Life should be clutter free and investments should be kept as simple as we can.

With stock market going through ups and downs every day, mutual funds have become a very attractive option for investment today. There are more than 1000 schemes available in the mutual fund industry which allows us to choose funds as per our needs and risk profile. The ultimate motive of the investment is to make every penny work so it takes you nearer to you goals and dreams.

Tough time call for tough choices and pinching every penny, in this scenario when the market we get very worried about losing our money in commission and expenses ratio.

It’s true that regular funds have some commission included as a part of expenses ratio, however if you look towards the benefits of investing in regular funds, you can easily compromise on the charges part.

Why Retail Investor should avoid Direct Plan of Mutual Fund?

Records of Investment

It was quite shocking for me that none of the financial planners touch upon this point in their post on Direct Plans. Today if i invest in 8-10 mutual fund schemes of 5 fund houses then i need to remember and store details of all the direct schemes separately. If god forbids and something happens to me then my wife has to search & trace all the details. We forgot one imp point that approx 22000 Cr. investor’s wealth is lying unclaimed in various financial instruments. The only reason is either the investor forgot about investment or legal heirs of investor could not trace any record of the investment.

The basic thumb rule of personal finance says that all the investments should be consolidated, concentrated and preferably centralized. If i have single unified mutual fund account with bank or distributor then my wife can easily access all the details through single window.  Remembering password of 10 different accounts is a big hassle.

Now you must be wondering what about single consolidated statement generated by CAMS etc. for all mutual investments. Answer is that you cannot rely on same. The day i registered my email id, i stopped receiving physical statement. My wife may not have access to my Email account.

Documentation

Documentation is major hassle in direct plan for both online and offline investors. For each investment, you have to complete separate set of documentation. If you are active investor then its a nightmare. Today, i have mutual fund account with one of the leading private banks. I can place order / redeem mutual fund units with 2 mins flat without any additional documentation for each investment.

Operational Hassle

For investors who are not comfortable with online operation, it will be operational nightmare. For every transaction they have to visit the branch of fund house. In case of agents / distributors, they provide pick up service to regular investors. Also the agents / distributors have wide network of branches compared to branches of a fund house. In a city, you will find 1 branch of fund house but there will be 10-15 branches of popular agents/distributors.

Review and rebalance – Specially when the market is going against our expectation, we need someone who and hold our hands in these tough times and help us to safeguard our portfolio from market volatility, At Saffollya …, we provide you an investment advisor who help you to review and rebalance your portfolio as the need arises. It has been observed that with review and re-balances; there are higher chances of keeping you on track with your financial goals.

All funds under one umbrella -At Saffollya …, we provide you a platform, where you can purchase funds from any AMC with one account, no paper work, and no hassle to remember numerous passwords, just one login and you can perform all the transactions. You can even purchase NFOs online. The basic thumb rule of personal finance says that all the investments should be consolidated, concentrated and preferably centralized. If i have single unified mutual fund account with bank or distributor then my wife can easily access all the details through single window.  Remembering password of 10 different accounts is a big hassle.

Detailed comparison – Compare two or more funds from the same category to make smart investment choices.

Amazing customer support– Customer support is the back bone of regular funds; we are just 1 call away to provide you any guidance related to your investment. Our customer support specialist not only helps you in picking the right fund but also, they assist you for every query related to redemptions, switch or anything related to mutual funds.

Wealth Coach : Our advisor – “Wealth Coaches” are highly trained on managing personal finance and assigned to work towards clients goals with consideration of Insurance need, individual taxation etc.  Moreover, through technology support we take care our client’s interest on faster way.

No bias– The funds offered are not biased towards any single AMC, choose you funds depending on your needs and risk profile or ask for an advisor.

54EC bonds, or capital gains bonds, are one of the best ways to save long-term capital gain tax. 54EC bonds are specifically meant for investors earning long-term capital gains and would like tax exemption on these gains. Tax deduction is available under section 54EC of the Income Tax Act. 54EC bonds do not allow any tax exemption on short-term capital gains tax. Invest in 54EC bonds to get benefits of tax deduction. The maximum limit for investing in 54EC bonds is Rs. 50, 00,000. The eligible bonds under Section 54EC are REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd) and NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation Limited).

Listed below are the Key features of Capital Gains Bonds:

Capital Gains Bonds are issued by the below Corporations:

Disclaimer: Interest Rates are subject to revision by the respective Companies/Government from time to time. Saffollya Investment Advisory LLP acts as a referral agent to these companies and the offer is brought to you by the companies subject to fulfillment of eligibility criteria, terms and conditions etc. Investors are advised to read the Terms and conditions offered by respective companies carefully before taking any investment decision.

Frequently Asked Questions

Who can invest in 54 EC bonds?

The following can apply:

Resident Individuals

Hindu Undivided Families (HUF)

Firms

Companies

Banks, Commercial RRB, Co-operative Banks

Financial Institutions

Company

Mutual Funds

Insurance Companies

Eligible NRIs (as per applicable law and regulations)

What is the mode of application & payment?

You can apply for the 54 EC bonds offline with physical forms. The payment can be done through cheque, DD or RTGS

In what form can 54 EC bonds be held?

The bonds can be held in physical or demat form.

When someone asks me “tell me some risk-free investment which can generate good returns” or “low risk high return mutual funds” – I get confused. Why? Because according to me there are n number of risks in investing & I am not sure which risk he is talking about. Warren Buffett Said “Risk comes from not knowing what you are doing”  so today let’s risk ourselves to understand different types of risks that are associated with equity & debt investments.

What is Risk ?

What comes to your mind when someone says RISK or this investment is risky? Risk for most of the people has only one meaning loosing the principal amount. In scientific language “Risk may be taken as downside risk, the difference between the actual return and the expected return (when the actual return is less), or the uncertainty of that return.”

Image Credit Onemint

2 most basic types of risk

Investment is related to saving but saving does not mean investment. Investment is about deferring your present consumption for future goals with expectation of security of amount & getting returns. So there are 2 basic risks in it:

Investment Risk – it is about possibility of losing money. Today you invest Rs 5 lakh in equity & get Rs 4 after 3 years. Investment risk can be measured by Standard Deviation.

Inflation Risk – it is losing purchasing power of money. In 2011 you invest Rs 5 Lakh in debt & get Rs 10 Lakh in 2020. But your Rs 10 Lakh is not able to buy you the item which was available for Rs 4 Lakh in 2011.

Check below picture which tells you that with time (in equity) Investment risk is reduced & at some point of time it turns to zero. But on other hand Inflation risk increases with the time & there is no end to it. Or we can say in short term risk is volatility of assets & in long term it is loss of purchasing power.

Systematic Risk Vs Unsystematic Risk

There is one more way to classify financial risk – is risk will impact whole economy or particular company or a sector.

Systematic Risk – it is also known as market risk or economic risk or non diversifiable risk & it impacts full economy or share market. Let’s say if interest rate will increase whole economy will slow down & there is no way to hide from this impact. As such there is no way to reduce systematic risk other than investing your money in some other country. Beta can be helpful in understanding this.

Unsystematic Risk – it affects a small part of economy or sometime even single company. Bad management or low demand in some particular sector will impact a single company or a single sector – such risks can be reduced by diversifying once investments. So this is also called Diversifiable Risk.

Different types of Risk in Investments

We have divided it into 2 parts – risk in debt & other risks. It is a big investment mistake if someone feels that there is no risk in debt investments – people who have ignored this in past have paid huge price.

Risk in Debt Investments

Credit Risk – it is also called default risk. As the first pic of this article shows that people only look at returns & not risk in it. Let me ask if SBI bank is paying some 9% interest & some NBFC NCD is paying 12.5% – which one you choose. If you think 12.5% NCD will be the right choice – you are ignoring the credit risk. Credit risk is when company doesn’t have capacity to pay principal or interest amount. In past there is a long list of companies which defaulted like CRB Capital, Escorts, Morpen Labs etc. Even Bank FDs have credit risk – there is guarantee only upto Rs 1 lakh. Credit risk is close to zero in Government Bonds.

This is most common & most important risk in debt – to understand it better read “Why debt will always give negative returns”

Interest Rate Risk – change in interest rate will impact price of bonds (or NCDs). There is negative relation between price of bond & interest rates – if interest rate will increase price of bond will go down & vice versa. This risk can be reduced if you hold bonds till maturity. Interest rate risk also affects Bank Fixed Deposit investor – he was having Rs 5 Lakh & he invests at a prevailing rate of 9%. What will happen if interest rate increase to 10% – he will be losing 1% interest.

Reinvestment Risk – Let’s assume that you made investment in a bond with 9% yearly interest. Interest rate reduced to 7% in 1 year so next year when you received interest & went back to invest it was invested at lower rate.

Liquidity Risk – if you have some bonds that you would like to sell for immediate requirement but there is no buyer or fewer buyers than sellers – you may have to sell your bonds at discount.

Country risk – it is also called sovereign risk. As you read in Credit risk “Credit risk is close to zero in Government Bonds” but close to zero doesn’t mean zero. What about present condition of PIGS – Portugal, Ireland, Greece & Spain. Even in India there have been instances where fixed deposits issued by govt. backed companies deferred maturity payments by issuing additional bonds.

Inflation Risk – as mentioned in starting of the article. Inflation is your biggest enemy.

Other Investment Risks

Exchange Rate Risk – If you invest in debt or equity of some other country you will face exchange rate risk. If some of your US investments earn 10% in one year in dollar terms but the same year dollar loose 2% in comparison to rupee – your actual return will be 8%. NRIs are heavily impacted by this risk & they should make financial decision after considering it.

Timing Risk – I don’t think I need to explain it but only one suggestion – don’t take this risk.

Volatility Risk – equity prices keep fluctuating on day to day basis. This can be measured by standard deviation.

Political Risk or government risk or regulator risk – What will happen if you have invested in a particular sector & government comes out with an adverse policy. This risk can be clearly seen in sugar or oil & gas sector.

Valuation Risk – You may find a great company with great future prospects but if present valuation is too high you will not make money. Infosys was good company in 2000 & great company in 2005 but its price of 2005 peak was less than 2000.

Business Risk & Technology Risk – couple of years back pagers & typewriters were important part of once life but these products are no more there. Same happened with Audio tapes & floppies – what would have happened to these companies.

Execution risk – the time between when you see your price and when the trade actually goes to the market.

Concentration Risk – when you invest in single company (I know a person who invested all his long term savings in Satyam), single fund or single asset management company you are actually taking a huge risk.

Information Risk – This is again a very important risk to understand. You take your financial decisions based on some information – this information is provided either by manufacturer of financial products or agents/distributors/advisors or media. What will happen if this critical information is wrong or not complete? If you think this only happens at the time of buying insurance – you are absolutely wrong. This can happen in any financial product including mutual fund (you see advertisement of 100% return in a year – these are point to point returns & completely misguiding), taking loan (interest rate shown 9% but actually it is 16% – it is game of Flat rate & Reducing rate) or even simple products like tax free infrastructure bonds.

Someone rightly said “If you torture numbers enough, they will confess to almost anything”– read extract from Economic Times about IDFC Infrastructure Bond advertisement:

“IT IS A PLAIN-VANILLA INFRASTRUCTURE BOND ISSUE THAT OFFERS TAX RELIEF AND A MODEST RETURN TO INVESTORS. HOWEVER, THE ADVERTISEMENT FOR IDFC BOND OFFER HAS INVESTMENT EXPERTS QUESTIONING SOME CLAIMS. MOST OF THEM CLAIM THE ADVERTISEMENT IS “GROSSLY CONFUSING”, “MISINFORMING THE INVESTORS” AND “TOTAL MISREPRESENTATION OF FACTS”.

THE BONE OF CONTENTION IS IDFC’S CLAIM THAT THE ISSUE OFFERS TAX-ADJUSTED YIELD OF 17.85% TO INVESTORS. SURE, AS ALWAYS, THERE IS AN ASTERISK, AND A QUALIFICATION THAT THE YIELD IS TAX ADJUSTED FOR INVESTORS IN THE HIGHEST TAX SLAB. THE TROUBLE, SOME EXPERTS SAY, THEY CAN’T VERIFY THE CLAIM EVEN AFTER EXHAUSTING ALL FINANCIAL FORMULAS AVAILABLE IN THE SPREADSHEET.”

*(yes this star) – Do you know what this star is called? Asterisk or Aster-RISK – Aster means Star & Risk means anything or everything that is written in this article. If you find this star somewhere try to find hidden things in footnotes.

There are few other risk which impacts you directly or indirectly – institutional risk, operational risk, event risk, company risk, geopolitical risk, sociopolitical risk, counter-party risk, reputation risk, commodity risk, management risk, principal risk, opportunity risk, prepayment risk, call risk, legal risk and I am sure I have missed lot others….

Oh so many risks & you thought only equities are risky. Now from the next time when you say Risk Free Investment – first clarify which risk you are referring to.