All You Wanted to Know About Bonds

Bonds have been traded far longer than stocks have. *In this thread, will be covering the basics of how a bond market operates.

1. What Is a Bond Market & Who issues Bonds
▪️ A bond is a promise to pay investors interest along with the return of principal in exchange for buying the bond.
▪️ The bond market is a marketplace where investors buy debt securities that are fetched to the market by either Government or Corporations.
▪️ Govts typically issue bonds in order to raise capital to pay down debts or fund infrastructural improvements.
▪️ Companies issue bonds to raise the capital needed to maintain operations, grow their product lines or open new locations.
▪️ Bonds tend to be less volatile and more conservative than stock investments, but also have lower expected returns.
▪️ The bond market is also referred to as the debt market or fixed-income market.

2. Segments of Bond Markets
▪️ The bond market is broadly divided into the primary market and the secondary market.
▪️ The primary market is frequently referred to as the "new issues" market in which transactions strictly occur directly between the bond issuers & the bond buyers.
▪️ In the secondary market, securities that have already been sold in the primary market are then bought & sold at later dates.
▪️ These secondary market issues can be packaged in the form of pension funds, mutual funds, life insurance policies, etc.

3. History of Bond Markets
▪️ Debt instruments' history traces back to 2400 B.C; for example, a clay tablet discovered at Nippur, (present-day Iraq.) used to record a guarantee for payment of grains & listed consequences if the debt was not repaid.
▪️ In the middle ages, Govts began issuing debts in order to fund wars.
▪️ The Bank of England, the world's oldest central bank still in existence, was established to raise money to rebuild the British navy in the 17th century through the issuance of bonds.
▪️ Early chartered corporations such as the Dutch East India Company issued debt instruments before they issued stocks.

4. Types of Bond Markets
i) Corporate Bonds : Corporate Bonds describe longer-term debt instruments that provide a maturity of at least one year & above. 

▪️ Corporate bonds are typically classified as either investment-grade or else high-yield (or "junk").
▪️ This classification is based on the credit rating assigned to the bond & its issuer.
▪️ An investment grade is a rating that signifies a high-quality bond that presents a relatively low risk of default.
▪️ Junk bonds are bonds that carry a higher risk of default than most bonds issued by Corporations & Govts.
▪️ Junk bonds represent bonds issued by Companies that are financially struggling & have a high risk of defaulting.
▪️ Junk bonds are also called high-yield bonds since a higher yield is needed to help offset any risk of default. These bonds have credit ratings below BBB-.

ii) Government Bonds : Because sovereign debt is backed by a Govt that can tax its citizens or print money to cover the payments, these are considered the least risky type of bonds.
▪️ In the U.S., Govt bonds are known as Treasuries
a) A Treasury (T-Bill) is a short-term government debt obligation backed by the Treasury with a maturity of one year or less.
b) A Treasury note (T-Note) is a debt with a fixed interest & a maturity between 1 & 10 years.

5. The correlation between the Stock Market & the Bond Market
▪️ The correlation between Equities & Bonds has not always been stable
▪️ Up until about 1998 Bonds & Stocks correlated positively but then starting in 1998 that correlation flipped negative.
▪️ When inflation is high one tends to have a positive correlation between stocks & bonds.
▪️ When inflation comes down then the correlation flips negative & people become more concerned about deflation or maybe even a depression-like we had seen after the 2008 financial crisis.
▪️ The correlation between stocks & bonds has started to trend back positive lately due to quantitative easing & Govt stimulus leading to inflation across the economy.

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New Tax Regime Vs Old Tax Regime: What is different

New Tax Regime Vs Old Tax Regime
Under the new income tax regime, new income tax rates & slabs will be applicable for those who forego tax exemptions & deductions.

The tax breaks that will not be available under the new regime include Section 80C deductions (Investments in PF, NPS, Life insurance premium), Section 80D (medical insurance premium), HRA & interest paid on housing loan. Tax breaks for the disabled and for charitable donations will also be gone.

Because of these changes, a lot of taxpayers are not sure whether the new personal tax regime will really bring substantial tax relief. 

Here's what you will gain or lose if you switch to the new regime : Under the new tax regime, the individuals can opt to pay tax at the reduced rates without claiming the various tax exemptions & deductions. The individuals will have to work out their liability under the old & new tax regime before deciding which one is more beneficial. While the new regime seems simple on account of no exemptions, there would be individuals who have already made commitments in recurring tax savings instruments who may still want to avail exemptions & get taxed under the old regime.

Here’s a list of the main exemptions that taxpayers will have to forgo if they switch to the new regime:

1. Leave travel allowance exemption which is currently available twice in a block of four years

2. House rent allowance is normally paid to salaried individuals as part of the salary.

3. Standard deduction of ₹ 50,000 available to salaried taxpayers.

4. Deduction for entertainment allowance and employment/professional tax as contained in Section 16

5. Tax benefit on interest paid on housing loan taken for self-occupied or vacant house property.

6. Deduction of ₹ 15,000 allowed from family pension under Section 57

7. Deductions under Section 80C include Provident fund contributions, life insurance premium, school tuition fee for children & various specified investments such as ELSS, NPS, PPF etc.

8. Deduction claimed for medical insurance premium under Section 80D.

9. Tax benefits for disability under Sections 80DD & 80DDB.

10. Tax break on interest paid on education loan under Section 80E

11. Tax break on donations to charitable institutions available under section 80G.

12. All deductions under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc).

13. It is worth mentioning that deduction under sub-section (2) of Section 80CCD (employer contribution on account of the employee in a notified pension scheme, mostly NPS) & Section 80JJAA (for new employment) can still be claimed after switching to the new tax regime.

What is Equity Linked Savings Scheme?

What is Equity Linked Savings Scheme?
Equity Linked Savings Scheme (ELSS) is a kind of Mutual Fund scheme that predominantly invests in Equity & Equity related instruments to generate high returns.

What makes ELSS different from other Equity MF schemes is that investment upto ₹ 1.5 lakh in ELSS is eligible for deduction from taxable income in a financial year.

The scheme comes with a statutory lock-in period of 3 years for each SIP.

It is the only mutual fund scheme that qualifies for tax deduction under Section 80(C) of the IT Act.

Benefits of Investing in ELSS : 
1. High Returns : Since Equity Linked Savings Scheme is essentially an equity scheme, it has the potential to deliver exponential returns in the long run. Although risky, investment in ELSS has the potential to deliver significantly higher returns when compared to traditional tax saving instruments. Moreover, ELSS has the lowest lock-in period amongst all other tax saving avenues.

2. Tax Exemption : If your mutual fund savings offers tax saving opportunity, along with high investment growth, what more can you ask for. ELSS allows you to save taxes, as investment upto ₹1.5 lakh in these schemes is eligible for tax exemption.

3. Diversification : Investment portfolio of ELSS consists of balanced allocation to different asset classes such as equity and debt securities. Besides this, numerous funds diversify within the equity category as well, allocating assets to large cap, mid cap, small cap equity stocks. Via ELSS, one can easily diversify their overall investment portfolio & effectively mitigate market risk.

4. Professional Management of Investment : As the investment portfolio is managed by professional experts who are well-informed about the market sentiment & functioning of capital markets, the investors’ money is in safe hands. Even if you don’t have much knowledge about the working of financial markets or lack time to track the market, you can still capitalize the returns from equity markets, via investment in ELSS.

5. Disciplined Investment : Investment in ELSS requires a minimum lock-in of 3 years, which instills investment discipline amongst consumers. For a more efficient disciplined investment approach, you can also invest via Systematic Investment Plan (SIP) in ELSS, which requires periodic installments in the fund on predetermined date. However, it should be noted that each SIP installment remains locked-in for 3 years.

Who Should Invest in ELSS?
ELSS offers an amazing opportunity to investors who want to reduce their tax liability along with high capital growth. If you’re looking for equity investment avenues that will deliver significant returns in the long run, you can opt for this fund.

This scheme is suitable for investors with a long term investment horizon (preferably more than 3 years), as the fund has a minimum lock-in period of 3 years. Also, it has been observed that equity securities perform well in the long run & this mandatory lock-in period ensures that the investors remain invested.

As the underlying assets mostly comprise equity securities, which are quite volatile, it is important that the investor has a high risk appetite to invest in ELSS & a long term wealth creation goal.

If you have already invested ₹ 1.5 lakh in various tax saving instruments under Section 80(C), it is advisable to opt for other equity funds that don’t have any lock-in period. Or you could even consider other tax saving instruments that can come under other sections to save tax for eg: health insurance for self/spouse/parents or National Pension System.

4 P's Approach to Mutual Fund Selection

4 P's Approach to Mutual Fund Selection
When it comes to choosing a Mutual Fund, investors are faced with an enormous task of picking a set of schemes that suit their needs from a large universe of funds in India.

At this stage, which comes after assessing their risk profile & evaluating their financial goals, investors are subjected to a lot of noise & often get mired amid investment tips and recommendation based on short term events.

A lot of this is a distraction & is irrelevant when it comes to choosing a mutual fund for achieving important long term goals like retirement planning, building a corpus for children or simply creating wealth.

Overcoming Myopia : 
When it comes to analyzing a mutual fund track record, even a 3 to 5 year performance may not be long enough & can be misleading at times, as several market themes play out over a much longer period.

This was the time of the great bull run in the markets as the equity markets rallied for over 5 consecutive calendar years.

These were euphoric times & the toppers of the mutual fund performance chart during the period might not have been the winners in the subsequent period & vice versa.

An analysis of 19 equity oriented mutual funds (ones that are currently classified as Large Cap, Flexi Cap & Multi Cap schemes which were in existence then) shows that the top 3 performing funds during the bull run of 2003 to 2007 ended with a ranking of 14, 12 & 11 respectively during the subsequent 5 years. The message is simple – Winners keep changing.

The two calendar years of 2018 & 2019 were favorable for Large caps in contrast of Mid & Small caps. During this period, a fund with a relatively higher weight to large caps within a category would likely have outperformed, but may not have continued to do well in subsequent periods.

The key message from these data points is that a particular trend in the market or a market cycle could persist for 3 to 5 years or even longer, effectively rendering us myopic while we choose a mutual fund.

Another example would that be of growth style of investing outperforming value style, a trend that prevailed over almost entire last decade.

So how do we go about when it comes to choosing among mutual funds? One may argue that instead of just looking at returns, analyzing risk-adjusted returns would help. However, it is difficult to overcome the problem of short to medium term trends overstating the potential of a particular fund, even with risk-adjusted returns as most research agencies consider just preceding 3 to 5 year time periods.

The solution to overcoming this myopia is to look for really long-term mutual fund performance over the last two decades.

The relevance of 20 or 25 years of track record : 
To begin with, one must remember that a strong track record over say, 25 years, means a particular fund has successfully sailed through good & bad times, multiple market cycles, geo political events & crisis periods like the Dot Com Event, the Global Financial Crisis & the recent Covid induced volatility.

A successful long term track record is also a testimony of the 4 P's - investment team’s robust Processes, risk management Policies, a stable set of People & a sound investment Philosophy at the core. It is these 4 P's that enable a fund manager through tough times in reducing the possibility of emotional decision making.

It is important to note that these 4 P's are common for a fund house & not just a particular scheme. Hence, experience matters & it would be advisable to choose a scheme managed by a fund house with long term track record. When your financial goals are long term in nature, select mutual funds based on long term track record. Here long term would signify 20 or 25 years.

Choose not only the scheme, but fund house as well : 
A better approach as a first step in scheme selection is to consider the fund house. Investing is a life long journey requiring you commit your hard earned money & placing your trust on a capable partner. This is where the 4 Ps – Processes, Policies, People & Philosophy can guide you to make effective decisions when it comes to mutual fund investments.

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FIRE (Financial Independence/Retire Early) Movement & Planning

The FIRE (Financial Independence/Retire Early) movement has got quite famous for the last couple of years in India. Every investor I meet these days wants to achieve FIRE asap. I would like to discuss some important points related to FIRE movement & types of FIRE today with you all.

What is FIRE Movement? : FIRE or Financial Independence Retire Early is all about creating enough wealth for yourself as early as possible, so that you are financially independent and free from worries of money. Once you achieve FIRE, your wealth is enough to generate an inflation-adjusted income for you which lasts your lifetime.

Let take an Example : Imagine a 30 yr old person with the monthly expenses of ₹ 75,000 per month (or 9 lacs a year) who has ₹ 18 lacs of current corpus & is ready to now aggressively invest ₹ 80,000 per month for the next 15 yrs & will increase the SIP by 8% each year. The investments growth will happen at 12% & the inflation assumed is 7% (pre-retirement) & 6% post-retirement along with post-retirement returns of 7%.

How will his corpus grow & where will it at age 45 (in 15 yrs time) : He will achieve FIRE at the age of 45 with a Corpus of ₹ 7.2 Crores. At that time his expenses would be around ₹ 22.8 Lacs approx & his corpus will be around 32X (32 times his expenses).

Do you actually stop working when you achieve FIRE? : Actually NO
It’s your choice if you want to work after FIRE or not. You can stop working if you wish, but if you still want to work, you can & any money you earn will be a cherry on the top and will only add up to your FIRE goal.

Top 3 reasons why people want to achieve FIRE?
1.It’s getting tougher & tougher to be employed till 60 these days & hence people don’t want to depend on the fact that they will keep earning for a very long time.

2. Once you achieve FIRE, life is less stressful & you get power in you to live life on your terms. People want to create a situation where they don’t have to dance to the tune of their managers & employers.

3. People also want to get out of stressful & demanding jobs by the time they hit a mid-life crisis & that means moving to a job that is more enjoyable, even if it pays very little. This is possible only when you have already created enough wealth

But, FIRE is tough!! Is it very easy to achieve FIRE? : NO, is the answer
1. Forget FIRE, even normal retirement at 60 is not possible for many people in India. We can clearly see that a big number of investors will have a bad retirement because they are not living their financial lives in the right way & are not on the path to creating sufficient wealth.

2. FIRE in that sense will only be achieved by a small minority.
a. Most of the people who achieve FIRE do that not because of fantastic returns, but very aggressive saving & deploying that money in meaningful investments.

b. If you keep your expenses in check & keep it on the lower side, it simply means that it becomes easier for you to achieve FIRE because FIRE is not just about wealth, but both wealth & your expenses

c. Most of the people who achieve FIRE are those who earn quite well. If you earn ₹ 1 Lacs a month & your expenses are ₹ 50 k per month, You are earning 2 times of expenses every month. That helps a lot

d. Most of the people who are not able to control their lifestyle & keep upgrading their life find it tough to achieve FIRE despite having good wealth as the goal post keeps shifting.

In simple words, if you want to know how does a person who achieves FIRE looks like, its like this :
1. The person has a very good income

2. The person saved a very big portion of that income (often more than 60-70%)

3. The person is not extravagant and mostly lives a frugal and simple life (but not compromising on fun and desires)

4. The person makes sensible investment choices (often earning at least more than inflation)

5. The person has mostly created liquid assets and not blocked his money, because you need to generate cash flow at the end

5. The person is quite confident of managing the money post FIRE & earning decent returns (he won’t keep all money in FD)

What is COAST FIRE? : There is one more concept called Coast FIRE, which is something many of you may have already achieved.
A person is said to have achieved Coast FIRE when he/she has enough corpus already which will grow to FIRE corpus in the future without the need for any new investments. This simply means reaching a point, where you just have to earn money equivalent to your monthly requirements and wait for 5-10-15 yrs to achieve the actual FIRE.

This discussion above is just for basic knowledge. I would love to know what you feel about FIRE & what are your thoughts about it?

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EPFO subscribers are entitled to free benefits worth ₹ 7 Lakhs

EPFO subscribers are entitled to free benefits worth ₹ 7 lakhs.
All EPFO members are automatically enrolled for the EDLI Insurance Scheme which provides an assured life insurance cover of up to ₹ 7 lakh to legal heirs or nominees in the event of death of policy holder

All members of the Employee Provident Fund Organisation (EPFO) are also entitled to a free life insurance cover worth ₹ 7 lakh under the retirement fund body’s Employees’ Deposit Linked Insurance Scheme (EDLI).

The EDLI-EPFO comes with the benefit of an assured life insurance benefit of ₹ 7 lakh at no cost or premium paid by the members.

The nominee or legal heir of EPFO active member gets upto ₹ 7 lakh insurance cover in case of demise of the account holder during active service.

EPFO account holders are automatically enrolled for EDLI insurance under Employees’ Provident Fund (EPF) & Miscellaneous Provisions Act, 1976. There is no premium or other formalities involved to avail the facility. There is no exclusion & the insurance cover is decided by the salary drawn by the beneficiary during the last 12 months prior to demise. It is to be noted that employer pays 12% out of which 8.33% is diverted to Pension Fund. An employer also pays 0.5% of pay in EDLI Scheme.

The EPFO body time & again tweets about the facility & its features to make subscribers aware of the salient features of the scheme.

Few things to know about EPFO-EDLI Scheme : 
1. Maximum Assured Benefit : The maximum death benefit upto ₹ 7 lakh to the nominee or legal heir in case of death of the EPFO member during service. The maximum sum assured earlier was ₹ 6 lakh which was increased to ₹ 7 lakh subsequently from April 2021.

2. Minimum Assured Benefit : The minimum assured benefit for legal heir or nominees of an EPF subscriber is ₹ 2.5 lakh under the ELDI 1976. Sum assured is based on salary during the 12 months prior to the death.

3. How is sum Assured Calculated :  The claim amount under this scheme is 30 times the average monthly salary in the past 12 months subject to a maximum of ₹ 7 lakh. The average monthly salary is calculated as the Basic + Dearness Allowance of the employee. A bonus of ₹ 2.5 Lakhs is also applicable under this scheme The employer can opt-out of the scheme in case he takes a higher paying life insurance scheme for employees under Section 17 (2A). There are no exceptions to the insurance coverage provided by EDLI. It protects the insured person round the clock

4. Free for Employees : This life insurance benefit being given to the EPFO member is free of cost for the PF/EPF account holders. Their employer will pay 0.50 per cent of the monthly wages up to the ceiling of ₹ 15,000.

5. Auto-Enrolment : There is auto-enrolment provision for PF or EPF account holders. They become eligible for EDLI scheme benefit once they become an EPFO member or subscriber.

6. Direct bank Transfer : The EDLI scheme benefit will be directly credited to the bank account of the nominee or legal heir of the EPF or PF account holder. Note that an EPFO member is only covered by the EDLI scheme as long as he/she is an active member of the EPF. His/her family/heirs/nominees cannot claim it after he/she leaves service with an EPF registered company. There is no minimum service period for availing EDLI benefits. The employer has to make the contribution for EDLI & no fee can be deducted from the employee’s salary.

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Seven Annuity Options you can consider before opting for a Retirement Plan

Seven Annuity Options you can consider before opting for a Retirement Plan

The value of pension depends on the annuity option that you choose. So, one needs to carefully go through the plans and choose the one that suits his/her requirement the most.

While there are multiple annuity plans are available in India, mostly companies in India provide seven different annuity options to customers. The value of pension depends on the annuity option that you choose. So, one needs to carefully go through the plans and choose the one that suits his/her requirement the most. 

Here under explained seven annuity plans mostly offered in retirement plans. 

1. Annuity with return of premium on Death : 

In this option, the annuitant gets a fixed annuity payouts throughout his/her life. On his/her death, the initial amount paid to purchase the annuity is returned to the annuitant’s nominee.

Experts say this plan is suitable for individuals who have dependents & those who want to leave something behind for their loved ones.  Worth mentioning here is that an annuitant has to pay a higher premium to buy this option compared to other annuity options.

2. Joint life Annuity : 

This is the most popular annuity option opted by investors. Under this option, an annuitant & his/her wife get pension throughout their life. Under this option, an annuity is paid till at least one of the life assured is alive.

This plan ensures that you receive a regular income throughout your life & on death, your spouse will receive an annuity throughout his/her life. Also, joint-life annuity comes with a return of purchase price option, which is again a very relevant feature as on the death of both the annuitants, the nominee gets the purchase price.

3. Increasing pay Annuity : 

This annuity option is designed to help retirees beat inflation. As we all know the cost of living increases every year due to the general price rise in the economy or inflation. So every year retirees an increased amount to maintain their standards of living. In this annuity option, the payout increases at a fixed rate annually at a predefined rate, say 5%. 

By buying this annuity option, retirees can remain assured that they will be able to maintain their lifestyle even during their golden years.

4. Level Annuity :

This plan pays a fixed amount for life. This is not indexed with inflation & is not designed to take care of the inflation aspect. This is the most simplest form of annuity offered by insurers. This plan is suitable for a person who has invested a sufficiently large corpus in his annuity plan & believes that it will be enough to maintain his lifestyle & bear all their expense despite any increase in prices.

5. Annuity for Life : 

Under this option, pension is paid monthly, quarterly or yearly, depending on the option chosen by the annuitant throughout his life. The annuity proceeds stop only on the death of the annuitant.

As average life expectancy in India is increasing one needs to be prepared for long-retired life. Under this annuity option the risk of long retired life is secured financially by the insurer. This annuity option is suitable for every individual irrespective of occupation, age or gender since it tends to give higher returns.

6. Annuity payable for Guaranteed time : 

In this plan, pension or the annuity is paid for a defined period regardless of whether the individual dies during the specified term. Annuity stops either on the annuitant's death or once the annuity term ends. If you are worried about the risk of losing out on your investment due to an early death then you can go for this option.

7. Annuity with return of Premium on Survival : 

This option offers both life & survival benefit to the annuitant. Here, the annuitant gets back the purchase price of the annuity once he completes a predetermined age. This option ensures the investor receives guaranteed payouts throughout life. After completion of a predetermined age, say 80 years, the annuitant gets back his invested amount through the return of purchase price feature with annuity continuing subsequently. The survival benefit of this annuity option can help the investor manage any unexpected medical expenses arising due to old age.

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Mutual Fund Calculator : SIP's that can help you get ₹ 1 lakh pension Per Month

Mutual Fund Calculator : SIP's that can help you get ₹ 1 lakh pension Per Month

Mutual Funds investment can be used for post-retirement income as well. According to tax & investment experts, Mutual Fund SIP (Systematic Investment Plan) enables an investor to grow money for one’s post-retirement financial needs. However, if an investor uses this money wisely, it will help the investor continue earning post-retirement.

They say that like SIP, one needs to invest the mutual fund maturity amount in SWP (Systematic Withdrawal Plan) to continue earning on monthly basis.

On how to plan one’s monthly income post-retirement, “One needs to first ensure how much monthly income one would require to continue meeting one’s financial goals.

After that, there is need to assess how much amount one would need for SWP after retirement. Once, these two goals are finalised then comes how much monthly SIP will be needed to meet that post-retirement monthly income goal.”

Money required for SWP to earn ₹ 1 lakh monthly income for next 25 years, “One would need ₹ 1.35 crore amount for SWP to get ₹ 1 lakh monthly income post-retirement for next 25 years. Assuming 8% return on one’s money in SWP, the investor will continue to earn ₹ 1 lakh per month for next 25 years.”

However, that sometimes people want to retire little earlier and in that case one needs post-retirement income for longer period. If a person wants to retire at 55 years of age, then it would need ₹ 1 lakh monthly income for next 30 years. In that case, one’s SWP amount will go up to ₹ 1.43 crore.

On how to get ₹ 1 lakh income for next 30 years post-retirement, “Without assuming inflation post-retirement, an investor can start an SIP of ₹ 2,100 per month & increase the amount of SIP by 15% year after year. Assuming CAGR of 12% on investment, you will be able to accumulate around ₹ 1.43 crore.

If you invest the Corpus in SWP at 8% per annum, you will be able to withdraw ₹ 1 lakh per month for next 30 years.”

Mutual Fund schemes in which one can think of investing today are ICICI Prudential Focused Equity Fund, ABSL Equity Advantage Fund, Axis Midcap Fund, Nippon Small Cap Fund & ICICI Prudential Global Advantage Fund.

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Mutual Fund Transferability – Gifting & Transferring of Mutual Funds

Mutual Fund Transferability – Gifting & Transferring of Mutual Funds
Many people intend to gift Mutual Fund units to their closed ones as a token of love or even bequeath it to their loved ones after demise. However, there are certain complexities involved in this transfer process.

What are the benefits of Mutual Funds?
Investing in Mutual Funds is considered one of the best investment decisions for an ordinary investor looking to book capital gains in future. Also, since they have a long-term horizon of 5-15 years with guaranteed financial security, mutual fund transferability is a necessary process. We shall explore the feasibility & technicalities associated with gifting or transferring mutual funds to another owner.

Transfer or Transmission :
Units of a Mutual Fund are transferred to a surviving member in case of an untimely demise of the first holder, it is known as ‘transmission’ of Mutual Funds. On the other hand, a ‘transfer’ is said to happen when all the unit holders are alive.

a) Transfer of mutual funds is a grey area since as per the SEBI regulations, 1996, transfer of Mutual Fund units is allowed. However, the fund houses don’t let all the unit holders to transfer their units, en masse. The argument presented by them is that since these Mutual Fund units could be quickly sold & liquidated, there is ‘no point’ transferring funds.

b) Transfer of mutual fund units from one holder to another is quite rare. So the concept of gifting mutual fund units also is a hypothetical one &is practically not possible.

In fact, ‘third party’ payments are not accepted by mutual funds. In no way can one use his/her spouse’s money to invest in their name or vice versa. This might seem devious, but this is the only process one needs to follow in case one wishes to transfer mutual fund units. So if you want units to be in a relative’s name, then you need to transfer money first to the receiver’s account. You will then be able to use that amount to invest in the fund by their name.

The only scenario in which mutual fund units can be transferred to another is in case of the demise of the unit holder. This is usually in favour of a joint holder or a legal nominee to whom the transmission of a mutual fund unit takes place.

What are the legal documents needed?
In case of a nominee staking a claim to investment, the fund house asks for a set of legal documents.

1. Death Certificate of the Deceased. 
2. Letter from Co-Holder/Nominee.
3. KYC of the Nominee. 
4. Mandate to register the nominee's bank account. 
5. Indemnity bond if the amount exceeds 1 Lakhs.

As per SEBI’s circular, one would need a letter from a joint holder or a nominee (in case there is no joint holder). Also, the death certificate of the deceased unitholder, the Know-your-client documents of the nominee will be required. One would also need the bank account mandate to get nominee’s bank account registered, instead of the one that is already existent or the one belonging to the deceased unitholder. These documents might range from an indemnity bond if the invested amount exceeds Rs.1 lakh to an affidavit by the legal heir.

Starting a SIP for a Minor :
If you are looking at mutual funds to create a fund for your child, then it’s better that you start when they are a minor. You can buy MF units in your child’s name & choose the SIP scheme. The payments will be made into the account until your child reaches majority. The minor, i.e. your child, would be the first & the sole holder of the account & no joint holders are permitted under this scheme. You will act as a guardian until your kid reaches 18 years of age.

The AMC will send across a document before the date on which your child attains maturity. The document will act as a de facto application for changing the account for ‘minor’ to ‘major’ status. The guardian will not be allowed to operate the account anymore. Some other documentation like KYC, etc. will also be required for the process to be complete. Your child will then be able to reap the benefits of the MF investments you have made on their behalf.

SWP for Senior Citizens :
Our parents have looked after us all their lives. If you wish to do something beautiful for them, then look no further than investing in MF schemes with a monthly interest payment facility. Along with Rupee Cost Averaging, the SWP schemes also provide you with tax benefits as the prime investors.

Plus, it will give a fixed sum to your parents to help them meet their needs. So, instead of waiting for a transfer or transmission of your MF units, why not invest in a SIP/SWP scheme for your children or your parents which will be more effective in the long run?

Nine things you need to know before investing in Index Mutual Funds, ETFs

Nine things you need to know before investing in Index Mutual Funds, ETFs
While investing in passive funds, investors' decisions should not be driven by just expense ratio of the fund.

Key Highlights :

• Passive funds are not always safer
• Passive funds also underperform the index
• Tracking error & tracking difference in passive funds are not the same

Of late, more & more retail investors are getting attracted towards passive mutual fund schemes as actively managed funds have failed to outperform their benchmark over the last couple of years.
Looking at the investors' interest fund houses are lining up new ultra-low-cost index fund offerings. A few weeks back, Navi Mutual Fund created a buzz with its first offering—a Nifty50 index fund, which has an expense ratio of only 0.06%.
Index funds simply try to mirror the performance of their underlying index by holding the same stocks in the same proportion in which the index holds.
Despite this, index most funds fail to match the performance of the index they track.
Passive funds also have some drawbacks & advantages as well which investors should know before investing. 

Here are nine things investors should know about Index Funds & ETFs.
1. Passive funds are not always safer
Many investors are of the opinion that index funds or ETFs are safer than actively managed funds. Worth mentioning here is that both active funds and passive funds invest in equities, which by nature are volatile. So if the market falls index funds will also fall in line with the index. However, as index funds track a particular index, the quantum of fall may be lesser than active funds in general. But both active and passive funds carry market risk and can fall if overall markets fall. But the only difference in case of index funds is that their risk profile is consistent with the underlying index.

2. Passive funds also underperform the index
Although index funds try to mirror the performance of an underlying index, in most cases they underperform their benchmark. Returns of a passive fund are usually slightly lesser than the index it tracks, for multiple reasons. “The index itself is a theoretical concept and replicating it comes at a cost.” Worth mentioning here is that a fund's NAV is arrived at after deducting expenses. So more the expense ratio of a passive fund, the more will be underperformance. The cash position held by the fund also contributes to the gap in performance. Also, inflows & outflows in the fund lead to divergences in performance. This apart, tracking difference may also arise during rebalancing.

3. A passive fund can also outperform its Index
Sometimes, passive funds outperform their underlying index due to several reasons. Index funds having higher cash positions tend to outperform their index in case of market corrections. But if your fund is consistently outperforming its index—showing positive tracking difference then it is a matter of concern as it implies the fund manager is either struggling to mirror the changes in index or may even be taking unwarranted risk on the index portfolio. Experts say in a normal scenario, index funds are expected to show a nominal negative tracking error.

4. Tracking error & tracking difference are not the same
Most investors believe that tracking error & tracking difference of an index fund are the same. Typically investors use these two words interchangeably but these two are not the same. While tracking difference indicates the difference in return between an index fund & its benchmark index, tracking error signifies the volatility in the performance of the index fund relative to its index. tracking error is calculated by annualising the standard deviation of the tracking difference of an index fund. Tracking error captures the consistency in the fund’s tracking difference over a period of time. A high tracking error shows that the fund returns relative to its index keep varying widely & it is not a good sign.

5. Lowest expense ratio does not guarantee better returns
Typically investors tend to invest in the index fund that has the lowest expense ratio. But that does not guarantee better performance or lower tracking error. “Many other factors can still create a divergence between the fund & its index.” Funds with high expense ratios can also track the index better & funds with low expense ratio may clock high tracking differences. Obsessing over lowest cost index funds will be no different than yearning for highest return active funds. It traps you in the same endless pursuit. Just pick a fund with a reasonably low cost & stick with it for your investing time horizon, the publication mentioned.

6. There are additional costs in ETF other than expense ratio
Expense ratios of ETFs are even lower than index funds. But that does not mean that investors are better of buying ETFs. Unlike index funds, ETFs can be bought & sold on exchanges from other unitholders. So investors have to pay brokerage along with taxes & depository charges hide buying & selling ETF units from the market. These expenses increase the overall cost of holding ETFs.
Also, barring a few, trading volumes of most ETFs are very poor. This lack of liquidity often creates wide divergences between the fund NAV & the price at which it can be bought or sold. What you save in expense ratio is more than nullified by this impact cost. This gap is over & above the tracking difference common to both index funds & ETF's.

7. Watch out for creeping expenses
At present, expense ratio of passive funds are low as they aim to attract more investors. But there could be a surprise later when asset management companies achieve their target AUM. Passive funds are currently in their infancy & are inviting more assets by keeping costs very low. Recently, several index funds hiked their expense ratios. Tata Sensex Index Fund’s expense ratio increased 16 times from 0.05% to 0.8% in early April. HDFC Nifty & HDFC Sensex index funds now cost twice as much – from 0.1% to 0.2%. Similarly, UTI Nifty Index fund will charge a TER of 0.18% compared to 0.1% earlier. All these hikes were on direct plan variant, the regular plans already charge higher.

8. Bigger index doesn’t lead to greater diversification
Typically investors invest in passive funds that track a broader index such as Nifty 500 index to get the benefit of diversification. However, in real sense, this does not lead to greater diversification. Studies have shown that there is no incremental gain—in the form of lower risk—from diversifying beyond a point. In the same way, buying a broader index is not much different than buying a frontline index like Nifty50.
If you buy Nifty 100 index, theoretically, you do get 50 additional stocks but here the top 50 stocks enjoy a disproportionate allocation (84%) & the rest 50 stocks get lower allocation. So you don't get the desired benefit of diversification. The equal-weighted index will allow for more diversification in the true sense.
Similarly, if you are investing in a passive fund that tracks Nifty 500 index, large-cap stocks, account for a whopping 77% of the index, mid-cap stocks constitute 16%, while small-cap stocks make up the remaining 7%. Index funds based on broad market indices like Nifty 500 may not actually offer the diversification that investors are looking for as these indices are top-heavy.

9. Funds tracking beyond frontline indices don’t track well
Of late many fund houses have launched passive funds tracking small cap & multi cap indices. But tapping the broader market with an index fund or ETF can come at a steep cost, the publication mentioned. It may be noted that the tracking difference get bigger for broader index-based funds.
Over the past year, the gap remains up to 1% for bulk of the Nifty 50-based funds. It rises to 1.5% & beyond for the Next 50 index variants. The return differential increases to 2% for the Nifty 500 index & widens further for funds that are based on mid-cap & small-cap indices.
The main reason for this is the poor liquidity in the broader market. The low liquidity increases the impact cost, or the cost of executing a transaction.

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