"Mutual Funds are the Stocks of the Middle Class"- Nobody, But This is what middle class or low risk investor thinks when they think of Mutual Funds.
The Rap of "Mutual Funds are subjected to market risks" that comes at end of each mutual fund ad raises suspicions in the Minds of the low risk investor.
While I would still suggest low risk investor to go with mutual funds, Here are 3 simple Suggestions that can potentially .
3 Mutual Fund Suggestions that can potentially save lakh
1. Never go with Systematic Investment Plan (SIP)
Before going
with SIPs, Lets understand mutual funds in little detail
Mutual funds
works on concept of NAV (Net Asset Value) which is value of 1 unit of mutual
fund, Consider NAV of HDFC Index fund is 10Rs, when you invest 10,000Rs in the
mutual fund, you’re effectively purchasing 1000 units of HDFC Index Fund
This NAV
Changes daily (Monday to Friday) as per the market fluctuations and other
factors-
As the time
goes the number of units of funds purchased remains the same (just like any
product you buy) but the NAV or value of the mutual fund varies.
What is
SIP
Systematic
Investment Plan or SIP is a method of investing in mutual funds scheme where
the investor chooses to deposit certain sum of money in same mutual funds at
regular time intervals.
For
Example:
Rakesh
chooses to do SIP of 500 per month on 5th of every month in HDFC
Index Mutual Fund.
Now that we
understand the concept of SIP, Let’s see why its actually a bad practice to do
SIPs
Why you
should never do SIP
·
Reason 1: There’s clearly no benefits over investing
multiple times in mutual fund whenever you want
When a
person chooses to do SIP on particular day say 5th of every month,
NAV might be at its highest peak for the month, you’re thereby purchasing the
mutual fund at higher cost thereby causing significant loss in long period of
time.
For
Example
March 2021-
NAV of HDFC Index Mutual Fund
|
5th Mar |
8th Mar |
9th Mar |
11th Mar |
12th Mar |
15th Mar |
|
12 |
11.5 |
11.3 |
11 |
10.8 |
10 |
Here if you’re opting for SIP, You’re forced to invest on 5th of March where NAV is 12 and if you invest 12000Rs, you’ll get only 1000 Units of the funds
Case of Choosing date yourself
With the
help of finance guides or with simple analysis you can opt to invest in the
funds on the date where the NAV is on lower side
You choose
to go with say 12th of March when the NAV is 10.8 (As its tough to
predict whether NAV will again drop going forward), If you happen to invest
same 12,000 Rs as the case of SIP, You’ll get 12,000/10.8 i.e 1,111 units of
mutual fund.
Thereby with
smart decision of choosing to invest when NAV is on lower side for month, one
can easily purchase more units of mutual funds for the same price.
When you
repeat the same for each month, in long run, you’ll make more profits than
that’s possible from SIPs.
·
Reason 2: You’ve to take out SIPs in increments to
avoid paying more taxes
Lets
understand this is more detail
Income Tax
from Equity Mutual Funds for example can be categorized into 2 types.
· Long term-
Profits from Funds invested over 1 year
· Short term -
Profits from Funds invested less than year
Long term
Tax- 0 tax till
withdrawn profit reaches 1 lakh for the year, 10% of withdrawn Profits
thereafter
Short
term Tax- 15% of
Withdrawn Profits with no minimum threshold.
Systematic
Investment plan (SIP) should always be followed by Systematic Withdrawl plan
(SWP)- Just like investing month on month, you should also withdraw the amount
in a span of 12 months to avoid extra tax.
Example: You invest 50k every month in SIP
for 1 year, you invested 6L in the year, say you got back 6.4L.. If you
take all 6.4L at a time.. you'll end up paying 6,000 INR as tax... (15% of
40,000) while you pay no tax if take it out in 12 months month on month.
This happens
because only the money you invested in the 1st month would've completed
1 year and profit of which comes under long term profits while the
money invested for next 11 months wouldn't have completed 1 year and hence
profits from which comes as short term gain, so you should pay 15% tax with no
minimum threshold. Not following the above might blow up even Few Lakhs
How to
follow Systematic Withdrawal Plan while taking out the money to avoid extra
tax?
Mutual funds
have NAV ( Net asset value) for each small asset. Say you invest 50,000- you
get 500 units, in which case each unit NAV is 100. This NAV grows with time
while number of units remains the same.
You should
see the number of units purchased in 2nd month of investment and withdraw the
same in 14th month. 3rd months units in 15th month and so on..
Mutual funds
are always advertised as long term investments and you should take it out only
for Long Term Personal goals like Children’s marriage, Retirement, Children’s
Higher Education. But please understand these kind of promotions are made based
on emotional and risk adverse mindset of Indians.
Investment
on Mutual funds will definitely help the people on other side of table but not
for the investor. Let’s Understand why.
For simple example lets consider the case of
Equity Mutual Funds for which Income tax as I told earlier are
Long term
(Taken out Profits from Over 1 year Investment)- Nil till 1 Lakh per year, 10% of
profit thereafter
Short
term (Taken out profits from Less than 1 year Investment)- 15% of profits
Lets
understand why mutual funds are not effective over long run,
Example: Consider Rakesh had invested 10L in
March 2011 and left it like that for next 10 years, lets see how it goes assuming
10% increase in NAV year on year
|
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2017 |
2018 |
2019 |
2020 |
|
11 |
12.1 |
13.3 |
14.64 |
16.1 |
17.7 |
19.48 |
21.43 |
23.57 |
25.93 |
So in 2020,
He takes 25.93L out and pays Long term tax on profit of (25.93L-10L= 15.93L),
That’s 1.6L.
Consider if
he taken out profits the respective next year and had invested back- He did not
had to pay taxes till 1L Profit for the year, effectively tax he would’ve paid
is about 60K, He could’ve saved about 1L on Taxes!!
Maybe he could’ve also repurchased the funds every year at even less NAVs than running ones, effectively making much more profits!!
3. Don’t do Mutual Funds in Single Person’s Account
If you’re investing heavy on mutual funds, its always better to have one account for each family member above age of 18 (else its not useful).
Example:
Consider
Rakesh has invested 30L Rs in March 2020 and it had become 33l in 2021 and he
plans to take it out. He has to pay 10% of profit (3l) as tax that’s 30K Rs.
Instead if
he had invested 7.5L in Four accounts (His, Mother’s, Father’s and Wife’s),
There would be
75K profits in each account (which is less than 1L per year), thereby no taxes
has to be paid
Rakesh would
be saving 30K Rs by diving money among 4 mutual funds accounts of his family.
0 Comments