Financial Cocktail Samosas Bitesized Money Morsels For YOU 05/05/2021

Are you a victim of your own Confirmation bias?

Confirmation bias’ might sound like a psychology mumbo-jumbo but do you know that it might actually be hampering your investments from performing? We often hear things like –

  • ‘I’m comfortable investing in SBI Mutual Fund because SBI is India’s largest bank and has Govt’s backing’, without realizing that SBI bank and SBI mutual funds are absolutely separate entities and SBI MF too has poor performing schemes like any other MF company.
  • ‘I don’t want to invest in anything to do with stock markets because I lost some money in 2008’, without admitting to even own self that the loss was due to wrong investing at a wrong time by the investor without any research and then not monitoring those investments done.

People tend to look for and notice evidence that confirms their existing beliefs, ignoring other information that challenges or contradicts their views. First impressions can be hard to shake because we tend to selectively filter, paying more attention to information that supports our opinions while ignoring the rest.

Our role as a financial advisor is to ensure that we do not let such biases come in the way of good investing of our investors. Recognition of such confirmation biases in your own financial journey will make wealth creation an easier route for you.

Mutual Funds – a very versatile and tax efficient investment avenue

Most of the time, investors who have never invested in Mutual Funds (MFs) mistake MFs to be an investment avenue which invests in the stock market – and stock markets only! They do not realise that MFs invest in stock markets, bank FDs, company FDs, real estate, Govt bonds, international stocks and even have products similar to a savings bank account.

And the versatility of MFs doesn’t just stop here.

You can choose how much and when to invest, when to get out, in how many instalments to invest or take out money, take a regular pension if required from whichever age you want, the pension could be of the amount and frequency that you want and it could be started, increased, stopped and re-started when you want.

There is no concept of TDS (Tax deducted at Source) in MFs for resident Indians unlike most other investment products. In equity mutual funds (ie, those which invest in stock markets), the long-term capital gain (ie, if you are invested for one year or more) is exempt up to Rs 1 Lakh in a financial year, and over and above this, the profit is taxed at a mere 10% rate. Even in the safer debt mutual funds, if you remain invested for 3 years or more, your tax liability would be just about 1/5th of an investment in equivalent bank FD.

Same advantage continues for pension from MFs – your taxation is miniscule compared to any other pension investment avenue including insurance policies, Senior Citizen Saving Schemes (SCSS), etc.

(Above two snippets contributed by Team Prithvi of Hum Fauji Initiatives)

Medicines are selling like hot cakes. Should you invest in Pharmaceutical sector right now?

The Indian Health sector sprang into action post March 2020 as the first wave of Covid-19 hit the country. However, from December onwards, the sector went into a healthy correction as investors moved to cyclicals as the economy opened up. The fresh spike in cases again seems to be making the case for tactical allocation to healthcare.

To ride the trend, many big Mutual Fund companies are planning to launch their Healthcare ETF this month.  Should you catch this trend now in your investing? What do we recommend?

Please remember that hot trends come and go but the basic rule of investing for the long run does not go away ever. Extraordinary sales of products for a short period of time (medicines here…) does not mean that it will be a long-term trend too. Most of the investing trends catch fancy when their stocks have already run up very high, leaving much lower future price appreciation potential there, if at all.

Our simple recommendation is to stick to a well-diversified portfolio as per your requirements (aka Financial Goals) and risk profile. It could have a range of equity funds of various categories (Largecap, Flexicap, Midcap etc). The fund managers, with their own vast experience and that of their research teams, keep aligning the portfolio to whatever is good for the fund, to get the best returns. Investing in sectoral/thematic funds defeat the main objective/fundamental of mutual funds of diversifying risks and not falling prey to trends which may not really be profitable going ahead.

(Contributed by Jatin Uppal, Financial Planning Coordinator of Hum Fauji Initiatives)

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