Mutual Fund Taxation 2018 - 19

Budget 2018 substantially alters taxation rules for Equity Mutual Funds. A ready reckoner on taxes is available here:

http://www.tatamutualfund.com/docs/other-documents/tax_reckoner.pdf?sfvrsn=24 

Linking Aadhaar to Mutual fund Folios Online

The government has mandated linking of Aadhaar to Mutual Fund Folios before December 31, 2017. We are not certain if the deadline may be extended, but would recommend linking Aadhaar online whenever you get time.

It is best to link your Aadhaar with both the registrars CAMS And Karvy at the earliest. The links to do the same are provided below. You will need your Aadhaar Card, your folio linked email id and your Aadhaar linked mobile phone to complete the linking. It takes just a few minutes. 
 
https://adl.camsonline.com/InvestorServices/COL_Aadhar.aspx and https://www.karvymfs.com/karvy/aadhaarlinking.aspx


There are other manual ways to link Aadhaar using a signed photocopy of your card and a simple form. These should be used as a last resort as these methods are cumbersome and time consuming.

What is the best Mutual Fund to invest?

There is no single best fund to invest. There are different types of funds that can be chosen for different types of requirements.

The fund that is most appropriate for most Indians is the Equity Large and Mid Cap fund, which invests in shares of Indian companies listed on the National Stock Exchange or the Bombay Stock Exchange. The reason why this type of fund is most appropriate is because most Indians do not invest in equities in a systematic long term manner to build wealth. The absence of this fund in your portfolio will cause large and lasting damage to your financial well being. These funds are best used for investments of 10, 20 even 30 years. An investor can choose to supplement these funds with Small and Mid Cap funds to boost risk and return. For a young person investing for a long time, this is the fund that matters.

For those who wish to place large sums of money for a short period of time, it is better to go with short term debt funds. These funds are easily replaced by bank fixed deposits, but they are usually better than bank FDs. In any case, even if you do not have these funds in your portfolio, it will not cause much harm unless you are placing very very large sums of money idle in a bank account. This is a 'nice to have' fund for most Indians, and a 'must have' fund for cash rich Indians.

Other funds are useful if you have a specific view on the share market. For example, infrastructure funds, pharma funds, technology funds, etc. are useful only if you believe that these sectors will do better than the economy as a whole. Similarly, long term debt funds are useful if you believe interest rates will fall.

From here on complexity in Mutual Funds increases. There are many funds for many different requirements. There is, however, NO single best fund.

How should I invest to finance my two year old's higher education?

Higher Education in India is getting scandalously expensive. Any half decent professional degree is likely to cost in the range of Rs. 20 lakhs to Rs. 30 lakhs fifteen years from now. This does not include outrageously expensive degrees like medicine or a US MBA, that cost crores even today and will be more expensive in the future.

Assume you want to save Rs. 25 Lakhs for your child's higher education 15 years down the line. You have a few investment choices. Let us run through them: (The calculation is quite useful for other sums as well. If you want to save a crore instead of 25 Lakhs, for example, you just need to multiply all investment by 4.)

The NSC/PPF/FD/Debt Fund
You could invest in a good long term bond like an NSC, which is government guaranteed and returns on an average about 8% per year. To get 25 lakhs in 15 years you can put in a one time investment of Rs. 7,90,000 in an NSC, and keep renewing it every five or ten years. It will grow to Rs. 25 Lakhs.

Another way to do the same thing would be to buy Rs. 7,000 worth of NSC every month for 15 years, and you will build about Rs. 25 lakhs in investments.

The advantage of this approach is that it is ultra safe and government guaranteed.

The disadvantage of this approach is that your money is locked for 5 years or ten years at a time. You cannot take it out at all. A second disadvantage of this approach is that NSC interest rates can change. When you have to renew after 5 or 10 years, you could face a situation where interest rates are low - say 5% or 6%. That could throw the entire plan out of gear.

PPF, bank FDs and long term bonds would work similar to NSC, though there are some differences in taxes charged on each. Simply stated, NSC and PPF are your best bond or fixed income options, closely followed by Debt Mutual funds. Fixed deposits are not good for long term investing because of the way tax works in India.

The Equity Mutual fund
You could also invest your money in long term equity Mutual Funds. To get 25 Lakhs in 15 years you can put in a one time investment of Rs. 3 Lakhs on an expected average return of 15% per year. Another way to do the same would be to start an SIP of Rs. 3,500 per month for 15 years.

The advantage of this approach is that it provides better returns, so the money you need to put in is lesser. Using an NSC you need to put in a one time investment of Rs. 7.9 Lakhs. With Equity Mutual Funds, just about 3 Lakhs would do. Using an NSC you will need a monthly investment of Rs. 7,000 for 15 years. With Equity Mutual funds Rs. 3,500 per month would do. A second advantage of Equity Mutual funds is that you get liquidity. You can withdraw your money or invest more money at any time. This is not the case with NSC and PPF, though it is possible with Debt Mutual Funds.

The disadvantage of using Equity Mutual funds is that you do not get guaranteed or safe returns. Returns from year to year can vary hugely. An Equity Mutual Fund can swing from -50% to +200% per year. That can be quite scary.

So what is the best way? It is balance. Mix it up. Use both. That is what I do.

Go with Rs. 2.5 Lakhs in NSC and Rs. 2.5 lakhs in Equity Mutual Funds. Or go with Rs. 2,500 per month in NSC and Rs. 3,000 per month in Equity Mutual Funds, and you have a good chance of making more than Rs. 25 lakhs for your child in 15 years.

You can write to us to set up a workable plan right away. And yes, avoid the Insurance based Children Plans. They don't work very well because they are basically the same as Equity Mutual Funds, only about four to ten times as expensive. They can look very attractive and responsible, but that is a neat mind trick played by advertisers, which you can learn more about by clicking here

Is a house a good Investment?

Its a dream to own a house. Your own roof and floor is absolutely essential in life. One of India's most prolific writer and thinker, Khushwant Singh, has written that in order to be happy one must have: "your own home. Rented places can never give you the comfort or security of a home that is yours for keeps. If it has garden space, all the better. Plant your own trees and flowers, see them grow and blossom, and cultivate a sense of kinship with them." (you can read the essay here)

We agree. One must buy a home to live.

But is a house a good investment?

Should one buy a house so that one makes good money?

That is an entirely different question, and we believe that on balance, a house isn't a good investment.

Here are a few reasons for you to think about:

1. The ticket size and risks are incredibly huge. Houses in most large cities in India cost around a crore or more these days. That translates into roughly a Rs. 1 lakh per month EMI over 20 years. It is a huge burden to pick up. If you buy a house for Rs. 1 Crore when you are thirty five, then you are effectively committed to paying Rs. 1 lakh per month till you are fifty five years of age. If the price of your house falls, or if you are unable to sell it, or if there is some problem with the builder or with the building, you will end up with a financial liability that will completely take over your life. It is the stuff nightmares are made of.

2. House prices fall. It is often missed, but it is true and can be seen these days: house prices fall, sometimes they fall off a cliff. What is worse, when house prices fall, a phenomenon called deflation takes over and buyers dry up. There is no reason for a person to buy a house you are selling if he believes that prices will fall in the next six months. Not only will prices fall, you will be unable to sell until prices bottom out and start rising again. This is a nerve wracking and very dangerous situation.

3. There are very few credible house buyers in general. As a rule of thumb, a person can buy a house that is about three to four times the annual salary. Which means only a person with an annual income of about Rs. 25 Lakhs and above can buy a house worth Rs. 1 Crore. There are very few such persons in India.

4. Transaction costs are huge, sometimes as high a 10% one way in broker fess and registration charges and legal fees, etc. This 10% does not include taxes due from you for capital gains. It is very expensive to both buy and sell a house.

The one advantage in investing in a house is that it allows you to borrow money cheaply. Cheap borrowing allows you to feel rich and also allows you to take advantage of rising prices because as prices rise, loans become less onerous. Cheap borrowing also boosts the returns you make. But you must be careful. Borrowing works both ways: it can boost the profits you make, and it can also magnify the losses you could end up with.

The clinching reason to not use a house (or a flat or a plot for that matter) as an investment is that even after all these troubles, houses are just no good as investments. Equity is far better. I live in Gurgaon and a lot of times people point houses to me and say: "that house was worth Rs. 35 Lakhs in 2005. Now it is 2 Crores." And they look at me waiting for me to be impressed.

Well, I am not impressed. Far from it, I am shocked. Rs. 35 Lakhs to Rs. 2 Crores in 12 years is a 15.6% return on investment. And this is the best return you get in the biggest boom in the biggest boom town in India, and this return is before taxes and broker costs and other charges.

Now compare.

Rs. 35 Lakhs invested in DSPBR Opportunities Fund on 1 Jul 2005 would be worth Rs. Rs. 2.5 Crores on 1 Jul 2017. DSPBR Opportunities is nothing extremely extraordinary that I have especially chosen. It is a good solid above average fund from a good solid fund house rated about 3.5/5 stars for performance. The best performing funds would have turned Rs. 35 Lakhs to more than Rs. 5 Crores. 

Remember, your gains from DSPBR Opportunities would be tax free, and you would be able to take out your money at the click of a mouse without the need to visit any broker. The DSPBR fund would cost nothing to buy or sell. On the other hand the flat would have cost you maintenance, interest, taxes and a whole lot of hassles.

There is simply no contest between the two investments. So yes, buy a house to live, but don't buy one as an investment. 

The One Financial Decision You Must Get Right

Playing it too safe?
The most important financial question that an Indian professional has to ask is: Am I playing too safe? Most probably, You are.

The most dangerous thing an investor can do is to play too safe. When you buy a fixed deposit or insurance investment or infrastructure bond and feel happy that you have a guaranteed Minimum return, you often don’t realize that you have also bought yourself a Guaranteed Maximum Return. It is a very expensive thing to miss. You are all skilled at calculations. So I will show you the math straight.

For the most important case study of your life, read on.

Do the Math 
If on the day you joined work you put in Rs. One lakh in a fixed deposit, then on the day you retire exactly 40 years later an 8% fixed deposit will give you Rs. 8 Lakhs. Since you guys do the math: this number is calculated as (1+8% x (1-32%))^40. Remember the 32% income tax. Even without tax, this sum will be Rs. 22 Lakhs at the end of 40 years.

Now, consider a different choice. If on the day you joined work, you put in Rs. One lakh in a diversified Equity Mutual Fund, then:

If stock markets give average returns of around 12%, you get Rs. 93 lakhs from the Equity Mutual Fund. Equity Mutual Funds have ZERO tax. This number is (1+12%)^40

At good 15% stock market return you get huge additional profits because Mutual Fund gains do not have a Maximum limit. At 15%, the sum is Rs. 2 crores and 70 lakhs.

At fantastic 20% stock market returns you get Rs. 14 crores and 70 lakhs. Note that 20% isn’t a random fantasy. It is the actual historic average return of good Equity Mutual Funds in the last 15 years (to Feb 2014, See: http://www.morningstar.in/mutualfunds/f0gbr06rou/hdfc-top-200-fund-growth/performance.aspx.)

The fixed deposit will never do better than Rs. 8 Lakhs. Never. It is held down by a Guaranteed Maximum Return and taxes. Playing it safe is the biggest danger you face. Investing in equities is the single most important financial decision you can make in your life. Write to us at spheregreen.investments@gmail.com to invest.

A Career Plan without a Financial Plan is Meaningless

When people think about their careers, they think about skills, role, designation, the brand value of the company they work for, or wish to work for, the number of people who report to them, and in addition they think about salary, perks and benefits.

These are all important things.

But they are not THE most important thing. THE most important part of a career plan is a financial plan.

There are three reasons why a financial plan is the core of a career plan. Let me go over them.

First, any career, howsoever successful, will ultimately end in failure if it does not lead to financial security. We all work hard, long hours, we take unbelievable stress, we commute for hours through a toxic pollution haze. It is worthwhile to take the time to think about what we do with the money we are making. It is not enough to make large salaries. Examples abound of famous stars and sportspersons who made millions in their heydays, but were ultimately left bankrupt, unable to finance even a roof over their head. It is not enough to have a large income. It is necessary to plan how that money will accumulate into enduring wealth and financial security.

Second, your career choices depend largely on your finances. The choices you can make, or let go, depend on the money you have.. Want to start up? You will need the staying power of personal wealth. Want to negotiate hard for a raise? You will need the safety of a large balance to be able to bargain hard. Want to wait for the right role to come along before you start working again after a hiatus? You need money to have staying power without a salary. Personal wealth provides you flexibility. It multiplies your options as you grow in your career. It provides you the cushion to take risks, because you know that even if you fall, you have enough to get back up again.

Third, a financial plan helps you set the priority of your career in the larger scheme of your life. For a few of us the working life is all there is to life. This set of persons gets up every day raring to go to office and does not wish for anything more than to be able to work at the office lifelong. For many of us, however, a career is a means to other ends. We spend our time at office working with great dedication and effort, but desire more from life than just an office and a designation. Do you know what is truly important to you? A world tour? A holiday home? Kids’ education? Your own house? A year biking in the mountains? And do you know what is perhaps not so important? All careers involve a tradeoff between time spent earning and time spent spending. The financial plan helps you make your choices. It can help you determine what you must have, what you can let go, and how long and in what way you need to work to have enough money to get what you truly want.

If you do not have a financial plan, then you really don’t have a career plan. Write to us at SphereGreen.Investments@gmail.com and we can help you understand how to develop a basic but effective financial plan for free, and then help you set it into action.

Click here to view or download our presentation on basic DIY financial planning

What returns can I expect from Equity Mutual Funds?

Equity Mutual Fund returns are highly volatile. However, over the long term, typically five years or more, they are also highly rewarding. Returns on Equity Mutual Funds depend on the investments they make. Large Cap Funds tend to have stable returns. Mid Cap Funds offer higher but more volatile returns.

In this post I am considering just these two fund types and comparing them to Bank FDs

Here are the ACTUAL annual returns on various categories of Equity Mutual Funds from four top fund houses: DSP, HDFC, ICICI and UTI over the last 3, 5 and 10 years as on Jun 21, 2016:

Equity Large Cap funds: 15.41% in 3 years, 10.17% in 5 years and 11.76% in 10 years.

Equity Mid Cap funds: 31.65% in 3 years, 17.44% in 5 years and 13.44% in 10 years.

Comparable returns on Liquid funds have been

Debt Liquid Funds: 8.67% in 3 years, 8.85% in 5 years and 7.80% in 10 years.

Now, Bank FDs provide about 1% less than Liquid Funds at about 6 months tenure. This difference adds up. At 6.8% return (10 year liquid fund return minus 1%) a Bank FD would grow Rs. 1 lakh to Rs. 3.7 lakhs in 20 years. If we include the impact of 30% tax as applicable on Bank FDs for top income tax bracket, the growth in Bank FD would be Rs. 1 lakh growing to Rs 2.5 lakhs in 20 years.

The average large cap fund would grow Rs. 1 lakh to Rs. 9.2 lakhs in 20 years. The average mid cap fund would grow it to Rs. 12.5 lakhs. There is more. The BEST large cap fund would grow Rs. 1 Lakh to about 21.5 lakhs over 20 years (if we assume that the 10 year return would be valid for a 20 year period also). The best mid cap fund would grow Rs. 1 Lakh to Rs. 56 lakhs. And all Equity fund returns are tax free after a year of holding. So no tax is payable at all.

The net net is this: it is extremely loss making to invest money for the long term in Bank FDs. ACTUAL history shows that in the last 20 years investors lost Rs. 55 lakhs in trying to protect Rs. 1 lakh.

EPF and NPS: Retirement products in India are necessary, but not sufficient.

The 2016 budget has made changes to the withdrawal and taxation rules related to EPF contributions. Tax rules on EPF and NPS are still being clarified as I write this post, and there is hope that changed rules will be brought into place that will make EPF and perhaps even NPS EEE schemes - i.e. Exempt from tax at investment, Exempt from tax on returns generated, and finally Exempt from tax on withdrawal. We will get away from taxation, but there are other very onerous requirements that are being missed. EPF withdrawals have been made impossible till 58 years of age, for instance.

Both the NPS and the EPF are great products, even if the new taxation rules apply. There are however four things that make these schemes extremely dangerous and should be kept in mind before one invests.

First, these products assume that a person will not retire until 60 years of age. In today's world that is no longer a viable assumption. Many of us will be forced to retire by 45 simply because there will be no other employment opportunities worth pursuing. It is also possible that many of us will simply not have the will to keep up with the grind of corporate employment at enormous personal cost. India is a young country and the pressure from an ever younger workforce will make it difficult to sustain a long term career, or to survive a layoff in the late thirties or early forties.

An early retirement will lock you out of your NPS and EPF funds for 10 to 15 years, from when you retire at 45 to when you get access to the funds when you are 60 years of age. How will a person finance such a gap? How will a person handle critical funding requirements such as a child's education or wedding or house purchase or a financial emergency that occur from 45 to 60 years of age? The avenues are other investments or personal loans.

Second, lump sum withdrawal from EPF and NPS are tough and will be made yet tougher and more taxable in the future. These funds can no longer be used to finance critical lifetime milestones such as buying a house or financing a child's education or wedding. They are also not very useful in managing an emergency requirement for large sums.

Third, you will be forced into buying an annuity using the corpus created in NPS and EPF. An annuity is an insurance guaranteed return on money irrespective of interest rates. You pay a large sum of money to an insurance company - say Rs. 1 crore, and they pay you back a  monthly amount, which, currently, would be about Rs. 50,000 per month. Annuity products are provided by the Life Insurance industry and this industry has a very patchy customer service reputation. Simply put - all the benefits you make through EPF and NPS could be appropriated by your annuity provider by giving you a bad annuity product. And you will not have a choice to say no. To be a captive customer to India's life insurers is the stuff nightmares are made of.

Fourth, NPS and EPF funds are completely government regulated. You have little or no control over what changes may come about in the future. For instance, the government may force all NPS money in government bonds in order to finance its fiscal deficit in times of crisis. Anyone who believes that such changes may not occur is dangerously naive. The government will be tempted to use your money for its finances, even if that damages you financially. I have no doubt that they will fall to such a temptation. The age of socialism is upon us. The time when one can be arbitrarily labelled too rich to be spared tax is here.

Intelligent financial planning demands that you invest in NPS and EPF. Intelligent financial planning also requires that you do not depend entirely only on these schemes. NPS and EPF are necessary, but not even remotely sufficient.

Our view: if you do not have a healthy equity and debt exposure through Mutual Funds, your financial plan will not work. It just won't. The math does not add up.

It is at times like these that money is made

The Sensex is close to 24,500, substantially below fair value. Markets are volatile, but cheap. People who have invested money in the market over the last two years are almost all losing money, and there is a sense of gloom. Not surprisingly, the question I get asked most often is "Is it a good time to invest?"

Yes. This is a great time to invest money, and it gets better as markets fall further. It will be a rare, once in a decade event affording a special opportunity to make extraordinary returns if we are lucky enough to see a 20% further crash from here. At that level, below 20,000, I would borrow and invest in the market.

When the Sensex rises , and touches 40,000, and is substantially above fair value and expensive. When people who have invested recently are sitting with double their money and there is a sense of euphoria and a belief that good times are here to stay. That is when nobody asks me whether they should invest in the market. They just go ahead and do it.

Actually, that is the worst time to invest in the market. That is the time when I advice people to take their money and sit tight. And I can tell you very few people ask the right questions.

Invest based on what you need, not what you like

Often a person’s investment is driven by his risk appetite. Conservative persons cannot stand to lose money and so prefer safe investments like bank deposits. Risk loving persons, on the other hand, avoid safe investments because they like the feeling of risking money to make stupendous returns.

Actually, it is probably a bad idea to choose an investment based on how much risk you like. It is far more intelligent to consider what you want to achieve through the investment. I am sure you would agree that it is intelligent to use a hammer to drive a nail and to use scissors to cut paper. In the world of investments, however, there are many persons who would use a hammer to cut paper because they ‘like’ a hammer.

The safest, simplest instrument is a Bank Fixed Deposit. You put money for a fixed duration of time and get a fixed amount of money at the end of that period. It is useful for short term requirements such as putting aside money for kids’ school fees or even buying that expensive iPhone for Diwali. These deposits provide anywhere from 5% to 9% return depending on interest rates and duration of investment.

The Short Term Debt Mutual Fund offers 5% to 9% returns and is a little riskier than the Bank Fixed Deposit. It is the preferred choice of sophisticated investors such as companies and rich individuals because it is ‘liquid’, which means you can invest and withdraw money from a Short Term Debt Mutual Fund easily at any time, and because these Funds attract lower tax rates if held for three years or more.

So the Fixed Deposit and Short Term Debt Mutual Fund is useful to keep money parked for a year. They are products investors 'like.' Both the Bank Fixed Deposit and the Short Term Debt Mutual Fund are harmful, however, if you want to save for retirement, or for your Children’s college education, or their marriage.

When dealing with investments that have to last for twenty or thirty or forty years, you need to look at Equity Mutual Funds. These are risky but offer great long term returns and they are essential if you want to build wealth for the long term. The Bank Fixed Deposit or Short Term Debt fund are worse than useless for these durations.

A person investing his January Bonus in Equity Mutual Funds so as to buy a Car at Diwali in October is like a person using a hammer to cut paper. Similarly, a person saving in a Bank Fixed Deposit for his retirement is like a person using scissors to drive a nail. Yet, investors often invest only in Bank Fixed Deposits for ALL purposes because they believe that these instruments are safe. Some others put all their savings into share trading in the vain hope that it would mushroom into a massive sum that would make them rich overnight.

A good investor studies all instruments and astutely uses the one that best suits his purpose. The correct application of an investment to a purpose is financial wisdom.

Should you still invest in a fixed deposit?

There is nothing called as investing in a fixed deposit, because those who keep their money in a fixed deposit are not investing it, they are merely parking it. And to park money, Liquid Debt Mutual Funds are much better than Fixed Deposits.

Here are some comparisons between fixed deposits and Liquid Debt Mutual Funds:

1. You cannot withdraw money in a fixed deposit without severe penalties. A Mutual Fund allows you to invest and withdraw at any time without penalties.

2. A fixed deposit return is guaranteed. A Liquid Debt Mutual fund gives you better returns almost all the time, though returns are not guaranteed. There is no TDS on a Liquid Mutual Fund.

3. A Fixed deposit is taxed at your income tax rate. A Liquid Debt Mutual fund is taxed at the same rate, but the tax reduces after three years of holding.

4. In a fixed deposit you are taxed on ALL the money you invest. In a Liquid Debt Mutual Fund you are taxed only on the part you withdraw at any given time.

So would you like to:

1. Pay more taxes,

2. Lock your money,

3. Pay penalties on withdrawing your own money, and

4. Get less interest?

If you do, Fixed deposits are for you. If, on the other hand, you want to make your money work harder, Liquid Debt Mutual Funds are a better option. You can know more here: click here

Write to us to invest better.

Where can I invest for 2-3 years in a Mutual fund?

For a duration of 2 -3 years you can get returns of approximately 8% to 9% through debt/liquid funds as of 2015. These funds are quite safe and deliver returns slightly above FDs. These funds are

taxable. Any interest you earn will be taxed as part of your income.

You can also look to invest in Fixed Maturity Plans, which give higher returns, but these are illiquid. You will not be able to take out your money before maturity.

You can look to invest in Arbitrage Mutual Funds. There give returns similar to Liquid Debt Funds, but the returns in an Equity Mutual Fund are tax free after one year of holding. Even for sales within a year, returns are taxed at approximately 15%.

If you want to run greater risks for higher returns, then you can try Balanced Funds. These could give you-20% to +50% in two years and will be tax free if you hold for more than 1 year.

To make  good choice you need to understand fund objectives, category, house, manager, holdings, yields, expenses, and history among other things. Knowing exactly which funds to pick, and for how long to keep with it requires deep understanding. We are happy to help you with that if you invest through us at SphereGreen.

PPF does poorly even when compared to the least performing Mutual Fund SIPs

The Economic times today did a systematic study that showed something that SphereGreen has know for a long time: returns on Equity Mutual Fund SIP Investments are much better than PPF even in the worst case. And when Equity Markets do well, then Equity Mutual fund Investments grow to four times the size of PPF investments in 15 years. You can see the ET study: click here

The article says that PPF has given a return of about 9% per year over the last 15 years. Mutual Fund SIPs have given a return of 13.7% in the worst case and 26.6% per year in the best case, with an average return of 21.1% per year.

What this information does not show very well is the magnitude of difference these returns generate over a period of 15 years. Here it is: If you invested Rs. 10,000 per month for 15 years, then:

1. In a PPF this money would grow to 36.8 Lakhs

2. In the worst performing Equity Mutual Fund SIP it would grow to 54.9 Lakhs

3. In an average performing Equity Mutual Fund SIP it would grow to 1 Crore 5 lakhs

4. In the best performing Equity Mutual Fund SIP it would grow to 1 Crore 71 lakhs

In other words, those who invested in PPF instead of Equity Mutual Fund SIPs lost as much as Rs. 1 Crore 35 Lakhs in the last 15 years.

It takes fifteen minutes of your time to start a SIP and you can manage it online and stop investments or withdraw money in five minutes. Without these investments you will never be rich.

Write to us now at SphereGreen.Investments@gmail.com, or through this blog, or call us to invest straight away.

What charges do I have to pay on a Mutual fund Investment?

The charges a person pays on a Mutual Fund investment depend on the way one purchases the Mutual fund. Broadly there are three ways:

1. Investing Directly with the AMC (Asset Management Company or Mutual Fund Company) without an Adviser. To do this you need to complete a SEBI KYC and then open a folio with the Mutual fund company and invest in the DIRECT version of the fund. Since you do not have an adviser you are on your own in opening the account and in choosing funds. This is the cheapest route and it is a Do It Yourself Route meant only for those who are very comfortable with Mutual fund investments, such as corporates. Direct equity funds usually have an expense of about 2%.

2. Investing Directly with an AMC with an Advisor. This is the model we follow at SphereGreen. This investment is in a REGULAR Fund and is about 0.5% more expensive than a DIRECT fund, but you get our help in opening folios and choosing funds and in managing your money over a long period of time. This is best suited for new investors in Mutual Funds.

3. Investing through a bank or stock broker. Usually banks or brokers act as advisers but do not provide any advise on funds. Investing through them is the same as investing with an adviser, so you pay for an adviser, in this case the bank, but you do not get much advice. Even more, some banks and brokers put you onto Mutual Funds through their wealth management arms, and that is extremely expensive. Investing through wealth management is the most expensive way to buy Mutual Funds because it can cost as much as 3% more than REGULAR FUNDS, and in our experience it provides little extra benefit.

We believe Investing Directly with an AMC, but in a REGULAR fund with us as an adviser, is the best way to invest in Mutual Funds for a new investor. 

What is an Arbitrage Mutual Fund?

An arbitrage mutual fund is a very specialized Equity Fund that makes money by exploiting tiny differences in the prices of shares in different exchanges or the differences in prices between shares and their derivatives.

These funds are not very risky provided they are managed professionally under a good risk management system and they adhere to rules. Which is why it is critical to be invested with a good fund house in these funds. Overall returns are around the rate of an FD, but, and this is what makes arbitrage funds attractive, capital gains on these funds are tax free after a year of holding. On the other hand, taxes on debt funds comparable to arbitrage funds reduce only after three years of holding to 20% with indexation, and gains from FDs are usually added to your income.

The best use of an arbitrage fund is to park large sums of money for the short term. You can write to us to invest at SphereGreen.Investments@gmail.com, or you can contact us through this blog, or simply call us to invest.

Are there any secure Mutual Funds?

Most certainly.

Debt funds are safer than Equity funds, and the safest Mutual fund would be a Liquid Debt Fund. Other debt funds such as Government Bond Funds, Income funds can be risky because they are extremely sensitive to changes in interest rates.

A Liquid Debt Fund is a great place to park money:

1. It provides slightly above the 6 month Bank Fixed Deposit Rate of return

2. You can invest or withdraw money at any time

3. After three years of holding taxation is very low

4. Interest is NOT taxed until you withdraw

5. Tax is charged only on the money withdrawn

6. There are certain specialized Equity Mutual Funds that give returns similar to a Liquid Fund called the Arbitrage Funds, but these are much more complex.

So a Liquid fund is quite safe, but there are no guaranteed returns in ANY mutual funds.

And then safety is a relative concept. With a Liquid fund you can be around 90% certain of positive returns above an FD rate in a year. So it is safe only for a short duration.

Over a period of ten years, the Liquid fund is very dangerous because you can lose a lot of money due to low returns. If you had put in Rs. 100 in a Liquid fund 10 years ago, you would have about Rs. 200 now. If you had put money ten years ago in some of the 'risky funds', such as diversified equity, the money would have grown to Rs. 900 by now. This is how you can lose Rs. 700 in trying to protect Rs. 100.

What is an SIP, How do I start one?

Systematic Investment Plans, or SIPs are simply a convenient way to invest in Mutual Funds month on month. You select a fund, choose a date, choose an amount to invest, and the period for which you would like to put in money. Once you have selected all of this, you need to fill a few forms and the money will be automatically placed in your mutual fund account from your bank account every month on the date selected by you.

Simple, Powerful. Convenient.

A Systematic Investment Plan is a matter of convenience and not an obligation. you can stop the investment at any time, you can withdraw the invested money at any time, and you can invest more money at any time.

An SIP can also make you very rich. For example a Rs. 5,000 per month SIP for 20 years on the 7th of every month will help you invest Rs. 12 Lakhs (5000 x 12 x 20) in small monthly amounts. And your money will grow because SIPs can be very profitable. An investment of Rs. 5,000 per month over 20 years should give you about Rs. 80 Lakhs (15% annual return). These gains are tax free and uncapped. If I calculate that MF SIPs give you returns similar to what they have done in the last decade and a half, then you should make Rs. 1.5 Crores in 20 years (20% annual return). But there are no guarantees on returns.

To begin an SIP takes 10 minutes. You need to:

1. Complete a KYC

2. Select a fund

3. Open a folio

4. Request an SIP.

Write to us if you want to start an SIP today and we will help you with all four steps.

How do I make Rs. 10 Lakhs in 10 years?

You can generate Rs. 10 Lakhs by simply putting Rs. 5,000 per month in a debt fund for ten years. These are fairly predictable and stable return funds where your money will be at minimal risks. You could end up making Rs. 9 Lakhs or you could end up making Rs. 11 Lakhs based on what interest rates turn out to be in the future.

You can also generate Rs. 10 Lakhs by investing Rs. 3,500 per month in a custom designed mix of ELSS and other Mutual Funds. Returns here are not stable. You could end up with as little as Rs. 7.5 Lakhs, but importantly you could end up with as much as Rs. 18 Lakhs.

For a ten year horizon, it is better to invest in Equity Funds rather than debt funds. Write to us or call to set up the investment.

Want to Invest in the Stock Market?

Investing directly in stocks is one of the fastest ways to lose money. An individual investor is the worst informed, has the slowest IT systems, has the longest chain of brokers to market and has the highest costs. He has zero risk management and holds his losses, often growing them as he seeks to 'average' the price of his holdings. Everybody loves the retail investor, because ultimately, it is he who gives free money to all the other players in the market. No market is truly in a bubble until the retial investor is pumping in money freely and directly.

Fools invest directly in the stock market.

Smart guys invest through Equity Mutual Funds. These funds are tax free after a year of holding, can be used to provide 80C tax benefits, have provided historical returns of over 15% to 17% per year (some have provided more than 23% per year), and are fully liquid - you can put in more money or take out money at any time you want. Most importantly, you get an expert to manage your money.

Where should you invest money?

Suppose you have a Lakh to invest. Your choices are as follows:

1. A bank account will give you 4-5%, which translates to Rs. 104,000 in a year, Rs. 1.21 lakhs in 5 years and Rs. 1.48 lakhs in 10 years. These are guaranteed returns. You will not make any less or any more than this amount.

2. You can invest in National Savings Certificates (NSC). NSC have lock ins for five years at least, and will give you approximately 8.5% per year. Your money will grow to approximately Rs. 1.5 Lakhs in 5 years and Rs. 2.4 Lakhs in ten years. These are government guaranteed returns. You will not make any less or any more than this amount.

3. Debt Mutual Funds have zero lock ins, which means you can invest and withdrawe money at any time. They give about 8.5% per year, and their returns attract very low tax after three years of holding. Your money will grow to approximately Rs. 1.5 Lakhs in 5 years and Rs. 2.4 Lakhs in ten years. Returns are NOT guaranteed.

4. Equity Mutual funds have zero lock ins and very high volatility. In a SINGLE year Rs. 1 Lakh may grow to Rs. 3 Lakhs, or it may fall to Rs. 50,000. What actually happens only time will tell. This calculation is based on the historical performance of these products. On an average, however, Mutual Funds should give you 15% to 17%, the best will give you 23%. In ten years, your money should grow to Rs. 4 Lakhs (at 15% returns) upto Rs. 4.8 Lakhs at 17% returns. If markets do very well, and you make 23% returns, you would make close to Rs. 8 Lakhs. Quite a few funds have actually given such returns in the last 10 years. Returns are Tax free after a year of holding and returns are NOT guaranteed.

So:

For money you need within a year use Bank Accounts and FDs

For Money you need between 1 to 3 years use Debt Mutual Funds

For money you need more than 5 years in the future, use Equity Mutual funds.

What are the Sensex and the Nifty? How can I invest in them?

The Sensex is a number based on the average share price of a list of the 30 largest companies in India. To calculate it they took the prices of the top 30 companies in India, calculated an average, set that average at 100 in 1979 and are now measuring changes since that date.

Nifty is similar, but covers 50 companies and started at a different date.

You can invest in Sensex or Nifty through a variety of ways:

1. You can buy Index Futures.

2. You can buy an Index Exchange Traded Fund

3. You can buy an Index Mutual Fund

4. Or the best way - you can buy a Mutual Fund that uses the Sensex or Nifty as its benchmark.

A Mutual Fund that uses the Sensex or Nifty as its benchmark is the simplest, most effective way to invest in the India growth story. It is also the most important part of your personal financial plan because it is responsible for creating up to 90% of your personal wealth.

Write to us at SphereGreen.Investments@gmail.com to invest or to ask any questions regarding your personal investments in Mutual Funds.

Which are the best Tax Saving Mutual funds?

You can get a list of all the top tax savings Mutual Funds in India at ELSS -Value Research Online. There are a few things you should remember on ELSS Funds (as tax saving Mutual Funds are called).

1. They provide tax exemptions under section 80C up to a maximum of Rs. 1.5 Lakhs per year.

2. They have a three year lock in. You cannot take any money out.

3. They give way more than 9% returns. They should give you returns of 17% or more over a ten year period based on historical performance. In any given year, though, your returns could be anywhere from -50% to +200%.

4. Returns are not guaranteed

Interested in investing? Write to us at SphereGreen.Investments@gmail.com 

Why should I Invest in Mutual funds?

They give good returns. They are highly liquid. They are low cost. They have uncapped gains. They are tax efficient. These factors alone make Mutual funds great investment vehicles.

But the real reason you must invest in Mutual funds is because you do not have a choice. Without sizeable equity investments, there is no way you will be able to generate enough wealth to live comfortably. There is simply, mathematically, no way.

The real work, the heavy lifting in wealth creation is done by Equity investments. About 70%-90% of your wealth is generated by equities. Put another way, you can be ten times as wealthy if you invest in equity mutual funds.

Write to us at SphereGreen.Investments@gmail.com to know more. 

Good things in life come to those who are smart about investing