When we invest in mutual funds, the profits we make are subject to taxes. The good news though is that, in many cases, this taxation is somewhat better (lower) than the regular income tax that we pay. The basic reason for this is that the government considers these profits as a different form of inflows/income compared to regular salary or interest incomes.
Understanding the impact of taxation is important – obviously, since our real returns from a mutual fund investment is what we get after tax. But, more importantly, understanding taxation will help us design our portfolio in a manner that could potentially reduce our tax burden and increase our ‘post-tax’ returns.
In this article, we will take a look at how such profits are considered, how taxation differs across mutual fund categories, what the actual tax rates are, and such other topics. This article, as in other articles in this series, has been written assuming very little prerequisite knowledge from the reader.
When it comes to mutual fund returns, two things are true for most mutual fund investors:
It is the most important thing for them
It is among the least understood set of concepts
An advisor may talk about all the nuances of mutual fund investments to an investor – risk mitigation, balancing, diversification, down-side protection etc – but at the end of the day, the person would only care about how much he/she would end up making.
And yet, when it comes to reading and understanding returns, they could make elementary mistakes. For example, once when I recommended an investor invest in a scheme for 5 years for optimal benefit, he said he would invest in it for a year, because “the fund has better 1-year return than 5-year return” – obviously going by the most recent numbers.
A good way to gauge the state of personal finance books that are India-centric would be to visit the ‘Book’ section of Amazon’s India website.
If you go to the American Amazon.com, you will find the ‘Business and Money’ section, under which you will find ‘Personal Finance’. Boom, done – you have access to a treasure trove on all topics PF.
If you go to the Indian Amazon.in, you will find a ‘Business and Economics’ section, and under that, you will find ‘Analysis and Strategy’, ‘Economics’, and ‘Industries’. If you, by power of logical reasoning and elimination, go into the first category, you will find, along-side books about American personal finance and self-help (Dale Carnegie!), a smattering of books by Indian authors to help Indian investors.
A handful, at best.
No doubt, this is an emerging section, but the current state of limited selection is properly captured by just browsing through these aisles.
Monika Halan’s ‘Let’s talk money’ is, especially in this context, a much-needed publication that addresses a sore need in the Indian market.
The mechanism of expense ratios in mutual funds is a befuddling topic for many investors. Over the years, questions associated with expense ratios have been among the most frequent that I have answered.
This essay is an attempt to answer questions on this topic in a patient and clear manner. But before we find out how it works, let’s understand a bit of what it is.
I like to approach my investing with the same mindset that I approach watching India play cricket abroad. The keyword there is ‘abroad’.
See, when India plays abroad (and I mean the SENA countries – South Africa, England, New Zealand and Australia), my expectations are low. When they do better, I am elated, and when they lose, I don’t get too depressed.
I think watching our investment portfolio should be the same. Having realistic expectation means, a boom market (like now) makes us real happy, but a downturn does not faze us much. There is, let’s just say, downside containment of our disappointments 🙂
On the other hand, if we look at our portfolio like watching India play at home (like right now), we expect too much, every defeat is a an unexpected disaster, and a win feels like just ok.
Not good feelings; And makes us act rashly with our portfolio (like ‘resting’ Rohit Sharma :-/ )
How do we form the right expectations, you ask? Glad you did – please read this article from our archives – it’ll set you right!
It’s not easy to impress me.
OK, that’s not true. I am not that hard to impress; so let me rephrase that.
It’s not easy to impress me a lot in a short time.
But that’s what happened today – I did not wake up on a Sunday morning looking to get impressed by the writings of a boomer professor in New York.
First, I watched a clip from Friday’s Bill Maher show (big fan) – one guy that spoke was very animated, and very impressive.
World over, planning and investing for retirement in a disciplined fashion is not the norm. However, western countries have a healthy social security net that would keep people out of really bad situations, and many such countries would have state-sponsored health coverage that would take care of the inevitable big bills in old age.
India has neither, at least not in a manner that will cater to a middle-class life-style and care aspirations here. Hence, planning, saving, and investing for retirement becomes a must-do activity during the earning years of an individual in India.
P V Subramanyam’s book – “Retire Rich – Invest Rs 40 a day” was the first book on this topic. The original version was published in 2011 and sold more than 150,000 copies, and is now available in a new edition (since 2019).
When I read non-fiction books, I keep myself daily minimum targets to get through it in reasonable time – at least 100 pages a day, or in some tough reads, 50 pages a day.
With Phil Knight’s ‘Shoe Dog’, I had to set for myself daily maximum reading targets – not more than 150 pages a day – so as to not let my other work suffer.
I could not, however, hold myself to the target – I finished the 400-page tome in a day and half flat. In one word, it’s ‘unputdownable’.
My partner from FundsIndia Chandra gave me the book 2 or 3 years ago and exhorted me to read it, and I’m ashamed I just got around to it. Of course, as with the other books I am reading these days, I am wishing this book existed and I read it, 15 or 20 years ago.
“The Compound Effect” by Darren Hardy explores the power of compounding in our everyday lives – our habits, our goals, our routines, our successes, and failures. The central premise of this book is simple enough – “Everything compounds. It is up to us to choose the direction that it happens in our lives”.
Most best-selling books on investing and personal finance are from the west (mostly US). With such publications, readers in India will need to do some