Sell or Hold? Decoding the Signals to Exit Your Mutual Fund Investments
1. Goal Achievement: If you hit your financial target sooner than expected, like saving for a car in 3 years instead of 5, it’s time to cash out and celebrate with that new car. Of course, you always have the option to continue accumulating for a bigger car!
2. Changed Circumstances: Emergencies or changes in financial needs might necessitate selling your fund if other cash reserves are exhausted.
3. Rebalancing Your Portfolio: Market fluctuations can skew your asset allocation. Selling part of your holdings to restore balance between equity and debt can be beneficial.
4. Fund Underperformance: Consistent underperformance compared to peers over three years or more is a red flag. However, avoid decisions based on short-term performance which could be due to many of the temporary phenomenon like portfolio rebalancing on, one odd bet not going right, some investment unexpectedly not performing well, etc
5. Change in the Fund’s DNA: If a fund changes its investment mandate and no longer fits your strategy, it’s wise to reassess its place in your portfolio.
Be cautious about selling due to a change in fund manager or AMC ownership, or if an investment style falls out of favor. Observe performance post-transition before deciding.
The bottom line is to avoid selling out of fear or impulse. Investing is a marathon, not a sprint. Make informed decisions and stay focused on long-term goals.
(Contributed by MF Alam, Sr. Research Analyst, Hum Fauji Initiatives)
The High-Risk Game: Futures and Options burning Investor Wealth
Investing in the stock market can be exciting, especially with the promise of quick profits. However, a recent study by SEBI shows that most individual investors in the equity cash segment faced losses in FY23, with over 70% not making money.
One of the key trends observed is the surge in intraday trading, where people buy and sell stocks within the same day. The number of intraday traders grew by 300% from FY19 to FY23. Alarmingly, many of these traders are young—48% of them were under 30 years old in FY23, up from 18% in FY19. Unfortunately, 76% of these young traders lost money, making them the most affected age group. It is of course not known from SEBI’s study the kind of profits others made, who did not lose.
Why do so many intraday traders lose money? One reason is the high frequency of their trades. The more often you trade, the more likely you are to incur losses. Additionally, trading costs significantly impact profits. Loss-making traders spent 57% of their trading losses on costs, compared to 19% for profit-making traders. This shows how frequent trading can quickly eat into any gains.
Investing should be about building steady, sustainable growth – ‘Slow and steady wins the race’. Before diving into high-risk trades, consider the substantial risks involved. Taking a more cautious approach could help protect your wealth and lead to better long-term outcomes.
(Contributed by Vishakha, Relationship Manager, Team Arjun, Hum Fauji Initiatives)
Why should You prefer Step-Up SIPs over Traditional SIPs?
Step-up SIP allows you to boost your SIP contributions by a set amount or percentage at regular intervals. You can schedule these increases quarterly, semi-annually, or annually, based on your financial goals and income, here are some advantages of Step-up SIPs over traditional SIPs:
- Encourages Savings: As your income grows, a Step-up SIP automatically increases your investment, promoting financial discipline and future savings.
- Adjusts for Income Growth: It matches your increasing income with higher investments, making it a realistic saving approach.
- Keeps Up with Inflation: By increasing your investment amount, Step-up SIPs help your money grow with inflation. For example, if inflation is 6% and you increase your SIP by 10%, your investment stays ahead.
Illustration
Rohan starts a regular SIP of Rs 20,000, while Mridul begins a Step-Up SIP with the same amount, increasing it by 10% each year from the second year for 15 years as his salary rises.
At the end of the investment term, Rohan’s total corpus will be Rs 1.09 Crore, significantly less than the Rs 1.73 Crore accumulated by Mohan (refer to table).
A Step-up SIP is an excellent method to grow your wealth by regularly increasing your investment. It benefits from compounding, handles inflation, encourages savings, and is easy to manage.
If you want to achieve your financial goals and boost your investment, it’s time to start a Step-up SIP.
(Contributed by Anjeeta, Financial Planner Team Arjun, Hum Fauji Initiatives)
Question: With the recent tax changes, how will my mutual fund investments be affected?
Our Reply: With the recent Budget 2024, several tax law changes have been introduced that could significantly impact your mutual fund investments.
1. Equity Mutual Funds (more than 65% equity holdings)
- Short-term Capital Gains (STCG): Tax rate has increased from 15% to 20%. If you sell your units within a year, you’ll pay more tax on profits.
- Long-term Capital Gains (LTCG): Tax rate has increased from 10% to 12.5% for investments held over a year. The tax-free limit on LTCG has been raised from Rs. 1 Lakh to Rs. 1.25 Lakhs.
2. Debt Mutual Funds (more than 65% in debt securities)
- Now taxed as per your income tax slab rate, with no difference between short-term and long-term investments.
- Removal of Indexation Benefit: Last year, the indexation benefit, which allowed investors to adjust the purchase price of an asset for inflation, was available for purchases made until April 1, 2023. However, following this year’s budget, this benefit has been completely eliminated.
3. Other Categories (e.g., gold index funds, gold ETFs, equity funds of funds, international funds, conservative or hybrid funds)
- Short-term Taxation: Taxed as per your income tax slab rate if redeemed before 2 years.
- Long-term Taxation: A flat tax rate of 12.5% applies to investments held for over two years.
Note – Above rules applicable to Residents and Non-residents
In summary, the recent changes are beneficial for long-term investors, particularly those investing in other categories of mutual funds. Instead of being taxed according to their individual tax slab rate, long-term investors will now pay a flat 12.5% tax on capital gains.
For more queries, feel free to connect with your RM at Hum Fauji Initiatives.
(Contributed by Team Prithvi, Hum Fauji Initiatives)
