Investing
errors to avoid
Stopping SIPs now
or switching from debt funds to FDs will not be very beneficial for investors
The wide divergence in performance of the stock
market is giving mixed signals to investors. Confused investors are prone to
making costly mistakes. Here are some missteps that mutual fund investors are
likely to take now and why they could turn out to be harmful:
Switching from bond funds to FDs
Interest rates are heading north again after a gap of
four years. At the same time, returns from bond funds have been very poor in
the recent months. Some categories of debt funds have delivered less than 2% in
the past one year due to the rise in bond yields (see story on page 2). Given
the high rates offered, investors might find bank fixed deposits and recurring
deposits more attractive. They may dump their bond funds in favour of bank
deposits. But while the assured returns from bank deposits may seem alluring,
they are not tax efficient. The entire interest earned from bank deposits is
included in the individual’s income for the year and taxed at the applicable
slab rate. The post-tax return will be much lower for those in the higher tax
brackets. Instead, investors should park some money in short term or low
duration debt funds and fixed maturity plans now. Bond funds are far more
tax-efficient. If held for more than three years, the gains are treated as
long-term capital gains and taxed at 20% along with indexation benefit.
Stopping SIP as returns are low
or negative
Since the turn of the year, the highflying mid and
small cap stocks have taken a severe beating, which has affected the return
profile of funds investing in these pockets. Investors who had initiated SIP in
these funds within the last year would be staring at very low returns, with
some even in the red. Jittery investors may want to discontinue their SIPs,
particularly in funds focused on the small- and mid-cap segments. However,
experts suggest this would be unwise. This is precisely the time when SIP investors
will be able to make the most of the volatility by effectively fetching more
units at lower prices for the same amount. When the mid-cap segment regains
strength, investors who persisted with their SIPs will stand to benefit.
“Timing your SIP only gives you an illusion of being in control. In reality,
you end up putting less money at work,” argues Kunal Bajaj, CEO, Clearfunds.
Starting new equity SIPs for
short-term goals
Given the healthy return from largecap funds over the
past year, some may be tempted to start fresh SIPs in this space. Some may even
consider initiating a SIP in a mid-cap fund to gain from the volatility. This
is fine so long as you are not investing in these funds for short-term goals or
hunting for quick gains. Given that valuations in select pockets from both
segments are still stretched relative to historical levels, returns are likely
to be muted in the near term, feel analysts. Investors coming in with a
short-term horizon now may be left with a sour taste in the mouth. Investors should
commit to atleast a five-year horizon to benefit from the SIP.
Investing in dividend option of
mutual funds
Lately, equity-oriented funds have been pushed as a
source of regular dividend income for investors. But with 10% tax on dividends
introduced now, this proposition is no longer tax-efficient. Investors who are
still tempted by the consistent dividend payouts from these schemes should
reconsider their decision. In any case, the dividend gets deducted from the NAV
of the scheme so it should not be seen as additional income. Also, dividends
are paid out of the distributable surplus accumulated by funds over the years;
there is no guarantee that they will be able
to sustain the quantum of payout. If the market
nosedives, these funds may not have enough surplus left and dividend payouts
may get increasingly erratic. “Entering an equity oriented investment for the
sole purpose of income generation is a bad idea,” insists Amol Joshi, Founder,
PlanRupee Investment Services.
by Sanket Dhanorkar
ETW24AUG18
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