Category: Mutual Fund Investment for Defense

17 Sep 2015
Gift to a loved one How about a Mutual Fund SIP

Gift to a loved one? How about a Mutual Fund SIP?

Divesh Kumar has recently retired as a contended man. He hasfulfilled his duties as a devoted father, caring son and loving husband all his life. He now wants to gift something long lasting for his two lovely grandchildren which he and his wife fondly dote on. They both decided to contribute for higher studies for them by contributing some money every month. Their first impulse was to save in a bank Recurring Deposit (RD) but wanted their decision to be validated by us.

We heard them out and asked them, “Have you thought of mutual funds for this purpose?” They never had thought so. We explained to them that they had a long time frame for their gift. The gift should actually work for the recipients to create value as they have planned and not be lost to inflation and taxes. In case of any emergent requirement some time later, they should also be able to take out the money fully or partly without any penalties or severe tax implications, though such withdrawals should be avoided since they were saving for the specific purpose of their grandchildren’s higher education.

We then went on to explain the superior tax-efficient returns that mutual funds offer with a lot of flexibility of how they wish to save or withdraw the money. They could contribute on a monthly basis through SIPs (Systematic Investment Plans) for as long as they wished. In case they could not contribute any longer, they could just let the accumulated money lie there and grow as long as they wanted. They could also put in bulk additional amounts of as low as Rs1000 on special occasions whenever they wished to. We made an illustrative table for them for contributing Rs 5000 per month, comparing RDs and various categories of mutual funds on the basis of current interest rates of RDs and past returns of best mutual funds of various categories.

5 years10 years
ReturnsAmountReturnsAmount
Bank Recurring Deposits7.75%₹ 3,65,0007.75%₹ 9,02,083
Pure Debt Funds10.50%₹ 3,92,3459.40%₹ 9,89,759
Balanced – Debt Funds13.90%₹ 4,29,80813.10%₹ 12,27,461
Balanced – Equity Funds16.30%₹ 4,58,95117.40%₹ 15,95,380
Diversified Equity Funds (Large Cap)14.10%₹ 4,32,14717.00%₹ 15,56,130

 

It was explained to them that while above returns of RDs will be fully taxable on yearly basis as per tax slab irrespective of time frame of investment, pure debt and balanced debt funds will have indexation benefits beyond 3 years, thus reducing tax liability substantially. In equity products, there will be no tax after one year. They also were made to understand the risks of various products – equity was subject to market risks while debt products including RDs were comparatively safer. However, statistically, risk of equity products declines to negligible levels over long periods of time. Hence, when saving for long periods, it is better to take some equity exposure, depending on one’s comfort level, to make the money grow in real terms.

 

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03 Apr 2015
Can Your Bank FD or PFDSOPF match this

Can Your Bank FD or PF/DSOPF match this?

We are generally comfortable investing our money in bank FDs, PF/EPF/DSOPF and other fixed income instruments, always smug in the belief that our money is safe and will grow up adequately to meet our aspirations regarding self, spouse and children. However, we neglect the combined damaging effects of Inflation & Taxation from our calculations.

If your safer investments are tax-free (generally the PF/EPF/DSOPF, and Insurance policies), they should generate at least 8% per annum to merely neutralise long-term inflation and your money actually grows only if you earn beyond this. If the investments are not tax-free (all your bank and post office instruments including savings accounts, FDs, PO MIS, SCSS and RDs) and say, you are in 30% tax bracket, your investments should give at least 11.43% annualised returns for you to ‘break-even’. For 20% and 10% tax brackets, the minimum returns to break even are 10% and 8.88% respectively. We call this these the ‘Tread-mill’ rates! When you are earning this return, you feel you are moving fast. But when you get down from this tread-mill and take a reality check, you find you are not even  reaching the place where you started from – you’ve actually lost due to inflation and tax.

Have you ever considered Debt Mutual Funds as an investment? Debt funds generally invest in Govt Bonds, equivalents of bank FDs and Company FDs. They have no component of stock investments. When interest rates go down, while your FDs will lower the rates, the returns from long-term debt funds will actually rise. Even without that, currently long-term debt funds are clocking returns between 11-13% per annum. Also, if you remain invested in them beyond 3 years, you are likely to pay a tax of just about 5-7% after 3 years and maybe Nil tax after 4 years, going by the past 3-4 years’ performance and inflation statistics.

What about Equity Mutual Funds? You take stock market risks and get the risk-premium there. A large number of investors continue to believe that stock market movements can lead to a complete loss of your money if the markets do not behave. This happens only if you try very hard to achieve such a complete loss!Consider this – what was one of the worst financial year for Indian stock markets? Undoubtedly 2001-02. Twin Towers attack in USA took place on 11 Sep 2001 (9/11, famously) and the Indian Parliament attack on 13 Dec 2001. The BSE Sensex was 3604 on 30 Mar 2001 and 3469 on 28 Mar 2002. So if you kept your head when everybody else was losing theirs, there was literally no effect even in the worst of the crisis.

See the returns chart for the last financial year (FY 2014-15) published in Economic Times of 03 April 2015. Do you still think you can afford to leave out mutual funds from your portfolio if you want to meet your future financial commitments comfortably?The Best Performing Assets

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09 Dec 2014
MFs your Financial Supermarket- humfauji.in

MFs your Financial Supermarket

There are a lot of misapprehensions in the minds of most of the people about Mutual Funds. Despite the fact that they are one of the best financial avenues to invest and save while giving a lot of flexibility and convenience to the investor, they have not been able to capture the investing space of a large number of people.

My article below in Times of India today (National Edition, Page 7, 09 Dec 2014, Tue) tries to bring out that Mutual Funds are the most versatile financial instruments, for any period of time and purpose while giving you all the flexibility which no other financial instrument can match. You may also look at the link http://humfauji.in/blog on our website to read more about it.

(Please enable ‘Display Images Below’ in your browser to see the newspaper clipping)

MFs - Your Financial Supermarket