Trading v/s Mutual funds and mutual funds in depth

In this article I am going to discuss about trading, speculation, investment and finally many relevant details about mutual fund investments.

Stock trading

Let me start with explaining a little about how stock market works. Suppose I have an idea about starting a business which will be the next big thing. To execute it I would need money to fund various activities like for office space, paying salary or buying raw material or some service. I can invest my own savings, ask my friends or family to invest, go to a bank to take loan, approach some venture capitalist or angel investor. Once the business is setup and becomes successful it would require a lot more money. Then I need to go to general public and many financial institutions to seek funding. I would issue them shares which would represent their stake or ownership. If my business succeeds further, they would make money.

Stock market provides interface for this. I need to approach an stock market (like NSE or BSE) with my detailed business plan and they would facilitate the initial public offering or IPO to sell my shares at a price fixed by me. Whatever money is raised in this process would be given to me and shares of my company would be issued to those investors. Then onwards share of my company would get listed and those investors would be able to buy and sell my shares through stock market.

Once stock is listed, price would be determined purely based on demand & supply of shares. That means if business makes a lot of money & becomes successful, many people will want shares and prices will increase.  On the other hand, if business doesn't do well, people would want to sell shares and price would decrease.

However it doesn't always work that way. Not everybody would be as rational and many would simply buy and sell without much logic. Sometimes they may ignore my shares completely, despite of my business making money or want to buys shares even if business doesn't make any money. Take Microsoft and Amazon for example. Microsoft makes a lot of money (many billions of profit every year) but stock market perceive that there future is bleak and the share price goes nowhere. Whereas despite of making a little or no money, Amazon rises like anything possibly in the anticipation of huge growth in future.

Investment v/s speculation

Determining how the business behind  a share is doing and predicting it's future prospects requires a lot of knowledge and effort. Most people do not have time, patience  and interest to learn and keep track of all this. When somebody lure them to trading, they depend on tips regarding when to buy and sell. In most cases that's the worst thing one could do with his hard earned money. It's not much different than speculating on a lottery ticket or horse race.

Unless there are definite strategies to protect against losses, what you are actually doing is speculation. I find people often trading futures, options and commodities. Tell me how do you predict whether prices of copper or mustard will increase or decrease over next few months? Mostly probably you can't and same will be the case with most people. However many still speculate on commodity trading.

To sum up, in my opinion regular investors like you and me should keep ourselves away from commodity trading or trading shares, futures, options etc so that we do not indulge in speculation and put our hard earned money at risk.

Time tested strategies of investing:

• Keep realistic expectations: It's temping when we hear stories about people doubling or tripling money on certain stock or real estate. However that doesn't happen to everybody and there are many more people who in fact loose in the very same avenues. Hence consider yourself lucky if you make 100-200% gains but the chances are that over the long term equity would provide you 12-15% returns which is still much more compared to other fixed income avenues.

• Play to win in the long term: Equity could be very-very risky for short term. Unless you are willing to stay put for 10-15 years or more, chances are you might loose a lot of money in equities.

• Know what you are doing: This is the most important thing. You must understand precisely why you are choosing certain investment avenue so that you can keep a tab on your investments and take corrective actions in case something goes wrong.

• Diversification: do not put all eggs in the same basket. In case something goes wrong with one investment and you loose money on it, gains in the other can compensate for the same.

• Rupee cost averaging: economies and markets see many ups and downs over the time and it's not possible to predict accurately when market is at absolute low or high. Hence it make sense to invest fixed amount every month so that the price averages out and we make better than average gains.

• Asset allocation: neither invest all of the money in equity nor in debt. When people are young, they can afford to invest larger portion in equity as they can stay put for longer time. The older they grow, they can gradually move it in debt. Thumb rule is to invest %-age of money equal to your age in debt and rest in equity. So a 30 years old invests 30% of his savings in debt and 70% in equity. Then one should keep reviewing the portfolio periodically and rebalance accordingly. This way when stock markets move up you will automatically move some money in debt and vice-versa to gain from market movements without timing the market.

Mutual funds:

Mutual funds receive money from people like you & me and invest it into multiple shares hence offer much better diversification. They hire one or more dedicated professionals called fund managers, with education and experience in equity research to do that job. Fund managers have skills to select right businesses to invest and track developments to make informed decisions regarding when to buy and sell. 

Mutual funds provide opportunity for all investors to take exposure to equity while minimizing risk with diversification and rupee cost averaging through SIPs.

Types of mutual funds:

• Equity oriented: these funds invest major portion of their portfolio in equity shares of various companies. They are tax efficient as gains made for period more than 1 year are tax free.

• Debt oriented: these funds invest major portion of their portfolio in various debt options like corporate deposits, government securities etc. They offer low returns compared to equity oriented mutual funds but are much less risky and tax efficient than bank FDs & corporate deposits.

• Hybrid: They offer somewhat middle ground by investing portions of portfolios in both debt & equity. There are Hybrid equity oriented or balanced funds that invest about 65% of money in equity. Hence they offer good returns compared to debt funds. At the same time risk is much lesser compared to equity oriented funds that invest 90% money in equity. Best part is that these are treated like equity funds and returns over 1 year are tax free. Then there are Hybrid Debt Oriented funds which invest some 10-15% portfolio in equity hence offer slightly better returns than debt funds.

• Sectorial funds: These are like regular equity oriented funds but they invest in only companies of certain sector say banking or IT. These are far more risker compared to diversified equity funds and unless you can predict which sector is going to outperform others, your investments would be at huge risks. These must be avoided by regular investors.
• Large cap/Mid-small cap: Shares of small companies have greater potential to gain because if small company does well and end up becoming huge overtime, investors of those will get huge returns. But as you might have guessed, risk of loosing money is far higher as many small businesses will eventually fail. Hence small and mid cap funds strive to gain more by taking more risk. Larger companies are more stable but they have limited growth potential. Hence large cap mutual funds which invest primarily in those bigger companies offer lesser return with lesser risk.

• Equity tax saving (ELSS): These are similar to equity diversified funds with lock-in period of 3 years and you can invest upto Rs 1 lakh to get tax benefit under 80C (more details in my previous post).

Selecting mutual funds:

Since not all mutual funds do well, it's critical that you identify best mutual funds to invest in and keep a tab on it's performance over time. In my personal experience, I saw that in 2006-07 timeframe, SBI mutual funds were doing really well. Than Reliance & HDFC funds seemed to do better. Now a days I see that most ICICI funds are doing better than others.

Hence we should be able to select winner and then review in every 3 to 6 months to ensure that they are still doing well. Else we need to switch to another good fund if our winners seem to loose out.

Can we select a mutual fund purely based on it's returns? No. Because chances are that fund might gain by investing in too many risky stocks. It might have been lucky to make huge gains in that timeframe but it's luck might run out next time. And don't just look at past 2-3 years returns as fund may not have seen enough economic cycles in such a less time. Prefer long term history over 5-10 years. 

Also keep in mind that funds return may not be much meaningful in isolation and you should always compare it with other funds in the category and general market. For example in last 3 years, market in general hasn't moved up much so most mutual funds have bad returns in that period. Then there are other parameters like beta to measure risk and alpha to see how fund generated returns compared to market.

All of above might sound too complicated again for regular investors. Hence I recommend taking a look at funds rating available at valueresearchonline.com. They rate fund between 1-5 stars, where 5-star is highest rating. While coming up with this rating, they account for risk adjusted return over a long time. I realized most funds which have good long term returns, low beta, high alpha and did better compared to benchmark & similar funds, had good rating too.

My thumb rule is that I strive to  keep investing through SIP in 5-star or 4-star funds. If it’s rating drops to 3-star, I switch my SIP into some other better fund. If rating remains at 3-star for extended period like 6 months to 1 year or drops below 3-star, I switch all my investment from that fund to a better fund.

But which type of mutual fund should I invest in:

First of all determine how much money you can invest every month which you may not need in next 10-15 years. This money could then be invested in a few good mutual funds from different categories and companies based on your asset allocation.

Suppose you can invest say Rs 10000/- every month. It would be a good idea to divide this money in 5 chunks of Rs 2000/- each. Now first SIP could be for Rs 2000/- in an equity oriented balanced fund like say

HDFC Childrens Gift Inv or ICICI Pru Balanced. 2nd SIP for Rs 2000/- could be done into a good Equity: Large Cap fund like Franklin India Bluechip. 3rd SIP could be done in a fund from Equity: Large & Mid Cap category like Quantum Long Term Equity and 4th from Equity: Mid & Small Cap fund like ICICI Pru Discovery. Finally 5th & last SIP could be in Hybrid: Debt-oriented Conservative fund like Birla SL MIP II Savings 5.

This portfolio would provide ample diversification amongst fund categories and fund houses. About 40% of it is in large & large-mid cap which provides stability with high returns, 20% is in mid-small cap that provides very high return with high risk, 20% each in hybrid equity & debt fund which provides stability with low returns. In 20 years this portfolio is expected generate wealth of about Rs 86 lakh assuming moderate return of 12% or Rs 1.22 crore at 15%.

If you are not willing to take much risk initially or want to get a feel of this process, I would recommend to start with a equity oriented balanced fund and start an SIP for few months and observe it.

For tax saving investments please see details in my previous post. Preferably  plan SIPs in them inline with your overall investment strategy. For example as ELSS do similar investments as equity diversified funds, you can swap either  Equity: Large Cap or Equity: Large & Mid Cap  with ELSS.

I hope this would have given you idea about how to select good mutual funds while  achieving diversification. In subsequent article on financial planning, I would touch upon how to plan mutual fund SIPs in order to achieve certain financial goals.

Where to search:

I use www.valueresearchonline.com. Go to www.valueresearchonline.com/h2_cat_5Years.asp, there are links for different categories of funds along with return information. For example  the link for 

Equity: Large Cap. You can sort by rating, returns etc and make a choice.

How to invest:

You need to be KYC complaint by providing details like address proof, ID proof and PAN card before you could invest in mutual funds. You need to approach a fund house (or AMC like HDFC mutual fund or Quantum mutual fund), distributors like various banks or online providers like www.fundsindia.com or registration agents like CAMS or Karvy. They will help you file for KYC, make investments, start SIP or redeem your units etc. Here are the details of these options:

• fundsindia: I use them because they do not charge up front fee and it's much convenient. You can open account in matter of days (including KYC) and start investing. You can do everything online including starting/stopping/switching SIPs, making new investments, redeeming your investments etc. They are safe and secure and I am using them for last 5 years. The only drawback is that I can't avail direct option hence my mutual fund pays them about 0.5%-1.5% yearly as trailing commission which is very less price to pay in my opinion for the convenience that they are offering.

• Banks: generally all banks distribute most mutual funds and you can fill up application form by visiting bank branch. They charge 2-3% upfront fee for every installment of SIP and get trailing commission too. This would be a bad option in my opinion.

• AMC or fund houses directly: You can visit their office and some of them provide option to invest online. For me it's a hassle to keep track of all those passwords and investment details separately and I prefer fundsindia.  Only positive point is that I could avail direct plan of mutual funds in which trailing fee could be saved.
• Transfer agent (CAMS or Karvy): they offer services like AMC only but you can invest in almost all mutual funds from 1 place. Still you need to visit them every time to make investment and manage your investments separately for all mutual funds.

Disclaimers and disclosures:

The views shared here are based on my own knowledge and research. Whatever advise I am offering here is best based on my own knowledge & abilities. I would like to reiterate that equity investments are risky and there are no guarantees. However avoiding equity completely is riskier. The risk associated with them can be managed and that's what I am trying to put it across in simplest possible terms. More on this here.

I am not going to get any commissions from any mutual fund etc in case you act on my advice and I don't take any legal responsibility for any losses that you might incur (at the same time not asking you to share your gains with me :P). 

I am recommending fundsindia because I am using it for last 5 years and I found it really good and convenient. I am just another user for them and I would NOT be getting any commissions on any investments that you are going to make. If you use the link above to register, I might be getting a Rs 200/- coupon one time in case join them. However that is not my primary motivation and I have made my family & close friends join fundsindia even before they started any such campaign. 

Basic concepts and different investment avenues

In this article, I will cover some basic concepts including inflation, compounding, savings, investments, financial planning, various investment avenues etc.

Why save money?

Most of us are earning good amount of money and many think why not spend it all and have fun? Why bother saving any of it as we are confident that we can keep earning in the foreseeable future? Short answer is to be financially secure. For life.

There are needs that require far more amount of money than our monthly salary. You need to pay 2-3 lakhs now a days to get your kid admitted into a good school and there are so many such requirements. True there are banks eager to offer loan for everything but they would expect you to pay back large interest and EMI would drastically reduce amount available to fulfill rest of your needs. 

What do you do if an accident puts you on bed for few months or a recession makes you loose your job and you fail to find another one for a few months? Would you have more peace of mind when you have enough savings to sustain for a few months or when you have nothing?

Everybody is going to become too tired of job some day and would retire. How would he survive if he has no savings? We Indians count on kids too help us out post retirement. I would be lucky if my kid earns enough and is willing to help me out. So am I going to count on my luck? No. I would rather plan, save and invest.

So it's very important that we must save a large amount on money during your productive years so that it would support us during bad time or post retirement. I would encourage you to read following articles:

I Invest, So That I Live Like a Man…Not a Donkey, Dog or Monkey, The Value of Saving and Investing Money

Inflation

We keep hearing about high inflation, CPI, WPI and all that jazz every now and then, but should we really care? Yes because inflation is far more than just a concept as it depicts that purchasing power of money decreasing over time.

As I remember during my childhood, monthly groceries used to cost hardly Rs 1000/- for the family of 4. However now just for the family of 2, even Rs 2000/- not enough just for weekly grocery. The 1 BHK that I rented in 2006 when I came to Bangalore for Rs 5000/- now costs Rs 10000/-. That is 100% growth in just 7 years which is roughly 10% inflation annually.  Prices of groceries, fuel, medicines etc have increased too.

That humble Rs 100/- note used to be far more valuable for my father when he was young. You would call me foolish if I tell you to put  Rs 10000/- in a piggy bank  for retirement because after 30 years, it would hardly be equivalent to about Rs 800/- assuming 8% inflation.

Hence for financial security, just savings are not enough. You need to ensure that you invest it wisely and get more returns than inflation. Inflation has been in double digits in last a few years and it would be safe to assume long term inflation of about 8-9%. Hence if your FD interest is 9%, or ~6.3% after accounting for income tax assuming highest tax bracket, the reality is that value of your savings is decreasing with time. 

Compounding

Hopefully we now agree that we need to save & invest. The next questions comes into mind is when is the right time to start? Most of us still have too many years to retire so why bother now?

Let's take an example. My friend 'A' starts investing Rs 5000/- every month in a good MF through SIP soon after joining his job when he was 22 years old. He wants to retire at 60 and guess how  much he would have assuming 12% return? Rs 3.66 crore for the investments of about Rs 23 Lakh.

What if he decides to start when he is 40 years old and invests Rs 25000/- every month? Rs 2.16 crore for investment of about Rs 60 Lakh.

What if he starts when he is 50 and invests Rs 100000/- every month? Rs 2.1 crore for investment of about Rs 1.2 crore.

So what is going on here? How come humble Rs 5000/- investment per month over 38 years beats Rs 1 Lakh per month by more than 70%? Let's see what happens in the first scenario. After starting at 22 with Rs 5000/-, when 'A' turns 40 years old, he has already accumulated about Rs 33 Lakh. Hence though this year he invests only Rs 60000, the interest that he gets is whopping Rs 4 Lakh. When he turns 50, his accumulated wealth is Rs 1.1 crore on which he earns interest of Rs 13.2 lakh. That's the magic of compounding my friends.

The simple message is start saving & investing and start as early as possible. Time is running out fast.

Financial planning

Is saving certain amount every month enough? No. That's certainly most important part of financial planning but there is more:

• Life insurance: when you have dependents , it's critical that you have some term insurance with enough sum assured in case something happens to you.
• Health insurance: health insurance too is equally critical as some sudden medical emergency might cripple your finances. Health insurance is actually wealth insurance.
• Emergency funds: you must keep enough money to sustain for 3-6 months in non-risky avenue  like savings account, FD or debt fund for some unforeseen emergency situation like job loss
• Planning for goals: you must have a plan in place for goals like retirement, kids education, buying a house etc
• Estate planning: having a will is really important to ensure that your heirs are not left in legal tangle if something unfortunate happens to you

More on financial planning soon.

Investment avenues

Debt versus Equity

Most of us are generally familiar with debt investment options that include bank accounts, FDs, RDs etc. where rate of interest is fixed and guaranteed. These options are less risky but return too is low.

Equity mean ownership. When you buy shares of some company, you become owner of it and you get proportionate claim on assets and profits. Your investment does well only if company does well and stock market acknowledges it. There is basically no guarantee regarding interest or return. In equity risk is far higher but so are returns.  

I can't stop stressing on the importance of equity and equity investments are critical to beat inflation in the longer term.

What are the different options available for saving & investing money:

1. Bank accounts, FD, RD, NSC, Post office deposits: saving account is good options for keeping money for day to day expenses or emergency funds. However you get hardly 4% interest per year. FD/RD/NSC returns are slightly more but after accounting for tax, they general don't beat inflation.
2. PF, PPF, Tax free bonds: These are promising instruments for long term requirements like retirement planning. Returns are tax free and they generally beat inflation. You can get some tax breaks too.

3. Traditional insurance policies and ULIPs: As I mentioned in my previous articles, these are bad investments and must be avoided at all costs.  More on these in my previous article
4. Real estate: is very popular choices among Indians. Home is basic requirement and generally own house is better than rented one. People however choose to speculate and in the hope for getting rich quick, they end up investing in multiple of them without realizing that not many of them give multibagger returns . Many people prefer to invest in land/plot and commercial properties like office or shops. Real estate is generally good investment avenue but it's highly risky, comparatively illiquid and requires a lot of care to get it right. 
5. Gold: is another very popular choice among Indians. Few years back it gave better returns than equity but this year it didn't perform as good. People believe it's value will always increase in long term but some also say it's a bubble. Gold is again a high risk investment and as per most experts, one should not investment more than 10% of his investments in gold.
6. Shares & trading: These are a very risky and bad options for general public. I see that most people just speculate in share market and do rackless & mindless trading. They seem to make some money during good time but are crushed during bad times. These could be as harmful as buying lotteries and may people end up loosing a lot of money (I am telling this with first hand experience :P). So in short these are very risky with high returns and requires very specialized skills. Hence they should be avoided by most people.  
7. Equity Mutual funds: Mutual funds manage pool of money from multiple people by investing it in shares by dedicated professionals. They are called fund managers and many of them have specialized degree and number of years of experience in share market. It's much easy to invest in these and they are low cost and tax efficient (no tax on if invested for more than one year)..  These are risky with high returns & are critical to beat inflation. Recommended way is to invest regularly in them through monthly systematic investment plans (SIPs).  More details on MFs in my previous article
8. Debt mutual funds: Debt mutual funds invest in corporate deposits which are risker than bank FDs. But again these are managed by professionals hence these are less riskier than corporate deposits. These are also low risk and low (and not guaranteed) return instruments and they hardly beat inflation. These are more tax efficient than FDs (income tax rate applicable is only 10% or 20% with indexation if held for more than one year v/s 30% in case of FDs assuming highest tax bracket). These are good for emergency funds and other similar debt/safe investment requirements.

I hope this article provides a good overview of financial landscape. Please let me know your thoughts, feedback and comments. Also if you liked it, please do share it on facebook/twitter/linked-in and email it to your friends & mail groups.

Further reading:

• The Equity Imperative: by not investing in equities for the long term, too many Indians are setting themselves up for old age poverty
• Time is Everything: the only reliable way of growing your savings at a rate faster than that of inflation is to invest it into equity or equity based investments

Disclaimers and disclosures:

The views shared here are based on my own knowledge and research. Whatever advise I am offering here is best based on my own knowledge & abilities. I would like to reiterate that equity investments are risky and there are no guarantees. However avoiding equity completely is riskier. The risk associated with them can be managed and that's what I am trying to put it across in simplest possible terms. More on this here.

I am not going to get any commissions from any mutual fund etc in case you act on my advice and I don't take any legal responsibility for any losses that you might incur (at the same time not asking you to share your gains with me :P).  

Plan for subsequent articles

I am planning to write articles covering the following over next few weeks:

1. Basic concepts: inflation, compounding, savings and financial planning, various investment avenues etc
2. Trading v/s Mutual funds and mutual funds in depth
3. Investing in mutual funds
4. Insurance v/s investments and insurance in depth
5. Various aspects of financial planning
6. Tax planning revisited and filing return

Please let me know if there is any particular topics that you want me to cover here.

Old articles:

       1. Financial literacy series

       2. Tax proof submission time is closing in: have I missed the bus for this year?

Tax proof submission time is closing in: have I missed the bus for this year?

Short answers is "NO". Please read on.

Since most companies would soon ask employees to submit their tax receipts, I thought it would be a good idea to start with an article on the same. I have touched upon various tax saving options and their pros & cons and also there is some advice for quick action.

Salary, taxes and deduction

I don't think salary requires any explanation. All of us know how hard is it to earn.

Government imposes taxes on people  earning income and employers are liable to deduct taxes and submit it to IT department before giving salary every month (it's called TDS or tax deducted at source). However at the same time government encourages people to invest some of the income in certain avenues to get tax breaks. Currently there are deductions permissible for rent paid, medical expenditure upto Rs 15000/-, LTA, interest paid on home loan, educational loan, health insurance and various options under 80C for upto Rs 1 lakh.

Every year, in the beginning of the financial year, i.e. April, companies ask employees to declare what investments people are going to make and based on that they determine the monthly TDS. Then in January or February they will ask employees to submit the proof that they actually made those investments.  Throughout the year, company deduct less TDS based on the declaration and if you fail to submit the proof by due date than they need to deduct the balance tax in just last month resulting very little salary for that month. 

When I filled the declaration in the beginning, I wasn't very careful. What's the way out?

It doesn't matter what you declared as long as you make up for the same amount while doing the actual investment. For example say you declared that you would buy an ULIP or LIC for Rs 80000/-. Now you figured that better thing is to invest that money in PPF or Tax saving mutual funds (ELSS). You can still invest Rs 80000/- in PPF or ELSS and submit the proofs. It will be gladly accepted by your company and the IT department.

I haven't made any investment so far. What do I do now?

For HRA (house rent), medical allowance and LTA, we don't have much leeway. Submit whatever actual receipts you have  got. For rest of the avenues under section 80C:

1. PF: This is the best form of debt investment available in my opinion. It gets deducted automatically. You get about 8.5% percent interest guaranteed by Govt and all of that is tax free. In case you change employer, you can withdraw this amount or get it transferred. By default it's about 12% of your basic salary and there is an option to get it increased.  
   Some people opt out of PF which is a very bad thing in my opinion. Please  don’t do that.
2. PPF: Similar to PF, return on PPF is also tax free. It's offered by SBI and ICICI. This is also quite good option in my opinion and it can be done online. This is also for long term and you are not allowed to withdraw for 15 years.
3. Insurance (LIC or ULIP or term insurance): most people end up buying LIC or ULIP when the deadline is near. This is NOT the best thing to do as returns on LIC are hardly about 5-6% and ULIPs have very high charges (10-14% or higher) compared to mutual funds (about 2-3%) with very little insurance cover. Also information available about fund management of ULIP is much limited compared to mutual funds. In short ULIP is design to be very expensive and confusing with very little benefits and tradition insurance offers way too insurance coverage as well as very low return on investments.
   Term insurance make sense. In case you don't have any insurance, you can go for an online term plan which costs really less (as low as 7000-8000/- for insurance of Rs 1 crore). The only disadvantage is that in case you survive the tenure, you don't get anything. That's why other insurance plans are much popular in India as people fail to notice the very high cost associated with them.More on insurance v/s investment later. For now please take my word that term insurance is the best insurance.
4. Deposits: I don't like these avenues at all because complete interest is taxable. So people who are in highest tax bracket, will end up paying 30% tax on interest that they receive. This includes 5 years bank FD & post office deposits etc. Please ignore them and go for PPF or ELSS.
5. Tax saving mutual funds (ELSS): This is my favorite avenue. As in the example I described in my previous article, long term returns in equity are quite substantial compared to other avenues (average considered to be about 12-15% over 10 years in general, however it's not guaranteed and actual returns could be lower or higher. See disclaimer for more info on this). Also returns for over one year are tax free which makes equity extremely attractive. 
   Since the best way to invest in equity is through SIP over the whole year, this is not advisable now as you hardly have only 2-3 months. However you could still invest some small amount in multiple chunks like say Rs 10000/- in December, January and February. You will get statement within 3-4 days after making the investment so you can still submit that as a proof. Also if you could go for longer tenure, i.e. you need not withdraw this money say for next 10-15 years, you can still invest larger amount. 
   How to select which tax saving mutual fund? Check out value research online and invest in 1 or 2, 5-star funds: http://tinyurl.com/o7k2bqq . More on understanding and selecting mutual funds later. 
   How to invest in equity mutual funds? You could visit any banks which would charge about 3-5% fee. However I would recommend that the best way is through fundsindia. I am using it for last 5 years and I found it safe and extremely convenient. They can help you open your account for free and let you invest online for free in a matter of few days. Alternatively you can directly go to fund house office or their registrar CAMS or Karvy (address available in value research online page of mutual fund under investment details tab) and avail direct option which has 0.25% lesser charges which otherwise would have gone to fundsindia. However it could be a big hassle if you are not KYC complaint.  

Apart from 80C, you can claim deduction on health insurance premium payment for upto Rs 35000/- for your family and parents. Taking additional health insurance is a good thing. More on why health insurance required and choosing a good one later. Also you can claim deduction on interest paid on educational loan, if any.

Another good avenue is buying a house but it's not advisable  to buy one now for this financial year due to lack of enough time. However this is something that can be planned for next financial year. You would get tax benefit upto Rs 150000/- on interest paid and principal can be claimed for the limit of Rs 1 Lakh under 80C.

Bottom line, for section 80C that has Rs 1 Lakh limit, please opt for PF, take term insurance and invest balance amount in PPF or ELSS. 

In case I fail to submit the receipts by the deadlines, is there anything I can do about it?

If you fail to submit receipts by the deadline set by your company, you can still make the investment before March 31st. However your company would have deducted the TDS and submitted it to IT department. Hence while filing for tax return during next July, you can ask for tax refund.

Also be aware that tax refunds could be delayed substantially. I know friends who didn't get refund even in 3 years. Hence resort to this option only if absolutely necessary.

I hope this is useful information and you would be able to make an informed decision about investments for tax planning. I would like to add here is financial plan for tax saving investments must be inline with overall financial plan and most probably it would if you follow the above advice. More on financial planning in subsequent articles. Please do share if you have any questions, comments or feedback. Also needless to say please share this article with as many people as possible.   

Disclaimers and disclosures:

The views shared here are based on my own knowledge and research. Whatever advice I am offering here is best based on my own knowledge & abilities. I would like to reiterate that equity investments are risky and there are no guarantees. However avoiding equity completely is riskier. The risk associated with them can be managed and that's what I am trying to put it across in simplest possible terms. More on this here.

In case you act on my advice, I am not going to get any commissions from any mutual fund etc.  Also I don't take any legal responsibility for any losses that you might incur (at the same time not asking you to share your gains with me :P). 

I am recommending fundsindia because I am using it for last 5 years and I found it really good and convenient. I am just another user for them and I would NOT be getting any commissions on any investments that you are going to make. If you use the link above to register, I might be getting a Rs 200/- coupon one time in case join them. However that is not my primary motivation and I have made my family & close friends join fundsindia even before they started any such campaign. 

Financial literacy series

Why?

I would like to start with a story that motivated me to write this blog post. I have a colleague who trades stocks and we had conversations about a share where he was making substantial losses. Based on that I presumed that he would be a financially literate person and at least he would know the basics of investing. Fair assumption, isn't it? However I was astonished when one day he mentioned that he doesn't know things as basic as SIPs into MFs. And guess what? He is not alone. I come across questions like following all the time:

• "I don't understand how should I fill up my tax declaration"
• "Should I opt for EPF, PPF or 5 years FD for tax saving?"
• "What is tax return? Why should I fill it up every year when my company already deduct taxes?"
• "Oh...I can file my tax returns in 10 minutes for free!!! Then why was I running around those help-desks and CA's all these years?"
• "This is tax proof submission time and I need to find some agent who can help me buy some LICs or ULIPs"
• "I don't have time to understand financial matters. The information available about this is too much (or too complex) and I have no time to get into any of it"
• "Finance is too complex for me to understand and I do whatever my father or a relatives or a friend or some adviser tells me to do" 

Do they sound familiar? Does it worth it to be financially literate  given that so much help is readily available from relative/friends/advisers? 

It does. Please read on to understand why.

Why does it matter?

Again let me take a very simple example. Two friends started their careers in 1998 and today they compared their tax saving portfolios. My friend A didn't know much about investing and his LIC agent uncle convinced him to buy a policy worth 15 lakh for 15 years with yearly premium of about Rs 25000/quarter for tax saving purpose. At the end of 15 years he got the sum assured 15 lakh along with a handsome bonus of worth about Rs 11 lakh. In addition, every year he saved tax of worth Rs 30000/-. Hence overall he received or saved Rs 31 lakh at the end of 15 years and he is very happy. That's why his father was trusting that LIC agent uncle for all these years and everybody is quite happy with this decision.

Now being financially literate B was far more careful, he chose to invest in tax saving equity mutual funds or ELSS through SIP (systematic investment plan, i.e. money is invested every month automatically). He chose a popular fund called "HDFC tax saver" and he started investing Rs 8300/- every month for all those same 15 years. Guess how much he had at the end of 15 years? A whopping sum of  about Rs 1.1 crore excluding Rs 30000/- that he saved on taxes every year. Do I have any proof about example of B? Yes, here you go: http://tinyurl.com/q748qqj

But wait a minute, isn't equity risky?

We hear all the time that "Mutual fund investments are subject to market risk. Read all scheme related documents carefully before investing". If things are that hunky-dory, why do they say that?

Yes, I admit equity investments are quite risky. In fact even in the same fund, if B had invested Rs 1 lakh when market was about to collapse in 2008-09 recession on January 1st 2008, he would had ended up with only Rs 40000 in March 2009 when market was at rock bottom!!

"What? Man, you give dangerous advice. Good that I read on so far. Now I understand what they mean when they say equity is risky".

But wait. Is the story really over? Or is there more? Please read on.

Being a sophisticated investor, why would B invest all that sum in one shot at the peak of market? Also why would he pull out all that sum within little more than a year when the market is at rock bottom?

If he decides to wait only for one more year and a half, he would have had about Rs 1.25 Lakh. By the way, tax saving mutual funds have lockin period of 3 years so he wouldn't be allowed to pull money out that early.

But B, being a financially literate, would choose the same strategy of doing SIP of 8300/- per month starting from same January 2008 when worst time started. He would not be deterred by ups and downs of the market and would continue investing no matter what. Let's see where would he be today. Keep in mind that when he started the market was collapsing and so far these have been one of the worst 5 years of Indian stock markets in terms of returns. Still my friend B would end up with Rs 8 lakh for the investment of about Rs 6 lakh in November 2013. Still impressive , isn't it? Adding Rs 1.5 lakh as saved tax over the same period makes it even better at about Rs 9.5 lakhs. 

The name of the game is long term and Rupee cost averaging my friend.   

Again, why this blog?

Though already there is a lot of information available and more & more is being generated every day, why am I still doing it?

Yes, true. There is indeed a lot of information available. Much of it is quite precise and helpful. But still, why do I encounter those above mentioned questions all the time?

In my opinion, like in case of A, every ULIP or LIC bought just for tax saving  is probably a big opportunity lost. May be my dear LIC agent uncle doesn't have any bad intentions but it's just that he is too old fashioned. Also our parents didn't have all these resources and internet at disposal hence they can't be blamed too. However school/college education is to be blamed as it fails to teach financial literacy to everybody. 

All of us work very hard to make money. But after working for those many years, how much wealth could you preserve? Are you satisfied with that amount? If no, then why not let's all become financially literate so that we are not at the mercy of others to preserve and grow that hard earned money.

I want everybody around me, even those who are far away but connected through my social network, to be financially literate. That's why I am writing it. Any takers?

Please stay tuned for more articles on tax planning, return filing, insurance , investment, financial planning & financial literacy in the weeks and months to come.  Needless to say, I would try to keep them short, sweet and simple to follow.