Please do not reply back to this mail. This is sent from an unattended mail box. Please mark all your queries / responses to webmaster@samirkotak.in .
Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. samirkotak.in and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. samirkotak.in, its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.
An equity SIP can perform the miraculous feat of transforming a portion of your monthly income into capital deployed in a business, so that you can share the profit stream, says Dhirendra Kumar

Two weeks ago, I discussed the Maths and the psychology of Systematic Investment Plans (SIPs). We saw that the logic of SIPs is impeccable and there is no better way to invest in mutual funds. However, there's a lot more to it than just that.

Last month, I came across this statement by John Bogle, “[Without the equity markets,] there would be no way to turn a stream of income into a pile of capital or a pile of capital into a stream of income.” Bogle is, for all practical purposes, the inventor of the index investing as a practical product. There are few people who have done as much as Bogle to make the idea of steady, low-cost, long-term investing a success. So how do the equity markets `turn a stream of income into a pile of capital?' for an ordinary investor, and what does this have to do with SIPs?

Firstly, we have to appreciate that equity and equity mutual funds are a unique type of investment when compared to the various kinds of deposits that Indian savers are so fond of. As I'd written in one of the early articles in this series, when we invest in equity, we become part owner of a company. Boiled down to the basics, there are only two ways of investing money--either you can lend it to someone, or you can own your own business. While founding and running an entire business is not everyone's cup of tea, the existence of the stock markets means that any of us can be part-owners of a business. We can get a share in the profit stream of a business without the hassle of running a business.

As Bogle points out, essentially, your income stream has become part of a pool of capital that is funding a business. Instead of being entitled to just a fixed income on the money, you can--depending on how well you invest--become entitled to profits. Not just that, since the capital markets price stocks on what they believe the future holds, your investments gain in value based on that too.

So where do SIPs fit in? Simply by aligning with the pattern of income that most savers have, and by making this conversion of your income into capital effortless and automatic. Most of us earn and spend our income on a monthly cycle. Having a little bit of this flow systematically into an SIP becomes an easy way of linking your income to something that turns it into capital deployed in a business. This is something that is relatively new phenomena in saving and investing.

No one in an earlier generation could do this. Open-ended mutual funds, electronic transfer of funds from banks, online confirmations and monitoring are some of the tools that have made this possible.

A long-term SIP is the nearest thing to a certainty that exists in investing. When you look at it with the perspective I've presented above, that of a steady income transforming into capital, it becomes obvious that this should be the centerpiece of your lifetime investment plans. Some time ago, we did an extensive study at Value Research on how long must one run an SIP for the chances of a loss to be minimized.

While you can find details in Mutual Fund Insight magazine, the main finding of was that an SIP investment period of a mere three years meant that the investments had positive returns in more than 90% of the cases. At four years, this was up to 94%. Even for a two-year investment, which is too short in every way, positive returns are found in 84% of cases. If this is the kind of a deal that equity SIPs offer, it's foolhardy not to invest.

Source: Times Of India

While equity mutual funds are gaining traction with retail investors, debt funds remain uncharted waters for them

While mutual funds are gaining traction with retail investors, most new investors come via the systematic investment plan (SIP) route into equity funds whereas debt funds remain uncharted waters for them. Here are some numbers to illustrate this point: 80% of equity assets of mutual funds are held by individuals (retail 47% and HNIs 33%, as of April 2017). Only the remaining 20% assets are held by institutional investors. The picture is exactly the reverse in case of debt funds. Only 27% of debt fund assets are held by individuals (6% retail and 21% HNIs), whereas 73% of debt fund assets are held by institutional investors. I am sure this comes as a surprise to you as well that despite a tendency for the average Indian investor to be risk averse, the mutual fund industry appears to be an exception. Retail investors favor equity funds and hold assets under management (AUM) of Rs3,22,287 crore which is over four times the AUM held by individuals in debt funds (Rs78,697 crore). This anomaly is primarily because mutual funds cannot offer assured returns and further compounded by the lack of awareness about benefits of investing in debt funds. 

Here are five reasons why one should consider owning debt mutual funds.

1. Time horizon: Unlike traditional assured return products, debt funds offer a wider variety. Regardless of the time horizon, there is a suitable debt fund. For short periods of less than 3 months, there are liquid funds. These are considered a good alternative to savings bank accounts as they come with high liquidity and relatively stable returns. Similarly, ultra-short-term bond funds are suitable for a 3-month to 1-year period. Similarly, one can consider short-term bond funds for a 1-2-year horizon, medium-term funds for 2-3 years and long-term funds for 3-5 years. In each case, returns and risk are commensurately higher as one invests for the longer term.

2. Tax efficient: This is a key aspect of debt mutual funds. Unlike traditional assured return products, where interest income is taxed every year at income tax slab rates, with debt funds, only the change in net asset value (capital gains) is taxed. One pays short-term capital gains (STCG) tax at income tax slab rates only if units are held for less than 3 years. Thereafter, investors benefit from long-term capital gains (LTCG) tax at 20% and that too only on that component of the gain that exceeds inflation. So, if you earn 9% per annum over 3 years from debt funds and the inflation rate is 5%, you pay tax only on the incremental returns of 4%. This is called ‘indexation’ and is calculated using the cost inflation index (CII). So, even if debt funds and bank deposits provide the same returns, after a 3-year period, one can get higher post-tax returns from debt funds. 

3. Regular cash flows: With declining interest rates and rising life expectancy, there is a fear that retirees may run out of their retirement corpus. Debt mutual funds can help to provide tax efficient regular cash flows via systematic withdrawal plans or SWPs. Say, you invest Rs25 lakh in a bank deposit paying 9% interest per annum. This will fetch you Rs18,750 every month. If you are in the highest tax bracket of 30%, you pay about Rs5,600 as tax on the interest received, and your net receipt becomes about Rs13,100. However, if you opt for SWP in a debt fund with the same monthly cash flow (Rs18,750), you end up paying only a fraction of the tax (as capital gains tax) thus generating much higher post-tax returns. 

4. Diversification: Debt funds are an important component of a well-diversified portfolio as their returns are typically more stable (less volatile) than equity funds. Thus, diversifying via debt funds reduces the overall portfolio risk.

5. Convenience: Assume you have a large sum of money to invest in equities but are unsure of when to invest. An SIP is a good way to build time in the market, and benefit from rupee cost averaging. But with interest rates on savings accounts at 4%, is this the best way to invest?

It is time investors allocate some portion of their savings to alternate options like debt mutual funds for the higher tax efficiency, variety and convenience. But do ensure that you understand the full risks and rewards of investing in debt funds. Ask your adviser about the different types of risk that a debt fund can take (interest rate risk, credit risk) and to invest in a fund that meets your time horizon and risk appetite.

Source: Economic Times

Mutual funds are pure investment products, and there are thousands of them in the marketplace, suited to every kind of investment objective. So, what does the first-time investor choose?

Whenever you want to invest, your first step should be to outline an investment objective. This helps you shortlist the investment instruments best suited for achieving your objective.

Here Are a Few Persuasions for First-Time Investors:

Long-term growth with high safety
Debt mutual funds and gilt mutual funds may be your best option if you want slow, steady growth over the long term. Debt funds invest in a mix of fixed-income instruments such as government bonds, corporate deposits, non-convertible debentures, money market instruments, etc. Gilt funds invest in government securities. These provide a high degree of safety for your capital, along with long-term returns that exceed those of bank deposits or small savings schemes.

Long-term growth with moderate risk
Pick a large-cap fund. These invest 80% and more in large-cap companies, which tend to be stable as compared to their mid and small-cap counterparts. Investing through SIPs in a large-cap fund for the long term can provide high, tax-free returns, in addition to helping you build a diversified portfolio.

Long-term growth with aggressive risks
Small-cap, mid-cap, micro-cap and diversified mutual funds may be the way to go for the adventurous investor ready to take big risks. The long-term returns from these fund categories top all other categories. However, these funds are also very volatile, and you should invest in small, controlled quantities in them.

Combining risk and safety
Hybrid funds help you invest in a diversified mix of equity and debt options. If you are a risk-favoring investor, try an equity-oriented balanced fund that invests 65% or more of its corpus in equity options. If you prefer a much lower degree of risk, you can try monthly income funds which invest 70-90% of the corpus in debt options and the rest in equity.

Index funds mimicking the market indices
Index funds are passively-managed funds. They mimic market indices such as Sensex and Nifty, without the active involvement of a fund manager. The underlying assets tend to be stocks of large-cap companies. Index funds are best used for long-term investing.

ELSS for tax savings
Equity-Linked Saving Schemes (ELSS) are popular among first-time investors. They offer tax deductions under Section 80C of the Income Tax Act. They are diversified equity funds with a three-year lock-in period. They provide tax-free returns.

Undecided & just want to keep the money safe
Liquid funds are your option. These funds invest in short-term money market instruments with a maturity period under 91 days. They are considered highly safe and offer conservative returns matching those of fixed deposits. You redeem the money instantly without paying an exit load.

Source: Financial Express
Systematic investment plan and systematic transfer plan are smart ways to invest. Systematic withdrawal plan is the smart route to enjoy your wealth

Investors get swayed by short term swings in the market, especially in the stock market. And such swings could be in either ways. When the market is on a sudden slide, many investors tend to get out. Again, in times of bull rally, several investors sell out early. As a result, these investors miss out to take full advantage of the power of the market to create wealth in the long run.

Are there ways to get out of this? Putting money in mutual funds through the systematic investment plan (SIP) route is one of the solutions. Systematic transfer plan (STP) is another one while the third, which is a smart way to redeem the wealth created over the long term, is the systematic withdrawal plan (SWP). How SIP Works:
  • SIPs almost work like a bank recurring deposit. In SIP, you pre-fix an amount that you want to invest every month or every quarter in a particular fund. On the pre-fixed date, the amount is debited from your bank account and invested in the fund
  • SIPs help investors to not bother if the market is high or low
  • At market’s low, the investor gets more units while he gets lesser number of units when the markets are high
  • Over the long run the price is averaged out
How STP Works:

When you get a big bonus or there’s a large inflow of money, don’t invest all of that in one shot

First invest that money in a liquid fund, which rarely witness any substantial volatility in the short run

Then set up an STP from that liquid fund to another fund (depending upon your investment horizon and risk appetite

Over the next 6 months to a year, a fixed amount will be transferred to the fund you have selected while the balance amount remains safe in your liquid fund

How SWP Works:

After you have created wealth by investing over several years, you should enjoy that money. In such situation, SWP comes in handy

An SWP helps you withdraw a fixed amount from your mutual fund corpus on a fixed date every month/quarter

Through SWP you enjoy the wealth you have created, while at the same time the corpus which is remaining in a fund keeps growing

Source: Economic Times
Please do not reply back to this mail. This is sent from an unattended mail box. Please mark all your queries / responses to webmaster@samirkotak.in .
Information provided on this newsletter has been independently obtained from sources believed to be reliable. However, such information may include inaccuracies, errors or omissions. samirkotak.in and its affiliates, information providers or content providers, shall have no liability to you or third parties for the accuracy, completeness, timeliness or correct sequencing of information available on this newsletter, or for any decision made or action taken by you in reliance upon such information, or for the delay or interruption of such information. samirkotak.in, its affiliates, information providers and content providers shall have no liability for investment decisions or other actions taken or made by you based on the information provided on this newsletter.