Where to Invest: Short term Vs Long term investments: How do they differ

Where to Invest: Short term Vs Long term investments: How do they differ

There are many investments options to choose from, however investment options can be classified under two broad heads: short-term investments and long-term investments. To decide between the two types of long term investments, you need to begin by knowing the difference between these two and the purpose they are designed to fulfil. Let’s dig deeper to find out the essential differences between short- and long-term investment options.

Time frame

The first and foremost difference between short term and long term investments is with regards to the timeframe that they are held for. Short-term investments are typically held for less than 12 months. Long-term investments, as the name implies, can be held for several years, typically, 10 years or more.

Risk and return expectations

All financial instruments carry some element of risk and the ability to provide returns. The difference between short-term and long-term investments can also be determined in terms of risk and return expectations. For instance, equity investments are short term investments with high returns that can be held for a short but can be subject to a high rate of fluctuation.

However, if you have different expectations of your investments and are essentially investing for principal protection, a short-term investment in a debt-oriented instrument will suit your purpose just fine.

Expectations can be radically different when you are investing for the long term. In such a case, you do expect higher returns along with capital appreciation and minimum risks. Investing in equity in the long-term can be considered a relatively risk averse strategy. This is because over the long-term, the impact of volatility is lessened considerably. Additionally, equity as an asset class provides the best inflation-adjusted returns over the long term. Those with a medium- to high-risk profile can thus consider equity investments to build a decent corpus for retirement.

In conclusion, it may be fair to say that as an investor it is likely that you will need to invest in a mix of both long- and short-term investments to meet different financial goals. A good idea about the essential difference between the two will help you make a prudent choice. When it comes to creating an investment strategy, it is crucial to find the exact balance based on your individual circumstances. Prior to beginning an investment plan of action, whether short or long-term investing, you may want to list down a set of clear goals for investing.

Even though short-term investments may appear to be a better option, because it offers better liquidity, you may want to lay aside a component of your money to invest for the long term. This is because long-term investments have better protection ability if you were to fall back on some of your money due to an unexpected fall or a bad investment. One crucial tool towards building wealth is to invest without worrying about the future or avoiding it.

To help you understand your financial foals clearly and risk tolerance, you may want to consider using a financial advisor. An advisor can guide you in building an investment portfolio that focuses on your goals. You can receive the best course of action for your investments based on your financial goals as the financial advisor can help you determine the amount of growth and money you would require in a specific period.

Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.


Have you made your financial calendar yet?

IntroductionNew Year is around the corner. While you might be busy changing calendars, have you thought about having a financial calendar? Every year has a calendar which shows the months, days and dates and you plan your affairs around that calendar. What about a financial calendar? Do you plan your finances around one?Many of you might not have heard about a financial calendar. A financial calendar is one which is useful for your financial planning. It guides you on how to save and spend your income in different weeks of the month. If you create your calendar and follow it, you could utilize your income in the best possible way, both in terms of meeting your expenses and creating investments. Do you have any idea on making a financial calendar?Making a financial calendar is simple. You just have to plan your finances around key financial events at the right time. Let’s see how– Month-wise calendarFollowing is a quarter-wise financial calendar for your financial planning - • April to June – In the new financial year, it is time to take stock of your investments and plan for new ones. First, invest in insurance plans. Besides creating an emergency fund you can also save tax on your next tax return. If you have loans continue servicing them. Also, figure your tentative taxable income and plan for tax-saving investments. • July to September – Continue with your investments. If you plan on taking a vacation in the next quarter you should start saving for it. This would ensure that your vacation does not eat into your budget as you would be prepared. • October to December – This is the quarter which is filled with festivities. Festivities entail new purchases and gifts. You should create funds for any big-ticket purchases which you intend to make in Diwali or New Year. Also, a fund is required for New Year celebrations. Towards the end of the year you should start planning for investing in tax-saving instruments. • January to March – This is the first quarter of the New Year and the last quarter of the financial year. Tax planning takes centre-stage in this quarter. Analyse your income earned in the last nine months and also forecast the income for the quarter. Invest in Section 80C instruments to save tax on up to Rs.2 lakh of your income. Buy health insurance plans if you haven’t bought one and save tax under Section 80D. (To know more tax-saving options, click here)Planning for each monthAfter you have planned for the different quarters, you can plan for each week of a month in the following way - • First week of the monthFollow the Warren Buffet principle - Save first, spend later. As soon as you get your income, invest at least 30% of it in different avenues. Of this investment, 10% should be put aside in an emergency fund. After having saved, meet the urgent expenses. Pay off your household expenses and set aside lump sum money for daily lifestyle expenses. • Second week of the monthOnce you have met your household expenses, the next 30% of your income should be used for paying off your debts. Pay the EMIs scheduled and make sure there is no default. Your child’s education fees should also be met in this week.• Third week of the monthPay your bills for credit card, mobile and other utility bills. If you plan on making big-ticket purchases, schedule it for the last week and make provisions for them.• Fourth week of the monthAssess the remaining income in your hand. If all your goals are invested in, try and prepay your loans. If you are thinking of making a big purchase in the coming months, create a fund for the purchase. Points to keep in mind Big budget purchases should be planned in advance Tax saving should be done in regular investments throughout the year. Don’t plan your taxes only in March. When investing, choose tax-saving instruments and your tax planning would be taken care of. Plan for vacations and unforeseen bigger expenses too (like gifting, buying a luxury, etc.) Automate your savings through ECS facility Factor in inflation in your budgetary planning ConclusionCreate a financial calendar and you would know how to utilize your income in the best possible way. Don’t ignore tax planning though. Your investments should be in tax-saving avenues which reduce your taxable income. So, use the above-mentioned knowledge and plan your calendar. DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Prioritising goals

Investing money in different avenues can be a good way to earn higher returns in the future. By now, we know that investing is a good habit. But investing towards specific goals is a better habit. This way, you can concentrate on achieving real financial goals in your life within a certain time period. But what if you have too many goals? How do you achieve all of them?Let’s take Abhinav’s example. Abhinav has been working in an IT company for the past one year. He has just started investing his money. Right now, he has multiple financial goals for the near future. Here is his list of goals: Abhinav earns around Rs 45,000 per month. With his income, it is not possible to meet all his goals at the same time. Instead, it is always better to prioritize goals. In other words, some goals are more important than the others (at least for the short-term). By identifying the most crucial goals, it becomes easier to achieve all the goals at the right time.1) Create a listThe first step is to create a list of all the financial goals you have. This exercise helps you understand what you would like to achieve in the next six months, two years or even ten years. Remember to be as specific as possible when writing down the goals. This will help you arrive at a clear financial estimate for the goal. 2) Rank them in order of importance and urgencyOnce you have identified your goals, it is a good idea to rank them in order of importance. For instance, Abhinav may want to buy a sports car. But is the goal really that important currently? Paying off the college debt may perhaps be the most important financial goal at the moment. It is always better to clear off existing debts. There is no point in chasing lower investment returns (6-8%) when debt (20%) is much higher. It might be better to postpone a less important goal for a later date when the financial conditions get better. 3) Invest to achieve these goalsAfter identifying the short-, medium- and long-term goals, Abhinav can start investing to achieve them. For instance, creating a retirement fund is an important long-term goal that should not be ignored. Abhinav can start investing small amounts regularly in an equity fund through a Systematic Investment Plan (SIP) for this goal. Similarly, he can divide up his funds to invest in different avenues based on his requirements. 4) Reassess the list after a few yearsOnce he achieves a goal, he can tick it off the list. Every small progress is important. However, it is necessary to review the list once in a while. As people grow older, their goals and ambitions change. As a result, Abhinav needs to adjust his goals whenever necessary and invest accordingly.ConclusionGoals are an important aspect of human life. But not all goals are equal. As a result, it is necessary to prioritize them and work actively towards achieving them at the right time in life. This way, it is possible to lead a happy and fulfilled life (at least where the finances are concerned).What next?Most people have the habit of saving money. This is certainly a good thing. But guess what? In the current day, saving money is not enough. You need to do much more in order to beat inflation and achieve your goals.   DisclaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • Cost Inflation Index - Meaning, Calculation & Benefits

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Cost Inflation Index or CII is an essential tool for determining the increase in the price of an asset on account of inflation and is useful at the time of calculating the long-term capital gains on the sale of capital assets. It is fixed by the central government and released in its gazetted offices by the Ministry of Finance every year. Capital gains are the profits arising from the sale of assets like real estate, financial investment, jewellery, etc. The cost price of the asset is adjusted taking into account the Cost Inflation Index of the year of purchase and the year in which the asset is sold, and the entire process is known as Indexation. Cost Inflation Index Calculation The cost inflation index calculation is done by the government to match the inflation rate for the year and calculated using the Consumer Price Index (CPI). Cost Inflation Index India for the financial year 2019-20 has been set at 289. Change of the base year for the Cost Inflation Index The cost inflation index base year was changed in the Union Budget 2017 from 1881 to 2001. The base year was changed by the government to enable accurate and faster calculations of the properties purchased before April 1, 1981, as taxpayers started to face problems with valuations of older properties. The base year has an index value of 100, and the index of the following years is compared to the index value in the base year to determine the increase in inflation. With the change in the base year, the capital gains and tax burden has reduced significantly for the taxpayers as it now reflects the inflated price of the asset realistically. The current Cost Inflation Index Chart for each year is as under- How is the Cost Inflation Index (CII) used in calculating capital gains To calculate the capital gains on your assets the purchase price of the asset is indexed by the cost Inflation Index using the formula below- Indexed cost of the asset at the time of acquisition = (CII for the year of sale/ CII for the year of purchase or base year (whichever is later))*actual cost of acquisition If suppose you purchased a flat in December 2010 for Rs 42 lacs and sold in Jan 2019 for Rs 85 lacs. Your capital gain from the sale of the flat is Rs 43 lacs. The CII in the year in which the flat was purchased is 148, and the CII in the year the flat was sold in is 280. The purchase price of the flat after taking into account the Cost Inflation Index is = (280/148)*Rs42 lacs= Rs 79. 46 lacs  This is the indexed cost of acquisition. Your long-term capital gain after taking indexation into account is Rs 85,00,000- Rs 79,45,946 = Rs.5,54,054. Long-term capital gains on the sale of property are taxed at 20% with indexation benefit. So, your tax liability, in this case, would be- 20% of Rs 5, 54, 054= Rs 1,10,810 Without indexation benefit, the capital gains are taxed at 10%. In this case, the capital gains would be- Sale price of the flat - purchase price of the flat = Rs 85,00,000 – Rs42,00,000 = Rs.43,00,000.  The capital gains tax without indexation benefit will be 10% X Rs 43,00,000 = Rs.4,30,000. Thus, indexation helps reduce the long-term capital gains and reduce the overall tax burden for the taxpayer considerably. Indexation benefit can be used for investments in mutual funds, real estate, gold, FMPs, etc. but is not applied for fixed income instruments like FDs, recurring deposits, NSC, etc. Few important tips to remember about the Cost Inflation Index- If you receive an asset as a part of the will, then in such the CCI for the year in which it was transferred will be considered and not the CCI of the purchase of the asset Indexation benefit for the cost of improvement of the asset is the same as the cost of improvement of the asset. Cost of improvement incurred before 1981 to be ignored. CONCLUSION Cost Inflation Index is an important parameter to be considered at the time of selling long-term assets as it is beneficial for the investors. Reach out to our experts at IndiaNivesh for any queries about capital gains arising from the sale of assets for correct guidance.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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  • Dematerialisation of Shares – Meaning, Process & Benefits

    The online platform has revolutionised the way we live. Whether it is transacting, connecting with a loved one, getting updated about the happenings in the world, everything can be done online. When it comes to investments, the online platform provides ease and convenience. Investment in shares and share trading is a prevalent activity undertaken by many investors. They invest their money in the stock of a company with a view to earn profits when the stock value rises. When shares are purchased, share certificates are issued in physical form containing the details of the investor and the investor. However, these physical share certificates are inconvenient, and so the concept of dematerialisation has been introduced. Do you know what it is? What is dematerialisation? Dematerialisation of shares means converting physical shares and securities into an electronic format. The dematerialised shares and securities are, then, held in a demat account which acts as a storage for such shares. Dematerialised securities can then be freely traded on the stock exchange from the demat account. How does dematerialisation work? For the dematerialisation of securities, you need to open a demat account with a depository participant. A depository is tasked with holding shares and securities in a dematerialised format. As such, the depository appoints agents, called, Depository Participants, who act on behalf of the depository and provide services to investors. There are two licensed depositories in India which are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited). Need for dematerialisation of shares Dematerialisation of securities was needed because it became difficult for depository participants to manage the increasing volume of paperwork in the form of share certificates. Not only were there chances of errors and mishaps on the part of the depository participant, but physical certificates were also becoming difficult to be updated. Converting such certificates into electronic format frees up space and makes it easy for depository participants to track and update their investor's stockholding. Benefits of dematerialisation for investors As an investor, you can get the following benefits from dematerialisation – You don’t have to handle the physical safekeeping of share certificates. Since your investments are converted in electronic format, you can easily store them without the risk of theft, loss or damage You can access your online demat account and manage your investments from anywhere and at anytime The charges associated with the demat account are low. Depository participants change holding charges which are minimal and you don't have to pay any stamp duty on dematerialised securities Since no paperwork is required to be done, the transaction time is considerably reduced Given these benefits, dematerialisation proves advantageous. Nowadays, the practice of holding physical securities has become almost obsolete and buying through a demat account has become the prevailing norm for investors. How to convert physical shares to demat? To convert physical shares to demat, the following steps should be followed – You should open a demat account with a depository participant. A depository participant can be a bank, financial institution or a stockbroker who is registered as a depository participant with the two licensed depositories of India You would then have to avail a Dematerialisation Request Form (DRF) from the depository participant and fill the form Submit the form along with your share certificates. The share certificates should be defaced by writing ‘Surrendered for Dematerialisation’ written across them. The depository participant would, then, forward the dematerialisation request to the company whose share certificates have been surrendered for dematerialisation. The request should also be sent to Registrar and Transfer (R & T) agents along with the company The company and the R & T agents would approve the request for dematerialisation if everything is found in order. The share certificates would also be destroyed. This approval would then be forwarded to the depository participant The depository would confirm the dematerialisation of shares and inform the depository participant of the same Once the approval and confirmation is complete, the shares would be electronically listed in the demat account of the investor Buying securities in a dematerialised form If you are looking to buy stock in a dematerialized form, here the simple steps that you can take for the same – Choose your broker for buying the securities and pay the broker the Fair Market Value of the securities that you want to buy The payment would be forwarded by the broker to the clearing corporation. This would be done on the pay-in day The clearing corporation would, then, credit the securities to the broker’s clearing account on the pay-out day The broker would then inform the depository participant to debit its clearing account and transfer the shares to the credit of your demat account The depository would also send a confirmation to your depository participant for the dematerialisation of shares in your account. The dematerialised shares would then be reflected in your demat account You would have to give ‘Receipt Instructions’ to your depository participant for availing the credit of shares in your demat account. This is needed if you hadn’t already placed a Standing Instruction for your depository participant when you opened your demat account. Similarly, for sale of dematerialised shares, the process is opposite. Trading in stocks in a dematerialised format is simple, quick and convenient. It has also become the practice of the current market. So, if you want to buy or sell securities, open a demat account and start trading in dematerialised securities. Should you have any doubts, get in touch with the team at IndiaNivesh who will look into your requirement and lead you towards a quick resolution.    Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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  • High Dividend Mutual Funds

    Dividend mutual funds are a type of mutual fund that pays a regular dividend to the unitholders of the mutual fund scheme, thereby creating a regular source of income for them. The investment strategy of the fund manager is to invest in a basket of companies that have a steady flow of income and promise to pay periodic payment to the investors. Some investors prefer a regular source of passive income from their investments. Mutual fund schemes that offer a high dividend are a popular choice for such investors. The frequency of payment of dividends is decided by the fund manager and is usually fixed. Dividends can be paid daily, monthly, quarterly, six-monthly, or yearly, and the frequency of payment is mentioned beforehand. However, there is no guarantee on the rate and amount of the dividend to the investors and the payment of dividend is subject to the performance of the fund. There are 2 types of dividend mutual funds based upon the asset class that they invest in. 1. Dividend Yielding Mutual Fund (Equity) • Mutual fund schemes which invest more than 65% of their corpus in equity shares of companies • Like any other equity scheme, they have the potential for higher returns, but also carry a higher risk • Investors should invest in these schemes with an investment horizon of medium to long term 2. Dividend Yielding Mutual Fund (Debt) • Mutual fund schemes which invest more than 65% of their corpus in debt instruments of government and corporations like treasury bonds, commercial papers, etc. • These funds carry low risk and provide average returns to investors • Interest received from the various instruments is paid as a dividend to the investors• Investors should invest in these schemes with an investment horizon of short to medium term Tax treatment for dividend mutual funds Till now, dividend income received by the investor used to be recorded under the income head of “Income from other sources” and such income was tax-free in the hands of the investor. However, as per the Union Budget 2020, the DDT is now abolished for companies and mutual funds. From April’20 onwards, any dividend received above Rs 5000 will be taxed in the hands of the investor. It will be taxed as per the individual tax slabs for both equity and debt schemes. Only debt investors who fall in the lower slabs of 10% and 20% will pay lesser taxes on dividends. For all the others, the taxation would be higher going forward. Why should investors invest in high dividend mutual funds? Dividend mutual funds offer unique advantages to the investors, especially when the macroeconomic condition of the country is weak; these investments provide the reliability of income to investors. The benefits of dividend mutual funds which should be kept in mind while investing in such funds• Fund managers of dividend mutual funds invest in companies which can pay steady dividends and even if there is a slowdown in the economy, as companies do not want to send any negative signals, they avoid curtailing payment of dividends, thus making them less volatile than other funds.• Overall returns from these funds are less affected as compared to other funds as the dividends provide a hedge against market volatility.• In a low-interest rate regime, investors looking for a higher consistent income can opt for dividend mutual funds. Disadvantages of a dividend mutual fund scheme • Returns generated by dividend mutual fund schemes are lower as compared to growth schemes in case of rising markets• These funds are not suited for aggressive investors looking for higher returns from their investment• Moreover, with the abolition of Dividend Distribution Tax (DDT), investors in the higher tax-bracket will have to pay higher taxes on the dividend income. Role of dividend mutual funds in a portfolio Invest in dividend mutual funds with an investment horizon of 7 to 10 years for optimal returns. Investment in such funds should be a part of your strategic asset allocation and to lower the volatility of the overall portfolio. Aggressive investors can allocate less than 10% of their portfolio in such funds. Conservative investors, on the other hand, can allocate a higher percentage to these funds. Essential things to keep in mind while investing in dividend mutual funds • Conservative investors looking to invest in dividend funds should invest in large-cap funds, preferably of blue-chip companies that pay a higher dividend. Investing in companies with a higher proportion in mid & small-cap companies will increase the risk of the investment, thereby defeating the purpose of investment• Invest in a fund which has been in existence for some time and witnessed a few market cycles• Avoid investing in a fund with a small corpus to minimize risk as few wrong investment calls can significantly hamper returns• The expense ratio plays a vital role in determining the overall returns from a scheme. Choose funds with a lower expense ratio   CONCLUSION Investing in high dividend mutual funds is a good option if you are looking for a regular income through dividends. Consult our experts at IndiaNivesh to help you guide through the allocation of funds in these schemes as per your investment horizon and risk profile.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

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