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.

What is a Double Taxation Avoidance Agreement?

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.

Methods of Double Taxation Avoidance Agreement for NRIs

DTAA helps NRIs lower their tax liability using three methods:

1. Tax Credit

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.

2. Exemption

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.

3. Deduction Method

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

Documents Required to Claim DTAA Benefits

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.

What Type of Income Comes Under DTAA?

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.

Countries That Have Double Taxation Avoidance Agreement with India

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

Country	TDS Rate
USA	15%
UK	15%
Canada	15%
Dubai	12.5%
Oman	10%
Singapore	15%
Malaysia	10%
Spain	10%
Australia	15%
Germany	10%

Conclusion

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.

India is the world’s 5th largest economy with a GDP of $3.9 trillion and will reach $5.1 trillion in 2027. (Source). By 2030, India is likely to surpass Japan and Germany to become the world’s 3rd largest economy. Evidently, the Indian economy is rapidly growing and so are the investment opportunities. While Indians are benefiting from these opportunities, NRIs (non-resident Indians) are not left behind. There’s a wide spectrum of investment options in India for NRIs. NRIs can comfortably invest in Indian markets and diversify their portfolio. Here’s everything you need to know.

How can NRIs Invest in Indian Markets?

Non-resident Indians (NRIs) can invest in Indian markets by creating a Non-Resident Ordinary (NRO) or Non-Resident External (NRE) bank account. Having either of these accounts is mandatory to be able to transact in Indian currency.

Experts at VNN Wealth will guide you through the entire procedure, including KYC, after which you can start investing in the following options.

Smart Investment Options in India for NRIs

1. Mutual Funds

Mutual funds offer instant diversification to your investment portfolio. NRIs can invest in mutual funds via SIP or lumpsum, based on their financial goals and risk appetite. You can choose from equity mutual funds, debt funds, or hybrid mutual funds to balance risk-reward.

Equity funds are ideal for long-term investments. Debt funds offer a range of categories from short to long-term investments. Hybrid funds offer the best of both worlds. The rate of return on mutual funds depends upon the fund type and market movement.

Get in touch with experts at VNN Wealth for further guidance.

Note: Some Asset Management Companies (AMCs) may restrict NRIs from USA and Canada.

2. Alternative Investment Funds (AIF)

Alternative Investment Funds offer non-conventional investment options. NRIs can expand their portfolio beyond mutual funds by investing in AIF. AIFs have three categories: CAT I, CAT II, and CAT III. Each category provides diverse investment avenues such as private equity, venture capital, hedge funds, angel funds, etc. AIF CAT III is more popular among investors. You can contact VNN Wealth and our experts will walk you through the procedure.

Read more about AIFs.

3. Unlisted Shares (Pre-IPO Stocks)

Unlisted shares are gaining popularity among investors. NRIs can also buy shares of a company that hasn’t been listed yet. Unlisted stocks are traded off the market (Over-the-counter market). Therefore, it can be tricky to identify promising stocks.

VNN Wealth has handpicked unlisted shares with a good track record. These stocks are less volatile compared to the listed stocks as they’re not frequently traded.

Investing in unlisted shares unlocks the following benefits:
1. Guaranteed allocation if the company goes live on the stock exchange via IPO.
2. Pre-listing gains right before the company goes live.

NRIs can consider parking some of their funds in these shares to further diversify their portfolio.

4. Fixed Deposits

The good old FD is always worth looking into. While the return may not be as superior as the avenues listed above, it’s safe and can accumulate wealth over a period of time. NRIs prioritizing safer investments along with steady interest income can consider fixed deposits.

Here are three ways NRIs can create an FD:

1. Non-Resident Ordinary (NRO) Fixed Deposit allows you to invest your Indian income such as rental income, dividends, pension, etc.

2. Non-Resident External (NRE) Fixed Deposit converts your foreign currency into Indian currency to invest.

3. Foreign Currency Non-Resident (Banks) Fixed Deposit is a term deposit account. You can maintain and invest funds by transferring from your NRE account.

5. Portfolio Management Service (PMS)

Portfolio Management Service (PMS) provides tailor-made investments for HNIs. NRIs seeking personalized investments can also opt for PMS. A dedicated portfolio manager makes decisions on your behalf to optimize your investments & maximize returns. The minimum investment requirement for PMS is INR. 50,00,000. You will have to transfer the entire amount to the PMS house. Or, you can transfer your existing portfolio to the PMS house. If your portfolio is worth less than INR. 50 lakhs, you can invest the remaining funds by transferring the amount.

PMS helps you keep track of your stock, ESOP, and other asset holdings. The portfolio manager leverages market opportunities to deliver superior returns on your investments. You can directly communicate with the portfolio manager to gain insights. Read more about when is the right time to opt for PMS.

Taxation for NRIs

Taxation is an important factor to consider while investing. Tax rules for NRIs are similar to the Indian residents with slight exceptions.

The tax implications will depend upon the investment avenue and the investment horizon. The most important thing is to avoid double taxation. Make sure your country of residence has a Double Taxation Avoidance Treaty (DTAA) with India. You must also file The Foreign Account Tax Compliance Act (FATCA) self-declaration.

Also read- Mutual fund taxation for NRIs in India.

How Can NRIs Benefit From Investing in India?

1. NRIs with funds lying idle in India can invest without moving funds out of India. This will generate steady income for themselves or dependant parents in India.

2. NRIs returning with foreign assets can explore investment opportunities in Indian markets to amplify wealth.

3. NRIs planning to return to India after retirement can build a solid retirement plan by investing funds in various assets

Final Thoughts

India is likely to overtake Japan and Germany to become the 3rd-largest economy in the world. Sectors like Auto, Cement, Telecom, Financials, etc will significantly contribute to the growth. NRIs can explore plenty of investment options in India across various sectors and expand their portfolio.

A wide range of investment instruments, such as mutual funds, AIFs, unlisted shares, and FDs, are easily accessible. Savvy Non-resident Indian investors can also opt for Unlisted Shares/Pre-IPO to help generate that extra alpha on their portfolio. Make sure you evaluate your risk appetite and align your investments with your financial goals.

For more insights and guidance, contact VNN Wealth, and our experts will streamline your investments.

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. 

 

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.  

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. 

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. 

Every investor’s investment journey eventually comes down to one question- Stocks vs Mutual Funds, what to choose? There’s no correct answer. It all depends upon your financial goals and preferences. 

Which is why, you should carefully curate your investment portfolio. A balanced portfolio should be your ultimate goal. But…for the sake of understanding, let’s get to know both investment avenues a little better. Shall we?

What are Stocks?

Stocks aka shares are the units of a company. Upon buying them, you officially become a shareholder of a company. Stocks deliver returns in terms of gains and sometimes dividends when the company performs well. 

When you invest 1,00,000 in a company with a stock price of 1000, you will get 100 shares of the company. You need a demat account to invest in stocks. 

What are Mutual Funds?

Mutual funds are a collection of stocks of various companies. Apart from company stocks, funds also invest in other asset classes such as debt and money market securities.

Now, if you invest those 1,00,000 in a mutual fund of a NAV 1000, you get 100 units of a fund. These 100 units are a combination of multiple companies, enabling instant diversification. You do not need a demat account to invest in mutual funds.

Read along for a detailed comparison below…

Stocks vs Mutual Funds: A Detailed Comparison

1. Portfolio Diversification

Diversification is important to ensure a stable and sustainable portfolio. 

Diversification Via Stocks: You cannot invest all your money in one company. Having stocks from multiple companies is one way to introduce diversification. When one company underperforms, the other companies will keep the portfolio moving.

In order to achieve that, you have to study the market, analyze the performance of all the companies, time the investment, and keep track of all your stocks. It can surely be achieved with the right resources and knowledge, which individual investors may not have. 

Result? A long tail of underperforming stocks. Poor returns. 

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Watch a quick overview of why too many stocks can slow down your overall portfolio growth. 

Diversification Via Mutual Funds: Mutual funds offer instant diversification. The fund managers use their expertise and resources to analyze the market trends. Therefore, the fund comes with a collection of stocks carefully picked by the experts. 

You can further diversify your portfolio by investing in various categories of equity and debt funds. 

The only drawback is, you do not get to choose the underlying stocks. However, you can compare the performance of a mutual fund to decide which fund aligns with your goals. 

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2. Associated Risk 

No investment is safe. You cannot avoid the risk but you can balance it. Stocks carry higher risk compared to mutual funds. The returns on your portfolio depend on the performance of the specific stocks that you have bought. 

Mutual funds, on the other hand, have fairly diversified, well-researched stock holdings and can also balance the risk by asset allocation across equity and debt. The underlying assets keep moving up/down with the market. You can beat both volatility and inflation by staying invested for a longer horizon. 

3. Investment Amount

Let’s take a simple example- you have 10,000 to invest in. With 10,000, you’ll be able to acquire a limited number of good stocks, probably 3 to 4. Or, you may not be able to buy even a single stock of expensive companies. 

For example, MRF’s stock price is more than 1 lakhs. Honeywell Automation- 37256. Nestle India- 24000. P&G-17649. 

Even if you end up buying a couple of stocks, the entire performance of your portfolio will depend upon those stocks. 

However, if you invest those 10,000 in a mutual fund, you will be able to invest across market cap without worrying about the stock price. The corresponding units of your investment value will be allocated to you. 

You can either invest a lumpsum amount or start a monthly SIP. Usually, the minimum threshold of a lumpsum investment is INR 5000 and the minimum SIP amount starts from INR 100 per month. 

4. Taxation on Stocks vs Mutual Funds

You have to pay tax on gains earned via stocks and mutual funds. Stocks aka listed equity have the same tax rules as equity mutual funds. Investments redeemed before 12 months will attract a 20% Short-Term Capital Gain tax. Long-Term Capital Gains (investments redeemed after 12 months) are taxed at 12.5% above 1.25 Lakhs. 

Returns on debt mutual funds are considered as income. Both long and short-term capital gains are taxed as per investors’ tax slab.

You can benefit from the tax deduction of up to 1.5 Lakhs (under section 80c of the IT act) in a financial year by investing in ELSS mutual funds. Stocks do not offer any tax deduction benefits.

Stocks vs Mutual Funds: Who Should Invest in What?

Who Should Invest in Stocks?

Stocks are for investors who want to have complete control over their investments. They can pick the companies they want to invest in. 

However, picking stocks is not as easy as it sounds. Say you have 1,00,000 to invest. How would you distribute them among multiple companies? You’ll have to keep track of market trends, performance updates on companies, and a lot more. 

Stocks can be risky and you may not know how to balance that risk. And even if you keep investing in stocks, soon it’ll become difficult to keep track of. 

So, if you have time, research capability and knowledge to monitor all your stock holdings, only then consider buying individual stocks. 

Who Should Invest in Mutual Funds?

Mutual funds are for everyone. From beginners to savvy investors, anyone can craft a portfolio as per their risk tolerance and financial goals. 

You can choose the funds aligning with your risk appetite and instantly diversify across various asset classes.

Investors looking to invest a small amount each month can create an SIP. You can also consider investing in ELSS mutual funds for tax optimization.

Let your investment in mutual funds grow over a longer horizon so you can even withdraw a fixed income via SWP. 

Final Words

It all narrows down to what your preferences are and how much time you have. Both investment avenues have their benefits and limitations.

You must wisely choose where you want to invest your hard-earned money. 

The first step would be to craft your financial goals and the time in which you want to achieve them. Work backwards to plan your investments accordingly. 

Consider talking to your wealth manager. If you don’t have one, VNN Wealth experts can review your portfolio and guide you through the process. 

Mutual funds are the best way of building wealth and earning a fixed income from it. Be it a lump sum investment or SIP, mutual funds will deliver superior returns in the long term. 

And once you have enough wealth built, you can start earning income from your mutual funds.

There are two ways of earning a fixed income from your investments:

• Systematic Withdrawal Plan (SWP)
• Income Distribution Cum Capital Withdrawal Plan (Previously known as Dividend Plan.)

Let’s compare both in detail.

How Does a Systematic Withdrawal Plan Work?

A Systematic Withdrawal Plan (SWP) is an automated way of withdrawing a fixed amount from your mutual funds at regular intervals. Investors can define the amount and frequency at which they want to earn income. 

To put it simply, SWP is the opposite of a Systematic Investment Plan (SIP). In SIP, a predefined amount goes from your savings account to a mutual fund of your choice. SWP plan sells units of your mutual funds and transfers the amount to your bank account. 

Pro Tip- SWP is more effective when you give time to your fund to grow and benefit from the power of compounding. Stay invested for a longer duration. Once you have enough wealth built, you can start a SWP. It is one of the most tax-efficient ways to generate a consistent inflow, especially post-retirement. 

How Does The Income Distribution Cum Capital Withdrawal Plan Work?

In the IDCW (Dividend) plan, investors periodically receive a profit made by the fund. The mutual fund dividend plan works differently than the stock dividend.

In the case of mutual funds, the unit price increases with capital appreciation, interest earned on bonds, and dividends. Therefore, the income received is not like the dividend from a stock but your own profit.

Example:

The unit price (NAV) of a mutual fund is INR 100. After capital appreciation, bond interest, and dividends, the price goes up to INR 120. 

Now, if the mutual fund declares a dividend of INR 10 per unit, you will receive the amount (INR. 10 x No. of units) in your account but the NAV will go down to 110. 

Let’s say you have purchased 1000 units of a mutual fund with an NAV of 100/unit. You will end up investing INR 1,00,000 in an IDCW mutual fund.
 

The income investors earn from the IDCW plan is pulled out of the profit from their own investments. 

In the case of stocks, investors receive the dividend as an additional payout over and above the appreciated capital. Therefore, neither the principal amount nor the earned profit is reduced after dividend payouts. 

But with IDCW mutual funds, the appreciated amount goes down after the payout. This created confusion among investors. Therefore, SEBI renamed the Mutual fund dividend plan to Income Distribution Cum Capital Withdrawal Plan for clarity. 

In the IDCW plan, investors do not get to choose the amount or frequency of the payout. Therefore, it’s a less flexible plan compared to SWP.

A quick overview of SWP vs IDCW 👇

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SWP vs IDCW Plan: Top 3 Differences

1. Flexibility of Choosing the Fixed Income

A systematic Withdrawal Plan allows investors to select the payout amount, frequency, and date. IDCW, on the other hand, depends on mutual fund performance and the fund house’s decisions. 

Let’s say you start an SIP of 20000 at 12% p.a.

You will accumulate:

• 26,39,580 in 7 years.
• 46,46,782 in 10 years.
• 1,00,91,520 in 15 years.
• 1,99,82,958 in 20 years

The SIP amount and horizon depend on your financial goals. 

Now, after 20 years you can comfortably withdraw 1L/month as a regular income for the next 20 years via SWP.

The remaining amount will keep compounding.

It is clear that SWP offers more flexibility compared to a dividend plan. It also helps you plan a source of income ahead of time. 

2. Surety of Receiving the Income

Receiving a payment via the IDCW plan depends on decisions made by the fund houses. The frequency and amount may change as per the fund’s performance. 

SWP, on the other hand, offers surety of payouts. You have full control over when you want to start SWP, for what amount, and how often.

You will receive the income irrespective of market conditions. 

3. SWP vs IDCW: Tax Implications

One of the important factors to consider before choosing an income plan is the applicable tax. 

Dividends are a form of income, therefore, will be taxed as per your tax slab. So, if you fall under higher tax brackets, a dividend plan may not be ideal for you.

Systematic Withdrawals are a form of mutual fund redemptions. Taxation on mutual fund redemption depends on the holding period.

• If you start SWP within 12 months of your investment, you will attract a 20% Short-Term Capital Gain tax on your withdrawals. 
• Holding your investment for more than 12 months will attract a 12.5% Long-Term capital gain tax on withdrawals above 1.25 Lakhs in a financial year.

Therefore, SWP becomes a more tax-efficient fixed-income avenue than a dividend plan. 

Note- It is always better to hold your mutual fund investments for a longer duration. Not only is it tax efficient, but also helps you accumulate larger wealth by the power of compounding. 

Which Fixed Income Option Should You Choose Between the Two?

Investors who do not rely on income from mutual funds but wouldn’t mind a periodic payout often go for the IDCW plan. It is not their primary mode of generating regular income. 

IDCW plan does not wait for the principal amount to grow by compounding. Therefore, many investors prefer the growth plan. 

SWP is suitable for investors looking to generate regular income on their own terms. It offers more flexibility and tax-efficient withdrawals. It is advisable to let your money grow for years and then start the SWP. 

Choosing a suitable plan entirely depends upon your financial goals and preferences. 

Final Thoughts on SWP vs IDCW

To answer the primary questions- SWP vs IDCW (Dividend): Which one is better for regular income from mutual funds?

SWP is the clear winner because it gives you the freedom to choose the amount and frequency. The income withdrawn via SWP is more tax-efficient than the dividend income. Investors wanting to earn a salary even after retirement should go for SWP. 

It is wise to have clear financial goals to select the right plan. If you have any further queries, feel free to reach out to us. Experts from VNN Wealth would be happy to help you shape your investment portfolio.