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Why should you start investing early in life?

Why should you start investing early in life?
by Nutan Gupta 06/01/2017

We have always come across the advice of "the sooner the better".However,living in a rapidly changing environment, hardly do we pay attention to this. It happens quite often that we are so busy in paying household bills, splurging on new technologies and paying loans that there is hardly any time left to pay attention to investments. Though, it is a proven fact that even the smallest investment can have a long lasting impact on your financial status.

Better risk appetite

One of the biggest advantages of starting investment early is that you can take as many risks you like. In investing, volatile ventures aim to give the maximum returns too. Hence, you can invest in it and hope that the leap of faith would pay off. Since you started early, even if things don’t go as planned, you still manage to get enough time to recover and start afresh. Something which might not be possible if you start investing later in life.

Benefits of compound interest

Compound interest works on the basis of earning you interest on your interest. So, if you constantly reinvest your earnings, you might end up earning more due to the power of compounding. Let’s understand this with an example:

 

Amit

Abhijeet

Amount invested

Rs. 1000

Rs. 1000

Age at start of investment

25 years

30 years

Age at end of investment

60 years

60 years

Tenure of investment

35 years

30 years

Rate of interest

12%

12%

Corpus at the end of investment

Rs. 64 lakh

Rs. 35 lakh

Amit and Abhijeet both invested the same amount with the same interest rate but Amit ended up having a larger corpus. This was because he started 5 years early and the power of compounding worked for a longer time in his favor.

Improved spending

Investing early helps you develop a habit of saving. This would also ensure that you don’t spend recklessly on the things you don’t need. You would spend more responsibly since your goal is to earn money by saving it. The more control you exert on savings today, the more lavishly you can spend tomorrow.

Freedom to learn by doing

Since you start early, you get the benefit to study and learn to invest from both the ups and downs of the market. You can experiment and learn from your investment strategies and improve on them as time goes by. You may gradually start reducing mistakes and become more absorbed in understanding the nuances of the market. This can help you achieve great success ahead.

Investing early is not just for retirement. You can do it for various other goals as well. You can start early to save for your first house or your vacation to Bangkok or to buy the new sports bike that you fancied. Contributing to investments will give you a disciplined outlook towards your earnings. It would help you avoid those irresponsible spending and ensure you have a secure fallback option in times of need.

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Why Gold Jewelry is Not a Sound Investment?

Why Gold Jewelry is Not a Sound Investment?
by Nutan Gupta 06/01/2017

Gold is one of the most precious metals in the world. It plays a major role in almost all the cultural celebrations. Having a lot of aesthetic and historical value, it has been passed on from generations as a symbol of security and trust. Neha had purchased a gold necklace, earrings, and a golden bracelet as a security investment during her marriage. But, a few years later, when she and her husband faced financial crises, the gold could not be mortgaged at the price they hoped to get. The return on her investment was still less and she had to mortgage her home for a better price.

Gold jewelry is good from a visual point, but using gold jewelry may not be the right choice in today’s time. There are other financial instruments that you could invest and get better returns than from gold.

Some of the reasons why gold is not the best investment options are:

A costly investment

Making gold jewelry involves a lot of costs. If you are to buy ornaments of gold, it includes the making and wastage charges along with the price. This is then reduced when you try to resell it in the market. So, it can lead to about 30% loss of your invested money. This can reduce your profits significantly.

Capital appreciation is scarce

Investment in gold gives comparatively less profit. The capital appreciation from gold is less than real estate and equities. Even though the prices tend to usually rise every year, gold prices barely manage to outperform inflation marginally. You might lose more money while holding gold jewelry than while investing in equities.

An inefficient investment vehicle

Even though it is regarded as a precious metal, gold is not as popular as an investment vehicle. Modern investors see gold as an inefficient vehicle for investment. Getting your gold, storing it in security safe at home or depositing into a safe box at the bank also have an additional cost. Not to mention the various risks associated with it. So, even though you own your gold, you might have to store it with someone else who would be charging you for that service.

No tax benefits

One of the goals that people look for while investing is to save tax. Having gold jewelry is not beneficial from a tax standpoint. Capital gains from equities also become tax-free in the long term but there is no such benefit for gold assets. Hence, investing in them might not provide you any tax deductions or exemptions.

Does not match expectations of serious investors

Gold was an investment vehicle since before the boon of internet and mass communication. It no longer holds the same value in terms of returns on investment. Stocks earn the most returns followed by government bonds and other debt instruments. Gold provides the least growth among all. Hence, it is good as a safety instrument but if you into serious investing and expect returns, this might not be your best option.

To sum it up

Gold jewelry does not have much use in the financial market. You can invest your money into it for safety purposes but the purity of the gold would also matter. Only the 24 karat gold does give much value of the investment. Others have some amount of other metals mixed in it, reducing the value proportionately. You might get two different prices for your gold jewelry from two different shops. Hence, choose your investment option wisely keeping your goals and potential returns in mind.

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How women can become better investors?

How women can become better investors?
by Nutan Gupta 06/01/2017

Over the generations, men have tried in grasping their hold on a majority of sectors, leaving women to what’s known as 'feminine' duties. But as is with nature, scenarios of the 21st-century world have changed drastically. Women now find themselves competing in par with their opposite gender in every imaginable field.

In this men dominated society, we see modern women playing with numbers in finance. Apart from the usual competition, they face a different kind of pressure from their colleagues/competitors of the opposite gender. Even so, women hold certain traits that can provide them with an upper hand in the finance market. This has been repeated proved by research conducted by Ledbury Research, Barclays Capital, and other firms. So, if you as women are still thinking twice about your decision to invest, read this and make an informed choice.

Women exhibit a calm, disciplined approach

Women tend to portray a calm, thoughtful approach towards investment. They tend to avoid impulsive decisions like their male counterparts. Men might indulge in more situational decisions. For men, a huge gain could mean a huge party; a major loss would mean haphazard selling of stocks in the bear market. Women, on the other hand, happen to be on the calmer side. Their disciplined and cautious approach helps them refrain from making reckless decisions and help them take the next step wisely.

Having a research-oriented approach

A woman would do the necessary research before planning on investing her money in any stocks/funds. She would make sure that every stock/fund she invests into is worth her money and time. Women understand that financial news might be sensationalized around segments. Hence, depending on her own research is what they prefer.

Patience is the virtue of the wise

Women tend to play the safe game. They are conservative in their approach towards investment. Buying and holding are the key virtues of investing. Though it may not be applicable always, when it comes to it, women know exactly how it's done. This conservatism of buying and holding in right proportions help them achieve long-term targets.

Target-oriented approach

The divide between being goal-oriented and returns-oriented splits the factions of women and men. A woman would set a target and pursue it with all her heart and mind. They take relatively fewer risks than their male counterparts. This helps them be mindful of their competence, and navigate themselves even under risky market conditions.

Taking calculated risks

Psychological rift plays a bigger part in helping women do well in the finance market. The vociferous attitude that pertains to men makes them want to take bold decisions. A woman would keep it to herself, play it safe and gleam at every stock that pays out sufficient returns to her.

Things to keep in mind if you are a women investor

  • Do a fairly good amount of research before deciding to invest or not invest in something

  • Ensure that you don’t take every financial advice on your way. What works for others might not work for you

  • Plan your investment strategy keeping your goals in mind

  • Take risks when you are confident of the consequences and can handle it

  • Trust your instincts. If you believe in it, it is more likely to pay off, than when you don’t

Final Word:

As much as these are encouraging for women, one thing they have to realize is there is a lot to learn from male investors as well. Understanding, learning and acquiring the positive traits from both the sexes is the true way of excelling the finance market.

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ULIP or Term Insurance + Mutual Fund Investment: Which Is Better?

ULIP or Term Insurance + Mutual Fund Investment: Which Is Better?
by Prasanth Menon 06/01/2017
New Page 1

Let’s say you were selecting a team for IPL. Who would you have in your team? Would it be all bowlers? Or all batsmen? Or Just wicketkeepers? No right! However, if given a chance, you would want to select a team that has all round players. On occasions, such team could do well. However, there would be occasions when you would want a specialist bowler, opening batsmen, wicketkeeper, middle-order batsmen and a spinner. The case is similar when it comes to your investments. Occasionally, you would want your investments to be multipurpose. However, on occasions, you would want some specialist investments to take you over the boundary line.

Let’s revisit two such investment avenues that are usually confusing. One is unit-linked insurance plan (ULIP, the team with all all-rounders) and other is insurance+mutual fund investment (the team with specialists).

Features of insurance + Mutual funds

When you want to invest with an objective in mind, you usually tend to invest in mutual funds. If you want to invest for tax saving purposes while insuring yourself against unforeseen circumstances, you buy a term insurance with various riders. You individually can get the best of both worlds when you invest in insurance and mutual funds. Let’s look at the advantages of this type of investments:

  • There is no lock-in period; cashing out your funds is simpler

  • Because you buy a term plan, it is comparatively cheaper

  • If you feel that your mutual fund investments are not performing, you can easily switch your investments

  • You could simultaneously invest in multiple categories of mutual funds

  • You can withdraw from the mutual funds while retaining your term insurance

  • You have the option to counter inflation or other economic turmoil by smartly planning your investment and premiums

Features of ULIP

Unit-linked insurance plans or ULIPs bring you the best of both worlds. When you invest in ULIP, a part of your investment is directed as premium payment for an insurance plan and a part of your payment is directed to buy equities or into debt funds as per your risk appetite. The advantages of ULIPs are as follows:

  • You need not keep track of your investments; you just need to pay the premium

  • You can easily choose and switch between your fund options

  • Some ULIPs also allow you to increase your life covered

  • You can also increase your premium amount to maximize the returns

  • ULIP investments can be for different goals as well; you need not invest just for investing

  • Tax benefits while providing insurance and allowing you to invest

  • Triple tax benefits structure is applicable

  • You may also make partial withdrawals but only after the lock-in period

  • Though you invest in market that is risky, you still get some assured benefits and also have your life insured

  • You need not pay dual insurance-related and mutual fund associated charges

  • The entire investment does not include any service tax other than the mortality charges

ULIPs and Mutual funds+Insurance toe-to-toe

Let’s look at how ULIPs and mutual funds+Insurance fare toe-to-toe on factors that are not already mentioned above.

Unit Linked Insurance Plans

Mutual Funds + Term Plan

Every ULIP has a cost linked with it.

MFs too, have cost attached. Term plan added brings additional cost.

They provide transparency and flexibility as compared to other investment options in insurance segment

Transparent product. All costs are declared.

Initial tax is saved under 80C. So premium paid up to 1 lakh can save up to 30K depending on the tax bracket.

80C is provided by specific schemes only. These schemes have a lock-in for 3 years essentially.

The final amount at maturity is tax-free under section 10(10D). Thus the income is tax-free for self as well as the nominee.

Long term/ short term capital gain taxes are applicable.

The whole investment amount does not bear any service tax other than the mortality charge.

Other than these tax saving ones, lock- in is not applicable

Thus, we can see that both of these investment avenues have their own advantages.

Conclusion

ULIPs and mutual funds+insurance have their own advantages. Now that you know them, you can make an informed decision before you plan your investments. Either of these investments has the potential to fulfill your goals while insuring yourself against unforeseen circumstances.

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How to deal with stock market volatility?

How to deal with stock market volatility?
by Nutan Gupta 06/01/2017

A stock market drop can be an unnerving experience at any stage of life. It could have a financial as well as an emotional impact on the investors. Many investors tend to get baffled and take haphazard decisions to ensure the safety of their investments. But, if anything needs to be avoided in such a situation, it would be taking haphazard decisions. What is the best way to deal with it then? Well, let’s first understand what exactly volatility is and then move to steps how you can deal with it efficiently.

What do you mean by volatility?

It means a sudden rise or fall in the market or any such security in a short tenure. It can be measured by standard deviation of return which means the amount of variation or deviation than expected. This causes heavy trading and wide price fluctuations. Everyone either tends to buy or sell in a volatile market.

How can you deal with it?

Stay invested: Don’t let short-term losses take over the better you. Avoid taking decisions in the spur of the moment and stay invested. Focus more on your long-term goals and don’t let the daily imbalance have an impact on your returns. Planning for future might help you gain as well.

Don’t abort your plans: A sudden movement in the market might have different implications for those who just started investing and other professionals. Don’t change your investment strategies by hitting the panic button every single time. Reassess your goals, time to achieve and your plan to ensure that you are still on the right track. The idea is to change course when needed rather than to abort the mission.

Diversify assets: The best way to deal with stock market volatility is to diversify your assets. Help your portfolio to modify according to the need of the hour. A good mix of equity and debt funds can give you a more balanced approach than just going all equity in such market. Ensure you have your safety net in place before you plunge into the volatile market.

Do an active risk management: Desperate times call for desperate measures, they say. Don’t indulge into passive investing at such volatile times. Take the control in your hand to drive your investments towards growth. Adjust your investment portfolio on the basis of your risk tolerance. This would make you money as well as secure your future if the market decides to crash abruptly.

Consult your financial advisor: Talk to the professionals when you feel things are getting a little out of your own hands. Financial advisors can guide you by assessing your portfolio with other factors and suggest steps you need to take. They can also help you with a detailed financial plan if you wish to take some help in that as well.

Some other factors that would help you survive the volatile markets include:

  • Ensuring that all your essentials are insured or covered

  • Having cash handy as a shock absorber if markets crash

  • Having a strategic plan with reference to your investment income. This could mean creating a withdrawal strategy too

  • Adjusting your withdrawal rate that helps you navigate through the downslide in the market

  • Having backup temporary income sources as alternatives handy

To sum it up

Stock market volatility is a part of the market and there is nothing that you can do to avoid it from occurring. But with these tips, you could certainly try to protect yourself and your investment from losses as far as possible.

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Costs and Taxes Associated With Investing In Mutual Funds

Costs and Taxes Associated With Investing In Mutual Funds
by Priyanka Sharma 06/01/2017
New Page 1

The best things in life are free. However, realistically speaking, it may have some charges associated with it. Your child’s laughter is free. However, if your child is not a kid anymore, the laughter would be possible only if you bought them what they want. Your child could want a gaming console or a foreign trip. The laughter, in this case, involves some monetary charges. This is also true when it comes to Mutual Funds. You will get returns on your investment; however, there are certain charges and taxes that would be levied.

Let’s glance at the charges and taxes that you will have to shell out when investing in mutual funds.

Charges

1. Entry Load:  The charges levied by an asset management company (AMC) when you purchase a mutual fund is called Entry Load. This is a one-time charge. While this charge could increase your buying cost, this has been abolished for Indians by Securities and Exchange Board of India (SEBI).

2. Exit Load: This is the charge levied by the AMC when you sell off your units before a stipulated time. This is also a one-time charge. From a broader perspective, these charges favor you as an investor. Mutual funds use these charges as a deterrent so that you do not exit the investment avenue without earning substantial profits. These charges are also imposed to safeguard other investors who are with the fund for a longer time as any investor’s exit could increase the cost for other investors. The exit load is charged according to a pre-defined holding period cut-offs. The AMC may not levy any charges if the fund’s objective is to be a short-term fund. The exit load is usually between 1-3% depending on the exit timeline specified by the AMC.

3. Transaction Charges: Since 2011, SEBI has allowed AMCs to collect a nominal charge if the investment is above Rs. 10,000. This is the final one-time direct charge for now. If the investment amount is less than Rs. 10,000, then no investment charge would be levied. The investment charges are Rs.150 for a new investor and Rs. 100 for an existing investor. In case of systematic investment plan (SIP), if your total investment is more than Rs.10,000, a transaction charge of Rs.100 would be payable in 4 equal installments.

4. Expense Ratio: The expenses incurred by the AMC are not borne by them; they are borne by the investors. This is charged daily and the daily NAV is adjusted accordingly. The charges that AMC can incur are fund management fees, marketing/selling expenses, Audit charges, Registrar fees, Trustee fees and Custodian fees. Of these charges, fund management fees and marketing/selling expenses could be charged by the AMC at their own discretion. The other charges are the actual expenses that the AMC will actually incur while managing the funds.

5. Other Indirect Charges: When an AMC proposes a new fund offer, it incurs certain charges as well. These charges can be 6% of the total net assets and can be adjusted in over a period of 5 years. There are other minor one-time charges when you invest in mutual funds. If you invest in ETFs, you need to open an account. You will need to pay maintenance charges and broker charges as well. Mutual funds are also required to pay a security transaction tax while buying and selling stocks. This is also ultimately borne by the investors.

Taxes

1. Tax Deducted at Source: Tax deducted at source or TDS is the tax that the government collects on the returns on your investment. This is usually 10% of the returns. There would not be any tax on the dividend distribution or re-purchase proceeds to Indian resident investors.

2. Securities Transaction Tax: This tax is applicable only on funds dealing with equities, derivatives and mutual funds. STT can be collected for selling and purchasing through stock exchanges. STT is not applicable for debt, debt-oriented or commodities mutual funds.

3. Dividend Distribution Tax: The dividend distributed by debt-oriented mutual fund schemes is also taxed as dividend distribution tax (DDT). This additional tax is not applicable for any equity-oriented funds.

4. Capital Gains Tax: The government levies capital gains tax on investments that are supposed to be long term but are cashed in the short term. For equity-oriented schemes, capital gains tax is not applicable if the fund is held for more than a year. For debt-oriented scheme, there is no capital gains tax if the investment is held for more than 3 years.

Bottom Line

As Albert Einstein famously said—The hardest thing in the world to understand is the Income Tax. Thus, most charges and taxes can be difficult to understand. Now that you know what are the taxes and charges associated when buying mutual funds, you can make an informed decision.