How to Select the Best ELSS or Tax Saving Mutual Funds in 2019?

How to Select the Best ELSS or Tax Saving Mutual Funds in 2019?
08/07/2019

Equity linked savings schemes (ELSS) has emerged as an important method of tax saving in the last few years, although they have been in existence for a very long time. It is only now that the share of ELSS in the overall equity AUM pie has grown.

Data Source: AMFI

As the chart above shows, ELSS now accounts for 13% of the total equity fund AUM of Rs.7.25 trillion as of the end of June 2019. So, this is surely an indication of the increasing interest in ELSS schemes. So what are ELSS schemes and why are they taking off in India?

What exactly is an ELSS scheme?

An ELSS scheme is an equity fund that typically invests more than 85% of its overall portfolio mix into equities. Such ELSS funds can invest in large cap stocks and also in mid cap stocks as long as they are invested in direct equities. In terms of costs and management they are exactly like an equity fund. The only difference is that ELSS is an equity fund with a 3 year mandatory lock in period. During this lock in period the ELSS cannot be sold.

ELSS is one of the many tax saving schemes that the Income Tax Act offers. For example, to save on tax, you can opt for Section 80C exemption up to Rs.1.50 lakhs per annum. The eligible outlays include PPF, CPF, ELSS Funds, Long-Term FDs. LIC premiums, ULIPs etc. ELSS is one of the many options available under Section 80C but it is the only pure equity offer; as the remaining options have a large debt component or insurance component.

What makes ELSS attractive to investors?

A number of factors combine to make ELSS mutual funds interesting and profitable for investors. Let us look at some of the key highlights.

  • ELSS has the lowest lock in period among the Section 80C options. For example, PPF has a lock in period of 15 years while ULIPs and long term FDs have a lock in period of 5 years. Only ELSS (a wealth creating mutual fund investment) gives you the Section 80C benefit with just 3-year lock in.

  • ELSS is one of the few options in the Section 80C list that allows you to create wealth in the long run without any investment limit. The 3-year lock in period automatically forces a long term investment approach, which favours wealth creation.

  • ELSS Funds help to enhance the effective rate of returns. Let us understand this better from the table below.

Non-ELSS Equity Fund

ELSS Mutual Fund

Investment Rs.1,00,000 (10,000 units at Rs.10)

Investment Rs.1,00,000 (10,000 units at Rs.10)

NAV at the end of 3 years (Rs.16)

NAV at the end of 3 years (Rs.16)

Nominal Return at the end of 3 years – 60%

Nominal Return at the end of 3 years – 60%

Tax Breaks Under Section 80C - Nil

Tax Breaks Under Section 80C – 20% (Assumed the investor is in 20% tax bracket)

Effective investment Rs.1,00,000

Effective Investment Rs.80,000 (Rs.20K rebate)

Effective Returns after 3 years – 60%

Effective returns after 3 years – 100% (cost of the fund is down to Rs.8 due to tax rebate)


How to select ELSS funds for maximum savings

There is a wide choice of ELSS funds but here are a few basic rules that you must follow.

  • ELSS is the best method of on-boarding first time investors into equities. It ties them down to a long term investment approach and also introduces them to an equity investing at an early stage.

  • Focus on past returns but also focus on consistency. There is no point in looking at 1 year returns when the lock in period is 3 years. But you must look at 3 year rolling returns on an annual basis. Focus on funds that give returns with consistency.

  • Focus on risk adjusted returns. Some fund managers take on additional risk due to the lock-in period. That is not a great idea. Measures like Sharpe and Treynor help to highlight such aspects.

  • Preferably use the SIP approach to investing in ELSS funds. It helps make tax saving a round-the-year discipline and helps you benefit from rupee cost averaging.

  • Don’t buy ELSS funds if you have exhausted your Section 80C limit. There is no point in locking in funds for 3 years; plain equity funds are good enough.

ELSS is a great value addition to your portfolio; especially when you look at it from the perspective of effective post-tax returns.

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How to Invest in Share Market with Limited Funds?

How to Invest in Share Market with Limited Funds?
08/07/2019

Investing is all about making you money work harder for you. Most people have incomes and they also have expenses. It is out of this income that they need to save for a rainy day and also invest for their secure and fruitful future. On the face of it, this looks like a steep challenge. But all that you need to do is to plan your investments properly and invest with discipline. Let us first look at the approaches to investing.

Approaches to investing

For an individual looking to invest with a view to creating wealth in the long run, there are different ways of investing. It is essential to know the gamut of options available before making the choice.

  • Firstly, there is low risk versus high risk investing. Low risk investing would entail keeping money in government bonds, money market funds or just in a bank FDs. This can be safe but less productive in the long run when compared to equities.
  • Secondly, there is the direct versus indirect approach to investing. You can look to directly invest in equity stocks or indirectly through equity funds. That would depend on your level of expertise and comfort with equity as an asset class. Investing in equities requires a high level of research and understanding.
  • Finally, there is the active versus passive approach. A passive approach is about buying index funds and be happy with index level returns. The other option is to invest actively where a conscious choice is made of what stocks to invest in.

What are some of the Do’s and Don’ts of investing?

Before looking at how to invest in share markets, let us look at some basic dos and don’ts that you need to scrupulously follow while investing.

  • Take a long term view to equities. Investing in equities for the short term can be extremely volatile and you could be disappointed with 1-3 year time frame.
  • Do your homework before you invest in equities. It is essential to understand the business, its earnings and its management quality before investing.
  • Every stock has a business behind it and so you must begin by understanding the business. Stock price will eventually move towards what the business is worth.
  • Look at equities like bargains. There is nothing as exciting in equity investing as buying quality stocks at cheap prices and low valuations.
  • Don’t panic once you have invested in a stock. Business reality takes time to reflect in stock price so you have to be patient.
  • Don’t give too much credence to rumours and electronic media attention on the stock. A good business is a good investment irrespective of these factors.
  • Don’t compromise on quality. The last two years have clearly shown that when the chips are down, it is only the quality stocks that survive.

How to make a wise investment decision in equities?

The great mathematician once said that there is no royal route to geometry. So also; there is no royal route to success in equity investing. This five point approach can certainly help you make wise decisions.

  • Always start with your goals in mind. Write down your long term goals and structure your investment mix accordingly. You cannot invest at random. There has to be an overall asset mix that you must adhere to and keep rebalancing.
  • Adopt a systematic approach to investing. There are two distinct advantages in this systematic or regular approach to investing. Firstly, it lets you synchronize your outflows with your routine inflows. Secondly, you get the benefit of rupee cost averaging.
  • Invest in stocks online; either via the internet interface or via mobile app. There are some crucial advantages. It is more economical, the execution is quicker and as an investor you have greater control over the trade and also the post trade processes.
  • Continuously benchmark your portfolio. You must compare your equity returns with the index, the peer group and also with an index fund. Remember, when you invest in equities, outperformance in the long run is the key.
  • Periodically have a time table to review and rebalance your equity portfolio. You must rebalance when there is change in goals or when there is change in market condition or when the current allocation is out of sync with your original allocation.

Equity investing is not so much like rocket science. A little bit of discipline and a lot of patience can go a long way!

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How to Build an Investment Portfolio from Scratch

How to Build an Investment Portfolio from Scratch
19/07/2019

An investment portfolio goes much beyond stocks. It is a combination of stocks, mutual funds, bonds and other assets like gold. Obviously, you cannot just pick up the pen and start filling up the application form for investments. There has to be a method to the madness. In fact, even before you start investing, you should go through some key steps and then starts the actual process of investing. These preparatory steps need to be taken care of to ensure that your core task of portfolio building does not get impacted.

Steps to building your investment portfolio

There are 8 critical steps you need to take to build your portfolio from scratch. Needless to say, it has to begin with your financial plan.

Step 1: Begin with your goals in mind. You want to retire rich, you want to send your daughter to an Ivy League university and you also want to ensure that you have money to pay for your home loan and car loan. All these have to be planned. Define your goals; assign monetary values to them and then work backwards to see how much you need to invest. It is all about being systematic.

Step 2: When you make your financial plan, you first need to take stock of your assets and liabilities. Once the goals are set out, the first step is to ensure that high cost loans are paid off. Personal loan at 18% or credit card outstanding at 35% can make a mess of the best investment portfolio plans. Start off by repaying these high cost loans.

Step 3: Get adequate insurance and don’t overpay for insurance. Your focus must be to cover risk, not make money out of insurance. That is what your investments will do. Apart from taking life cover you must also ensure that your family has adequate health insurance that takes care of any hospitalization needs. Above all, take insurance for your assets and your liabilities too. Ideally stick to pure risk plans and avoid endowments and ULIPs.

Step 4: Based on your asset mix, first focus on debt. Debt provides you stability and regular income. Any goals maturing in the next 3-4 years must be tagged to debt funds or FMPs. You cannot afford to take too much price risk in these cases, which is an assumption in your equity investment.

Step 5: Next you turn to all the important long term equity investments tagged to long term goals like retirement, child’s education, child’s marriage etc. The best option is to opt for diversified equity funds or multi-cap funds. Sectoral and thematic fund are best avoided. More importantly, adopt regular SIP plans. That will ensure discipline in investment as well as the benefits of rupee cost averaging towards wealth creation in the long run.

Step 6: Once your goals are taken care of, the next step is to look at any surplus for building a direct equity portfolio. This may not be a core aspect of your long term goals but they are essential to generate long term direct wealth. Focus on a handful of stocks having good prospects, ability to disrupt the industry and also the capacity to sustain growth and margins over a longer time frame. Take a perspective of at least 10 years on this portfolio and don’t forget to diversify your risk here.

Step 7: Keep some part of your money as margin facility for short term trading opportunities? They are for short term alpha and there is no reason for you to miss out on these opportunities. Here we are referring to churning your money in and out of the market using short term trades in equities. You must ideally look to trade with stop losses and clear profit targets since you need to protect your capital in these cases.

Step 8: Take this opportunity to build insurance into your equity portfolio. Futures and options can give protection and flexibility to your investments. The best of portfolios and the best investors are vulnerable to macro and micro changes. Have a plan to hedge your risk using put options or futures. These products can be used to either protect your portfolio value or to even play the market both ways.

Of course, these 8 steps are only limited to creating your investment portfolio. Then there is the monitoring of the portfolio and the rebalancing that is required from time to time, but that would be the subject of another discussion altogether.

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10 Reasons Why You Should Start an SIP

10 Reasons Why You Should Start an SIP
19/07/2019

A systematic investment plan (SIP) is a regular method of investing in mutual funds. Normally, SIPs work best with equity funds and ELSS funds, although you can virtually do SIPs with every possible fund. From an investment perspective, the beauty of SIP is that it helps you to build wealth gradually, systematically and with a much higher degree of assurance.

Why to start with a SIP right away?

A systematic investment plan is your ticket to long term financial planning and wealth creation. Here are 10 reasons to start your SIP today.

  • SIP is simple, which is what makes it appealing even to someone who is new to investing. If you are familiar with recurring deposits with banks, then the SIP is exactly that concept. You allocate a small amount each month and it grows into a reasonably large corpus over the long term.
  • SIP is the best route to your long term financial plan. We all have dreams but to fructify these dreams you need a financial plan. The best way to achieve your financial plan is to use the SIP route. Work out current cost; inflate the cost to the future and work backward to determine how much you need to put in equity SIPs each month. That is all!
  • SIP is all about making time work in your favour. The longer you continue the SIP, the more it compounds wealth and the greater your return on investment. In fact, among all the factors, time period works most effectively in favour of starting your SIP right away.
  • More than an investment, SIP is a discipline. That means; you need to inculcate the habit of saving and investing early on. Quite often you see two people with the same level of income ending up with vastly different levels of wealth. The difference can arise if one uses the prudent method of saving through SIPs. SIP forces you to save and invest for the future.
  • Apart from the time factor, there is another strong argument in favour of starting your SIP early. It allows you to step up the SIP contribution over time. Normally, our income levels tend to increase over time but most of us don’t increase our savings and investments proportionately. Higher income is not only a license to spend more but also an obligation to save and invest more. This can be effectively achieved through SIPs.
  • The earlier you start the SIP you are better able to structure your spending around the SIP. Quite often, we tend to look at savings as a residual item. That will not work. You need to first make your plan and determine how much of monthly SIPs you need to do. Once that is done, look to adjust your expenses accordingly. That is the way to create wealth. If you wait till you earn enough, you will never reach that point. That is where SIP comes in handy.
  • SIPs reduce your cost of acquisition over time. In any investment, the cost of purchase matters a lot. But the challenge is that you don’t know the right time to buy. The best way is to opt for a SIP. A SIP will give you more value when the markets are up and more units when the markets are down. Over time, this rupee cost averaging (RCA) works in your favour to bring down your overall cost of acquisition.
  • SIPs are flexible. It often happens that you get into a set of funds and then realized that some of the funds are underperforming. When you start a SIP early, you have the time and the flexibility to make changes.
    • SIPs handle volatility best. Like it or not; markets have been volatile. If you look at the last 10 years, markets have been trending for 2 years and have been volatile for the rest of the period. If you had bought an equity fund at the peak of the market in 2007, you would have earned less than an FD in the last 12 years. A SIP would be a different story altogether.
  • SIPs are cost effective and also tax efficient. You have the choice of opting for a direct plan to reduce cost. Even after the 10% tax on LTCG, equity SIPs are still very tax efficient over the long run.

The moral of the story is not to ponder over the issue for too long. Just fill up your SIP form and the rest will follow!

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Top 10 Rules for Successful Trading

Top 10 Rules for Successful Trading
19/07/2019

The gist of trading was best captured by the legendary trader, Jesse Livermore. According to Livermore, “In trading there is no bull side and bear side. There is only the right side”. Traders don’t bother about the long term and they are not really worried about getting the market view right. The concern is whether they have properly understood the underlying trend of the market? That is the key to trading.

Obviously, trading is a complex game otherwise there could have been scores of successful traders in the world. So what is it that elevates a good trader into a successful trader?

10 rules to be a successful trader in the markets

While we are broadly talking with reference to the equity market, these rules can apply to all kinds of trading; be it equities, futures, options, commodities or even currencies.

  • Successful traders begin with capital protection in mind. What does that mean? You must be clear about how much capital you are willing to lose. This includes how much you are willing to lose in a trade; how much you are willing to lose in a day and how much capital erosion you can afford overall.
  • When you get into any uncertain activity you need insurance. In trading, that insurance comes in the form of a stop loss. Your stop loss can be based on technical levels, events or affordability. You set the stop loss with a positive risk trade-off. Earnings Rs.3 for Rs.1 of risk is a 3:1 trade-off. But 1:1 is a bad trade-off. More importantly, you must adhere to the stop loss as a discipline.
  • When you trade don’t think and behave like Warren Buffett, who takes a 10 year view. As a trader, you are not in the buy-and-hold game. The more you use each opportunity to take profits off the table, the more your money churns and the more funds you have available to buy when corrections present themselves. That is how you enhance ROI.
  • The market is right, even if you don’t agree with it. The rule of successful trading is to always stay on the side of momentum because trend is your friend. In short, don’t try to short a raging bull market or catch a falling knife. The market is always giving you a message about the underlying trend. Learn to read that message.
  • When you lose money, take away the lessons, but don’t take the losses to bed. Don’t look back and regret trades. Also, when traders book profits and the stock goes further up, they tend to look back at notional losses. A good trader never looks back at trades except for taking the hard lessons. Trading is all about moving on to the next trade.
  • Leverage and average are the two cardinal sins of trading. Don’t try to overtrade in a volatile market; don’t try to recover losses by overtrading and don’t try to average your wrong trades. It is OK to be wrong once, not to be wrong twice!
  • There are 3 actions in trading; buying, selling and doing nothing. Quite often, the most productive action is doing nothing. You can save your capital a lot more by staying out of a volatile market. The sign of a good trader is to know when to sit out and watch the market without committing funds.
  • If your well-wisher had a hot trading tip, he would be trading himself. Don’t get carried away by trading tips. Free tips are never worthwhile and you will eventually end up losing money in the bargain. Be your own analyst if you want to be successful in trading.
  • Successful traders fight for pennies because the pound normally takes care of itself. When you trade, your cost includes brokerage, statutory charges, demat charges and liquidity costs. Get the best deal on costs to be profitable.
  • Successful traders are wary of overnight risks, especially when there are domestic and global headwinds. One of the biggest risks you need to be conscious of if the overnight risk. When there is economic or geopolitical risk or a major event coming up, stay light.

Discipline and adherence to trading rules can bridge any gap. That is a good enough reason to start following these trading rules!

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How to Develop a Stock Investor Mindset?

How to Develop a Stock Investor Mindset?
23/07/2019

What do we understand by a stock investor mindset? There are quite a few aspects implicit in this argument. You need to think long term and you need to be patient. Above all, you need to be ready to invest your time before you invest your money. Let us look 7 such ways to develop a stock investor mindset.

Start investing small but start with your own money

This is the golden rule of developing a stock investor mindset. There is a big difference between a fund manager and an investor putting in own funds. The latter has his skin in the game. Investing is a lot about emotions like greed, fear, optimism and panic. These things can never be fully understood unless you put your own money in the game. Moreover, it can also help you understand how to invest in share market while keeping your emotions in control.

Investing with a minimum time frame of 5 years

You may not have to always wait for 5 years to get meaningful returns. In a country like India, returns can be much faster. But, there are also cases where you may have to wait for much longer. The longer your time frame, the less likely you are to be disappointed. It is only over the longer term that the odds get evened out in equity investing.

Consider a decision thoroughly but execute rapidly

This is a classic mindset that investors need to develop.  Any decision whether to terminate a position or to add more has to be well deliberated. Unlike stock trading, investments in shares are for the long term. Never take an investment or divestment decision without considering all the pros and cons including returns, risk, liquidity and tax implications. However, once the decision is taken the investor must ensure that it is executed rapidly. That is because; when you invest you must make time work in your favour, either ways.

Keep probing around for worthwhile investment ideas

The legendary Peter Lynch used to say that he picked more investment ideas from the shopping malls than from all the investment conferences put together. For example, the demand for Apple Computers was visible at the malls long before analysts started writing about it. Just keep your eyes and ears open for such new ideas and then do your own channel checks.

Don’t ignore the grapevine in the stock markets

We often tend to assume that investments have nothing to do with the market grapevine. That is not true. Of course, you need to separate the wheat from the chaff and take grapevine ideas with a pinch of salt. But many serious problems in reputed companies were first highlighted in the grapevine. As an investor, develop the mindset to listen to the grapevine but take your decisions after a process of distillation.

Buy into fear and sell into greed; that is the fundamental mindset

Investors often tend to behave differently when they buy stocks and when they buy other products. As customers we do look for bargains while we buy products but we think the other way when we buy stocks. The normal tendency is to buy stocks at rich valuations because momentum is in its favour. As an investor you need to develop the mindset to be greedy when others are fearful and to be fearful when others are greedy.

Try to constantly benchmark your performance and review

This is an important part of the investing mindset. It is necessary to constantly benchmark your investments with the index as well as with the peer group. For example, if you are holding Infosys, you need to benchmark it with the Sensex and also with other IT stocks and ensure that it is, at least, in the top deciles with respect to risk-adjusted returns.

An investment mindset is all about getting your investing attitude and investment approach right. In a way, the right investment mindset goes a long way in ensuring smart investing.