Best Personal Finance Blog in India - The Financial Literates

8 Tips to Reduce Home Loan Interest Rate

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March 2, 2022

8 Tips to Reduce Home Loan Interest Rate

Home loans EMI is usually a big part of the monthly expenditure. It comprises the interest and principal components of the loan. In the beginning, a larger part of the EMI goes towards the interest, and over a period of time, the interest component reduces and the principal part becomes more.

Read about – SBI Maxgain home loan

How to Reduce Home Loan Interest Rate

Let us see some ways to reduce the interest burden. Look at each option and check if it is beneficial to the terms and conditions of your loan. You can use these tips to pay off other loans as well.

1) Increase EMI

You have to pay EMI for many years. You can increase the EMI by a certain factor of the annual increase in your salary. This will reduce the interest payment as the tenure will become less.

Here is an example that shows how you can save money by increasing your EMI –

Details
mortgage Amount (Rs.)	30,00,000	30,00,000
Interest Rate (% p.a.)	9.10%	9.10%
Tenure (years)	20	15
EMI (Rs.)	27185	30605
Total Amount Payable (Principal +Interest) (Rs.)	65,24,405	55,09,210

As you can see, you can save more than Rs. 10,00,000 if you increase your EMI.

Must Read- Should I Take Loan?

2) Ask your bank to reduce the home loan interest Rate

You must have noticed that banks charge new borrowers but don’t reduce the interest rate of existing borrowers.

You can ask your bank to reduce the interest rates on your ongoing home loan because banks are willing to negotiate if the borrower has a good repayment history. If the bank doesn’t agree you can give a mild threat of shifting the mortgage to another bank because of the cut-throat competition going on in the financial market.

But before going ahead with the switch of lender do not forget to take into account the charges new bank might levy on switching the mortgage such as processing fee, legal fee, etc.

Financial institutions may ask you to pay one time .25% on the remaining loan. A few months back I paid a small amount & my overall interest rate was reduced by almost 1%.

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3) Prepayment the loan

If you get a windfall or bonus, use a part of it to pay some amount of the loan. This will help to repay the mortgage quickly thus reducing the interest burden. You can do this when you get your annual bonus or some performance incentives. Prepay a home loan if the EMI is more than 33% of your income in cash. If it is less than that, you should consider tax savings and investment possibilities.

Most banks do not charge prepayment fees provided you follow the rules they have laid down. Different banks have different schemes for the prepayment of loans. For example, Citi bank does not charge for prepayment of home loans, you just need to submit an application. HDFC bank also does not charge any fee for the prepayment amount. Check with your bank regarding the prepayment conditions and make a decision. There is a process to be followed to prepay the loans. Understand and follow it.

Ensure the documentation is properly done and transferred under the new loan agreement. Prepayment reduces your loan burden as the outstanding principal amount will become less leading to reduced interest payout.

4) Refinance the loan

Sometimes the interest rates fall. Some banks might have offered during festivals. But there is no benefit of the falling interest rate to people who have already taken loans. You should refinance your loans which means, you transfer your loans to the new scheme. There will be some fees for the switch. You should go for this option only if the new interest rate lower by more than 100 basis points.

If you have a floating rate loan (interest rate linked to market rates) and the interest is rising and that will be the trend for a while, you can switch to a fixed-rate loan. But here the charges are higher.

If you have a fixed interest loan and the interest rates are falling, you can switch to a loan with a floating interest rate. Again there will be a conversion fee.

Also Read: Do Not opt for Home Loan Protection Insurance Plans

5) Be disciplined regarding EMIs

You should pay the EMIs regularly. Missing an EMI will affect your credit profile badly and you will also be charged a hefty amount as interest for delayed EMI payment. It is best to make the EMI a direct debit from your account on a certain date. You should ensure there are enough funds in the bank whenever the EMI is due.

As we all know that when the tenure of the loan is less the interest component in the EMI is less as well and that ignites us to increase the EMIs. Remember that you should choose your EMI as per your cash flow surplus, don’t go for higher EMI’s because that can affect your financial stability.

6) Insure your home loan

It is best to have insurance (e.g. term insurance) if you have dependents. The home loan will be taken care of by the insurance in case of unfortunate events and the family has a home free of debt.

Must Read- Bank locker the games bankers play

7) Tax Savings

A home loan provides income tax benefits for principal and interest payments. If the amount in tax savings is more than the amount saved by ending the loan, you might want to consider keeping the loan intact.

8) Top Up Loan

In case if you have a personal loan or auto loan where you may be paying a much higher interest rate than a home loan. So if you have an existing home loan, you can take a top-up loan from the same institution & consider prepaying loans with a higher interest rate. (consider preclosure charges & other conditions before making the decision)

Apart from all these factors, one must take the help of his financial planner in what is going to be more beneficial for him and, since home loans are usually high in the amount it is always important to remember affordability as a primary factor when choosing your loan EMI amount, one must always evaluate the budget before taking any decision.

If you have any questions related to loans – add them in the comment section.

Sovereign Gold Bonds – All You Need to Know

Hemant Beniwal

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February 28, 2022

1

Sovereign Gold Bonds – All You Need to Know

What are Sovereign Gold Bonds?

The Government of India launched the sovereign gold bond scheme (SGB) in November 2015. The bonds are being issued by RBI till March 2022. The aim was to reduce the demand for physical gold and move some of the country’s domestic savings into financial savings.

Must Check – 5 Benefits of Gold Monetization Scheme

Just recently, the seventh tranche was closed for subscription and the bonds were issued. If you did not subscribe to it and want to, there are three more tranches. The details are as follows:

How do I subscribe to them?

The bonds will be sold through most banks, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), certain post offices, and recognised stock exchanges – NSE and BSE. You can subscribe to it either by filling a physical form or online. This time, the online subscribers got a discount of ₹50 per unit. Once you are issued the bonds, they will be transferred to you in a Demat form.

Check – Do Not Invest in Gold Just for The Returns

What will be the price

The SGBs in Series VII were issued at Rs 4,765. The price is based on the simple average of closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Ltd for the last three working days of the week preceding the subscription period.

Are there any eligibility criteria?

Residents of India, HUFs, and trusts can invest in these bonds. The minimum permissible investment is 1 gram of gold, and the maximum limit is 4 kg for individuals and HUFs and 20 kg for trusts and similar entities. The know-your-customer (KYC) norms are the same as that for purchase of physical gold.

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What is the holding period?

The tenure of the bond is eight years. You will have an exit option after the fifth year.

What will be my returns?

Investors will receive 2.5% per annum payable semi-annually on the nominal value. Apart from that you will stand to gain if there is appreciation in the value of gold.

Check – Does it make much sense to invest in tax-free bonds?

What are the tax implications?

There is no tax liability if the bonds are held until maturity. Capital gains on SGBs sold prematurely in the secondary market are taxed as per your income tax slab rate, if held for 36 months or less, and at 20% with indexation benefit, if held for more than 36 months. The interest earned is again taxable as per your income tax slab rate.

Key Features of sovereign gold bonds

The bonds bear interest at the rate of 2.5 percent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.
The bonds will be available both in demat and paper form.
The tenor of the bond is for a minimum of 8 years with an option to exit in the 5th, 6th, and 7th years.
The bonds will carry sovereign guarantee both on the capital invested and the interest.
The bonds can be used as collateral for loans.
No STT or Capital Gains Tax (as per Government of India guidelines)

Advantages of sovereign gold bonds

- A superior alternative to holding gold in physical form.
- Risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest.
- No issues like making charges and purity in the case of gold in jewellery form.
- Held in the books of the rbi or in Demat form eliminating the risk of loss of scrip etc.

Should I invest in sovereign gold bonds?

There are many positives to investing in these bonds:

Gold usually performs well when other asset classes such as equity are on a downtrend. The price depends on various factors. In the last few months, rising US dollar and treasury yields have largely led to lower prices.
Investors get tax benefits and regular interest payout.
These bonds are a better option to invest in gold as you will do away with worries like storage cost, making charges, theft, etc.

But do remember that gold usually has prolonged periods of low returns and short periods of high returns. Therefore, it is important to invest for the long term. These are also illiquid assets.

Gold can form part of about 8%-10% of your portfolio. It adds to the diversification of the portfolio and acts as a hedge against underperformance in other assets.

If you have any questions regarding SGB add them in the comment section.

Direct Investing In Stocks Is Risky

Hemant Beniwal

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February 23, 2022

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The turnover of stock trading via mobile phones has increased significantly in 2022. The number of trading accounts created on trading platforms of brokerage firms has significantly increased.

COVID-19 lockdown resulted in different things –

More time in people’s hands
Unemployment or loss of pay
Work from home
Surplus money in people’s hands due to lesser opportunities to spend

Must Check – How and why the stocks price change

This led to people trying out their hand at stock trading. The stock markets have risen too in spite of the pandemic affecting every sphere of human activity. This may not paint a realistic picture of the actual economy or performance of the companies.

Brokerage houses are making the most of this situation by offering attractive products and services at attractive prices. For example, Zerodha has deployed a product that allows retail investors to use semi-automated trading strategies. Curated portfolios, simplified transactions, algorithmic trading, and high-quality data points pull people, especially the more digitally savvy ones to get into trading.

Direct Investing In Stocks Is Risky Click to Tweet

Direct Stock Investing Global Issue

This is the case not just in India but across the world. In the US, Robinhood, the brokerage and financial services firm offers a platform with an intuitive user interface, easy account opening process, gamification features, trading in fractional shares, and commission-free trading. It has managed to lure many people to trade in stocks and even complex derivative instruments. This has led to some people being in the money but a majority of people making losses at varying degrees.

If you are new to the stock market or to managing your investments, trading directly in stocks may not be the best course of action irrespective of the attractive offers of the brokerage houses or even a few wins in the stock market.

I can see few long term investors trying to become traders ? pic.twitter.com/ghIxMcWdDT

— Hemant Beniwal, CFP (@hemantbeniwal) December 31, 2020

Why is it not smart to trade and invest in direct equity?

Timing the market

Traders try to time their trades. They aim to buy and sell stocks based on their prediction of the price fluctuation. It is not possible to predict stock performance accurately & consistently. There are many factors at play that an individual cannot control. It can lead to losses and the investment portfolio will be unbalanced.

Gambling

Trading or Direct investing in stocks in India is a form of gambling as many risks are involved. Many young people treat it as a game. They buy and sell to make profits and win money rather than with the aim of investing or creating wealth. This can backfire as in the long run you never win in a casino.

Retail investors depend on market news and views to trade and invest. They usually get the information late. By then, the big players have already factored in the news and views in their trading or investing decisions and the retail investors’ actions backfire.

Also Check: The ART of Thinking Clearly in Personal Finance

Behavioural Biases

People get emotional when it comes to money and their decisions around it. People are unable to sell at the right time, they try to hold on to stocks losing value as they will not be able to bear the real loss, and sometimes, they buy on wrong analyses and refuse to admit that they are wrong. Such biases can hurt one’s finances terribly.

Costs and Taxation

The more trades you do, the more costs you will bear. Moreover, there are short-term and long-term tax implications. There is a lot of time and effort involved in trading. So, consider what you are spending in terms of time, effort, and money to fulfill your direct investment aspirations and analyze the worth of your endeavours.

Read – Mutual Funds Vs Direct Equity

Your Portfolio Vs Index

Few people who recently started investing in stocks in India are happy with their performance. My question to them is it’s because of your skills or markets? (bcoz small & mid-cap indexes doubled from march lows)

Check – Foreign Institutional Investors in India

How to Invest in Direct Equity?

Direct equity investments have the potential to give better returns provided you study, research and analyze before taking action. (which most people can’t) Even then, there is no guarantee of returns or price movements in your favor. So how does one invest in direct equity?

Slow and Steady Wins the Race

Start slow. Prepare before investing in direct stocks. Understand the stock market, individual stocks and their performance potential. Pick out stocks that you would like to invest in for the long term. Do not buy all the stocks in one go. Create a diversified portfolio made up of different asset classes such as stocks, mutual funds and other investments, and grow it gradually over time.

Balanced Investment Portfolio

Create and review your investment portfolio such that it is balanced for your current life stage, near-term and long-term goals. A carefully designed investment portfolio will allow you to generate wealth with the power of compounding over a long period of time.

Also Check: Is it the Right Time to Re-Balance your Portfolio

Fulfill your desires

Many people want to try out stock trading. Others probably are habituated to it. Some people do make money in short-term equity trading and want to continue to do so. They can limit 5-10% of their equity allocation to trading. They should not use up their insurance money, emergency fund or other long-term investment funds for trading. They can set up limits for losses or number of trades so that their hobby or addiction does not cause financial ruin.

Investing in the stock market is exciting when you make profits else it can bring despair. So do remember, that you can always participate in the equity market using other products such as ETFs and Mutual funds.

But if you still want to trade and invest in direct equity, invest carefully and after understanding the impact of the investment on your financial life and emotional well-being.

7 Types of Indian Investors, Which One are You?

Investor Psycology

Hemant Beniwal

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February 22, 2022

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7 Types of Indian Investors, Which One are You?

Decisions make a lot of difference in our lives. While right decisions at right time can chart a good future, wrong ones can screw things up. This holds true for our finances also. Those who intelligently plan their finances always have an edge over those who invest money in a haphazard manner and without any proper planning. But we also can’t ignore the fact that everybody learns from mistakes. It is human to err, but learning from it and not repeating the mistake is what is expected of a mature investor. Maturity comes over time. To grow up as an investor, it is important to do a self-check to understand the weaknesses and shortcomings which could help rectify them. But foremost is to understand what kind of investors are we.

Must Read – Why Should You Invest Regularly? Benefits of Regular Investing

Types of Investors

Typically investors can be qualified into 7 broad categories. The first two are Rajnikanth’s of markets as they are not impacted by any market conditions. These 7 types of investors are:

1. Only Savers

The majority of investors in India are from this category. When you say equity they will look at you as if you were some Andaman tribal people lecturing on GPRS. They never invested a single penny in equities. Their answer to equity is – equity is risky so why take the risk. They are happy with what they are getting but not greatly thrilled, all the same.

2. Regular Investor

This is a rare breed. They have a long-term view over equity. They will never discuss small market events. They are also a bit mechanical in investing. They invest when they have a surplus and withdraw when in need. They are convinced over the fact that equity will beat all other investments in the long run. Generally, you feel very comfortable in their company as they understand finances & talk sensibly.

7 Types of Indian Investors, Which one are you? Click to Tweet

Now come the investors who are actually affected by market see-saw or roller costar rides.

3. Window shoppers

They will be the first to read or get information over an investment but they will never participate in markets. They will constantly float opinions and talk about personal finance but will not dare to risk their own money. He is the nonplaying captain who will never dare to sweat himself but would be the first one to talk about strategies.

4. Seasonal Traders

These are experienced people but who have earned nothing from the investments. These are generally close to employees of the trading houses or investing professionals. They live in a fantasy that all the “first news” comes to them. They show they are waiting for the right opportunity to make a killing in the markets. They are irregular investors and have high volumes of trade but what about earnings??… Keep guessing.

5. Scapegoats

He is basically a friend of financial product sellers. Agents complete the majority of their targets from these investors. He takes advice from all… from colleagues, panwala, fellow bus travelers, etc. Absolutely, no discrimination at all. He is a typical 9 to 5 person busy earning money and managing his daily chores thinking he would be rich someday. Brokers enjoy their money.

6. The Hi-tech Lalaji

These people are champs of their business and think that they can be successful when it comes to investing too. They suffer from “I know everything” syndrome and do not hesitate to show off there contacts. Their common reactions are – Don’t give me advice….. I have been investing before you were born…. I traded in gold when it was Rs 600 per tola…. Pay for advice? Instead, make me your partner …Thinking of meeting Jhunjhunwala ji to discuss a new idea…. They display an experience, you wish you had yourself!

7. Mr. Cool:

These investors never panic and hold their nerves at all times. They are cool and confident. They work against herd mentality and are ready to listen to others viewpoints. They take decisions of their own and stick to it. They follow a disciplined approach and rarely invest in dubious schemes. They advocate transparency and appreciate the longevity in investments.

Read – KISS strategy in financial products

The last five investor types are affected by market conditions and they re-balance as per their mentioned characteristics.

Recently we interviewed 5 such investors you can check what they replied to similar questions.

This article is part of “What Investors Really Want” E-book

Download & read the full Behavioral Finance Guide from here

and be a sensible investor.

So you are in which category?? Tough question or big Confession. 🙂

Portfolio Management Services in India – Complete Guide

Investment Options

Hemant Beniwal

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February 21, 2022

118

Portfolio Management Services in India – Complete Guide

What are Portfolio Management Services In India?

Portfolio Management Services account is an investment portfolio in Stocks, Debt, and fixed income products managed by a professional money manager, that can potentially be tailored to meet specific investment objectives. When you invest in PMS, you own individual securities unlike a mutual fund investor, who owns units of the entire fund. You have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, your account may be unique. As per SEBI guidelines, only those entities who are registered with SEBI for providing PMS services can offer PMS to clients. There is no separate certification required for selling any PMS product. So this is a case where mis-selling can happen. As per the SEBI guidelines, the minimum investment required to open a PMS account is Rs. 5 Lacs. However, different providers have different minimum balance requirements for different products. For Eg Birla, AMC PMS is having min amount requirement of Rs. 50 lacs for a product. Similarly, HSBC AMC is having a minimum requirement of 50 lacs for their PMS and Reliance is having min requirement of Rs. 1 Crore. In India, Portfolio Management Services are also provided by equity broking firms & wealth management services.

Update: From 2020 minimum investment in PMS will be increased to Rs 50 Lakh.

Must Check – Alternative Investment Funds In India

Types of Portfolio Management Services

1. Discretionary PMS India

Where the investment is at the discretion of the fund manager & the client has no intervention in the investment process.

2. Non-Discretionary PMS

Under this service, the portfolio manager only suggests investment ideas. The choice, as well as the timings of the investment decisions, rest solely with the investor. However, the execution of the trade is done by the portfolio manager.

The client may give a negative list of stocks in a discretionary PMS at the time of opening his account and the Fund Manager would ensure that those stocks are not bought in his portfolio. The majority of PMS providers in India offer Discretionary Services.

How can investors invest in Portfolio Management Services?

There are two ways in which an investor can invest in Portfolio Management Services:

1. Through Cheque payment

2. Through transferring existing shares held by the customer to the PMS account. The Value of the portfolio transferred should be above the minimum investment criteria.

Besides this customer will need to sign a few documents like– PMS agreement with the provider, Power of Attorney agreement, New Demat account opening format (even if the investor has a Demat account he is required to open a new one), and documents like PAN, address proof and Identity proofs are mandatory. NRIs can invest in a PMS. The NRI needs to open a PIS account for investing in PMS. The documentation required for an NRI, however, is different from a resident Indian. A checklist of documents is provided by each PMS provider.

Must-Read- Investment Options for Senior Citizens in India

Working of a Portfolio Management Services (PMS)

Each PMS account is unique and the valuation and portfolio of each account may differ from one another. There is no NAV for a PMS scheme; however, the customer will get the valuation of his portfolio on a daily basis from the PMS provider. Each PMS account is unique from one another. Every PMS scheme has a model portfolio and all the investments for a particular investor are done in the Portfolio Management Services on the basis of the model portfolio of the scheme. However, the portfolio may differ from investor to investor. This is because of:

Portfolio Management Services (PMS) in India - Complete Guide Click to Tweet

Entry of investors at different times.
The difference in the number of investments by the investors
Redemptions/additional purchases done by the investor
Market scenario – Eg If the model portfolio has an investment in Infosys, and the current view of the Fund Manager on Infosys is “HOLD”(and not “BUY”), a new investor may not have Infosys in his portfolio.

Under PMS schemes the fund manager interaction also takes place. The frequency depends on the size of the client portfolio and the Portfolio Management Services provider. The bigger the portfolio, the frequency of interaction is more. Generally, the PMS provider arranges for fund manager interaction on a quarterly/half-yearly basis.

Portfolio Management Services Charges

A PMS charges the following fees. The charges are decided at the time of investment and are vetted by the investor.

Entry Load – PMS schemes India may have an entry load of 3%. It is charged at the time of buying the PMS only.

Management Charges – Every Portfolio Management Services scheme charges Fund Management charges. Fund Management Charges may vary from 1% to 3% depending upon the PMS provider. It is charged on a quarterly basis to the PMS account.

Must Read – 7 Simple Steps To an effective investment strategies

Profit-Sharing – Some PMS schemes also have profit-sharing arrangements (in addition to the fixed fees), wherein the provider charges a certain amount of fees/profit over the stipulated return generated in the fund. For Eg PMS X has fixed charges of 2% plus a charge of 20% of fees for return generated above 15% in the year. In this case, if the return generated in the year by the scheme is 25%, the fees charged by the PMS will be 2% + {(25%-15%)*20%}.

The Fees charged are different for every Portfolio Management Services provider and for every scheme. It is advisable for the investor to check the charges of the scheme.

Apart from the charges mentioned above, the PMS also charges the investors on the following counts as all the investments are done in the name of the investor:

Custodian Fee
Demat Account opening charges
Audit charges
Transaction brokerage

The table below lists the top PMSes in India

PMS Company	Fixed Fee (per annum)	Performance Fee	Brokerage and Exit Load
Motilal Oswal	2%- 2.25%	–	0.3% brokerage per transaction; 1% – 2% load
ASK	2.5%	1.5% plus 20% above 10% profits	–
Alchemy PMS	2%-2.5%	–	–
White Oak PMS	Upto 10 Cr. 2.5% Above 10 Cr. 2%	_	–
Abakkus PMS	2.50%	–	Less then 1 Year 1.5% After 1 Year -0%

Must Read: How to Setting SMART Financial Goals

Taxation for Portfolio Management Services (PMS)

Any income from the Portfolio Management Services account is a business income. Unlike MF, PMS is not required to remain 65%+ invested in equity to get equity taxation benefit. Each Portfolio Management Services account is in the name of an additional investor and so the tax treatment is done on an individual investor level.

Profit on the same can be considered as business income. (i.e slabs). Profit can be considered as Capital gain. [STCG(15%) or LTCG(10%)]. It depends on the client’s Chartered Accountant or the assessing officer how he treats this Income. The PMS provider sends an audited statement at the end of the FY giving details of STCG and LTCG, it is on the client and his CA to decide to treat it as capital gain or business income.

How is PMS different from a Mutual Fund?

Both PMS and Mutual Funds are types of managed Funds. The difference to the investor in a Portfolio Management Services over a Mutual Fund is:

Concentrated Portfolio.
A portfolio can be tailored to suit the needs of investors.
Investors directly own the stocks, rather than the fund owning the stocks.
Difference in taxation

If you have any questions regarding PMS or any other investment product, just add them in the comment section.

How to Setting SMART Financial Goals – Complete Guide?

Financial Planning

Hemant Beniwal

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February 18, 2022

68

How to Setting SMART Financial Goals – Complete Guide?

Someone rightly said, “An investor without GOAL is like a traveler without a destination.” But setting financial goals is not an easy task so let’s simplify the whole process of financial goal setting – smart way, You can check what are financial goals, few financial goals examples & finally you can download a financial goal planner worksheet which will help you in converting your dreams into reality. Also, note returns cannot be your goal in investing.

Must Check – Here’s How you can achieve Financial Freedom?

How to Set Smart Financial Goals

Recently in one of the Soft skill Learning workshops, people were asked a question, that what they would like to see of themselves in the coming 5 years and 10 years in their professional lives. The majority of the answers that came were very vague in nature like I would be a good manager, a human being, successful or I will develop leadership skills, etc. Best brains were not able to picture their own future or could not set a goal today that they would achieve in the coming years. I think the same happens when we confront a more valid question about our financial goals.

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What are Financial Goals?

If I ask you what you will like to become financially in the future, the majority will say just one word RICH, but how much rich? Rich with what, assets or cash? 2 houses or 1 farmhouse or Rs 2 cr for retirement or Rs 50 lakhs each for the wedding of two daughters? This is common when we are not clear of our financial goals. And clarity comes when we actually plan financial goals and understand them. Financial Goals are set first and then a road map is created to achieve them. But again the basic question – how do I set my financial goals?

Check – Importance of Financial Planning

Financial Goal Setting – the Smart way

Any goal, financial or otherwise will become a Smart Goal when you add the following features:

Smart Financial Goals are SPECIFIC

As mentioned above, being “Rich” is a goal but not a smart financial goal. If I put it like this that I wish to plan for my retirement, so that I am financially independent – it becomes more specific. The statement specifies “richness” and the time by when you want to achieve the goal. But again this is not a smart goal. Something is missing. Let’s see what more it needs to become a smart goal.

Smart Financial Goals are MEASURABLE

Besides being specific one should also be able to assign a number to the goal. Instead of saying “financially independent” it should define the money in a number of terms. This is not simple as it looks. When you wish to assign a cost to future expense, you need to guess or calculate the numbers taking a few realistic assumptions like inflation and interest rates. These assumptions can also vary. For example, the inflation rate on Education can be much higher in comparison of buying a car. So it is an expert’s job. But when you assign numbers a goal becomes measurable and comparable also. So for the above example if I say (in present value) – I wish to buy a new car of Rs 10 Lakh and a house worth Rs 60 Lakhs in Goa.

Check This Video for Better Understand why Financial Goals needed

Smart Financial Goals are ACHIEVABLE & ATTAINABLE

Only decorating the goal with numbers is not smart work. A Smart goal needs to be thoughtful and has to be seen in the light of practicality as well. We have to see if this is attainable or not. It should not be an out-of-reach dream that one starts to work upon and expect magic to help. Again expert advice is required here and he can help you to understand its reality. Also sometimes a non-achievable may be adjusted and can be made achievable. So we need to sit and give deep thinking and even ask for expert help. Again for the above example – can a person earning Rs 30000/- per month having 2 kids to support and a monthly expense of Rs 20000/- achieve the above-mentioned goals? What if he has not started saving till today? Or what if he is bound to get some inherited money? So under all these circumstances, which are unique for all individuals, we need to check the attainability criteria of a goal to make it a smart financial goal.

Smart Financial Goals are REALISTIC & RELEVANT

Goals should be realistic – you can’t say I will build my retirement goals by investing in the last 5 years of my job or I will invest Rs 500 per month to achieve my retirement corpus of 3 crores.

Smart Financial Goals are TIMELY or TIME-BOUND

This is the last step of financial goal setting but is very important. There should be some time limit attached to every goal. For exp, I want to buy a car in 5 years or I want to buy a house in 2030.

Prioritizing Smart Financial Goals

Why are financial goals important? Life is not like a play script. It does not dwell on one theme or issue. It is full of phases, events, and happenings. In financial life, one has to invest today for things he would require in a very short span like annual premiums or kids hostel fees and for the expense that would behave long spans like kid’s marriage or retirement. Thus goals need to be put on the priority list. Once these are recorded on the time frame they can be classified as immediate goals, mid-term goals, and long-term financial goals.

Financial Goals Examples (Indian Context)

Short Term Financial Goals:

Making a contingency fund or emergency fund for the family.
Saving for school admission of kids.
Saving for purchase in the near term like a domestic appliance or for treatment of a recently diagnosed ailment.
Saving for life insurance premiums.
Investments for tax planning. (actually, it’s mean but people think it’s a goal)

Medium Term Financial Goals:

Retiring a loan or debt.
Planning for a foreign trip or a vacation.
Saving for college or pre-college expenses for your kid.
Saving for starting a family in coming years.
Planning for a new or change of vehicle.
Saving for home/property investment.

Long Term Financial Goals:

Building retirement corpus. (both, expenses and medical included)
Saving for providing inheritance.
Saving for daughter’s marriage etc.
Planning a home for post-retirement life or a farmhouse.

Have you set your SMART Financial goals?

Before I close, try answering these questions:

Have you decided your financial goals?
Have you checked are these goals Smart?
Have you prioritized and taking action to your financial goals?

If “NO” is the answer to any of these questions, it’s time you take a pen & writing pad. Download Financial Goals Worksheet & start making smart goals.

Financial Goals Planner Worksheet – Download

Smart Tip: Someone rightly said, “An investor without GOAL is like a traveler without a destination.” The most important part of financial goal setting is writing them. Writing makes goals visible & tangible – now goals are not just a thought but a commitment. Go & write your smart goals. Keep this sheet at a place where it keeps reminding of your commitment. You should also discuss this sheet with your Financial Advisor Or Financial Planner.

Once you have set the Smart Financial Goals now the herculean task of achieving these goals starts. It is a lengthy discipline and is impossible to pen down it in this article, but I will try to write another article on how to achieve financial goals.

Returns cannot be your Financial Goals

In a seminar, where I was talking to a group of young investors, I repeatedly told them to have Financial Goals before they start investing. Annoyed by my repetition, one young guy stood and said, my goal is to achieve 30% returns per annum. Can you help me to achieve that?

Now let me clarify his statement to all of you.

• The world’s richest and the most successful investor of all times “Warren Buffet” could not achieve 30% return consistently over his 50 years of investing.
• His rate of return on investment is more 24.7% p.a.
• If you would have invested Rs.1 lac with Warren Buffet 50 years before, you would be worth more than Rs. 621 crore today. This is just equal to what was his compounding rate of 24.7%.
• But if your rate of return would have been 30%, your 1 lac would have become closer to Rs.5000 Crore.

Must Read – Biggest Problem With Your Financial Planning, And How to Fix It

For god sake, I can’t give that much return to people, if someone can achieve that, please contact me, I shall give all what I have. For sure, I will give Rs. 1 lac.

What this young guy said was not new to me and most investors think that they are investing because they need to earn high returns. In fact, I thought the young guy had at least an idea of how much return he wanted to earn, most people we talk just land up asking for a HIGHER return. There is no definition of HIGHER RETURN that they have.

Investing just for earning return cannot be anyone’s target or AIM. Having more money cannot make you happy, but fulfilling your dreams can make you happy. All of us have certain dreams in our life and those dreams need to be fulfilled to lead a happy life. In the hindsight, we all land up investing for our goals only, it is the long-term Financial goals for which we don’t plan or for that matter, we are not clear.

Let me explain to you in other words.

• We all have a savings account and we keep money there. Even though we may not really need the money, but still we are comfortable to keep the money there even at the lowest return.
• The reason we have our money there is one of our financial goals, that is EMERGENCY. So even if we are getting high returns elsewhere, we prefer to meet our goal than earn a high return.

I am not trying to say that we should not be hunting for returns. But returns are by-product of investing, the main aim is to achieve our Financial Goals. Typically people go wrong in Financial Planning when it comes to their Long Term Goals. Achieving long-term financial goals involves careful study of a few factors.

• What is the present cost of that goal
• What will be the inflation factor over the years
• What product mix we have to take so that the goal can be comfortably met
• What should be the periodic investment towards that goal
• What should be the PLAN B in case of any mishappening

Just aiming at returns will not lead to goals. If I ask you, my aim is to drive fast, would you agree. Or if I say, I want to take the train that has the highest speed. It sounds odd. You definitely need speed when it comes to traveling but speed cannot be your goal. Your goal is the destination that you want to reach.

Also at times, driving should be a mix of speed and caution, we should strive for balance and not just speed. Similarly, we always advocate for a Balanced Portfolio which will help you in achieving your Financial Goals.

Keep your asset allocation intact and you will then not only achieve your goals but also have desired speed as well.

Hope you enjoyed the article – if you have any questions related to smart financial goal setting, feel free to add them in the comment section.

What are Alternative Investment Funds In India (AIFs)?

Hemant Beniwal

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February 16, 2022

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What are Alternative Investment Funds in India?

An Alternative Investment Fund (AIF) is a private investment vehicle. It is established or incorporated in India for a specific investment policy. It enables the pooling of funds from investors. Investors can be Indians or foreigners. It is a financial asset that does not fall into the traditional asset class (equity/income/cash).

It is not covered by SEBI regulations but by a set of regulations known as the SEBI Regulations, 2012. They are commonly known as AIF Regulations.

Also Check: Structured Products- Alternative Avenue of Investment

Why AIF was introduced?

There has been a surge of venture capital investments in India for the past few years. Moreover, Indian businesses attract a lot of foreign investments too. This resulted in many regulations leading to fewer effects of concessions for the promotion of start-up companies or companies in their early stages.

What are Alternative Investment Funds (AIFs) Click to Tweet

The Government, therefore, decided to set up a new category of investments that will push money in socially and economically desirable sectors. It will be a different asset class for investors.

There will be lesser constraints for investments leading to increased long-term capital flow in India. Capital can be diverted to useful economic activity insisted of being invested in unlisted securities and other businesses. It will be used as an alternative to existing funding methods.

The emergence of the AIF Regime

Now until about 2012 India only governed only Venture Capital Funds from the mid-’90s and so, and then there was a real regulatory empties, to bring within the fold of a wider set of regulations all soughts of an alternative private fund. Today the entire gamete of entirely private pooled funds are covered in the AIF Regime

How are the Alternative Investment Funds structures?

There are 3 categories of Alternative Investment Funds. These are designed by the Government and by the regulator to allow the concessional benefits available depending on which category you fall.

Must Read – Aligning Investing with Life Goals

Category I

AIFs that invest in early-stage ventures in areas that are desirable for social and economic growth. The investment vehicles can be venture capital funds, SME funds, social venture funds, infrastructure, or angel funds. Angel funds are treated a little differently.

Category II

Funds that do not fulfill features of funds In Category, I and Category III are Category II funds. These funds provide for day-to-day operations. For example, real estate funds, private equity funds, and funds for distressed assets falling under the purview of AIF regulations are Category II funds.

Category III

Funds that leverage using different kinds of instruments or use different trading strategies for returns are included in this category. These can be hedge funds or open-ended funds. The Government nor regulatory bodies give any specific incentives or concessions. Various types of funds such as a hedge, PIPE funds, etc are registered as Category III AIFs.

The mentioned category has its own sets of investment constraints specified.

Must Check –Benefits of long-term orientation in Life & Investing

Is it possible for an AIF to collect some sum of money from some investor?

The minimum corpus for an AIF is Rs. 20 crores. For angel funds it is Rs. 10 crores. An individual investor should invest a minimum of Rs. 1 crore. If the investor is an employee, fund manager or director, or angel fund investor, the minimum is Rs. 25 lakhs. If the shares of the AIF have been given to the employee as part of compensation, there is no minimum limit.

The maximum number of investors is 1000 for all funds except for angel funds in which the limit is 49 investors.

What should I know about the taxation of AIFs?

AIFs that belong to Category I and Category II AIF enjoy tax benefits of their pass-through status. This status means that any income accruing or arising to, or received by, a unit-holder of Category I AIF and Category II AIF shall be chargeable to income-tax in the hands of the unitholder. The tax treatment would be in the manner as if the income has accrued or arisen to, or received by the unitholder as if the investments were made directly by the unitholder.

The tax pass-through status has not been accorded to Category III AIF though there are some demands for the same.

The tax implications on residents and non-residents should consider the clarification issued in the Finance Act, 2016.

Also Read: Sovereign Gold Bonds – All You Need to Know

FAQs about Alternative Investment Fund in India

1) Can AIFs have joint investors?

AIFs can have the following as joint investors provided the investment is not less than Rs. 1 crore –

Investor and Investor’s Spouse
Investor and Investor’s Parent
Investor and Investor’s Child

2) How does one register an Alternative Investment Funds

SEBI provides a Form A as per SEBI Regulations which has to be completed with relevant documentation. An application fee of Rs. 1 lakh is required. If the AIF is approved by SEBI, registration fees as applicable should be paid.

3) Can AIFs change the category in which they have been registered?

An AIF can change its category after registration provided investments as per the category it has been registered are not done. The application in Form A has to be filled up again with the application fee. But registration fees are not required to be paid when approved.

4) Are the fund close-ended or open-ended?

Alternative Investment Fund under Category I and Category II can be ONLY close-ended. The minimum tenure is of three years. Category III AIFs are allowed to be open-ended or close-ended.

5) How are investor complaints against AIFs addressed?

AIFs need to have a procedure for the resolution of disputes laid out.

SEBI has a web-based centralized grievance redress system called SCORES.

Complaint Redress System (SCORES) at http://scores.gov.in/. Investors can lodge their complaints on the website.

6) What are Angel Funds?

Basically, these types of funds come into the category of Venture Capital funds where the fund manager pools money from various investors (angel) and further invests in the startups for their development.

7) What should investors look at before investing in AIF?

The investor needs to ensure the Risk-Reward Ratio of the fund, how the fund is structured, the expected hurdle rate of the fund, the expense ratio, and the management fees. These are some of the factors but not all are the investors need to consider.

8) Where can an investor look out for information on AIF?

Investors can visit the website of SEBI

If you have any questions or experience related to AIF – you can add them in the comment section.

Best Tax Planning for NRIs In India- NRI Tax Planning Tips

Hemant Beniwal

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February 15, 2022

11

Best Tax Planning for NRIs In India- NRI Tax Planning Tips

Income tax planning for NRIs is different in India. I am sharing some important information that can be helpful for you

Must Read – 11 Unusual Ways of Saving Tax In India

Who is an NRI – for Tax Purpose
Tax Planning for NRI
Taxable income for NRIs
Tax-free income for NRIs
DTAA Simplified
NRI Tax Planning Tips

Definition of a Non-Resident Indian (NRI)

An Indian is considered as a non-resident when he/she has stayed less than 182 days of the current financial year in India or if the person has been in India for less than 60 days in the current financial year and has been in India for less than 365 days in the last 4 years. The following flowchart helps to determine easily whether a person is an NRI-

Best Tax Planning for NRIs In India

The taxation rules in India are different for NRIs. Here is some information for an NRI to plan his taxes better-

The following income of an NRI is taxable

Income earned, accrued, or to be earned or accrued via salary in India.
Capital gains received or deemed to be accrued from the transfer of property/ real estate or other capital investments in India.
Interest earned or income from capital gains of short-term investments and securities.

The following income of an NRI is non-taxable

Interest earned from NRE accounts.
Allowances or Perquisites paid by the Government of India to an NRI for his/her services outside India.
Long-term capital gains from the sale of equity shares or units of equity funds but such transactions are subject to securities transaction
Interest on certain savings certificates and bonds subscribed to using the foreign exchange.

Note – this is tax-free in India but may be taxed in the country where you are currently residing.

Check – How Can Your Family Help You Reduce Tax Liability?

Information on DTAA

DTAA stands for Double Taxation Avoidance Agreement. It is an agreement created to ensure that people do not pay tax more than once on the same income earned. It might happen that you have not fulfilled the conditions to be an NRI and have earned income in 2 countries say India and United States. You will have to pay taxes on income earned and investment income in the US and India. You can avoid double taxation by any of these three methods –

Showing tax payment in one country and getting exempt from the second country.
Deducting tax paid from total income across all countries and then paying tax in the country that you are staying on the balance amount.
Getting credit for tax paid in the country currently staying for income earned in a different country and deducting that amount in the country where it was earned.

If you are getting credit for tax paid in the source country, you should ensure that you have a Tax Residency Certificate (TRC).

Currently, India has DTAA in place with 88 countries. DTAA is a mechanism to reduce your tax burden. It is not a tool for tax evasion. You should understand the rules clearly before opting for it.

Read – Use DTAA as Tax Planning for NRIs Tool

NRI Tax Planning Tips

Tax Filing

As an NRI, if your income is above Rs. 2,50,000 in India, you have to file tax returns. The tax slabs applicable to NRIs are the same as residents. If you have to claim a tax refund, you have to file a tax return. If you have a capital loss to be set off against capital gains. to lower your actual tax liability, you have to file a tax return. In the ITR form, you have to select the residential status as ‘NRI’ to file tax returns. You can check tax deducted at the source by downloading Form 26AS where all details of tax collected are mentioned. Not filing income tax returns can result in interest and penalty.

Moving back to India

If you are NRI planning to move back to India, you should consider assuming Resident but not ordinarily resident (RNOR) status. You can get this status if –

You have been an NRI in 9 of the last 10 financial years

OR

You have lived in India for 2 years or less in the last 7 financial years

You will get the benefit of exemptions given to NRIs for 2 years to post your return. If you continue to stay in India after that, you will be treated as a resident and taxation rules of for resident Indians will be applicable to you.

Property-related tax matters

As an NRI, you can own, buy and sell assets outside India provided you conduct these transactions as an NRI without tax implications in India. You can also inherit property from an NRI. But if you plan to sell these assets after becoming a resident, there can be capital gains tax liability under the taxation laws in India. It might be better to sell off the assets as an NRI to plan taxes better.

Must-Read – Tax Strategies for NRIs Everyone Should Know

Reduce Tax Liability

You can reduce tax liability by gifting assets to adult children and parents. If there are tax-free bonds issued, you can invest in them. You can create a HUF to take advantage of separate exemption limits allowed for HUF. If you do not plan to return soon to India, you should convert some of your NRO deposits to NRE deposits to reduce tax payable. After these 2 years, returning NRIs are treated as resident individuals.

All you want to Know about TDS for NRIs

Income earned or accrued by NRIs in India is subject to tax in India. Section 195 of the Income Tax Act covers Tax Deducted at Source (TDS) on payments made by non-resident Indians. We have a separate article on TDS you can get more information about TDS for NRIs

Examples to understand Tax Planning for NRIs

Avinash is an NRI. He has a house in Delhi. He wants to sell it and buy a house in the United States. Are the capital gains taxable?

Long-term capital gains got from selling a residential house are exempt from tax if the individual has within a period of one year before or two years after the date of sale, or within a period of 3 years constructed, one residential house in India. Since Avinash wants to buy property outside India, he will not get a tax exemption.

Neha has been living and working in Singapore for the last 8 years. She gifts a car to her parents who are residents in India. Is the gift taxable?

The car is a gift to a relative and therefore not taxable for Neha or for her parents.

Mr. Dubey has been working in Dubai for many years now. He has invested in many fixed deposits in India. Is the interest earned taxable?

The taxability depends on the type of account-

– Interest on a non-resident ordinary (NRO) account

– Interest on resident accounts is fully taxable

– Interest earned on NRE accounts is non-taxable

– Interest earned from deposits in the FCNR account is exempt from tax.

It is important to plan your investments and tax even if you are an NRI. It will help to reduce your tax burden and steer away from problems of tax evasion. You can manage your wealth and income better when you convert your status to Resident Indian.

Note – we are not tax planning experts – the Tax Planning for NRIs post is based on our interaction with the clients & basic reading.

Please add your experiences & challenges while tax planning in the comment section – I think that will be helpful for other TFL readers.

What are The Different Types of Mutual Funds in India?

Mutual Fund

Hemant Beniwal

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February 14, 2022

55

People keep me asking why there are so many different types of mutual funds schemes in India. We have to understand that a mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. And due to different investment objectives, there are different types of mutual funds.

Must Read –How Mutual Funds Work?

The mutual fund will have a fund manager (team of experts) who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unitholder of the fund.

Types of Mutual Funds in India Click to Tweet

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

What are the types of Mutual Funds In India

By Nature	By Structure	By Investment Objective
Equity, Debt, Balance	Closed-Ended Funds, Open-Ended, Funds Interval funds	Growth Schemes, Income Schemes, Balanced Schemes, Index Funds

Let us discuss each of these types in detail:

Read- How Healthy Is Your Mutual Fund Portfolio?

Based On Nature

Equity mutual funds

These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary differently for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

Diversified Equity Funds
Multi-Cap Fund
Value Fund
Dividend Yield Fund
Mid-Cap Funds
Small-Cap Funds
Sector Funds
Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

Check – 7 Things We All Hate About Mutual Funds

Debt mutual funds

The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks, and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

Gilt Funds
Income Funds
Monthly Income Plans – MIP
Short Term Plans
Liquid Funds

Balanced Funds / Hybrid funds

As the name suggests they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with a pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both worlds. The equity part provides growth and the debt part provides stability in returns.

If you want to Know Mutual Fund Investment watch this Video

Money Market Funds

A money market fund is a type of mutual fund that invests in highly liquid, short-term securities. These may include cash, cash equivalents, and high-credit-rating debt-based securities with a short-term maturity. Money market funds are designed to offer investors high liquidity with a very low level of risk. Money market funds are also called money market mutual funds.

Based on the Investment objective

Growth Fund

Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over the medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear a short-term decline in value for possible future appreciation.

Must Check – Portfolio Safety : Is Your Portfolio Risky?

Income Fund

Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed-income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

Index Fund

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stock’s index weight age. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

Based On Structure

Close Ended Fund

A close-ended fund or scheme has a stipulated maturity period For eg. 5-7 years. The fund is open for subscription only during a specified period at the time of the launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV-related prices or they are listed in the secondary market.

Open-Ended Fund

An open-ended mutual fund is the most common type of mutual fund available for investment. An investor can choose to invest or transact in these schemes whenever he likes to. In an open-ended mutual fund, there is no limit to the number of investors, shares, or overall size of the fund, unless the fund manager decides to close the fund to new investors in order to keep it manageable. The value or share price of an open-ended mutual fund is determined at the market close every day and is called the Net Asset Value (NAV).

Interval Fund:

Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV-related prices. FMP or Fixed Maturity Plans are examples of these types of schemes.

And there are new categories like ETF & Gold Funds. Hope now you are clear about various types of mutual fund schemes in India.

Portfolio Safety : Is Your Portfolio Risky?

Hemant Beniwal

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February 14, 2022

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Portfolio Safety : Is Your Portfolio Risky?

How to Manage Risk in Your Portfolio in these Crazy Times?

The Merriam-Webster Dictionary defines risks as, among other things as:

Possibility of loss or injury
Someone or something that creates or suggests a hazard
The chance that an investment (such as a stock or commodity) will lose value

Legendary investors have their definitions of risks.

Warren Buffet famously said, “risk comes from not knowing what you are doing.” While his partner Charlie Munger has emphasized, “risk to us is (a) the risk of permanent loss of capital, or (b) the risk of inadequate return.”

Must Check – How Healthy Is Your Mutual Fund Portfolio?

Another legendary investor Howard Marks says that he is “against the purported identity between volatility and risk as the former is an academic’s choice for defining and measuring risk.” According to him, risk comes from uncertainty or the unknowable future.

In the recently concluded India Today Conclave 2021, Rakesh Jhunjhunwala said, “Risk is the essence of life. If you don’t [take] risk, you are nothing.”

So, What is Risk After All?

Risk means different to different people – and rightly so as they all bring in a different perspective to the table. Similarly, risk in investment means different to different categories of people. For someone in their 70s and living off their retirement fund, equity investments are risky, while for a young professional in their 20s not going all-in equity is risky.

For most people investing in equity is risky as they are highly volatile, but for some people buying cryptocurrencies is not at all risky, which are far more volatile than equities! Therefore, defining a model to assess risk in your portfolio is risky too! It is a very subjective measure for most people, and they bring in their life experiences, learnings, and biases while defining what is a risk.

According to us, there are many things that we do as investors that add risk to our portfolio. Many of these things are the result of involuntary actions – not controlled by rational judgment. But some of them indeed are well-thought-out actions that do not go as we planned.

In this article, we try to introduce you to such Portfolio risks and how to avoid them.

Risk of Not Knowing Where It May Come From

Over the long run, stock markets have consistently given stellar returns beating all asset classes. But equities are volatile and for most investors, that means they are risky. If you cannot fathom even the thought of losing more than 30% of your portfolio value in a short period, then probably you are not cut out for direct equity investments.

Portfolio Safety : Is Your Portfolio Risky? Click to Tweet

Those who think that debt is the best way to go ahead, think twice. Bonds and debt can be risky too – ask numerous investors who deposited their life savings in DHFL, Sahara India, PMC Bank, Franklin Templeton MF Debt fund schemes, and AT 1 bond from Yes Bank (touted as Super FD).

Check –Is it the right time to rebalance your portfolio

Risk of Not Knowing What is Your Risk Tolerance

Risk tolerance is an individual’s or institution’s capacity to endure pain, hardship, or in case of investments, losses. Risk tolerance is as much of a psychological construct as it is a numerical one. Your current financial situation plays a key role in determining your risk profile.

For example, you trade in equities and cryptocurrencies but have assets worth Rs. 1 crore and liabilities worth Rs. 85 lakhs. With a net worth of only Rs. 15 lakhs, your risk-taking margin is very small. On the other hand, if you have assets worth Rs. 20 lakhs and no liabilities, then your risk profile is quite strong.

You may have to sit with an investment advisor to discuss your financial past, present, and future holistically to gauge your risk profile.

Must Read – Direct Investing In Stocks Is Risky

Risk of Concentration

Too much money invested in one stock, most FDs & savings in one bank, all mutual funds from one AMC (mutual fund house), and all financial information with only one person in the family. These all are examples of concentration. In some cases, concentration can bring enormous benefits and give you astronomical returns.

But for most mortals, concentration can bring unmanageable risk. See how:

Employees have their largest allocation in the form of ESOPs of their employer company.
Depositors of a troubled bank (PMC bank) or NBFC (DHFL) having their lifelong savings frozen up or written off overnight.
Investors of respected and risk-free debt MF schemes (Franklin Templeton AMC) were left in limbo all of a sudden.
The sudden demise of the primary bread earner in the family (COVID deaths) leaves a vacuum and there is no way to know anything about their financial, business, & legal positions, assets, and liabilities.

Risk of Over-diversification

Recently, I came across a colleague from a long-time back. He used to be as savvy an investor as they came. He was one of the “influencers” who motivated many people around him to invest in stock back in 2004-2005. In our casual discussion, he slipped in a simple fact, “Bhai Sahab, I have 24 mutual fund portfolios for different goals. Can you please suggest a couple more for these two goals?”

As you may have guessed I was shocked, more than astonished. But as I was dealing with a “learned” investor, I kept my shock and astonishment to myself and just gave a cursory look at his holdings. Just by the look of it, I could tell that more than 70% of his portfolio was redundant and was probably a result of his “investments” on the advice of a relative or friend.

The enormity of managing so many portfolios and the charges that he pays makes the whole point of MF investments completely irrelevant and ridiculed. This is an abuse of the terms goal-based investing as well as diversification.

Risk of Leveraged Investments

If you borrow money to invest then you are a leveraged investor, or rather a speculator. We always suggest that except for a few necessary debts – like for home loan, education loan, and sometimes business loan – all other kinds of leverages are instruments of an investor’s death. When you borrow to invest, you “hope” to earn more with less amount of money. You need to pay a fixed rate of interest, but your profits are uncapped.

One thing that you forget is that, if your bet turns sour, then not only you would lose your margin money, you still owe your creditors the loan amount as well as interest on it. The borrowed money is like a glass springboard – more likely to crack than to spring you up in the air.

Must Check – How Should You view Investment Risk?

Risk of Confusing Speculation with Investments

One of my acquaintances is an accidental investor! He is actually a trader but says he has invested for the long-term when he has stock in his account for more than a few weeks. In fact, what happens is that he could not sell the stock in the daily trade and nor in the next few days at a price level that he desires.

Similarly, many investors are “investing” in cryptocurrencies and Forex futures, options, and derivates. Doing so in the former is not illegal, per se, but is fraught with risks. Cryptocurrencies have seen swings of more than 20% in just a single day and are NOT an investment from any stretch of the imagination.

Trading in forex through apps is illegal in India, but the app developers are circumventing the minor loopholes in forex guidelines & rules to cheat retail investors.

Risk of Innumeracy – Percentages, Inflation, Taxation, and Charges

The biggest risk that an investor can bring to her/his portfolio is through innumeracy. If you cannot understand the difference between absolutes and ratios or you cannot calculate is the impact of a decline or appreciation in the value of a stock by a given percentage, then you are innumerate.

You must understand the concepts of inflation, taxation, and charges and how do they impact your investible surpluses, their returns, and yields. If you are ignorant about any of these, then you should better stick to the index funds.

Carl Richard Said “Risk is what’s leftover after you think you’ve thought of everything. It’s the car you never saw that kills you.” but still please share in the comment section.. do you think your portfolio is risky?