Every investor has short-term goals and long-term goals. For the short-term goals, one can consider debt mutual funds, but for longer term goals (3+ years) equity is the asset class you need. There are multiple categories of equity funds and one must consider investing in them based on one’s investment horizon and risk profile. One important category is the Mid Cap Fund. Let us try and understand why one should be investing in this category.

Mid Cap funds invest in companies that are at an early stage of their business cycle and have higher growth potential than other companies. Adding a mid-cap fund to your portfolio for longer term goals gives your investment the opportunity to benefit from the growth cycles of these companies. Not just that, it adds to portfolio diversification too.

Things to keep in mind when investing in mid cap funds

• Don’t get swayed by market volatility – stay invested, keep investing
• Invest for the long term (5+ years)

Don’t get swayed by market volatility – stay invested, keep investing 

Mid cap funds are to be invested for achieving your goals. If you have defined financial goals, you should continue your investments in line with those goals regardless of the market movements. Don’t focus on returns and keep pausing your SIPs. When you stop or pause your SIPs, your investment is lower and hence your wealth shrinks. An SIP of over 8-10 years goes through several cycles of bull and bearish phases. Continuing to invest during the downturn only helps to make good gains from mid-cap funds.

Consider the period from January 2005 to December 2012 and a monthly SIP of Rs 1000 in the BSE Mid Cap Index. Assuming, from Feb 2008 to May 2009 as it was a bear phase, you had paused your SIP and started it again from June 2009. This means you would have missed SIP for 16 months, hence your total investment would be  16,000 lesser.  Though, you had missed investing  16,000, the value lost is close to  60,500

Data as of 30th April, 2019

Invest for the long term (5+ years)

• Mid cap funds are volatile but not risky

If you are an investor with an investment time frame of 5 years, mid cap fund is a must for wealth creation. These funds add to the incremental returns in your portfolio. Mid Cap funds go through high volatility, but at the end of the day who has remained a long-term investor will accumulate considerable wealth. If you stay invested for longer periods, the probability that you make any negative returns diminishes. You need to have discipline, patience, understand risk and holding period when investing in mid cap funds.

BSE Mid Cap Index – 5 Year Average Rolling Returns

Data as of 30th April, 2019

• Mid cap Funds have the potential to become large caps tomorrow

Mid cap companies tend to be less researched and therefore there is always a valuation gap between the market price and its intrinsic value. They are not tracked as vastly as large cap stocks. Investing in mid cap stocks is all about individual stock picking. Long term success in small and mid cap stocks is based on identifying them early and having the conviction to invest in them at an early stage of their growth. One needs to also hold them for a longer period of time irrespective of market volatility to benefit from their growth.

Performance BSE Mid Cap Index

Data as of 30th April, 2019

When it comes to long term investing, no other asset class can beat inflation. Have an investment goal of at least five years while investing in mid cap funds. Stock market corrections should not push you away from equities. Focus on your goals and investment horizon when choosing your funds.

Contact your investment advisor to select the right mid cap fund for you. Look at it’s past track record and it’s consistency of performance and invest!

Capital appreciation and income are two primary investment goals. Mutual funds provide a multitude of investment solutions for both these objectives for different risk profiles. However, in India mutual funds are mostly associated with capital appreciation. A retail investor’s faith in mutual funds for wealth creation has been well-rewarded, with good equity mutual funds giving multiple times returns over a sufficiently long investment period.

The main purpose of investing, for many investors, is capital appreciation or wealth creation; investing for regular income is not an important consideration for majority of investors, except senior citizens. Most mutual fund investors in India belong to the salaried class and they depend almost entirely on their salary for meeting their regular expenses. Be that as it may, monthly income, whether from salary or investments, is the most important financial need for all of us.

Let us take a typical salaried person in his mid to late thirties or early forties in the upper middle income group. Consider his regular monthly expenses – home loan EMIs, fees for school going children, utility bills, fuel bills, grocery bills, salaries of household staff etc. Most of these expenses are fixed expenses and you simply cannot wish them away. Let us now ask the very uncomfortable question. What if he does not get his salary next month? He may have enough balance in his savings account to take care of his monthly expenses for a few months.

Eventually he would have run out of liquidity and have started redeeming his investments (fixed deposits, mutual funds, etc.) If unfortunately the market crashes at the same time (bad luck often strikes on multiple fronts), then he will be selling his mutual funds at a low price or even at a loss. He could find a new job, but until then his investments may have depleted considerably and it may take the investor a very long time to return to comfortable levels of savings/ investments, not to mention the severe mental stress, the investor and his family had to go through.

Safeguarding from loss of income

How can investors safeguard themselves from such a situation? In the developed countries like USA, Canada, UK etc. there are general insurance products which can provide income replacement if the insured loses his or her job, but unfortunately at present there are no unemployment insurance products in India. Investors should therefore, look for investment solutions for regular income. Fixed deposits paying monthly interest and Post Office Monthly Income Schemes were traditional investment choices for income in India. However, interest rates of these traditional fixed income products have fallen over the last 2 years and as such these products may not be able to generate sufficient income for your needs. Investors need to look at alternate income investing solutions and mutual funds provide such a solution to investors.

Before we discuss income investing solutions, it is important to understand that income producing assets are low or moderately low risk assets and therefore, investors should not expect very high returns from these investments. Further, since the income yield is not very high, it may take a considerable amount of assets to generate sufficient income to replace your monthly salary. But investing in income producing assets is a step towards financial independence. If your investment income can meet, say 20% of your fixed monthly expenses, pressure on your other assets will be considerably lesser during periods of no salaries.

Who should invest in income generating assets?

There is a misconception that only retired people should invest in income generating assets. Even if you are working, you should invest in income generating assets. You should ask yourself, how much flexibility you have in expenses – a very large part of the expenses of most families are inflexible. Such families should therefore, invest in income generating assets. You should look at your financial liabilities like home loans, car loans etc. You should also look at your family obligations – school going children, dependent parents etc. The higher your financial liabilities and other obligations are, the more you should invest in income generating assets.

Mutual fund income solutions

Mutual Fund Monthly Income Plans are excellent investment choices for investors looking for income and also some capital appreciation over a sufficiently long investment period. Monthly Income Plans are debt oriented hybrid mutual fund schemes where debt allocation can range from 75 to 95% and the equity allocation can range from 5 to 25%. You can choose between lower and higher equity allocations based on your risk appetite. For example, younger investors can opt for higher equity exposure, while older investors canopt for lower equity exposure.

The primary objective of Monthly Income Plans is to provide regular income to investors along with some capital appreciation over a sufficiently long investment tenure. The capital appreciation can help investors beat inflation in the long term. The debt component of Monthly Income Plans lowers the volatility, provides stability and generates income for investors. The equity portion provides a kicker to returns over a sufficiently long investment horizon and can help investors beat inflation.

Both Growth and Dividend options are available in Monthly Income Plans. Unless you have immediate income needs, you should invest in the Growth option so that you can benefit from compounding. When you need income from your investments, you can switch from Growth to Dividend and start receiving regular monthly payouts. Investors should understand that, though Monthly Income Plans aim to payout regular dividends to investors, mutual fund dividends are not assured.

Difference between Monthly Income Plans and Balanced Funds paying monthly dividends

Both Monthly Income Plans and Balanced Funds of many AMCs are paying monthly dividends for the last few years. The monthly dividend payout rates of Balanced Funds have been a few percentage points higher than that of Monthly Income Plans. However, you should understand that the risk profiles of these two types of mutual funds are very different. Balanced funds have at least 65% exposure to equities and the rest in fixed income. Monthly Income Plans, on the other hand, have only 5 to 25% exposure to equities. Lower equity exposure makes Monthly Income Plans much less volatile compared to Balanced Funds.

Let us also understand how Monthly Income Plans and Balanced Funds pay regular dividends. Monthly Income Plans ideally aim to pay dividends from income accrued by investments, e.g. interest earned from debt securities. Balanced Funds on the other hand are paying monthly dividends from their accumulated profits earned through portfolio churning, i.e. buying and selling stocks and bonds. Over the years, the older Balanced Funds have paid out only a portion of their profits as dividends, keeping the rest of the profits in reserve to be paid out on rainy days. But you should understand that Balanced Funds are more affected by stock market volatility and their ability to pay dividends has market dependency. Monthly Income Plans, on the other hand, get their income primarily from debt securities and therefore, provide much greater income stability.

Dividend taxation

One of the main reasons of higher dividend payout rates by Balanced Funds is because of the tax advantage these funds enjoy over Monthly Income Plans. Balanced Funds are taxed as equity funds and dividends paid out will be taxed at 10% by way of dividend distribution tax (DDT). Dividends paid by Monthly Income Plans, which are treated as debt funds, are subject to DDT of 28.8%. These rates are exclusive of surcharge and health and education cess.

Capital Gains Tax in Monthly Income Plans

Short term capital gains (investment holding period of less than 3 years) in Monthly Income Plans are taxed as per the income tax rate of the investor; long term capital gains (investment holding period of less than 3 years) are taxed at 20% after indexation. Indexation benefits can reduce the effective tax rate of the investors substantially.

Long term capital gains tax advantage makes Systematic Withdrawal Plan (SWP) in Monthly Income Plans more tax efficient than monthly dividends. However, the SWP rate should not be more than the long term average rate of return of the fund; otherwise you may end up depleting your investment and this will defeat the purpose of income investing. Top performing Monthly Income Plans have given nearly double digit returns over the past 5 to 10 years, but in our view you should limit your withdrawal to 8% per annum. Once your corpus grows, you can then increase your withdrawal rate.

Conclusion

Your portfolio should comprise of both growth assets (for capital appreciation) and income generating assets. Growth assets will create wealth for you, while income generating assets will provide stability in difficult times. Monthly Income Plans are excellent income generating assets for long term investors. You can invest in Monthly Income Plans either as a lump sum or using Systematic Investment Plans (SIP).

We advocate SIP as a disciplined investing mode for salaried investors. Over a sufficiently long period of time, through SIPs, you can accumulate a sufficiently large asset base, which can take care of a large part of your income needs. Investors should consult with their financial advisors if Monthly Income Plans are suitable for their investment needs.

Investors often take the decision of redeeming their fund in a haste. If the market is uncertain or their fund is underperforming or there is a change in the fund manager, their reflex action is to immediately redeem their fund. This may not be the right thing to do.

Mutual fund investments should always be aligned with financial goals. A correct asset allocation is the key to wealth creation. There are various categories of equity, debt and hybrid mutual funds. Picking the right mutual fund will make the difference to your portfolio. You can also talk to a financial advisor for help with choosing the right fund. Stay invested for the long term to benefit from the power of compounding.

So, when should you withdraw? Here is a checklist:

• When you reach your financial goals

Goals are what you invest for, isn’t it? So, when you reach your goal, it’s only right you redeem your fund. One strategy to follow is that if you have planned your mutual fund investment for a specific goal and it is one year away, you can switch or do an STP to a liquid fund. By doing this, you can reduce the impact of volatility from an equity fund when you are closer to reaching it.

Read why you need to adopt a goal-based investing strategy here.

• When there’s an emergency

Your first financial goal should be to build a contingency fund. You should be reasonably prepared to manage your financial emergencies. Ideally, your contingency fund should have at least 6 months of your monthly expenses. You can use liquid funds to park a portion of your contingency fund.

If you don’t have a contingency fund, you may have to redeem from your mutual fund investments.

• Rebalancing your portfolio

Portfolio rebalancing is important to ensure you remain invested according to your financial goal and risk appetite. It should be done once a year to ensure the portfolio still matches your risk profile and goal requirements. If there is any divergence, you may need to rebalance the portfolio by redeeming some part of your investment and investing in the other asset classes. This rebalancing may also be required in case the fund changes its investment strategy and asset allocation and it isn’t in line with your goals or there is a change in the fund manager or an acquisition by another fund house and your new fund manager does not have the same investment philosophy as the old one.

• Consistent underperformance

If the fund is underperforming due to short term fluctuations in the market, you should not be redeeming. However, if the underperformance is for a longer period, ask your financial advisor on what course of action to take.

Remember to stick with funds based on your financial goals, asset allocation mix and risk profile.

A Systematic Investment Plan (SIP) is a small, regular investment in mutual funds for a fixed time period.

Suppose you want to have 5,00,000 in 5 years for a car. Just like you’d save little by little to build a corpus to purchase it, you can start a SIP in a mutual fund for it. There are several advantages a SIP gives you over regular savings, the potential to earn higher returns being the foremost.

What are the benefits of a SIP?

1. SIPs make sure you invest regularly – With a SIP, you set your investing on auto-pilot I.e. a predetermined sum of money is invested on a fixed date for the time frame and period you’ve selected. SIPs on a monthly basis are the most common.
2. Start small with a SIP– You can start investing with as little as 500. There is no limit on the maximum you can invest. Every small instalment will contribute to your overall corpus.
3. SIPs give you flexibility– You can choose your SIP amount, date of debit, frequency of SIP and the period until which your SIP should run.
4. SIPs allow you to average out investment costs– When you purchase units of a mutual fund, you get each unit at the NAV (price per unit). This NAV depends on the performance of the scheme and is subject to change. So, when you invest periodically through a SIP, for the same amount you could be purchasing units at different NAVs, thus averaging out investment costs. When the NAV is low, you’ll get more units for the same amount, and vice versa. Here’s an example:

5. Variety of SIPs– Investors have several options when it comes to setting up SIPs. Apart from the regular SIPs, they can choose from Flexi-SIPs and Step-up SIPs too. A Step-up SIP increases your SIP by an amount you fixed at an interval you fix – say if your current SIP is 1000, you can choose to step this up by another 1000 annually. So, from year two, your SIP amount is 2000, year 3 it is 3000 and so on. With a Flexi-SIP, you invest a fixed amount regularly like a SIP, but can invest more when the markets are falling subject to a maximum limit you choose, lesser when markets are rising subject to the minimum investment value of the fund.

Reaching your financial goals is so much easier with a SIP. Start one today, and march one step at a time to wealth.

Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs) and Systematic Transfer Plans (STPs) are terms you’ve probably come across while investing. We’ve covered SIPs and their benefits in another article. In this article, let’s look at its variants – SWPs and STPs and how they can be used.

What are Systematic Withdrawal Plans (SWPs)?

A Systematic Withdrawal Plan allows you to withdraw a fixed sum of money from a fund at regular intervals. This is deposited in your bank account. SWPs are opted for by people who want a steady flow of income over time e.g. retirees.

What are Systematic Transfer Plans (STPs)?

A Systematic Transfer Plan allows you to transfer a fixed sum of money from one fund to another within the same fund house. The investor chooses the fund from which the transfer is made, the fund to which the transfer is made, the STP amount, STP date and STP frequency (daily, weekly, monthly, quarterly).

STPs work between both debt and equity funds: debt to equity, and equity to debt. Scenarios where STPs are usually used are when:

• you have a lumpsum to invest, and you want to deploy it in equity – in this case, the lumpsum is first invested in a debt fund so it can earn a better than savings return, and a fixed sum is regularly transferred to equity for capital appreciation.
• you approach your goals – in this case, a chunk of investments in equity are moved to debt funds for capital protection while the money continues earning returns
• you want to rebalance your portfolio to match the asset allocation mix you’re comfortable with

Note: An STP is considered as a redemption from one fund and a fresh investment in another.

Taxation of STPs and SWPs

As STPs and SWPs involve redemption of units, capital gains taxes apply on them. Short-term capital gains tax on equity funds (15%) apply on holdings of less than a year, and on debt funds (tax-slab) apply on holdings of less than 3 years. Long-term capital gains tax on equity funds (10%) apply on holdings greater than a year and are exempt up to 1,00,000. Long-term capital gains tax applies on debt funds (20% with indexation benefit) with holdings of greater than 3 years.

Retirement is considered the ‘golden’ period of one’s life, and it could be – if you plan right for it. You’d need a sizeable corpus to retire comfortably, while maintaining the same lifestyle, or a better one. The first step is to plan, the second is to execute that plan.

We’d covered the golden rules of retirement in one of our earlier articles. We’ll now cover how to use mutual funds to plan for your retirement and what strategies to adopt.

As discussed in our earlier article, you’ll first need to estimate how much you will need when you retire. This will involve understanding your current expenses and savings, the age you expect to retire, your expected lifespan, inflation and the growth you expect from your investments. You’ll arrive at a required corpus for your retirement. A good retirement calculator can help you figure out how what your corpus will be after adjusting for inflation and how much you need to invest to build that corpus.

Let’s look at an example:

*assumed rate of return for equity mutual funds

The above calculations don’t consider any existing savings you may have but taking them into account will give you a better picture of how much you’ll need to invest. Also, do account for any other planned expenditures and emergencies while figuring out how much you would need when you retire. You can calculate your retirement needs here.

Once you figure out how much you need to invest, the next step is to set up your SIP.

Start a SIP

What investment strategy should you follow?

Your investment strategy depends on two factors – your age, and your ability to take risk, both interlinked. You’ll also have two needs – capital appreciation, and regular income.

You can start a SIP in equity funds for capital appreciation. The further away you are from retirement, your ability to invest in equity is higher. Periodically step-up your SIP to possibly reach your goal faster. You can also add lumpsum investments along the way to your corpus.

The closer you get to retirement, use Systematic Transfer Plans (STPs) to move into debt funds, and Systematic Withdrawal Plans (SWPs) for monthly withdrawals.

STPs can be used for moving investments from debt to equity and from equity to debt. In the case of retirement, or any goal, the closer you get to your goal, the lesser you’ll want your investments to be impacted by market volatility. Using an STP will move your money from equity to debt and give your portfolio the stability you need.

SWPs allow you to withdraw a fixed sum at regular intervals from your fund. This will give you a regular stream of income during retirement.

It would be prudent to transfer a lumpsum from your equity fund to debt using an STP, and to do an SWP from the debt fund to your bank account. Ensure you continue to have investments in equity, albeit a lower allocation, so there’s still room for capital appreciation, and you benefit from the best of both.

Mutual Funds Sahi Hai – you’ve probably seen or heard this phrase in some place or another – when you’re browsing the internet, driving through the city or even watching television. This article breaks down the 6Ws – well, 5Ws and 1H – what, why, when, who, where, and how, of mutual funds to help you get started with this product.

What is a mutual fund?

A mutual fund is an investment product that pools money from several participants (investors), and uses it to buy a variety of stocks, bonds, and other financial instruments. They are managed by fund managers. The aim of a mutual fund is to generate returns on the money invested, from the investments.

HOW does it work?

Consider this – you and your friends want to get an internet connection that costs 1250 a month. You have 250, your friend A has 500, another friend B has 300, and a third friend C has 200. Together, you can get the connection and so you pool the money to buy it.

Now, how is it decided who uses how much of the connection? Everyone has paid a different sum of money, and you can limit usage for each user depending on their contribution. So, each user will only benefit from what they’ve paid for.

That’s pretty much how mutual funds work too. If you and your friends together invest 1250 and the fund generates a return of 12% for the first year, your share of the return will be proportionate to your investment. Suppose, the money in the fund has increased to 1400 – a gain of 150, you’ll be entitled to 20% of the gain which is 30, while A, B and C make 60, 36 and 24 respectively based on what they’ve invested.

WHY should you invest in mutual funds?

Before I tell you why you should invest in mutual funds, let me tell you why you should be investing in the first place. Your savings aren’t really earning anything at 4%, with inflation at a higher rate. How then can you meet expenses in the future? The answer is investing. When you invest, you give your savings a chance to generate inflation beating returns, and a better opportunity to grow.

So, what are the benefits of mutual funds?

1. Earn potentially higher returns: Mutual funds invest in market-linked instruments, and hence can deliver potentially higher returns compared to your traditional products.
2. Professionally managed: You don’t need the know-how of how to manage your fund. Your fund manager will take the hard decisions on where to invest and how much to invest, to generate the best returns for your investment. Just invest, sit back and relax!
3. Diversification: Your investment is spread across a bunch of securities, so that your risk is minimised. If a stock does badly in a portfolio, its losses can be offset by a good performer. The aggregate of their performance, and your fund manager’s timely calls impact your returns.
4. Affordability: You can start investing with as little as 500. A small investment can go a long way, and thanks to the power of compounding, you earn returns on your investment and even its returns.
5. Liquidity: Most mutual funds come with no lock-in and can be redeemed easily. Your redemption proceeds get credited straight to your bank account.
6. Flexibility: You can choose how much you want to invest, how you want to invest (lumpsum or periodically through a SIP), when you want to invest.
7. Options: There’s a mutual fund for every goal. If you want to build an emergency fund, you can invest in liquid funds. If you’d like to build wealth, you have equity mutual funds, if you want stability, you can choose from debt mutual funds. Keep in mind your risk appetite and investment time-frame.

WHO are mutual funds for?

Mutual funds are for everyone! Whatever your goal, there’s a fund that’s just right for you.

WHEN should you invest in a mutual fund?

Now would be a great time to invest in a mutual fund. We’ve always believed that the best time to invest is now. Also, the earlier you invest, and the longer you stay invested, the more opportunities you give your investment to grow.

HOW can you invest in a mutual fund?

You can talk to an advisor and invest in a mutual fund or go direct and invest with asset management companies. It’s easy! All you need is a bank account, and your PAN and you’re good to go.

Get started with your first investment today.

Mutual Fund investors make gains by way of capital appreciation and dividends. The gains you make from your mutual fund investments are taxed.

The tax rates depend on the fund category and the investment holding period. Holding period is the tenure for which an investor stays invested in the mutual fund scheme. The holding period can be short term or long term.

Let’s discuss the taxation applicable with an illustration.

Equity Funds

Equity funds are mutual funds in which at least 65% of the assets are invested in equity and equity related instruments. This includes Equity Linked Savings Scheme (ELSS) as well.

For more about equity mutual funds, read this blog.

Short term capital gain: When the holding period of the investment is up to 1 year, it is considered as short term. Short term capital gains tax of 15% on the gain amount is applicable.

Illustration:

• Shweta invests Rs 10,000 in an Equity Mutual Fund at an NAV of Rs 25 in November 2018.
• She gets 400 units (Rs 10000 divided by Rs 25) allocated.
• NAV grows to Rs 30 by June 2019. The value of her investment is Rs 12,000 (Rs 30 multiplied by 400)
• Shweta redeems the amount and she gets a gain of Rs 2000 (Rs 12,000 minus Rs 10,000)
• STCG will be Rs 300 which is 15% tax on the gain of Rs 2000

Exit load is not considered in the illustration as it may vary from fund to fund

Long term capital gain: When the holding period of the investment is more than 1 year, it is considered as long term. Long term capital gains tax of 10% on the gain amount in excess of Rs 1 lakh is applicable.

Illustration:

• Shweta invests Rs 5,00,000 in an Equity Mutual Fund at an NAV of Rs 25 in November 2012.
• She gets 20,000 units (Rs 5,00,000 divided by Rs 25) allocated.
• NAV grows to Rs 35 by June 2019. The value of her investment is Rs 7,00,000 (Rs 35 multiplied by 20,000)
• Shweta redeems the amount and she gets a gain of Rs 2,00,000 (Rs 7,00,000 minus Rs 5,00,000)
• Shweta has to pay 10% capital gain on the gains exceeding Rs 100,000. In this case, she must pay Rs 10,000 as LTCG ((200000 – 100000) * 10%)

Debt Funds

Debt mutual funds are those that invest in fixed income instruments – such as corporate and government bonds, overnight securities, corporate debt securities, money market instruments etc. These funds are ideal for investors who are averse to risk and seek to generate regular income. For more about debt funds, read this blog.

Short term capital gain: When the holding period of the investment is up to 3 years, it is considered as short term. Short term capital gains tax is applicable as per the income tax slab of the individual.

Illustration:

• Shweta invests Rs 10,000 in a Debt Mutual Fund at a NAV of Rs 25 in November 2018.
• She gets 400 units (Rs 10,000 divided by Rs 25) allocated.
• NAV grows to Rs 31 by June 2021. The value of her investment is Rs 12,400 (Rs 31 multiplied by 400)
• Shweta redeems the amount and she gets a gain of Rs 2400 (Rs 12,400 minus Rs 10,000)
• Assuming she is in the 30% tax bracket, her STCG will be Rs 720 which is 30% tax on the gain of Rs 2400

Exit load is not considered in the illustration as it may vary from fund to fund

Long term capital gain: When the holding period of the investment is more than 3 years, it is considered as long term. Long term capital gains tax of 20% is applicable on the gain amount after taking into consideration the cost of indexation.

Indexation adjusts your investment amount for inflation, and tax on gains are calculated on the adjusted investment amount.

Illustration:

• Shweta invests Rs 50,000 in a Debt Mutual Fund at a NAV of Rs 25 in November 2012.
• She gets 2000 units (Rs 50,000 divided by Rs 25) allocated.
• NAV grows to Rs 35 by Feb 2019. The value of her investment is Rs 70,000 (Rs 35 multiplied by 2000)
• Shweta redeems the amount and she gets a gain of Rs 20,000 (Rs 70,000 minus Rs 50,000)
• Taxes are computed using the Cost Inflation Index (CII)
• The CII for the financial year 2012-2013 was 200 and for 2018-2019 was 280
• Amount invested will be adjusted for inflation and it is recalculated as Rs 70,000 (280/200 * 50,000)
• Shweta has to pay 20% as taxes on the difference between the value at the time of withdrawal and the indexed cost. Tax here will be NIL as the gain is zero (Rs 70,000 – Rs 70,000)

Invest now

To summarize

For hybrid mutual funds, those that have at least 65% equity will be taxed as equity mutual funds, and the rest as debt mutual funds.

Dividend income from shares, debt, equity, and other non-equity MF

• Tax is not applicable on dividend income
• However, Mutual Funds deduct the Dividend Distribution Tax (DDT) from the NAV and pay it to the government
• The effective rate of DDT is 29.12% including the surcharge and cess for non-equity funds and 11.64% for equity funds

If you are a resident Indian, TDS (Tax Deducted at Source) will not be applicable when you sell your units. You must declare the income and pay taxes, if any, when you file your returns. If you are a non-resident Indian, while the tax laws remain the same for capital gains, TDS will be deducted, at the applicable rates, when you redeem.

Remember that even when you are switching units from one scheme to another or from the one option to another, or making an STP or a SWP, they will all be considered as redemptions.

Taxes are also one of the many factors you should consider when choosing a mutual fund. Consult a tax or other advisor accordingly.

How do millennials view savings or investments? This is a reasonably common topic of discussion in today’s world of financial planning.

If there’s one activity that we all tend to postpone and defer, it’s retirement planning. Most of us tend to underestimate the perils of poor retirement planning or the lack of a meaningful corpus at the time of retirement.

30s to 40s is typically when an individual has achieved a certain level of stability in both their personal and professional life. There is a sense of rationality, balance, and maturity that an individual typically attains. The key step in financial planning is estimating post-retirement expenses. One mistake that most people make in projecting cash-flow requirements post retirement is visualising a downsizing in lifestyle and consumption needs in post-retirement life. Consequently, they project lower ‘real cash’ flow needs. This to me is the biggest mistake most people tend to make.

The golden rules of estimating post-retirement expenses

1. Factor in inflation – that’s what ‘real money’ means – and factor in real inflation. Let your retirement calculations assume inflation at nothing less than 7% CAGR. It is always better to be on the higher side. If the inflation isn’t as high as you projected, you will have more funds in hand. However, if your projections are substantially lower, you will be in dire straits. Here’s a real scenario: To generate Rs.6,250 on a monthly basis, you would have needed a corpus of Rs.12,50,000 30 years ago. Today, you would need a corpus of Rs.1 crore to generate a monthly income of Rs.50,000. That’s the impact of inflation. (Inflation rate – 7.19% for 30 years computed based on Cost of Inflation Index, source: www.incometaxindia.gov.in; Monthly interest assumed at 6% p.a)

2. Assume no clamp down in lifestyle and consumption needs. Human beings are inherently averse to accepting change. This is more so the case when it is a scale down instead of a scale up. Moreover, there will always be additional lifestyle expenses that come with age than you may think of as necessary now.

3. Prioritise your expenses into three categories – must have, nice to have, and can do without. Try to live without the ‘can do without’ before you retire. This will help you address the previous point as well as give you a more realistic picture of what your expenses are like currently and what they could be like in the foreseeable future.

4. Project your expenses into monthly payouts and annual payouts. Annual payouts include things like Car Insurance, Medical Insurance, home-care initiatives like pest control and AC annual maintenance. Factor in all the expenses you undertake on an annual basis.

5. Build capex spends. For instance, you will need to replace your car once in 5 years, will need a TV once in 8 years, a mobile once in 3 years, and so on. These can be a major drain post retirement.

6. Once you arrive at these factors, sum these up and back-calculate when you intend to retire. Project a realistic life span for yourself of at least 80 years at the minimum. Now use these numbers to calculate your corpus.

7. Break this corpus into yearly and monthly expenses.

8. The above computation assumes that you have adequate Medical Insurance. Medical expenses are a major expense, especially post retirement, and you need to have a comprehensive medical policy that covers you and your spouse in case of eventualities. This is extremely important as an ineffective policy or lack of a medical insurance can throw all your plans out of kilter since the need for medical intervention and scope of medical expense is very difficult to predict.

Where do I invest for retirement?

There are many options available in the market including dedicated Pension Schemes. But for now, I’d like to emphasise that every retirement investment portfolio must have a significant allocation to equity.

Equity is the best asset class to beat inflation in the long run. Equity mutual funds in India have generated close to 15% – 17% CAGR over the past 10 years. That’s about 8% to 9% above inflation. When you compound this annually, it gives you a significant amount of wealth over an extended period of time. Here’s a fact – Over the past 40 years, an investment of Rs 10,000 in the S&P BSE Sensex would have grown to over Rs 45,28,568 (data as of March 31, 2019)

The typical approach is, the longer the period for retirement, the greater the allocation to equity. Individuals who are less than 40 years of age should have about 80% of their investments in equity and the assumption is at least 40% of their income goes towards investment products. My observation is that anything less than these numbers will always lead towards a sub-optimal post-retirement corpus.

To summarise,

1. Start early. Ideally, start from your very first year of work. The same old parents-to-children golden rule works in this situation as well – do not postpone important activities. Retirement planning is a supremely important activity and something that young India will do well to register on their priority list.

Project a realistic retirement age. Just because our fathers and grandfathers retired at 60 years does not guarantee that we will retire at 60 too. Be realistic about your retirement age

Whether you’re building your own business, or just trying to take charge of your finances, several financial experts offer targeted advice for women. No matter which stage of life you’re in, or if you’re a novice at finances, there is a lot you can do to achieve financial security. Let’s see how:

Early adulthood

Usually, early adulthood refers to the ages of 18 through to your mid-twenties. For many, early adulthood means either tertiary education, part-time or full-time employment. Financial experts say this is the ideal period to begin your financial journey. It is the right time to start simple saving plans – it could be for your college tuition, a vacation, or even if you’re planning to move out of your parents’ home.

The easiest way to kick-start your financial planning at that age is to set aside a small amount of money every week, which will make a massive difference to your savings in the long run. Starting a fixed or recurring deposit makes this task easier for you. You could also set up a fund for your future goals, say – an extensive travel plan to check things off your bucket list.

If you have a 3-5-year investment horizon, consider investing in a balanced fund or a large-cap fund. You can also save on income tax by investing in Equity Linked Savings Scheme (ELSS or tax-saving mutual funds).

Tying the Knot

Marriage is a significant milestone in every one’s life and not to mention, one of the most important transition periods too. With marriage, many other milestones follow like buying your first home and preparing to be a parent. When you marry, it’s not just your financial security that you have to take care of, but that of your partner and your family too. Discuss your savings, expenses, debts and investments with your partner, so you can together build a comprehensive investment plan secure your collective financial future.

Things you could do include starting a joint savings account. You could also invest in liquid funds for near-term goals or for day-to-day or monthly expenses. For longer term goals (5+ year horizon), you could invest in mid or small capequity mutual funds.

Motherhood

As a parent, you’ll have new expenses to take care of – childcare, schooling, higher education and maybe even your child’s marriage. With several financial goals to achieve during this stage of life, the best way forward is to start a SIP for each goal. Also remember that as your income increases, keep increasing your SIP amount as well. By planning early for your child’s goals, you not only invest comfortably over a long-term but also avoid getting into huge debts. This will benefit you in the long run.

Retirement

To say that retirement planning is essential is an understatement. A safe and financially secure retirement is the dream, which can be a reality for many women. Retirement though several years away is the goal you need to start investing for very early on in life. This is because you need to build a corpus that will allow you to lead the life you want for 20+ years once you retire. Start a long-term SIP in an equity mutual fund, and as you get closer to retirement shift your investments towards assets with lower risk (debt funds). Your investments can continue to grow, and with Systematic Transfer Plans (transfer from equity to debt for stability) and Systematic Withdrawal Plans (transfer from debt funds to bank for monthly income) you can make your retirement a happy one. Read our golden rules for retirement here.

When weighing your options, be sure to contact your financial advisor so you can successfully navigate your finances at every stage of your life. It is never too early to get proactive about your finances.