid any risks, we have chosen known brands with high brand value and promising futures. Get in touch with us if you are interested in buying the above shares. Experts at VNN Wealth will guide you through the process.

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Personal Finance

Top 5 Dos and Don’ts of Mutual Funds

Investing in mutual funds is as easy as ordering your favorite shoes online. 

The financial awareness has increased and so are the number of mutual fund investors. Anyone can start investing with as little as INR 100/month via SIP. Mutual funds can accompany you throughout your wealth-creation journey. And if you want that journey to be smooth, you must incorporate certain practices. 

In this blog, we will cover some of the common dos and don’ts of mutual funds. Let the learning begin…

What You Should and Shouldn’t Do with Mutual Fund Investments

Below are some factors to keep in mind as an informed mutual fund investor. 

Mutual funds have various categories primarily divided into equity funds, debt funds, or hybrid funds.

Equity funds invest in company stocks across the market cap. Debt funds are a collection of government bonds, corporate bonds, T-bills, etc. Hybrid funds are a combination of both.

Each fund has a different composition, category, and associated risk. You can read the mutual fund factsheet to understand the fund objective before investing in it.

Investing in a fund that doesn’t fit your risk appetite is like buying the wrong size of shoes. 

The easiest way to understand your risk appetite is by evaluating your income and expenses. Whatever money you are left with after expenses can be invested. 

Here, you may want to consider your ability to take risk instead of willingness
You may like to read-> Invest as per your risk appetite.

Once you understand your risk appetite- define short, medium, and long-term financial goals. For example, buying a car, moving to a bigger home, etc. 

Your risk appetite and financial goals collectively help you plan your investment across mutual funds. 

Consistent investments can help you achieve your financial goals faster. Systematic Investment Plan (SIP) is a popular strategy for consistent investment.

You can start an SIP of 100/month, 500/month, 5000/month or whatever amount you are comfortable with. 

Benefits of Investing via SIP.

Investors have to pay tax on capital gains earned from mutual funds. Equity mutual funds, debt mutual funds, and hybrid mutual funds have different tax implications.

Short-term capital gains will be applicable on investments withdrawn before 12 months for equity funds and before 36 months for debt funds. Whereas, equity investments redeemed after 12 months and debt investments redeemed after 36 months will fall under long-term capital gain taxation. 

Here’s a quick overview of mutual fund taxation rules for Indians and NRIs

Your income, financial goals and risk appetite will change with time. Update your investments accordingly. 

You can consider increasing the SIP amount, changing asset allocation, and redefining your financial goals. 

Regular portfolio monitoring also helps you restructure mutual fund categories that you’ve invested in. 

Your financial expectations, goals, and horizon will always be different than someone else’s. Just because a friend invested in a certain fund doesn’t mean you should too.

Investing based on other’s opinions might do more harm than good to your portfolio. Instead, consider hiring a wealth manager/financial advisor who can sketch a portfolio of funds for you. 

A lot of investors make the mistake of choosing funds based on past performance. The fund’s history has very little to do with its future performance.

Mutual fund past performance guarantees nothing. It only showcases the consistency of the fund during changing economic cycles.

The better way to judge a fund is by checking the underlying assets, the fund manager’s track record, and the rolling returns of the fund with respect to the benchmark.

Diversification plays a crucial role in bringing superior returns with downside protection. To achieve true diversification, you must distribute your money among various asset classes such as stocks, bonds, gold/silver ETF, etc.

The right asset allocation encourages balance and diversification. When one asset class declines in performance, the other can keep your portfolio moving. 

Therefore, avoid investing the majority of your money in a single asset class. 

Seeing your portfolio performance drop during a volatile market may cause emotional turmoil. 

At times like this, panic selling is the last thing you want to do. In fact, correction in the market should be used to invest more. 

The market bounces back as the economy recovers or as soon as the event passes (for example COVID-19). All you have to do is stay patient and let your wealth grow at a steady pace. 

Many investors focus more on timing the market than consistently investing. Let’s assume for the sake of example- Sensex drops by 1000 points from the current 73150 points (as of 15th Jan 2024), i.e. 1.36% drop.

If you plan to stay invested for a longer horizon, that 1.36% drop is not significant enough to time the market. Rather start an SIP and let your investment consistently grow at a steady pace.

Mutual fund investments are meant to achieve financial goals in a given time frame. Therefore, focus on spending more time invested in the market.  

Invest in Mutual Funds

Mutual funds are powerful tools for building wealth. However, investing in them requires patience and awareness.

By following the above dos and don’ts, you can certainly navigate through the changing economic situations. Follow your financial goals and stay informed.

If you are looking for financial advisors in Pune, experts at VNN Wealth can meet you in person. Reach out to us via Email. If you’re not based in Pune, you can also book a consultation call at your preferred time. Get a complimentary portfolio review and plan your investments accordingly. 
Read more personal finance insights.

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Personal Finance

Investing as per Your Risk Appetite and Risk Tolerance

Risk! 

It can feel like a threat for one investor and an opportunity for another. 

So let me ask you this- have you ever evaluated your risk profile before investing? Kudos, if yes.

But if not, you are neglecting one of the crucial factors to consider before investing your hard-earned money.

Got 10 minutes to spare? Let’s understand your risk profile based on your risk appetite and tolerance. And while we’re at it, we’ll also discuss which investment instruments align with your risk profile.

Pour yourself a cup of tea. Let’s begin…

What is Risk Appetite?

Risk appetite is your willingness to take risks in order to generate higher returns on your investments. It’s a comfort zone where you feel safe, brave even.

Ask yourself this- what extent of risk are you willing to take without losing your sleep? 

If you’re comfortable risking 40% of your investment for a short time for larger wins in the long run, then you’re an aggressive investor. Between 20-30%, you have a moderate risk appetite. And only 10% indicates you are a conservative investor. 

If you can sleep peacefully, that’s the extent of risk you can take, which is your risk appetite.

However, appetite is one thing. Being able to tolerate it is another. 

What is Risk Tolerance?

Let’s say you want to buy a new phone. You’ll check the specifications and features of the phone. But most importantly, you’ll check the price. Does the phone fit your budget?

Every time you buy something, you filter it out within the price range. So, even if you would want to buy a flagship phone, you’ll only do so if it fits your budget. 

Similarly, you might be willing to take more risk. But does your risk-taking ability align with your will? Something to think about.

What Factors to Consider to Evaluate Your Risk Tolerance? 

Many times when I review a client’s portfolio, I realize that they have misjudged their risk profile. A lot of investors believe they can invest aggressively, but they find it difficult to digest the volatility of the market or when the market enters a bear phase. 

So here are some things you must consider to understand your risk tolerance. 

1. Your Monthly Income and Expenses

Investors with a steady flow of income can take slightly higher risks. With income coming every month, they can consistently invest and still have money left for emergencies. 

However, investors with unstable incomes will have a different risk appetite and have to invest carefully. 

Your monthly income and expenses play crucial roles in your overall risk profile. Choosing the investment instruments will depend upon your risk profile. 

2. Your Age

Age plays a crucial factor in determining risk tolerance.

Let’s take the example of three investors. A 25-year-old investor with years ahead to earn and invest more. A 50-year-old investor nearing retirement who has generated wealth over the years. And a 70-year retired investor managing a retirement corpus.

A 25-year-old investor can take more risk by holding the investment for years. (Aggressive risk appetite.)

A 50-year-old investor might take a slight risk, however, would prefer safer instruments. (Moderate risk appetite.)

And, a 70-year-old investor would want to keep the retirement corpus safe, hence, would go for the safest options. (Conservative risk appetite.)

As per the thumb rule of ‘100 (minus) age’% of equity exposure: The 25-year-old investor can have 75% exposure to equity. The 50-year-old investor can have 50% exposure to equity. Whereas the 70-year-old investor can have only 30% equity exposure.

However, we have met aggressive investors in the 70+ age group wanting to invest in equities. They understand the equity market and are comfortable with the risk. 

It’s up to the investor’s risk appetite.

3. Your Emotional Strength

How upset would you be if your recent investment declined by 20%? Would you regret your decision or be confident about the future market rally?

Market volatility causes many investors to panic-sell their investments. Historical data clearly shows that the market eventually bounces back from any crash. The post-COVID bull phase is the most recent example.

So, if you panic during a market crash, you might be either a conservative or a moderate investor. An aggressive investor might invest more during a market crash. 

4. Your Investment Horizon

Your investment horizon decides how aggressive or conservative you want to be. For example, say you want to park your money for the next 3 to 6 months. For a timeframe that narrow, you’d prefer safer avenues such as liquid funds, short-term debt funds rather than equity investments. 

Similarly, if you can stay invested for 5+ years, you can consider high-risk investments. A longer time horizon can mitigate the risk. The economy is bound to grow, making the investment less risky. 

What is a Risk Profile?

A risk profile is a collective verdict of risk appetite and tolerance. Your risk profile indicates where you should/can invest to fulfill your financial goals.

So…the moment of truth:

Invest as Per Your Risk Profile

Aggressive Investors can invest in: Pure equity mutual funds, Direct equity, Emerging sectors via sectoral funds, Thematic Funds, Alternative Investment Funds, Unlisted Shares etc. And to manage all that, you can also opt for Portfolio Management Services

Moderate Investors can invest in: Hybrid funds such as the Balanced Advantage Fund, and the Multi Asset Fund. A small percentage of pure equity funds would contribute to the portfolio growth.

Conservative Investors can invest in: Various types of debt funds, Fixed Deposits/Corporate Deposits, Public provident funds, etc. 

The above categories are just for reference. You must also factorize your time horizon and financial objectives. 

For example, if you are investing for a short-term goal (say 6-12 months), then investing in pure equity won’t make sense even for aggressive investors.

Similarly, conservative investors with 5-10 years of investment horizon can look at hybrid funds or large cap funds instead of FDs or debt funds. 

Final Thoughts

Risk profiling, a very crucial first step, will give you an idea of the investment instruments you can look at. 

The next step is to finalize your financial goals. It will help you filter out the instruments with the appropriate time horizon. 

Your risk profile and financial goals may change with time. Therefore, you must periodically evaluate and rebalance your portfolio.

If you want to review your portfolio and calculate your risk profile, experts at VNN Wealth can assist you. Get in touch with us. Or schedule a finance consultation call at your convenience. 

 

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Personal Finance

How to Ensure You Never Run Out Of Money After Retirement

Retirement is the golden era of your life. You finally relax. Sit back in your rocking chair with a cup of tea. You have time for your family and most importantly, for yourself. 

However, the ride through the retirement years will only be smooth if you plan for it beforehand.

Currently in India-

  • Only 10% of the 60+ population is earning from the pension or the rent,
  • About 60% of men and 25% of women above 60 are still working,
  • And 60% of the people above the age of 70 are dependants.  

Planning for retirement is one of the crucial pillars of your financial journey. You spend years working hard and building wealth. That wealth should keep you afloat for the rest of your life.

So here’s how to ensure you never run out of your retirement corpus…

5 Things to Consider While Planning For Retirement

1. Emergency Fund

Emergencies never announce themselves. A sudden expense may dent your financial plan. It’s always better to be prepared for such scenarios. Build a highly liquid emergency fund that you can withdraw whenever needed.

2. Inflation

With a 6% inflation rate, today’s INR 50,000 monthly expense would be INR 1,60,000 after 20 years. You will need more money to continue or upgrade your lifestyle after retirement. Therefore, always consider the inflation rate while planning your financial goals.

3. Cash Flow

While planning retirement, keep your short, medium, and long-term goals in mind. Goals are essentially your expenses. Let’s say your monthly expenses after retirement are INR 2,00,000. To plan expenses for the next 3 years, you’ll need INR 7,200,000 kept in liquid assets for easy withdrawals. The rest of your retirement corpus can be invested as per your expenses in the next 5 to 6 years or even longer as per your financial plan. 

4. Taxation

Similar to inflation, taxes are unavoidable. You have to pay tax on gains and income generated through your investments. You can plan your investments to benefit from certain tax exemptions. 

5. Legacy

Transferring legacy to successors is still quite common in India. If you are planning to hand over your assets to your children, you may want to plan your finances accordingly. Consider your monthly expenses and the cash flow to have a comfortable life for yourself. What’s left after that can be invested in various assets for your children to inherit later. 

The 3-Bucket Strategy For Effective Retirement Planning

This is the most commonly followed strategy to manage your retirement corpus. The 3 buckets represent your financial needs for a particular period. Together, these buckets keep your funds moving, thereby offering you financial freedom.

Bucket #1: Short-Term Financial Goals (1 to 3 Years)

The 1st bucket, AKA Safety Bucket, contains highly liquid assets to cover living expenses for up to 3 years. 

Let’s assume for the sake of example that your monthly expense after retirement would be INR 2,00,000. In that case, you can fill bucket 1 with INR 7,200,000 to comfortably cover 3 years of expenses.

Those INR 7,200,000 can be invested in high-liquidity instruments. 

  • The most common liquid and safe instruments are Fixed Deposits, Certificates of Deposits, or Liquid Funds. 
  • Money Market mutual funds can also be included in this bucket. These funds invest in highly liquid assets.
  • While many prefer keeping funds in savings accounts for emergencies, you can also consider short-term debt funds. 

Debt funds offer liquidity, better yield than savings accounts, and are available in variable time horizons. 

This bucket offers financial safety even during market downturns and avoids the need to sell long-term investments.

Bucket #2: Medium-Term Financial Goals (3 to 6 years)

Bucket 2 is a Stability Bucket for medium-term goals. The assets in this bucket cater to 3 to 5 years of financial needs. 

While you are emptying the 1st bucket, investments in bucket 2 can generate interest to refill the 1st bucket. 

  • Fill the second bucket with Corporate Fixed Deposits, Hybrid Mutual Funds, and Senior Citizen Saving Funds.
  • Corporate FDs are slightly riskier than bank FDs but offer superior interest rates. That extra 1 to 2% can make a huge difference.
  • Hybrid Mutual Funds invest in equity, debt, and gold. For example- Balanced Advantage Funds, Multi Asset Funds. These funds are less riskier than pure equity funds and are suitable for intermediate financial goals. 
  • Senior Citizen Savings Scheme can also be a part of a medium-term financial plan. Retirees can invest INR 1,50,000 in a financial year to get an exemption on tax under section 80C of the IT Act. 

The second bucket aims towards income production and stability with less volatile investments. 

Bucket #3: Long-Term Financial Goals (7+ Years)

Bucket 3 is the growth bucket for wealth creation. While the first two buckets are taking care of your expenses, the 3rd bucket can keep generating more wealth. You can keep it untouched, or use the gains/capital to refill the previous two buckets. 

Final Thoughts: How to Divide Your Retirement Corpus Into 3 Buckets?

It all depends on how much corpus you have generated over the years and what your expenses are going to be after retirement. 

There’s no one-formula-fits-all. It’ll change as per your financial requirements and goals. The idea is to keep the cash flowing through the buckets. 

If you want to manage your retirement corpus, experts at VNN Wealth will help you create a personalized 3-bucket strategy. Reach out to us Via Email, WhatsApp, Instagram, Or LinkedIn.

Browse more personal finance insights here.

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Personal Finance

8 Biggest Investing Mistakes to Avoid Before It’s Too Late

Do you ever feel like your portfolio is not growing as expected? That could be because you may have, unknowingly, made investing mistakes.

I have encountered plenty of portfolio blunders in my clients’ portfolios that go unnoticed by them. If kept unfixed, these errors can slow down your wealth creation journey. 

Don’t worry! It happens to the best of us. Even the savviest investors stumble at times.

In this blog, I’m sharing some of the most common investing mistakes in India and how to fix them. Let’s dive headfirst into it…

Investment Portfolio Mistakes to Avoid 

Mistake #1: Not Comparing The Mutual Fund to its Benchmark

You know how you love the butter chicken from that one particular restaurant? If you eat butter chicken anywhere else after that, you’ll compare it to the one that you loved. Nah! It’s not the same. Or, Yes! It’s pretty close to that one.

You start treating your absolute favourite butter chicken as a benchmark to compare butter chicken from every other restaurant.

Benchmark comparisons are a part of our life, especially while investing. 

Yet, the majority of investors that I have met, beginners or experienced, ignore the benchmark comparison. 

I’d say, benchmark comparisons are the easiest way to evaluate your mutual fund investments. Indices are clear reference points to review any fund’s performance.

You must compare funds with benchmarks such as BSE 200, NSE Nifty 50, Sensex, etc before investing and periodically evaluate them after investing.

If your fund is beating the benchmark- Great!

But a fund consistently underperforming its benchmark can be a concern. It might be a sign of poor strategy or lack of management. Keeping that fund in your portfolio will slow down your growth.

Fix: Dive deeper into why the fund is not beating the benchmark. And if required, re-allocate that money to funds in the same category that are beating the benchmark. 

Mistake #2: Being Too Hands-Off as an Investor

Imagine this. You build a nice garden in the backyard of your house. It’s gorgeous. Everyone is talking about it. 

But will it stay gorgeous if you forget to water it and take care of it? No! It will soon start to wilt. 

Similarly, not taking care of your portfolio, and being too hands-off with it, can be damaging. 

Your portfolio shows enough symptoms to determine what’s going wrong. For example: multiple fund manager changes, significant asset outflows, and prolonged periods of poor returns.

Fix: Don’t ignore the above symptoms of a fund. You might miss out on better opportunities elsewhere. Periodically review your portfolio’s health and proactively make decisions. Make sure your portfolio is always aligned with your financial goals, risk appetite, and market conditions.

Mistake #3: Long Tail of Underperforming Stocks

This is the most common mistake I notice while reviewing client portfolios. Stocks purchased due to some trend or a friend’s recommendation lead to too many stock holdings

Most times, the investors are unaware of the impact this may cause. It’s one of the reasons for over-diversification, which is as bad as under-diversification. 

You are lowering liquidity and losing out on investing in stocks that may deliver higher returns. 

Let’s say you have invested INR 1,00,000 in 50 stocks. For the sake of example, we’ll assume the average value of each stock is INR 20,000.

Now, say, one of the stocks doubles in value (INR 40,000) with a 100% return. Amazing, right?

Wrong! Despite the 100% return on a single stock, the overall portfolio returns would only be 2%. 

The ‘long tail’ of underperforming stocks can significantly lower the overall returns. Sooner or later, you’ll lose track of all the stock holdings. 

Fix: Discard underperforming stocks and invest that money in stocks or mutual funds that align with your long-term goals. 

Mistake #4: Buying Mutual Funds Based on Past Performance

I cannot stress this enough- past performance is not the only criteria to judge mutual funds. 

The economy keeps changing and so does the market. The fund that performed well in the past may not deliver similar returns in the future.

Fix: Instead of only relying on past performance, focus on the key ratios of the fund mentioned in the factsheet. Look at the rolling returns. It showcases how the fund performed in changing economic cycles. Additionally, always focus on YOUR financial goals and risk appetite before choosing investment instruments.

Learn how to read a mutual fund factsheet here

Mistake #5: Not Focusing on The Right Asset Allocation

I’ve met multiple investors who believe only equity delivers superior returns. Having an equity-heavy portfolio makes sense to them.

Yes. Equity does deliver superior returns over a longer term. However, like any other asset class, equity is also cyclical in nature. In order to be a savvy investor, you must invest in various asset classes to ensure that your entire portfolio is constantly growing. 

Take a look at the table below.

Each asset class has had its own ups and downs over a decade.

An equity-heavy portfolio would have delivered significant returns in 2017 and 2021. But the same portfolio would have underperformed in 2016, 2018, and  2022.

Fix: Invest across various asset classes. A balanced allocation towards multiple asset classes can deliver superior returns with downside protection. This way, when equity performance drops, gold or debt can reduce the downside risk in your portfolio and vice versa.

Read more about asset allocation here

Blunder #6: Accidentally Falling For Schemes with Low IRR

Have you ever been lured in by an insurance scheme that promises guaranteed returns? ‘Invest xyz per month for 7 years and earn this much for the next 8 years.’ Well…something like that. 

Let me tell you, these sales pitches are amazing. They know how to make you believe in those numbers. They throw in the words like minimum risk, guaranteed earnings, and whatnot.

The best of the best have fallen for similar schemes that are nothing but slow torture. If you calculate the IRR (Internal Rate of Return) of the scheme, the overall returns are never attractive considering you’re committing to the product for a really long duration. 

Fix: Don’t blindly invest in such schemes without calculating the actual IRR. You can use a simple Excel formula to calculate the IRR before you make a decision. 

Mistake #7: Investing in Multiple Mutual Fund Schemes from the Same Category

You might create a redundant investment if you invest in more than one mutual fund scheme within the same category.

In most cases, the underlying assets in two funds from the same category might be the same. 

Let’s say, you’ve invested in two large-cap funds. We’ll take ICICI Prudential Bluechip and Kotak Bluechip fund as an example.

These are some of the underlying assets in both the funds:

You’ll notice that the majority of the assets in both funds are identical. This can also be viewed as a co-relation matrix, which shows that 97% of the stocks in both funds are exactly the same. 

Here’s a snapshot of the correlation between multiple large-cap funds-

The degree of correlation between these funds ranges from 88% to 99%, which indicates similar underlying assets. 

Fix: To ensure true diversification, invest in different categories of mutual funds or asset classes with low correlation. You can compare the factsheet of the two funds to get an idea of their top holdings. For a more detailed mutual fund comparison and an accurate correlation matrix, contact VNN Wealth advisors via our official email, Instagram Channel or LinkedIn Page

Mistake #8: Panic Selling

Another common mistake many investors make is panic selling. Market volatility may cause anxiety. Understandable!

However, selling off your investments in panic is the last thing you want to do. 

Let’s take the example of the 2008 global economic crisis. The Sensex had fallen by 63% from its all-time high of 21,207. 

Many investors sold their investments in a panic, causing a huge loss. 

If these investors had resisted the urge to panic sell and stayed invested for the next 5 years if not more; their capital would have appreciated by 115%. And about 286% in the next 10 years. 

The point is, you cannot time the market. Instead of looking at small wins, focus on long-term investments. 

Market volatility is inevitable but so is a market rally when the economy stabilizes. Mutual fund returns can beat inflation when you stay invested for a longer horizon. 

Fix: Hold your investments for a longer horizon, especially when the markets are volatile. If you panic during a market crash, talk to your financial advisor. They will provide the necessary reassurance and guide you through the changing economic cycles.

Final Words

So, there you have it- the top 8 investment portfolio mistakes you must avoid at any cost. 

Building wealth is a journey that takes years. In fact, the more years you spend invested, the larger the wealth you generate.

Invest wisely. Diversify your portfolio across asset classes. Let your investments grow on auto-pilot but don’t forget to rebalance your portfolio periodically. 

Reach out to VNN Wealth if you have any questions.  

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Personal Finance

When Should You Consider PMS: Choosing a Portfolio Management Service

Portfolio Management Service (PMS) offers customized portfolio management for high-net-worth individuals and Non-individuals such as HUFs, partnerships firms, sole proprietorship firms and body corporate.

A skilled portfolio manager handles your portfolio, which can be crafted as per your financial goals and objectives. 

When you invest in a mutual fund, your money goes to the fund house and then into the fund. However, in PMS, the transactions take place through your demat account. Therefore, you can see all the transactions happening on your behalf. 

You may like to read- Basics of Portfolio Management Service before moving ahead.

When is the Right Time to invest via Portfolio Management Service?

1. More than 50 Lakhs of Portfolio to Manage

PMS caters to HNIs with a minimum of 50 lakhs (as per SEBI guidelines) of investment. 

After spending years with mutual fund investments, you may have gotten comfortable with the risk associated with it. Now, if you don’t mind a slight more risk for even better rewards, PMS can be your next step.

Pro Tip- Entrust a PMS house with 50 lakhs only if that amount is not more than 20% of your overall portfolio. 

2. Managing a Large Number of Stocks

Recently, especially right after COVID, we reviewed a lot of portfolios with a large number of stock holdings. 

At a certain point, losing track of all these stocks is bound to happen. Investors may not have enough time to study the performance of each company in the current market. This leads to a long tail of underperforming stocks. 

The declining performance of multiple stocks creates a significant dent in your overall portfolio return. 

Instead, you could invest in stocks that align with your risk appetite and goal by selling underperforming stocks. 

Experts at PMS House can help you manage all your stock holdings. You can convey your buy/sell preferences and the portfolio manager will re-shape your portfolio accordingly. 

3. ESOPs Holdings

Salaried individuals may have ESOP holdings over the years. 

While reviewing client portfolios, we’ve often noticed that the biggest holding in their overall portfolio belongs to ESOP. Sometimes 90% of the portfolio consists of a single ESOP.

This leads to high-concentration risk. The returns will depend on the performance of a single ESOP. Your portfolio may not beat the benchmark. 

With PMS, you can filter out the stocks you want to keep or sell. You can set your preferences and invest accordingly.

For example, if you already hold an ESOP of Infosys, you can avoid buying more stocks of the same company. That way, you can truly optimize your portfolio. 

A well-balanced and diverse PMS commonly holds 20-30 concentrated stocks. Portfolio managers will readjust your portfolio accordingly by buying/selling stocks. The right asset allocation can minimize the risk and maximize returns. 

4. Flexibility

PMS offer more flexibility compared to mutual funds. 

Mutual fund categories have to follow SEBI regulations on asset allocation. But also, there are many norms regarding the capping on the underlying stocks, bonds and cash holdings. Additionally, mutual funds do not have exposure to the unlisted stocks.

PMS can choose the asset composition as per investor’s preferences and market opportunities. You can have a concentrated portfolio of 20-30 stocks. 

If you are someone who follows Sharia law, you can avoid investing in alcohol, tobacco, gambling, gold, and silver trading, banking and financials, pork and non-vegetarian, advertising, media, and entertainment industries.

It is possible to invest beyond equity, debt, and gold. PMS can open a door towards alternative assets and sectors to invest as per your choice.

How to Select a Good Portfolio Management Service? 

Launching a PMS in India is much easier than launching a mutual fund. Therefore, there are a lot more PMSs to choose from. 

Without a wealth manager by your side, it would be difficult to narrow down your choices. A certified wealth manager/relationship manager can recommend a list of suitable PMSs. Get in touch with VNN Wealth to know more.

Once you have a bunch of options ready, here’s what to review in a PMS.

1. Evaluate the Credibility of a PMS

Make sure the PMS is registered with SEBI (Securities and Exchange Board of India). Head to their website to review their team’s experience and track record. 

Delivering successful results in various economic cycles is a sign of a good PMS.

2. Communication and Transparency

The whole point of having a custom portfolio is knowing what’s happening with it. Having an active communication right from the start is the key to assessing the PMS provider. 

Make sure you read the client testimonials on their site. Ask questions about strategies. See the response time and quality. As an informed investor, it is your duty and right to know everything. 

3. Fee Structure

PMSs either charge a fixed management fee and an exit load or a profit participation fee. Each PMS has a different fee structure. To give you an idea, the fixed management fee could be between 2 to 2.5% of the total asset value. The exit load depends on the holding period and withdrawal value and could range from 1 to 2.25%. 

The profit participation fee depends on the agreement you have with the portfolio manager. For example, the portfolio manager will share a small part of your profit if it crosses a hurdle rate of 10-12% p.a. return. 

It is crucial to understand the fee structure before you hand over your portfolio.

4. Strategies and Risk Management

As mentioned above, PMS customizes your portfolio as per your financial goals and the timeframe in which you want to achieve them.

Therefore, the investment strategy and risk management changes as per the investor’s risk appetite.

Similar to mutual funds, PMS also offers large-cap, mid-cap oriented investment options. You can build a strategy to meet your financial requirements and preferences. 

Your wealth manager will be able to guide you through the entire process. If you don’t have a wealth manager yet or want to hire a new one, VNN Wealth is just a phone call away.

Final Words

According to SEBI data, the assets under management of PMS have increased to 28.50 lakh crore by 2023, with 14% year-on-year growth. 

Many investors are actively seeking personalized investment opportunities to align with their financial goals. If planned right, PMS can offer superior returns compared to conventional investment avenues. 

If your portfolio meets the criteria mentioned in this article, you can definitely go for PMS. 

Take a complimentary portfolio analysis with VNN Wealth to know where your portfolio stands and which PMS to choose. Contact us to know more. 

Follow @vnnwealth for more insights in the world of finance. 

Categories
Personal Finance

Importance of Asset Allocation to Create a Balanced Portfolio

Asset Allocation plays a vital role in the overall performance of your portfolio.

You know how a balanced mix of spices makes a delicious biryani? Similarly, a combination of various asset classes optimizes your investment portfolio. 

Market conditions dynamically change with time. No one can predict the accurate performance of a single asset class. 

The right asset allocation can hold your portfolio together during changing markets. 

Read along to know more.

What is Asset Allocation?

Asset allocation refers to distributing/allocating your money to different asset classes. 

The allocation strategy ensures diversification. That way, the poor performance of one asset class can be recovered by another well-performing asset class. 

Different Asset Classes Include:

  • Equity: Stocks or equity-oriented mutual funds invest in companies listed on the stock exchange. This asset class is riskier compared to others but has the potential to deliver superior returns in the long-term. 
  • Fixed Income: Government bonds, corporate bonds, FDs, debt mutual funds, and money market instruments come under fixed-income securities. Safer than equity, this asset class can generate regular income.
  • Gold: Works as a hedge against inflation, currency fluctuations, geopolitical uncertainties, and global economic ups and downs. Gold/Silver ETFs can deliver superior returns compared to physical gold/silver and are easy to manage.
  • International Equity: Some selective mutual funds also offer exposure to international markets by investing in companies across the globe. 
  • Real Estate: Purchasing residential buildings, commercial buildings, and lands delivers returns via property appreciation or rent. This asset class is less liquid and may take a lot of time to deliver attractive returns. Investors can alternatively explore Real Estate Investment Trusts (REITs) which do not require buying a physical property. 

Importance of Asset Allocation in Portfolio

1. Balancing Risk

Asset allocation avoids dependence on a single asset class. Refer to the image below and you’ll notice that every asset class performs differently in changing economic conditions. 

[Data Source: Bloomberg]

In the year 2021, equity delivered 26.53% returns, debt delivered 1.4% and gold was underperforming. 

But in 2022, gold picked up pace and equity, debt declined by a large margin. 

An equity-heavy portfolio would have delivered significant returns in 2021 but would have underperformed in 2022.

Which is why, allocation across multiple asset classes can together balance the returns. 

2. Ideal Returns

Multiple asset classes can significantly improve your chances of earning superior risk-adjusted returns. Explore the above table again. Each asset class goes through its ups and downs every year. 

An equity-heavy portfolio would have suffered in 2016, 2018, and 2019 when gold was delivering superior returns. However, a portfolio with a mix of equity, debt, and gold would deliver ideal returns considering the state of the economy at the time. 

You can invest in different asset classes with variable horizons to keep your portfolio moving. 

3. Adequate Liquidity

You can enter and exit mutual funds as per your preference. However, an investment horizon plays a vital role in receiving the returns you are aiming for.

Equity mutual funds usually deliver superior returns over a longer horizon. Every savvy investor would suggest you stay invested for 5-7 years or more. 

And while equity investments are catering to your long-term goals, you need something liquid to withdraw quickly. Liquid funds, short-duration debt funds can be included in your asset mix for liquidity. So that, you can redeem them during an emergency.

4. Tax Optimization

Every asset class has different taxation rules. Asset allocation strategies also focus on lowering tax implications to maximize returns. 

For example, the ELSS mutual fund is a popular tax-saving instrument offering a deduction of up to 1.5L under section 80C of the IT Act. 

Hybrid debt funds with more than 35% exposure to equity still have the old indexation benefit which pure debt funds don’t have anymore. 

Explore taxation on all categories of mutual funds here. 

5. Financial Goals Accomplishment

Your financial goals are easier and faster to achieve by asset allocation. It avoids confusion, prevents panic-selling during market volatility, and simplifies decision-making.

Factors to Consider For Effective Asset Allocation

1. Risk Profile

Your risk appetite, tolerance, and capacity assessment are crucial to plan asset allocation. 

The risk you can comfortably manage depends upon your age, family dependency, monthly income, expenses, and more.

Evaluate your risk profile for FREE with VNN Wealth to know which asset classes fit your profile.

2. Investment Horizon

Asset classes may have a lock-in period or a time-frame in which they deliver ideal returns. It is crucial to ensure the expected investment horizon before entering any asset class. 

3. Your Financial Goals

All your investments essentially cater to your financial goals. You can align your investments with goals such as buying a house, funding children’s education, planning for your retirement, etc.

Asset Allocation Strategies

1. Strategic Asset Allocation

Strategic investments maintain a core static mix of assets. For example, if an investor wants to maintain a 65:35 ratio of equity:debt, they will periodically balance the assets to the static ratio.

Let’s say you have distributed 1,00,000 into equity:debt as 65:35%, which will be 65000 in equity and 35000 in debt.

Now assume that your equity investment went up to 1,00,000 and debt went up to 40,000 bringing the total amount to 140,000. The asset ratio became 71.4% equity and 28.5% debt. 

In order to bring it back to 65:35, the equity and debt investment amount should be 91,000 and 49,000 respectively. Therefore, you’ll have to sell equity worth 9000 and allocate it to debt. 

Note- You can take advantage of market opportunities to rebalance the portfolio. For example, buying more equity when equity markets are down. 

2. Tactical Asset Allocation

Tactical asset allocation also follows a core asset mix but with opportunistic expectations. 

This strategy takes advantage of market trends and timing, to maximize returns. For example, including gold/silver in your portfolio when there’s an opportunity to earn higher returns on the precious metal investments. 

Another scenario is- a portfolio of 65-35% equity:debt can go to 80:20% if there’s the possibility of earning superior returns through equity for a short time. The allocation adapts to the market changes and can go back to the original formation when markets are steady.

3. Dynamic Asset Allocation

Dynamic Asset Allocation is more of a fund-level strategy. It changes the asset mix based on the market conditions. 

Counter-cyclical is a common dynamic allocation strategy in which- portfolio managers buy more equity when the markets are cheaper and sell it off at a higher price when markets correct. The debt allocation changes accordingly. 

Unlike the above two strategies, here you do not have to predefine the ratio of asset mix. It can go beyond rage if the opportunity presents itself. 

  • Evidently, Balanced Advantage Funds follow dynamic asset allocation.  
  • Multi Asset Funds offer exposure to equity, debt, gold and international stocks all in the same fund. 

You can explore various categories of mutual funds before sketching asset allocation for your portfolio.

Final Words

Now that you know the importance of asset allocation, you can choose the strategy as per your risk appetite. Many investors like to stick to the core asset mix while others explore dynamic allocation. 

A lot of investors also go with the thumb rule of age i.e. (100 – your age)% of equity allocation.

However, you must take your risk tolerance and financial goals into account. 

It’s always better to start with a set of goals and plan your investments accordingly. Connect with VNN Wealth experts for more insights on asset allocation. Rebalance your investment portfolio with us. 

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