Tax system is complex. Each year a thousands of people struggle to save tax but end up paying more than they actually should. If you too are amongst such taxpayers, you must seek advice from a tax specialist or an accountant who would guide you on how to deposit your tax wisely. Besides, you may also reduce your income taxes by owning a home business. Here’s how?
Let’s suppose you have a full-time job but you are also a travel consultant who runs a small business at home. So now since you run a business from home, you must be using a car to travel back and forth possibly to drop off your business advertising pamphlets. It could also include your supermarket visits, grocery shopping, etc (coincidentally) while on the way to post a flyer or meet some client related to your business, which makes 90% of your automobile expense tax deductible. In view of the fact that you have an office in your house, you claim at least 30% tax deductions from mortgage interest, house maintenance, water bill, electricity bill, rent (if you don’t own a house), repairs made in your house for business, etc. The use of telephone, internet and any other facility that is required to conduct a business from home can also be claimed as business deductions.
Furthermore, if your business requires you to travel to places within or outside India, your airfares, meals while traveling, hotel accommodation, car rental, the purchase of any types of equipment like video, camcorder and cell phones are other essential tools for your travel business that will be entirely tax deductible. This way you can save a lot of money that you would otherwise use to pay taxes. However before taking the plunge and claiming tax deductions from your home-business make sure you meet IRS qualification that states that your home should be your principal place of business. However by any chance, you operate your business from a separate location other than your home; you cannot claim deductions for use of your home. Still, IRS determines a few factors to approve the deduction:-
1. The relative importance of activity that is performed at each of your business location
2. How much time you spend at each of your business location
If you manage your business solely from home, you’ll have to abide by the following clauses:-
1. You use the business place at home solely for business activity, management and administrative purposes.
2. Apart from your home, you have no other fixed place to conduct the business management and administrative work. However, you may do some business related work outside your home. For instance, your car.
Other than this, to get the IRS approval, you are required to prepare an IRS audit that ensures that you are not violating any rule or regulation and your home office is used "regularly and exclusively" for business purposes. One important point to note is that home business deductions are limited. You can claim deductions for your home business expenses to reduce your business income for the year, but if you had a business loss, these deductions are not possible in any circumstance. Also, not all home businesses are treated the same and may reduce your yearly taxes. There are special rules applicable to daycare business operations and if you use your home for storage space, you must seek advice from an accountant or tax attorney to come up with a better tax-saving alternative.
Monday, March 19, 2018
Wednesday, February 14, 2018
Five Easy Blogging Tips For A Profitable Blog
Creating
a blog is an easy way to get started making money online. However, as with any
business, you need to keep your eye on your blog's profitability. If you're new
to blogging, these five tips will help you to make money with your blog.
1. Set blog goals
Ideally, you should set your blog's goals before you create your blog. If you set your goals first, you will be able to estimate the potential traffic you can attract to your blog, and therefore the amount of income you're likely to make.
So before you create your blog, write down:
* Your blog's topic (for example digital photography, photo retouch or diet tips, or whatever topic you'd like to create a blog about);
* Use keyword research tools to discover how many people are searching for your blog's topic online each day:
If there are fewer than 100 searches, look for another topic. Don't shy away from topics which have lots of competition online - lots of competition means that there's a lot of interest, and a lot of traffic too. So if your topic has 5000 search a day, and millions of Web pages, go ahead and create your blog.
* Decide how you will make money from your blog. Will you sell advertising space? Sell products? Make a list of revenue streams for your blog;
* Estimate the income your blog will make in your first, second, third and fifth years. Yes, this is mainly guesswork, however it will motivate you to keep blogging when you see your blog's potential.
If you're completely new to blogging, and have no idea how to set your blog's goals, then get a blogging mentor, or ask questions at forums. Your blog has the potential to make a great income for you, if you treat your blogging as a real business.
Now you've set some goals for your blog, set up your blog and start blogging.
2. Diversify your blog revenue
In your first year of blogging, focus on creating content for your blog, and experiment with various forms of income. There's always a new income-generator coming out, so test out as many forms of revenue as you can.
3. Concentrate on content - make it useful
The bigger your blog, the more traffic you'll get from the search engines, and the more readers you'll attract. Therefore, concentrate on creating good content for your blog. All the time you spend on content will be rewarded.
4. Remember to use keywords in your posts
Once your blog's a few months old, the search engines will start sending you traffic. Keep that traffic coming by writing posts which include keywords, but don't go overboard. If you keep writing, you'll attract many "long tail" searchers.
5. Publicize your blog
Once your blog's making some income, set aside a portion of that income to promote your blog. There are many ways in which you can advertise your blog; again, experiment to see which forms of advertising work best for you.
Watch for other bloggers' advertising, and if you can see that bloggers are advertising in a particular area month after month, you can be sure that it's profitable for them, and will perhaps be profitable for you, too.
So there you have five easy blogging tips which will help you to create a profitable blog.
1. Set blog goals
Ideally, you should set your blog's goals before you create your blog. If you set your goals first, you will be able to estimate the potential traffic you can attract to your blog, and therefore the amount of income you're likely to make.
So before you create your blog, write down:
* Your blog's topic (for example digital photography, photo retouch or diet tips, or whatever topic you'd like to create a blog about);
* Use keyword research tools to discover how many people are searching for your blog's topic online each day:
If there are fewer than 100 searches, look for another topic. Don't shy away from topics which have lots of competition online - lots of competition means that there's a lot of interest, and a lot of traffic too. So if your topic has 5000 search a day, and millions of Web pages, go ahead and create your blog.
* Decide how you will make money from your blog. Will you sell advertising space? Sell products? Make a list of revenue streams for your blog;
* Estimate the income your blog will make in your first, second, third and fifth years. Yes, this is mainly guesswork, however it will motivate you to keep blogging when you see your blog's potential.
If you're completely new to blogging, and have no idea how to set your blog's goals, then get a blogging mentor, or ask questions at forums. Your blog has the potential to make a great income for you, if you treat your blogging as a real business.
Now you've set some goals for your blog, set up your blog and start blogging.
2. Diversify your blog revenue
In your first year of blogging, focus on creating content for your blog, and experiment with various forms of income. There's always a new income-generator coming out, so test out as many forms of revenue as you can.
3. Concentrate on content - make it useful
The bigger your blog, the more traffic you'll get from the search engines, and the more readers you'll attract. Therefore, concentrate on creating good content for your blog. All the time you spend on content will be rewarded.
4. Remember to use keywords in your posts
Once your blog's a few months old, the search engines will start sending you traffic. Keep that traffic coming by writing posts which include keywords, but don't go overboard. If you keep writing, you'll attract many "long tail" searchers.
5. Publicize your blog
Once your blog's making some income, set aside a portion of that income to promote your blog. There are many ways in which you can advertise your blog; again, experiment to see which forms of advertising work best for you.
Watch for other bloggers' advertising, and if you can see that bloggers are advertising in a particular area month after month, you can be sure that it's profitable for them, and will perhaps be profitable for you, too.
So there you have five easy blogging tips which will help you to create a profitable blog.
Thursday, January 18, 2018
What Is Knowledge Management?
Benefits of Knowledge Management
Experts get better at what they do by learning
more. Some people can only learn by trying to do things themselves, but most
people learn a lot from each other. When people share expertise fully and
openly, when they write essays, for
example, the sum is greater than the parts. Quantum leaps in knowledge can be
generated when experts collaborate. Then there is simple efficiency. Time and
other resources are wasted every time employees have to learn something through
trial and error, working in isolation. The pace of change and innovation is so
great that one person cannot do it all. When experts collaborate, progress can
be made much faster than any one employee working alone. Speed is the essence
today – speed of execution as well as that of innovation.
Problems with Knowledge Management
Some experts are not that great at
collaboration. They like to figure things out for themselves and can’t be
bothered with passing on their knowledge to others. Many such talented people
also hate the bureaucracy associated with having to document everything they
do. Then there is the old saying “knowledge is power.” Just as knowledge gives
organizations a competitive advantage, individual knowledge workers also know
that the uniqueness of their expertise enhances their marketability.
There is also the fact that pooled knowledge may
be better for efficient execution than for innovation. For example, if you want
to know how to make a sale to a client in a foreign country, it is wise to find
out what your colleagues did that worked for them. But innovation often occurs
through live collaboration rather than the accessing of stored knowledge.
Brainstorming does not necessarily tap into existing knowledge. Rather, it
creates new insights out of nowhere. Similarly, many of the greatest
discoveries in science and technology happened virtually by accident. Someone
experiments by trying out solutions on a trial and error basis to see what
emerges. Often, the unexpected results are the more interesting ones. Knowledge
management has a mechanistic ring to it that could stifle the entrepreneurial
spirit of employees who work best in a very experimental way.
There is also the common organizational culture
of functional silos where managers are territorial and want to keep the power
of their department’s expertise to themselves. Finally, knowledge becomes
obsolete so fast that it hardly seems worth the effort to capture it. Knowledge
management is still worth doing, however, despite these and other obstacles.
Ideally, it makes less sense to document everything an organization knows than
to focus strategically on the specific areas where knowledge adds the most
critical value, where it offers the greatest competitive advantage.
How to Manage
Knowledge
Several knowledge management initiatives have
failed for a number of reasons, one of which is that they are too centrally
driven. They are less interesting to potential users if they feel no ownership
for them. Communities of practice are one way around this problem. Rather than
centralize all knowledge, specific user groups or types of experts are formed
into specialized networks. After effectively localizing the management of
knowledge, the next step is to involve the users in designing a knowledge
sharing process that they can sign up to and will use. This raises the question
of the fundamental purpose of knowledge management. Is it to store knowledge
for all employees to access or is it more about sharing and collaborating in
real time?
Our educational system stuffs knowledge into the
heads of students that it thinks will be useful to them several years later.
Often, most of this knowledge is lost because students don’t feel a need for it
at the time. It has no application in the here and now for them. A knowledge
management system based on this philosophy is bound to fail. Organizations that
foster live collaboration during an actual project are more likely to succeed.
On the downside, the relevant expertise may not be captured for later use, but
the organization achieves its most important objective – to exponentially
transform the expertise of multiple experts into tangible competitive
advantage.
Monday, January 8, 2018
How Much Income Tax Can You Save, if You Take a Home Loan?
Buying your first residential property with the help of a home loan can get you several tax benefits. These deductions will not only enable you to save big on your income tax outgoes but also allow you to manage your expenses efficiently. If you want to learn how much income tax you can save, if you take a home loan, below is the list of deductions that you can claim:
1. Deduction on interest: With every home loan comes the liability of paying EMI. However, the interest amount of the loan EMI can be claimed as a deduction, if you are both the owner as well as the co-borrower of a home for which you have taken home loan. You can claim this deduction in the year the construction of your home is completed. Let’s suppose the construction of your home is completed on 30 September 2015. You can claim the deduction for interest for the complete 12 months in the financial year 2015-16. This way you can claim the deduction of Rs. 2 lacs for the new house you stay in. However, if you have put the same house on rent, the interest of entire year can be claimed as a deduction.
2. Deduction on principal repayment: As the EMI of a loan constitutes both the interest and the principal amount; you will also get benefit for principal repayment. Under section 80C of the income tax act, the part of the EMI which is paid towards the principal can be claimed for deduction. For this, you can calculate the yearly principal amount and claim it for deduction. You can claim Rs. 1.5 lac as a deduction under Section 80C.
3. Tax deduction on pre-construction interest: You can also claim a deduction for pre-construction interest of your home loan but make sure you make these claims in the beginning of the financial year in which the construction is completed. For this, you must first add the entire pre-construction interest and then claim it in equal payment. Your total deduction on pre-construction interest should reach more than Rs 2 lacs if you reside in the same house and not putting it on rent.
4. Deduction on registration charges and stamp duty: Under section 80C of the income tax act, you can claim the deduction on stamp duty and registration charges as well. But this deduction is only claimed in the same year these payments were made.
5. Deduction under section 80EE: You can claim tax deduction under the section 80EE if you are the first-time buyer whose property price is not more than Rs 40 lacs and those who have borrowed the loan of Rs 25 lacs or less. To claim this deduction, another clause is that your home loan should have been approved in between April 1, 2013, to March 31, 2014. Under this section, you can avail a maximum deduction of Rs. 1 lac which can be claimed in any one financial year, i.e. 2013-14 or 2014-15. However, this benefit does not exist for the current financial year 2015-16.
Conclusion: Home loan comes as a boon for those who want to buy their own house and these income tax deductions certainly act as the cherry on the cake. With these deductions, new homeowners can save big but only if these claims are made on time. In addition to this, a little awareness of all types of tax deductions is important to act accordingly. For your further help, many websites provide tax saving calculators with which you can easily find out how much tax can you save if you apply for a home loan. These calculators have a user-friendly interface, thus can be used by anyone with ease.
1. Deduction on interest: With every home loan comes the liability of paying EMI. However, the interest amount of the loan EMI can be claimed as a deduction, if you are both the owner as well as the co-borrower of a home for which you have taken home loan. You can claim this deduction in the year the construction of your home is completed. Let’s suppose the construction of your home is completed on 30 September 2015. You can claim the deduction for interest for the complete 12 months in the financial year 2015-16. This way you can claim the deduction of Rs. 2 lacs for the new house you stay in. However, if you have put the same house on rent, the interest of entire year can be claimed as a deduction.
2. Deduction on principal repayment: As the EMI of a loan constitutes both the interest and the principal amount; you will also get benefit for principal repayment. Under section 80C of the income tax act, the part of the EMI which is paid towards the principal can be claimed for deduction. For this, you can calculate the yearly principal amount and claim it for deduction. You can claim Rs. 1.5 lac as a deduction under Section 80C.
3. Tax deduction on pre-construction interest: You can also claim a deduction for pre-construction interest of your home loan but make sure you make these claims in the beginning of the financial year in which the construction is completed. For this, you must first add the entire pre-construction interest and then claim it in equal payment. Your total deduction on pre-construction interest should reach more than Rs 2 lacs if you reside in the same house and not putting it on rent.
4. Deduction on registration charges and stamp duty: Under section 80C of the income tax act, you can claim the deduction on stamp duty and registration charges as well. But this deduction is only claimed in the same year these payments were made.
5. Deduction under section 80EE: You can claim tax deduction under the section 80EE if you are the first-time buyer whose property price is not more than Rs 40 lacs and those who have borrowed the loan of Rs 25 lacs or less. To claim this deduction, another clause is that your home loan should have been approved in between April 1, 2013, to March 31, 2014. Under this section, you can avail a maximum deduction of Rs. 1 lac which can be claimed in any one financial year, i.e. 2013-14 or 2014-15. However, this benefit does not exist for the current financial year 2015-16.
Conclusion: Home loan comes as a boon for those who want to buy their own house and these income tax deductions certainly act as the cherry on the cake. With these deductions, new homeowners can save big but only if these claims are made on time. In addition to this, a little awareness of all types of tax deductions is important to act accordingly. For your further help, many websites provide tax saving calculators with which you can easily find out how much tax can you save if you apply for a home loan. These calculators have a user-friendly interface, thus can be used by anyone with ease.
Friday, January 5, 2018
Securing Your Retirement Through Mutual Funds
Retirement and pension plans are identical. Whenever someone thinks about saving for retirement, the pension plan is the first thing that comes to their mind. However, with time, mutual fund schemes are treated as one of the finest retirement schemes which are better to manage and more flexible way to save for the retirement. This article delves deeper and talks about how mutual fund investments can be used towards better and tax saving and retirement planning.
But before getting into the details, one must know that retirement planning with best mutual funds schemes has three phases – accumulation of funds, preservation, and distribution. In the accumulation stage, funds are invested in the different portfolio according to investor’s risk profile and time prospect towards retirement. The preservation and distribution phase, however, go parallel with each other and these stages come at the age of retirement. In both these stages, the investor first preserves the accumulate fund which also earns him income in his retirement days.
To be precise, the money in mutual funds is first accumulated and in the latter part, it gets distributed in the form of monthly income to the investors after their retirement. Securing your retirement through best mutual fund investment schemes is flexible, convenient and can be initiated online with mere few simple clicks. In addition to this, there are a variety of mutual funds available, you just have to decide on the asset allocation you want to invest in, and make an investment portfolio consisting of all the low risk and high-risk funds.
Since mutual funds investment for retirement is a long-term investment, so you must invest in diversified equity fund that is a combination of large and mid-cap funds. In case of debt, always choose the long-term debt option. For gold allocation, there are gold ETFs and other long-term gold savings fund available for investment. You may also consider investing in different real-estate portfolios if this domain is flamboyant.
1. Mutual funds are flexible in nature. Unlike pension plans, Mutual Funds do not restrict investors for making a regular payment or making complete or partial withdrawals in between. Also, you may withdraw your investments anytime with no penalties.
2. Mutual funds come with tax benefits. Long-term capital gains from equity mutual funds are completely tax-free. In debt mutual fund, it is 10% before indexation and 20% after indexation.
3. Mutual funds are transparent and user-friendly. Here you can choose fund as per your choice. Also, information related to fund managers; associated risks, objectives, etc are publically available.
4. A mutual fund is a disciplined approach to save for your retirement. Investments if made regularly and in the right fund type are likely to earn good returns for the investors.
Note: No mutual fund is perfect for all categories of investors. Therefore to determine the most suitable mutual fund for investment purpose; one must consider three factors - Cash requirement, Time Frame, and Tax efficiency. In addition to this, a thorough research should also be done on the list of advantages of disadvantages associated with each fund type before making an investment.
But before getting into the details, one must know that retirement planning with best mutual funds schemes has three phases – accumulation of funds, preservation, and distribution. In the accumulation stage, funds are invested in the different portfolio according to investor’s risk profile and time prospect towards retirement. The preservation and distribution phase, however, go parallel with each other and these stages come at the age of retirement. In both these stages, the investor first preserves the accumulate fund which also earns him income in his retirement days.
To be precise, the money in mutual funds is first accumulated and in the latter part, it gets distributed in the form of monthly income to the investors after their retirement. Securing your retirement through best mutual fund investment schemes is flexible, convenient and can be initiated online with mere few simple clicks. In addition to this, there are a variety of mutual funds available, you just have to decide on the asset allocation you want to invest in, and make an investment portfolio consisting of all the low risk and high-risk funds.
Since mutual funds investment for retirement is a long-term investment, so you must invest in diversified equity fund that is a combination of large and mid-cap funds. In case of debt, always choose the long-term debt option. For gold allocation, there are gold ETFs and other long-term gold savings fund available for investment. You may also consider investing in different real-estate portfolios if this domain is flamboyant.
Why are mutual funds better than any other retirement plans?
Gone are the days when retirement savings was more about investing in pension plans, fixed deposits, etc. Today investing in best mutual funds scheme has become the most common type of investment. Though it is subject to market risks, it also claims to provide the largest benefit to the investor in the long run. Other benefits of mutual fund are:-1. Mutual funds are flexible in nature. Unlike pension plans, Mutual Funds do not restrict investors for making a regular payment or making complete or partial withdrawals in between. Also, you may withdraw your investments anytime with no penalties.
2. Mutual funds come with tax benefits. Long-term capital gains from equity mutual funds are completely tax-free. In debt mutual fund, it is 10% before indexation and 20% after indexation.
3. Mutual funds are transparent and user-friendly. Here you can choose fund as per your choice. Also, information related to fund managers; associated risks, objectives, etc are publically available.
4. A mutual fund is a disciplined approach to save for your retirement. Investments if made regularly and in the right fund type are likely to earn good returns for the investors.
Note: No mutual fund is perfect for all categories of investors. Therefore to determine the most suitable mutual fund for investment purpose; one must consider three factors - Cash requirement, Time Frame, and Tax efficiency. In addition to this, a thorough research should also be done on the list of advantages of disadvantages associated with each fund type before making an investment.
Thursday, January 4, 2018
Earn More Returns on Your Mutual Fund Schemes; Switch To Direct Mutual Funds
Mutual Funds are one of the best investment plans that are professionally managed and can accumulate money from several investors to get various securities like stocks and bonds. Nowadays, investment in mutual fund is more simplified than buying and selling of individual stocks. Mutual Funds can provide you highest returns compared to any other investment schemes.
Mutual Funds can get you to achieve the desired goals and earn returns on your investments, but you must be aware of the type of mutual funds that comes with a certain risk profile and returns. You need to be careful and aware before choosing the type of mutual funds investment to make the maximum returns on your investment.
You can invest in a mutual fund scheme under two ways:
· Through a mutual fund distributors (Regular plans)
· Directly with the funding firm (Direct plans)
Under Regular Mutual Funds, investment is done with the help of a distributor or a channel partner. Investment made from regular distributor or online fund investment comes under regular plans. You need to pay commission in regular plans, which differ across schemes and distributors. Mutual fund does not directly charge the commission, it gets paid from the fund itself and thus it affects your profits indirectly.
Under the Direct Mutual Fund, you get the facility of managing funds in a better way than the experts as you go to the mutual fund house directly for investment. As there is no role of any distributor or agents in direct mutual fund, there is no need of paying any commission or transaction fees to brokers. This is the reason that the expense ratio is less for direct plan when compared to regular plan. Expense ratio comprises of fund management fees, operational, marketing and fund distribution expenses. Lower expense ratios mean less cost and high returns, which is the primary reason why direct plans NAV is higher than regular plans NAV.
Let us go through the advantages of investing in direct mutual fund. Making investments in direct mutual funds have become much easier and stronger than before. Check out the advantages of the same below.
· The expense ratio is lower in direct mutual fund than regular mutual fund as there is no role of intermediaries or distributors and you don’t have to pay any transaction fee or commission to them, which makes higher returns for investors
· The investor gets high returns on his investment in direct plans in long term and it becomes beneficial for the investor if invested in retirement plan to get the benefit of 15-20 years
· The Net Asset Value (NAV) is higher in direct mutual funds than regular mutual funds
· The investor earns 25 to 75 basis points higher in direct equities when compared to regular plan that is 0.25% to 0.75% more returns per annum
· The funds are managed by professionals in a better way to yield more returns
Some tips on Selecting Direct Mutual Funds
· As direct plans are cheaper, one should not consider low price as a criterion for fund selection
· Always select a fund with a good track record
· Select funds in consideration with your risk profile
· Funds should be from diversified fields to lessen the risk
· Keep an eye on stable funds rather than high return funds to reduce the losses at the time of economic failure
Direct Mutual Fund can provide higher returns compared to regular mutual fund plans. However, many of us do not know how to invest in mutual funds directly. Until recently, making an investment in direct mutual fund was far from simple. Nowadays, online investment advisers come with the convenience of one time registration and give recommendations about the best possible funds to assist you buy any direct mutual fund of your choice.
Mutual Funds can get you to achieve the desired goals and earn returns on your investments, but you must be aware of the type of mutual funds that comes with a certain risk profile and returns. You need to be careful and aware before choosing the type of mutual funds investment to make the maximum returns on your investment.
You can invest in a mutual fund scheme under two ways:
· Through a mutual fund distributors (Regular plans)
· Directly with the funding firm (Direct plans)
Under Regular Mutual Funds, investment is done with the help of a distributor or a channel partner. Investment made from regular distributor or online fund investment comes under regular plans. You need to pay commission in regular plans, which differ across schemes and distributors. Mutual fund does not directly charge the commission, it gets paid from the fund itself and thus it affects your profits indirectly.
Under the Direct Mutual Fund, you get the facility of managing funds in a better way than the experts as you go to the mutual fund house directly for investment. As there is no role of any distributor or agents in direct mutual fund, there is no need of paying any commission or transaction fees to brokers. This is the reason that the expense ratio is less for direct plan when compared to regular plan. Expense ratio comprises of fund management fees, operational, marketing and fund distribution expenses. Lower expense ratios mean less cost and high returns, which is the primary reason why direct plans NAV is higher than regular plans NAV.
Advantages of Direct Mutual Funds over Regular Mutual Funds
· The expense ratio is lower in direct mutual fund than regular mutual fund as there is no role of intermediaries or distributors and you don’t have to pay any transaction fee or commission to them, which makes higher returns for investors
· The investor gets high returns on his investment in direct plans in long term and it becomes beneficial for the investor if invested in retirement plan to get the benefit of 15-20 years
· The Net Asset Value (NAV) is higher in direct mutual funds than regular mutual funds
· The investor earns 25 to 75 basis points higher in direct equities when compared to regular plan that is 0.25% to 0.75% more returns per annum
· The funds are managed by professionals in a better way to yield more returns
Some tips on Selecting Direct Mutual Funds
· As direct plans are cheaper, one should not consider low price as a criterion for fund selection
· Always select a fund with a good track record
· Select funds in consideration with your risk profile
· Funds should be from diversified fields to lessen the risk
· Keep an eye on stable funds rather than high return funds to reduce the losses at the time of economic failure
How do I buy a Direct Plan?
Wednesday, January 3, 2018
Is Lump Sum Investment in Mutual Funds a Good Option?
The option of investing in mutual funds has been gaining popularity among investors in India recently. The biggest issue with mutual funds for Indian investors has been that they invest in the equity and debt markets which are evidently subject to risks.
However market risks haven’t deterred investors to invest in mutual funds and the investments in this investment tool has been rising steadily. Lump sum investments are usually made in equity mutual funds thus for the purpose of this article mutual funds means equity mutual funds unless otherwise mentioned. Any investor knows that all kinds of investment tools are subject to the inherent terms and conditions of its governing factors. Lump sum investment in mutual funds is also a good option depending on a few factors; please find them discussed below:
1. Use the P/E ratio as benchmark: New investors usually wait for the right time to buy (invest) and the right time to sell (redeem) mutual fund units but one should understand that it is next to impossible to determine the best time to do so. However to judge the market you can use the Price/Earning (P/E) ratio of a mutual fund as a benchmark. P/E ratio is valid for equity mutual funds and a fund’s P/E is calculated on the basis of its portfolio. Remember, when calculating a fund’s P/E for investment, one should consider its earnings from the last four quarters. If the fund’s P/E ratio is low then the chance of earning a profit from it is more, i.e. an equity mutual fund of SBI mutual funds with a P/E of 15 may fetch you better earnings than an equity mutual fund of the same fund house with a P/E of 22.
2. Be in it for the long-run: If you are investing a large amount in equity mutual funds, then maintain your investments for a long tenure. The disadvantage of being short-sighted with lump sum investment in mutual funds is that if the market corrects itself significantly you will suffer a terrible loss in that moment. However with time the market and your mutual fund portfolio will stabilize by bottoming out (i.e. by stopping to fall any further). This is why it is recommended by experts to invest lump sum in an equity mutual fund only after evaluating the fund’s performance over a long period of time and if you invest a large amount in a fund, then be in there for a long haul.
3. Long-time returns and Low liquidity: Equity mutual funds won’t be able to bring you expected returns on your lump sum investments in a short time of one year. You need to give them at least three to five years or more to outperform your expectations. Also based on the same concept is the low liquidity factor. If you have low liquidity of funds, i.e. you are going to require your funds back in a couple of months or by the end of the year then you need not invest a large amount in equity mutual funds. It’s better to put your money in a debt fund like liquid fund or an ultra-short-term fund.
4. Patience pays: The saying that patience is the most important virtue is the truest in this case. Equity funds are very volatile which is why their risk is high and the returns in them are high too. Thus, if your lump sum investments face a volatile market in short term you shouldn’t panic and let the fund rationalize so that it offers you good returns in long term.
5. Go Hybrid: It is understandable if you are not sure of the right amount of time for which to invest your lump sum investment in equity mutual funds. The solution to this problem is a hybrid mutual fund which has an STP (Systematic Transfer Plan). In a hybrid mutual fund, your investments are invested in a liquid fund or an ultra-short term fund where it is earning good returns but you can get the benefit of long term equity investments too with them through the hybrid fund STP system. STP systematically transfers a pre-determined portion of units from your liquid mutual fund/ultra-short term mutual fund to the equity mutual funds part of the portfolio. Thus it gives you the best of both worlds, investments in short-term funds and long-term funds both.
Lump sum fund investments are better for long term mutual fund investments. The tenure for large investments shall ideally be as long as possible but at least three to five years so as to give the funds a time to stabilize and provide you good returns on annualized yields. If long term investments doesn’t suit you then it is better to invest in a hybrid fund or a debt fund or a liquid fund however if you are okay with putting in a large sum of money, which you may not need for a decade or so, in mutual funds units (i.e. in mutual funds provided by the fund house SBI mutual funds) then as per experts the returns of this large investment will be high because just like in real life, in the case of mutual funds too, fortune favours the brave.
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