What are Capital Assets?

Anything you own, whether for personal or for investment purposes, is referred to as a capital asset. It includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating. Capital assets can be classified as financial assets (bonds, stocks, etc.) and non-financial assets (real estate, machinery, etc.).

What is a Capital Gain?

When you sell your capital assets for a higher price than you bought them at, the difference is a capital gain. Any income from the sale of a capital asset made in the previous year is taxable under the head ‘Capital Gains’.

Mutual Funds are capital assets, so any income from the sale of Mutual Funds is classified as a capital gain and is taxable.

What is Capital Gain on Mutual Funds?

The profit you generate when you sell or redeem your mutual fund units are referred to as capital gains on Mutual Funds. There are generally two types of capital gains decided by the period of holding: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The tax applicable on these capital gains is referred to as ‘Capital Gains Tax’.

What’s Short and Long Term

1. Short Term Capital Gains (STCG)

If you sell any units in an Equity Mutual Fund scheme within a year of purchase, your gain will be considered as a short-term capital gain. For anything other than Equity funds (eg Debt, Liquid, etc), this is slightly different. The holding period needs to be less than 3 years for the gains to be considered as short term capital gains.

2. Long Term Capital Gains (LTCG)

If you decide to wait it out for more than a year on any investments in an equity mutual fund scheme, the profits on your investment will be considered as long term capital gains. Again, with debt funds, you’ll need to hold on to them for more than 3 years for the gains to be considered as long term capital gains.

Capital Gains Tax Rates on Mutual Funds

1. Equity funds: On equity funds, your short term capital gains will attract a 15% capital gains tax. No tax was charged on long term capital gains until January 31, 2018, but currently, long term capital gains are taxed at 10%.
2. Debt fund: You pay short term capital gains tax on debt funds as per your current income tax rates (10, 20 or 30%). Long term capital gains however, are taxed at 20% (with indexation benefits). Indexation is a process used to adjust your original cost upwards by means of a government issued index. This helps you adjust for inflation over the period you’ve held your capital assets - reducing your tax liability.

What Happens to Dividends?

1. Equity mutual funds: The dividend earned used to be completely tax-free until Budget 2018. This has been increased to 10% from April 1, 2018 in line with the long term capital gains tax applied on equity mutual funds in the 2018–19 budget.
2. Debt funds: Your dividend income from debt funds is also tax free in your hands, but the Mutual Fund house has to pay tax before distributing the dividend to you. This tax is called dividend distribution tax (DDT). The dividend distribution tax on debt funds is set at 28.84%.

What Happens to Capital Gains Tax after the 2018–19 Budget?

With the Budget of 2018–19, the tax for long term capital gains on equity mutual funds moved from 0% to 10%. This applies if your gains are over Rs 1 lakh in a year and does not bring any indexation benefit with it. However, any long term capital gain before January 31, 2018 will not be taxed.

For instance, if you bought units in an equity Mutual Fund on July 31, 2017 and you made a gain of 15% till January 31, 2018. If you redeem this Mutual Fund on July 31, 2018, you will pay long term capital gains tax on only the gains after January 31, 2018.

Do check out our post on how fast your money can grow for more insights.

Capital Gains on Mutual Funds Explained was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

Calculate your expenses, set realistic targets and prepare for contingencies.

If you’re wondering how much of your income you need to set aside for a secure future, the answer is … as much as you need to support your lifestyle.

Follow the 50–30–20 rule of thumb.

Spend 50% on necessities (rent, food, transport, education), another 30% on things you want or enjoy (“discretionary expenses”) and save the remaining 20%.

#1 — Start early

• Start saving as soon as you can. The sooner you start, the earlier you’ll reach your savings goals.
• The power of compound interest works in your favour. Give your money time to grow, and you will reach your goals faster.

#2—But not before settling your debts

• First, let’s understand what happens when you borrow money to buy something. You accelerate your consumption — you spend today with tomorrow’s income (at a high cost, of course).
• The high interest rates on your credit card (up to 3% a month) just can’t be made up by your investments! Borrowing at such high rates leaves you much poorer off then when you started.

Do you have a debt to settle? Pay it off first.

• If you have low-interest-rate loans (such as a student loan or an agricultural loan), consider investing in a debt fund where the interest you earn exceeds that the interest you pay out. That’s smart money in your pocket!

#3— Create an emergency fund

• Make sure you have at least four months’ worth of living expenses stowed away in an immediately accessible bank account or in liquid or ultra-short term funds.
• This is your emergency fund and you must able to withdraw it immediately at will. Be mindful that you use it only in times of real emergency, such as unexpected medical bills or the loss of a job. Keep this money in a separate bank account or a fixed deposit so that you don’t touch it without good reason to.

#4 — Set targets based on needs

Calculate how much money you’ll really need for short-term and long-term expenses.

• Say, you need to buy a ₹ 12 lakh car five years from now. You need to save ₹ 20,000 a month for five years to reach your goal.
• But if you were to invest your savings and instead earn, say, 8% on them, the amount you need to save each month to buy your car in five years drops to ₹ 16,350 a month.
• You’d also have to account for taxes on returns, which vary depending on the time period of your investment and the tax slab applicable to you.

You can use our cool calculator tool to find out how much your money would amount to at 8% a year. We think 8% is a reasonable number to expect in light of current interest rates and economic growth.

#5 — Save for retirement

Its never too early to start saving for retirement. We all dream of a life where we don’t have to work for money anymore, and our money works for us instead! The key to a successful retirement is to start early. Our calculator shows you that the earlier you start saving, the more you’ll have when you retire!

So if you’ve always dreamed of buying a round-the-world ticket on your 70th birthday, or setting up an education fund for your grandchildren, start saving for it now.

How much of my income/salary should I be saving? was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

Timing the market is like catching a bus that comes and goes as it pleases. If you were to buy or sell all your stocks at one go, you could lose money in the event of a sudden downturn. You could also be late to catch the market on an upswing — and miss out on an opportunity to make money.

A SIP, or a Systematic Investment Plan is a safer, more disciplined investment approach.

A SIP lets you automatically invest a predetermined amount at regular monthly or quarterly intervals in your chosen Mutual Fund scheme. It protects you from the ups and downs (volatility) of the market and helps you develop a habit of saving and investing.

How SIPs Work? Fixed investment amounts at regular intervals.

Think of SIPs as EMI deductions (in the sense that they are debited from your account at fixed intervals) — but with the difference being that these are actually investments instead of expenses. This means you will buy units of a mutual fund (or stocks) on a given date on a monthly (or quarterly, bi-annual, or annual) basis. In other words, SIP help you to customize your own savings plan.

You can invest a fixed amount in a scheme every single month through a post-dated cheque or an ECS mandate/auto-debit facility. All you have to do is fill in an application form and a SIP mandate form specifying your SIP date (the date on which your investment amount will be deducted automatically from your account). The completed forms and the cheque should be dropped off to the office of the Mutual Fund or the nearest service centre of the Fund’s Registrar & Transfer Agent.

What Are The Benefits of a SIP?

1. Rupee-Cost Averaging: This eliminates the stressful work of continually monitoring market ups and downs. With rupee-cost averaging, you invest a fixed amount at regular intervals regardless of the Mutual Fund’s Net Asset Value (NAV). As a result, when the NAV goes up, you buy fewer units and when the NAV comes down, your money buys more units. This is exactly what savvy investing is about: buying more when the price is lower and buying less when the price is higher.

Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who does not … pays it - Albert Einstein

2. Power of Compounding: A SIP allows you to remain invested in the market over a longer period of time in order to reap the money-making potential of compounding.

3. Disciplined Saving: The key to wealth creation is discipline. A SIP helps you develop a habit of disciplined saving that is crucial to your investment success.

4. Safety: A SIP enables you to invest in smaller amounts over a longer period of time rather than going all in with a lumpsum investment at one go. This protects you from market volatility and reduces the effects of market dips and rallies on your investment.

5. Flexibility: You can discontinue a SIP and cash in on your investment at any time, although this isn’t advisable, of course. Most schemes also allow you to increase or decrease the amount of your investment depending on your goals and strategy.

6. Investing little amounts: SIPs enable even smaller investors to buy equity Mutual Funds, since the minimum investment in many funds can be as low as Rs 500. Online advisors like Clearfunds let you easily click a button to change your investment amount and how often you invest when you get a big bonus or have an unexpected expense.

7. Discipline: A SIP instills investment discipline, as the amount to be invested is deducted automatically from the investor’s bank account.

A SIP is a hassle-free method of investment for those who lack the knowledge or the time to actively invest in the equity market. A SIP protects an investor from the ups and downs of the market, compounds your wealth over time and instils a disciplined saving habit that is crucial for investors to achieve long-term investment goals.

What is a Systematic Investment Plan? was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

Direct Mutual Funds give you fewer units than Regular Funds, but better returns.

Every Mutual Fund in India comes in two versions — a ‘Regular Plan’ and a ‘Direct Plan’. Both offer the same scheme, run by the same fund managers, investing in the same stocks and bonds. The only difference is that Direct Mutual Funds give you better returns for the same investment.

Here’s how.

The Regular Plan

A Regular Plan is one in which your broker earns a commission on the amount of money you have invested in a mutual fund. Who pays your broker — the Mutual Fund company. However, here’s the catch. This commission comes out of your investments, although you never write a cheque for it.

The Direct Plan

In a Direct Plan, no commissions are paid to anyone. What you save on commissions ends up being added to your investment in that Mutual Fund.

Now that bit about better returns on Direct Plans …

• A Regular Plan and a Direct Plan of the same Mutual Fund Scheme will have different expense ratios (expense ratio is a fancy word for annual fees)
• The expense ratio of a Direct Plan is always lower because there is no commission to be paid out to brokers — and what a saving that is!
• Your agent might say that these commissions don’t matter in the long run. After all, he only earns a ‘small fee’ for his services. But this ‘small fee’, over the long run, is a large amount of money. After all, if you
• This large amount of money that you have saved by taking the broker out of the equation is added to your returns. This is why the Net Asset Value (NAV), or price, of a Direct Plan is always higher.

So as a savvy investor, shouldn’t you buy the plan that has a lower price or NAV, in other words, the Regular Plan? The answer is no.

A Regular Plan has a lower NAVs than Direct Plan but is a worse deal!

A Regular Plan might look like a better deal because it gets you more units for the same investment, but it isn’t. Direct Plans will always give you better returns on your savings. Here’s how:

Say, you have a budget of Rs 1,000 and you need to buy watermelons.

• The fruit-seller has two varieties — smaller watermelons that weigh 70gms, and bigger ones that weigh about 100 gms. Of course, they’re priced differently.
• The smaller watermelons are priced at ₹25 each, while the bigger ones cost ₹31.25 each.
• This means your budget can get you 40 smaller watermelons, or 32 larger ones.
• Would you buy 40 watermelons of 70 gms each (40 x 70 = 2,800 gms) or 32 watermelons of 100 gms each (32 x 100 = 3,200 gms)?
• You’d go with 32 watermelons intead of 40 because you’re getting 400 gms more. The number of watermelons doesn’t matter here. What matters is how much watermelon you’re getting for your money, and not how many watermelons.

Let’s now look at this when you invest in Mutual Funds:

• Let’s say you invested ₹10 lacs each in Direct and Regular Plans of the same Mutual Fund.
• The starting price or Net Asset Value (NAV) of a Regular plan is ₹90 and that of the Direct Plan is ₹100.
• You’ll receive 11,111.11 units of the Regular Plan and 10,000 units of the Direct Plan.
• Assume annual returns of 20% on a Regular plan and 20.75% on a Direct Plan (the Direct Plan will have lower costs, and this will get passed on to its investors in the form of higher returns).
• After a year, the NAV of the Regular Plan will increase to ₹108 (20% on ₹90) and the NAV of the Direct Plan will be ₹120.75 (20.75% on ₹100).
• So after a year, your investment will be valued at ₹12,00,000 in a Regular Plan and ₹12,07,500 lacs in a Direct Plan.
• As the returns on the Direct Plan are always higher, the difference between both NAVs will continue to increase, only getting bigger with time.

The returns on the Direct Plan are always higher and the difference between NAVs of Direct and Regular Plans will continue to increase, only getting bigger with time!

How do you Invest in a Direct Mutual Fund Scheme?

1. Online: At Clearfunds, you can invest in Direct Plans for any Mutual Fund of your choice. The Clearfunds team does all the research and analysis in order to recommend funds that are best suited to your investment plan and strategy. We receive no commissions from Mutual Fund companies, which means all your returns are yours alone. Simply log on to the Clearfunds website to get started!
2. Offline: If you’re not comfortable with online transactions, you’ll need to visit the office of the mutual fund you are interested in and submit a purchase or SIP registration form. Remember to mention ‘Direct Plan’ in front of the scheme name, to avoid any confusion.

Offline process are generally time-consuming, will require more paperwork and supervision and will need more visits to the Mutual Fund Offices. So get online (it’s 2018!) and try something different. You won’t be disappointed.

If Direct Mutual Funds Give You Lesser units, How Do They Deliver Better Returns Than Regular… was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

Budget yourself, invest and reduce your tax spend

Dreams cost money. Whether it’s the next car you’re planning to buy, the next vacation or a stress-free retirement plan, you need to think about balancing your expenses against your income right from the start. Here’s how you maximize your savings, in three easy steps.

#1 — Prepare a budget

• Take a note of your monthly expenses, sorting them into three broad categories: essentials, discretionary and luxury expenses.
• Cut down on non-essential expenses. You can’t escape the monthly rent, or paying your child’s school fees, but you can certainly weed out the new phone upgrade, or catch a movie on the weekend instead of splurging on drinks and dinner.
• Set aside anywhere between 10 percent and 20 percent of your monthly income as savings. Most important, don’t let your saved money sit around idle. Invest.

#2 — Invest in the right instruments

• You could invest your savings in a recurring or fixed deposit, but there are other options available with better returns ….
• You can invest your money in mutual funds for as long as you’re comfortable. If it’s a short-term goal you’re after, park your money in a debt fund. If it’s the long-term you have in mind, opt for equity funds. For the medium term, your investments should be a mix of debt funds and equity funds.

#3 — Maximize tax savings via salary structures

Tax-saving investments are a great option, not just from an investment point of view but also because they reduce your taxable income. Employee Provident Funds (EPF), Public Provident Funds (PPF), National Pension Scheme (NPS), 5-year tax-saving fixed deposits, ELSS, ULIPs, Life Insurance, etc., all help you save on income tax under section 80C of the Income-tax Act. You could also save on taxes by negotiating with your employer for a tax-friendly salary structure, or for terms of service that help you save on tax. For instance:

Structure your Salary in a tax-friendly manner

House Rent Allowance (HRA)

The HRA is a component of your salary structure. You can ask your employer for an HRA to decrease your taxable income. The HRA is not fully taxable — it is exempted under Section 10 (13A) of the Income Tax Act. This exemption can reduce your taxable income and thereby increase your net income. Note, however, that if you’re not living in a rented house, HRA will remain fully taxable.

Leave Travel Allowance (LTA)

The LTA is one of the best tax-saving instruments out there. As the name suggests, it is an allowance paid by your employer when you are traveling on leave with your family, or on your own. The LTA is exempt from tax under Section 10(5) of the Income-tax Act. Note that you are only eligible for LTA if you travel within India.

Children’s Education Allowance

This is ideal for working parents. The government of India allows you an income-tax exemption on tuition fees for your children. The maximum deduction on tuition fees is capped at Rs 1.5 lakh under Section 80C (together with the deduction on insurance, provident fund, pension etc. in a single financial year). Note that this is applicable regardless of whether your children are biological or adopted, and regardless of your marital status.

Employee Provident Fund (EPF)

The EPF scheme is designed to promote retirement planning and saving for employees across India. If you withdraw your EPF before you complete 5 years of service, the withdrawal is taxable. Post 5 years, your EPF is totally tax-free. The interest earned by you on EPF funds is tax-free as well. The latest EPF interest rate stands at 8.65% per annum for the year 2017–2018.

Savings on Capital Gains

You can reduce your net taxable capital gains by taking a closer look at the taxation laws around them. For example — if you’re invested in the equity markets, holding on to your investments for a year will result in your gains being taxed at 10% instead of 15% — with an additional bonus of the first Rs 1 lakh in gains being completely tax-free.

For other assets, you also stand to benefit from indexation advantages.

Maximize Your Monthly Income Now

All these tax savings (and the increase in your monthly income) exist only on paper until you invest. Invest as early as possible, pick the right mutual funds, the right tax saving instruments, and get started.

Take a look at Clearfunds if you haven’t already!

Maximize your monthly income was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

Investing smartly sounds harder than it really is. Follow the Ten Commandments of Investing. Legendary investors like Benjamin Graham and Warren Buffet have used these to great success, and you can, too.

#1 — Law of the farm

Warren Buffett famously said, “The stock market is a device for transferring money from the impatient to the patient.”

If you’re confident about your choice, give it time.

Equity investments can take time to show growth. Of course, there’s a chance that the stocks or funds you invest in fail to deliver expected results, but often enough, stocks take time to appreciate in value. Acting in haste to remove a stock from your portfolio may turn out to be a reckless move that you repent at leisure.

#2 — Volatility cannot be avoided

You can’t expect a ride in the stock market to be uneventful. The stock market has always been a volatile space, and this strikes fear in the hearts of potential investors.

But it is precisely this volatility that could be exploited for gain if you follow some time-tested investment principles. You should invest in bearish times. During a bear market, stock prices of fundamentally good companies drop to attractive levels. The stock prices of these companies typically bounce back when the economic climate improves.

#3 — The ‘Best’ Time to invest?

The best time to plant a tree was 20 years ago. The second best time is now.

You can’t (and shouldn’t) wait for the perfect time to invest. There are opportunities everywhere if you’re willing to look. You’ll always find some undervalued stocks even in a bull market. And in a bear market, when inexperienced investors generally avoid buying stocks out of a fear that prices will plummet even lower, you can find great stocks at bargain prices. Take care not to get greedy. You should avoid buying overpriced stocks in the unfounded hope that their prices will go up further.

#4 — Guessing tops and bottoms is a waste of time

Every investor dreams of buying at the bottom and selling at the top. But as all dreams go, this one is near-impossible to achieve. A more realistic and achievable aim is to invest in fundamentally good stocks when their prices are low. Studies prove that staying invested over a stock market cycle and eliminating unnecessary punting is a recipe for a happy investor. It also makes you wealthier in the long run. You are better off studying investment strategy and finding new companies to invest in rather than trying to time the market.

#5 — Take a look at Mutual Funds

Even if you’re not trying to time the market, picking the right stocks is hard work. This is especially the case when you aren’t good with numbers.

This is where equity mutual funds come in. These funds pool capital from multiple investors and invest on your behalf. They’re managed by highly qualified fund managers, offer a diversified portfolio and deliver great returns at a reasonable cost.

#6 — SIPs: The ‘auto-pilot’ of investing

An ideal way to invest in mutual funds is via Systematic Investment Plans (SIPs). A fixed amount is invested in a mutual fund of your choice, on a predetermined date every month. SIPs help you to become a disciplined investor, and reduce some of the stress associated with timing the market.

#7 — Stock valuations vs. stock values

When the market goes up dramatically, many investors end up selling their holdings fearing a market correction. We’ve already discussed how timing the market is futile. These investors often miss out on the opportunity to generate even more gains. Remember to stay invested in a stock as long as the company earnings and its fundamental valuation support the stock price. You should sell your stock only when you feel that its price have exceeded its value.

#8 — Want excitement? Look elsewhere

Fluctuations in stock prices are exciting for some investors, terrifying for others. Your investment decisions shouldn’t rely on these ups and downs. Stick with basic investment strategies. A quick fluctuation in the wrong direction could end up making you exit at a loss.

#9 — Envy — The enemy of investing

Your investment decisions should never be influenced by envy. Avoid emulating the strategies of other investors around you in the hope of making a quick buck. Their goals or investment horizons may be different from yours. Worse — they may have timed their investments well, and it may be a bad idea to do what they did now. Think hard before taking investment decisions and keep your own goals in mind.

#10 — Emergency funding first… Investments later

The basic principle of equity investing is to give up something today for a better future. However, giving up too much can hurt you in an emergency when you need liquidity to pay a hospital bill, for instance, and your money is locked up in a fund. Invest only after setting aside for contingencies. Equity investments may also suffer periodic declines in value. Be patient and your patience will be rewarded in the long run.

Get Started Now

Investing with these principles can go a long way toward building a successful and healthy portfolio. It’s also important to keep policy changes in mind when planning your investments— such as the change in long term capital gains tax. A well-planned investment strategy based on sound principles can grow more rapidly than you think.

The 10 Commandments Of Investing was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Finance Bill, 2018 has introduced two major tax changes to Equity Mutual Funds — 10% tax on Long Term Capital Gains above ₹ 100,000; and 10% Dividend Tax.

Equity Mutual Funds bought on or before January 31, 2018

Any notional long term gains until January 31, 2018 have been “grandfathered” or exempted while calculating for long-term capital gains. So you can assume the new cost of holding your Equity Mutual Funds is the closing price on January 31, 2018.

Don’t forget that the exemption of ₹ 100,000 applies to all your Equity Capital Gains — across Stocks and Equity Mutual Funds and not just investment in one scheme.

Equity Mutual Funds bought on or after February 1, 2018

Short-term Capital Gains stay taxed at 15%, while you pay Long-Term Capital Gains on amounts greater than Rs. 100,000 in a financial year.

Debt Mutual Funds

There is no change to the taxation of Debt and Liquid Mutual Funds. You need to hold them for three years to be considered Long-Term, and you get the benefit of indexation when calculating your new cost. Indexation considers rise in inflation between the year in which you purchased the debt fund units and the year when you sold them — it allows the tax on debt fund gains to come down significantly.

What are Equity Oriented Funds?

The Income-tax Act defines Equity and Equity Oriented Mutual Funds as those investing in a minimum of 65% in Indian listed stocks.

• Categories such as Large-cap, Small and Mid-cap, Flexi/Multi-cap, Tax Saving (ELSS), Arbitrage, Balanced, and Equity Income funds are counted as Equity Oriented for tax purposes.
• So funds that primarily invest in International Equities are not considered as Equity Oriented for tax purposes.

Which investment option should you now choose — Growth or Dividend?

Our simple rule is: When in doubt, always pick Growth. But this doesn’t apply all the time — so we put together a quick guide to help you choose.

How the new Equity Long Term Capital Gains Tax Works? was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

The Finance Bill, 2018 has introduced two major changes to Equity Mutual Funds:

Gains on Equity Mutual funds now taxed at 10%

Any Long Term Capital Gains (LTCG) over Rs 100,000 per year on Equity Mutual funds will now be taxed at 10%.

All gains until January 31, 2018 have been “grandfathered”. So you can assume the new cost of holding your Equity Mutual Funds is the closing price on January 31, 2018. The start date of your holding remains the original purchase date.

Dividends on Equity Mutual funds now taxed at 10%

Once the Finance Minister decided to introduce Long Term Capital Gains on Equity Mutual Funds, he had to tax dividends at the same rate. Not doing so would have meant that one could avoid taxation on Equity Mutual Funds by switching to Dividend options.

As a result, all dividends in Equity and Equity Oriented Funds will now be taxed at the rate of 10%.

A summary of the new tax structure is below:

But wait, don’t forget that you need to pay a Surcharge based on your income. And the new Health and Education Cess of 4% (earlier 3%) is applicable to all taxes.

Which option should you now choose — Growth, Dividend Reinvestment or Dividend Payout?

Picking between Growth and Dividend depends on how long you plan to stay invested — and your current tax rate. When in doubt, apply the simple rule:

Always pick Growth. Pick Payout if you need a regular income.

The compounding effect of having your dividends reinvested gets really dramatic as time goes on. Over longer investment periods the decision to select the growth option and could mean tens of lakhs of rupees in additional investment returns. We’ve prepared a handy table below which explains how we would select between Growth and Dividend for our own investments.

If your current income tax rate is 30%, you would be better off picking the Dividend Payout option as your dividends are taxed at a lower rate of 29.12% as against your income tax rate of 30% (plus surcharge and cess)

This article first appeared on Moneycontrol.com on February 1, 2018.

The Quick Guide to Mutual Fund Tax Changes, 2018 was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

Asking the right investment questions — with the Rule of 72, 114 and 144

We often have questions on the returns we would get on our investments. What does 8% a year actually mean in 10 years? Or what does doubling your money in 6 years mean in percent terms?

Here are three quick-and-easy rules to estimate your returns without scientific calculators and spreadsheet programs. These rules apply well to exponential growth and are therefore used for compound interest as opposed to simple interest calculations.

The Rule of 72

Familiar with how investment advertisements talk about ‘doubling your money’? The rule of 72 deals with just that. It’s a method for estimating an investment’s doubling time.

Divide the number 72 by the interest percentage per year to obtain the approximate number of years required to double your money.

Consider a mutual fund that has historically given 16% annual rate of return. Plug that into this rule, and you’ll see that your investments took 72 ÷16 = approx 4.5 years to double.

The Rule of 72 is one of the most useful tools a new investor can use because it makes it quick to estimate both — the number of years needed to double your money at a particular interest rate, or the rate of return needed to double your amount of money in a certain number of years.

(Tip: You can also use the Rule of 72 to find out the amount of time it takes for money to halve due to inflation! If inflation is running at 6%, then a given amount of money will be worth half as much in 72 ÷ 6 = 12 years. And if inflation decreases from 6% to 4%, your money will lose half its value in 18 years, instead of 12 years.)

(Expert tip: The rule of 72 is a generalised rule of thumb, but there are a number of variations to the rules that improve accuracy. For instance, 69.3 is used for continuous compounding calculations to improve the accuracy of the result.)

Rule of 114

The rule of 114 works just like the rule of 72 but with a slight difference. It’s a short-cut to estimate the time it takes for your money to triple.

To estimate how long it takes to triple your money, divide 114 by your expected interest rate (or rate of return). If you use the same 16% return in the example above, 114 ÷ 16 = 7.125 years for your investments be worth 3x original amount.

Rule of 144

As you may have guessed by now, the Rule of 144 is used to estimate how long it will take to quadruple your money.

Again this rule is a rough estimation and does not provide an exact figure, but it is useful for investors to easily get a rough estimate of their returns.

At the end of the day, these tools are just mental-math shortcuts! An investment that grows at 8% each year takes 9 years to double, while one that grows at 7% a year, doubles in 10.3 years. Just 1% more means…

One-and-a-half year more of your money working for you, rather than you working for money!

You can add this 1% each year to your returns merely by investing in the Direct Plan of a Mutual Fund. As with all investments, it is prudent to study all your options and choose one which makes most sense to you and your preferences. In fact, it’s great if you get some financial advice before finalising as well.

It can also be incredibly helpful if you’ve got someone making the process easier for you. At Clearfunds, we’ve been working on just that — offering you the option to invest in over 3000+ funds from 36 Fund Houses, with one simple registration, so you can find and select the fund that is just right for you! Happy investing!

How fast will my money grow? Three quick rules was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.

It’s never too late or too soon to start investing. If you have money to spare, it’s always good financial karma to invest rather than splurge on things you don’t need. With investing, there’s no time like the present!

Before you begin

• Save two to four months worth of living expenses in a readily accessible place. This is your emergency fund to meet unpredictable and unforeseen expenses such as sudden medical costs. You could deposit this amount in a savings bank account separate from your other accounts. If you’re in a secure, public sector job, you might consider saving only two months worth of expenses rather than four!
• Pay off any high interest loans. If you have any credit card loans (which typically carry an incredibly high rate of interest), you should pay that off before investing in Mutual Funds. If the interest rate on your loans is low (a subsidised student education loan, for example), you could consider investing in a very low risk instrument such as a Liquid or Ultra short-term debt fund which could earn you some money over the interest rate on the loan itself.

What should I invest in?

There are broadly four types of financial investments: Equity (or stocks), Fixed Income instruments (bonds, debt, or bank deposits), Commodities (such as gold and silver) and Real Estate (or property).

• Unless you’re a financial expert with the time to monitor your investments regularly, you might not want to directly invest in a particular stock or commodity.
• Mutual funds are well suited for working individuals without the expertise or time to manage their investments. Mutual funds are managed by market experts, called “fund managers” who look after your investments full-time, so you don’t have to. You can either invest as a “lump-sum” every once in a while or invest a part of your savings every month in a Systematic Investment Plan (SIP). A SIP lets you automatically invest from your bank account so that you’ll never forget an instalment.

Choose your investment portfolio. All investing carries risks. But a simple 50/50 strategy that works over time is to invest 50% in a lower-risk debt mutual funds that beat your bank’s fixed deposit rates, and the remaining 50% in equity funds that offer a higher return but are more volatile (higher ups and higher downs).

How early should I start?

Long-term compounding is an investor’s best friend, so why get in its way -Guy Spier

Start as early as possible. In fact, right now would be nice. Why? because investment returns compound over time. The power of compound interest makes an amount that seems small now, result in huge returns over time. Here are some examples:

25-year old investing Rs 5,000 a month until retirement at age 65

• Amount Invested: ₹ 21 lakhs (₹ 60,000 x 35 years)
• Retirement pot 35 years later @ 8% per year: ₹ 1.08 crore
• Wealth gain: ₹ 87 lakhs

Fairly impressive, innit? But if you start just 10 years later at the age of 35, your money has less time to grow

35-year old investing Rs 5,000 a month until retirement at age 65

• Amount Invested: ₹ 15 lakhs (₹ 60,000 x 25 years)
• Retirement pot 25 years later @ 8% per year: ₹ 46 lakhs
• Wealth gain: ₹ 31 lakhs

See that? You invested ₹ 6 lakhs less, but your total retirement pot went down by more than half! All because you started ten years later — in your mid-thirties instead of your mid-twenties.

Convinced? Get started now on Clearfunds!

How early should I start investing? was originally published in Blog | Clearfunds on Medium, where people are continuing the conversation by highlighting and responding to this story.