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Ask any experienced investor – Which is a more difficult decision – Buying or selling. Most of them will tell you it’s the latter.

As an investor, when you are buying, you are full of hope. You are multiplying numbers. When selling, you don’t want to shatter the same.

The market is above everyone. Just because we have bought, doesn’t mean the stock should rise and vice versa.

So how can an investor know when is the right time to exit a stock.

When is not the Right Time to Exit a Stock?

Before we get into the right time to exit a stock, let us understand when it is not the right time to exit a share in the first place.

1. Never based on PE Multiples

Never invests like a mathematician. Investment decisions aren’t to be based on any mathematical numbers or PE multiples.

The first step is to know the right stocks and one can do that by Investment Checklist and Fundamental Analysis.

Once the stock qualifies the above checklist and analysis, analyze the business.

Then comes the understanding the technical analysis based on price action which gives us the right price.

So if never invested based on PE multiple or peer valuation, why should exit strategy be based on PE Multiples?

2. Because the Stock has Gone Up

Because you are making profits doesn’t mean it is time to book them.

For my portfolio, I get this question often if I am holding my most profitable of investment which is Pidilite Industries and Divis Lab. My answer is YES. Just because I am making a handsome amount of return in them doesn’t mean the business will start deteriorating from here on.

3. RSI and MACD or any other Parameter Indicates a Sell

I got this quote in a WhatsApp group

You are fighting with the institutions on the opposite side who have billions of dollars with world-class technology, humans resources from IIT, IIM, Stanford and Harvard. Hence don’t expect your RSI and Moving Average formulas to make millions.

If you expect some sell signal by any random mathematical formula can help you sell at the right time, you are to be a trader, not an investor.

When is the Right Time to Exit a Stock?

So finally when is the right time to exit a stock?

I am no investment guru, but I will share when I find it good to exit my investments. Most of the time even when I am wrong, I don’t mind because it suggests my investment is always in the right stocks.

1. When Management takes Rash Decision

The most important of all decision for me to exit in a stock is when management makes some random decision that isn’t in favor of the minority shareholders.

As shareholders, we aren’t able to deal in the day to day activity of the business. So we rely on the management for the same. If I can’t trust them, I will not remain invested in the company irrespective of any other parameters.

The recent example on this line is my investment in Jubilant LifeScience. The management’s decision to ask for a royalty payment for using the “Jubilant” as the name of the company.

Come on; your company will have a name you choose. Now you want to charge a fee for it.

The day it was announced, I am done with the Jubilant Group stocks. Finally, the management backtracked it when they saw the reaction in the market wasn’t pleasing, but it doesn’t make me an investor in them for the rest of my life.

2. When Business Environment isn’t Stable

The geopolitical environment keeps changing. So it can impact businesses.

If you don’t want to remain invested in a business where the environment isn’t stable, it can be a reason to exit a stock.

Like for example, in 2016, on the day of Brexit, I was out of Tata Steel because I thought European Union Geopolitical environment wouldn’t be stable for the foreseeable future and so I should not remain invested in the company where it is one of the key markets.

So, when the business environment isn’t stable and if the company has a problem that you don’t want to remain associated with, it is time to exit as well.

3. Other Better Investment Opportunity

You don’t need to sell your house to invest in stocks. You can sell your investment to invest in the next opportunity.

Currently, I am booking out of my trading account to invest in Page Industries because I think it is an excellent investment opportunity around the 20k Mark.

It is one of the better ways to churn the portfolio. Remember, you should not book out of profitable opportunities. Wise investors cut on the loss-making investments more than the profitable ones.

4. Story no longer Holds True

If you invested in a company based on some story that is no longer valid and the company is moving in a different direction.

As Warren Buffet puts it, the best time to invest in a company is

A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem. – Warren Buffett

Similarly, if you happen to find the problem is not solvable or it is not a one-time problem. So on and so forth.

Anything that points to the fact that initial investment based on a story is no longer valid.

I booked out of Ashok Leyland way too early but the view at the time of my investment was, it will lead the EV implementation for commercial vehicles in India which I doubted as things moved along.

5. You Think You made a Mistake

There are certain investments where I sold off in a few months because I thought I made a mistake of investing in them.

I was wrong in deciding to book out but remember one thing, whatever you do, there will be more occasions when the market proves you wrong. It is unavoidable.

If you thought you made a mistake, you should always book out even when the market proves it otherwise.

In most of my 2016 portfolio, the market has proved me wrong and that too by significant margins. After I sold, each of the following stock doubled

  • Jubilant Foodworks
  • Tata Steel
  • Britannia Industries
  • Infosys
  • Larsen & Toubro
  • Ashok Leyland

On top of that, I also invested in a stock that has halved like Force Motors.

Still, one has to respect the market and take decisions when one finds he has made a mistake.

If you ask me now, do you regret the decisions any of the above stocks, I will say not all but Britannia Industries? The reason I out because I was angry at my investment in investing too little.

6. You Need Money

Finally, your investments are for you to enjoy life. We invest with a goal in mind. And if you need cash, no rule can defy you from selling.

Just remember one point because the amount invested in stocks and to the extent in the mutual fund is as liquid as cash, it doesn’t mean it should be the first choice to sell.

Take the decision wisely. Consider equity investment as the last option to sell because it is the only investment that can help you build wealth.

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What is LTCG?

LTCG stands for Long-term Capital Gains. In other words, it is the gain for investing in the equity market (stocks as well as equity mutual funds) over the long-term.

Investment for one year or more is a long-term investment in the Indian market. Anything under one year is short term.

Pre 2018, there was no tax on long-term capital gains. It means if you book profit in any stock or equity mutual funds after holding it over one year, all the profit were tax-free.

It was exploited by many to convert black money into white without paying taxes.

So LTCG was introduced in 1st Feb 2018 Budget.

As per the new rules crafted in 2018, any gains made on long-term investments are all taxable making such malpractice operators out of business.

What is Grandfathering of Taxable LTCG up to 31 January 2018?

Grandfather is the right of the person to avail concession because they have made their decisions under the old law.

Because there were no LTCG 31st Jan 2018, taxing old long-term investors who have been holding stocks for the past many years wouldn’t be right.

The investment made pre 31-Jan 2018 which qualifies for tax-free return as per old long-term capital gains rules will be grandfathered at a price as on 31st Jan 2018.

In other words, long-term capital gains made until Jan 31, 2018, aren’t taxed. Any further profits on the holdings will now be taxed.

As an example, I invested in Pidilite Industries in September 2016.

  • My purchase price of each share is ~₹716, and I continue to hold.
  • On 31 Jan 2018, the share price was ~₹898.

So my gains till 31st Jan 2018 was ~₹184 per share.

Currently, the price of Pidilite Industries is ~₹1200

So if I sell now, my per share gain will be sell price which is ~₹1200 less cost price which is ~₹716 which is ~₹484 per share.

I am eligible for tax grandfathering on this transaction because it is long-term investment done before 31st Jan 2018.

So my taxable gains will be sell price which is ~₹1200 less the grandfathered price as on 31st Jan 2018 which is ~₹898 instead of my cost price of ~₹716. So my taxable capital gains become ~₹302 per share.

Note: The price to be considered for grandfathering is the price on 31st Jan 2018 and not the highest price till 31st Jan 2018.

So, for example, the high of Pidilite Industries pre 31st Jan 2018 was around ₹950, but for grandfathering, we consider ₹898 which was the price as on 31st Jan 2018.

In the above calculation, we assume the sale is above the 31st Jan 2018 price.

  • If I sell the under ~₹898 but above ₹716 – I am entitled to complete gains as tax-free because they are grandfathered.
  • Similarly, if I sell the stock under ₹716, I make a long-term capital loss.

Hope the above calculation clarifies most questions about tax implications on grandfathering.

Again I am not a tax consultant or any taxation expert. Above calculations is based on my understanding of the matter and is shared to help you as a retail investor understand the concept. For exact calculations on your investment, it is always better to consult the expert in the matter.

One more point to note is, tax saving was allowed to investors who wish to book out of the stocks before 31st April 2018 and after the declaration of LTCG on 1st Feb 2018. It is now of no value, and so I like to skip it.

Does LTCG apply to Mutual Funds?

Yes, it certainly applies to equity mutual funds.

Regarding debt mutual funds, I am not sure if it applies or not. There are many types of debt mutual funds, and so it is advisable to consult an expert for your type of fund and time of investment. I don’t invest in debt mutual funds so won’t be able to comment on it.

For equity mutual funds, grandfathering for the NAV is precisely the same as I explained above.

If you remained invested in the fund for more than a year, and your purchase was before 31st Jan 2018, you are eligible for tax exemption on LTCG as per the above grandfathering calculations.

Instead of price per share, the calculation is on cost per unit or NAV.

Can you Save LTCG Tax if you Re-Invest?

No. You can’t save on the capital gains tax by re-investing. The investor has to pay the tax for the gains irrespective of investing back or not.

What is the Percentage of Tax for LTCG?

10% on the net LTCG profits with tax heaven of 1L per fiscal whereas short term capital gains tax or STCG Tax rate is 15%.

Read How to Save Tax Under 80C Without Any Fresh Capital Investment?

Let us look at the tax calculation with the example below, to make things more transparent.

How to calculate LTCG Tax on Shares and Equity Mutual Fund Units?

Let us use the above grandfathering calculations to understand the taxable amount.

My taxable gains as per the above calculations are as follows. The selling price which is ~₹1200 less the grandfathered price as on 31st Jan 2018 which is ~₹898.

My taxable gains are ₹302 per share.

If I am selling all my 1,000 shares of Pidilite Industries, my total gains will be ₹302 x 1000 or ₹3,02,000

I am eligible for LTCG tax saving of 100k per year.

If I have no other LTCG gains in a year, my taxable LTCG is ~₹2,02,000.

So I have to pay 10% of my gains which is ~₹20,200

LTCG is applicable only when you make a sale and not if you continue to hold.

If I don’t sell all the units but only sell 300 units in a fiscal, My total gains become

= ₹302 x 300 shares which equal to ₹90,600

So this will be tax-free assuming I have no other LTCG.

Again, if I spread my sell for few fiscals, I can save on the tax.

My view of LTCG Tax

There is no denying fact about the misuse of LTCG tax heaven. So it is good to have an LTCG but applying the same for retail investors on the mutual fund wasn’t ideal. I think we have made good progress in curbing the bad guys but at the expense of taxing retail investors.

LTCG is healthy for the market, but it should only be applied on stocks and not on equity mutual funds to let retail investors continue investing in the equity market via the mutual fund route. Equity investment in India is still under-penetrated, and tax-free return is a way to lure investors into considering investing in equity.

LTCG existed in the Indian market very early, but it was removed back then with an introduction of STT for each transaction irrespective of long or short term investment. LTCG is back, and STT also remains.

On top of that, LTCG doesn’t have indexing which means if I am not booking any profits in a fiscal, I lose the 100k benefit which I am entitled in a year. It makes retail investor book out some amount every year than to remain invested. Over time, it will be taken care off.

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Yes, you have read the title correctly. We can save tax under section 80C (Up to ₹1.5L) without any new capital investment.

Withdraw an old investment from an ELSS tax saving mutual funds done three years prior. The period is three years because in ELSS Tax Saving Mutual funds have a lock-in period of three years. Once the lock-in period is over one can withdraw the amount.

Invest the same in a new or same Tax Saving ELSS mutual fund. It is a way to record a transaction of tax saving investment in the current financial year without a need for fresh capital. Assuming we are eligible for tax saving under 80C in the current fiscal.

I did the same in this month itself for my tax saving investment for the financial year 2019-2020.

I placed a withdrawal request for my investment in early 2016 on April 16, 2019.

The amount got credited into my HDFC bank account on 22nd April 2019.

On 23rd April 2019, I placed a purchase request in the Mirae Asset Tax Saver Fund Direct Dividend which is my choice of Best ELSS Tax Saving fund for 2019.

The order got executed on 24th April 2019, and I got the confirmation in a couple of days.

Note: I Always prefer Direct Funds Dividend Option. Read Why here.

Remember, the withdrawal from the old fund may have an LTCG or long term capital gains tax depending on an individual’s total gains under LTCG in a fiscal.

Is this Completely Legal?

As far as I have asked my CA, Yes it is entirely legal. You are allowed to withdraw the investment in the ELSS fund as and when the lock-in period is over. So once the withdrawal is permissible, and after it hits your bank account, you can make a new investment either in the same or a new ELSS fund.

Still, if you have any doubt, please consult a CA on the matter. I am not a legal advisor, and exact details can vary from individual to individual.

If you don’t find it convincing, there is one more way to make a full tax saving without total investment. Invest in the dividend option. As and when funds declare dividends, receive back the tax-free amount. Read the full details here.

What if I Invested in SIP 3 Years Back?

If your investment is in parts, your withdrawals have to be either in parts where each units lock-in period is over. If you wish to redeem all, one has to do after the lock-in period of the last transaction is over.

So my investment was made in Feb and March of 2016. So I was eligible for units purchased in Feb 2016 to withdraw in Feb 2019. Units purchased in March of 2016 were available for withdrawal in March of 2019.

I could have withdrawn all my investment in March of 2019 but I wanted to wait till April, so I can withdraw the money and use the same for completing my tax saving investment for this fiscal.

Again, after three years, i.e., in April of 2022, I can use the same money to invest back in an ELSS tax saving fund and save tax.

What if I didn’t Invest Full 1.5L 3 Years Back?

No worries. There is no correlation between past investment and current investment.

I invested ₹1,05,000 in 2016. My withdrawal amount was ₹1,30,000+ which includes 25k+ as LTCG gain. It is below the level of 31st Jan 2018 which is grandfathered date for the investment value for LTCG. The reason it is lower than the amount on 31st Jan 2018 is because of dividend paid out by the fund.

So I don’t have to pay any LTCG on the gains either. Even if it weren’t pre Jan 2018, as the amount is lower than the 1L allowed limit per year for LTCG, I wouldn’t be paying LTCG either. If I make a lot more LTCG gains in this fiscal, I will have to pay the tax.

Coming back to the original question. The thing I am trying to explain is, what you withdraw and what you invest has no correlation. The only thing to consider is LTCG.

So if you withdraw the money and invest back and if you didn’t invest the full amount in the past, you can still add new investment and save the complete ELSS tax saving under 80c.

Even if you have not withdrawn any past investment in ELSS, one can withdraw them and invest in the current year if you don’t want to commit fresh capital for saving tax.

It is quite normal for someone not to have a full 1.5L as an invested amount because 80C also offers other tax saving option which includes LIC policies, PF, PPF or even be paying school tuition fees. So if your mutual fund investment is less, one can withdraw whatever amount he has invested in the past. Add, Subtract or use the same amount to re-invest. There is no relation between the two.

One is free to withdraw a partial amount from the past investment as well.

Why I withdraw ELSS Investment instead of building a Portfolio?

I get this question quite often. My prime objective with an ELSS investment is to save tax.

For investment, I don’t prefer mutual funds because I am better off investing in the stocks directly. When I can beat the returns of mutual funds by a significant margin, it doesn’t make sense for me to be doing it the mutual fund, but I don’t recommend it to others.

I have a simple approach to investing in stocks.

If you can’t beat the best ELSS fund’s returns by a margin, you should be building wealth via the ELSS mutual funds. If not go with the mutual funds. I don’t advocate you to be dealing in stocks just for the sake of it, but if you are confident, you can beat funds return, invest in stocks but not otherwise.

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What is the Expense Ratio?

The expense ratio of a mutual fund in India is the total expense a mutual fund has to manage it. It includes the salary of the fund manager, the expense of the fund house including the administrative costs, advertising expenses, distribution cost paid as commissions to channel partners, and any other type of fee.

An expense ratio of 1% means each year 1% of the fund’s total assets will cover all its expenses so if the fund has an asset under management or AUM of ₹10,000 Crores and an expense ratio of 1%. It has a yearly cost of ₹100 Crores.

Let us take a real fund example and understand it better.

As per ValueResearchOnline, HDFC Top 100 Equity Large Cap Fund which manages ₹16,610 Crores of Asset.

In the regular fund, the expense ratio is 2.08%. So the fund in the past year had a total expense of 2.08% off ₹16,610 Crores which is ₹345.48 Crores.

Now considering the direct fund, the expense ratio is 1.5%. So, the fund in the past year had a total expense of 1.5% off ₹16,610 Crores which is ₹249.15 Crores.

There is no bifurcation of how much asset is under direct fund management and how much is under the regular funds, but direct plans exclude the distribution cost which lowers the total expense.

Read: How to Invest in Direct Mutual Funds – A Step by Step Guide and How To Switch From Regular Funds To Direct Plan?

What is Good Expense Ratio for a Mutual Fund?

There is no good or bad expense ratio. The lower, the better.

So, if you find a fund where the past performance of them is at par, invest in the fund with the lower expense ratio.

Is Expense Ratio Charged Every Year?

No, the calculation is daily.

The NAV is adjusted for the expense daily. It is charged daily because, in most funds, there is no lock-in period. One can invest for from few days to weeks. So in that case, the asset under management may rise or fall daily.

So funds also charge expenses on a pro-rata basis daily. Otherwise, the investor holding the fund’s unit at the end of the year may have to bear all the charges which may not be ideal.

The calculation for lock-in period funds or closed funds may not be daily, but all open-ended fund charge expense ratio daily.

The final NAV adjusts after deducting the expenses.

Does ETF Have Expense Ratio?

Yes, they do have an expense ratio as well, but it is very nominal.

As an example, HDFC Nifty 50 ETF has an expense ratio of only 0.05%.

The reason for such a low expense ratio is, there is no need for a fund manager to manage the allocation of the fund. It is entirely on the constitution of the Nifty 50 Index. It is also one of the main reason why Warren Buffett recommends an ETF over a mutual fund.

Again, when the funds have a benchmark differently than the index, it is better to invest in a fund. For benchmark funds, it is better to invest in the ETF if it is available more so because SEBI has strict guidelines to stick to the benchmarking and minimal a fund manager can do to invest beyond the benchmark.

Does Expense Ratio Include all Fees for Mutual Funds?

Typically yes but it excludes the exit load which an investor may incur if he doesn’t remain invested for a certain period in the mutual funds.

As an example, HDFC Top 100 fund has an exit load of 1% for investors redeeming within 365 days of investing in the fund.

ETF’s don’t have any exit loads but as they are traded on the exchanges like stocks so they may incur the brokerage charged by the broker. Read What is: Exchange Traded Fund – ETF Vs. Mutual Fund

Is the Expense Ratio Excluded from the Total Returns?

Yes. The calculation of total returns is from NAV. As NAV excludes the expenses, the performance, of the funds exclude the expense ratio.

One must see things with a pinch of salt. When we are calculating the total returns, we see the past data. The past performance is from the not so stricter guidelines from SEBI for funds to invest.

So for example past 1-year performance of a large cap was much better than the performance of NIFTY but it may mean the fund was allowed to invest in stocks beyond Nifty as well.

It may not be the case anymore, and so the future performance of a large-cap fund may not beat the NIFTY returns by a significant margin. They now predominantly need to invest in the Nifty stocks only.

The only tool in the hands of the fund manager is to change the allocation in the sectors differently based on their study of what will lead the next market move.

How Expense Ratio Effect the Overall Mutual Fund Returns?

They dampen by the percentage of the total expense. If a mutual fund has an expense ratio of 2% and if another fund has an expense ratio of 1.5%, typically it means the return of the investor will vary by 0.5%.

In case of HDFC Direct and regular funds, as we saw, the total return from the direct plan will be 0.58% (2.08-1.5) higher.

Is there a Limit a Fund can Charge as Expense Ratio?

Yes certainly. Otherwise, the expense ration may have been even in double-digit like insurance.

The maximum total expense ratio or TER allowed is 2.5%.

As the amount of asset under management or AUM increases, the expense ratio keeps decreasing.

For the first ₹100 crore of average weekly total net asset under management the expense ratio can be 2.5%, it reduces to 2.25% for the next Rs 300 crore, then to 2% for the next Rs 300 crore and finally reduces to 1.75% for the rest.

So we don’t find fund’s with an expense ratio of more than 2.5%

Final Thoughts

If you have any questions on expense ratio, please ask them in comments below, and I will be more than happy to answer them for you.

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What is EPS?

EPS we all know is earnings per share. In simple terms, the total earning of the company in the past 12 months divided by the total number of shares will give us the past 12 months earnings per share.

There can be a couple of types of calculations for an EPS. One is trailing twelve month EPS, and other is EPS of the company for the last complete financial year also known as annual EPS.

  • Annual EPS is the earnings per share of the company for last fiscal or last financial year.
  • Trailing twelve month EPS also written as TTM EPS is the sum of earnings of the last four quarters.

After the March quarter results, the TTM EPS is the same as the annual EPS.

We also have consolidated EPS and standalone EPS.

A company can be a single entity, or it can be a composition of many subsidiary companies operating in a variety of business or various GEO.

Consolidated EPS is when we consider the company and all its subsidiaries. Standalone EPS is when we use only the parent companies earnings.

As an example, Tata Motors India has India operations as well as Global operations. Standalone EPS is for India operations that are taken up by Tata Motors, but when considering all its subsidiaries operating in all GEO, we get the Consolidated EPS.

As an investor, I always consider the consolidated EPS and not standalone EPS.

We shall consider the consolidated EPS for all the subsidiaries companies, but some companies listed in India are a subsidiary of the parent company. For example, Hindustan Unilever or HUL where the parent company Unilever holds a stake in the company. Here we will consider the Hindustan Unilever and its subsidiary companies and not the parent company Unilever.

How to Use EPS to Invest in High PE Stocks?

Investors go about using PE or price to earnings ratio for investing in stock. So lower price to earnings ratio as compared to its peers the better.

Again, it is one of the better ways to understand the relative valuations of the company but when it comes to high PE, high growth stocks, I like to calculate differently.

I do the calculation as follows:

If I am buying a company for a particular price to earnings, how many years will the company need to convert the current EPS to the price I am paying per share today, assuming the company can maintain the average EPS growth rate of past five years.

So for example as per Investello, Page Industries has a TTM EPS of ₹370.44 with an average EPS growth for the past five years of 25%.

So if the company continues to grow at 25% for the next 20 years, it will reach an EPS of 25k.

Again, growing at that rate for the next 20 years will be tough. So what is the probability it can achieve the same?

The higher the probability, the better.

So if I put the same calculations on other companies, some companies get the EPS to the current prices very far down the road.

As an example, HUL It has an EPS of ₹27 and EPS growth of 6.35% for the past five years. It is currently trading at ₹1700. So it will need 60+ years to reach an EPS of ₹1700.

Britannia with an EPS of ₹47 and EPS growth of 14%, it will reach an EPS of 3k in 35 years.

Hero Moto Corp has an EPS ₹181 and EPS growth of 12%. It will reach ₹2600+ in 25 years.

In the above screenshot, blue cells represent the EPS after N years when the company will reach an EPS equal to the current share price.

As we can see, Page Industries, Symphony or HDFC Bank will reach the current price as EPS in 19 years whereas other stocks like DMart or Britannia will need a lot more time.

Remember one key point, we assume the past rate will continue for the next 20 years, but in some cases, the growth rate may increase as well. Like in DMart, the expected growth rate is more than 20% among investor, but I have used 15% in the formula.

One more observation is the PE ratio of Hero Moto Corp or Amara Raja Batteries at current year earnings is under 15 and 25 respectively. Both will need 25 to 30 years to reach an EPS they are currently trading.

Here is the Google sheet for the above formula. Make a copy of the Google sheet and apply the same method to any stock of your choice.

The Critical Aspect of the above Calculation

I like to invest in companies when I find EPS will reach within the next 20 to 25 years. If it is more than 25 years, I want to avoid unless I plan to invest for more than 25 years.

Again, this is how I prefer but feel free to innovate your way to calculate.

The above method is more to give an idea of what price we are paying for the company and when the company can earn the amount we are paying now. The stock will trade at many multiples by then as well, but it is for the sake of making relative calculations of high PE stocks.

Page Industries 10 years back was trading at ₹350 at the time of IPO, and now it has an EPS of ₹370.

Whatever calculations one uses, don’t forget the most critical question – Can the company and the management keep the growth rate going in the future for such a long period as well?

Over to You

What are your thoughts about the way I interpret the EPS? I am no guru and will be more than happy to learn from your views as well. So please share them in comments below.

Let’s help each other interpret the EPS in a better way to help invest in high growth companies at a better price.

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What is a Nomination?

The nomination is a facility that enables individuals to nominate a person as a nominee, who can claim the underlying asset in case of their death.

The underlying assets can be

  • Units of mutual funds
  • Cash for bank accounts
  • Shares for the brokerage account
  • Insurance

If any of the above is held jointly by more than one person, and if one of them dies, the other joint holder becomes the sole owner of the underlying assets.

In case of a death of the nominee, the nomination automatically gets canceled and the investor has to choose a new nominee.

Note: This article is for the information purpose and encourages my blog reader to add a nominee in their mutual funds, bank accounts, and other investment. It shouldn’t be taken as legal advice. Please consult the lawyer if you have a doubt or need to know about any specific situation.

Read: Why I Avoid Investing in Mutual Funds but You Shouldn’t?

Who Can Nominate?

Any investor, trader or a bank account holder can nominate another person to be his or her nominee.

Who Can be the Nominee?

Any individual can become a nominee. Even a minor or an NRI can be a nominee.

Can There be More than One Nominee?

Yes, there can be more than one nominee.

The number of nominees can vary from one bank account to another.

So for one bank account, one can have a single nominee, and for another account in the same bank, one can have multiple nominees.

The crucial part is to have a nominee.

Can I Change the Nominee?

Yes, any time. One may wish to change the nominee; one needs to submit a duly filled form.

One can remove someone from being a nominee as well as add a new nominee to the existing nominees.

It is simple, and every bank, broker or mutual fund house has a process to update the nominees.

What is a Legal Heir?

A legal heir is a person entitled by law or religion to acquire all the assets in case of the death of the other.

The legal heir can be son, daughter, wife in case of death of a husband or as per the will. It can vary from case to case basis, and I won’t get into the details.

In the case of multiple legal heirs, the distribution of wealth is as per the will. If there is no will, the succession law of the religions is followed to distribute the wealth among the heirs.

Difference Between Nominee and Legal Heir?

For mutual funds, bank accounts, and other investments: Nominee is the person who will act to transfer the assets to the legal heirs.

In case of insurance, the nominee is the beneficiary which means the nominee becomes the owner of the amount. Similarly, it can and may vary from case to case and asset to asset basis.

So from mutual funds, bank accounts, and other investments perspective, the nominee doesn’t become the owner of the asset. He or she is only the caretaker and is responsible for transferring the assets to the heirs.

Generally, people make legal heirs the nominee.

The Misconception About Nomination / Nominee

One of the myths among Indians about the nomination is – they assume it is a process which makes the nominee the rightful owner of the assets.

It’s not true.

The nominee is only the caretaker of the assets. He or she will is responsible for distributing the assets to the legal heir.

The misconception mainly arises because we see the same in movies where in cases of insurance, a nominee who is also the beneficiary becomes the owner of the assets as well.

In case of mutual funds, bank accounts as well as equity investments, the nominee is only the caretaker of the assets.

Whom Shall I Nominate?

Typically in India, we want to give all our wealth to our kids. For a husband, the wife is the best person to be doing so and vice versa.

So, in an ideal scenario, husband’s should nominate their wife as nominee and vice versa.

In case you are a single parent, and your kids are minor, use the option wisely so after you, your wealth is well managed and transferred to your kids.

If you have slightest of the doubt on a person, he or she should not make them the nominee.

Who Can’t be a Nominee?

Any company or partnership firms can’t be a nominee.

I will re-iterate because the nomination is a process of letting the asset be passed over to the legal heirs by a nominee. So only individuals can become nominees.

Why Must One Always Nominate?

If there is no nomination, the legal heir has to prove before he will be allocated all the assets from the bank, broker, or the mutual fund house.

But if someone is a nominee, the amount can be transferred to them instantly without much of paperwork.

It is a crucial aspect because there is nothing that can repair the loss of the person but one can reduce their paperwork at least.

So every one of us should nominate.

I will request you to stop reading this article right here. Check all your bank accounts, mutual fund investments as well as brokerage accounts to see if you have added a nominee?

If not, do it at the earliest.

How to Nominate?

Finally, the question is, how one can nominate the person.

The process is simple. One has to fill a form and submit at a branch or courier it at a designated address.

An email I got from ShareKhan that states the steps for adding a nominee to my account.

  • Download the Nomination form from the website or collect it from nearest Sharekhan branch.
  • Fill the form, which requires signatures of the account holders, nominee and two witnesses
  • Submit the duly filled form along with a photograph of the nominee at any of our nearest branch.

The process has to be same for all brokers, mutual fund houses as well as the banks.

I know the question may come why can’t I add a nominee online?

Instead, consider a simple one-page form. If you take the pain to submit it now, it can save your loved ones lot of pain to prove they are your legal heirs.

Let Nominee Know About Investments

Finally, the most important part is, let your better half know about all the investments. Otherwise, it may so happen they may never know about the investment.

As an example, an investor invested in a direct fund directly through the AMC a lump-sum amount. Added her wife as a nominee. As it happens often, she signed the form without asking exact details. Husband didn’t actively discuss it either. After his death, the wife will never know about the investment in the fund.

The amount will remain invested and keep growing as well, but the family has a little chance of making it to the money.

Read: The Best Small Cap Fund to Invest in 2019

Final Thoughts

Always add a nominee and make sure to maintain a Google Sheet for the list of places where you have added a nominee. It will help in more than one way. Also in case you want to change it in the future, you will not miss any.

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There are many approaches to investing.

No doubt all of them works.

The question isn’t what approach works and what doesn’t.

For some investor growth investing approach works more than value investing whereas it is vice versa for others.

So let us define both first.

What is Growth Investing?

Growth investing approach is to find companies, which are expected to grow at a much higher rate than their peers. It is a well-discovered story by the market, and so the price of the stock is relatively higher compared to its peers.

Investors typically profit from an increase in earnings of the company but not so much for the expansion in the price to earnings multiple in the market.

The great example can be investing in companies like HUL or Colgate or Emami etc. where the company is available at a much higher price to earnings compared to its volume growth. In a correction, investors consider investing in the company, and so the stock price doesn’t correct too much.

Investors can’t expect to invest in companies already trading at 40, 50 or 60 PE to have any further expansion in it but as the business grows steadily, the share price of the company will continue to move higher.

What is Value Investing?

Value investing approach is to find value in the stock at the current prices based on the calculation of future growth prospects. It may not be a very high growth phase for the company, but at the given price, slightly lower growth still offer a great value at the current price.

The main focus is on the increase in “price to earnings” ratio of the company going forward along with an increase in the earnings.

Often investors compare the growth and the current stock price of the company. If it is lower than the fair value of the stock as per the calculations, it is a buy.

Growth Vs. Value Investing

Growth investors always have a dilemma – Growth at what valuations?

As an example, HUL is trading 60 times its current earnings whereas it has a volume growth in single digit.

So at what price to earnings, one can consider investing in the future growth of HUL. What if the environment or the business deteriorates?

A value investor, on the other hand, takes the risk of investing in future growth assuming it is a value at the current price.

But value investors also have the dilemma – When the company will get into the next growth phase? What if it doesn’t?

So when it comes to growth or value investing, it isn’t only one of them works.

Both works.

What works more for you and your state of mind as an investo?.

No one else will be able to tell you what will work for you. It is you who can and will have to decide over time what works for you and what doesn’t.

I am more of a buy and forget kind of investor. I like to see the EPS of the company increased more than the price because I don’t have plans to sell. If earnings increases, I will have more dividend. When the market corrects, the earnings will protect the downside and turning my portfolio into the red.

As an example, Pidilite is one of my portfolio holding since 2016. I had the questions in the DIY forum if I letting it off in the correction of 2018.

I have an obvious reply for them when I purchased it in 2016 at around ₹700, the PE was about 45. Now at my purchase price, it is 35. So I am all good as long as the company is increasing its earnings at a decent rate. I don’t need to consider anything else because over time; the stock will make EPS equal to the price I paid for each share.

It is a growing company that has proved its metal for the past decade, and I don’t see any foreseeable reason why it can’t continue doing the same for the next decade as well.

Why not Growth + Value Investing?

Wait for high growth companies to correct and provide value. It is when investors make the most out of their investments.

Pidilite at ₹700 in 2016 at 45PE was a growth investing more than value investing. But again, it also corrected from high of ₹800 at that time.

A 10% growth rate, and 40+PE value investor may not consider.

More money is lost in waiting for the correction than in an actual correction, but if you follow Warren Buffer, he purchased financial and banking sector stocks in the financial crisis itself.

Again, it is not about being a growth or value investor only but a mix of both.

I have Pidilite and Page Industries in my portfolio, but I have a heavy allocation to Pharma and auto sector because we have issues in the US focused Pharma company because of strict USFDA guidelines and demand issues the Indian auto sector.

Time will tell if I make it or break it. It will be a good learning experience not only for me but also for my blog readers.

Again I will give ample time to my Pharma portfolio to be conclusive. At least 3 to 5 years from now before I consider any sectoral churn. Yes, I moved out of Jubilant life science because of the news promoter demanding a royalty for no reason but then allocated the amount in the Natco Pharma, in the Pharma sector only.

Final Thoughts

Don’t be a growth or value investor for the sake of it. Be in the market to make money.

I invest in some companies where I find good growth opportunity like Page Industries, Pidilite Industries.

Then I find Value in some of my core portfolio holdings like Lupin, Natco Pharma or Divi’s Lab when it was available in 3 digits.

Further, I have a mix of Growth + Value Investing in companies like Zydus Wellness and Amara Raja Batteries.

So you don’t need to choose either a growth or value investing approach. It can be a mixture of both in a single investment or portfolio as a whole.

But remember one thing, never try to find value in companies which aren’t making a consistent profit for an elongated period. Don’t invest in the hope of a turnaround. They seldom happen. If it happens, let it happen for an elongated period. You will have ample time to invest after the turnaround has happened. Always keep an investment checklist ready to avoid such non-profitable, high debt, low margin business.

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As per the new SEBI guidelines, a fund house can have only one fund in each category (Large Cap, Mid Cap, Small Cap, Multi-cap, ELSS, etc.).

It means SEBI has a clear guideline for what stocks a fund can invest in but also makes sure a fund house offers only one fund in each category.

It wasn’t the case earlier.

So fund houses that had more than one fund in any category or at least overlapping fund in a category had to stop the overlapping fund or in some cases merge or rename funds for clarity.

As an example, Reliance Top 200 Fund is now Reliance Large Cap Fund. Aditya Birla SL Tax Plan is closed for new investment and will act like a closed-ended fund. The ELSS fund available from Aditya Birla SL fund house is Aditya Birla SL Tax Relief 96.

There are some questions about such closed, merged or renamed funds in the minds of my blog reader I will answer.

What Happens to the Invested Amount in a Fund Not Accepting New Investments?

The invested amount remains, and the NAV keeps moving as per the investment in the underlying assets by the fund.

Slowly over time with redemptions from investors will help the fund house stop the fund.

So there is a difference between closed for new investments, and fund seizes to exists.

If you have invested in such a fund which is now closed for new investment, no need to panic, as long as an investor wants, he or she can remain invested with the existing units allocated in the fund.

But it is always recommended to redeem from the funds that aren’t accepting new investment as and when one has a plan for redemption.

The reason being as more and more investors redeem, the asset under management for the fund will go down which will increase the expense ratio for the fund. On top of it, a fund may not be managed actively because of very low asset under management. So returns over time may take a beating.

What Happens to SIPs?

Ideally, because the fund is not accepting new investments, SIPs will stop, or they may be switched over to the new fund depending on if the fund is renamed or merged.

In some cases, my friends reported the SIP was stopped and they had to start a new SIP in the other fund.

So if you had a SIP in such fund and if it is continuing, take a statement to see if it is being invested in the fund as expected or not.

Will Investor Pay Exit Load?

As and when one redeems, the exit load if applicable has to be borne by the investor.

In all equity funds, typically there is no exit load if one remains invested for a year or so.

Check your fund’s exit load criteria and redeem only when you aren’t paying the exit load because there is no panic even if the fund is not accepting new investments.

One may also need to pay the entry load when investing in the new fund but if you don’t want to be paying entry load, opt for direct funds instead of regular funds.

Does Investor Need to Pay Long Term Capital Gains Tax?

Yes. If an investor has more profit than his allowable limit of 1L per annum as long term capital gains tax, he may need to pay 10% as LTCG tax on the profit.

One only needs to pay tax when one redeems. To save tax, spread the withdrawal across different financial years. Each year an individual is allowed an LTCG tax-free bracket of 1L. So if the total profit in a fund is more than 1 lakh, spread the redemption across multiple financial years to save the LTCG tax. The best part is, one can withdraw part of the invested amount or units from the fund.

Final Thoughts

Do you have any more question about investment in the mutual funds? Share them in comments below, and I will try to answer them ASAP.

And don’t miss the best equity mutual funds for 2019.

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There are two types of chit fund. One organized chit fund where there are an organizer and participants and others by personal friends or relatives only participate.

In an organizer based chit fund, the organizer brings in the participants. Some people may need money early whereas others at a later time in the period. Those who need first get less amount compared to those who take it at a later stage. The amount reduced is often pre-decided based on when they choose or is even auction based where the reduction is on the lowest bid for the sum for that particular month.

All the chit funds in India are governed by The Chit Funds Act, 1982. Because of scams in chit funds, people have become cautious about them.

We aren’t discussing the organizer based chit fund, but some friends use funds where everyone takes equal amount based on the lucky draw. There is no organizer, and so there aren’t any fees either.

How Personal Chit Fund Works?

A group of people (Typically living in the same society or even friends) decides to contribute an equal sum of money every month.

For instance, say 12 members agree to deposit Rs. 2000 every month for 12 months.

Every month, all the 12 members deposit Rs. 2000, which amounts to a total of Rs. 24,000 (12*2000).

The money so collected every month is then up for a lucky draw. Each of the 12 members in the fund is given one slip to put their name in the auction. One winner of the lucky draw winner takes the money for that month.

Already winner doesn’t participate in the future lucky draw but continues to contribute in the fund for the rest of the tenure.

So all in all, every member contributes ₹24,000 in the tenure of 12 months and get back ₹24,000 back as well.

Neither one loses nor anyone has any financial gains out of it.

Why Personal Chit Fund Works?

My wife was (maybe is) a part of such personal chit funds from the household expenses that I share with her every month.

When I discussed with her, I told her, why not give me the money and take it back at the end of the year.

She wasn’t very eager in doing so.

I was so confused as to why?

After all, it meant the same. I will give the same amount at the end of the tenure.

But I found, it helps her in more than a few ways, and they aren’t financial.

Its when I realized why chit fund is so popular.

It helps you to Dream

I found first of every month when they were doing the lucky draw; the excitement was quite high.

She decided what she will do if she gets the money in the next few days.

It will be a new dress or some jewelry, and the list continues.

More importantly, they enjoy the process of who gets it and how they will spend.

Again, the fun part is, they didn’t complete the lucky draw and decide who is taking first and who is taking last. It was being conducted every month, and so the excitement continued every month.

Money is Accumulated

Some are very bad at accumulating. It just never happens for them. I am one of those. If I invested the money, the temptation is to spend.

As the money is being kept aside in the chit fund, it is accumulated. It helps in paying off some of the significant planned purchases that are once a year expense. Kids school fees, purchases of household items like fridge/washing machine, etc.

One can fulfill the Dream

With chit fund, you are sure to get the money in the entire tenure for sure.

The adrenal rush is on every month, but it is also a sure shot way to materialize once.

So, not only one can dream about getting what they want, but it also makes it a reality. It makes the process as one of the most preferred product.

Final Thoughts

Many use such personal chit funds for basic family needs whereas some use it as fun part.

It is a fun part for my wife, but it also means when you get the lucky draw, and your friend needs the money, you have to give your draw to them.

It happened with my wife most of the time, and so she was second last to get the money.

It is part and parcel of being a friend, but then it is something which every wife loves being part of it as well.

Is your Wife or Mother part of it? Share your story in comments below.

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We will find the best value-oriented mutual fund to invest in 2019. We didn’t have the best value-oriented fund for 2018.

A mutual fund that can invest irrespective of the market cap in companies where the fund manager finds value is known as a value-oriented mutual fund. The advantage of investing in a value-oriented fund over other funds is – it invests in companies where the fund manager finds stocks price provides a value.

As an investor, the decision of choosing value stocks is with the fund manager. If he gets the study right, there are more chances of fund doing very well compared to others.

Also, check out: The Best Large Cap Funds To Invest in 2019 & The Best Midcap Fund to Invest in 2019.

Top Value-Oriented Funds

The process we will use is- from the best rated direct value-oriented funds by VRO, we will choose the funds that can outperform.

Best Value-Oriented Funds To Invest in 2019

We nail down to a fund that has given stable returns in the volatile market of last year.

Kotak India EQ Contra Fund

Kotak India EQ Contra Fund has managed to provide positive returns where all the other funds have given negative returns in this category.

Invesco India Contra Fund

If we have to select more than one fund from the category, it has to be Invesco India Contra Fund. Though the returns are slightly negative but not too much. On top of that, it has a very stable expense ratio in the direct fund as well.

Final Thoughts

In case you have not selected a better performing fund earlier or want to move to a new fund for any other reason (move to regular to direct funds). Don’t exit the investment in the old fund. Just stop the SIP and let the invested amount remain and grow over time in the old fund. Create a new SIP in the new funds.

As always this isn’t an endorsement of the above fund. The emphasis is on the process to select the best mutual funds using tools like ValueResearchOnline as and when you want to invest in 2019.

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